There’s one thing that all eCommerce businesses have in common: they all have inventory. It might be a few boxes of products stored in your garage or thousands of products held in an off-site storage facility.
Table of Contents
1. Understanding The Distinctive Characteristics Of Fulfillment Centers And Warehouses
2. Matching Business Needs With Fulfillment Center Capabilities: Identifying The Ideal Fit
3. Identifying The Ideal Industries For Warehouse Implementation
4. Sorting Out Logistics: Warehouses vs. Fulfillment Centers
5. How Fulfillment Centers Can Benefit Your Business
6. The Advantages Of Utilizing A Warehouse
7. Disadvantages To Consider: Warehouses Vs. Fulfillment Centers
7(a). Disadvantages Of Using A Fulfillment Center
7(b). Disadvantages Of Using A Warehouse
If you’re in the early stages of your retail business, you might be fighting to keep up with the number of orders you’re receiving. Or maybe that garage space is starting to overflow. Either way, it might be time to think about some alternatives to help you manage your inventory and orders.
But not all eCommerce businesses are created equal. Some sell directly to consumers one or two units at a time. Others sell to retailers or deal in wholesale products.
That means different needs for managing their storage and logistics process.
But how do you choose between a fulfillment center and a warehouse?
Did you even know there was a difference?
A warehouse is a storage space where businesses store inventory for long periods. Businesses can own their own warehouse or rent space in a warehouse. The space is typically huge and features everything required to move large amounts of inventory around very quickly.
A fulfillment center is a facility operated by a third-party logistics provider where eCommerce businesses can store inventory for direct and fast sales directly to customers.
Fulfillment centers also handle end-to-end logistics services, including inventory management, picking, packing, shipping, and delivery.
Part of any retail business is figuring out how to get merchandise to customers. Whether small-scale or large-scale, sometimes that means looking outside your garage or basement.
This article will help you understand the differences between warehouses and fulfillment centers and give you some pointers on determining which is the right choice for your growing business.
Determining the difference between a fulfillment center and a warehouse can be tricky, and that’s because their functions overlap in some ways.
You might hear people use the terms interchangeably, but in truth, they serve very different purposes for eCommerce businesses, and they often serve different types of customers.
Let’s look a little closer at the main differences.
At its core, a warehouse is a place where businesses store their inventory. Warehouses offer long-term and short-term storage solutions, but businesses often use that space for long periods.
And for the most part, these types of businesses deal with wholesale or business-to-business sales.
The large volume of goods required to meet these sales forces businesses to look for a cost-effective space to store, manage, and transport them from. Smaller and medium-sized businesses may rent out a portion of a warehouse as a temporary or small-scale storage solution.
A warehouse is a facility that acts as a kind of intermediary in the supply chain for businesses, managing both the flow of goods and materials into the warehouse and the flow of goods out of the warehouse for sale.
Some businesses use multiple warehouses to handle goods in different stages of production.
Fulfillment Centers tend to be busy hubs of activity, where employees manage inventory from eCommerce businesses and handle the picking, packing, and shipping of products directly to customers.
Since many fulfillment centers have multiple locations, eCommerce businesses can choose to split their inventory across those locations, which means faster and more efficient shipping times.
Products stored at fulfillment centers are typically there for a short time. Also, fulfillment centers mostly ship individual orders to customers, while warehouses deal with bulk or cargo orders to B2B customers.
A warehouse is often described as inactive because it is essentially just a storage solution that businesses can use to hold inventory until it's ready for sale.
A fulfillment center, on the other hand, is very active. Because a fulfillment center handles every step of the order fulfillment process, including picking, packaging, and shipping, a lot of activity is happening all the time. And they’re much more targeted to businesses who need to ship out products very quickly.
A great example of a fulfillment center is Amazon FBA, which stores and handles the shipping for Amazon store owners.
Fulfillment centers are designed to help businesses find a cost-effective way to store inventory, process orders, and schedule shipping and delivery services. Businesses using 3PLs typically have enough inventory to fill those expected orders.
Some larger eCommerce businesses may even use both a warehouse and a fulfillment center, shipping goods from the warehouse to the fulfillment center as needed.
Many eCommerce businesses start very small – think one person shipping items from their home or office space. As a business grows, the necessity of outsourcing certain parts of the supply chain becomes apparent.
Businesses hire employees when they become overburdened with work. Hiring a 3PL is very much the same concept.
It allows small and medium-sized businesses to outsource many of the steps involved with order fulfillment at a reasonable cost and frees up the business’s time for other tasks.
Weighing fulfillment centers as opposed to warehouses for your business requires taking a careful look at where you are now, and where you expect to be in the future.
Warehouses typically serve B2B customers, meaning they store inventory in large quantities to meet large orders. A warehouse might be the best choice if you’re primarily selling wholesale or to retailers. It allows for more space and quick delivery of large orders very quickly.
However, if you’re a small or medium-sized eCommerce company that deals primarily in B2C sales, meaning direct-to-consumer, then a fulfillment center might be a better option.
