Companies are founded on great ideas but turning those ideas into thriving businesses is the true challenge. The goal of any company is to grow, but with growth comes the issue of growing profitably.
For this reason, obtaining operational efficiencies is crucial. Businesses must decide which processes to keep in-house and which ones to outsource. If a process is a core competency, i.e., it is an area of expertise that provides a competitive edge, then that process should remain in-house. However, if a process is not a core competency, a company may prefer to outsource the process to gain efficiencies.
As an example, consider a manufacturer. Most of its core expertise is the design and manufacture of its products. Once a product is produced, shipping the product may not be an area of competitive differentiation. A manufacturer may yield greater efficiencies if it outsources shipping to a logistics specialist.
If order fulfillment remains in-house, then a company must continually invest in having high levels of expertise in this process. For companies as big as Amazon, order fulfillment is still mostly provided by third-party logistics companies such as FedEx and UPS. Walmart, which started shipping from a garage in the 1960s, now has over 93,000 employees in Walmart Logistics. Walmart considers its own distribution a core competency of the business.
As a company grows, scaling the order fulfillment process brings a variety of challenges and additional costs that a company may or may not wish to take on itself.
Physical Space Challenges
The first challenge is the amount of physical space needed to store inventory. Growing orders means growing requirements for storage space. If a company runs out of in-house storage capacity, it will need to move to a larger facility or rent a second one. Both options commit the company to substantial investments and create the inability to scale down if orders decrease. Retailers that have seasonal increases in sales can be financially strained when paying for the full amount of space needed for the peak sales season only to see that space sparsely populated in the off-season.
For these companies, outsourcing order fulfillment can be highly beneficial. It removes the space challenge associated with seasonal increases. Essentially, these companies can share a common warehouse and the third-party logistics company takes care of flexing the total space requirements up and down with sales fluctuations.
As sales fluctuate, the number of employees needed to support order fulfillment changes. Adding extra employees to support increased orders brings with it the challenges of hiring and managing the extra staff. For seasonal sales companies, it also brings the challenge of letting the staff go at the end of the peak season.
If order fulfillment is outsourced, employee management becomes the responsibility of the third-party logistics company. Since these logistics companies perform order fulfillment for multiple companies with different sales patterns, the overall workload in the warehouse fluctuates less than it would for each individual company. This makes managing the workforce simpler.
An added feature of some order fulfillment companies is that they also offer light assembly and kitting services in addition to pick, pack and ship. These extra services work well for the kitting and shipping of promotional packages.
Technology changes very quickly. This includes the software that companies use to manage the order fulfillment process. Investing in order fulfillment technology can be quite expensive since it involves both the cost of the software and the cost of the equipment that interacts with the software. When multiple companies outsource the order fulfillment process to a common third-party, the cost of continually upgrading this technology and equipment is essentially shared across all customers.
In a world with constantly changing tariff scenarios and regulations, producing accurate shipping and customs paperwork is an additional challenge, particularly when shipping goods across borders. One inaccuracy on the order paperwork can be enough to delay an order. A delayed order equates to an unhappy customer who didn’t receive their order when promised.
For companies that keep the order fulfillment process in-house, it can be a huge challenge to remain informed about the latest regulations. If order fulfillment is not a core competency that adds competitive advantage to a company, releasing this responsibility to a third-party logistics company can eliminate shipment delays and improve customer service.
Solutions for Small and Medium-sized Businesses
While very large companies can afford to invest in their own order fulfillment process, smaller businesses are less likely to see a return on investment in this area. Companies could ship products with transportation companies such as FedEx and UPS, however these services do not include inventory management, picking, packing or kitting.
Small companies can benefit from Third Party Logistic companies that provide clients with order level flexibility, the associated technology, the necessary workforce, the required paperwork and the ability to execute efficiently on both forward and reverse logistics.