How to Start an Online Store – Part 3: Fulfillment

<< See Part 2 of “How To Start an Online Store“: How to register your business, finding the right suppliers, integrating them in the supply chain and setting the right product prices.

So you’ve got this far. Starting an Online Store is a lot easier when you’ve got the right info and this is the place where you can find it. It takes a lot of drive do get through Part 1 and Part 2 of this guide, so good for you!

During this part of the guide, you’ll get a better understanding of what fulfillment means and how to build a company that can effectively manage orders and ship the right products to the customer.

Good, good … fulfillment. Yeah! But wait …

What is ecommerce fulfillment?

Good question! Although the term fulfillment is used quite a lot, not everyone has a clear grasp on the whole idea. I mean – why fulfillment? Well, it’s actually a pretty simple concept. Order fulfillment is anything that has to do with fulfilling your promise to the customer. That promise is you’re going to ship the products they’ve purchased, those products are going to be in good condition and they will arrive as soon as possible.

Fulfillment also covers the reverse process (also called reverse logistics). That means getting merchandise back from the customer. That type of operations happen:

  • in case of a package return
  • when the customer refused the package
  • the shipping company was not able to get deliver the goods

So basically when your ecommerce business is fulfilling an order, it is actually making good on its promise to deliver merchandise in the best way possible. Although the concept is not that really hard to grasp, making it happen is a little bit harder.

In order to make sure your fulfillment operations you’ll have to look for the answer to four very important questions:

  1. am I moving the goods in the most effective way? This is a question you will always have to be answering to. The answer is usually no. If you have answered yes too many times – you are not really trying that hard. The truth is ecommerce operations are evolving very, very fast and there is probably always something you can do better.
  2. am I always shipping the right products? You have to understand that sometimes you will not be shipping the right products. Yup – that’s a fact. It may happen when you’re using a drop-shipping service or when your team is overwhelmed with the number of orders (say during the holidays). You have to minimize these type of mistakes and always strive to correct your mistakes.
  3. is my team working in sync or are there any communication or operational bottlenecks? Your ecommerce business will not always run smooth. The most common reasons are either the team is not communicating properly or the IT systems are not fully connected (say your order management and inventory management tools are not synced). You have to stay alert and solve these type of issues as soon as possible.
  4. is my fulfillment scalable? You won’t need to ask yourself this question in the first days but eventually you will have to check if your operations are ready to scale if you’re successful. To do so – try wondering what will happen if all of a sudden you were to receive each day ten times as much orders as you’re expecting right now. How about if your sales were to increase one hundred or one thousand times? Would you be ready? How would you manage this change?

The 4+1 steps in ecommerce fulfillment

Fulfillment is probably the most complex and tedious part of ecommerce. It is also the one thing that is the least talked about in terms of ecommerce. It’s not flashy and it’s not cool. It’s complex, involves a lot of tweaking and a lot of work to getting it right. While most ecommerce guides will point out to the importance of picking the right shade of orange for the “Buy now” button, few will speak of how important fulfillment is.

Just to get a glimpse of how important fulfillment is – think of your car. While having the right color and the right type of leather is important, the car won’t start without an engine. Fulfillment is the engine that keeps ecommerce going.

There are just five basic steps in fulfilling ecommerce orders. Four of them are mandatory and one is optional. Hopefully you will cover this last step as few times as possible. These five very important steps are:

  1. Receiving the orders
  2. Receiving the products
  3. Processing the order
  4. Shipping the ordered products
  5. (hopefully not needed) Handling order returns

Overview of the Fulfillment Process (including returns)

1. Receiving the orders

Customers will place the orders through one of your sales channels. It may be your online store, on the phone or through a mobile application or a pop-up store.

There is a great variety of order management software out there and later on on this guide will get through some of them. It matters less what you will be choosing later on. What matters from a fulfillment standpoint is what the order info should contain. Here is the minimal information you will be needing:

  1. who is handling this order (who will be managing the order and who will actually be picking and packing the products)
  2. the customer info – usually name, address, whether the customer is a person or a company, whether the customer has already purchased from your store before
  3. special discounts or shipping conditions – this may happen when the customer has used a voucher or a special promotion and is entitled to a smaller shipping fee, a gift or a bonus product.
  4. order info – total cost, estimated shipping cost, whether the order is prepaid or paid on delivery, and where you will be shipping the products from (either internally from your warehouse or from a drop shipper)

Most of the time, you will be receiving more info from your order management tool but these are the essential blocks of information to keep in mind.

2. Receiving the products

Before moving on to the actual order fulfillment bullet points I have to make a point. You don’t HAVE to fulfill the orders yourself. Some companies outsource their fulfillment to other companies. My advice is you should keep most of your fulfillment operations within your company. You won’t be able to ship products across the globe but you can pick, pack and carefully wrap orders for your customers.

