What Is a Fulfillment Center & Why It’s Important [+ Breakdown of Warehousing]
September 18, 2018
What do you want to learn?
The terms warehouse and fulfillment center (or distribution center) are often used interchangeably but can have very different connotations. Both are large buildings that hold inventory for businesses that sell goods; however, the use cases and services provided are often quite different. Let’s break down each option, so you have a better idea of what the best ecommerce shipping solution is for your business.
This article will cover:
- What is a fulfillment center?
- What is a fulfillment warehouse?
- Difference between warehousing and fulfillment centers
- Benefits of using a fulfillment center
What does a warehousing solution do?
When we talk about a warehousing solution, we’re referring to a company that stores products for an extended period of time. A warehouse is a large storage center or industrial space designed to house inventory in bulk. You will see equipment like forklifts and containers, with shelves stacked high and stocked with large quantities of products.
There are warehousing providers that are geared toward businesses that primarily do wholesale or B2B ecommerce orders in huge quantities. Some large retailers will have their own warehouse(s) in which to store excess inventory, while others rent space in a warehouse in conjunction with other ecommerce businesses.
Leasing warehouse space is typically more cost-effective than buying for small to mid-sized retailers, though pricing depends on the lease terms available. It’s also worth noting that many logistics warehouse tenants can expect to see a 10% rate hike starting in 2021, due to a high demand for warehouse expansion and construction.
Some small ecommerce sellers may choose to rent more cost-effective space, like local lockers or inventory storage units if they don’t have space at home. That way, they keep some inventory on hand and retrieve more when they’re running low.
What is a fulfillment center?
A fulfillment center is the physical location from which a third-party logistics (3PL) provider (also known as a fulfillment provider) fulfills customer orders for ecommerce retailers. A fulfillment center exists to get online orders to customers in a timely fashion and relieve ecommerce companies of managing this crucial-yet-challenging process.
How do fulfillment centers work?
Fulfillment center operations consist of the work that helps get online orders to your doorstep — also referred to as the order fulfillment process. An ecommerce business’s inventory is stored strategically in a 3PL’s fulfillment center in preparation for fulfilling customer orders. After a shopper completes a purchase on an ecommerce store, inventory is picked and boxes are packed, then labeled for shipment.
Fulfillment centers can process both business-to-business (B2B) orders — typically a high volume of product that is sent to a big-box retailer — as well as business-to-consumer (B2C) orders, which are shipped directly to an individual consumer’s home.
When a seller outsources ecommerce fulfillment, the 3PL is completing the fulfillment process on the store owner’s behalf. This includes everything from inventory management to negotiating rates with shipping carriers.
Outsourcing order fulfillment processes to a 3PL can make it easier to manage inventory, improve customer service, and save the seller lots of time to focus on more strategic tasks.
What is a fulfillment warehouse?
A fulfillment warehouse is often interchanged with the term “fulfillment center”. A stand-alone warehouse differs drastically from this. A warehouse is usually a place where inventory is just stored, while a fulfillment warehouse has many other jobs besides storage.
What are the differences between warehousing and fulfillment centers?
Let’s look at a few of the nuances of these two buildings that hold inventory.
Long-term vs. short-term storage
While there is a warehousing component to a 3PL’s fulfillment center — storing a merchant’s inventory in its designated locations — the main goal of a fulfillment center is to turn inventory over quickly.
Ideally, inventory should not sit in a fulfillment center for more than a month, or the merchant may be stuck paying high warehousing fees. However, sellers should proactively send more inventory to their fulfillment centers to make sure there is always enough product on hand prior to shipment.
The role of a warehouse or an on-demand warehousing solution is to store products, whereas the role of a fulfillment center is to efficiently meet customer expectations around shipping. This is made possible when retailers store inventory in fulfillment centers located near their customers, to reduce shipping costs, time in transit, and shipping zones.