Fulfillment centers are typically more cost-effective for smaller businesses and are better suited for storing small amounts of inventory intended for quick turnaround and sale.
Since a fulfillment center can handle all aspects of the logistics process, businesses benefit from built-in inventory management, packaging, shipping, and delivery.
Do your capabilities match your needs right now? Will they match in three to six months? What about next year? Not keeping up with demand is a death blow for eCommerce businesses. Customers won’t wait for their orders because you’re backlogged, and they won’t forgive you even if you try to explain the situation.
What does your reverse logistics process look like? Ecommerce selling isn’t just about shipping goods to customers. It’s sometimes about handling returns, which means determining if a product is resalable, restocking that product into your inventory, and accounting for it in your inventory numbers. Your customers demand a smooth, effortless, and free returns process. A 3PL can help you provide that without any extra work.
There are many different types of eCommerce businesses, and any type of retail business can utilize a warehouse to store its inventory. But if you’re considering using a fulfillment center or a warehouse, it will help to think a bit about what kind of business you’re running.
A warehouse is just another word for a storage site. It’s where businesses can store inventory until it’s time to sell it. But unlike a fulfillment center, a warehouse does little else.
It is best suited for larger businesses that buy in bulk because it offers a long-term storage solution. That means businesses can prepare for large orders easily and have the capability to move large amounts of inventory around quickly.
Think of it like this. If you’re a small business selling direct-to-consumer, you probably won’t be buying thousands of a product at once. It doesn't make sense regarding cost versus profitability because you risk ending up with a bunch of inventories that you might not sell.
However, if you’re a large-scale eCommerce business selling to retailers, then you are going to need to have enough inventory on hand to fill those large orders.
There may be times when buying in bulk will save you money. So, you will need a large space to store all that inventory until it's ready to ship to your retail or wholesale customers.
When considering a fulfillment center versus a warehouse, smaller eCommerce businesses lean toward the fulfillment center as their best option.
That’s not to say a warehouse might not be useful, but because of the high overhead, a dedicated warehouse space might be out of reach for smaller businesses.
Also, smaller businesses benefit from choosing a fulfillment center because they do more than just store products.
A fulfillment center is useful from the moment a customer places an order to the moment that the product arrives at the customer's door (and because fulfillment centers handle reverse logistics as well, even beyond that delivery).
Fulfillment centers can also help businesses save money on shipping costs because they are well-positioned to negotiate better prices with couriers. And they often have well-established relationships with numerous carriers, giving businesses a greater choice and flexibility.
A fulfillment center can also help businesses from a customer service aspect. For one, many 3PLs operate a network of fulfillment centers, making it faster for businesses to ship their products around the country (or around the globe).
Part of the reason fulfillment centers have become so popular is because of the growth of the eCommerce industry itself.
Even just a decade ago, online shopping looked much different than it does today. But as of last year, 14.8% of retail sales (Zippia) in the U.S. occurred online, totaling $1.07 trillion.
As more retail businesses turn to online sales to meet their customers' needs, those businesses have had to rethink how they handle their logistics, which has led to the incredible growth of fulfillment centers.
Just how big?
The market size for global eCommerce fulfillment services is expected to reach almost $200 billion by 2030, representing a 9.5% growth.
Businesses weighing the pros and cons of a fulfillment center vs. Warehousing will discover that the former provides numerous benefits beyond end-to-end logistics services. We’ve listed the major benefits of choosing a fulfillment center below.
Most likely, a warehouse represents an expense that is just too much for smaller businesses.
It’s not just the space itself that is costly.
The equipment used in the warehouse, fixtures used to store inventory, and employees all require an investment as well.
Fulfillment centers, and the people who manage them, are experts at what they do. They are well-trained and have experience managing every aspect of the logistics process. When you use a fulfillment center, you benefit from an experienced and already-trained team working for you from day one.
A big part of the rise in the popularity of fulfillment centers can be attributed to advancements in technology and automation. These 3PLs have the resources to implement the newest technologies to help them manage your inventory. Using their service gives you access to that technology without making a costly investment.
Part of any good business decision is weighing the cost against the benefits. If you’re already spending cash to handle your logistics process, whether it’s in the form of employees, packaging, shipping costs, or a combination of these things, then it might save you a significant amount of money to outsource those tasks to a 3PL.
But wait – doesn't outsourcing represent an additional cost? Of course, it does. But if you balance the savings against the cost, you might find that you could save a substantial amount of money, not to mention headaches, by utilizing a fulfillment center.
Fulfillment centers can not only save you money, but they can also give you a large percentage of your time back. For businesses, time is money. If you’re constantly fighting the clock to keep up with orders or spending most of your day handling picking, packing, and shipping, then a fulfillment center could be a great way to get that time back.
Think of the things you could accomplish with the time saved – customer acquisition, marketing, advertising, social media campaigns, product development, vendor sourcing, etc.
Sometimes, businesses start as brick-and-mortar retail stores and then decide to add eCommerce services. But not every brick-and-mortar store has the space or capabilities to process online orders quickly and efficiently.
