Third Party Logistics Considerations
Regardless of the platform you choose, selling your product online is only part of the challenge. Similar to brick-and-mortar, creating and managing your distribution model is a critical piece of the business. In the offline world, food businesses may make deliveries directly to customers or deliver larger quantities to wholesalers. The online world can be a bit more complex and offers additional options. There are multiple touchpoints, and your business may use any combination of them.
Typical Brick and Mortar Distribution Model
In a traditional distribution model, the sale and product follow a linear path with each point in the chain ordering or purchasing and taking physical possession of a product.
Online Distribution Model
In the e-commerce world, product is positioned at a warehouse ready for purchase, but doesn’t typically move until a consumer visits a website and makes a purchase. At that point, the order is transmitted to the warehouse and fulfillment of the order begins. This warehouse could be owned by the manufacturer, an online retailer or third-party logistics company contracted by the manufacturer.
Generally, three primary models exist for fulfillment of e-commerce orders; fulfillment by the retailer, self-fulfillment and third-party fulfillment.
Fulfillment by Retailer:
In this model, the retailer is fully in control similar to how a brick-and-mortar retailer would operate. It takes the order from the consumer and fulfills it from the inventory it holds in a process largely transparent to the manufacturer. The food manufacturer provides case or pallet quantities to the online retailer’s warehouse in a sale or consignment model. Fulfilled by Amazon is a common example of this model.
In a self-fulfillment model, the manufacturer ships or delivers product directly to its customers. This may feature delivery by company employees or may leverage shipping resources like UPS, FedEx, USPS or even couriers. In this model, the manufacturer is responsible for storing product, picking orders, preparing for shipment and either delivering the product or getting shipment to the delivery service.
Items to consider are:
- Delivery can be an efficient and cost-effective option for small businesses and ones with local clientele.
- Consider your products temperature state – shipping through mail services require shipping on dry ice, driving increased packaging costs, both the packaging and the labor to assemble.
- Consider when time spent assembling, packaging and shipping products through self-fulfillment would be better spent doing other tasks that grow your business.
- Shipping cost on a per-piece can be high. Consider purchase minimums to offset.
- Larger volumes may dictate a move from a mail or courier service to a common carrier that can handle palletized product.
In third-party fulfillment, the food company relies on another company for fulfillment of its orders to the customer. This may include a warehouse or wholesaler shipping product to retailers or may be a retailer shipping product directly to consumers. In this model, the food manufacturer commonly ships multiple case or pallet quantities to the fulfillment provider who subsequently ships smaller volumes to customers further along the value chain. Items to consider include:
- Confirm ability to manage temperature state, volume or fragility of your product.
- Need to manage total inventory to the fulfillment company; they will manage in front of consumers.
- Typically, a cost-efficient approach that allows a food company to focus on other activities.
- Additional layer of distribution may lengthen time in the logistics chain, reducing shelf life available to customer or consumer.
- Will pay for storage and shipping services.
A look at Amazon’s Models
Amazon provides two different distribution/fulfillment models, Fulfilled by Merchant (FBM) and Fulfilled by Amazon (FBA). These two models are examples of self-fulfillment and third-party fulfillment and are replicated to some degree by other online shopping environments.
Fulfilled by Amazon: In Fulfilled by Amazon, the food company lists its product for sale on Amazon, either as a single item, a company page or storefront. When someone orders a product, Amazon accepts the order and fulfills it from inventory in its warehouse/under its control. In this model, the food company ships multi-case or pallet quantities to an Amazon warehouse. Amazon manages the inventory available on its site and provides prompt delivery. Items to consider include:
- Food company needs to ensure Amazon has inventory.
- Can provide path to free shipping as products can be bundled with items from other companies.
- Does not handle refrigerated or frozen products.
- Amazon charges fees for storage of product and handling of fulfillment in addition to its normal commission.
- Fulfilled by Merchant: In a Fulfilled by Merchant model, the food company appears nearly identical to shoppers on the Amazon website. The only difference being a small notation from who the product is sold and fulfilled. However, when a customer purchases a product, the order is sent directly to the food company who is then responsible for fulfilling the order from inventory at a location of the food company’s control. Items to consider are:
- Company must balance Amazon inventory among others and address any out of stocks rapidly.
- Allows for distribution of refrigerated or frozen products.
- May challenge free shipping opportunities.
- May be lower cost approach depending on company storage and shipping cost structure.
Third Party Logistics Alternatives
A wide array of third-party logistics options too extensive to list here exist for Minnesota food businesses. Food businesses can conduct an online search using terms like “3PL”, “Third party logistics” or “pick and pack services” to find suitable alternatives. In many cases, these service providers are warehouses that offer pick and pack fulfillment services to their clients. They may be an individual warehouse or part of a large national network like PDM or Americold Logistics. The manufacturer will send goods in pallet or case quantities for the warehouse to send out in unit quantities.
Highlighting Two Unique Solutions
Cygnus is a 3PL system owned by Minnesota food company Schwan’s. This service offers frozen food businesses a turnkey logistics system. Upon establishing an account, the food business sends inventory to Cygnus who in turn distributes among its 10 nationwide distribution centers. Once an order is received, Cygnus fulfills the order – picking, packing and shipping to the customer. The service seamlessly integrates with the food business’ online sales platform so the interaction between customer order and shipment is seamless.
ShipBob is a shipping and fulfillment service targeted directly to helping e-commerce stores. Similar to most 3PLs, ShipBob stores manufacturer inventory at one of its warehouses and then picks and packs customer orders transferred to them from online sites. Rather than coming from a warehousing approach, ShipBob is a technology company that offers integration with leading online retail platforms to make sales and shipping more seamless.