When medium and large online stores are fighting each other over consumer mind share, we only see the marketing and superficial aspect of this battles. But the fact is, underneath all this visible struggles, the real battles are won in the warehouse. Your real chance for success stands in picking, packing and shipping the right products, within the timeframe you’ve promised.

It may seem hard to handle fulfillment operations and it sure is. But because it is hard, you have to master it before the competition does. Walmart and Amazon, two of the largest retailers in the world, are also two of the best supply chains in the world. It’s not that these companies have developed spectacular fulfillment operations because of their huge sales but the other way around.

Glad we’ve got that out of the way. Now – what’s the best way you can receive products in your inventory?

It all starts with an order to your supplier. It is usually called a “Purchase Order” as you are placing an order to purchase products. We will assume that you have already set up an agreement with your suppliers and they will ship the products. You will probably pay as you place your order, when the order arrives or at a given time after the order has arrived, if you have agreed as such with your supplier.

Once the products have arrived at your warehouse you will need to:

  1. verify their integrity – check whether the goods are damaged and if so return those that are damaged
  2. count the number of products – check if the supplier has indeed shipped the correct number of products
  3. check if the product cost is the one agreed upon – if you have agreed to either pay on delivery or at a given deadline you will probably receive an invoice with individual costs split. Check to see whether these costs are those you have agreed upon when placing the order
  4. add the product SKU’s to your inventory management – Standard Keeping Unit or simply SKU is what retailers use to define unique types of products that can be sold. They are used to track goods movement through inventory. The SKU is not to be confused with the product model no, although this can be included. The SKU code is formed using product characteristics (such as manufacturer, size, color etc.) and it is usually used as a barcode so it can be tracked easily using bar code readers.
  5. add bar codes corespondent to the SKU’s you’ve just issued for the products. You can do this using special bar code printers and special stickers that will be attached to the product package.
  6. once the product is received and marked it will be sent to your storage unit (or warehouse) where it will be placed in a way that it can later be easily picked and packed.

( Basic check list when receiving products from the supplier )

Placing the products in the inventory is a very important part in receiving the products. The better you keep track of where the products are, the less time and effort you will need when picking and packing the products.

When placing the products in storage you need to keep in mind some very important aspects:

  1. not all products are equal: products should be placed according to how popular you expect them to be. Some products will be sold faster and they need to be easier to reach. Either closer to the packing unit or lower on the shelves so they can be easily picked.
  2. however, all products have to have their position in stock clearly assigned and saved. Each SKU should have a clear position in the warehouse. You will probably develop your own warehouse numbering system but you will probably have to add things such as aisles, sections, levels and positions to keep product identification easy and scalable.

Hopefully at this point you have managed to get the products in your inventory, they are correctly marked and stored and you are ready to pick said products for the orders you are going to be shipping.

3. Processing the orders

Once you have the products in the inventory and orders are coming in, it’s time to process these orders.

Order processing is split between four main areas:

  1. picking
  2. packing
  3. quality control
  4. movement to appropriate shipping station

 

Picking products from the inventory

Picking is probably the most time consuming part of order processing. It also gets a lot more complicated as your business grows and it may be prone to errors. Having more products in your inventory will increase the complexity of picking the right products in the fastest way possible.

If you’ve managed to place the products in the right spots (as stated in the step above – receiving products) your chances of correctly processing orders increase big time. The reason is it will be easier for picking staff to move fast through the aisles and pick the right products.

How does product picking work?

To have a streamlined picking process that works just as well with 10 orders per day or 1000 orders per day you have to decrease the chances for errors. To do so, your picking staff will cycle through these steps:

  1. Receive a pick list – the pick list is a … well … list of items to be picked from the inventory. It may vary depending on how you run your fulfillment operations and what kind of software you are using but it usually contains:
    1. Product location (section A, aisle 3, level 3 etc.)
    2. Product code (usually the SKU)
    3. Quantity to be picked
    4. Product description and image (for quicker identification)
    5. Barcode (usually used to confirm product picking directly into the inventory management system)
    6. Product bin
  2. Create the optimum route to pick products: usually picking staff will collect more orders to improve efficiency and gather all the products in one trip. This route is usually generated by the inventory management software based upon the warehouse layout.
  3. Pick products and place them either in separate bins based on ordered items or a general items to be sorted later at quality control or packing stations.
  4. Bring products to the Packing Station, where they will be sorted, placed into the right packages, and so on.

( A basic example for a picking list )

Packing ecommerce orders

Packing is the next step in the fulfillment operation. Once the products have been picked from the corresponding aisle, shelf or bin, they are sent to the packing station where they will be split into orders and prepared for shipping.

