Over the years, I’ve witnessed how having the right ecommerce warehouse process, alongside the right order fulfillment and shipping strategy, can make or break a business.
Which warehousing, storage, and ecommerce order fulfillment services options are available, and which one should you choose? Hint: Amazon FBA (fulfillment by Amazon) may not be as good as you think.
Since I started ‘doing ecommerce’ back in 2005, I’ve consulted with various companies of all sizes on their order fulfillment strategy. I’ve helped companies open warehouses on 5 continents, from selecting the location to implementing WMS (warehouse management system), OMS (order management system), IMS (inventory management system), pick & pack systems, and more.
So I wanted to try and impart hard-won wisdom to help you get it right.
Let's dive in.
What Is Ecommerce Warehousing?
Ecommerce warehousing is the process of storing goods intended for sale online through your ecommerce store. It’s a critical part of your supply chain, as the timely delivery of goods greatly impacts customer satisfaction.
The ecommerce warehouse process covers:
- Setting up and operating distribution centers
- Managing partnerships with logistics companies
- Managing supplier relationships
- Forecasting and inventory management
- Integration with your existing systems e.g. your ecommerce platform
While complicated, warehousing gives me particular joy because of the potential to give your business a competitive edge. One example is mail-presorting, most companies don’t presort their mail or even know what it is.
We can talk about mail-presorting in a separate post, but the point is that if you pay less for postage than your competition then you can offer the same product for less than your competition and win the sale, leaving your competition scratching their heads trying to understand how you’re able to offer the same product for less.
Ecommerce Warehousing Options
Let’s take a look at the generally available options available to you:
- A shared warehouse is also known as 3PL (3rd Party Logistics)
- Dedicated warehouse owned and operated by the business it’s serving
- Ship from store
- Amazon FBA (Fulfillment by Amazon)
- A hybrid solution of two or more of the above
Now let’s take a closer look at each one of these options, starting with Dropshipping.
Why are we even discussing dropshipping in an article that is supposed to be on warehousing? Dropshipping is a business model where the manufacturer, brand, or retailer doesn’t take part in the order fulfillment process at all. The retailer is simply sending the order information to the manufacturer or the factory and they ship the items directly to the end buyer.
Dropshipping is a popular eCommerce warehouse strategy and business model these days. It’s proved itself a good option for many businesses so, before we look at the other options, you should take a step back and ask yourself “Do I even need a warehouse?”
We will need more than this post to cover all aspects of the decision-making process for Dropshipping but let’s take a look at some of the bullet points:
Does my business have enough capital to buy in bulk, pay for shipping, store in a warehouse etc’...?
While businesses of all sizes adopted the dropshipping business model, businesses with more capital usually only use dropshipping to supplement their order fulfillment strategy.
Location, location, location: Is the manufacturer/vendor warehouse close enough to my customers? If the majority of your customers are in the US or Europe, for example, and your vendor is in China then dropshipping may take too long to meet customer's expectations or shipping costs of expedited services such as the ones offered by FedEx, UPS, and DHL will be too high.
Will the manufacturer/vendor warehouse be willing to dropship?
The number of brands and manufacturers who are willing to drop ship is growing by the day, but many (if not most) brands and manufacturers will still only sell in wholesale quantities. Talk to your vendor and find out. If they’ve never dropped shipped before and are open to trying then you should expect the relationship to not be smooth from the first day.
Adopting a dropshipping capability in a business that has only sold wholesale may require some changes that can take a long time to implement. Billing, shipping, new software implementation, existing software configuration, staffing, and more… are just some of the changes the drop shipper will need to make.
Lastly, your vendor’s system will then need to be integrated with the software in your business and that integration alone can take some time and comes with a cost as well.
On a side note, if you’re going to help your vendor/factory become a drop shipper they may start drop shipping for others which may / may not be ideal for your business strategy…
Let me share a personal story:
Around 2012, many ecommerce businesses were in search of drop shippers to sell their inventory online. Many ended up working with the same drop shippers and competing with each other on the same marketplaces (mostly eBay and Amazon).
