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Startup Order Fulfillment – When It Makes Sense to Outsource to a Third-Party Provider
The decision to outsource startup order fulfillment is a critical one for startups and other early-stage firms. For firms that are resource-constrained, third-party order fulfillment will usually increase the direct cost of shipping a package relative to an informal operation that is based out of the proverbial (and often literal) kitchen, living room, garage, or basement—especially when such an arrangement is coupled with (seemingly) free labor supplied by the founders, their spouses, and their friends. These types of arrangements are part of the fun of a startup; however, with just a bit of growth, they can quickly become insufficient and stifling—necessitating either a large investment in overhead (long-term warehouse space, dedicated employees, fork lifts and other equipment, etc.) or outsourcing to a third-party fulfillment center. The tipping point generally comes when one or more of the following points apply:
- The informal operation cannot keep up with existing demand
- Substantial focus is being diverted away from sales, marketing, and growth
- An increased need exists for special service classes, compliance with complicated and unforgiving routing guides, and order accuracy
There are times when it might make sense to keep fulfillment in-house—especially if the manufacturing of finished goods is being handled in-house and/or if excess warehouse space, equipment, and staff are already paid for and in position; however, for most resource-constrained startups, a capital-light outsourced model is going to make a lot more sense.
Startup Order Fulfillment – Growth Overwhelms the Capacity of the Kitchen
It can be a long-time coming or a bolt out of the blue; however, at some point, a successful startup will lose the ability to operate informally. Common issues:
- Inventory levels – bootstrapping startups often carry low levels of inventory which take up very little space; however, with success usually comes a need for a material investment in inventory to increase margins and decrease the likelihood of potentially crippling stock-outs. When cartons turn into pallets and pallets turn into trailer- and container-loads, the kitchen is going to get a bit cramped—not to mention dirty.
- Relentless deadlines – orders have to go out on time each and every day, especially around the holidays. For a short while, this isn’t all that problematic, but overtime, the bootstrapping startup is going to struggle to maintain standards. Daily trips to the post office—last minute dashes to a FedEx or UPS drop off point—all may be fine for a while, but the grind of fulfillment eventually wears people down.
- Error rates – busy people make mistakes and, like it or not, the modern consumer is less-than-understanding. Accurate picking requires proper verification tools or inventory errors will be the norm as opposed to the exception.
Startup Order Fulfillment – Focusing on the Wrong Things
The typical resource-constrained startup needs to generate revenue – and rather quickly – to avoid becoming another unfortunate entrepreneurial statistic. Accordingly, internal resources should remain dedicated to sales and marketing as opposed to non-growth-oriented operational matters. The points outlined above are applicable here as well, but a few more to consider:
- Receiving and reworking – success in the pick, pack, and ship process demands timely receiving and reworking. For a lean operation, the tasks of managing large inbound shipments, correcting wide-spread manufacturing errors, and kitting numerous bundles, among other things, can quickly become onerous and distracting.
- Packaging materials procurement – polybags, bubble mailers, corrugated cartons, void fill, tape, and pallets must all be purchased in (capital- and space-absorbing) bulk quantities and re-ordered promptly to maintain outbound packaging standards.
- Order change management – the handling of last-minute order changes, cancellations, and consolidations gets ever more time-consuming and, therefore, error-prone as order quantities increase.
- Returns management and reverse logistics – depending on the industry, returns management and the entire reverse logistics process can become quite burdensome for an overstretched operation – resulting in mismanaged refunds/exchanges, damaged or destroyed customer relationships, and substantial opportunity cost.
Startup Order Fulfillment – Growing Complexity
In many instances, with growth comes an ever more complex scope of work for fulfillment. Things to consider:
- Multi-channel fulfillment – when all sales are running through a single proprietary website or Amazon storefront, things like inventory management are pretty straight-forward; however, the complexities increase dramatically as additional sales channels are layered into the mix – especially in the absence of the right software.
- Wholesale customers – very few business models allow for substantial scale without a wholesale component. As wholesale clients enter the picture, so to do complicated and unforgiving routing guides and the ever-present threat of chargebacks and rejected shipments.
- Accuracy – increasingly, error-free fulfillment is becoming the expectation as opposed to the exception. Programs like Seller Fulfilled Prime, for instance, demand near perfect performance – every single shipping day.
Outsourced fulfillment is an excellent solution for many startup operations; however, there are certainly exceptions – some of which are addressed above, but many of which are not. For a more complete exploration, please take a look at Startup Order Fulfillment – When It Doesn’t Make Sense to Outsource to a Third-Party Provider and 7 Reasons to Change Order Fulfillment Providers (which discusses the selection of a specific provider).