Order Fulfillment: How It Works and Best Practices To Improve Your Current Process

Ryan Baum
Ryan Baum
Last updated on 
June 7, 2022
June 7, 2022
Order Fulfillment: How It Works and Best Practices To Improve Your Current Process

As an ecommerce business leader, you’re constantly juggling numerous aspects of your business, seeking to make it the best it can be. It’s worth asking from time to time: Why did you get into ecommerce in the first place? Chances are, one of your top three reasons has something to do with delivering value to customers.

Most of the time, ecommerce businesses think of value in terms of the products they offer. While that’s certainly one massive component of value in any sales-oriented business, there is another facet that most people find much less interesting or captivating: order fulfillment strategy.

Order fulfillment strategy is crucial for businesses that want to deliver value to customers. In fact, it’s just as important as the value of the products you’re selling. This is because before customers can get value from your products, they must have your products in hand — and that’s precisely what order fulfillment is all about.

Let’s dive in with a definition of order fulfillment.

What is order fulfillment and what are some common misunderstandings?

Order fulfillment is the complete sequence of steps that starts after a customer places an order, and ends when your customer receives their order. It includes order intake, picking, assembling, packing, shipping, and tracking. Some companies include some post-delivery communications in this category, while others put that communication into another category, like customer support or onboarding.

All organizations rely on some third-party assistance within the order fulfillment process. Even those who keep their order fulfillment in house must still rely on a delivery service for shipping orders to customers. Most firms, including many ecommerce businesses, choose to outsource additional functionality within order fulfillment, such as inventory storage and warehousing.

Companies frequently run into several common hurdles when building an ecommerce fulfillment strategy, especially as they grow and scale. Processing more customer orders is a good thing, but only when businesses can keep up with customer expectations around their fulfillment needs. Otherwise, customer satisfaction starts to slip, and growth can stall.

Do any of these order fulfillment challenges sound familiar to your business?

  • Poor inventory management: Frequently being out of stock (or, worse, selling items you don’t have in stock) hampers your sales potential and harms the customer experience.
  • Low shipping quality: When you hand packages off to a carrier, much of the shipping experience is out of your hands. Yet, customers still blame you when items don’t arrive or show up damaged.
  • Too much stock: Keeping too much stock on hand affects storage and carrying costs, and you can end up stuck with unsellable items that have gone out of style, out of season, or otherwise become unpopular.

Why pay close attention to your order fulfillment strategy? Because it’s what ensures your customers get what they ordered, when they expect it. As many as 90% of online shoppers see 2-day and 3-day delivery as the standard, with 30% of shoppers saying that they expect same-day delivery. What’s more, Arvato finds that 54% percent of U.S. shoppers have walked away from a purchase because of the cost of delivery, and 27% percent have done the same because the ecommerce business didn’t have timely enough fulfillment options.

How does the order fulfillment process generally work?

Before we get into best practices, let’s take a step back to the basics and look at how the order fulfillment process works for the typical ecommerce business selling on an ecommerce platform.

Each of these steps has its own set of intricacies and details, and it’s easy to overlook something in one or more of these areas. Looking at each step before getting any deeper in will help you better assess what your business needs to handle — and how to go about doing so.

1) Receiving inventory

Before you (or your order fulfillment company) can ship products to customers, you (or they) must first have products to ship. Receiving inventory is the process of taking stock into a warehouse or fulfillment center.

Depending on how your business is structured, inventory can come from a wide range of sources. It can come from your own production facilities, from other companies directly, from third-party or intermediary services, and so on.

Part of the receiving process is counting and inspecting incoming stock. Categorizing or labeling starts here and continues in the next step.

2) Storing inventory

While just in time (JIT) delivery is the goal for many production facilities, as an ecommerce business you’ll need to have some inventory on hand. The products you don’t immediately process and ship need to be categorized, logged, and stored, usually using a SKU and/or barcode or perhaps an RFID tracking system.

Items are placed into inventory storage, either in your warehouse or in that of your fulfillment center or third-party logistics partner.

This step encompasses a lot, as your strategy here dictates how much time and labor goes into finding and packing items later on. For example, digital inventory management systems are crucial for tracking and locating items stored in inventory.

3) Processing the order

Processing an order involves your pickers finding an item on the warehouse floor, pulling the proper items, and then packing them effectively. Here, too, many digital systems can come into play. Warehouse management or order fulfillment software plays a role, as do your physical strategies for item placement and packaging.

4) Shipping the order

This step is when your team (or your 3PL) hands off the order to a transportation channel (for example, carriers like FedEx, UPS, and USPS).

