3 Fulfillment Models for Every E-Retailer

Let’s talk fulfillment. It’s an often overlooked part to selling online, but it’s a crucial one. It deals with getting product from where it’s stored to the customer’s door, and most merchants probably agree that’s pretty important.

There are three common fulfillment models that most e-retailers adopt to get products from A to B; in-house, outsourced, and dropshipping. We’ll cover all of them, starting with dropshipping.

Dropshipping

Dropshipping is a fulfillment model with the least actual fulfillment -- it’s super hands-off. It’s a model where an e-retailer sells a supplier’s products which the supplier ends up fulfilling on their own. Dropshippers could run their business from a car with an Internet connection.

It’s attractive to a good amount of merchants because you won’t have to deal with the process of buying, picking, packing, and shipping products. No boxes, no shipping labels, no stored product. All you do is work with a supplier that has products you’d like to sell, you market them, and send any orders to the supplier who handles the rest.

Here’s a rundown of all the benefits:

  • No upfront costs -- You won’t need cash for inventory, as your supplier is the one handling that. That means no paying for storage space or having cash tied to inventory.

  • Focus on the sexy side -- Your job is to sell the product. All of the enjoyable customer-facing responsibilities -- branding, website design, content, email marketing -- are in your court.

  • Test new products easily -- As you build a brand, adding products is as simple as asking suppliers if they’ll let you sell them. No need to worry about riskily buying a product that won’t perform well. Just dropship new products to see if they’re decent performing.

  • Scale simply -- If you find yourself looking to expand your product offerings, simply leverage multiple suppliers. Sell products from as many suppliers as you can manage.

And, for emphasis, you won’t have to deal with anything related to fulfillment. It’s probably a pretty picture, but it does have an uglier side that repels many merchants…

Lack of control

When you dropship, you have little to no control over anything about an order, whether it’s the fulfillment time, method, packaging -- any of it. It is entirely hands-off; you sell the product and that’s it.

That causes some issues for merchants. Because you’re essentially the salesman and marketer, you’re missing out on an opportunity to build the very brand you’re using to sell the product. You won’t be able to add any branded or personal touches to the order, whether it’s branded packaging or a thank you note, because you don’t fulfill anything.

Plus, if something goes awry in the fulfillment process and you have an irate customer with a return, what are you going to do about it? The return is sent back to your supplier who handled the order to begin with. Are you going to wag your finger at them and tell them to correct their mistake for future orders to come? A returned order impacts your brand more than the supplier.

Pick those partners wisely

That leads to the next and perhaps biggest risk to dropshipping: you don’t have much leverage unless you’re selling effectively. Your vendor is your biggest risk.

A dropshipper, at the end of the day, is a middleman between supplier and customer. A salesman, so to speak, that sells the supplier’s products. What’s to prevent a supplier from getting a new one? There are plenty of businesses out there.

In fact, what’s to prevent a supplier from bypassing the salesman altogether? Once a customer places an order, the supplier has all the information they need to cut out the middleman and sell directly. That said, most suppliers wouldn’t risk their reputation by making such a move.

To make matters worse, suppliers also have a finite amount of product, but can have as many dropshippers as they want. You’re sharing inventory with other businesses. If quantity hits zero, you won’t have products to sell.

Long story short, relationships are everything when dropshipping. You’re very reliant on your supplier when you dropship, and that makes some merchants very uncomfortable.

Outsourced fulfillment

How about a fulfillment-free fulfillment model where you actually control inventory but don’t need to rely on suppliers? That’s the essence of outsourced fulfillment, a model where a merchant purchases inventory from suppliers to sell, but outsources their entire inventory and shipping operations to a third-party that stores, manages, and fulfills orders.

Hands-pretty-much-off

You won’t be dealing with fulfillment when outsourcing. That’s the biggest pro to the model. No routine, day-to-day, hour-to-hour order fulfillment. By outsourcing to a 3PL (third-party logistics provider), you’re paying for products to be stored and fulfilled efficiently, all while you go about handling other business matters, like online marketing.

Other than the cost-effective shipping rates that 3PLs are able to negotiate due to the order volume they’re fulfilling, that hands-off fulfillment is pretty much the only benefit, albeit a huge one.

There are a few big questions you need to ask yourself before trying out outsourced:

  • Is my order volume steady -- Working with a 3PL means added expenses and added costs for every product fulfilled. Consistent order volume makes sure those expenses are manageable, if not predictable.

  • Is integration a possibility -- It’s incredibly important that you’re able to connect your sales channels to your 3PL if you want to optimize your process by automatically routing ready-to-be-fulfilled orders their way.