A 3PL can be a partner for businesses that are looking to grow or expand. That includes transitioning from in-person to online sales or just an existing eCommerce business looking to expand its product offerings or take on larger customers.
If you're comparing a fulfillment center and a warehouse, you will probably find that they share a lot of the same benefits. They both provide additional space to store inventory. They both can save businesses time and money in the long run.
They both represent tools businesses can use to serve their customers better (while making some profit along the way).
But just like choosing a fulfillment center provides some unique benefits, the same holds for choosing a warehouse.
For some businesses, a warehouse just makes more sense.
Here’s why:
Some businesses have products that require additional considerations. For example, products that require temperature-controlled storage or refrigeration might benefit from a warehouse because it can support that type of storage on a larger scale. Warehouses are also typically well-secured and highly monitored, so you can be sure your inventory is safe and secure.
When you hand over any part of your business process, it means giving up some measure of control. A dedicated warehouse gives you greater access to the daily operations, employees, processes, etc. But when you use a fulfillment center, you’re handing over that control to someone else and are at their mercy to perform the job correctly and with integrity.
When you already have a dedicated storage space, deciding to grow is easier. You don’t have to go out and find a place to put new inventory or worry about meeting the requirements of a new customer – because you already have it. A warehouse makes it easier for larger businesses to scale up.
Warehouses are designed to store large amounts of inventory for long periods. This gives businesses the ability to shop around a bit when purchasing. They can buy in bulk without worrying about where to put products when prices drop.
When seasonal fluctuations hit, and sales skyrocket, there’s no worry about having enough products to meet demand.
There are many benefits to consider when choosing between a fulfillment center and a warehouse. But there are also drawbacks to not dealing with your logistics in-house. Depending on the size and scale of your business, you might decide to handle everything yourself.
There are a few reasons why eCommerce businesses choose to hold off on using a warehouse or fulfillment center. We've looked at the pros. Let's look at some of the cons.
As mentioned above, choosing to outsource any service requires giving up control. You hope that the people managing every aspect of your logistics process are doing it the right way, but you have no real oversight and no ability to adjust if something isn’t working right.
Fulfillment centers will package and ship your products, which can benefit you. But it also means you have a limited number of choices regarding what types of packing material you’re using.
Want to stuff flyers, add specialty packaging, or include a gift for a customer? If you’re using a fulfillment center, you probably can’t. Packing and shipping products from your garage or office mean you have complete control over what that package looks like. But you give up some of that control when you outsource to a 3PL.
Using a fulfillment center has the potential to save you money under the right circumstances. But some businesses might discover they can save money by keeping everything in-house. The size of your business and your sales volume will majorly impact whether a fulfillment center saves you money or winds up costing you.
When you’re storing your inventory in a warehouse everything must come and go from that location. Depending on where your warehouse is located, it might mean a few limitations when it comes time to get that product to your customers.
A warehouse still depends on the people who run it. If the people in charge of your warehouse or the employees who manage the day-to-day tasks are improperly trained or irresponsible, it could cost you in the form of damaged or lost merchandise.
Choosing a fulfillment center as opposed to a warehouse is a big decision, and making the right choice can make or break an eCommerce business. But understanding how both work and what types of businesses use them can help you determine where your business will fit best.
Most of the warehouses are best suited for businesses that serve other businesses. B2B retailers have a greater need for lots of space and long-term storage options.
They need equipment that can move large quantities of merchandise around very quickly, which means that they need the ability to manage large volumes of merchandise coming into and moving out of the warehouse.
If your eCommerce business deals in large volumes or plans to expand and grow into a business that does, a warehouse will be beneficial in the long run.
Fulfillment centers are usually better suited to small or medium-sized eCommerce businesses selling directly to customers. They can manage small amounts of inventory and are set up to make the logistics process smooth, fast, and easy – from the initial order to delivery.
Since they include all the services required to manage inventory, pick orders, package and ship orders, and handle reverse logistics, they can save businesses a great deal of time and money.
Now that you understand the major difference between a fulfillment center and a warehouse, you can decide on your business's needs. It all comes down to outlining the needs and capabilities of your business (and yourself). Then you must determine if you can continue to manage things successfully in-house or if it might be time to try something different.
If you’re fully capable of handling your order volume and shipping process in-house, and you’re happy with the size and scale of your business, then you might not even need a warehouse or fulfillment center. But if you find yourself pulling out your hair every day because you can’t keep up with demand, you might benefit from the services a 3PL can provide.
If you’re a large-scale business, or hoping to be one, you might need to consider a dedicated warehouse space for storing your inventory. A warehouse is an excellent choice for businesses that receive and ship large volumes of merchandise, and having a space to put all that inventory is essential to keep your customers happy.
The bottom line is this: match your tools to your needs. That’s true for any business decision, and it’s the same for choosing between keeping your logistics process in-house, storing inventory off-site at a warehouse, or using a fulfillment center to handle the process for you. No matter what you choose, remember that the most important part of the equation is your customers. Make the decision that will keep them happy, and you will find success.