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Business.com Guide to Order Fulfillment Services

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Contents

Steps in Order Fulfillment 4

Benefits of Using an Order Fulfillment Service 6

Basic Order Fulfillment 10

Advanced Order Fulfillment 13

Order Fulfillment Software 15

Pricing Order Fulfillment Services 17

Top Tips for Order Fulfillment 18

Business.com Checklist for Order Fulfillment Services 20

Glossary of Order Fulfillment Terms 22

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Steps in Order Fulfillment

Shipping on the surface seems like a relatively simple problem, but when you have to send 4,000 boxes all over the world, it becomes this amazingly complicated task.”

David Carr, co-founder of Twine, in CrowdCrux

Broadly speaking, order fulfillment comprises the process in receiving, processing, and shipping a customer order. More specifically, order fulfillment entails the following steps, roughly in chronological order:

1. Maintaining inventory.2. Responding to a sales order to determine availability and location in

inventory. 3. Confirming pricing. 4. Configuring the order (if there is more than one piece or product).5. Booking the order (placing a request into the inventory system for what

is ordered).6. Acknowledging and confirming the order is booked.7. Invoicing/billing the customer.8. Determining the shipping address where the item will be sent.9. Sourcing the order – determining which facility to ship it from.10. Determining which carrier will be used to ship the item.

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11. Issuing order changes initiated by the customer after-the-sale, substituting for pieces no longer in inventory, or updating the order with newer pieces in inventory.

12. Processing the order – the physical picking and packing of the order at a warehouse or distribution center.

13. Shipping the order, which may go directly to the customer or to one or more distribution points.

14. Delivering the order to the customer.15. Settling, receiving, and processing payment for the received order.16. Handling returns of unacceptable or damaged goods by either refilling

the order or refunding the customer.17. Updating inventory.

Now that’s a lot of steps! We tend to take them for granted, or bundle them together under a term like “shipping,” but there are many stages an order must pass through that involves software systems and physical systems. It’s no wonder companies large and small are contracting out this function to specialized order fulfillment services providers.

There are many stages an order must pass through that involves software systems and physical systems. It’s no wonder companies large and small are contracting out this function to specialized order fulfillment services providers.

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Benefits of Using an Order Fulfillment Service

There are a number of advantages to outsourcing all or part of the order fulfillment process. This outsourcing option is particularly attractive for merchants with only an online store that lacks warehouse

and distribution facilities. Even established “brick-and-mortar” companies will contract with order fulfillment services to reduce infrastructure costs and improve operational efficiency. The benefits include:

¾ Seasonal and Sales Fluctuation Flexibility. While no one should complain about selling more than anticipated, there are headaches associated with unforeseen surges in sales and seasonal rushes. To adequately respond to higher than normal ordering, additional workers are hired, more capital equipment is purchased, possibly even extra warehouse space is leased to ensure timely and proper fulfillment. The problem is, what happens when sales inevitably trend down to “normal” levels, and you have these extra workers, equipment, and square footage you no longer need?

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A fulfillment services company eliminates the need to hire, train and manage workers, and purchase equipment and space. When sales are up, the fulfillment services company manages the surge. When sales decline, there’s no idle equipment, no temps or excess employees to let go, and no costs for empty shelves. All you need to worry about is providing the fulfillment services company with your product at the levels that are necessary to meet current demand. The order fulfillment services company worries about the rest.

¾ Lower Shipping Costs. No one likes to pay for shipping, so it’s a great marketing tool to offer free shipping. However, no shipper is going to send your goods to customers for free. So how do companies afford to offer free shipping? Warehouses and distribution facilities located strategically around the country significantly lower shipping costs to the point where it becomes economically feasible to offer customers free shipping. But if you’re not big enough to maintain facilities throughout the country, what do you do? Contract with an order fulfillment company that does have a regional/national/international infrastructure in place and take advantage of bulk delivery discounts that most order fulfillment companies can offer because of that scope.

