E-commerce logistics: what processes does it include?
At the outset, it is worth establishing one thing: logistics in e-commerce only partially overlap with logistics in traditional commerce. E-commerce requires different processes, and similar ones often occur in different intensities. When talking about logistics in the context of an online store, we must therefore take into account:
- Placing orders with wholesalers and manufacturers – you can order both finished products and materials (if your store sells its own products).
- Handling deliveries – receiving and verifying goods received.
- Warehousing – your company’s logistics concept must not lack a thorough plan for warehousing. You need to ensure proper storage of goods, their inventory, etc.
- Order picking – in this process, integration of ordering systems with warehouse management software is key. By combining them, employees can not only view current inventory, but also more easily find the products they need to pack.
- Packing orders – it’s worth remembering the need for proper packing materials. Even such a mundane problem as the lack of appropriate cartons or packing envelopes can have consequences in the form of delayed order processing and dissatisfied customers.
- Shipping and delivery – engaging with suppliers in e-commerce requires strategic thinking and planning ahead. Customer expectations are rising – same-day shipping of orders and next-day delivery is becoming something of a norm. Customers welcome the option to use pick-up at parcel machines, stores and other pick-up points. This requires cooperation with many entities at the same time.
- Complaints and returns – online shopping is governed by its own rules – literally, as different regulations apply in its context than in the case of stationary shopping. This can be seen especially in the area of returns. A customer who has ordered goods online has the right to return them without giving a reason, and this is a scenario that every online store must be ready for. Also, the system for reporting and processing complaints must be planned accordingly – to allow consumers to assert their rights.
- Disposal – some unsold or returned goods can be sold (for example, by organizing sales), but we can’t always use this option. Products that are damaged, decomposed or past their due date should be disposed of – this is also one of the important logistical processes that is often forgotten.
The above processes occur in varying intensity and nature in both e-commerce and physical sales.
Four logistics models for the e-commerce industry
Logistics in e-commerce must be planned. The first step should be to choose the right model for your business. Four options are most often mentioned: own warehouse, dropshipping, fullfilment and cross-docking. Let’s discuss them in detail.
Own e-commerce warehouse – independent and efficient
Having an in-house warehouse seems like a natural step for stores that want to remain independent and retain control over most company processes. It’s also a solution often chosen by new players in the market – entrepreneurs who want to save on order processing costs and take care of everything themselves.
When is an in-house warehouse a good solution?
Small stores that offer a narrow assortment and have their own space that they can use as a warehouse will benefit the most from their own warehouse. If you have a spare room in your apartment, garage or other room where you can set up a warehouse, this is a good solution to start with.
What are the benefits of having your own warehouse?
- You will save not only on handling costs, but also on renting storage space.
- You will retain full control over logistics processes – picking orders, packing, preparing for shipment, etc.
- You will keep a personal eye on the quality of customer service.
- Enable you to personalize your orders – you can easily add a handwritten note, a small gift or decorate them with a drawing to your packages. In many cases, this can prove important to your customers.
When will an in-house warehouse not necessarily work?
When your business starts to grow, the number of orders (and thus goods to be stored) will increase significantly. In this situation, a garage or a room will no longer suffice, and changing to a larger space will begin to generate huge costs.
The greater the demand for your store’s products, the greater the cost. At some point your commitment will no longer be enough and you will have to start hiring. This again generates costs.
More warehouse space, more orders and employees also mean more complex processes. At this stage, it may be necessary to expand your and your team’s knowledge, as well as your first investments – in warehouse management systems, packaging and labeling equipment, specialized equipment.
What are the disadvantages of having your own warehouse?
- Costs rising by leaps and bounds as the company grows.
- Full responsibility for order fulfillment.
- Warehouse and employee costs are fixed costs – you will still incur them in worse periods.
- You are the one who makes the decision to upgrade to a larger storage facility. If you choose one that is too large and too advanced, the costs can be overwhelming. If you choose too small or don’t take care of sufficiently advanced systems to ensure high throughput, you may soon need to make another “move,” which, of course, will generate further, not inconsiderable costs.
Dropshipping – one-stop shopping for orders without goods
This modern model is becoming increasingly popular – especially among those who are just beginning their e-commerce adventure. This is because what distinguishes dropshipping is the extremely low entry threshold, as well as the ability to run a store not only without a warehouse, but also without goods.
Why is dropshipping so popular?
Dropshipping promises a lot. This is because in a store based on this distribution model, the owner is responsible for sales and marketing activities, while the rest of the processes (warehousing of goods, picking, packing and shipping orders) take place on the distributor’s side.
Thus, one may be tempted to set up store without knowledge of logistics and distribution processes.
Benefits of dropshipping
- You can sell without a warehouse and goods.
- You don’t handle orders – you only focus on marketing and sales.
- You can offer a very extensive range of goods to your customers.
- Dropshipping requires minimal investment, so you can get started with little capital.
The dangers of dropshipping
Like any other, dropshipping is also not a perfect solution. Removing a large part of the responsibility for processes turns out to be only an illusion, because it works until everything goes according to plan. After all, customers will blame the store, not the distributor, for any failures, delays and problems. This is why it is so important to select reliable and professional business partners.
Entrepreneurs who are just starting out can have a lot of trouble determining which distributor is trustworthy (and worthy of being entrusted with customer orders) and which is not. Negotiating the right terms of cooperation can also prove troublesome. Stores with an established position in the market, familiar with market mechanisms and the pitfalls lurking for sellers, will cope much better in this regard.
If you want to use dropshipping, you also need to know that you are thereby giving up any personalization. You won’t have any say in how your packages are packaged, the materials used to secure your shipments, because at no point in fulfillment will it go through your company.
Disadvantages of dropshipping
- You lose control over how the order is processed.
