A Complete Guide to Third-Party Warehousing & Distribution for Retailers

Published : January 24, 2020

Millions of retailers have become etailers as more and more shoppers choose to make their purchases online

Smart Insights estimates that consumer spending over the Internet accounted for $3.5 trillion (that’s trillion with a t) in sales in 2019 and will pass $4.2 trillion in 2020. The research company projects that online customers will spend $6.5 trillion in 2023. Online sales are growing at an annual rate of about 15 percent.

With more and more sales online, more and more retailers are making third-party warehousing and distribution a critical part of their program for success. Third-party warehousing and distribution free up construction capital and eliminate rental expenses. They reduce inventory holding costs. They liberate both online and brick-and-mortar retailers from the hassles of picking, packing, and shipping products and dealing with returns. The right third-party warehousing and distribution partner can make a critical difference in the success of any retail company.

Wait a minute. Is third-party warehousing and distribution the same as drop-shipping?

Third-party warehousing and distribution is not the same as drop shipping. Third-party warehousing and distribution, which you may also see described as third-party fulfillment or third-party logistics differs from drop-shipping in one critical way:

Retailers who use third-party warehousing and distribution services retain ownership and control over their inventory. Retailers who use drop-shipping services do not.

The drop shipment model uses retailers to provide a digital storefront for products the drop shipment company owns. Multiple digital marketers may be displaying storefronts for the same product at the same price. These marketers usually rely on the content of their sites to drive sales. If they can just put out enough free information that gets the attention of search engines and converts to the occasional click, then they can get a commission on sales of the drop-shipped product.

There are digital marketers who do well with the drop shipment model. They are a small minority of those who try, but it’s possible to eke out profits in this system. The third-party warehousing and distribution model is quite different — and potentially much more profitable.

In third-party warehousing and distribution, retailers own both their digital storefront and their inventory. They choose their own stock. They set their own prices. But they do not have to buy or rent warehouse space.

Retailers who choose third-party warehousing and distribution do not have to invest in workers to prepare orders for shipment to customers, and they don’t have to run a “complaints department” to track down problems in shipping or to deal with defective product returns. And if they choose the right third-party warehousing and distribution partner, they don’t have to deal with just-in-time logistics, choices among carriers to optimize freight costs, sales analytics, and the inevitable problems of having inventory in one location and a surge of customers on the other side of the country.

Third-party warehousing and distribution can free retailers to do what they do best: Creating new products to keep consumers happy. But it helps to have a clear idea of exactly what third-party warehousing and distribution does.

What is a third-party warehouse?

A third-party warehouse is a storage facility owned by a commercial provider outside your company. Providers of third-party warehouse services go through several steps to serve your needs.

  • Set-up. Your third-party warehouse keeps up with all the details of receiving inventory from your suppliers. They must know your standards for accepting inventory and what to do when your supplier does not meet your terms. The warehouse must make sure it can accommodate the complexities of your business, both in receiving your merchandise and in sending it to your customers.Receiving and intake. Your third-party warehouse may need to receive your inventory on pallets. They may need to have workers who can receive, document, and store your inventory piece-by-piece. The third-party warehouse must have clear procedures for unloading, sorting, counting, entering inventory into their online system, making sure their online system is in sync with yours, and placement within the storage facility.Storage. The third-party warehouse keeps your inventory safe and secure until it is picked up. Depending on the size of your product, the warehouse may store your product in bins, on pallets, or on shelves. Your storage costs may be quoted in terms of numbers of items, numbers of pallets, or volume of storage space. Usually you will have more than one option to achieve the lowest cost.Kitting. Customers dread purchases that come with the warning “some assembly required.” But some items are most efficiently stored as parts and assembled just before they need to be shipped to the customer. This process is called “kitting.” It is a service that your third-party warehouse can provide so you do not have to hire additional staff.Order fulfillment. Twenty years ago, order fulfillment charges were often referred to as “pick and pack” fees. Modern third-party fulfillment, of course, still involves the pick and pack function of shipping out orders to your customers, but this function is integrated with information technology. This function ties in with “third-party logistics,” which ensures that your inventory comes in as fast as needed so it can go out smoothly.Shipping. Third-party fulfillment can achieve enormous reductions in shipping costs. UPS, FedEx, DHL, and the trucking companies all offer price breaks when they can send an empty truck to a warehouse and drive it away full. Maybe your retail business generates enough sales that you can take advantage of reduced rates for shipping. Maybe if it doesn’t now, it eventually will. But in the meantime, your lowest shipping costs are available through third-party fulfillment.Account management. Your third-party warehouse can handle calls about shipments into your inventory and out to your customers. It can deal with customer inquiries about order fulfillment. And it can provide you with detailed data about revenues and costs to act as a check on your internal accounting systems.

As you can see, providing third-party warehouse services is about more than just providing a building. It is about more than just fulfilling orders. Third-party fulfillment provides essential services at lower cost. And it provides essential information for the business decisions you make that grow your company.

How does third-party logistics work? What are the advantages of third-party logistics?

What makes third-party logistics the work for your company? How can you cost out the advantages of third-party fulfillment?

