The average cost of renting warehouse and distribution space is around $8.84 per square foot. Building your own warehouse can cost between $100 and $200 per square foot depending on size, materials and location. Add another $10 to $20 per square foot to set up warehouse space and racks. Then, there are the costs of maintaining the space and equipment as well as managing and staffing the facility.
It adds up fast. For online retailers, for example, the average cost of order fulfillment can run up to 70% of the average order value (AOV). Finding a way to streamline operations and lower fulfillment costs can have a big impact on the bottom line of any e-commerce company.
Can a third-party fulfillment service help you cut costs and meet customer expectations? In this article, we’ll explain how third-party fulfillment services work, their benefits and why you may want to consider working with a third-party fulfillment company.
What Is a Third-Party Fulfillment Service & How Does It Work?
A third-party fulfillment service, often called a 3PL, handles the entire fulfillment process for companies. Typically, this includes warehousing inventory, picking and packing, and shipping orders to customers. 3PLs also handle processing returns.
Instead of storing merchandise and handling the logistics, businesses outsource the retail fulfillment process once orders are placed to deliver products to customers.
Main Advantages of Third-Party Fulfillment
In most cases, working with a 3PL reduces the cost per order compared to internally managing operations. This is especially true of businesses that are seasonal or have low sales volume at certain times of the year. By outsourcing, you avoid paying for warehouse space and services you only use at intervals.
For year-round sellers, 3PLs also provide several other key advantages.
Using fulfillment providers helps streamline operations by relieving the burden of logistics for their clients. Automated processes such as pick/pack/ship, optimal warehouse configuration and other technology can create a more efficient operation and reduce errors.
By integrating with client order management systems (OMS), 3PLs can receive orders in real time while eliminating manual entry or order sheets.
Most 3PLs also use a warehouse management system (WMS) to optimize warehouse operations and transportation management systems (TMS) to manage shipping at scale, optimizing routes and loads, balancing negotiated rates with spot rates and choosing among various carriers.
Shipping Cost Savings and Scalability
Third-party fulfillment provides more affordable shipping because of its business model. Savings can come from:
- Consolidation: Because 3PLs handle shipping for multiple businesses, they can often consolidate orders from multiple e-commerce companies into larger shipments. Consolidation enables 3PLs to take advantage of full-truckload (FTL) prices rather than less-than-truckload (LTL) pricing.
- Negotiated Rates: The 3PL fulfillment method provides consistent volume for shipping companies. This volume creates opportunities to negotiate better rates and discounts.
- Optimization: 3PLs know the optimal shipping times and strategies for the most cost-effective method of delivery.
- Location: Fulfillment centers are generally located in areas that offer significant logistical advantages, such as being nearby shipping hubs or target markets. This can reduce the cost of transportation to lower overall shopping costs, even for two-day or same-day fulfillment.
Scaling fulfillment is also easier by paying for more available space rather than having to build out warehouse space or commit to longer-term rentals. Most fulfillment centers can scale quickly to accommodate your growing business.
Minimize Overhead Costs & Infrastructure Investments
Sellers can also minimize overhead and infrastructure costs by avoiding the acquisition of warehouse space and staffing for warehouse management. Rather than buying or leasing storage space and maintaining it, retailers can outsource warehouse management. Since 3PLs work with multiple vendors, costs for maintaining the warehouse are amortized across multiple companies, reducing overall costs.
E-commerce businesses can also avoid the expense of warehouse equipment and the technology needed for ongoing operations. These costs can be hefty, requiring repair, upgrade or replacement of warehouse equipment over time. Costs also arise from maintaining equipment and technology to keep it operating efficiently.
Flexibility and Scalability To Meet Fluctuating Order Volumes
Third-party fulfillment providers can scale efficiently to handle peak volumes, using advanced inventory management systems (IMS) to help optimize inventory turnover. This enables 3PLs to handle high-volume order fulfillment that sellers might not otherwise have the capacity to handle.
Focus on Core Competencies
One of the biggest advantages of working with a 3PL for fulfillment options is that it frees up time to focus resources on strategic initiatives rather than fulfillment. By outsourcing fulfillment to specialists, you can leverage their knowledge and resources.
