When is the Right Time for a Startup to Invest in Outsourced Fulfillment?

If you are a founder at a high growth start-up, there will inevitably come a time when you ask yourself: When should I start thinking about outsourcing my fulfillment operations?

Operations and fulfillment consume the majority of an ecommerce company’s administrative output. For startups in the early stages there are many decisions to make—fulfillment should be at the top of the list as it impacts two mission critical areas: revenue growth and customer satisfaction. 

Here is the evolution of fulfillment capabilities within a typical product startup (from Seed Stage, to Series A, to Series B) and the considerations founders need to take every step of the way.

? Pro tip!

Look for partners and external support options before you start to grow! Educating yourself about various fulfillment options in anticipation of growth helps you avoid being caught flat-footed when you start to see major sales volume increases. Don’t leave money on the table, map out your fulfillment roadmap out of the gate!

Seed Stage — You Have A Single Focus: Product. Product. Product. 

Some markers of a company at the Seed Stage: 

  • You are focused on product viability and market fit. 
  • You likely fulfill everything in-house (but not always). 
  • You have a small volume of orders. 
  • You likely have higher cost margins. 

At the Seed Stage your focus is (rightfully) almost exclusively on your product. This stage is really just about iterating on your initial product assortment, finding what is working, and getting the products out the door. The goal is to do it in a timely manner with as few mistakes as possible—and at a price point that can support the EOV’s (estimates of value) of your business. One benefit of doing fulfillment in-house during the early stages is it provides the team with control and an intricate understanding of the entire fulfillment process. Learning how to optimize and improve your systems, packaging, and shipping, will make conversations with future fulfillment partners much easier down the line. 

The challenge at this stage is that you’re less efficient with costs. Your gross margins may be below your target but you’re learning and it’s okay to not be fully maximizing efficiency at this point. The point is you’re not quite there yet. The tradeoff is that you have have more potential to really please your early customers because you can control more of the touch points in your ecosystem.

“From an investor’s perspective, we’re encouraging founders to think about when they want to be managers of fulfillment versus the actual executors of fulfillment. We’re looking at revenue projections and working back what that implies from an operational standpoint and making sure everything lines up.”

Amit Sharma Investor at BlackJays

Startups should watch out for a slipping point when you start to transition into needing more external support. It might happen quickly than you anticipate (which is a good thing!), and you want to give yourself adequate time to consider partners you want to work with and/or hires you need to make. .

? Pro tip!

If your monthly sales are ramping up to ~$500K per month (or $6M per year) you should probably start thinking about starting a Series A fundraise.

Series A — You’re Approaching Major Growth Mode: This is Make-or-Break-it Fulfillment. 

Some markers of a company at the Series A Stage: 

  • You have specialized partners helping advise you, but you likely do not have the sales volume to efficiently start outsourcing (yet). 
  • You don’t have huge order volumes, but you’re steadily growing.
  • You are deliberately expanding your product lines and SKU count.
  • You are likely shipping to many geographic areas across the US and maybe internationally.

At the Series A stage, sellers are mostly trying to manage consumers’ expectations without overspending their budget. Most of their energy goes into the jigsaw puzzle of shipping products to customers within the two-day window that consumers have come to expect (thank you Amazon!)—all while maintaining costs. The holy grail is striking the right balance between growth and customer satisfaction.

“What I hear most from startups at this stage is that they know they need a more robust fulfillment solution but they’re unsure about what direction to take and are nervous about making the transition. There are dozens of different fulfillment models and providers out there—fully tech-enabled, micro-distribution centric, boutique establishments, traditional incumbents—and the choices can be really intimidating.”

Amit Sharma Investor at BlackJays 

A few tips when planning your shipping: 

  • Shipping costs can make up approximately 70% of your fulfillment budget. 
  • Spreading inventory across multiple fulfillment centers will increase delivery transit times and reduce shipping costs. (Don’t go overboard though, with too many distribution centers there are diminishing returns as the cost and resources to manage multiple pools of inventory can be greater than the perceived benefits.)
  • Consider offering free shipping at 30% above the AOV to increase sales

Another part of the puzzle for Series A companies is managing internal resources versus external resources. This stage can be make-or-break-it in terms of hiring internal operations and fulfillment personnel. How you spend your financial runway is important at any stage but for product companies this is especially true when it comes to fulfillment. You’re looking to understand what the triggers are for you to be doing something different and avoid making the same mistakes as others.

