In fulfillment warehouses, predictable volumes are nirvana. They allow you to exactly allocate space, equipment and labor resources to achieve maximum cost control.
Unfortunately, the reality for most E-retailers is persistent volume variability, whether it's related to seasons or promotions or just increased market traction. If you don’t know how to manage this variability with a flexible fulfillment approach, operating costs will rise and cannibalize your profit.
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You want to be able to scale your order fulfillment operations to be as large or as small as needed. Let’s look at three real-world examples of companies who failed to scale or scaled incorrectly.
Company A was very confident in the success of its product. Expecting very high order volume, the company leased a large warehouse and bought loads of equipment to handle the perceived demand. Launch came and went, and order volume was way below anticipated. Company A began bleeding money as their overhead costs were significantly higher than sales revenue. The company folded months after launch.
Company B had a relatively small operation in terms of manufacturing and fulfillment. Orders were steady for a while and easy to keep up with – until a celebrity mentioned the company’s product on Instagram and orders went through the roof. The company scrambled but ultimately was unable to keep up with order volume. Unhappy customers had to wait a long time to receive their orders, so they gave negative product reviews and voiced their dissatisfaction on social media. Sales slowed to a crawl.
Company C was enjoying a fair amount of success. They had a steady stream of orders with the usual peaks and valleys. Then the holiday season arrived and their order volume increased by 300% compared to the previous months. Like Company B, they were unprepared for this spike and had to scramble. They shipped most of their orders in time for Christmas, but still disappointed a sizable portion of their customers with post-holiday delivery. The company is still in business but their growth has stalled.
In looking at the above examples, it’s clear that Company A over-scaled; Company B under-scaled; and poor Company C almost had it right, but didn’t scale eCommerce fulfillment operations in anticipation of a holiday rush. So, what’s the solution?
The solution is choosing a more flexible fulfillment warehousing model where your logistics costs parallel your revenue stream, protecting your cash flow.
For those of us whose weight fluctuates, clothing is very unforgiving. The pants that fit perfectly in the Fall get just a little too tight after a holiday season of eating and binge-watching football on the couch.
So what happens when the scales tell a different story every week? We buy another pair of pants until, pretty soon, our closet is full of “skinny” jeans, “fat” jeans and “normal-me” jeans.
But there’s one clothes item in that closet that is VERY forgiving – the belt. A high-quality belt can last for years, letting you go up and down a notch as your weight dictates. To scale fulfillment operations, your warehouse should be more like the belt than the pants.
Proper planning allows all these firms to scale fulfillment services to meet these peak periods. They don’t have to go out and buy/rent warehouse space to accommodate different selling seasons. Their third-party logistics provider (3PL) serves as their “belt” – flexibly and seamlessly adapting as demand grows and contracts.
Since 3PLs serve multiple clients in the same warehouse, they can share space, labor and equipment across clients. This makes it easier for them to offer variable cost models that let your logistics costs parallel your revenue stream.
An ability to scale operations is critical on a week-to-week and month-to-month basis. But it’s even more important as you consider the long-term trajectory of your business. You want a modular solution that scales with your business – from start-up to market leader.
Don’t build the “future state” warehouse while your business is growing and gaining traction. Future volumes are not only hard to predict, but so is the order mix. That has major implications for warehouse design. Today, you may ship 1,000 orders a month with 20 SKUs and one unit per order, but in 3 years it could be 50,000 orders a month with 1,000 SKUs and 6 units per order. That change would require a completely different layout with different equipment and automation.
If you outsource, choose a 3PL partner that can grow with you. It’s painful and costly to change fulfillment partners. So evaluate 3PLs carefully at the start, not only based on what they can do for you today, but their ability to offer a flexible fulfillment infrastructure that can scale with your business as it grows in volume and complexity.
The right fulfillment partner can “future-proof” your distribution solution so you can focus on sales growth, not how to handle that growth when it comes. This can apply to domestic or international growth. For instance, companies wanting to expand to the U.S. market lean on 3PLs to get them there. H2O at Home, for instance, was a very successful business in France, where it started, and used Amware Fulfillment to establish a strong U.S. presence. Read the case study on H2O at Home’s flexible distribution model.
Another aspect to flexible fulfillment involves the technology deployed on the warehouse floor. One of the biggest benefits of 3PL fulfillment services for a growing company is the ability to deploy a modular solution.
LEGO® blocks are probably the simplest example of modular design. There are many types of pieces that could be used to build your final structure, but every single piece fits together and can be added at any time.
