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Fulfillment Centers vs. Warehouses

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Warehouses. We’re all familiar with them. And if you’re on this blog, and you’re interested in eCommerce and delivering the best experience possible for your customers, there’s a pretty decent chance you’ve worked with one of these concrete palaces in the past. Maybe you’re considering working with a warehouse again to store your product.

Warehousing has evolved tremendously over the past decade. The rise of eCommerce has necessitated the rise of locations for digital companies to store their physical products. But with this storage requirement comes a host of challenges unique to eCommerce companies – specifically challenges centered around logistics.

Today, warehouses that serve eCommerce companies specifically are often referred to as fulfillment centers. In this article, we’ll talk a little bit about how fulfillment centers, or distribution centers as they are sometimes called, and how they support companies in need of outsourced fulfillment and differ from warehouses. We will also examine some key traits of fulfillment centers so that you can help discover which is best for you.

Fulfillment Centers vs. Warehousing 3 differences

Fulfillment centers and warehousing centers can look very similar in terms of construction. Pass either one on the highway, and you likely won’t be able to tell the difference. That’s because most differences between fulfillment centers and warehouses stem from the differences in operations within. Here’s a look at three key differences between warehouses and distribution centers.

1. Warehousing & Inventory Management

Traditional warehousing features only the most rudimentary of inventory management systems: you rent out space in the warehouse, you store your things, and you come by to remove those things at some point in the future.

With a fulfillment center, the ‘set it and forget it until it’s time’ functionality persists, but options like inventory tracking are common. That is to say, if you have one hundred units of your product in your system, a warehouse might reflect your inventory at one hundred units. However, if you receive sixty orders from customers, your available inventory will be different than your physical inventory: you will still have one hundred units, but only forty of them will be available for new orders. Fulfillment centers with advanced inventory management systems provide significant added value over warehouses in this regard, since you’ll know precisely when you need to order additional product.

2. Warehousing Operations Processes

When you warehouse your products, you are usually only paying for a glorified storage unit. When your customers place orders, it is your responsibility to arrange for the removal of your product, its packaging, and its shipping. You will also be accountable for anything that happens to the product when it is in transit.

Fulfillment centers operate differently: with a fulfillment center, you will be completely removed from the operations part of the fulfillment process. Your customer will place their order, and then a representative from your fulfillment company will go to your storage location, remove your product, package it in accordance with your instructions, and then ship it off to your customer. Best of all, they will often assume at least partial liability for products in transit.

3. Fulfillment Centers & Warehousing Shipping

You may have noticed that, in the previous paragraph on operations, we mentioned that fulfillment centers can (and do) ship your product to your customer. They fulfill orders. But in so doing, they can also provide you with significantly more optionality than a warehouse. Sometimes, warehouses will offer basic freight shipping services.

Fulfillment centers, on the other hand, often have extensive and carefully cultivated relationships with logistics providers: sometimes, your third-party logistics (3PL) partner can save you thirty percent or more on shipping than you would have paid to send the same package to the same customer!

Five Essential Services of any Fulfillment Center

So now that we understand the differences between fulfillment centers and warehouses, how can we understand how to evaluate the best fulfillment center for you and your product? Let’s take a look at the five essential processes that each fulfillment center should provide.

Shipping and Receiving

Every product’s journey begins with manufacturing. Whether your product is developed in a garage in Los Angeles or in a high-tech factory in Shanghai, your fulfillment center – you can think of them as your eCommerce partner – will need a way to get ahold of your product so it can ship orders to your customers.

All capable fulfillment centers are ready to receive inbound product shipments, be they from LTL pallet shipments, entire shipping containers, or a box dropped off by you at the center’s doorstep. Rates vary considerably, however, as do shipping restrictions. Be sure to ask your fulfillment center for their specifics.

Storage & Inventory Management

It’s common to think of storage space volumetrically. After all, this is how we pay for things like storage units and even our homes. However, when it comes to fulfillment centers, volume is only part of the equation. One product with the dimensions of 3’x3’x3’ could have significantly cheaper storage fees than twenty-seven individual products (SKUs) with the dimensions of 1’x1’x1’ each – despite taking up identical space.

Furthermore, you will want to ask about the way inventory is managed. You may want to ensure that your online shopping cart syncs hourly (or even more frequently) with your fulfillment company’s inventory management system so that you never accidentally end up selling a product to one customer that has already been purchased by another.

Picking & Packing

Economies of scale manifest most sharply in the “picking and packing” segment of fulfillment. In fact, if you are considering fulfillment, it is likely for this very reason: the financial costs associated with retrieving your product from storage, packaging it for delivery, and shipping that product for one thousand orders, on a per unit basis, are significantly lower than the financial costs associated with shipping ten orders. However, the time costs associated with one thousand orders are substantially higher with one thousand orders than they are with ten.

Fulfillment centers obviously lighten the burden by reducing you financial costs and reducing your time cost to effectively zero. But you will still want to understand precisely what type of savings you will realize, and what type of order turnaround you can expect. For instance, you may want to choose a fulfillment center that has a ‘same day turnaround’ on all orders by noon as opposed to a center that has a 48 hour SLA.

Custom Packaging & Prep

Not every customer requires custom packaging or special project prep. However, if you want to take your branding to the next level, or if your product is especially complex and does not neatly conform to the “pick SKU, pack SKU, ship SKU” process – it requires assembly, custom messaging, etc. – you want to know whether or not your fulfillment center is capable of accommodating your requests at scale.

Return and Exchange Management

Here is a surprising fact for many fledgling eCommerce entrepreneurs: customer lifetime value and return rate are directly proportional. Yes, you read that right – the best customers actually have the highest return rate. As a result, if you have a popular brand, you will need to be ready to process returns. In much the same way that your fulfillment center will be your partner in receiving product shipments, you may also want to work with them on returns to ensure that your returned item is either returned directly to inventory or given a custom disposition at your discretion.

There are significant differences between warehouses and fulfillment centers. In some cases, a warehouse might be the right choice for you: if you have low sales volume, you sell most of your product locally, or you have particularly large and cumbersome products, you might be better off with the freedom afforded to you by a warehouse. However, if scale if your goal and volume is a consideration, you might consider instead looking at fulfillment centers. And now, armed with the knowledge of the five essential services provided by any quality fulfillment center, you’ll know what to ask them.