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¾ Grow New Markets. Looking to expand, but holding back because you lack the infrastructure to ship overseas or even west of the Mississippi? An order fulfillment services company can extend your reach without undue capital investment. And should dipping your toes in some new market waters prove not worth getting completely soaked, you haven’t spent the same amount of money and resources you would have if you went about it alone. Your order fulfillment services partner supplies the infrastructure and scales it over time to grow as your business grows, without your commitment to high and potentially risky new overhead.

¾ Eliminate Fixed Costs. The cost of carrying inventory rises when sales are flat or in decline, but you still pay the same rent and utilities for warehouse space. By contracting with an order fulfillment services company, your fixed cost is now a variable cost. When business is slow, your order fulfillment costs go down. Of course, they also go up when business improves, but that’s a price well worth paying and not one you need to maintain when it’s not necessary.

¾ Focus on Your Core Competencies. The logistics of order fulfillment can be complex. If it’s not your area of expertise, or if you find you are unable to hire the right people for the job, an order fulfillment services company may be just the thing. You worry about making your product and making it better, and hire someone else to do all the stacking and packing that they can do better than you.

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¾ Differentiate Your Brand. What seems a rather mundane and routine process is actually an exciting opportunity to stand out from your competition. As Jeff Dahltorp, vice president of Fifth Gear, explained to Retail Solutions Online:

Rather than looking at order fulfillment as a commodity back end process, retailers should tailor their fulfillment strategy to capitalize brand awareness. Take a look at the target audience and find ways to deliver goods in a way that stands out from the crowd... Retailers can tap into resources of the [order fulfillment] vendor to achieve economies of scale, thus increasing the cost advantages of offering customized fulfillment [such as] personalized embroidery, specialty merchandise handling, promotional inserts, gift wrapping, and product photography.”

Rather than looking at order fulfillment as a commodity back end process, retailers should tailor their fulfillment strategy to capitalize brand awareness

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Basic Order Fulfillment

All order fulfillment services worthy of the name will provide certain standard services and at competitive prices as there is a great deal of competition in the order fulfillment industry. You should expect to

find these basics offered by every vendor you’re considering:

¾ Storage Facilities. Inventory is often stored in warehouses or other storage facilities. Your inventory might require special storage facilities, such as a refrigerated warehouse or hazardous-material storage.

¾ Shipping Facilities. The ability to package items for shipment, including providing packing materials, boxes, tubes, tape, labels, and scales. You might require a service that has its own delivery vehicles.

¾ Inventory Tracking. This is usually a computerized system. Often inventory is tracked with bar codes, or Universal Product Codes (UPC numbers), that are scanable. Advanced systems include RFID (Radio-frequency identification) tracking by using tags on the inventory that communicate continuously with sensors throughout the storage and shipping facility.

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¾ Order Entry. Recording requested goods, either manually or via real-time system, to trigger the packing and shipping of goods to the customer. This includes the ability to change orders, which is necessary to ensure the accuracy of an order or to respond to customer requests.

¾ Order Accuracy. An industry-standard measure of the rate of accurate fulfillment, it’s the percentage of times an order is filled correctly. No large fulfillment service has a 100% rate of order accuracy, so if you hear that you should be suspicious.

¾ Packaging Services. Proper packaging reduces breakage, which can cause customer dissatisfaction and higher operating costs to process returns.

¾ Service Level Agreements. Industry-standard measures of performance often guaranteed by order fulfillment services. Includes “dock-to-stock,” which is the time it takes from product reception to the time it is placed in “pickable” inventory. An industry standard is 48 hours, but the shorter the better. The “fulfillment time” is the period from when a customer order is received until it leaves the warehouse or distribution center. To some extent, the fulfillment time is chosen by the customer.

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¾ Electronic Data Interchange (EDI). A standard for exchanging order information between computer systems including invoices, shipping forms, and other documents.

¾ Shipping Discounts. Your order fulfillment services company should have strong partnerships and be able to obtain volume discounts from major shipping carriers (FedEx, UPS, and USPS).