Why has modular design become so popular? Because it combines the advantages of standardization (repeatable solutions that work) with those of customization (building a solution that is tailor-made to your precise needs).
This is very applicable to fulfillment since a key challenge companies have is how to scale warehouse and fulfillment operations to adapt to changing order volumes and profiles. Given the option, most fast-growing eCommerce and direct selling companies would rather outsource to a 3PL fulfillment company than invest time, energy and capital to continually adapt their own infrastructure.
The accompanying illustration is an example of how companies can use different technologies during different phases of their growth. Not all 3PL fulfillment companies can offer this level of modularity.
Smaller, single-location operations tend to specialize in smaller, manual pick-and-pack environments. They may be an excellent solution if your products are just gaining traction in the market, but they may not have the ability to scale as your business grows.
The largest 3PLs are interested only in managing large-scale operations that require a dedicated facility. They have a minimum order volume number that must be present for them to even entertain the project.
In between are a number of 3PL fulfillment providers that will work with growing companies and can deploy new strategies and technology when, and only when, your business requires it. That is a huge advantage if you need to preserve capital.
This approach is modular, but also very customized. Operators and engineers assess growth projections and suggest proven options for warehouse design and picking methodologies – to be deployed once certain volume thresholds are hit. The pieces are ready to go when needed.
If flexible fulfillment is your goal, not every fulfillment model is well-suited to achieve that goal. Let’s look at different options for establishing a fulfillment capability.
Option #1: Build it yourself
VC-funded start-ups that are flush with cash often make the decision to invest in infrastructure, instead of preserving capital. They build for anticipated volumes thinking, “We’ll be ready with the flood gates open.”
But do you really want to build the church for Easter Sunday?
The truth is you have no idea what the business will look like in three years. You might need a totally different warehouse design than the one you started with and, if you’ve already built the future-state warehouse based on false assumptions, a rather embarrassing capital equipment write-off, as well.
Option #2: Outsource to a local “mom and pop” provider
The warehousing and fulfillment industry is dominated by small local and regional companies who typically operate a single location. They likely provide good quality operations, great customer service, and proximity – you can visit the facility any time you want.
What they don’t offer is SCALE – in size, location flexibility and systems.
When you outgrow them, you’ll need to transition to a new provider, and that comes with pain and potential operational hiccups that can be disruptive to the business and result in lost customers.
Option #3: Outsource to an “all-in-one” provider
Many companies offer fulfillment services as part of an “integrated” package of eCommerce services, including website development, marketing, fulfillment operations and customer care.
It’s a tempting value proposition for lean start-ups – less work to find and manage partners. But be careful here. It’s hard to be “excellent” at a wide variety of very distinct functions. You’ll want to do a deep dive into the provider’s fulfillment design and operations approach.
Keep in mind, too, that many turnkey eCommerce providers are in the start-up phase themselves, still waiting to turn a profit for their investors. Your focus should be on your own company’s viability, not the viability of strategic suppliers.
Option #4: Use Fulfillment By Amazon
They’ve become your sales channel (Amazon.com), your IT infrastructure (Amazon Web Services) and your shipping partner (Amazon Prime). Should they be your fulfillment partner, too (Fulfillment By Amazon/FBA)?
Here are some things to consider:
No one has a denser distribution network than Fulfillment By Amazon but, by necessity, the company’s model is very much “do it our way.” You’ll have to flex to their requirements, not the other way around.
Predicting warehouse and distribution center (DC) needs in today’s fluctuating business environment can be a crapshoot.
Marketing promotions, direct sales conventions, and other events create sudden order surges that can be challenging, even for the best run fulfillment centers. You or your fulfillment partner need to get these orders out the door, regardless of how quiet or busy the facility is.
If you handle fulfillment internally, you’ve got a dilemma. Do you secure permanent warehouse space to accommodate peak sales or remain in a smaller facility and manage continuous ramp-ups?
Either way, it’s like buying a very expensive belt with just one hole.
The right third-party fulfillment partner is literally built to accommodate fluctuating order volumes. They can help you scale up or down as needed – through seasonal spikes during the year and, longer term, through every stage of your company’s growth cycle. It’s flexible fulfillment outsourcing.
Running a business is tough enough. Why complicate things by trying to manage business fluctuations on your own? Instead, focus on your core business and let a reliable third party deliver a flexible warehousing and fulfillment solution.