What Is Order Fulfillment? 7 Step Process & Key Strategies (2024)

While order fulfillment is, by definition, the method by which a company processes a salesorder to the customer's specifications, that understates its importance. Customers hold morepower than ever, are more informed and have higher expectations. Efficient order fulfillmentis key to your brand's reputation, your company's profits and your ability to retainclients.

Without sales there is no business. Without order fulfillment, there are no sales.

Video: What Is Order Fulfillment?

Key Takeaways

  • Order fulfillment is a critical business task for many product-based businesses.
  • An efficient order fulfillment operation requires coordinating with multiple departmentsand outside partners.
  • An ERP often plays an essential role in managing the order fulfillment process.

Order Fulfillment Explained

A new sale is almost always something worth celebrating, but the work isn’t done untilthe order is fulfilled, and the customer has the order in hand. Order fulfillment is thecritical task of assembling the order and shipping it off to the customer, plus thesupporting processes that support those tasks.

The complete order fulfillment lifecycle is made up of five primary steps starting withstrategic sourcing and ending with shipping. Many businesses include inventory management,supply chain management, order processing, quality control, and customer support in theumbrella of order fulfillment.

Much of the order fulfillment process can take place under one roof in a well-organizedwarehouse, depending on the size of your business. Many small businesses handle orderfulfillment themselves in-house through a simple process. Large enterprises require a morecomplex, multi-layer distribution center strategy. But in either case, the main goal isefficiently getting the customer what they ordered as quickly, reliably, and inexpensivelyas possible.

Order Fulfillment Process: How Does It Work

The order fulfillment process takes place in one or more distribution centers and typicallyinvolves inventory management, supply chain management, order processing, quality controland support for customers that need to report problems or make product exchanges or returns.

  1. Receiving Inventory

    Goods may come from a third party, another company department or a company warehouse;a pipeline (as with oil, fuel, water or some other fluid product); as digital datafrom a database; or in a variety of forms from other external or internal sources.

    In any case, the incoming inventory must be counted, inspected andinventoried to ensure the proper amount was received and the quality is acceptable.SKUs or bar codes on the arriving products are used in the receiving and storageprocesses, and to retrieve goods from internal storage later.

  2. Inventory Storage

    Once goods are received in the fulfillment center, theyare inventoried and either immediately disbursed or sent to short- or longer-termstorage. Items are ideally stored just long enough to help organize the orderlydistribution of goods for existing sales, rather than to hold product for futuresales.

  3. Order Processing

    An order processing management system dictates the product picking and packingactivities per each newly received customer order. In the online marketplace, ordermanagement software can be integrated with the shopping cart on an ecommerce websiteto automatically initiate order processing.

  4. Picking

    A picking team or automated warehouse robots select items from the warehouseaccording to a packing slip's instructions. The packing slip contains specificinformation, such as a list of item SKUs, product colors, sizes, number of units andlocation in the distribution center's warehouse.

  5. Packing

    Packing materials are selected by a packing team or automated fulfillment robots toachieve the lowest practical dimensional weight, which is calculated by multiplyingpackage length times width times height. Since space on delivery trucks is at apremium, optimizing dimensional weight (or DIM weight) is important to speedtransport while also potentially lowering shipment costs.

    Further, packingteams often include return shipping materials and labels in case the customer wishesto exchange or return the item for a refund later.

  6. Shipping

    The order is sent to a transportation channel or shipping node to be shipped to thecustomer. Shippers and carriers — be they freight lines or airlines, FedEx,UPS, theU.S. Postal Service (USPS) or other carriers — determine freight billablecosts bywhichever is greater: actual package weight or its dimensional weight.

    Even if the actual weight is low, such as with a t-shirt, packing it in the lowestDIM is often worth it to keep the packaging from adding significantly to the overallpackage weight. Also, most carriers have packaging rules to optimize their ownprofits from the shipping space they have available. Failing to meet thoserequirements can delay shipments if carriers refuse to accept the order.

  7. Delivery

    It is common for shipping routes to include more than one carrier. For example, FedExmay pick up a package at the fulfillment center that will later be delivered by theUSPS to the customer's home. There are many reasons for these hybrid shippingmethods. One common example is that the USPS delivers even to remote areas wheremost other commercial carriers do not. It's simply more practical to use the USPSfor the last mile of delivery in those cases.

  8. Returns Processing

    Returns processing begins with including shipping materials and a return label withthe original customer's order. When a customer does return a product for exchange ora refund, the process must be executed carefully to ensure it's appropriate torestock it. Obviously if the product malfunctions, it can't be restocked. Nor can asoiled item. Returns processing involves quality control checks and sorting returnedproducts accordingly. Return products are thenrestocked, returned to a vendor or manufacturer for a distributor refund orcredit, or sent to a recycling center.

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Why Is Order Fulfillment Important?

Companies make money by selling goods, products and services to businesses or direct toconsumers. No matter whether you’re B2B or D2C, the sale is not complete until thesold items are received by that customer. Order fulfillment is how companies complete thesale and it’s at the heart of every business.

