Warehouses vs. Fulfillment Centers vs. Distribution Centers: Choosing What’s Right For Your Online Business

As e-commerce merchants prepare for what is estimated to be a record-breaking holiday shipping season, they are loading up on inventory as consumer demand increases. But, with all of the increased inventory, where will you store your unsold goods?

As growing e-commerce merchants can testify, home garages and storage units can only fit so much.

Instead there are a few common ways in which online retailers maintain their inventory as they prepare to fulfill incoming orders. That’s where warehouses, fulfillment centers, and distribution centers come in. 

While they are similar, there are some key distinctions between the three that e-commerce merchants should consider.

What Are Fulfillment Centers?

Along with finding space to store inventory, early-stage e-commerce merchants know that packaging each item individually and then delivering them collectively to carrier centers can be very time consuming.

Fulfillment centers are more focused on quick turnaround, and offer more value-added services like packaging, shipping directly to customers, and managing returns. 

Fulfillment centers are strategically located in order to ensure products get delivered to customers as quickly as possible. 

One aspect to note is that they have limited storing capabilities and only keep products on a short-term basis. 

Factors To Consider When Looking To Use A Fulfillment Center

While using fulfillment centers seems like a no-brainer in certain circumstances, there are a few factors that should be considered before signing any contracts. 

• Importance of value-added services: Are services like packaging, labeling customer orders, and faster shipping to customers necessary for your company’s current goals.
• Cost of service: Can your business afford to use a fulfillment center at your particular stage?
• Expected Sales: Is your business expecting a high volume of orders, or will your products need to sit for a while?
• Location of fulfillment centers: Are there fulfillment centers near where your target customers live?

Knowing who your customers are and where they are will allow you to get the most out of your experience with a fulfillment center.  

When Should My Online Business Start Using A Fulfillment Center?

E-commerce businesses should start using fulfillment centers once it becomes too laborious and/or time consuming to store, package, and ship orders themselves. If you find that this part of your operation is stopping you from growing and scaling your business, it may be time to look into using a fulfillment center. 

Along with the factors described above, you should also be asking yourself what you’d be doing with the time you’d save outsourcing the fulfillment and inventory management process. 

If those opportunities outweigh the cost of using a fulfillment center, that could be the time to start using one as well.

Also, if you’re expecting a surge in sales in particular areas around the country, using a fulfillment center could be extremely beneficial as they have a dedicated staff to package your products and have scheduled daily pickups from multiple carriers so you’re able to meet those growing demands.

Shippo has partnered with many fulfillment companies so that your company still has access to the most carriers at the best prices, even when you’re sending orders out from a fulfillment center. 

Check out our 2021 E-commerce Benchmarks Report for more information on how to best use fulfillment centers to your business’s advantage. 

What Are Warehouses?

Quite simply, warehouses are used to store goods for an extended period of time. They are also used to organize and manage inventory. While it may sound simple, modern warehouses are sophisticated in their processes and use warehouse management systems (WMS) to ensure a smooth operation.

This allows them to track how many products you currently have, where they are, where they are going, who’s handling them, etc. 

E-commerce merchants can rent space within a warehouse via short-term and long-term leases depending on their specific needs. 

Factors to Consider Before Using A Warehouse For Your Online Store

Before you decide to use a warehouse for your e-commerce business, there are several factors you’ll need to weigh:

• Seasonality of your business: Will you need the storage space after your company’s peak season?
• Location location location: Will the location of the warehouse need to be close to your customer base or can it be located further away?
• Cost of storage: How many SKUs do you have and what will the cost of storing them be?
• How long will inventory sit: Will these products need to be shipped soon or will they need to be housed for a while?

Again, warehouses aren’t typically made for quick turnaround. Rather they’re a way to make sure your products are stored safely, organized efficiently, and are overseen in a way to make sure you never run out of inventory. 

When E-Commerce Merchants Should Use Warehouses?

Warehouses should be used by e-commerce businesses that need space to store products that aren’t going to be sold in the immediate future. 

As mentioned before, fulfillment centers only have limited space and are made more for short-term storage. If your business has grown to the point where you need more products than a fulfillment center can store, using a warehouse will be the next step. 

This doesn’t mean that you have to use one or the other.

In fact, they often work in tandem for e-commerce businesses. Most products are stored within a warehouse and then are sent to fulfillment centers when needed. That way you don’t run out of products, and you’re only sending the proper amount of products to be fulfilled. 

Shippo has also partnered with many warehouse management companies so that they can ship with more carriers for less. This is a benefit which is passed onto your business when using a warehouse with those warehouse management systems. 

What Are Distribution Centers?

Distribution centers are somewhat in between traditional warehouses and fulfillment centers. They are capable of storing more inventory, but typically ship less often and in bulk. 

Products sent out of distribution centers are sent out on pallets and will still need to be sorted through and packaged.

Distribution centers are most beneficial for replenishing inventory to physical stores and/or storing and delivering for B2B businesses. 

When To Use A Distribution Center

Let’s say your e-commerce brand has grown to the point where having physical stores is beneficial to your business. In this scenario you will need to ensure that the shelves at your stores are stocked and ready to be sold. 

At your stores you will have employees who break down, package, and/or fulfill orders in-house so the need for a fulfillment center may not be applicable here. 

Also, you may not want to send straight from your warehouse to your land-based business because of the distance between the two or storage space available at your store. 

It may then be time to consider using a distribution center. They are normally located near physical stores to cut down on delivery times. They can also store more products for longer than a fulfillment center can and they can ship out in bulk to your store. 

If you’re looking to offer BOPIS (buy online, pick up in-store) on your e-commerce site, it could also be beneficial to incorporate a distribution center into your operations. 

Factors To Consider Before Using A Distribution Center

Since many e-commerce merchants are strictly B2C and don’t necessarily have a physical store, the use of a distribution center may not make sense depending on your specific circumstance. 

Distribution centers generally store and ship products in bulk. The products aren’t individually wrapped and packaged. However, the location of distribution centers allow you to hold inventory closer to your target market.

Understanding your offerings and your clientele will be key in deciding if distribution centers are right for your business.

The Verdict

When looking at all three options you’ll see there really isn’t a one-size-fits-all answer. As your e-commerce business grows, your needs regarding inventory management and fulfillment will change.

Your inventory management and fulfillment decisions should depend on factors such as the size of your business, your forecasted sales, budget and goals, where your target consumers live, and more. 

If your primary need is to get your products packaged and shipped quicker, a fulfillment center may be best for you.

If your primary need is to store your products safely and have your inventory managed more effectively, then a warehouse may be the better option.

And if your e-commerce business is trying to optimize inventory levels at a physical store, then a distribution center may be your best option.

How Shippo Fits Into the Equation

One common theme of all these storage options is that ​​any e-commerce storage method will require shipping at some point, whether that be warehouses shipping to fulfillment centers, or fulfillment centers shipping out to customers. 

Shippo is there every step of the way as it not only integrates directly with your e-commerce platform, but has also partnered with both third-party logistics companies (3PLs and fulfillment companies) and with warehouse management system companies to help manage end-to-end fulfillment operations.  

Creating shipping labels with Shippo also allows you to track your packages throughout their journey so that you know if they’re inside of a fulfillment center, distribution center, or if they’re on their way to your customer. 

Sign up to Shippo for free today to see how you can count on a more seamless fulfillment and shipping journey, from inventory and order management to carrier pickups and deliveries.