The cost accounting of in-house inventor and order fulfillment gets a little complicated. There are numerous factors to consider. Your accountants will have numerous rules to follow. It can be hard to put a number to the cost of order fulfillment handled within the company.

Third-party fulfillment provides a single number for your profit and loss. And when you compare internal costs of order fulfillment to the costs of third-party fulfillment of your orders, here is what you will usually find:

  • The total cost of order fulfillment by a third-party service usually roughly equals your labor cost if you do fulfillment in-house.Storage costs at a third-party warehouse can be much lower than the cost of leasing a warehouse, especially if your inventory fluctuates throughout the year. A third-party warehouse will not charge you for storing inventory you do not have.Shipping costs will almost always be substantially lower, about 15 percent for ground shipments and 25 percent for express.The more you sell, you more you will save through third-party fulfillment. Most third-party fulfillment companies offer volume discounts.

What is the role of third party logistics providers?

Third-party warehousing and distribution is the cost-effective choice for most retailers involved in eCommerce. But how can online retailers recognize the right third-party warehousing and distribution company?

Third-party fulfillment should lower your overhead but also increase your throughput. 

Third-party fulfillment should just lower costs of storing inventory and fulfilling orders. It should also increase the number of orders you are able to fill. The right third-party fulfillment provider will do this for you by providing you real-time data on inventory levels and order activity.

Retailers pull product from multiple sources. They get their inventory from wholesalers. They get their inventory directly from manufacturers. Sometimes they accept inventory on consignment.

Every retailer’s inventory management system must tie into all of their supply channels so they will know how to restock when inventories are low. Your fulfillment provider should be able to update your customer’s shopping cart with current inventory levels. Your fulfillment provider should be able to help you maintain your standards for minimum and maximum levels of items in stock and have built-in alerts to notify your supervisors when those levels are reached. Your third-party fulfillment center should provide you with real-time data that helps you make sure you don’t lose orders because you don’t have the goods to sell.

Third-party fulfillment should be able to handle unexpectedly high order volume. 

No retailer wants to lose out on a rush because they can’t get orders out. Every retailer needs to understand how their third-party fulfillment provider will handle unexpectedly high volumes of orders. If your third-party logistics provider relies on seasonal or temporary workers, the results can be disastrous unless your provider has standard operating procedures in place and a warehouse management system that optimizes workflow.

A warehouse management system — which is something your provider works out to ensure you receive excellent service — learns from experience. Your fulfillment center will learn how to streamline movements. It will avoid unnecessary repetition of work. It will become more efficient in providing service to you the longer it serves your account. Your fulfillment provider should be able to tell you how they store your inventory so your most-picked items are closest to their staging area and your least-picked items are greater distance, so your orders can be sent out as quickly as possible.

Ask your third-party fulfillment provider if they use batch or wave picking. Batch picking eliminates redundant trips to the same inventory location. Wave picking allows the warehouse manager to view a large volume of orders and pick the best routes for transporting merchandise from storage to staging. You won’t supervise the warehouse’s use of these methods, but it is good to know whether they are in place.

Third-party fulfillment should have procedures to ensure pick and pack accuracy. 

Customers tend to be unforgiving when they pay for and receive merchandise they didn’t want and didn’t approve. Inaccurate order fulfillment loses sales, loses customers, damages brand, and hits the bottom line. Your third-party fulfillment provider should be able to show you how their equipment, technology, and procedures ensure that the right inventory is shipped to the customer.

Barcode scanners ensure that the item picked matches the product number on the order. Fulfillment centers at the very least should be able to answer your questions about barcode scanners, and to show you how they keep barcodes, SKUs, and your product numbers in alignment. Your logistics provider should show you that they can track, trace and authenticate any product and monitor its environment anytime and anywhere. Your supply chain needs to be seamless.

Third-party fulfillment should lower shipping costs. 

New retailers will not have the sales volume that allows them to negotiate shipping costs. Third-party fulfillment centers will. A fulfillment center can batch all of its shipments to take advantage of the lowest available freight rates. A good fulfillment center can take advantage of multiple relationships with freight companies to drive down costs.

But the special relationship of third-party logistics providers to freight companies does not just lower shipping cost. Third-party fulfillment can get product out faster. The third-party fulfillment center will almost always have a third-party shipping application that integrates their fulfillment center to the carrier’s tracking system. Drivers don’t have to wait for the shipping department to print labels and fill out paperwork. Additionally, who integrate with multiple carriers reap the benefits of comparison shopping that can be passed along to the client.

Third-party fulfillment should have processes in place to enhance customer experience. 

Modern consumers have many choices. They have unlimited access to product information. They can tap the experiences of other consumers through product reviews. They can post their opinions of products for the world to see.

Modern retailers are forced to customize, customize, customize. Your third-party fulfillment center should be able to tell you how they can help you customize your customer’s product experience.

Retailers invest significant time, professional expertise, and capital in choosing products of unique value and in providing a unique online experience. Their third-party fulfillment providers can help give customers outstanding value and satisfaction while giving them turn-key control over inventory. The secret to achieving these advantages is choosing the right third-party warehousing and distribution partner.


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