- You bear full responsibility (legal and image) for the execution of the order.
- Your store becomes dependent on the distributor – its problems will quickly become your company’s problems.
- You may have problems with the availability of the products you sell – and it’s your store that will have to account for this.
Fulfillment – integration and modern systems to optimize logistics processes
Fulfillment is a set of services in which an external company undertakes the handling of orders and storage of goods. The scope of fulfillment can vary widely. From basic services, such as providing warehouse space, to full order processing from the moment the goods are received into the warehouse until shipment (and even further – to handling returns and complaints).
At first glance, fulfillment is not very different from dropshipping, but this is only a mistaken impression.
Fulfillment assumes that the products ordered by our company will be stored in a third-party warehouse. Thus, the store owner retains control (and decision-making) in the context of ordering goods. He has to decide on its quantity and type – he builds the assortment of his store himself.
Stay in control with fulfillment
The control goes much deeper. When working with a fulfillment company, a representative of the online store can provide guidelines on how to pick and pack orders. If you and your customers care about the environment, you can agree with the company that your company’s products will be packaged using only cardboard boxes and paper fillings. You can also provide the fulfillment store with packaging marked with your company’s logo, custom labels and many other branding elements.
Most service centers also offer special apps so that store owners who have entrusted them with their goods can keep track of their orders in real time.
What are the benefits of fulfillment?
- You don’t need to have your own warehouse, and you still retain partial control over packing and shipping orders.
- You convert fixed costs (e.g., for the warehouse and employees) into variable costs – you pay for the warehouse space used and according to the number of orders processed.
- You don’t need to have specialized knowledge – fulfillment centers have both the technological facilities and the knowledge to fulfill your customers’ orders – often even abroad.
Does fulfillment have drawbacks?
- Although you retain some control (compared – for example – to dropshipping), still the services are performed outside your company – so you can’t be sure that they will be performed reliably.
- You bear full responsibility for the way orders are fulfilled. In case of shortcomings yourself, you must resolve the matter with the fulfillment service provider.
- Fulfillment is not a solution for micro businesses and stores that are just starting out. With a small number of orders, the cost of fulfillment services proves unattractive.
You can read more about fulfillment in an article we devoted entirely to it. Read: What is fulfillment and how does it work in an online store?
Cross-docking – a mix of solutions for an online store
The last model we will discuss today is cross-docking. This is again a solution that has a lot in common with both dropshipping and fulfillment. In this variant, however, you need warehouse space.
Small warehouse, full hands
Cross-docking involves – as in dropshipping – a store putting up for sale products it does not physically own. When a customer orders a product, the retailer orders it from a distributor and routes the delivery to its warehouse address. There, the store’s employees repackage the goods and then ship them to the end customer.
Efficiency is key in cross-docking. The very fact that you have to first pull the goods that have been ordered by the customer from the distributor, and only then send them to the end customer, means that it can take longer to fulfill the order. Effective use of this logistics model therefore requires full commitment and quick action as soon as your company receives the package from the supplier.
How is cross-docking better than other solutions?
- You don’t need to own the goods, because you order them from the distributor after they are sold.
- You retain control over how orders are packaged and shipped to customers.
- Although you need to have a warehouse, all you need is a small space – orders will flow in on the fly, and you will send them on right away.
- If you organize your processes properly, you can order sets, i.e. larger sets of goods from a distributor. This way you will save on delivery costs.
Cross-docking problems
- Lead times will increase – especially if you care about completing sets. Each order will have to go through a longer-than-usual route. If your customers expect instant delivery, cross-docking may not be the solution you’re looking for.
- Cross-docking requires a well-thought-out and planned process in detail – so that goods received from the distributor are repackaged and sent on their way as soon as possible.
E-commerce logistics models – which one to choose for your business?
When it comes to choosing the right logistics approach, several factors are key. Before you begin to analyze the costs and detailed capabilities provided by each model, rank the needs of your store – from the most pressing to the less important. Here are some aspects to pay close attention to.
Number of orders
Check the number of orders you are currently handling. Use historical data to do this – consider at least the last few months.
Don’t stop there. Be sure to estimate how many orders you can take in the following months. Prepare scenarios in which your company maintains its current rate of growth, but also those that predict sudden growth as well as its stalling. When choosing the right logistics model, you need to be aware that your company’s situation can change from week to week.
Experience
Honestly scout your and your team’s experience. In some cases, hijacking the creation of your own warehouse and full independence may be a solution that is beyond your store’s capabilities. This doesn’t mean, however, that other methods don’t require knowledge – in any scenario, you should take the time to prepare yourself and your employees for the new system.
Legal preparation
Knowledge of regulations is a key thing in business. The level of difficulty increases especially when you decide to expand abroad. You need to take care of your company’s legal services, and logistics are of great importance here.
Each of the methods discussed here requires compliance with regulations, but some of them are more complicated for an entrepreneur running an online store. When choosing a logistics model, check what it will require of your company in terms of legal preparation.
Ease of change
Even if you decide to start a dropshipping business, it doesn’t mean you have to stay with that decision forever. Each of the decisions regarding the choice of logistics model is reversible. However, phasing out dropshipping and switching to cross-docking is much easier than giving up your own warehouse for fulfillment.
Logistics planning for e-commerce is a must – summary
Logistics in e-commerce is a crucial aspect and impossible to overlook. The choice of a logistics model should be thought through, and its implementation should be planned down to the smallest detail. For a small-scale venture, you may want to consider going it alone, but as your business grows and expands, it’s worth seriously considering teaming up with a logistics partner.
Don’t be afraid to compare offers from logistics service providers and even confront them with counteroffers. Negotiating the right deal with a partner can be difficult (especially in the beginning), but as your store begins to become more visible and recognizable, your negotiating position will increase.
