On June 19th, 2019, Shopify announced their largest development to date – the Shopify Fulfilment Network (SFN).
Through combining sophisticated machine learning systems with a geographically dispersed network of warehousing facilities, Shopify aims to make it easier for online sellers to successfully grow their brands.
“Shopify is known for having simplified the online shopping experience, and we are now taking this one step further — making the fulfillment systems and technology that used to be reserved for the largest companies in the world accessible and affordable to every merchant, even those just starting to take off. All of this happens without requiring you to be a technical expert, so that you can focus on building lasting relationships with your customers.”
Over the next five years, Shopify plans to invest $1 billion into the SFN. And they mean business. Less than four months after the original announcement, Shopify completed the acquisition of 6 River Systems for $450 million.
By adding the capabilities of this leading warehouse automation and robotics provider to their team, Shopify has sent a strong signal to the marketplace that they are prepared to operate on a much larger scale than originally anticipated.
This bold move into the logistics space has gained widespread attention over the last six months. Some commentators have called it a direct move to compete with Amazon’s FBA service, while others are reserving their judgement to see how things play out.
Although there are still many unknown factors at this stage, we can be sure about at least one thing: competition is heating up in the fulfilment space, and this means better service for online retailers.
“While Amazon may dominate the U.S. online marketplace right now, companies like Shopify are realizing that there’s room for other players who can address pain points that are being overlooked by the larger marketplaces.”
Through launching the SFN, Shopify is staying true to their overarching goal of “democratizing commerce” and levelling the retail playing field between large and small operators.
In this article, we take a closer look at where the market is heading, the most important things to note right now, and how you can use the Shopify Fulfilment Network to expand your business.
Table of Contents
- Frequently asked questions
- The problem with existing fulfilment options
- Introducing the solution: Shopify Fulfilment Network
- How can I leverage the Shopify Fulfilment Network to grow my business?
- How will using the Shopify Fulfilment Network affect my sales tax obligations?
- Outsourcing and automation are the keys to achieving scale for today’s online retailers
Frequently asked questions
Here are our answers to some of the most commonly asked questions by people searching for information about the Shopify Fulfilment Network.
What is 3rd party fulfillment?
Third party logistics, otherwise known as 3PL, is where a service provider looks after the operational task of storing and sending your products to customers.
These businesses typically have dedicated warehouses (otherwise known as fulfillment centers) that handle products for a range of different brands, and work with delivery companies to get your orders out the door.
Here are some of the main services that third party fulfillment providers offer:
- Receiving your products and checking that they are in good condition.
- Storing your inventory in a safe environment until you need it.
- Picking and packing orders.
- Managing the logistics of shipping parcels to customers on your behalf.
- Customer service related to order delivery.
What is a fulfillment network?
A fulfillment network is a combination of individual fulfillment centers that work together to provide you with the most efficient way of storing products and getting them to customers.
In today’s retail environment, shoppers expect speedy delivery – which comes at a cost. The cheapest way to deliver orders quickly is to store your items closer to customers. This is where fulfillment networks come in handy.
As an example, Amazon operates more than 100 fulfillment centers in the United States alone. When you send items to their warehouses, Amazon forecasts where your next customers are most likely to be located and sends your goods to the nearest fulfilment centers.
This way, when shoppers buys your products, you can send them from the nearest storage location. This reduces delivery times, and keeps the cost of freight down.
What do fulfillment centers cost?
The cost of 3PL varies from provider to provider, depending on how they price their services. Traditional third party logistics companies are known for having complex and confusing fee structures with a wide range of different charges. By comparison, Fulfilment by Amazon offers simplified fees to make it easier for you to understand.
The most common fees that fulfilment centers charge are:
- Inwards goods costs for receiving, recording and storing inventory (generally charged on a per box, per shipment or per item basis).
- Monthly storage fees based on the amount of floor space used (generally charged on a per square foot or per pallet basis).
- Picking, packing and preparation fees for getting your orders ready to ship (generally charged on a per order plus an extra charge per extra unit picked basis).
- Courier fees for delivery to the customer. This is sometimes bundled up with the preparation expenses to make it easier for customers to understand (delivery charges are normally priced based on where you are sending the parcels).
Here is a list of other fees that are common for fulfilment centers to include in their cost structure:
- Stocktaking fees.
- Optional insurance fees.
- Labelling, repackaging and other pre-order preparation/kitting charges.
- Customer service fees.
- Returns and product destruction fees.
- Onboarding costs.
What is Shopify fulfillment?
This is another name for the Shopify Fulfilment Network, which is aimed at vastly simplifying the experience of third party logistics for online sellers in the United States. Keep on reading to find out more!
