Could Your Business Benefit from Using a Fulfillment Center?
By Jennifer Craig | June 25, 2011
There are many methods for increasing sales – changing locations, expanding markets, adding new products, cloning good customers (adding new customers and ensuring existing customers continue to buy), incentive programs, customer rewards, and up selling, to name a few.
Regardless of the method of increasing sales, small businesses need to think about delivery. Product-related businesses (sometimes service businesses), added sales requires dealing with issues like warehousing, distribution, and new inventory systems. For small businesses, the increase in expenses may not match the increase in sales at that time; however, eventually volume selling will require making decisions on increasing staff and warehouse/space (for storing, packing, and shipping).
Retail businesses usually have storage rooms to accommodate an increase in merchandise, but may not be prepared to grow the business by square footage (due to long-term leases, high rent costs, etc.). Home-based businesses or selling online might require additional space as well (especially if the garage and storage units are full), but cannot handle the increasing costs of rent, staff and shipping. So what is the answer for moving the merchandise (which is necessary to increase cash flow) without breaking the pocket book? The answer may lie is a simple notion of outsourcing shipping, packaging, and warehousing via fulfillment centers.
Drop Shipping May Save the Day
We’re all facing changes in the way Americans do business. One concept is to drop ship (or have someone drop ship for you) via a fulfillment center. These centers can be anything from kitting (processors that package a number of items into kits), rebating (facilities that manage rebates sent to consumers for items purchased), warehousing and shipping (places that store products and ship them once a sale has been made – thus the term “drop ship”), and managing records (sites that store, duplicate, or shred documents).
Perhaps a business wants to kit airplane parts for the government. That business would need a place to store and label all of the parts, sealable bags in which the parts would be placed before shipping, storage racks to house all the kitted parts, shipping capabilities (boxes, tape, scissors, and labels), and employees to kit the items into bags, label, package, and ship the items to the government facilities. Then, the inventory has to be controlled and the business owner needs to know when to order new items.
Ways that Fulfillment Centers Work
An ideal scenario is when an online business makes sales. Does that business have to have all their merchandise close at hand? The answer is no. They can do one of two things. They can make an agreement with their suppliers drop ship the products for them (to the customer) using the business owners’ label and bill of lading. This method is ideal because the small business does not have to tie up cash flow in inventory, waiting for it to sell and it can do its business, literally, from anywhere. The second method is for the small business to buy the merchandise but outsource the warehousing, packaging, and shipping to a fulfillment center. The center then responds to orders by packing the items, shipping them and taking them off the inventory tracking system. In turn, the business pays the fulfillment center for its services.
Fulfillment centers can contract as many services as needed to benefit the small business. Since the small business reduces costs of warehousing space or hiring extra employees (which includes added costs in payroll taxes, benefits, worker’s compensation and liability insurance), the small business has more money for inventory. As the merchandise is depleted, the business can order replacements and have them drop shipped to the fulfillment center and the cycle continues while the business grows.
Advantages in Using a Fulfillment Center
Besides the obvious (reducing the workload and operational costs), fulfillment centers allow business owners to concentrate on conducting business (creating products, marketing products, and increasing sales). Fulfillment centers are especially good for the artisan who makes a product but works alone. That artisan can be anything from an inventor to a sculptor/artist to a master furniture maker and a designer.
The benefit to the small business is huge when they realize they do not have to expand the square footage of their business in order to increase their volume in sales. Also, they do not have to handle shipping and warehousing. The fulfillment center catalogs and stores items; manages the inventory; maintains records; and carries a supply of boxes, tape, and shrink wrap materials (all of which can cost in equipment and supplies.
Fulfillment centers hire and manage the staff, buy the equipment required by the warehouse to operate – everything from forklifts, racks, coolers, freezers, and tables to assembling equipment, and they ensure that the inventory, invoice, and packages are handled with care – correctly shipped to the right persons while meeting all deadlines.
Since fulfillment centers ship on a regular basis, they can often get good rates that the small business owner would not be able to secure. Likewise, the centers are handling shipping for numerous customers at one time, so they are able to buy shipping materials at wholesale prices and cut costs even more.
As small businesses grow, they may decide to take on the responsibilities of fulfillment themselves; however, it may prove to be more cost effective and productive to continue using a fulfillment center.
What Businesses Need to Know When Selecting a Fulfillment Center
With any business contract or agreement, businesses need to do their research. Check references, ask to speak to current customers, search the Internet for complaints, law suits, or any negative information. A business should select a center that can accommodate their needs – location (where the business can visit if needed), longevity (how much experience do they have at doing what they are doing?), credit ratings, quality control (businesses don’t want to lose customers because a center cannot meet deadlines, send the wrong items, or send damaged items), reliability, reputation, ability to grow (as the business grows, it is nice to know the center can handle the added volume), honesty, and finally, confidentiality (businesses do not want competitors learning information about their business from the centers).
About the Author
Jennifer has over 30 years combined experience in business consulting, human resources, training, organizational development, and entertainment. In the past, she had worked for a variety of organizations including NMSU, Federal Reserve Bank of Dallas, and Universal Studios before joining WESST in 1995. Her BA is in Journalism and Mass Communications, and her graduate work is in Training and Development. She was on the founding Board of the local ASPA (SHRM) group, was named SBA’s Small Business Advocate of the Year in 1997; and has illustrated two books. She enjoys writing and painting.