Q: I'm writing a business plan for an online retail clothing site, and I want to run it from home until the company grows. I want to outsource the fulfillment to cut operating expenses. Can you give me some advice?

A: You are smart to consider outsourcing fulfillment--44 percent of online retailers lose money on shipping and handling. B2C Web sites typically have to operate on very thin profit margins, simply because the Web is so pervasive and consumers have the ability to easily compare and contrast prices. If somebody else out there sells the same thing you sell for a nickel less, your customers will know about it. And because the profit margin is so small, by the time you put the product in a box, surround it with Styrofoam packing peanuts and take it down to UPS, you've often lost money. (Have you ever priced packing material at your local office supply store? The cost of Styrofoam peanuts alone can eat up every cent of your profit.)

One advantage of using a fulfillment outsourcer (especially one of the larger ones) is that they are able to buy shipping materials in large quantities in order to receive volume discounts. They can then pass the savings on to their clients. Another plus: When you outsource fulfillment, you don't have to run a large warehouse operation, and this in itself can be a big money-saver. (Buying large amounts of inventory and having that inventory sit is very ineffective and costly.)

Perhaps the greatest advantage is that an outside fulfillment organization is likely to be automated. The contractor-who has invested millions of dollars to create a system that's highly accurate-keeps your costs down, speeds up your processing time and lowers your inventory requirements. They can do this because they don't use a paper-based system, where a warehouse employee takes a piece of paper and walks through the warehouse picking out each product on the order. This approach is naturally prone to error, and a paper-based system's biggest failure is poor picking. A sophisticated fulfillment operation will have an automated system with bar code readers to ensure a higher degree of accuracy.

As you select a fulfillment service, here are some things to keep in mind:

  • Fulfillment is connected with everything else in your operation. Select an outsourcer that understands the integration involved.
  • Make sure you get periodic reports on everything that goes into and out of the fulfillment center.
  • Your fulfillment contractor should be able to handle multiple sales channels. Regardless of where the orders originate, fulfillment should be able to take place at the same speed and with the same level of efficiency across the board. Furthermore, you should be able to get a channel breakdown report.
  • Find out about returns management. Can the fulfillment company handle returns to your satisfaction? Some providers can even take returned products and refurbish them for you.
  • Some full-service fulfillment contractors also operate call centers, where they can take orders on your behalf and field customer service calls.

Dan Blacharski has more than 15 years of industry experience, has written several books and writes for a wide variety of trade publications. Currently living in Santa Cruz, California, Blacharski has three entrepreneurial high-tech companies under development, and is also writing the next edition of Entrepreneur Media's How to Become an Internet Entrepreneur.