Does Shopify have warehouses?
Yes. At the time of writing, Shopify currently operates 7 fulfilment centers in California, Georgia, New Jersey, Nevada, Ohio, Pennsylvania, and Texas.
As the Shopify Fulfilment Network expands, they will be opening and acquiring new locations throughout the United States, and partnering with existing third party logistics providers to create a comprehensive network of warehouses that span a much wider geographic area.
Can Amazon fulfill Shopify orders?
“You can use Fulfillment by Amazon to store your inventory at and fulfill your orders from an Amazon.com fulfillment center. Before you set this up, you’ll need to have an Amazon Seller Central account.”
Shopify offers a built-in FBA integration to connect your online store with Amazon’s warehouses and make it easier to fulfil orders. Check out this resource to learn how to set it up.
How do you do fulfillment on Shopify?
Fulfilment is the process of getting your orders out to customers. There are a handful of ways to do fulfilment on Shopify:
- Send products from your home or business premises.
- Use a third party logistics service such as ShipBob or one of the many generic providers.
- Let Amazon’s vast network of FBA centers look after your fulfilment.
- Try out the latest in eCommerce fulfilment and sign up to the Shopify Fulfilment Network.
- Rather than holding your own inventory, why not try dropshipping with one of these apps?
For more information about configuring and changing your fulfilment settings on Shopify, check out this guide.
The problem with existing fulfilment options
As brands grow beyond their existing warehousing and logistics capabilities, they have a couple of options for expansion: invest in larger warehouses and more staff or outsource this labour-intensive work to a third party provider.
There has been a growing trend towards using fulfilment centers to look after physical operations. This reduces much of the need for ever-increasing human resource budgets, signing long-term leases on commercial buildings, buying comprehensive insurance policies and committing to other capacity-confined expenses.
In other words, third party fulfilment turns the requirement for a range of cumbersome fixed overheads into a set of scalable variable expenses that increase (and decrease) in proportion to your sales revenue.
So, when you’re thinking about how to grow the operations of your business, it’s important to consider the world of outsourced, third-party logistics providers. Until recently, there were two main options for sellers: use traditional warehousing facilities or place your trust in the hands of Fulfilment by Amazon.
The problems with traditional 3PL providers:
- Complex pricing structures and year-long or multi-year contracts.
- Stock is either held in only one warehouse (increasing the delivery costs for sending goods to customers on the other side of the country), or the inventory costs balloon because of the need to hold sufficient quantities of stock in multiple warehouses.
- Sellers often run into problems with integrating their technology with multiple warehouses.
- Multiple ‘truths’ about what inventory is located in each warehouse – creating the added expense of regular stocktakes, or reducing the ability to deliver on customer promises.
- Poor performance – delays, damaged goods and higher prices due to the smaller buying power of individual warehouses.
The fulfilment services provided by large marketplaces such as Amazon’s FBA network go a long way towards solving these issues. However, there are still a range of challenges that online sellers encounter with these marketplace-provided offerings.
As outlined by Chief Product Officer, Craig Miller at the 2019 Shopify Unite conference, here are some of the core issues with marketplace 3PL services such as Fulfilment by Amazon:
- Not as accessible to smaller merchants – “recently in the news, they have actually been talking about kicking out some of their smaller merchants to get rid of those that aren’t selling fast enough.”
- Obscured customer data – “some of the large marketplaces out there actually start picking the customer data and using it in other ways. Worse, they sometimes don’t even give you your own customer data.”
- Little to no brand control – “you want the package to arrive in a box that has your logo on it, not theirs.”
- Unfair competition – “recently, we’ve started to see marketplaces using data like order volume to actually decide to create knock-off products for less money and lower quality, potentially competing with the actual merchants that use them.”
These problems were the backdrop from which the Shopify Fulfilment Network emerged…
Introducing the solution: Shopify Fulfilment Network
As described by Craig Miller, Shopify’s solution to the issues with other contract logistics services is…
“A geographically dispersed network of fulfilment centres with powerful machine learning that supports intelligent demand forecasting, inventory allocation, and order routing.”
In other words, the Shopify Fulfilment Network is an arrangement of fulfilment centers located throughout the United States. They are connected together by a machine learning algorithm that predicts sales of each product in each area (with 85% accuracy).
Using this data, they then send the merchant’s inventory to where it is needed most. By adding an intelligence layer to their infrastructure network, delivery timeframes are minimized and sellers don’t need to hold unnecessarily large quantities of stock all over the place.
Through seamlessly connecting advanced fulfilment warehouses (using the 6 River Systems robotics technology) with a robust demand forecasting AI, Shopify is taking the technology that was once reserved for only large companies and making it accessible to almost everyone.
