Understanding fulfillment centers: What to look for and why they matter

understanding fulfillment centers

Logistics and supply chain management are full of complex terms and workflows that can become overwhelming for brands. Behind every operation are a huge number of puzzle pieces that must fit together seamlessly for fast, effective order fulfillment.

The biggest puzzle piece? The humble fulfillment center.

The fulfillment center is the centerpiece of every ecommerce fulfillment strategy and 3PL partnership, yet it's also one of the most overlooked elements. Without a strategically located, technology-led fulfillment center at your disposal, ecommerce brands will struggle to meet consumer expectations for memorable brand experiences.

What is a fulfillment center?

A fulfillment center is a logistics hub that handles a range of retail and ecommerce fulfillment services on behalf of retailers and brands. This includes inventory management and storage, picking and packing orders, and shipping services.

Most fulfillment centers are run by third party fulfillment companies like Ryder, who lease space to businesses who have outsourced fulfillment to save time and money. A fulfillment center will either fulfill customer orders placed through direct selling channels or wholesale orders for brick and mortar retailer partnerships, or a mixture of both.

What is the difference between a warehouse and a fulfillment center?

There's a lot of confusion surrounding the difference between a fulfillment center and a traditional fulfillment warehouse. The two terms are often used interchangeably in discussions about logistics and supply chain management, meaning some businesses view them as one and the same.

Both warehouses and fulfillment centers are large, purpose-built facilities that are used by brands or fulfillment service providers to store and manage inventory. However, the role they play in fulfillment operations is very different:

Storage capabilities

The biggest difference between fulfillment centers and warehouses is that fulfillment centers aren't designed for long-term storage.

The goal of a fulfillment center is to store inventory in preparation to fulfill wholesale or customer orders quickly, meaning fulfillment centers are usually home to in-season or popular SKUs that have a high inventory turnover.

Some fulfillment companies, such as Amazon fulfillment centers, actively discourage long-term storage by adding hefty storage fees for items that sit on fulfillment center shelves for a certain number of days. This is because they want to free up this space for faster-moving SKUs.

A traditional warehouse is designed to store inventory securely and maintain product integrity via climate-controlled facilities or FIFO (First In, First Out sequencing) until it's ready to be transferred to a fulfillment center. Depending on a brand's business model, inventory may sit in a warehouse for several days or weeks until it's needed to fulfill orders.

The fulfillment services being provided

In most cases, warehouse space accomplishes one key task: storing inventory until it's needed to fulfill orders. This makes warehouse management much more limited in scope than managing a fulfillment center. A fulfillment center is responsible for providing a complete set of retail or ecommerce fulfillment services under that one roof, from receiving new inventory to processing returns.

This makes fulfillment centers much more dynamic and bustling places than your typical warehouse, which only springs into action when inventory arrives or departs.

It also isn't necessary for a brand to outsource both warehousing and order fulfillment. For example, an ecommerce business might run its own warehouse for long-term storage. But by outsourcing ecommerce fulfillment to third party logistics company that uses fulfillment centers, they gain the benefit of quicker delivery times and more cost-effective short-term storage fees.

Facility locations

Because fulfillment centers are designed to streamline order fulfillment services as much as possible, the location of facilities is incredibly important to a brand's overall fulfillment strategy. A fulfillment center should ideally be located in close proximity to a brand's end customers to cut shipping costs and meet customer expectations for fast delivery.

A brand's primary warehouse space should ideally be close to its fulfillment center so inventory can be replenished quickly in the case of an unexpected stockout or sales opportunity. Because the warehouse isn't responsible for coordinating the order fulfillment process itself, it isn't necessary for the facility to be within a two-day shipping radius of customers.

What happens at a fulfillment center?