Order Fulfillment Challenges

Order fulfillment challenges run the gamut from supply shortages and inventory managementissues to failures in demand and logistics planning to kinks in the supply chain.

Inventory Management

Running out of stock leads to customer dissatisfaction, failures in the overall customerexperience and harm to brand reputation. It is difficult for companies to repair the damageonce it's done. But there are exceptions: Customers tend to be more forgiving if shortagesand delays are caused by a widespread weather event, a natural disaster or a Black Swanevent(opens in new tab).

Demand Planning

On the other hand, keeping too much stock on hand drives up storage and carrying costs. Italso increases your risk since demand for those items may drop before you get them sold.It's important to carefully predict and plan for demand levels in order to keep adequatesupplies in stock without ever dipping too low or stocking too much of any given item.

Logistics Planning

Slow or missing deliveries, broken items and battered or wet packaging are all factors thatcan harm a company's reputation and future sales, and in turn its profitability. It isessential then to carefully manage logistics so shipping doesn't go awry and items aren'tdamaged. Simply put, customer satisfaction is greatly affected by logistics, so keep a closeeye on end-to-end — or warehouse to mailbox — performance.

Supply Chain Execution

Having a supply chain strategy entails evaluating cost versus benefit tradeoffs in terms ofoperational choices. For example, a company may choose a sole supplier for a given productto gain price breaks for the higher purchase volume. That's also a good strategy to gainpriority status with the vendor, which can make a difference in getting goods on time duringperiods of high demand. However, using a sole supplier model can backfire if anything goeswrong for that vendor — from employee strikes to natural disasters to their own supplyshortages.

Supply chain execution (SCE) is the flow of tasks in the supply chain. Software applicationsare used to manage every activity within that chain. Specifically, material management,tracking the physical status and movement of the product, tracking data shares and datafeeds, and managing financial information — particularly transactions among allparties.

SCE typically involves the use of multiple applications, such as order management, inventorymanagement, warehouse management, transport management and logistics software.

Order Fulfillment Best Practices

Remember that the efficiencies to be gained in order fulfillment depend on greatorganization. Best practices boil down to organize, organize, organize.

Start with the basics.

Streamline your receiving processes so incoming shipments are processed quickly and damagedgoods returned swiftly to the manufacturer for replacement. This will go a long way inpreventing back-orders or long wait times for your customers.

Organize your warehouse for more efficient picking times.

Place hot-ticket items upfront and close to human or robot pickers and packers. Place otheritems in your warehouse according to demand, with items least in demand being at the veryback.

Organize shipping and logistics.

This is so you get the fastest possible delivery times to customers at the least cost. Butalso plan a shipping backup strategy in case something goes wrong, or carriers unexpectedlyraise rates too high for your margins.

Automate.

Automating as much as you can saves labor costs, improves working conditions, and makesoperations safer.

How Do You Choose an Order Fulfillment Strategy?

Businesses have several choices when deciding on an order fulfillment strategy. Depending onthe skills and resources available in your company, you may prefer either internalfulfillment or outsourced fulfillment.

If you have the means in-house, you gain more control over operations and costs by handlingfulfillment internally. If your company’s in-house talent and resources are somewherein the middle, you may want to opt for a hybrid model to give you some of the benefits ofboth worlds.

If fulfillment and logistic skills and resources are scarce, you may be better offoutsourcing order fulfillment completely. This allows your team to focus its efforts onproducing and selling the product, and it often leads to more predictability. With internalfulfillment, you employ the staff, own the warehouse, and have to make sure every order goesout perfectly. When you outsource order fulfillment, many of those challenges are no longeryour problem.

To make the right decision for your business, look at the product, potential fulfillmentoptions, and fulfillment costs. A detailed financial analysis should guide you to the bestsolution.

Order Fulfillment Models

Order fulfillment models have been refined over many decades, but the basics hold true, andthat is for very sound business reasons.

What are the types of order fulfillment?

There are four order fulfillment models to choose from: in-house, outsourcing, drop shippingand hybrid. Each model fills specific business needs.

  • In-house:

    The in-house model simply means that all steps in order fulfillment are performedinternally.

  • Third-party:

    This model entails outsourcing all order fulfillment activities to an orderfulfillment vendor or other third-party.

  • Drop shipping:

    The order is produced and shipped by the manufacturer. On the pro side, this lowersthe barrier to entry and minimizes overhead costs, key for startups and ecommercecompanies. It also eliminates the middleman, which can potentially save the buyermoney. On the cons side, it can also strip control from merchants, particularly interms of inventory management and order fulfillment. It can also greatly delayshipments to customers, since many manufactures are in other countries, far from themerchant's customer base. In that case, shipping may take more time and cost more ora distribution center is set up and items ship from there.

  • Hybrid:

    A hybrid model simply means a combination of two or more of the three models above.For example, a company may choose to handle order fulfillment of all or just popularproducts internally, but also choose to outsource fulfillment during peak periods,such as the holidays, and drop ship big and bulky items directly from themanufacturer.