At the time of launch, they were able to look after merchants that ship anywhere from 10 – 10,000 orders per day. By the end of 2019, they were aiming to scale their capabilities up to cater for large customers that ship 30,000 orders per day and down to small sellers that send only 3 orders per day.
How to experience the Shopify Fulfilment Network
Click here to apply for early access and find out if you are a qualifying merchant. If your business is suitable, the setup process is simple:
- Install the app.
- Select the products that you want Shopify to fulfil.
- Get your quote – review a custom made, easy to read pricing structure with a ‘monthly storage fee’ and a ‘per-shipment fee’.
- Send your products to Shopify’s warehouses.
Once you are all setup, you’ll never have to worry about picking, packing, shipping or fulfilling an order ever again. As your stock levels get lower, Shopify will periodically tell you when to replenish inventory to ensure that buyers get their shipments fast and you never have to stop selling.
The Shopify Fulfilment Network is tailored to your needs
Not only are they planning to spend $1 billion on this network over the next 5 years and offer these services to businesses of all sizes, but Shopify has designed the network to serve sellers in the best way possible:
- Supports multiple channels – it doesn’t matter whether you’re fulfilling via an online store, through wholesale relationships, social channels like Instagram, or even marketplaces, they can handle it all.
- Supports custom branding and packaging – SFN allows you to own the direct relationships with your customers by customizing your packaging to suit the needs of your brand. No more dull cardboard boxes!
- Supports value added services – such as returns and exchanges, kitting and other offerings.
While there are still lots of unknown factors about this exciting new offering, it is likely that Shopify will add more customization options as development progresses.
Achieving scale through partnerships
Shopify is taking a hybrid approach to building out their fulfilment network. In addition to operating their own warehouses, they are also partnering with established market players to offer a comprehensive network of facilities without needing to own all of the infrastructure.
“The company has also said that it intends to stay true to its focus as a software company. To compete with Amazon, Shopify’s warehousing and inventory solution will rely on data for radical optimization.”
Shopify has also said it doesn’t plan to operate its own trucks in the near future. Instead, they are planning to work with delivery companies by providing the tools and data that they need to succeed.
What does it cost to use the Shopify Fulfilment Network?
Each user gets their own custom pricing structure, which is based on a range of factors that may include the size of products, average quantity of orders shipped, customization required and other operational factors.
It is therefore difficult to provide an overall price for using the Shopify Fulfilment Network. In saying this, Shopify has stated that their pricing will be extremely simple and easy to understand, with cost structures made up of two components:
- Monthly storage fee.
- A cost per item shipped.
If you’re interested in giving it a try, you can register here to apply for early access.
How can I leverage the Shopify Fulfilment Network to grow my business?
Aside from the benefits listed above, the real advantage that Shopify’s innovative fulfilment network offers is simplicity.
Rather than spending your time packing goods, resolving issues with warehousing providers and getting lost in the details of complex pricing, you can focus more of your efforts on building lasting relationships and developing your business at a higher level.
Here are a few ideas for how you can use the Shopify Fulfilment Network to your advantage:
- Multi-channel sellers can integrate the SFN with their eBay, Amazon and Etsy and other marketplace accounts so that Shopify acts as your central logistics hub.
- Gain a better understanding of your margins through a simpler cost structure. By knowing how much profit is in each sale, you can more accurately budget marketing spend and ensure sustainable business growth.
- Add promotional inserts, free samples and other goodies into orders that go out to customers.
- Invest your working capital into a wider range of SKUs or hold larger amounts of the top selling products by knowing that your existing inventory is located in the right place, at the right time.
Should I use SFN, FBA, 3PL or just do it myself?
When it comes to outsourced logistics, the number of acronyms can become quite confusing at times. It’s important to find a solution that is right for your individual business needs.
If you simply want to sell a few products and make some money, it might be worth focusing on a marketplace like Amazon and using FBA for fulfilment. However, if you understand how to market your business, and are prepared to invest in building a resilient brand, then an eCommerce store on Shopify may be a better option.
In this instance, the Shopify Fulfilment Network could be the solution that you’re looking for. Here are a few more questions to ask, to get a better idea of what’s going to suit your needs best:
- Do you have an existing business or are you at the beginning of your eCommerce journey? If you are just starting out, it is often cheaper and easier to ship orders yourself in the early days. This way, you can get a much better idea of how things work, and reduce your fixed costs when cashflow is precious.
- Are you selling in the United States? At present, the Shopify Fulfilment Network is only available in America. If you’re in another country, FBA or another 3PL provider might be more suitable.
