There are many challenges in the e-commerce business, and one of the biggest is choosing an effective logistics model. Entrepreneurs at various stages of e-store development face a dilemma: invest in their own warehouse or use fulfillment services. This decision has a direct impact on the subsequent costs of running an online store and its scalability.
Therefore, below we analyze the differences between these two logistics models, taking into account both their advantages and potential challenges. We also quote the opinions of people who have tried both solutions. So, your own warehouse or fulfillment - what and when to choose in e-commerce?
What is fulfillment?
Fulfillment is the logistics service of your online store provided by an external partner, such as Omnipack. This covers the full range of activities, from receiving goods from the manufacturer, through storage, picking and packing orders in accordance with your company's standards, to shipping goods and handling returns.
You may ask - why decide to outsource logistics when you can have your own warehouse and fulfill customer orders directly? There are many reasons.
Why do e-commerce companies move from their own warehouse to fulfillment?
The decision to change your own warehouse into a fulfillment center opens the way for online stores to numerous business benefits and may be dictated by many factors. The most important ones include financial savings and unlimited opportunities to develop your e-commerce business.
Unlike having your own warehouse, in fulfillment you pay only for the space your goods actually occupy and only the parcels you send. In this way, you change a fixed cost into a variable one - adjusted to your current sales level.
At the same time, you also reduce your storage expenses by an average of 30-40% from the very beginning, because this is how much space in your own warehouse is NOT occupied by the goods. And because of what? For example, offices, alleys or common rooms. You cannot eliminate this cost in your own warehouse, but in fulfillment it disappears immediately.
Cost optimization was a key decision factor for the Mercator Medical brand, which decided to give up its too large own warehouse and transfer part of its operations to Omnipack.
The warehouse we left was way too big. It used to perform mixed functions, i.e. it served all our clients. When wholesale orders were transferred to another facility, its maintenance costs and processes were absolutely not adapted to what was happening in the e-commerce business. We were still, of course, able to process all orders with a very high level of customer satisfaction, but the costs we incurred were unacceptable. Therefore, our only chance was to move to a place that would allow us to optimize these costs and track them better.
Logistics Director at Mercator Medical
The possibilities of flexible scaling
The strategies, goals and needs of e-commerce companies are changing - often very dynamically. This is particularly clear in the case of seasonal businesses, which, for example, for 3-4 months of the year need even several times more warehouse space than during the rest of the year.
Fulfillment perfectly meets these expectations because it allows for flexible space management. When sales increase, you request more space and receive additional warehouse space or additional employees to handle your online orders. When there is a stagnation in sales, you will just as easily limit these resources. In your own warehouse, similar moves are not so easy to implement - as a result, companies either struggle with a shortage of space or spend most of the year paying for more space than they actually need at a given moment.
The benefits of flexible scaling are confirmed by the La Mania brand, which also decided to switch from their own warehouse to fulfillment. In this case, this choice - in addition to cost optimization - was also dictated by a change in development strategy and an increase in production volume.
When our strategy changed, including the assortment and volume, our warehouse simply became too small and it was not profitable for us to maintain it. We preferred to move to fulfillment, where we have flexibility of space and always get support from our partner. We don't have to worry that suddenly there are too many goods.
Customer Service and Logistics Manager at La Mania
Sophisticated processes and full automation
In your own warehouse, you are responsible for creating logistics processes. Developing them effectively can be quite a challenge - especially if you are not a logistics specialist and do not deal with it on a daily basis. Time, energy and money are often invested in solutions that ultimately do not bring the expected results.
However, fulfillment centers work for a broad range of clients (at Omnipack there are over 100 e-commerce brands from all over Europe) because they have ready, optimized and automated logistics solutions in place.
This level of process perfection is impossible to achieve for someone who does not deal with logistics on a daily basis. It is better to entrust logistics to professionals, freeing up valuable resources such as money or time and focusing on other business areas.
