What Is Fulfillment? And When To Use a Fulfillment Center

By Indeed Editorial Team

Published April 2, 2022

E-commerce is the process of buying and selling products online. Successful e-commerce operations may rely on effective fulfillment processes that move the product from the supplier to the customer. Whether you're a fulfillment professional, an e-commerce professional or a customer interested in better understanding the process of online retail, you may benefit from learning more about fulfillment. In this article, we explain what fulfillment is, describe what the fulfillment process involves, provide descriptions of ecommerce fulfillment methods and suggest when to use a fulfillment center.

Related: What Is E-commerce? Definition, Advantages and Disadvantages

What is fulfillment?

Fulfillment, or order fulfillment, is the process of a company providing a product to a client. Specifically, it refers to the steps between when a company receives a new order and when it delivers that order to the customer. This is an important process for e-commerce companies because efficient and effective fulfillment processes can improve customer satisfaction. Improved customer satisfaction may lead them to recommend the company to a friend, leave a positive review or return to buy from the company again in the future.

What does the fulfillment process involve?

Here are the steps of the fulfillment process:

1. Receiving inventory

The first step in fulfillment is the process of delivering and unloading merchandise for storage. This may occur at a warehouse that the company owns. Companies may also choose to contract out to a fulfillment center. Specifically, receiving inventory may involve reviewing merchandise as it enters the storage facility and recording what merchandise arrives at what time. It can also involve labeling the merchandise and keeping records on where to locate different items.

2. Storage

If a company receives its own inventory, it's also responsible for storing the product until an order arrives. This stage of the process may involve tasks like shelving and maintaining careful product records. In some cases, companies may offer products that require specific storage environments, such as low temperatures. If a company with this type of specific storage environment need decides to outsource the fulfillment process, it might select a fulfillment center that specializes in storage environment options.

Related: Top E-commerce Metrics for Tracking Performance

3. Order processing and packing

Similarly to the storage step, companies that choose to outsource fulfillment can process orders by passing along order information to the fulfillment company. That company can then perform the order processing, which may include locating products in the warehouse, removing them from their shelves, transporting them to an inspection area, inspecting them for quality assurance, packaging them and transporting them to the shipping area. A company that chooses to manage its own fulfillment process is also responsible for completing these order processing tasks.

4. Shipping and delivery

Once a company or fulfillment center has completed all order processing and packing, the merchandise is ready to be shipped to the customer. Companies may choose to use a third-party shipping specialist or to hire shipment professionals and delivery drivers to perform the operation themselves. The cost of the shipment may depend on the size of the package, the weight of the package, where the package is going, how quickly it needs to get there and how much the customer is paying to offset shipping costs.

Companies can also create systems to notify customers by email when the shipping process begins and when their package arrives. This can be useful because customers may ensure that they're home to receive a package if necessary, and may be less likely to contact the company with questions about the shipping and delivery process. This clear line of communication can also help the customer feel valued.

6. Returns

The ability to return a product is important is an important option for customers who shop online, as they may change their mind about their purchase after experiencing the product in person for the first time. To encourage sales, many e-commerce companies choose to advertise accessible return policies that allow customers to send products back quickly and easily. This stage of the fulfillment process may include tracking and managing the returned item, and replacing it or refunding the client.

Related: What Is the Order Filling Process? Definition, Steps and Tips

Methods of e-commerce order fulfillment

There are several methods of e-commerce order fulfillment that companies may choose between. Some involve high levels of control and responsibility over the fulfillment process, while others outsource those tasks. Here are three fulfillment models common in the e-commerce business world:

In-house fulfillment

In-house fulfillment, or self-fulfillment, describes when a company completes each step of the fulfillment process internally. Single merchants or small companies may run the fulfillment process from a home or an office. For larger companies, in-house fulfillment may include securing a warehouse, purchasing equipment for processing merchandise and hiring staff to manage the fulfillment process. Companies that choose in-house fulfillment may expect to dedicate a significant amount of time to tracking, packaging and shipping their products. Companies may also invest in automation software to improve the efficiency of an in-house fulfillment process.

The benefits of in-house fulfillment include:

  • Company control: Complete control over the fulfillment process can allow companies to make shipping guarantees or include personal touches as part of the package.

  • Affordability: In-house fulfillment can help small companies save money by alleviating third-party expenses.

  • Ease: Anyone can create in-house fulfillment processes, making it a good choice for beginner merchants.

Third-party fulfillment

Third-party fulfillment involves outsourcing the fulfillment process to another company. In these cases, the fulfillment company is responsible for tasks like receiving inventory, facilitating storage and packaging products at their fulfillment center. Fulfillment companies may also handle the shipping of products, either by operating shipping and delivery infrastructure or by partnering with another third-party shipping organization. Fulfillment centers may form close partnerships with shipping companies to create a mutually beneficial shipping arrangement wherein the fulfillment center receives a discount on shipping services in return for the loyalty of the fulfillment company. Deals like this can help fulfillment centers create profit.

Benefits of working with a third-party fulfillment company may include:

  • Increased capacity: Fulfillment centers offer a large capacity for storing and managing product. This allows companies to purchase or manufacture products in bulk, which may save the company money.

  • Convenience: Companies can save time by outsourcing fulfillment, allowing company team members to focus their time and energy on company brand, products and growth.

  • Shipping deals: The fulfillment center's ability to negotiate lower shipping prices may also benefit company partners, because it can allow the fulfillment center to offer the company a lower price for outsourcing.

Dropshipping

Dropshipping is a fulfillment alternative that involves the manufacturer sending products to clients directly. An e-commerce company that uses dropshipping might advertise certain products without physically possessing them in a warehouse or fulfillment center. When it receives an order for that product, it can send the customer shipping information to the manufacturer who ships the product to the customer. While the ease of this process can be helpful to individuals entering business, companies interested in local, scalable or personal fulfillment processes may prefer in-house or third-party options.

Benefits of dropshipping include:

  • Affordability: Companies that use dropshipping can save money by avoiding traditional fulfillment costs like those required for a warehouse, staffing and processing.

  • Product variety: A company may expand the range of products that it offers by using dropshipping because the dropshipping process allows it to bypass the need to physically acquire new products before selling them.

  • Convenience: Dropshipping can free a company from the responsibilities of the fulfillment process, allowing it to focus on other areas, like advertisement or brand expansion.

Related: How To Start an Online Business in 5 Steps

When to use a fulfillment center

Deciding between in-house fulfillment or third-party fulfillment center can help define the scope and responsibilities of an e-commerce company. While many businesses begin with in-house fulfillment, as a company grows, it eventually may make most financial sense to shift to a third-party fulfillment process. To understand when the right time is to make that shift, consider the following tips:

Consider time spent on fulfillment

The fulfillment process can be time-consuming. When starting out, the money a small company or a merchant saves by performing fulfillment tasks themselves may be worth the time they spend performing those tasks. As business grows, these companies or individuals may reach a point when they've more orders than they've time to process. This can be a good indication that it may be time to outsource fulfillment to a fulfillment center.

Consider quality changes

One advantage of in-house fulfillment is that it allows a company to have complete control over the quality of its products, as well as the quality of the packaging, shipping and delivery. When a company contracts out to a third-party fulfillment center, it transfers some of that control to the fulfillment center professionals. While companies may mitigate risk of quality changes by choosing a professional and well-respected fulfillment partner, trusting another company with products always carries a slight level of risk.

For this reason, company decision-makers might consider the value of their merchandise and compare the risk of quality change with the advantage of outsourcing when making the fulfillment decision.

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