Redirect Resources to Core Business Activities
Without having to worry about the logistics involved in fulfillment, you can focus time and money on growing the business. Freed of the burden of operational tasks, you can put more resources into marketing, sales and customer service.
You can also focus your financial resources more efficiently, applying capital directly to inventory, marketing and business expansion rather than warehouse space and equipment. Outsourcing makes it easier to budget predictable costs and take advantage of new opportunities as they arise.
Leverage the Expertise & Experience of Fulfillment Specialists
3PLs focus their resources on fulfillment and shipping for peak efficiency. They employ best practices and strategies to create efficiencies to streamline their processes. Coupled with the latest warehouse technology, this allows them to lower costs.
Reduce Labor Force Concerns
With turnover among warehouse workers approaching 50%, hiring, staffing, training and retaining qualified employees is no small task. At the same time, investing in technology to reduce staffing needs is expensive.
When you engage a third-party fulfillment provider, they are responsible for the workforce, technology and management. You are also outsourcing the headache associated with managing your warehouse and fulfillment staff. There’s no more worry about having enough staff to handle orders, scheduling and overtime or dealing with rapid hiring or downsizing as business ebbs and flows.
Mitigate Risks and Improve Customer Experience
Every retailer knows that damage to their reputation will hurt profits. When mistakes happen, customers have a poor experience or orders aren’t processed and shipped promptly. A PwC study revealed that nearly a third of customers say they would stop doing business with a brand they loved after a single bad experience.
Reduce Errors and Order Inaccuracies
Order fulfillment mistakes, mis-picks and mis-ships are costly. With these errors, you risk customer satisfaction, and you have to pay for return shipping and restocking as well as absorb the costs of reshipping items to customers. There’s also the risk that the merchandise can be damaged in transport or can’t be sold as new once returned.
When you add up the costs and labor involved in fixing mistakes, it can cost companies between $50 to $75 for each error. Even a 1% discrepancy in error rates can add up fast. If you ship 100,000 items per year, a 1% error rate can cost $75,000. For large-volume shippers, the cost goes up from there.
Typically, 3PLs guarantee a certain level of order accuracy in their contract, including performance standards and consequences for noncompliance. Contracts may also include accuracy metrics for specific categories, such as picking, packing and shipping accuracy. Some 3PLs will commit to order fulfillment with 99% accuracy or greater, compared to the average e-commerce brand accuracy rate of between 96% and 98%.
Handle Returns and Customer Support Effectively
Handling returns is simply one cost of doing business, but that cost is high. E-commerce companies in particular have high return rates compared to physical stores. About 30% of all products bought online are returned, more than three times the number returned from a brick-and-mortar retailer.
Even if there was no error during fulfillment, you may have to absorb the cost of shipping. Plus, there’s the cost of customer service, handling and processing, and restocking or liquidation. In 2022, it was estimated that the cost of handling a return for a single $50 item can cost $33, nearly two-thirds of the item’s sale price. Aberdeen Group says reverse logistics in the U.S. add $100 billion to operating costs yearly.
3PLs are extremely efficient at handling returns. They deploy technology to streamline return authorizations and labeling, inspection and sorting of returns, inventory management and providing customer support for issues. Third-party providers know that handling returns properly is essential to keeping customers happy, so they work hard to ensure smooth operations.
Maximize Your Fulfillment Process by Outsourcing
Outsourcing your order processing to third-party fulfillment partners can streamline operations, reduce errors and costs and mitigate risk. By leveraging economies of scale, technology and 3PL resource infrastructure, companies can focus on their core competencies to optimize revenue.
Using a nationwide network of facilities and cutting-edge logistics software, Cart.com provides e-commerce fulfillment, contract logistics, 3PL service, and OMS and WMS software. As e-commerce experts and an integrated platform to scale pick, pack and ship services, Cart.com can handle your fulfillment needs with industry-leading accuracy and transparent tracking and monitoring.
Contact Cart.com today to explore opportunities and see how we can help you grow your business.