Receiving and storing inventory

Fulfillment centers must receive a fresh supply of inventory on a regular basis to ensure they have enough stock to meet customer demand. Fulfillment companies will need to monitor this carefully to avoid accumulating excess inventory that will be costly to store. Inventory replenishments will either come directly from your supplier to the fulfillment center, from your own warehouse. Once the inventory has been received, it has to be sorted and stored in a way that makes it easy for facility staff to find and pick SKUs quickly for customer orders

Order management

Once inventory has been stored within your fulfillment center, your ecommerce business can begin routing customer orders to be picked and packed at this location by your fulfillment service provider.

When a customer places an order, it should be sent directly to your fulfillment center via direct integration with your ecommerce platform. Alternatively, your fulfillment provider may ask for CSV files to upload manually to their order management system. However, this can result in costly delays to order fulfillment. Every order should be tracked throughout the fulfillment process to identify any bottlenecks due to inefficient picking processes or insufficient inventory.

Picking and packing orders

Once an order has been received, your fulfillment partner needs to pack and ship orders as quickly as possible for speedy delivery. A fulfillment center is designed to optimize picking/packing as much as possible. This refers not just to how SKUs are stored, but where they are stored. Fulfillment companies will locate popular SKUs and SKUs that are frequently ordered together in the same area of the facility to minimize unnecessary travel time.

Picking can be completed in several ways, such as zone picking, where workers pick SKUs in a dedicated section of the fulfillment center, or batch picking, where workers are assigned a group of identical orders to pick SKUs for. To prep orders for shipping, fulfillment centers are equipped with packing boxes, mailers, labels, and more to keep packages secure in transit and minimize DIM weight.

Value added services

Thanks to the growth of the subscription box market and rising customer expectations for memorable delivery experiences, many ecommerce merchants are now searching for greater customization capabilities from order fulfillment companies. This includes but is not limited to:

  • Custom packaging
  • Kitting
  • Personalized inserts
  • Return shipping labels

Shipping orders

Ecommerce merchants need to minimize shipping costs as much as possible while still meeting expectations for speedy delivery timeframes. With two-day shipping now the norm in ecommerce, your fulfillment center should be in a strategic location that helps to cut last-mile delivery times from the outset.

Your ecommerce fulfillment partner needs to be well-versed in rate shopping between shipping carriers to find the best value option for your business and offer you wholesale discounts on shipping rates. They should also assist businesses in meeting carrier regulations for different classes of packages, such as oversize or hazmat shipping.

Managing returns

Fulfillment centers have to handle returned merchandise as effectively as outbound orders. Reverse logistics processes include receiving returned items, inspecting them for damage, reconditioning, and reassigning units for picking.

Customers who have chosen to return items must experience a streamlined returns process to maintain a favorable impression of ecommerce companies and decide to shop with them in the future. This includes generating pre-paid shipping labels, offering return tracking, and being able to process refunds quickly to create a customer-centered return process.

The benefits of using a fulfillment center

Outsourcing the hassle of fulfillment to an experienced provider

Although many ecommerce businesses choose to keep fulfillment in-house with the goal of reducing costs, fulfilling orders yourself is going to cost you more in the long run - and not just in a monetary sense.

Managing your own fulfillment center entails a variety of fixed and ongoing costs including technology, labor, utilities, and insurance, just to name a few. While this is manageable while your order volumes are small, overall fulfillment costs will spiral alongside business growth.

Moreover, being responsible for coordinating every step of the fulfillment process takes valuable time away from your business managing other areas of your brand. While opportunity costs such as lost marketing opportunities can be hard to detect, they can have a big impact on your business in the long term. By outsourcing fulfillment to a fulfillment company that offers complete fulfillment services, you can get back to focusing on what your business does best.

Take advantage of better technology and infrastructure

As we mentioned above, it's relatively easy to run a fulfillment hub out of an office or small warehouse at the beginning. But it's not a viable long-term solution to ensure customer satisfaction. A logistics operation involves many moving parts that require the right approach to optimize for cost and speed. Finding enough space and knowledgeable staff to run your fulfillment operation becomes a major challenge as order volumes increase.

Retail and ecommerce fulfillment providers are the ideal partners because they have seen first-hand what works and what doesn't in their years of working with brands. Furthermore, they have the resources to invest in providing advanced, technology-led fulfillment services and fulfillment centers that make fulfilling and shipping orders more streamlined and cost-effective for your business.