This is the step where your strategy most directly influences the costs your business incurs. The packing materials, weight, and sizes you choose get calculated into a measurement called dimensional weight (DIM weight), which generally determines how much you pay in shipping costs.

If you’re curious about ways to reduce shipping costs, here are eight tips for minimizing shipping costs while maintaining speedy delivery.

Ecommerce businesses also have opportunities within this step to boost or improve customer messaging, sending better or more detailed shipping information than the carrier itself offers.

Related: 9 Revenue-Driving Ecommerce Shipping Best Practices

5) Handling returns

Any ecommerce business must have a process for handling returns in place, and this crucial function usually falls under order fulfillment. Your returns procedures must establish when returns are and are not accepted, along with how to determine which returns can be restocked and which cannot (e.g., soiled or defective items).

The 4 types of order fulfillment

While the broad strokes we just outlined are fairly consistent, the details of order fulfillment are different from company to company.

Most businesses fall into one of four categories or types of order fulfillment. Below, we’ll detail each of these four categories: in-house order fulfillment, third-party order fulfillment, dropshipping order fulfillment, and hybrid order fulfillment.

In-house order fulfillment

In-house order fulfillment is what it sounds like — the business handles all the steps listed above internally (aside from the actual shipping). Employees or contractors for the ecommerce business receive and store inventory, pick and pack orders, and handle the customer relationships that accompany each order.

In-house is common on two extreme ends of the spectrum: smaller, low-volume businesses and startups (where packing boxes doesn’t consume too much of any one person’s time), and major enterprises (think Amazon).

Want customers to place more orders (and abandon fewer carts)? Read our guide on how to offer free shipping.

Third-party order fulfillment

In a third-party model, everything about the order fulfillment process is outsourced to a third-party logistics company. Outsourcing fulfillment to a partner like Amazon FBA, Amazon MCF, or Deliverr is a highly strategic choice for ecommerce businesses that have grown to a certain order volume but lack order fulfillment infrastructure.

It also makes sense for firms with volatile or seasonal sales patterns, where maintaining as much storage space as possible is unsustainable during slower seasons.

Dropshipping order fulfillment

Dropshipping is when a manufacturer ships a product directly to the end consumer. It makes sense for D2C businesses that own their own manufacturing and want to keep order fulfillment in house. It also makes sense for ecommerce businesses that want minimal involvement in the fulfillment process. Essentially, the business forwards shipping details to the manufacturer, who takes over the transaction.

The downside to dropshipping is that it means giving up control of the order process. Additionally, costs (and shipping times) can shoot up quickly when customers are far away from your manufacturing partner’s shipping locations.

Hybrid order fulfillment

Hybrid order fulfillment is any scenario that combines multiple strategies. For example, a company with heavy seasonal sales might keep most order fulfillment in house, but outsource some to a third-party firm during Q4. Alternatively, the company may select high-value or specialty items for dropshipping, while everything else is handled another way.

Best practices and tips for an optimized order fulfillment process

Once you’ve determined a broad direction for your order fulfillment strategy (or identified some top-tier issues with your current process), it’s time to reevaluate and optimize. Use these best practices and tips to tighten up your order fulfillment strategy and further wow your customer base.

Streamline receiving processes so damaged goods are handled promptly

Returns handling is something no business wants to focus on, but it’s an important area nonetheless. As a part of this process, make sure you have a way to recognize damaged goods quickly and return them to the manufacturer for prompt replacement.

Whatever the reason for the return, handling items promptly is a good practice — even more so when there’s revenue or reimbursement on the line.

Organize your inventory and warehouse with efficiency in mind

If you’re handling your own inventory management and doing in-house fulfillment, keeping your inventory and warehouse organized can have a meaningful impact on your bottom line. When used in combination with an order fulfillment system, better organization can generate real results.

Searching for lost pallets is a resource drain that generates zero revenue. The right organizational strategy makes it easier for human or automated pickers to find the items, and can even reduce travel time between items. This is especially true as you scale organizational strategies across entire or multiple distribution centers — clear organization helps improve pick and pack times.

Automate processes wherever possible

Automation in warehousing settings tends to require substantial upfront investment and may even require rethinking your entire warehouse footprint. But wherever you’re able to implement it, automation can help save you money and time in the long run by optimizing labor, improving working conditions, and making operations safer.

Use order fulfillment software that integrates with customer service software

As your company grows, you’ll eventually turn to some kind of order fulfillment software. When you do, choose one that integrates well with your chosen customer service software — you don’t want siloed information systems that can’t talk to each other.

NetSuite and ShipBob are two leaders in this category. The latter also offers some third-party logistics support.

