Ecommerce is expected to grow steadily in coming years as discussed in my previous article Ecommerce and Future of Retail Business. In this article we will look closely at an important component of ecommerce called order fulfillment process.
Ecommerce order fulfillment process consists of steps taken in receiving, processing and delivering orders to customers. Without doubt it is a core component of any online business. If you are an online retailor then you are using a fulfillment process. It consists of following core components.
- Stock or Inventory Management
- Warehousing or Storage Management
- Receiving Orders
- Packing Orders
- Shipping Orders
- Processing Returns
As always there are different ways to perform each of these steps resulting in three different fulfillment business models as given below.
- Third Party Logistics (3PL)
Each of these fulfillment models have their own advantages and disadvantages. Picking a right business model is very important for the success of your business. Depending on your overall business strategy you can either use one model or all of them.
For a startup with access to smaller funds drop shipping is the right approach. Later on 3PL or self-fulfillment can be added once business starts getting traction.
For an existing business who already owns inventory and real-state self-fulfillment might work best in the beginning which can be later boosted through 3PL and dropshipping.
Self-fulfillment business model is simplest of all three models. In this model you perform all five steps involved in the ecommerce fulfillment by yourself. Either you are a producer or you buy inventory, store it in your warehouse or garage in the case of smaller startup, receive orders through your online shop, and process those orders by packing and shipping them to your customers. You are also responsible for handling returns.
It is a suitable business model for startups and traditional retailers/producers who want to jump into ecommerce. It does require appreciable upfront investment though.
Third-Party Fulfillment which is also referred to as 3PL in the business literature also requires you to buy or produce your own inventory before you can put it up for selling. Third part fulfillment is a service provided by a different company. They will store your product and also take care of order processing as well as returns.
Marketing of products can be done either by 3PL providers or by the business owner and 3PL provider.
This model is suitable for product producers who are well established and also for smaller startups as it requires lower upfront investment as compared to self-fulfillment.
This model provides easier access to established order processing and marketing technique to new businesses. It also helps them market their products to greater audience easily.
Logistics Management maintains list of top 3PL service providers. According to this list top 3 companies Worldwide for the year 2018 are given below.
Business needs to carefully establish service level agreements with these companies to establish expectations. For fresh startups it is recommended to go with the well-known and well established companies. As discussed in this book available from Amazon for few product traders, Amazon FBA program works quite well.
The dropshipping business model is the simplest of all of them as it does not require you to have your own product inventory. In this model you act as a middle man. Product is most probably being sold by another trader in different part of the World. You market this product using your own channels in your selected region and sell it at a higher price to create some profit for your business. By acting as a middle man your business provide required trade guarantees for the region you are targeting.
In this model you present products on your ecommerce platform for selling at your chosen price. When a customer places order with you, you place the same order with your dropshipping trade partner. Your trade partner is responsible for sending products directly to the customer.
As you can see, your trade partner will take care of packing, shipping, and return although you will be acting as intermediary during these steps.
Well it depends. One model might work best in one scenario and might not work at all for a different scenario. There are whole lot of factors which go into decision making process before picking any of them. Some of these factors are, product type, product availability, business type, business maturity, business technical expertise, funds at hand, integration requirements, business volume, business local and Word wide competition and list goes on.
- It is generally understood that dropshipping works best for new entrepreneurs as it requires the least amount of funds upfront.
- Investment is also minimum for dropshipping so risk factor becomes low too.
In fact dropshipping is my favorite as you can experiment with this by making a very small investment. You can gain valuable experience from this business model which can later on help you get into self-fulfillment or 3PL.