The How and What of E-commerce: Inventory and Fulfillment [Quora]

This is a repost of a Quora question I started, which gathered some amazing responses: How do e-commerce startups like One Kings Lane, Manpacks, and Dollar Shave Club handle the inventory fulfillment side of their business?

One of the biggest operational hurdles for any small commerce business is sourcing the products, managing inventory, shipping products, accepting returns, etc. Without a lot of initial investment, how can small start-ups take on this challenges to build subscription-based commerce models?

Five Stages of E-commerce Startups

Inventory Management is the process of employing historical and future forecasts of product performance to acquire the optimal inventory levels for your strategic goals based on the financial constraints of your company.

Shipping & Fulfillment is a function of inventory management that relates directly to managing the process of pulling inventory from the current available stock, packing the items into individual orders, packaging the orders for shipments (i.e. the pick & pack process), and transferring the shipment to a delivery carrier for fulfillment to the customer.

There are five stages of operations management that all e-commerce startups move through:
1. Launch – minimum needed to sell online (eg: working out of your apartment)
2. Survival – demand generation and marketing
3. Growth – ironing out the kinks in your inventory and fulfillment (using a third-party logistics provider)
4. Scaling – bringing all your inventory and fulfillment logistics in-house
5. Infrastructure – optimizing infrastructure; building out multiple distribution centers

Stage 1 – Bootstrap E-Commerce
Anecdote: Bonobos started out of a Andy Dunn & Brian Spaly’s Atherton apartment while they were attending Stanford. They sold pants out of the back of their car, apparently. (How sketchy is that?)

Stage 2 – Surviving Means Outsourcing Fulfillment
Once you reach about $350k to $500k in revenue, this is where working with an outsourced warehouse or third-party logistics partner comes into play. A third-party logistics company (3PL) is a warehouse that handles the Shipping & Fulfillment part of inventory management for your business for a fee:

 

And some details about the cost breakdown of a 3PL:

Examples of Startup E-Commerce: The Manpacks Model

A men’s essentials subscription service that allows guys to schedule regular shipments (i.e. every quarter) of their favorite socks, undershirts, boxers, and shaving gear.

The subscription model takes a lot of the demand estimation out of the equation because the retailer has the customer’s credit card and a fairly high probability of the customer completing the transaction.

Examples of Startup E-Commerce: Trunk Club
The stylist model is employed by e-commerce startups like Trunk Club or Shoedazzle.  The service establishes itself as an expert resource to supply the ‘right’ product to their customer.   This is significantly better than the traditional e-commerce model of buying on averages because you have deep customer insight into what they like and their sizes, etc. The entire business model around subscription fashion is built to make the inventory management side of the business easier to manage.

Drop Shipping as an Early-Stage Solution
Drop shipping is an inventory management technique that enables a retailer to sell a product for which the retailer is not currently holding in inventory.  The retailer is able to do this because they have have setup a drop ship arrangement that allows the retailer from the product manufacturer’s inventory of “Available To Sell” products.