  • Do my products fit an outsourced model -- If your product is fragile, personalized, or perishable, it won’t do very well in a 3PL that efficiently gets products out the door.

The cons

When it comes to outsourced fulfillment costs, things get a lot more complicated. It gets pricey, and 3PLs pricing structures can vary quite a bit. Finding the 3PL that meets your needs -- whether it’s product or cost-wise -- will require research.

And, like dropshipping, control remains the biggest issue. Merchants will have to make sure a 3PL is willing to accept and use their branded suppliers if they want to drive brand awareness and loyalty.

But where that lack of control really stings is the fact that your inventory -- that large investment of yours -- is potentially far away from you in a warehouse owned by a third-party. It’s uncomfortable for inventory to be out of a merchant’s hands, and it forces them to rely on a third-party for updates as orders are fulfilled. The integration question mentioned earlier is important here.

Unless you want to be in constant communication with your 3PL -- manually sending orders their way, waiting for their updates, and updating your spreadsheets -- an integration between your sales channels and the 3PL is essential. Through it, the sales channel can alert the 3PL of fulfillable orders, after which the 3PL can fulfill them, update inventory quantity and automatically write amounts back to those channels so everything is aligned.

It gets complicated. But for others who want that simple control over both inventory and fulfillment, there’s in-house, a more common model.

In-house fulfillment

In-house fulfillment is almost always first-base for e-retailers when they launch their online businesses. Why? Well, it’s the simplest, it’s DIY, and you can literally begin fulfilling in your very own house (or apartment, of course).

It’s a model that takes the fulfillment process -- getting products from inventory to the customer’s door -- and puts the reins in your hands. That’s the chief benefit of in-house fulfillment: complete control.

Control

As orders flow in, you’ll pick, package, and select the carriers to ship your products out. And that second word, package, is where your power of control shines.

Here are some operational options in-house provides:

  • Quality control -- Because it’s DIY, you won’t be relying on any third-party to ensure that your package above par. Every package that goes out has your seal of approval.

  • Branded unboxing experience -- Rather than using standard, cardboard boxes that a 3PL or supplier uses, you have the ability to use your own branded materials, like brand-colored tissue paper and branded boxes.

  • Add some personalization -- Because you’re handling orders, you can apply a personal touch, like a handwritten note of thanks, a second-purchase discount, or returns information.

Scale

As you grow, in-house fulfillment scales alongside you, as it’s still (you guessed it) in your control. Once your living room or garage gets too packed, renting out warehouse or storage space is a possibility. And if you find your order volume getting too high to manage alone (a great problem), it’s always possible to hire some part time employees that help pick, pack, and ship.

Do keep in mind, though, that these are also risks. The more space, the more inventory you have, and that means more tied-up cash. And the more people you hire, the greater the legal and compliance risk.

Reaction time

With in-house, you’re able to react quickly to changes in demand. You’re constantly aware of stock quantities, and if something’s selling fast, it’s easy to restock. If a product’s sitting on a shelf, throw a promotion up. Similar products selling in the same cart? Bundle them together as a single product for sale.

Whenever you’re fulfilling with a 3PL via outsourced, they must always be kept in the loop. It’s not as simple as “wow, this product’s flying off the shelves -- let’s buy more.” You must alert them, involve them, and be sure they’re prepared for changes in your demand.

That said, regardless of how much control you want, you are reliant on suppliers. If they don’t have product, it doesn’t matter how quick you react.

Control problems

So far, in-house probably looks amazing compared to the former two models. But there’s a big reason merchants select outsourced fulfillment and dropshipping. They would prefer not to have to control fulfillment.

It can get overwhelming at high order volumes when you’re spending much of the day going through the motions of getting products out. And if you aren’t doing it yourself, you’re likely renting space and hiring employees, which can get just as expensive as outsourced fulfillment at a point.

The spectrum

Essentially, each of these fulfillment models lies on a spectrum of control, with in-house having the most control over fulfillment, and dropshipping the least, with pros and cons dispersed throughout each. Merchants will always end up picking one that meets their needs when it comes to cost and control.

It also should be said that none of these models is exclusive; you can fulfill different products in different ways. Large products with sizable margins may be great for outsourced or dropshipping. Items easily fulfilled in small parcels or that require some personalization may be good for in-house. It’s all up to you!

About the author

This is a guest post, written by Harrison Dromgoole, the Content Creator at Ordoro, a shipping and inventory management tool. Ordoro tackles the unsexy but essential function of supply chain and order management, allowing merchants to streamline their back-office processes across all their sales channels so they can focus on growing their business.