A fulfillment center can seem like an amalgamation of warehousing with logistics. But it’s much more than that. The fact that fulfillment centers also open up your package to take out and pack individual units the way you want them to makes them much more than any warehouse or 3PL provider.
Whether it’s out of curiosity or speculation, a common question asked is, “How do fulfillment centers make money?”
Surely, with the amount that’s going to keep all that labor, transportation and management, they must be charging a lot for everything they do. And they’re also offering more than just storage and a hefty collection of services; they’re also offering expertise in terms of streamlining D2C and retail supply chains.
Skipping past the calculations, it’s clear that not every company can start such a robust system of order fulfillment in their target markets as easily as fulfillment centers can, which is why we’re all bound to use their services. That is until you become a big enough business to take control of the relationship.
Whether you’re a brand, an investor looking to start a fulfillment center or just curious as to how fulfillment centers make money, here are the 4 ways they do it:
1- Picking and Packing
The first thing that separates a fulfillment center from a warehouse is the picking and packing service that FCs provide.
After receiving shipments in the form of packed pallets, FCs take the responsibility of opening each bundle up (Picking) and moving on to pack each item as per your specific requirements (Packing) before the final product is delivered to the customer.
The process of picking and packing requires a substantial amount of labor as well as a robust infrastructure that streamlines the entire process. Fulfillment centers usually set up a manual infrastructure before incorporating automation into their process.
Fulfillment centers that use automatic unloaders, product-identification scanners, palletizers, AGVs (Automated Guided Vehicles), ASRS (Automated Storage and Retrieval System), and UAVs (Unmanned Aerial Vehicle) may charge more than others that are using manual labor.
Paying teams of individuals, with each employed at $15-20 per hour, an FC is able to break the cost down to a few cents for each product picked by their workforce. This is how they calculate their markup and is something that varies across different industries and product niches.
2- Shipping Markup
The primary source of revenue for fulfillment centers is the markup they have on each shipment. If you calculate the cost of each shipment, including logistics, you’re looking at a rate that’s slightly lower than the price they quote.
As setup costs can seem like a huge investment for small businesses, the negotiation process for them can be pretty straightforward as brands can just accept the rates and terms put forward by the FCs.
For the uninitiated, this may seem like a profitable deal since you’re not paying for the whole infrastructure, you’re just getting the price for each individual order you’re getting them to fulfill.
Whereas, for bigger businesses that have a notable order size, the rates can differ and the markup that FCs charge can change as they deal in bigger quantities. Players like Walmart can take control of the contract with their superior buying power by negotiating payment terms that work in their favor.
And since there’s nothing better than working in the big leagues, bigger FCs don’t mind playing by their rules but to make it a win-win situation, they charge an extra 10-50 cents for every order that isn’t shipped on their own shipping rates.
This is why not every brand can negotiate payment terms with FCs as it can be a tough and complicated process that requires negotiating power and careful analyses as well as substantial business capital and inventory size.
3- Value Added Services
Other than performance, Value-Added Services (VAS) are what distinguishes FCs from their competitors. Each fulfillment center can offer a wide range of value-added services that their target market needs.
Some notable VAS include:
Reverse Logistics: The FC takes responsibility for picking up and processing returns from customers.
Kitting: Picking and packing customized bundles of different SKUs that go together differently for each customer.
Labeling: The FC takes responsibility for labeling each individual order packed as per the instructions specified.
Real-Time Tracking Visibility: FCs can provide automated cloud-based tools and integrations that offer real-time tracking options for brands to monitor their shipment progress
Although this is just an idea, the full range of value-added services is almost impossible to gauge because some fulfillment centers can specialize in dealing with particular niches of products such as cosmetics, chemicals and medicines, clothes and apparel, tech gadgets, etc.
These FCs can offer a diverse range of services that can be required by companies such as product quality assurance, special storage environments and inventory disposal, to name a few.
Lastly, a fulfillment center can make money from the inventory it’s storing based on the period it stays there. Just like a warehouse, an FC can take responsibility for storing your product so long as you continue to pay for the storage and upkeep.
Unlike traditional warehouses, an FC can provide you with quality assurances and monitoring services but compared to the services mentioned above, storage hardly contributes to the total revenue generated by a fulfillment center.
Although the cost is negligibly low if, at all, storage can generate little over a couple of hundred dollars every month in terms of revenue when compared to hundreds of thousands that are generated by packaging and fulfillment.
The services provided by a fulfillment center today are not just limited to order fulfillment. They can vary with each industry and product that individual FCs work with.
Typically, a fulfillment center makes money by:
- Providing specific services like Picking and Packing
- Negotiating markups that work in their favor, whether clients are small or big businesses
- Offering value-added services that vary with different products, industries and niche markets
- Offering storage for products and inventories for substantial periods
Although this is the standard, the industry keeps evolving as FCs take on more responsibilities and offer more services to a diverse clientele.
And while this may be a general overview of how FCs make money, there are new ideas and innovations introduced often that revolutionize the way industry players such as fulfillment centers work.