¾ Returns Processing. The returns process is a way to turn a negative (“I didn’t get what I ordered.”) into a positive (“I didn’t get the right thing at first, but they corrected the problem quickly and professionally, and I’m now satisfied.”). All fulfillment services should have the ability to process returns and you should not be charged for errors made by the service.

The returns process is a way to turn a negative (“I didn’t get what I ordered.”) into a positive (“I didn’t get the right thing at first, but they corrected the problem quickly and professionally, and I’m now satisfied.”)

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Advanced Order Fulfillment

Beyond the basics, your unique order fulfillment requirements might dictate the purchase of advanced services. You may be limited in the number of firms that offer such services and therefore in less of a

position to bargain. Here are some typical special needs:

¾ Kitting and Assembly: Creation of product kits by assembling component parts and products and shrink-wrapping the items into custom packaging. This process is frequently used for special gifts, promotions, and retail displays.

¾ Unusual Merchandise. The specific demands of your product may require certain equipment, processes, and expertise. Fashion merchandise, for example, is handled differently than electronics. You may have to pay more to find an order fulfillment service that has handled similar products or has the capacity to accommodate your needs.

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¾ 3PL: Third-Party Logistics. This is a kind of “super” order fulfillment company that supports complex supply chain management. 3PL companies provide integrated warehouse, distribution, packaging, inventory management, and transportation services customized and scaled to specific customer requirements. The 3PL typically has an extensive and highly sophisticated IT (information technology) system to effectively manage costs. 3PLs frequently compete less on their capabilities of the physical assets, but on the capabilities of their IT systems to improve cost-efficiencies.

¾ Advanced Partnerships. Because fulfillment involves so many different steps, it helps to use a vendor that has solid relationships with companies that provide ancillary services that can help your business grow, such as online marketing and database management.

3PL companies provide integrated warehouse, distribution, packaging, inventory management, and transportation services customized and scaled to specific customer requirements.

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Order Fulfillment Software

Integral to any order fulfillment service is the software used to automate the time-consuming tasks of warehouse and inventory management, order processing and fulfillment, and shipping and tracking. The order

fulfillment services company should offer systems that easily integrate with your existing IT infrastructure to provide seamless and secure, easy-to-access, detailed, real-time, on-demand reporting on where and how orders are processed throughout the supply chain.

Every vendor has its own twist about why its software is better than someone else’s. While you aren’t overly concerned with the internal processes the company performs to provide your order fulfillment services, you do want the capabilities to:

� Create new orders � View, search, and edit existing orders � View inventory � Forecast inventory levels � Receive inventory alerts (e.g. low stock levels, out-of-stock notifications) � Check/verify returns

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� Integrate your e-Commerce shopping cart or other ordering system � Manually enter orders as needed � View invoices � Run reports � Receive email alerts on order statuses

Most commonly, the order fulfillment services company provides an online dashboard that allows you access to their software. All you need is a computer and an Internet connection. More complex situations may involve direct integration into enterprise-wide software architecture.

Most commonly, the order fulfillment services company provides an online dashboard that allows you access to their software.

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Pricing Order Fulfillment Services

Pricing varies according to the order fulfillment services company and the extent and range of services it provides.

While some may negotiate a short- or long-term contract, typically the agreement is fee based and dependent on the number of individual units of product shipped, the volume of expected ordering, and/or the product price. In many cases, the fee is negotiable.

Typically the agreement is fee based and dependent on the number of individual units of product shipped

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Top Tips for Order Fulfillment

¾ Look for a vendor with warehouse and distribution facilities that can most effectively reach your customers. Request shipping zone maps to determine what portion of your customers are likely to receive next-day service.

¾ Be clear about who is responsible for insuring your inventory in transit to the fulfillment service, while held by them, and in transit to the customer. The fulfillment service should be the one on the hook for any damage to, or loss of, inventory while in their possession.

¾ How does the order fulfillment services company “gear up” for seasonal spikes? What contingency plans are in place to handle higher than usual ordering? How have they addressed this issue in the past?

¾ Ask if the pick and pack costs include the cost of handling returns. You don’t want to be charged for restocking returns or refilling orders when the error was made by the order fulfillment service and not by you or your customer.