We are a company that produces natural cosmetics, not a logistics company. Our core competences are in the area of marketing, sales and creating great cosmetics, and not all the logistics related to it. I believe that you should do what you know best. In turn, those areas that are beyond core activities should be given to those who have greater expertise in them.
Co-founder, co-owner and VP, Orientana
Your own warehouse or fulfillment? Pros and cons of both solutions
Each logistics model has its strengths and weaknesses. What benefits do e-stores notice after switching to fulfillment, and what turns out to be a challenge?
Advantages of fulfillment:
- Fees are adjusted to the actual resources used: Fixed logistics costs are converted into variable ones and you can flexibly adjust the amount of storage space, and therefore costs, to the current needs of the e-store.
- Faster development: Fulfillment gives you full flexibility and freedom to develop. When sales decline, you reduce resources and costs. But as it grows, your warehouse and personnel resources quickly adapt to the growing needs. You don't have to look for additional storage space, you don't have to deal with expansion, you don't have to recruit a team, etc. You report it and you get it - it's that simple.
- Fast shipping: In the era of growing demands of online store customers, fast shipping is a priority. When you do it yourself, it's hard to keep up, especially when your business is large. Fulfillment centers are prepared to handle large scale and fast shipments. Warehouses are located in strategic points, close to key communication hubs and courier stations. Orders can be packed and shipped the same day, couriers pick them up even after 8 p.m., making next-day delivery a real possibility.
- Support in international expansion: An experienced fulfillment company will help you enter new markets and cross-border sales. At Omnipack, we have the appropriate infrastructure, we fulfill orders to 40+ countries, including 1-day delivery, e.g. in Poland and Germany, as well as 1-4 day delivery to other European countries.
- Safety during sales peaks: Fulfillment centers guarantee error-free and timely order processing even during busy periods such as Black Friday or Christmas. Automated processes and many touch-points make the level of error-free order fulfillment close to perfect (in Omnipack the Perfect Order Ratio is 99.95%).
- Increased level of customer service: At Omnipack, we ensure quick order fulfillment, which translates into buyer satisfaction. Merchants receive access to a clear and intuitive system where they can quickly find all information about orders and complaints.
We are able to respond very quickly to any customer question, like What is happening with my order? What is the status of my return or the shipment tracking number. We are simply more effective because the application is very clear and easy to use.
Customer Service and Logistics Manager at La Mania
- Fulfillment of orders in accordance with e-shop standards: It may seem that an external partner will pack orders differently than we would ourselves. Nothing could be further from the truth. An experienced fulfillment center understands how important brand strength is. Therefore, it will adapt to the merchant's needs and develop packaging rules consistent with the e-store requirements.
- Freeing up company resources: The fulfillment partner takes over all your responsibilities related to the logistics process, and you regain time and energy to work on other areas of the business. You don't have to worry about space management, process optimization, or recruitment and training of warehouse workers, because all these areas are on the fulfillment side.
- 24/7 view of logistics operations: In fulfillment, all processes are monitored on an ongoing basis, and merchants can track them from an intuitive application, which streamlines work and makes it easier for merchants to make optimal business decisions.
I do not work operationally, I have never been trained in the Omnipack application, and yet I am able to find all the necessary information efficiently and on my own. This is exactly what this application has to offer.
Logistics Director at Mercator Medical
- More favorable courier rates: Thanks to the scale of fulfillment operations, your e-store can benefit from lower order shipping costs. At Omnipack, we cooperate with many courier companies, the services of which our merchants have immediate access to - without having to sign a separate contract with each of them.
- Fulfillment of orders sold on marketplaces: At Omnipack we fulfill orders sold, among others, on Allegro, Zalando, eBay and Amazon (also in the AVO and FBA models), while complying with the strict requirements of marketplaces.
