Fulfillment Models (Warehousing, 3PLs and Drop Shipping)

Fulfillment Models (Warehousing, 3PLs and Drop Shipping)

Your fulfillment model, or in other words, the system you have in place to store and ship your products to your customers, is a very key aspect of any ecommerce business. Without a solid fulfillment model behind you providing a great customer experience there is no way to scale an ecommerce business.

There are various different ways you can set up fulfillment for your business, and we will dive into them in this section.

Traditional Warehousing Model

A traditional ecommerce fulfillment model involves buying, leasing, or renting warehouse space somewhere in the proximity of where the products are sold. Then, hiring staff to work in the warehouse to keep it clean, keep all of the products organized on the shelves, and to ship products to customers once the business receives new orders.

Large warehouses typically have a software system set up that is used to ingest orders from the online store backend (like Shopify for example), and automatically choose the shipping carrier and print labels for the shipments. These systems are referred to as ERP (Enterprise Resource Planning) systems, and help warehouses organize and manage their day-to-day operations. Warehouses should generally try and maintain a 24 hour ship-by window, so orders will go out within 24 hours of the order being placed on the website. Having a good ERP system in place to keep day-to-day operations organized and efficient is very important.

Many new business owners opt to warehouse and ship products themselves. This usually means getting truck loads of products shipped to their personal address, sticking all the products in their garage, and spending a few hours per day labeling and driving packages to the local post office.

While I am not against the idea of handling the storage and shipment of products when you first get started, I am fully against scaling a business in this fashion. The fact is if you are spending more than 1 hour per day labeling and shipping boxes, your time can be better spent as an ecom business owner. The largest value-add and competitive advantage of an ecommerce business generally comes down to its marketing, not it’s fulfillment system, so that is where you should dedicate your time as a small business owner.

If you do plan to scale while maintaining ownership of your own warehouse, then it would at least be a good idea to get it out of your home. This will involve finding a leasing a warehouse space, and then staffing that warehouse space with hourly workers to help you ship all the orders you receive. Of course, to know how many workers to hire you will need to estimate the demand of your business. Which can be almost impossible starting out. It can also introduce bottle necks into how fast you can scale. If you only have 1 parttime warehouse worker who can send 50 orders per day on average, then you cannot scale beyond this number without hiring more staff.

As I said, owning your warehouse and fulfillment infrastructure like this is a popular choice for many new ecommerce brand owners. However, not necessarily a wise choice in my opinion. I want to re-iterate, your main competitive advantage as an ecommerce brand is your ability to market and sell your products better than the competition, not ship every order out within 24 hours. Because do you know who can ship their products within 24 hours? everyone. If that’s all your business has going for it, it is destined to fail.

3PLs (Third Party Logistics)

I believe the better approach is to outsource your fulfillment model and logistics to what we call a 3PL (Third Party Logistics). A 3PL is an independent company who’s sole business is to warehouse and ship products for their clients. They are a warehouse for hire, and they can serve tens, hundreds, or even thousands of merchants at the same time. Some popular US 3PLs you may have heard of are ShipBob, Deliverr and ShipMonk. There are thousands of other 3PLs in the US and elsewhere in the world, all with their unique pros and cons.

The great thing about hiring a 3PL when you are small is that you can leverage a 3PLs pre-existing economy of scale. 3PLs serve many ecommerce businesses like I mentioned, so that means they have the scale and resources behind them to invest in the best ERP systems, best warehouse spaces, and most importantly, get the best rates on shipping due to their high shipping volume. Carriers like UPS and FedEx often offer much better prices for clients that ship a lot of packages, so 3PLs are in prime position to take advantage of this and pass those savings on to you.

Choosing the right 3PL will also remove that bottle neck in terms of scaling your business. A good 3PL can process thousands of orders per day for you with no extra staffing or hiring needed on your part. They are very flexible; as long as you can sell more products, they can ship them.

Many 3PLs also have special relationships, or special software set up to ship to certain retailers. So, if you wanted to get into Walmart for example, you can find a 3PL who already ships to Walmart and is set up with their systems. Very valuable if you plan to get into retailers at some point down the line.