For that reason, I was looking for a leading wholesale business with inventory and a warehouse that has never sold online at all to partner with.
I reached out to one of the largest perfume wholesalers in the US and offered my partnership in a joint venture model. I had to invest time and money in building an ecommerce department based on their existing inventory and warehouse without interrupting their wholesale business, but it was well worth it!
I ended up having an exclusive drop shipper with +30 years in the business, a warehouse, and millions of dollars in inventory. We were already processing thousands of orders per day within a few months and, except for our competition, everyone was happy.
The point of the story is that if your vendor or factory is already a drop shipper then you may have a lot of competition. If he’s not and you’re going to convince him to drop ship then you may be cutting the branch you’re sitting on. If you’re going to make him dropship, make sure they will only drop ship for you, and my story demonstrates how I personally did it.
How much is the manufacturer/vendor warehouse will charge on top of the item’s cost to pick, pack, and ship individual items?
Since your vendor overhead is likely to be higher due to its dropshipping capability, that means that they’ll need to cover these extra costs and this usually means passing it on to their customers (you) which in turn may increase the price for the end buyer and make you less competitive.
Ship From Store:
If your business has one or more stores then you can possibly use your stores as a warehouse and ship orders directly from the store/s.
- Lower postage costs when you have multiple stores and you’re fulfilling the orders from the store that is closest to your buyer
- Faster delivery when shipped from the nearest store to the buyer
- Less inventory—the same inventory can be used to fulfill both online orders and store purchases as opposed to allocating inventory for the warehouse
- Require expertise—while may sound easy, some businesses are spending millions in order to add a Ship from Store capability. Some OMS (Order Management Systems) that support Ship from Stores like Manhattan OMS or IBM Sterling OMS are among the most costly in the market
- Implementation - It takes on average 6-24 months to implement an enterprise-level OMS that support ship from store and order routing
- Cost - aside from the licensing costs of these systems and the cost to implement there’s usually also a maintenance cost.
A shared warehouse is also known as 3PL (3rd Party Logistics):
Third-party logistics, or 3PL, is used interchangeably with fulfillment warehouses or fulfillment centers.
Companies that provide 3PL services offer many of the same services as order fulfillment companies. These services include:
- Inventory management
- Shipping and receiving
- FTL and LTL freight shipping
- Picking and packing
- Kitting and customization
- Reverse logistics (returns)
A third-party logistics company acts as an ecommerce fulfillment company. It provides all the services you need to outsource your logistics operations.
Different 3PL services companies specialize in different types of fulfillment and warehousing. Some are equipped for cold fulfillment. These warehouses can store and ship food products that need to be refrigerated or frozen. Other 3PL companies are prepared to store and ship hazardous materials.
So if dropshipping will not work for your business, or if it will but you still need to have the goods shipped from your vendor and stored in a warehouse where you have more control of them, then keep reading…
Benefits of 3PL:
- Low to no initial investment - no investment in real estate, some investment in integration may be needed (keep reading for more details)
- Low overhead
- Low long term commitment
- Less risk
Drawbacks of using a shared warehouse:
- Time and cost of initial integration of the 3PL systems with your business’s systems. If you’re using one of the popular systems, then the warehouse may already have an integration with these systems that will shorten the time and lower the costs to integrate.
- Higher costs vs. owning and operating your own warehouse, assuming you have enough business, volume is relatively steady, and you’re here to stay.
Amazon FBA (Fulfillment by Amazon)
Fulfillment by Amazon (FBA) is a service that helps businesses grow by providing access to Amazon's logistics network. Businesses send products to Amazon fulfillment centers and when a customer makes a purchase, Amazon handles receiving, packing, shipping, customer service, and returns for those orders.
Amazon FBA is more expensive than you think! In fact, it’s much more expensive compared to having your own warehouse. The savings for 90,000 cubic feet per year is around $750,000. I created an Excel spreadsheet to help visualize and understand how I did the math:
In this example I used these assumptions:
Warehouse size: 24,000 square feet
Rent: $288,000 / year or $24,000/ Month
Storage space (percentage): 22%
Actual storage space: 72,600 cubic feet
Sure, some will say that the rent is too high and doesn’t represent the national average in the US, but I wanted to be conservative before making any claims. The rent cost of $12 per cubic foot per year is for a warehouse in NJ which is where many warehouses servicing the New York City metropolitan area are located.