- Do you have any complex handling requirements when it comes to looking after your products? If your items are extremely large, heat sensitive, fragile, flammable, explosive or pose other handling risks, you might be better off looking after the storage and logistics yourself.
- Are you selling on Amazon? Third-party Amazon sellers receive a range of excellent benefits from using FBA. If this channel makes up a significant proportion of your revenue, then it may be best to use Amazon’s FBA facilities.
Perhaps you are currently in the process of working out the best fulfilment option for your business? If so, this 3PL checklist by Shopify might come in handy.
How will using the Shopify Fulfilment Network affect my sales tax obligations?
Sales tax in the United States is a complex issue for online sellers to manage. Due to the nature of how America’s political system is set up, each individual state has the ability to set their own sales tax regulations. Because of this, there are a wide range of rules that vary from state to state.
Prior to the emergence of major marketplaces such as Amazon, collecting and remitting sales tax was a relatively simple process. Aside from some notable exceptions, you were simply required to become compliant in states where you had a physical presence.
For most small businesses, this was easy – as they typically stored their inventory in one state, and sold products in just a handful of areas. However, when marketplaces began to dominate retail and geographically distributed fulfilment networks such as FBA arrived on the scene, the world of US sales tax became much more complex.
During June 2018, a landmark ruling by the Supreme Court (South Dakota vs. Wayfair) determined that States have the ability to set their own laws around who is required to file sales tax returns. The definition of ‘economic nexus’ was broadened to include companies located in other states that sell to customers in their jurisdiction.
In other words, this ruling allowed states to have much more control over deciding who is legally required to submit sales tax returns, and ultimately pay the tax.
States typically structure their interpretation of economic nexus in one or a combination of the following ways (for Amazon sellers):
- Marketplace facilitator laws: when these regulations are in place, the marketplaces are required to look after sales tax on behalf of their third party sellers.
- Sales-based nexus: businesses are required to submit their tax returns directly with the state once their sales exceed a specific value or number of orders delivered.
- Physical presence nexus: sellers are required to submit their tax returns directly with the state if they have a physical presence (such as storing inventory in a local SFN or FBA warehouse).
“Since the Wayfair decision, we’ve seen multiple states enact marketplace facilitator laws that require marketplaces to collect and remit sales tax on behalf of their third-party sellers. It’s possible the states may eventually take action to view this relationship between Shopify’s fulfillment network and sellers the same way.”
At this stage, it is unclear whether tax collection agencies around America will treat eCommerce sellers who use the Shopify Fulfilment Network in the same way as Amazon sellers that store their products in FBA warehouses.
Shopify store owners are currently required to pay file sales tax returns in states where they have a physical presence, or sales that exceed the set threshold for that State.
By using the Shopify Fulfilment Network, your products will be stored in warehouses throughout a number of states – which might increase your sales tax obligations. However, we don’t have enough information at this stage to draw any definitive conclusions.
The silver lining
Shopify’s new network will allow users to know exactly where their products are located at any given time, which may make it easier to keep up to date on sales tax requirements.
There are a couple of indispensable apps that can help you to stay on top of your accounting and taxes:
- TaxJar automates the calculation, reporting and filing of sales tax returns to free up your time for more interesting work.
- A2X for Shopify integrates your shopify transaction data with Xero or QuickBooks Online accounting systems, making it easy to know your numbers, avoid tedious data entry and stay on top of your finances. Click here to sign up for a free trial.
For more information on what you need to know about sales tax in the US, check out these guides:
- Sales tax crash course by MuseMinded – this resource takes you through everything from the basics to creating a plan, putting measures in place to reduce your liability and bringing it all to life.
- Sales tax information for every state by TaxJar – this comprehensive database of information takes the most important things that you need to know for becoming sales tax compliant in every state, and condenses it into a selection of easy-to-read guides for each jurisdiction.
- How-to guide to collecting Shopify sales tax – in this article, we take you through how to configure your tax settings in Shopify.
- A2X blog – our blog is dedicated to empowering eCommerce entrepreneurs by providing a comprehensive range of information about selling online, managing your taxes and simplifying Amazon and Shopify accounting.
Outsourcing and automation are the keys to achieving scale for today’s online retailers
The internet has stripped away many of the barriers that previously limited retail businesses from reaching new customers. Whilst there are now more ways to connect with your audience than ever before, selling online has become much more complex. In such an environment, it is important to focus on doing less (rather than more).
By outsourcing your physical operations to third-party logistics providers and automating repetitive aspects of your business with apps like A2X for Shopify, it is possible to free up your time to focus on more important things – like building valuable customer relationships.
This way, you can grow a business that’s ready for expansion, rather than creating a workload that increases in proportion to your income.
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