Fulfillment models 101: The basics every retailer should know

by | Jul 1, 2024 | Order Fulfillment, Order Management, Retailer Requirements, Retailers

Order fulfillment is the process of getting the right product to the right place, at the right time and at the right cost. It sounds simple enough, but as retail leaders know, it’s a complex and costly undertaking.

Today’s consumers expect nothing less than perfection, leaving little room for error. Plus, fulfillment costs often account for 10 to 15% of gross sales, and even more if automation is limited.

What is a fulfillment model?

A fulfillment model is the strategy and process a retailer uses to deliver products to customers. These models determine how retailers manage inventory, process orders and ship products to their destination.

Retailers may refer to fulfillment models by various names, depending on the company and industry. Some common alternative names include:

  • Order management models
  • Supply chain models
  • Distribution models
  • Order fulfillment strategies

Likewise, each retailer and their vendors may use different terms to describe their fulfillment processes. For example, what one company calls “ship to distribution center” might be known as “warehouse fulfillment” by others.

With a shared set of definitions, retailers can work closely with vendors and 3PL partners to continuously improve order fulfillment.

Exploring common retail fulfillment models

While there are many variations and combinations of fulfillment models, here are three of the most common:

  • Ship to distribution center: Suppliers ship products to a retailer’s distribution center or warehouse. The retailer then allocates inventory to individual stores or fulfills customer orders from the distribution center. This model allows for centralized inventory management and can be cost-effective for retailers with a large network of stores.
  • Ship to store: Suppliers ship products directly to a retailer’s brick-and-mortar stores, bypassing distribution centers. Store operations teams receive and manage inventory, often fulfilling online orders from store stock. This model can help retailers optimize inventory levels and improve the customer experience by offering in-store pickup and faster delivery options.
  • Direct to customer (dropship): Suppliers ship products directly to customers on behalf of the retailer. The retailer does not hold the inventory. Instead, they transfer customer orders to the supplier, who then picks, packs and ships the products. This model allows retailers to expand their product offerings without managing additional inventory.

The importance of fulfillment models

Choosing the right mix of fulfillment models has a significant impact on several key areas:

  • Cost-effectiveness: Certain fulfillment models, such as Ship to Distribution Center, are typically more cost-effective than others, like drop shipping. By selecting the most efficient models, retailers can reduce transportation and handling costs, optimize labor costs and improve profitability.
  • Scalability: Fulfillment models like shipping to a distribution center are highly scalable because they allow retailers to handle large volumes of inventory and orders efficiently.
  • Inventory management: Centralized models, like shipping to distribution centers, offer better control over inventory levels and can help prevent stockouts and overstock situations. Decentralized models, like direct-to-store or drop-shipping, require more sophisticated inventory tracking to ensure products are always available where needed.
  • Customer satisfaction: Order fulfillment directly impacts the customer experience, including product availability, order accuracy and delivery speed. Efficient fulfillment models that align with customer expectations ensure timely deliveries and accurate orders, enhancing customer satisfaction, building loyalty and driving repeat business.

Navigate order fulfillment with SPS Commerce

Want to optimize how you fulfill orders? SPS Commerce provides practical solutions and expert guidance to enhance your fulfillment processes internally and with your vendors.

Scott Williams
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