Yes, some will say that 22% of space is used for actual storage is too low and they can squeeze more out of their warehouse space.
You can download the Excel sheet I prepared here and change the values based on what’s relevant for your business. The totals will automatically update based on your inputs. I hope it’ll be helpful!
Dedicated warehouse (owned and operated by the business it’s serving):
Most of the brands we love and are familiar with have their own warehouses and there’s a reason for that.
- More control of internal processes - while many of the processes are the same in many businesses, some businesses require some customized processes that are hard or impossible to find in 3rd party warehouses. For example kitting on-demand, custom packaging, free gifts, mail presorting, or integrating the warehouse software with your software.
- Lower costs - this can vary from one business to the other but, generally speaking, after initial investment in equipment, buying or renting a warehouse, and operational costs the overall long-term cost is lower than the other options.
- Initial investment - that is larger than all other options
- Staff - managing employees means you’ll have more liability as an employer such as payroll, HR, insurance, workers comp, paying for time off, shortages in available labor, and in general more dependency on you employees. If you’re a small business and few of your employees aren’t available when you need them the most, you’ll have to find a solution. Think of COVID-19 as an example where many warehouse employees had to quarantine at the same time, this can cause a serious problem to any size business.
Hybrid solution of two or more of the above:
This is probably the best of all options because when used properly, it can cover all bases and use cases where other options ‘fail to deliver’.
- If your warehouse is too busy during the holiday season, and you want to ensure the best possible customer experience, then complementing your order fulfillment strategy with a 3PL during these peak times can help reduce risk of delayed delivery times.
- If you’re selling on Amazon and participating in their SFP (Seller Fulfilled Prime) program you need to guarantee a 2 days delivery to the areas you selected. What if you’re unable to deliver in 2 days without paying arm and leg for expedited service to large metropolitan areas like Greater New York City and Los Angeles Metro? You can allocate some of your inventory to a warehouse that is geographically closer to these metros.
Advice For Operating Your Own Warehouse
If, like many ecommerce businesses, you decide to run and operate your own warehousing operation, here are a couple of key considerations:
- Have a disaster plan before the disaster happens—so many things can go wrong and some can literally put you out of business. Having a disaster plan is critical when operating your own warehouse
- Maximize efficiency with automation—being competitive in ecommerce isn’t easy, as is, and operating a warehouse with just labor and no automation can be costly. True, robots, software, and hardware can be costly, but usually decrease your overall long-term operational costs and your only way to remain competitive.
- Form a winning team —a seasoned and sophisticated warehouse manager should be able to help your business execute everything in this article and much more than we can cover in this short post.
- Establishing and tracking KPIs—What gets measured gets improved so, to properly streamline your warehousing operations, it’s worth establishing and tracking KPIs such as: order lead time, transportation cost per package, picking accuracy, revenue per employee
- Take time choosing the right ecommerce warehouse management system—These are nerve centers of your warehouse, so it’s worth taking the time to look through the available options. They help you with key processes such as inventory management, picking and shipping, and space and picking route optimization. Some features I look out for include real-time inventory visibility, easy integration with your existing systems, scalability, and increasing AI automation.
There’s so much more to the ecommerce warehouse process than I can include in this short post, so I tried to just give you some food for thought. In reality, companies with great technical teams can be creative and use a winking hybrid solution.
I still think that Amazon FBA is a good tool to have in your toolbox. For example, companies can use FBA if they’re selling on Amazon, wish to offer Amazon Prime benefits to their buyers, and in areas where they can’t deliver to their buyers within 2 business days without paying arm and leg for postage.
While this short article can’t replace a thorough analysis needed to make a decision, I hope I could shed some light on some of the considerations and the process.
Related Read: What Is Economic Order Quantity (EOQ)?
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