Being ready to scale at a moment's notice

Ecommerce is a dynamic landscape where challenges and opportunities can emerge with little warning. The brands that have the biggest competitive advantage in this marketplace are those who are able to move quickly to capitalize on changing trends - and it all starts with scalability in fulfillment.

Scalable fulfillment refers to the ability of brands to adjust their fulfillment operation in response to peaks and troughs in demand. If you cannot scale up order processing to meet a rise in order volumes, you're looking at a lot of unhappy customers who are unlikely to shop with your brand again. In the reverse, being unable to scale down can result in equipment, labor, and storage going unused and affecting your bottom line.

Because ecommerce fulfillment providers commonly operate multiple fulfillment centers and optimized storage space, they are well-positioned to assist brands in scaling effectively. Whether you need additional space in a fulfillment center during peak season or part of a longer-term expansion, it's far easier to obtain this via ecommerce fulfillment companies than searching independently.

What do fulfillment centers cost?

The cost of outsourcing to a fulfillment company will depend on several factors. If you're using a service such as Amazon or Shopify that offers standardized fulfillment services, they will supply a full pricing list that details storage costs and the cost of order fulfillment per package.

If you're partnering with a full-service 3PL, Cost Per Order (CPO) is determined in a more granular way. Fulfillment services such as receiving inventory, storage, picking/packing, value-added services (if applicable), and returns processing are all separate expenses that contribute to your total fulfillment cost. These fulfillment services are generally charged by the hour, or per pallet or pick.

There also may be additional costs for onboarding, order management software, automation technology, and data reporting. These costs can differ widely between fulfillment companies, so it pays to do your research.

The amount of customization you require during the fulfillment process will add considerably to the overall cost of fulfillment. If your online store wants to offer customers a bespoke unboxing experience, this is a unique accommodation that is specific to your business and will cost extra.

What kinds of fulfillment centers are available to my business?

Amazon fulfillment

FBA (Fulfilled By Amazon) is an ecommerce fulfillment and storage service offered by Amazon for merchants who sell via Amazon and other sales channels.

With one of the most extensive networks of fulfillment centers in the country, Amazon FBA is a popular option due to its transparent pricing and relative ease of obtaining storage space. Ecommerce businesses also get to leverage Amazon's last-mile delivery capabilities to access the fast delivery timeframes the marketplace is known for.

However, brands using FBA or Amazon Multi-Channel Fulfillment have little control over the fulfillment process itself. They don't get to choose which fulfillment center to store their inventory in, or have access to customization opportunities like branded packaging. Because ecommerce businesses are beholden to the rules of the Amazon marketplace, there are also restrictions on what products can be fulfilled and stored.

Check out our Amazon MCF vs. 3PL guide to determine which service is a better fit for your online store.

Shopify fulfillment

Once an ecommerce platform for online sellers, Shopify has quickly expanded into additional services - including ecommerce fulfillment. Shopify's fulfillment service is highly convenient for Shopify merchants because it's fully integrated into one system and able to sync inventory levels in real-time, a functionality not available at all 3PLs.

However, Shopify fulfillment is a relatively expensive fulfillment option. In addition to paying for order fulfillment per package, merchants also need to be on the most expensive Shopify plan at $299 per month to access all of the advanced features, such as advanced reporting and integrated order management.

Unlike Amazon, Shopify does not directly manage the third-party fulfillment centers it integrates with. This means potential issues with quality control and inconsistencies in how a fulfillment center operates. It’s important to remember that if customers have poor experiences, it's your online store that will take the blame.

Third-party logistics (3PL)

Unlike one-size-fits-all ecommerce fulfillment solutions that are designed for economy of scale, the purpose of a full-service 3PL is to design a bespoke fulfillment strategy that takes into account a business's unique needs.

An order fulfillment company will use its internal expertise to determine what kind of storage will work best for a brand's product, how to create a streamlined packing strategy, and which shipping carriers are most appropriate to work with in order to ship orders at a low cost.

