What Are Fulfillment Centers & How Do They Work?
Katie-Jay aims to put answers in the hands of small business owners by leveraging over 10 years of retail and hospitality experience. With a background in gemology, she specializes in jewelry and luxury ecommerce.
This article is part of a larger series on Retail Management.
A fulfillment center is an enterprise that specializes in handling inventory, processing orders, and shipping goods for other businesses—effectively freeing up their precious time and resources to put toward driving growth in other areas.
The term fulfillment refers to all supply chain functions related to receiving, processing, and delivering customer orders.
For many ecommerce retailers, the strain of handling fulfillment operations in-house leaves them at a loss for crucial resources like space and time. Fortunately for merchants, wholesalers, and manufacturers alike, these tasks can be outsourced to third-party fulfillment partners such as ShipBob or Red Stag Fulfillment.
The Fulfillment Process
Each step of the fulfillment process is important to ensuring your orders go out smoothly and your customer experience remains positive.
Some merchants—especially as they’re just starting an online store—find that these tasks can be efficiently performed in-house. But when order volume outgrows available space, labor, and time, it makes sense to hand those duties off to a partner company.
Here is an in-depth look at the six steps involved in order fulfillment.
1. Inventory Is Delivered to Your Fulfillment Center
The first step in working with a fulfillment center is getting your inventory to them. Depending on where your stock originates, this can happen in multiple ways.
If you purchase goods for resale, your orders can simply be routed from your supplier directly to your fulfillment center. Then, when a stock shipment is en route, you’ll forward the details of the shipment to your fulfillment partner. Often, your purchase order or supplier’s order confirmation is all the fulfillment center needs to properly receive the shipment.
If you manufacture goods in your own facility, you’ll ship stock to your fulfillment company yourself via truck freight or parcel shippers like UPS or FedEx. Shipment details are provided when you notify the company of the inbound delivery, and the partner company takes it from there when the goods arrive.
2. Your Fulfillment Company Sorts Your Goods
Once it has made it to the fulfillment center, your stock is received and sorted by the partner company’s staff.
Fulfillment companies receive inventory shipments in much the same way any ecommerce warehouse or retail store accepts new inventory. Using the shipment details you provided, they check in your stock by verifying quantities and inspecting for damage.
It’s standard for them to confirm receipt and communicate any discrepancies before proceeding—allowing you to work with your supplier or shipping company to be credited for damaged or lost goods.
Order fulfillment companies will sort and check in your stock by verifying quantities and inspecting for damage.
Once received, your products are managed and organized within the fulfillment center through a tagging system—just like in any warehouse or brick-and-mortar store. There are different methods used for this task, and the type of system utilized is largely dependent on the partner company you choose. Many companies offer the ability to coordinate with your personal SKU system for use in their tagging and organization (but this often comes along with fees based on SKU quantities and bin requirements).
Some fulfillment centers—like Red Stag Fulfillment—specialize in advanced warehouse management system (WMS) features such as RFID tracking, video monitoring, and automation. These options are popular with merchants that sell high-value goods.
Did You Know?
ShipBob, a well-known order fulfillment company, reports a 99.95% accuracy rate when fulfilling client orders. More than 5,000 ecommerce businesses use the service, with 99.89% of reported orders shipping on time.
3. Inventory Is Stored by Your Fulfillment Company
With expert tagging and organization systems in place, your goods then move into storage.
As opposed to a traditional warehouse meant for static, long-term holding, a fulfillment center is designed for optimized logistics and fast turnover. Keeping a healthy amount of merchandise available must be balanced against storage fees that incur when your excess stock sits around taking up space. Experts recommend preventing your goods from being stored in a fulfillment center for longer than one month.
ShipBob’s warehouse shelves are lined with easy-access bins so products can be stored and picked efficiently. (Source: ShipBob)
Sellers should keep regular shipments coming in to ensure available stock is always sufficient to meet order demand. Data provided by your fulfillment partner can assist you in maintaining that balance. Growth of your company results in a more profitable partnership for them, so your fulfillment service provider is always happy to work with you in refining your processes.
Depending on the type of merchandise you sell, optional features like climate control and increased security measures can be added to your storage service to keep your goods in shape. Assess your specific needs and have them in mind when choosing which fulfillment company to use.
4. Customer Orders Are Routed to Your Fulfillment Company
Now that your inventory is safely delivered to, received by, and stored within your fulfillment center, it’s ready to process your customers’ purchases.
No matter which system you choose to accept and manage your orders, fulfillment companies go the distance to make connectivity simple. If you don’t have an order-receiving system in place, they can provide an online portal for manual order entry. Some fulfillment partners will even take care of this task for you, or offer customer service options to accept your orders via phone or email.
Here are some of the most common order-routing options.
Complete Integration
Complete integration with your retail point-of-sale (POS) system, order management software, or ecommerce platform is the best way for your business to relay orders to a partner fulfillment company. This option automatically routes your orders to your fulfillment company’s internal system, allowing it to receive comprehensive order information—including product specifications, customer info, and shipping method—as soon as the order is placed.
Complete integration is common between most fulfillment companies and top ecommerce platforms, POS systems, and order management systems. Since integration increases the efficiency of their operations, most fulfillment companies heavily promote this capability and offer it at no additional cost.
When shopping for a fulfillment partner, look for compatibility with your existing order-receiving system.
CSV File Order Submission
If your fulfillment company doesn’t fully integrate with the system you use, you can send orders in bulk using a comma-separated value (CSV) spreadsheet.
This file type is a universal data format that most systems recognize. Virtually every spreadsheet program, POS system, ecommerce platform, and order management tool allows you to save your order data in a CSV file.