Unlike warehouses that are more static or inactive, a fulfillment center has continuous movement and is a much more complex operation. A 3PL provides a variety of order fulfillment services in a fulfillment center, including:
- Receiving inventory
- Generating pick lists and picking products
- Kitting and assembling items
- Packing boxes
- Labeling shipments
- Shipping orders
- Managing returns
As far as what’s happening operationally in a warehouse, the main action occurs when inventory is added or transferred out. There are not many additional services offered.
Frequency of pickups by shipping carriers
A fulfillment company can have relationships with many different shipping carriers. Since a fulfillment center operates to fulfill direct-to-consumer orders as soon as they are placed, they need shipping carriers to pick up shipments at least daily. This ensures orders will be delivered to consumers in time as promised.
Depending on the exact services a fulfillment company offers, shipping carriers may need to pick up customer orders for any guaranteed same-day or next-day shipping options chosen by customers at certain times each day. Other carriers and services will have regularly scheduled pickups, for both domestic and international shipments.
Retail fulfillment companies will have cutoff times for orders to be placed by. For example, customer orders placed by noon local time will be processed in the fulfillment center and shipped out the same-day.
Conversely, a warehouse will typically need scheduled, less frequent pickups, since it is more cost-effective to ship freight and have boxes wrapped together on a pallet instead of generating individual shipping labels.
Freight companies try to pool inventory from various pickup locations for PTL and LTL freight shipments, which can cause a delay in pickup/delivery time, so merchants should allow for a longer turnaround time from prep to pickup.
Benefits of using a fulfillment center
What are the top advantages to online sellers that use a fulfillment companies?
Eliminate storing inventory and packing boxes
Unless you’re a brick-and-mortar retailer, managing a physical space may not be ideal. It’s no surprise that many ecommerce businesses want to avoid the hassle of storing inventory or dealing with ecommerce warehousing.
Furthermore, if you don’t want to pack boxes and run to the post office every day, a fulfillment center is a great alternative. The number one sign that it’s time to use a fulfillment center is no longer being able to keep up with your increasing order volume. Fulfillment providers help you spend less time worrying about packing supplies and post office lines and give you more time back to grow your business.
Focus on the big picture
While packing boxes and shipping customer orders are critical to meeting consumer expectations, they are generally tasks that can be easily outsourced. Entrepreneurs and ecommerce store managers have an endless to-do list, so they must stay laser-focused on the tasks that only they can do and those that will help them scale and make money.
Taking the time spent on order fulfillment and instead focus on marketing, customer service, and product management can help ecommerce businesses be more strategic and less operational. There will never be enough time in the day, but using a professional fulfillment center can help sellers be more proactive in other areas of the business.
“Working with ShipBob has allowed us to focus on the important parts of running our business and lets someone else take care of the shipping.”
Brett Miller, CEO, BRIK
Leave it to the experts
Inbound and outbound logistics can be challenging, and a fulfillment center is a complex machine with many moving pieces that must simultaneously work together. From order processing and inventory management to preparations for peak shopping seasons, fulfillment companies are domain experts and have seen it all.
A single fulfillment center handles operations for countless ecommerce businesses and ships millions of orders out regularly. Because of this, their volume and experience make them a strategic partner.
Fulfillment companies can also drive greater efficiencies in everything from the low shipping rates they negotiate with carriers to the number, size, and locations of their fulfillment centers — all to be utilized by the ecommerce businesses they work with.
“When you’re dealing with logistics, you want everything to flow, and ShipBob has been able to help out with pretty much every shipping issue we’ve come across. Knowing that your shipping department is taken care of is one less thing you have to worry about, and it allows you to focus on growing your business.”
Toby Davis, Assistant Director of Operations, Azurro Group
Automate warehousing and fulfillment
Modern fulfillment companies keep technology at the center of their fulfillment services. This means that every step of the fulfillment process is automatically documented in real-time for ecommerce businesses to know the status of their inventory and each order in the fulfillment center without having to be there.
