Editor’s Note:”Notable Views” is a series where we ask leading experts to address critical, ecommerce-related topics. For this installment, we corresponded with John Lindberg, president of eFulfillment Service, a Michigan-based ecommerce fulfillment company. He is also a Practical eCommerce contributor, addressing shipping and fulfillment matters. Lindberg’s views on outsourcing fulfillment are below.
I own an order fulfillment company. So you might assume that I want all merchants to outsource their order fulfillment. But I don’t see it that way at all. There are lots of situations that outsourcing makes sense, but there are likewise many where it doesn’t. The purpose of this article is to offer my views — which any online merchant can use — on whether fulfillment outsourcing is appropriate.
Reasons Not to Outsource Fulfillment
First of all, there are many reasons not to outsource fulfillment.
A recent blog post on Practical eCommerce did a good job of explaining why outsourcing may not be right for you. In “Top 7 Reasons Why You Shouldn’t Outsource Fulfillment,” blogger Jamie Salvatori — a successful ecommerce entrepreneur — explained his opposition to outsourced fulfillment.
- You have to depend on your fulfillment center’s delivery reliability and speed.
- Your fulfillment provider may make more mistakes than you or your staff would.
- The return processing workers may not be able to judge the salability of your returns.
- The outsourced cost may end up more than you would pay doing fulfillment on your own.
- The fulfillment house may not pack your merchandise carefully enough.
- You will have to rely on your fulfillment company’s stock packaging.
- And you will have to adapt to your fulfillment center’s generic systems, instead of creating a unique processing solution of your own.
Reasons to Outsource Fulfillment
But, there are some compelling reasons why the opposite may be true.
- Outsourcing can absorb seasonal spikes in shipping and returns volume.
- Most fulfillment houses provide access to FedEx and UPS discounts.
- All established fulfillment providers guarantee their work.
- Outsourcing converts fixed costs like rent and labor to pure variable cost per order.
- You can focus on what you do best by outsourcing unfamiliar tasks.
Plus, there are situations for which there is no viable alternative to outsourcing. Examples include: (a) foreign exporters selling expensive-to-ship merchandise into the U.S.; (b) online merchants avoiding order processing because of lifestyle choices, (c) the physical workload may be too much for the online merchant to handle on their own, and (d) the merchant’s geographic location may be too remote from its customers. In all these cases, fulfillment outsourcing is often chosen no matter what costs are involved.
Calculating the Per-Order Fulfillment Cost
In most circumstances, however, reduced per-order fulfillment cost is the key factor. The starting point in the cost comparison process is to carefully calculate your present or planned fulfillment cost per order and to compare this to the cost per order quoted by reputable order fulfillment companies.
To begin, use your most recent profit and loss statement or your business plan to identify all the costs that you would reduce or eliminate if you were to outsource order fulfillment. Then, simply divide this total by the number of orders that you have shipped or plan to ship in the same time frame. The result is your average fulfillment cost per order.
For example, suppose you ship 12,000 orders per year and the total of your shipping-supplies expense — UPS, FedEx, USPS cost; fulfillment labor cost, including taxes and benefits; total facility cost, including rent, utilities and depreciation — came to $180,000. Your fulfillment cost would thus be $180,000 divided by 12,000 orders or $15.00 per order. This is the figure to compare to your outsourced cost per order.
Compare Costs: In-House vs. Outsourced
The next step takes some shopping, but the effort is worth it. Once you know your own fulfillment cost per order, gather quotes from several fulfillment companies based on (a) the number of orders and items to be shipped, and (b) the delivery charges using their rate charts and including their receiving and storage fees, return processing costs and so forth.
Just as you figured your internal fulfillment cost per order, you can now project all the costs for outsourced fulfillment for a year and divide by the same number.
For example, suppose your best outsourced-fulfillment fee averaged $2.20 per order, average delivery cost was $7.50 per order and the annual storage and other fees divided by your orders per year was $.80 each. This would mean your outsourced would be $10.50 ($2.20 + $7.50 + $.80) per order and this is the factor that you would compare to your internal fulfillment cost per order in making your outsourcing decision.
Low Volume Shippers
There is a key cost that impacts the outsource decision for most low volume shippers. FedEx and UPS charge from $520.00 to $1,040.00 a year to access their daily pick up rates and negotiated volume discounts. These lower rates are about 25 percent less than rates charged at their retail outlets, but you must sign a contract and provide the needed equipment and materials.
Endicia.com and Stamps.com fees for access to USPS electronic rates run from $120.00 to $420.00 per year depending on service plan and rate-shopping software like TrueShip or ShipWorks costs an additional $180.00 to $600.00 per year, depending on features.
The total of these costs plus shipping supplies and equipment expense is typically $2,000 to $3,000 per year, which means an online merchant with package ship volume less than 1,000 annual parcels may have a $2.00 or $3.00 per order expense before adding in the cost of delivery, facilities and labor. Because outsourced per-order pick-pack fees are often less than this, outsourcing can provide free access to lower ship rates without having to invest in the needed equipment and software. Likewise, partial outsourcing can be an effective solution for some.
As the trend toward free shipping continues to build, we are seeing more small and midsize ecommerce merchants outsourcing certain fulfillment orders while keeping the rest in-house. This is especially common among shippers located in the far Eastern or Western U.S. This means a fulfillment house could ship orders as, say, zone 2, 3 or 4 that otherwise would have been zone 6, 7 or 8. This feature alone could make a free shipping offer viable — instead of cost prohibitive. The same can be true when there is a large amount of slow-selling inventory to be stored, or storage of large individual items is required.
There are pros and cons to outsourced order fulfillment. For most online merchants, the key factor is their internal fulfillment cost per order compared to the outsourced cost per order. For startup and low volume merchants, the fixed cost of weekly and monthly common carrier and software fees — plus the initial cost of warehouse and package processing equipment — often makes outsourced fulfillment pick-and-pack fees “free” by comparison. Nevertheless, careful attention to any potential fulfillment company’s customer service record and service guarantees is a vital part of the decision-making process.