In sum, an ecommerce fulfillment partner is there to support you as your business scales and continuously find new ways to streamline your operation for better cost savings and a smoother customer experience. However, this does come at a cost; 3PL partnerships tend not to be suited for brands with low order volumes. It also requires a high degree of trust, and plenty of time to compare providers to find the right partner.

Ecommerce fulfillment services to look for in a fulfillment center

Optimized storage strategies

The cost of storing inventory is one of the biggest expenses that comes with outsourcing fulfillment, especially in a primary fulfillment center where long-term storage costs are steep. If a fulfillment company is using outdated storage strategies that cause SKUs to take up more space, you can end up paying far more for inventory storage than you need to.

Moreover, if pick sites are not designed to minimize travel time within the fulfillment center, this adds considerable time to the order fulfillment process. With today's sky-high expectations for fast delivery, every minute counts when it comes to getting orders out the door. Make sure that your 3PL is equipped to make the necessary changes to fulfillment warehouse space to optimize for cost and speed.

Multi-node fulfillment

Your ecommerce fulfillment provider might have a state-of-the-art fulfillment center. But if they can only offer you a centralized fulfillment strategy at one location, this lack of flexibility could disadvantage your business in the long run.

Some of your customers may be located a long way from your fulfillment center, meaning longer (and more expensive) last-mile delivery times for those customer orders and higher levels of dissatisfaction. If you encounter an operational issue at your fulfillment center that slows down fulfillment, you won't have the ability to route orders to another location to avoid delays.

This is why brands should look for a fulfillment provider who operates multiple fulfillment centers to help lower delivery timeframes and create contingency plans for disruption. A data-driven 3PL can also help you make informed decisions about where to store inventory to meet demand even faster.

Automated fulfillment

A modern fulfillment company shouldn't just be a logistics expert. They also need to be a technology center dedicated to the continuous improvement of their fulfillment services.

Traditional 3PLs are often home to time-intensive, manual processes that slow down fulfillment and increase the likelihood of errors. This can be extremely costly to your brand's reputation. A lack of integrated systems and real-time management capabilities means that your fulfillment center will always be on the back foot responding to external events that could affect fulfillment.

A fulfillment company that invests in seamless integrations with ecommerce platforms and management systems is a fulfillment company that’s going to keep your brand competitive and able to meet consumer expectations. By choosing a fulfillment provider with real-time visibility into inventory management and order processing, your business can make smarter, data-driven decisions about where to allocate inventory.

Custom fulfillment capabilities

The ability to add custom packaging or marketing inserts to customer orders is a huge competitive advantage for ecommerce brands. Partnering with a third party fulfillment company whose fulfillment centers offer these capabilities gives your business much more control over the packing process and the brand experience.

Not every ecommerce fulfillment provider will offer value-added services, as custom additions complicate workflows and require more manpower to execute. These ecommerce fulfillment services do come at an additional cost, so your brand may not be in a position to invest in fulfillment marketing immediately. But knowing these services are available should you need them gives you much more flexibility over fulfillment.

Dedicated customer success team

A common anxiety that many ecommerce companies face when outsourcing fulfillment is having to relinquish control over their operation. Bringing in an external party whose fulfillment center by be some distance away is a big shift that requires a high degree of trust.

Having a dedicated account manager and team is essential to having accountability and transparency in a 3PL partnership. A consistent point of contact who can field questions and concerns lays the foundation for a responsive fulfillment operation that offers customers the very best customer experience in an increasingly competitive landscape.

Looking for the best fulfillment center? Partner with Ryder

To find the optimum fulfillment center, you need the optimum partnership. Ryder works with both single and multi-node customers to create a fulfillment strategy that maximizes cost and speed, using 24 fulfillment centers at strategic locations across the United States, with over 10 million square feet of warehouse space close to key transportation routes and consumer hubs, we are experts in lowering last-mile delivery times and keeping shipping costs manageable.

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