The packing operation is usually split into these further steps:

  1. Choosing the right package – depending on the products shipped, they will be placed into special packages, according to specific needs. For example a wine bottle will be shipped in a different package than say, a dress or a cardigan.
  2. Scanning and marking the package – after the products are placed into the right package, products are usually marked with specific documents, usually used by the shipping company so their transport progres can be tracked. They are also scanned so the inventory management software will register said products as getting ready for shipment.
  3. Adding invoices, product slips or other documents and / or marketing prints – this step includes placing needed orders information or documents (warranty certificate or invoice), as well as marketing materials that should reach the customer (say a discount voucher or a bonus product).
  4. Preparing the package for quality control and shipping

 

Quality control

Once the products are placed in the right package, a quality control station will check for any errors that may happen.

Quality control personnel will usually check for one of the following errors that may appear:

  1. Wrong products: products may sometimes get mixed or the wrong information has been sent somewhere along the order management process. The most important aspect is that quality control will make sure the customer gets what he or she ordered.
  2. Wrong address / customer: sometimes orders get mixed and orders are sent to the wrong customers.
  3. Wrong payment information: there is a multitude of payment options and you do not want to ask your customer to pay something that was already paid for.
  4. Shipping options: maybe the customer opted for a quick delivery option. Quality control needs to make sure the product gets to the customer in the specified time frame. Another shipping mistake happens when online stores work with multiple shipping partners (say one for internal shipping and one for overseas shipping). It is important for the order to be routed to the right shipping partner to avoid delays or extra costs.
  5. Specific order information: quality control also needs to check for specific demands such as gift wrapping or a specific timeframe to be shipped at.

 

4. Shipping orders

Once the products have been picked, packed and quality control made sure there were no errors in the order management process, the package is ready for shipping.

Online stores usually partner with one or more shipping companies to deliver the goods. The shipping station will check the package weight and direct it to the right shipping partner.

Most shipping companies will provide you with a general framework on how to handle packing and preparing for shipping. Here are the most popular ones:

 

When these companies (and others) will charge you for their shipping services they will take into account some (or all) of the following variables:

  • package weight and size
  • departing country and arrival country
  • departing city and arrival city
  • shipping insurance
  • tracking services (now most of these companies offer this service bundled with others)

 

Once the orders are picked by the shipping company, the order status is constantly updated so customers and the online store knows where the packages are at the moment.

When the products are delivered the status is updated and the order is confirmed. After this point the product is in the customer’s ownership and any reverse process wil be treated as a return.

 

5. Handling ecommerce returns

Oh, returns – can’t live with them, can’t live without them. Just kidding. A clear and friendly return policy is what sets the likes of Zappos.com apart from the competition. They will let you return the products you’ve purchased within 365 days, free of charge and as their return centers will check the products you will be credited within 7 days with the money you’ve spent.

Great, right?

Ecommerce customers love a great return policy and you need to be ready to handle one. The logistics involved in such a return process are usually dubbed reverse logistics. This means you will reverse the steps mentioned above.

Basically you will unship the products, unpack, unpick and un-order everything.

If you offer free shipping, you will have to handle the shipping costs from the customer to your return center (for small and medium companies, the return centers are the same as the fulfillment facilities).

Now, the big problem when getting information on handling returns is that most of the resources out there are either

  • irrelevant (usually stating how important return policies are or how to market your return policy) or
  • boring (usually a bunch of text mixed by logistics experts that have no need to explain how reverse logistics work)

What will follow will hopefully be a bit more relevant and a bit less boring. The big idea you have to keep in mind is returns are the reverse process of everything you have read so far.

You will have to tailor the following concepts to your specific company structure, accounting, IT systems and processes.

That being said there are three main areas you need to focus:

1. Getting the products from the customer and into your fulfillment center.

There are usually three main options to do this:

  • using your shipping partner: most shipping companies offer return services. What they will do is go to the customer, pick up the package and send it back to you. Either you or the customer have to pay for these services. Companies offering free returns also include a special options for customers to use within a certain timeframe, in order to ship products back. This is usually a special voucher the shipping company will then use to charge you instead of the customer.
  • using your own network of brick and mortar stores: if you also have a network of stores (either classic or pop-up stores) you can direct the customers to these stores to save on shipping costs

2. Getting the products back into inventory

Once the products are back at the fulfillment center you will have to get them back into inventory. The process is similar to what you would do if you were to receive goods from your supplier. The main differences are:

  • in terms of accounting this operation will be treated differently
  • products need to be checked for damage or missing items
  • instead of paying your supplier, you will either credit the customer

3. Returning payments to the customers

Once the products have been checked and returned to the inventory, you will need to issue a refund to the customer and inform said customer of these changes.

And … that’s it.

It may seem complicated right now but keep in mind that thousands of online store owners are doing all these things. Now that you’ve got the basics, you will be able to deal with most of the operation challenges you will face. If there is anything else you need to know – just ask in the comments sections bellow.

This concludes this part of this guide. This is probably the hardest and the most important part of making your store run smooth. It involves many operations, usually lots of people and it needs to be built in such a way that it will easily scale when your company is growing at double digits.

Next week we will focus on branding, designing and choosing an ecommerce platform for your online store. See you soon!

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