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¾ Does the order fulfillment services company understand your brand and how best to present it? On the blog QuietLogistics, J.R. Siegel writes:

The way your product is packaged, wrapped and presented is the first thing customers will see when your orders arrive on their doorsteps. When customers tear off the packaging tape and open their orders, they’re generating subconscious feelings about your brand. If your products are packaged haphazardly, consumers will feel deflated. No one wants to get a $300 dress in a $0.10 cent package. But if orders arrive looking pristine, customers will be wowed.” 

The way your product is packaged, wrapped and presented is the first thing customers will see when your orders arrive on their doorsteps.

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Business.com Checklist for Order Fulfillment Services My Needs Vendor 1 Vendor 2

General Services

Free shopping cart integration

Web-based dashboard

24/7 access

EDI-compliant systems

Inventory storage

SKU labeling and bagging

Inventory management

Setup costs

Base fee Sliding scale contract Per item/order no contract

Service Level Agreements Dock-to-stock Fulfillment time

Pick and Pack Services

Bar code (UPC) tracking

RFID tracking

Pick and pack costs

Dunnage materials used

Dunnage material costs

Packing list customized to order

Gift wrapping

Product embroidery/personalization

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Email order confirmations

Custom packaging

Real-time reporting

Minimum order requirements

Kitting and assembly

Multiple retailer support

Cross-docking

Order Shipping

Domestic

International

Shipping method (train, truck, air)

Discounts

C.O.D. collection

Customer shipment tracking

Laser printing

FedEx, UPS, USPS agreements

Agreements with other shippers

Support

24/7 Internet ticket system

800 call center

Returns processing

Custom IT

Returns refurbishment

Mail services

Digital product photography

Contract length

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Glossary of Order Fulfillment Terms

3PL: Third-Party Logistics. This is a kind of “super” order fulfillment company that supports complex supply chain management.

Allocated Inventory: Reserved for a specific order, customer, promotional event, or other special need, and cannot be used to fulfill “regular” orders. Once allocated, stock should not appear as inventory available for new orders.

Bar Code: Scanable UPC (Universal Product Code) representing a unique identification used to track product location and status.

Accessorial Charge: Expense to provide extra services beyond normal order-processing and shipping services.

Cross-Docking: Unloading product directly from incoming transport onto outbound transport with little or no storage in between. Also used to describe combining material from different origins onto transport vehicles (or into containers) with the same or similar destination.

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Dunnage: Material used to protect freight, such as cardboard, Styrofoam peanuts, or air pillows.

DC: Distribution Center. A warehouse located strategically near transportation lanes to facilitate cost-effective shipping.

EDI: Electronic Data Interchange. The computerized exchange of ordering information.

FIFO: First-In, First-Out. An accounting practice in which the first products received are used to fulfill orders; the opposite of LIFO.

Freight Bill: An invoice for transportation charges generated when an order is delivered. 

Handling Charge: Fee for labor involved to move goods in order to assemble an order for shipment.

Intermodal: Using two different forms, or modes, of transportation, e.g. truck and rail.

LIFO: Last In, First Out. An inventory management method in which the oldest items in inventory are selected first to fulfill an order.

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Pick and Pack: Location and (if required) assembly of product(s) packaged for shipping.

Kitting: Assembling component parts and products into custom packaging.

Lot: Product grouping that shares the same manufacturing run or date.

Lot Number Traceability: The ability to locate items according to their lot numbers.

Master Carton: Large package used to hold smaller packages and use of one master carton reduces handling of multiple small pieces.

RFID: Radio-frequency identification (RFID) is the wireless use of radio-frequency electromagnetic fields to automatically identify and track tags attached to inventory.

Shipment Release: The order has been packed and staged for shipment, but is not yet in transport. The order can be modified if requested, though this is not a best practice.

SKU: Stock Keeping Unit. It’s a unique code that identifies a particular inventory item.

SLA: Service Level Agreements. Usually includes two key metrics: “dock-to-stock” and “fulfillment time.”

WMS: Warehouse Management Services.