What country you locate and hire your 3PL in will depend on where you are selling the majority of your products, and how heavy your products are to ship. If you are selling heavy products exclusively on the east coast of the US, then it stands to reason you should hire a warehouse somewhere on the east coast. This will lower the 3PLs shipping costs, and therefore your shipping costs to send products to your customers.

If you are selling very light products (like phone cases for example) to a global audience, and you manufacture in China, you should look at hiring a 3PL in China. This is an often overlooked, but incredible option for anyone shipping light products to a global audience. 3PLs in China use special shipping lines (such as YunExpress) to offer cost effective shipping to anywhere in the world within about 7-12 days. It’s also ideal from a cash flow perspective if you are manufacturing in China, since you can start shipping products as soon as the manufacturing is complete (no need to wait until your product is shipped to your local warehouse). If you are looking for a China 3PL I recommend a 3PL called EcomOps, and you can check them out at ecommops.com

Drop Shipping

Lastly, let’s discuss drop shipping. What is drop shipping exactly?

Drop shipping is a fulfillment model where you purchase the inventory you sell after you make a sale. Once your store makes a sale, only then do you purchase the product from your supplier, and pay that supplier to ship the product to your customer on your behalf.

Drop shipping is such a popular model because it eliminates all of your inventory risk as a business owner. If your website/product doesn’t sell, you are not out any money, because you do not own any inventory.

It’s also a great model because it can be highly scalable, assuming you select the right drop shipping agent to work with. As your demand grows, your agent should be able to grow with you and meet that demand.

If you are new to marketing and ecommerce than it’s hard to beat drop shipping. Setting up your store with a drop shipping model allows you to outsource all of the fulfillment operations, so you can focus on the marketing. It allows you to get up and running quickly, so you can start launching ads and testing demand for your product within days. I always recommend anyone who wants to sell physical products via social media advertising to start with a drop shipping store. It’s an extremely low risk way to get some experience under your belt and learn how to set up a store and market products.

Okay, so that was a lot of good things about drop shipping. Now, let’s talk about the negatives.

The biggest negative is that 80% of drop shipping agents out there provide slow and unreliable shipping. Aliexpress for example is likely the largest drop shipping marketplace for new ecom businesses.

Aliexpress, if you are not familiar, is just a marketplace for drop shipping agents, where they can list what products they have available for drop shipping, and you can hire and pay them through Aliexpress to drop ship your products for you.

If you navigate through the listings on Aliexpress and look at the shipping times you will commonly see shipping methods like e-packet that take 20-40 days for shipping to North America. So, shipping time is general very long on Aliexpress. Not to mention many Aliexpress drop shipping agents are simply unreliable, ship the wrong items, and sometimes do not ship anything at all.

Popular products on Aliexpress also tend to be very competitive in nature. Products on Aliexpress have basically zero barriers to entry. Any ecom business owner can very quickly and easily set up a website with dropshipping from Aliexpress. So products on Aliexpress with a proven market demand tend to get very saturated very quickly on Facebook, Instagram, and other marketing channels.

A better approach to drop shipping is to drop ship through dedicated agents. For example, you can partner with dedicated agents in China that you know and trust to source products for you, with faster shipping times than you would get on Aliexpress. The kicker is that good agents like this typically have requirements in terms of monthly order minimums. EcomOps is a good example of this. EcomOps can provide drop shipping services for you (where they take the inventory risk), but in general you will need a demand of at least 20 orders per day before they will work with you.

So, in summary, I recommend drop shipping for anyone new to ecommerce who wants to sell on their own website. Especially if your plan is to acquire your customers via paid marketing strategies. Drop shipping gives you a quick and easy way to get off the ground running, and will give you first hand experience in creating an ecom website and launching online ads.

After you launch your first few drop shipping businesses and learn the ins and outs of creating a website and launching ads, then you are in a much better position to go for it by investing money into a unique brand and product. This is the route I took, and I think it’s a winner.
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