Third Party Fulfillment Centers: When and Why to Outsource Fulfillment

What Is a Third Party Fulfillment Center?

A fulfillment center is more than just a warehouse. It is a full-service fulfillment provider that processes incoming orders, picks and packs products, and then ships them directly to your end customer. Your fulfillment center may be inside your living room, you may own and operate your own fulfillment network, or you may choose to outsource order fulfillment to a third party partner.

A third party fulfillment center is an outsourced fulfillment and warehousing partner that manages order fulfillment and delivery on your behalf. A third party fulfillment partner can ease the operational burden of delivering products to your end customers so you can focus on the parts of your business that you know best.

What is Third Party Logistics?

Third Party Logistics (otherwise known as 3PL) is an outsourced fulfillment solution. A third party logistics provider may have multiple fulfillment centers that are connected by a warehouse management system (WMS).

What is a Third Party Distribution Center?

A third party distribution center is often part of a hub and spoke distribution model. The distribution center is a large storage and processing facility that acts as a transfer point between shipping modes. Most often, merchants will import goods via ocean freight then transfer the product out of the port to a nearby distribution center. At the distribution center, the product will be unpacked, palletized, and distributed to multiple strategically-located fulfillment centers.

Distribution centers are large facilities that don’t offer as many fulfillment services as a fulfillment center. Therefore, they are able to store larger quantities of inventory for longer periods of time. When fulfillment centers within the hub and spoke network are low on inventory, they are replenished from stock at the distribution center.

Why Use a Third Party Fulfillment Provider?

If you are successfully managing your fulfillment in-house, you may wonder why you would choose to outsource to a third party provider. However, even the most sophisticated companies may choose to outsource their fulfillment for one or more of the following reasons:

• Free up working capital: Especially for young and high-growth businesses, it’s important to have capital on-hand to invest in new product lines or increasing headcount. Owning and operating your own fulfillment centers is a capital-intensive endeavor. Outsourcing to a third party can free up some of that capital to invest back into your business.
• Free up internal bandwidth: Similarly, you may find that fulfillment demands a high percentage of your employees’ time and energy. Outsourcing can free up some of their bandwidth to focus on core competencies that will drive better results for your business.
• Scalability: A good third-party fulfillment partner will meet your current business needs and have the capacity to scale up quickly when you experience periods of rapid growth. Scalability also allows you to increase capacity for seasonal demand and then scale back in the off-season.
• Expert support and recommendations: Having a dedicated fulfillment partner gives you access to experts across the supply chain who can make recommendations on inventory distribution, inventory management, and demand forecasting.
• Access to greater resources: A third-party fulfillment center will likely have access to greater resources, including fulfillment technology, inventory management, and a diverse network of facilities that can meet different storage needs.

Children’s furniture brand, ECR4Kids, was successfully operating multiple fulfillment centers in-house to fulfill their largely B2B orders. However, when they moved into direct to consumer (D2C) sales, they quickly realized that their facilities weren’t set up to meet consumer expectations for delivery.

They chose to outsource their D2C order volume to Ware2Go for a short trial period. When they saw how much more efficient their business was with a third party fulfillment partner, they chose to exit their in-house facilities and outsource all of their fulfillment to Ware2Go.

What Services do Third Party Fulfillment Centers Provide?

As we mentioned early on, a fulfillment center is much more than a warehouse. A full-service third party fulfillment center should offer the following services:

• Inbounding: The process of receiving and processing inbound shipments should happen quickly so your products are stocked and ready to be sold immediately.
• Storage: Proper storage protocols reduce damage and shrinkage during long-term or short-term storage.
  Inventory Management: A quality fulfillment center will perform regular inventory cycle counts to reduce shrinkage, provide data to inform inventory reorder points, and make recommendations on where to store inventory within their network.
• Picking and packing: Protocols like proper warehouse slotting help make picking and packing more efficient to reduce mis-picks and improve on-time fulfillment and delivery.
• Outbound shipping: A third-party fulfillment center will have regular pickups directly from their facility. Choose a partner that has a strong relationship with reliable carriers.

How Many Fulfillment Centers Do I Need?

In the beginning, most merchants fulfill all of their orders from a single fulfillment center. However, as they grow, they find that their consumers are spread out all over the country. If they continue to fulfill from a single fulfillment center, they end up shipping a percentage of their orders all the way across the country. These long-zone shipments are costly and don’t meet consumer expectations for fast shipping.

Distributing inventory to multiple fulfillment centers across the country lowers the time in transit (TNT) to the end customer, lowering the cost of delivery and enabling faster shipping promises. Many merchants know they should be distributing their inventory but knowing how many fulfillment centers they need and where to position them can be a barrier to entry.

Ware2Go’s free tool, NetworkVu, uses your own sales and shipping data to recommend a custom fulfillment network for your business. It displays multiple scenarios so you can see how adding additional warehouses to your network will affect your TNT and your cost of fulfillment. These recommendations can help you decide how many fulfillment centers you need in your fulfillment network and where they should be located to achieve the best possible delivery times to your best customers.

Learn more about NetworkVu

Looking for a third-party fulfillment center for your business? Reach out to one of our fulfillment experts today.