Of course, the best customer service software tools allow you to integrate these individual app-based tools into larger customer service software platforms. This allows you to connect all your data and customer management in one hub.

Learn more about Gorgias’ multiple integration options.

Prioritize your inventory’s accuracy

From a customer’s perspective, which is worse? Seeing that an item is sold out before you order it, or ordering (and paying for) an item that’s listed as in stock, only to find out later that the item was not actually in stock?

Most customers would prefer the bad news up front. Inventory inaccuracies create a host of customer frustrations that your business would surely prefer to avoid.

The math here is simple, even if the execution is complex: The more accurate your inventory, the more success you’ll have in delivering the right products on time.

Whether you’re using an in-house order fulfillment model or you’re relying on a 3PL partner’s distribution centers, using a warehouse management system is generally better than relying on manual data entry. This is certainly true as you grow or scale your ecommerce venture.

You also want to be sure to watch the right set of inventory management metrics, which can show you how well you’re doing at keeping an accurate inventory. These metrics will vary depending on your goals, but could include:

  • Backorder rate (rate of unfulfilled orders due to items on backorder)
  • Accuracy of forecast demand (compares on-hand quantity to the forecasted demand)
  • Lost sales ratio (number of days a product is out of stock compared to projected sales over that time)
  • Inventory shrinkage (inventory that you cannot find or cannot sell due to damage)
  • Fill rate (measures how many items were shipped compared to ordered)
  • Customer satisfaction score (number of positive responses against all responses)

If you’d like to learn more about these and other metrics, NetSuite has put together a solid explainer on 33 of the most important inventory management KPIs and metrics. Their guide explains all six of the metrics we’ve listed, plus several others.

Minimize package touching and handling

In general, it’s a good idea to limit the number of touches that each package gets (There are packing strategies that disregard this, such as wave picking, but we still consider it to be a best practice unless you have an overriding reason to choose a different strategy).

Why is it a good strategy to minimize touching and handling? Because of all the things that could potentially go wrong at every touch:

  • Product damage
  • Shrinkage
  • Employee injury
  • Packing mistakes (too many, not enough, or missing items)

Additionally, every touch is added time and energy expended on an item. You want to get items out the door with as little friction as possible, so engineer your processes in a way that minimizes touches and handoffs.

Keep enough inventory to keep up with demand

This best practice circles back to demand forecasting, which is always a complex element for ecommerce retailers. You want to keep enough inventory on hand to keep up with customer demand, because delivering on time and reducing stock outs are two primary ways to increase customer satisfaction.

Of course, you don’t want to overdo it and end up with excess or even dead inventory. Keep your inventory levels modest, yet sufficient — always have enough to deliver on time, but remain agile enough that you don’t end up with pallets upon pallets of product sitting around that cannot be sold.

Use an RFID system to enhance analytics

If you’re not relying on a third-party order fulfillment system and you’ve reached a certain size and complexity, consider implementing an RFID system for tracking inventory. Such a system far outpaces traditional systems for tracking and managing inventory, and it unlocks additional levels of analytics that can give you a better understanding of your inventory.

When doing inventory at scale, better data means better decision-making, which can filter through all levels of your supply chain.

Make returns and edits a simple process

Your customers want a simple returns process, but so do your in-house order fulfillment teams.

There’s strategic value in instituting a transparent returns process that’s easy for your customers to understand and to use when they need it. But while it’s great to focus  on customer satisfaction, don’t forget about the back end. Your internal teams are just as important to your continued order fulfillment success, so make sure the process for handling returns is simple to execute.

Along with this, make sure that editing an order is as simple as possible, too. As with many other aspects here, anything you can do to simplify and streamline processes will have a cumulative effect. These efforts allow you to more quickly and more accurately meet customers’ needs.

Want to reduce the number of returns your customers request? Read our guide to reducing returns in ecommerce.

Enhance your ecommerce order fulfillment process and customer service with Gorgias

Ecommerce businesses benefit when they get intentional about their order fulfillment strategy. By leapfrogging past common hurdles like poor inventory management or poor shipping experiences, businesses can win the customer relationship and continue to grow.

The best practices and tips we’ve provided here can get you well on your way to improving your order fulfillment strategy. But in the end, you also need the right tools and apps to round out your inventory and customer service abilities.

Gorgias can transform the way you empower your customer service team with better helpdesk and customer service tools that are tailored for the needs of ecommerce businesses. Plus, Gorgias integrates with all the top ecommerce platforms, shipping and fulfillment software, and other ecommerce apps used by businesses like yours to simplify essential services like order management.

Ready to find out how Gorgias can help improve your order fulfillment strategy? Sign up for free today!

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