This is possible when fulfillment solutions have built-in integrations with ecommerce platforms and marketplaces. This connection enables each customer order to be automatically sent to fulfillment center to get picked, packed, and shipped out. Once shipped, tracking info is pushed back to the ecommerce store and shared with the customer.
3 examples of companies using fulfillment centers
Many ecommerce businesses make the choice to work with a fulfillment company after self-fulling orders themselves. Read a few stories below.
ShipBob customer Matt Dryfhout, the President and Founder of BAKblade, shared his ecommerce business’s story of moving to a fulfillment center: The BAKblade team wanted a fulfillment company with straightforward pricing that would also give them more control over their brand. Fulfilling orders through ShipBob’s fulfillment centers means that there are no longer any logistical headaches due to ecommerce fulfillment, allowing the BAKblade team to focus instead on selling great products to move their business forward.
The positive customer feedback and quick deliveries of customer orders paired with the cost savings associated with using several fulfillment centers across the country have helped this business scale without having to manage their own warehouse and also run their own warehouse audits. BAKblade enjoys visibility into what has shipped, real-time inventory counts across fulfillment centers, and distribution metrics and inventory reports to understand their business performance.
2. Nature’s Ultra
Nature’s Ultra started to experience a surge in orders last year. Andrew Hardy, COO, wanted to get help on the front-end to ensure a long-term relationship with a fulfillment center that had a lot of room for scalability. They quickly came to find how massive and difficult fulfillment was, which required their focus and prevented them from focusing on our core products.
They chose ShipBob because off its Amazon-like delivery capabilities and use ShipBob’s fulfillment centers in Dallas, Texas, Chicago, Illinois, and Bethlehem, Pennsylvania. “ShipBob helps us to maximize our shipping and ultimately our growth potential. 100% of our orders are going out via 2-day shipping.” It’s helped them grow from $70,000 in sales in 2018 to over $7 million in sales in 2019.
3. Rainbow OPTX
Noel Churchill, Founder of Rainbow OPTX, was storing inventory and shipping orders out of his garage. He bought racks and organized all of the products, but the space was at maximum capacity. He knew he had to make a transition in order to scale. He could lease a warehouse somewhere and grow into the new space, but with how seasonal his business is, he would have to hire people to scale up over the summer and let them go in the fall, which didn’t appeal to him.
He partnered with ShipBob and felt freedom, with new time to read through customer feedback, make sure customers are happy, and work on his brand direction. Working with a third-party fulfillment center never felt like operations were out of his hands. “ShipBob takes really good care of their customers. Their software is always improving and the fulfillment services are always advancing,” Noel said. With ShipBob’s 2-Day Express Shipping Program, they’ve even seen a 24% increase in AOV.
Fulfillment center Frequently Asked Questions (FAQs)
Get answers to some of your burning questions about fulfillment centers!
Do fulfillment centers handle inventory management?
Yes! Fulfillment centers receive inventory, sort and shelf products in their respective bin, shelf, or pallet locations, and keep track of units on-hand. The goal of warehousing inventory in a fulfillment center is to turn over stock quickly and ship orders out as efficiently as possible.
Most fulfillment centers will provide technology to help ecommerce businesses manage their inventory from afar, including inventory tracking tools that help you know when to proactively reorder product to prevent stockouts.
How many square feet do I need?
If you choose to self-fulfill your customer orders, the total square footage you need to manage your inventory will depend on several factors.One is the amount of unique SKUs you have. For example, if you sell shirts on your ecommerce store, each size and color will need its own storage location.
Two is your order volume. If you are only shipping 150 orders a month, you may be able to keep your inventory in your basement, garage, etc. But if you are shipping several thousand customer orders a month, you will need the space to scale your fulfillment operation and store excess inventory. You will always want enough extra inventory on hand to prevent stockouts.
Finally, you will need to understand your growth plans to ensure you don’t move into or lease a space that you will immediately outgrow.