What are the top decisions a Series A company needs to make in regard to fulfillment?

  1. Hiring an operations manager. The first hire shouldn’t be at the director level. You want someone who is very knowledgeable but still very involved with the ‘doing’.
  2. Vetting a third party provider. The triggers for moving from one stage to the next are usually volume and growth driven. You might be growing faster than you anticipated or looking around the corner and noticing that you might not be able to fulfill your products with a lean back-of-office. Start doing your research about which 3PLs could be a fit.
  3. Expanding gross margins. You should start to consider where you can start adding back margin points through the use of an outsourced service provider. The light at the end of the product-margin-runway should be coming into focus.

A great way to sense-check your ops hire is to vet some of the recommendations they make with other companies of your size and type. If they suggest hiring a 3PL at a certain benchmark of units per month (say 5,000 orders per month), ask around and see if others are pushing that decision off or taking the plunge.

? Pro Tip!

Money from investors will subsidize your early losses, but investors tend to frown on companies with low margins at the product level. Your investment capital should support the team, marketing, and tools that help build up the kind of infrastructure all young businesses need to get the next level.

Series B - Your Sights are on Scaling — Outsourcing and Partnerships are Key

Some markers of a company at the Series B Stage: 

  • You have established product-market fit. 
  • You have figured out which channels work well. 
  • You need more on-hand inventory to provide flexibility.
  • You are expanding internationally.
  • Your main goal is scaling. 

Series B companies have likely figured out the sales channels that work well for their product, consumers, and overall budget. This stage is all about pouring gas into the channels that are working and growing top line sales. It might mean you need to just do more of the same to amplify your efforts, or it may mean you’re ready to add-on (whether that’s adding to your product mix, start shipping internationally, or getting into physical retail stores). 

If you’re not already working with a 3PL for fulfillment, this is the stage to start. The ideal is to find a provider who matches the needs of your company. Look for a 3PL who has core competencies that directly support your product. Do you need temperature control? Do you have products with lithium batteries (i.e. dangerous goods)? 

Here are a few basic questions to help you assess a prospective 3PL: 

  • Where are your facilities? – Make sure they serve the areas where your customers are. 
  • Which carriers do you work with? – Good fulfillment is only as good as the (low) shipping costs and (quick) transit times. Ask if your prospective 3PL gets bulk discounts from any carriers. 
  • What technology solutions do they use? Inventory management, automation, ecommerce integrations—a modern 3PL will rely on best-in-class solutions. 
  • What value-added services do you provide? You want a partner with agile fulfillment to meet your growing, changing needs. It’s the only way to stand out from all the other brown boxes out there!
  • Who do I call if there’s an issue with my orders? Some 3PLs only have a 1-800 number or generic support email (or worse, online forms!), you want a partner who will provide you with a dedicated team who can help you every step of the way.
  • What happens if I outgrow this provider? You want a 3PL with the capacity and experience to help you grow your sales volume. Look for a provider that can support DTC just as well as B2B. Their relationships with retailers and freight forwarders will help ensure your fulfillment is always great no matter how big you get.

The quality of service you provide your customers should be matched by your 3PL. Does the 3PL get orders out on time and accurately? Get historical data on your 3PLs performance, especially during peak season. Do they provide historical data on their performance, especially during peak season? Your fulfillment provider is a direct line to your customers and plays a key role in maximizing customer satisfaction. Make sure you choose a 3PL that matches your brand in terms of quality of service and values.

 

If you are looking for logistics and fulfillment support, we’d love to hear from you. DCL Logistics provides turnkey fulfillment solutions for brands of all sizes. We have a wide variety of services that include DTC and B2B expertise, RMA tracking, carrier optimization, Shopify and Amazon integration, plus international shipping support. 

Read more about why high-growth brands choose DCL Logistics.