Most fulfillment companies have either a client portal to upload these files or an account representative who can take care of CSV entry for you. Depending on your sales volume, you may need to export order sheets multiple times per day, once per day, or even just a few times each week. The CSV file method requires more labor and attention than other streamlined options, but once the process is set up, it’s simple to perform.
An order sheet submitted through ShipBob’s platform (Source: ShipBob)
Manual Order Entry
Most fulfillment centers’ online portals also have a feature that allows for manual order input.
It’s the least efficient method of transmitting order data to your partner company—each piece of order information is either manually typed or copied and pasted into the page, requiring lots of time and leaving your orders prone to error.
For sellers that prefer to keep their setup as simple as possible or maintain independence from technology, this rudimentary option comes in handy. Even for businesses using the other order-submission methods explained above, manual entry is often the best means of entering phone orders, shipping sample requests, or handling other special order needs.
5. Your Fulfillment Center Processes & Ships Your Orders
Once your partner company receives your orders, it will process them for shipment and get them on their way to your customers. This part of the operation is commonly called pick, pack, and ship. Here’s how each step works.
Picking Products
“Picking” describes the process of selecting and retrieving ordered items from stored inventory. Often your fulfillment center will keep a small amount of stock near its packing station for efficiency, and reserve a larger portion in storage to periodically pull from.
Fulfillment staff scans or checks the products they pick against your order information and then moves your items into the packing stage to prepare each shipment.
Packing Orders
In packing, staff double-checks the accuracy of the picked items and packages them accordingly. If your goods require assembly, many fulfillment companies offer the option to add specialty labor to this step.
Fulfillment centers are equipped to offer a range of shipping boxes, mailers, and packing materials to ensure the safe delivery of your items. They can even help you develop customized packaging for a branded unboxing experience, or assemble several products into a packaged group (an option called kitting). In response to the rising popularity of curated subscription boxes, many fulfillment partners offer kitting services tailored to this format.
Order receipts, return labels, and any other inserts are then added in the packing phase, which all can be easily customized as well.
Shipping Parcels
Once everything is properly packed, the fulfillment staff seals boxes, weighs orders, and labels them for shipment. If a specific shipping method or carrier was designated on the order, staff will route the package accordingly. In all other cases, the partner company will rate-shop to find the lowest rate and most reasonable delivery time for each order.
Rate-shopping helps cut your shipping costs while keeping customers happy with quick deliveries. Since fulfillment companies usually ship in great volume with all carriers, you’ll enjoy far lower rates than you’d get shipping packages on your own.
Depending on the size and weight of your goods, partnering with a fulfillment company that specializes in shipping heavier products may make the most economical sense for your business. Red Stag Fulfillment’s capabilities are geared toward larger, weightier parcels averaging 10 pounds or more, and it offers a 30-day risk-free trial to find out if their service is a good match.
Once shipped, your fulfillment company will update the order status to your ecommerce platform, POS, or order management system. You can even set up automatic email notifications that send shipping information to your customers, allowing them to receive confirmation and track the status of their delivery.
Did You Know?
- Fulfillment makes an impact—67% of consumers say they won’t shop with a brand again after a poor delivery experience.
- It pays to be transparent—56% of shoppers are more likely to complete a purchase if the estimated delivery date is visible in the shopping cart.
6. Your Fulfillment Center Processes Customer Returns
Upon arrival of the order, the fulfillment process is complete—unless your customer wants to return the goods they purchased. Fortunately, using fulfillment services makes this easy for you and your customers alike.
Most fulfillment centers receive and process returns as part of your basic service. By listing their address on any return information you publish or labels you send out, customers simply ship their unwanted goods directly to the fulfillment center where they are handled.
You define the requirements for items to be added back to inventory, sold on clearance, or discarded, and your fulfillment company’s staff handles returned merchandise accordingly. Reports you receive from them for each returned item can be used to issue refunds or credit back to your customers depending on your store’s policy.
Some fulfillment companies charge restocking fees or returns-processing costs, so it’s important to know their pricing structure before partnering. If you sell goods with a high return rate—such as fashion apparel or electronics—be sure to consider this step of the cycle when shopping for fulfillment services.
Why Use a Fulfillment Company
With an understanding of how order fulfillment companies work, you might be wondering if your business could benefit from fulfillment services.
While performing these tasks in-house makes sense for many small-scale sellers, 60% of ecommerce retailers choose to outsource some or all of their fulfillment needs to a third party, according to a DHL survey. Here are the top reasons why.
Partnering with a fulfillment company is like hiring a team of experts to do what they do best. Fulfilling orders is a complex process with lots of moving parts, and any oversight or inaccuracy can have a big impact on customer experience. By outsourcing it to specialists, accuracy and efficiency are guaranteed, and fulfillment success is supported by a laser-focused operation.
Red Stag Fulfillment’s highly specialized infrastructure and staff result in maximal accuracy and efficiency. (Source: Red Stag Fulfillment)
In addition to expertise, fulfillment partners offer cost benefits from their unique relationships with shipping and supply companies. Since they purchase packing supplies and shipping services in great volumes, they can negotiate far better deals than any small business could hope to get on their own. Most fulfillment companies pass these savings on to their clients to gain and secure their business.
When you run the numbers, the savings on shipping and packing materials alone often covers a large portion of your overall fulfillment costs.
Bottom Line
Using services provided by a partner fulfillment company to manage inventory, process orders, and ship goods allows you to focus on growing your business. Outsourcing these functions provides a host of other benefits as well that can promote development and optimize your resources.
The fulfillment requirements of each seller are unique, and a vast number of different partners and services are available to choose from.
Knowing how your needs stack up against your fulfillment options is crucial to finding the right match. Check out our recommended order fulfillment companies to learn more about how these services can work for your small business.