Thanks to ecommerce, warehouse space is becoming more difficult to find these days. And it can be expensive to rent or purchase warehouse space in the locations where your customers reside, such as shipping to major cities. If you work with a fulfillment company, each fulfillment center will likely have hundreds of thousands of square feet shared among ecommerce businesses.
Can a fulfillment center do one- or two-day delivery?
Yes, many fulfillment centers offer expedited delivery options, including same-day and two-day shipping. The exact services will depend on the geographic location of the fulfillment center, the technology and operations in place, and the carriers used.Read the Guide to Offering Affordable 2-Day Shipping to learn more.
How does order processing work?
An order is processed after a customer makes a purchase on your ecommerce store. The ecommerce platform that powers the store will send the order details to the technology used at the fulfillment center.This alerts fulfillment center staff to retrieve the ordered products, pack them into a box, label the package, and get the order shipped.
From there, tracking information can be pushed back to the ecommerce platform and shared with the customer so they know where their order is every step of the way.
What is a good price for fulfillment solutions?
When self-fulfilling customer orders, you will be responsible for procuring and paying for your warehouse space and equipment, staff salaries, warehouse management system, workers’ comp and liability insurance, boxes and packing supplies, postage, and more. Given the many direct and indirect logistics costs, the exact cost is often underestimated.
The cost of outsourcing fulfillment will vary among fulfillment companies, but typically your fees will include receiving your inventory, warehousing or storing items, and shipping products. Depending on the fulfillment provider, there may also be individual fees for each task, such as warehouse picking, packing, among other line items.
“Even when evaluating other 3PLs, ShipBob was by far the easiest, most reasonably priced option. Other 3PLs gave me confusing pricing with many per-item fees, which were hard to grasp and calculate ultimate costs. Thinking big picture, it was an incremental cost for me to ultimately sell a lot more. My business has tripled and I got my life back.”
Anastasia Allison, founder of Kula Cloth
Outsourcing fulfillment services may end up being more expensive than self-fulfillment, but it often is done to save time. Since each fulfillment company prices their services slightly differently, you will need to examine the entire fulfillment cost, taking every possible fee into consideration.
What kind of customer service should I expect?
While fulfillment companies strive for perfection, fulfillment services and shipping are prone to errors. With shipping carriers, your customers will experience damaged, lost, or stolen packages at some point. While inevitable, it’s how you, with support from your fulfillment company, will help your customer through this process that will ultimately influence their experience.
“From day one, we’ve appreciated the hands-on time ShipBob spent with us. Our Account Manager has worked hard to understand our needs and offered more flexibility than other 3PLs. They have used their expertise to give us business-specific solutions that have really made a difference. ShipBob is really committed to their customers and keeping themselves accountable.”
Pablo Gabatto, Business Operations Manager at Ample Foods
Fulfillment companies should empower you to run your ecommerce business with the right tools and guidance. Depending on your order volume, you may have a dedicated account manager. Otherwise, expect a team to support your business and answer any questions you have.
The service you receive may also depend on whether the fulfillment company staffs their own fulfillment center(s) or works with outside staff.
Regardless, you should expect transparency and visibility into any fulfillment company’s performance.
Managing your inventory efficiently and cost-effectively is critical for any ecommerce business. Though ‘warehouse’ and ‘fulfillment center’ are often used interchangeably, the need for simple warehouse space to store inventory is different than the need for complete fulfillment logistics services.
Such differences come down to the type of company you work with: A warehousing company that can help store large quantities of inventory over a long period of time, or a fulfillment company that can quickly ship orders out to your customers from their fulfillment center(s).
Learn more about fulfillment centers
If you’re in need of a fulfillment center in any of the largest US cities, check out ShipBob. We are a fulfillment company that picks, packs, and ships customer orders for ecommerce businesses. Our technology integrates directly with the leading ecommerce platforms to automatically send orders from your online store to our fulfillment centers. To learn more about ShipBob, request a pricing quote and speak with a fulfillment expert at the link below.