What Is a Fulfillment Center? Definition, Types, and Importance

There are several thousand warehouses in North America alone, but these vast buildings aren't the only places companies stash their products. Fulfillment centers are a newer option in logistics management that has forever altered how big businesses meet customer demand.

So, what is a fulfillment center, and how can it benefit a company like yours?

What are fulfillment centers, and how do they work?

Companies use fulfillment centers, also referred to as distribution centers, to stage products as part of order fulfillment. Rather than relying on their own warehouse capabilities, companies can rely on third-party logistics providers (3PLs) to translate orders into successful shipments.

What do fulfillment centers do? They primarily oversee their clients’ inventory by managing storage, picking products for orders, packaging those orders, and shipping the packages to consumers or — in the case of wholesale buys — retailers. They even manage returns.

Fulfillment centers may be dedicated to a single supplier, or they may deal with multiple clients who split the cost of space, labor, and other essential resources. The supplier sends products to the fulfillment center, and the center’s experts take care of the rest.

Fulfillment centers are sometimes called fulfillment warehouses, but don’t get confused. They are different from standalone warehouses operated by companies for their own needs.

Warehouses are usually intended for long-term storage. You might keep items there for months at a time. Conversely, fulfillment centers are designed for quick turnover, with products often hitting shelves and shipping in under a month.

Why would you need a fulfillment center?

Maintaining your own warehouse can be prohibitively expensive. You must cover expenses tied to receiving and evaluating goods, storing inventory, and running the warehouse itself — think rent, utilities, and security, for starters.

There's often a significant initial outlay to adopt software, hire and train employees, and bring on a tech team to maintain operations. Overall, the price tag associated with warehousing is often too hefty for small and medium businesses to contemplate.

Then, there are the bigger businesses that can afford to have a warehouse but move so much product so quickly that a fulfillment center makes more sense. These businesses are typically major e-commerce retailers facilitating the shipment of a vast array of items, some sold directly and others by third-party entities.

Most fulfillment centers are focused solely on B2B activity; they’re a business that serves the needs of other businesses, with an end client (such as a regular consumer) reaping the benefits.

Note that 3PL fulfillment services differ from freight brokers. The former oversee various logistical supply chain necessities, whereas the latter act as middlemen, facilitating shipments without ever actually handling the products.

Benefits of a fulfillment center for your company

Once you understand how a fulfillment center works, it’s easier to see how and why you might use one for your business. Partnering with fulfillment-focused solutions offers the following benefits: 

• Enhanced inventory management: Fulfillment centers are designed to manage inventory as efficiently and accurately as possible. You don’t have to build a system yourself; you get to piggyback off tried-and-true processes and reap the results quickly.
• Scalability and flexibility: If you run your own warehouse and suddenly triple output, you’ll probably need to buy another warehouse. Because fulfillment centers focus on short-term storage and rapidly move products from inventory to shipment, you can scale up (or pull back) on demand.
• Automated fulfillment: You can leverage existing software and integrations to automate much of the fulfillment process. You can send customer orders, transmit shipping details, receive requests for new inventory, and coordinate other important tasks without lifting a finger (once you set up the system, of course).
• Reduced staffing needs: You could expand your staff to match growing orders and meet warehousing requirements, or you could let your fulfillment partner handle staffing, HR, payroll taxes, and labor costs.

Fulfillment center success stories: 2 examples

Amazon FBA

Amazon FBA is one of the biggest fulfillment centers in action. It’s even in the name: Fulfillment by Amazon (FBA). Amazon has enormous facilities located across the country. Thousands of third-party sellers list their products on Amazon, ship them in bulk to those facilities, and relax as Amazon’s team fulfills orders on their behalf.

Rainbow OPTX

Rainbow OPTX is an excellent example of a smaller business that scaled up and needed additional help managing orders. Founder Noel Churchill started the company in his garage but knew that expanding to a self-managed warehouse wouldn’t make sense for his business model (which is highly seasonal) or his bottom line. Instead, Noel partnered with ShipBob, which allowed him to scale up during the busy season and pull back when things slowed down, all while sticking to his standards for fast shipping and superior customer satisfaction.

Fulfillment centers versus warehouses

To recap, here’s a look at the critical differences between fulfillment centers and warehouses:

Storage timing

Warehouses are intended for long-term storage. Companies often keep everything from stock to dormant equipment in their on-site warehouse. Fulfillment centers are only used for short-term storage. They want to move products in and out quickly, keeping items on-site only as long as it takes to receive and fulfill an order.

Operations

Warehouses can be relatively stagnant, whereas fulfillment centers are hives of activity. There’s a near-constant rush of receiving, packing, labeling, and shipping going on so the facility’s team can stay on top of the workflow.

Frequency and types of pickups

Warehouses generally ship a larger volume of products less often, relying on pallets of boxes picked up by a single carrier to help consolidate. Fulfillment companies may contract with multiple carriers, with pickups occurring throughout the day in varying volumes.

That’s how Amazon offers same-day shipping; they’re fulfilling on demand, with their own fleet of carriers supplemented by third-party entities, such as FedEx and USPS.

Which option is the best for your business?

There’s no one right option when considering a fulfillment center versus a warehouse. Ask yourself what your goals are.

• Do you prioritize hands-on control of your products or speedy delivery?
• Do you have the resources to purchase or rent warehouse space? What about investing in labor and other expenses related to operations and upkeep?
• Do you want to spend time managing the ins and outs of every order or trust a fulfillment center to represent your business to your standards?

What is a warehouse worth compared to a fulfillment center? Consider whether you’re interested in extending your reach to a broader customer base while maintaining customer satisfaction. If your answer is yes, it’s worth exploring fulfillment options in your price range.

Rethink your approach to inventory management with Orderful

Whether you’re interested in connecting with a fulfillment center or keeping your inventory management in-house, Orderful’s cloud-based electronic data interchange solutions can help.

Contact our team to learn how we can assist in simplifying your EDI integration and streamlining your warehouse management systems.