7 Tips to Improve Order Fulfillment

Companies managing their own order fulfillment process should plan ahead for a smooth orderprocess that’s automated where possible. Using a fully-featured ERP helps you trackorders, inventory, and shipments from end-to-end for enhanced visibility, the best customerand employee experience, and ideally maximized profits.

  1. Choose the best order fulfillment ERP system:

    Start by choosing a system that offers end-to-end tracking for orders, inventory, andall other aspects of your business. An ERP like Oracle NetSuite features helpfulmodules to help you and your team track the entire business, including orderfulfillment, finances, and human resources, through one secure, cloud-based systemthat’s always accessible.

  2. Integrate with suppliers and vendors:

    Modern ERP systems enable you to integrate directly with suppliers and vendors. Forexample, your entire restocking and accounts payable process can tie together andrun without extensive human intervention. Set up your rules, connect with yourvendors and suppliers, and your systems can handle things from there.

  3. Set clear customer expectations:

    Most businesses are wise to heed the business adage to “under promise and overdeliver.” Customers are likely willing to work with you and your expectedtimeline, particularly in the post-COVID era where delays are commonplace. Set clearexpectations when you receive an order, then work hard to meet those expectations.If anything looks to be delayed, communicate the issue as soon as possible so yourcustomer knows what to expect and isn’t disappointed.

  4. Optimize inventory management:

    If you hold too little inventory, you risk running out of stock and coming up shortfor a customer order. When you hold too much inventory, working capital and storagecosts may spiral out of control. A quality inventory management module in your ERPis tremendously helpful for this task.

  5. Select the right order picking strategy:

    When an order comes in, chances are you don’t have a fleet of automatedwarehouse robots to pick and package orders. Using your human capital effectively isvital to keeping costs down and efficiency up in your order fulfillment operation.Common order picking strategies include discrete order picking, where orders arepicked one at a time, zone and batch order picking, where multiple orders are pickedat once, and other strategies intended to limit travel time and increase pickingspeed.

  6. Treat your shipper as an essential partner:

    Organizations like the United States Postal Service, UPS, FedEx and DHL play a keyrole in your fulfillment process. Don’t treat your shipper like any othervendor. Spend the time and effort negotiating the best deal and delivery schedulefor your fulfillment needs, and work proactively with your shipper to avoid delays.

  7. Prepare for customer service and returns:

    As much as you try to leave every customer with a perfect experience, mistakes,defects, and delays happen from time to time. Whether the issue was your fault, yourcustomer’s, or a vendor’s, it’s best to be prepared to make itright.

Improve Order Fulfillment With Order Management Software

When building your order fulfillment process, don’t discount the value of high-qualityorder management and fulfillment software. When you use the right ERP, these systemsseamlessly work together, enabling the most efficient and enjoyable sales process possible.

When you shop online, you may not realize that you’re interacting with a series ofinterconnected systems to handle ordering, shipping estimates, payments, warehousefulfillment, and delivery. Some companies choose a hodgepodge approach where they usedifferent tools for each other these functions while others choose an order managementsoftware that fits into a larger ERP strategy.

NetSuite Order Management is a part of theNetSuite ERP that brings owners, managers, and fulfillment teams quick access to essentialinformation as the system tracks every order through your sales and fulfillment process.Users can securely view and any order, and the system handles complex order needs such assplit orders and outsourced drop shipping.

The Order Management module enables ordering, fulfillment, and returns from anywhere in theworld with a single data set and automated order management process. That’s a big helpfor any business involved with order fulfillment.

Whether you’re the exciting beginning stages of a startup or have decades of orderfulfillment experience, it’s never too late to look at your order fulfillment andmanagement systems with fresh eyes. You could find opportunities to cut costs while offeringan improved customer experience. That's a win-win for any business, and its valuedcustomers.

Order Fulfillment FAQs

What does it mean when an order is in fulfillment?

This generally means that the order is somewhere in the fulfillment process but not yetshipped.

What is order fulfillment rate?

The order fulfillment rate is an efficiency measurement calculated by dividing the number oforders already processed by the total number of orders. It is also called the order fillrate.

Order Fulfillment Rate = Totalnumber of orders process / Total number oforders

What is the order fulfillment process?

The order fulfillment process typically involves receiving goods, short-term storage in awarehouse in the distribution center, customer order processing (picking and packaging) andshipping and logistics.

What are the seven steps in the order fulfillment process?

The seven steps are receiving inventory, storage, order picking, order packing, shipping,delivery and returns.

What does order fulfilled mean?

An order is fulfilled when the customer receives it.

How do I start an order fulfillment business?

You'll need a solid business plan mapping out all the important details, from facility andtechnology costs and location plans to business prospects, sales projections and theestimated capital you'll need to get started and stay afloat. Outline your objectives andmake detailed plans for receiving, storage, order processing and shipping strategies.Implement your plan and make adjustments as necessary to refine and streamline your businessto optimize your profits and constantly improve customer satisfaction.

What Is Order Fulfillment? 7 Step Process & Key Strategies (2024)
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