Disadvantages of fulfillment:
- Specific procedures that must be followed: The fulfillment center operates based on rules previously agreed with the merchant, one of them is, for example, the need to report the necessity to take a product from the warehouse. This means that you cannot enter the fulfillment center unannounced, as you would do in your own warehouse. This limitation results from the adopted security standards and processes that are necessary to provide effective service to many companies from various industries.
Advantages of your own warehouse in e-commerce:
- Independence of operation: In your own warehouse, you are not limited by external procedures - if you need it, you can take a product at any time, e.g. for a photo session, or fully personalize each order. This will not be the most optimal operation, but it is indeed possible.
Disadvantages of your own warehouse in e-commerce:
- High costs: Maintaining your own warehouse often generates much higher costs, because you have to pay for renting the entire space - including rooms that do not directly generate income, but must be located in the warehouse (e.g. social rooms, alleys). You also have to bear the costs of hiring staff and maintaining all the technologies used in logistics.
- Lack of flexibility: The cost of the warehouse is a fixed cost, which means that its amount is the same from month to month, regardless of the level of sales in the online store. In addition to costs, it is also impossible to quickly adapt resources to dynamically changing needs. We will not give up our space overnight or lay off employees.
- Slower development: This point is related to flexibility. Just like you won't quickly reduce warehouse space when sales drop, you won't expand your warehouse overnight or hire additional people when things turn around. Even if sales skyrocket and the market craves your products, the pace of business development will be slowed down by your logistics capabilities.
- The need to manage warehouse staff: Recruitment and training consume company resources and may distract attention from key aspects of the business.
- Problems with organization: In your own warehouse, the entire work organization rests on your shoulders. You have to organize everything yourself, e.g. logistics processes and technologies, contracts with couriers, shipments on marketplaces, legal and tax issues related to sales abroad, etc. You must be an expert not only in your field, but also in logistics. The stakes are high - the lack of efficient processes and specialized systems means late shipments, and therefore dissatisfied customers and lower revenues. It takes a lot of logistics experience to do it at the level of a professional fulfillment center.
Your own warehouse vs fulfillment - which is more profitable?
Your own warehouse gives you more independence than fulfillment. The only question is at what cost? The answer is: extremely high.
Having to manage logistics takes you away from business development.
Suboptimal resource utilization and lack of flexibility cause you to burn through money.
What do the numbers say?
All cost simulations that the team did for me show that when moving from our own warehouse to an outsourced warehouse, we can achieve 30% cost optimization. This is quite a savings, especially in times of lower purchasing power and inflationary pressure.
Co-founder, co-owner and VP, Orientana
Summary: Your own warehouse or fulfillment - what and when to choose?
The choice between your own warehouse and fulfillment depends on many factors, such as the specificity of the products, the scale of the business or its development strategy.
When is fulfillment a good choice?
Based on our observations and merchant experiences, fulfillment will be the best choice when:
- You want to optimize logistics costs and use the experience and resources of an external partner
- You send at least 500-1000 parcels per month and you understand that logistics consumes a lot of valuable time and financial resources
- Your company is in a phase of dynamic growth and needs flexibility
- You know how important it is to focus on key business areas, such as sales and marketing, to develop the company in a stable way
When is your own warehouse a good choice?
Despite the many advantages of fulfillment, it will not be the optimal choice for every e-commerce company. You may want to consider running your own warehouse if:
- You are just starting out and have a small sales volume, because you will only feel the full benefits of fulfillment when you reach a shipping scale of at least 500-1000 parcels per month
- You have very specific needs, for example regarding storage or packaging of goods, such as:
- the need to pack each product differently
- adding handwritten, unique notes to all orders
- special requirements for dangerous products
Monitor the market and learn from the experiences of other e-shops
The e-commerce market is dynamic, so it is worth being open to adapting your strategy to ongoing changes. Regularly monitor and evaluate the effectiveness of your logistics model. Don't be afraid to make changes when you think your business is ready for them.
And if you still have doubts, watch the discussion with owners and managers of well-known e-commerce stores who have tried both solutions.