As your business grows and evolves, you should continue to reevaluate your distribution strategy. One major part is deciding what kind of warehousing to use.
When looking at warehousing, you have two main options: an internal warehouse or a distribution center. Distribution centers, also called fulfillment centers or third-party logistics providers (3PL), specialize in storing products and fulfilling orders for a business. You can learn more about the basics of warehousing here.
Deciding whether to use a 3PL vs. your own warehouse can be difficult. It can be critical for the success of your business and there is no right answer, but we want to help you navigate this! Keep reading to see the pros and cons of 3PL vs in-house logistics and decide what’s best for your business!
Why a Warehouse Strategy is Critical for Your Business
You have the option to use your own warehouse for fulfillment or contract out to a 3PL. The decision is complex and requires deliberation as each option comes with its own terms, every business has unique needs, and costs vary depending on the situation. Also, the decision is not final. You’ll need to reassess your warehouse strategy when your order volume grows. As a business consulting agency with expertise in logistics and operations, we can give you the information you need and help you navigate the 3PL vs own warehouse decision.
What are the Differences Between Third-Party and In-House Logistics?
The decision is not black and white. 3PL companies and self-fulfillment each come with their own costs. For new businesses that have a small inventory, handling logistics in-house often costs less. If inventory grows, you could save money working with a 3PL. Consider the different costs associated with 3PL vs own warehouses, along with your revenue and growth forecasts.
Self-fulfillment, instead of outsourcing to a 3PL, involves taking on some or all steps in your supply chain. The steps include packing, receiving, shipping, employing a distribution team, leasing a warehouse for storage space, and managing the logistics and associated costs. As a result, unless your business is large enough, self-fulfillment can be too large an investment because of the initial expenses. The benefits are in your long-term saving potential and control of the whole process.
Alternatively, you could go the hands-off route by outsourcing to a 3PL. They can handle some or all of the fulfillment process, including packing, shipping, returns, and order analysis. 3PLs can also have warehouses in strategic locations to make delivery quicker and cheaper. Because of their warehouse capacities, 3PLs are better for scaling. However, you have less control over the process.
The solution depends on your business, products, and goals. Outsourcing to a 3PL can often save time, energy, and money. Self-fulfillment gives complete control of the logistics process.
You Can Utilize Both 3PL vs Own Warehouse Fulfillment
The decision on how you want to structure your order fulfillment is not as clear as only a 3PL or in-house. Each comes with its own advantages. Many 3PLs offer hybrid solutions to businesses, letting you outsource where your process could be more efficient and keeping the rest internal. It all depends on your business goals and the 3PLs available to you. What are the benefits of each? Let us lay them out.
Advantages to Own Warehouse Fulfillment
Self-fulfillment is no easy task but sometimes it makes the most sense. Here are the advantages to in-house fulfillment:
1. Complete Control over Your Inventory and Logistics
The main reason a business chooses internal logistics is for control over product storage and delivery. When you own or lease your own warehouse, you can structure the process to fit your business needs. You can use your own space allotment, packaging methods, equipment, and location. Control over the warehouse location is convenient because storage can be closer to your headquarters, making addressing quality problems easier, or closer to your customer if your range is small.
In contrast, 3PLs require you to conform to standardized processes and predetermined locations. Maintaining complete control over your logistics is most effective if you have a fulfillment expert on your team or you already have an established supply chain.
Want help establishing your supply chain strategy? Our operation experts can help!
2. Customization of the Packaging and Customer Experience
You have more freedom over packaging and order customization when you handle warehousing and shipping, instead of outsourcing. Some 3PLs offer customized packaging but they charge extra. With internal fulfillment, specific packaging such as gift wrapped, made-to-order, subscription boxes, fragile, or special care need orders can be more customized and cost less with internal fulfillment vs 3PL.
3. Cost-Effective Storage
Despite the larger initial fees of buying or leasing a warehouse and stocking it, you save money in the long term. You can hold items in your warehouse for longer without paying extra for the space, saving you money if items are stagnant or ordered sporadically. Owning your own warehouse can also give you numerous tax benefits, as it is considered commercial real estate. You need to analyze what 3PLs will offer versus how much self-fulfillment would cost, factoring in expected growth, to truly know which option will cost less in the long run.
Advantages to 3PL Fulfillment
Outsourcing order fulfillment to a 3PL can feel like you are relinquishing control, but it helps growing businesses in some cases.
Here are the advantages to outsourcing fulfillment:
1. Less Time and Money Spent Planning and Setting Up Logistics
Outsourcing fulfillment to a 3PL usually costs less in the short term, and you avoid the commitment that comes with establishing, optimizing, and maintaining in-house logistics. Distribution and logistics are the main objectives of 3PLs. They know how to make an efficient supply chain and will save you the time and costs of doing it all yourself.
The set-up costs avoided with a 3PL are:
- Buying or leasing warehouse space
- Buying equipment for your warehouse
- Paying overhead costs (taxes, utilities, internet)
- Restocking supplies for packing and shipping
- Establishing a warehouse management system
- Hiring employees
- Obtaining the proper certifications and licenses
- Additional hidden costs
2. Flexible with Scaling and Sudden Growth
What happens if your order volume grows unexpectedly? Preparing for variability in market demand is a critical part of fulfillment. However, forecasting cannot account for every variable. 3PLs work with multiple businesses which means they have a higher shipping capacity. They are better equipped to deal with order volume changes quickly and cheaply, maintaining shipping standards.
3PLs are scalable as well. They can manage products with high and low seasons and adapt to business growth. With a 3PL, you avoid the important responsibility of planning for peak seasons and scaling space, labor, and shipping accurately.
3. Easy Integration of Multiple Sales Channels
You can access the latest technologies with a 3PL company (like inventory management, tracking, and reporting) without having to invest in your own system integration. They have pre-established warehouse management systems to automatically relay data between your store and the warehouse. You can view and analyze sales and logistic data remotely with the system integration that 3PLs provide.
4. Affordable Two-Day Shipping
Store your inventory at multiple fulfillment locations with 3PLs and get closer to your customers. Shorter delivery distances save time and cost less. Today, customers practically expect short shipping times.
You now know the main advantages of 3PL vs own warehouse fulfillment. Continue reading to make an even more informed decision.
Or connect with a Fulfillment Expert for help analyzing the costs of both!
How to Choose the Right Warehouse Strategy for Your Business
Is 3PL vs self-fulfillment right for you? Consider the following:
1. How many SKUs do you sell?
The number of SKUs you warehouse and fulfill is a major factor. A 3PL will charge a warehousing fee for each SKU, while in your own warehouse you can store products how you choose. At a 3PL, a large number of SKUs will cost a high inventory storage fee.
2. What is your customer range?
If your target market is spread across many locations, 3PLs will help you save. Shipping from more locations translates into lower shipping times and costs. Shipping longer distances isn’t much more expensive but will add up over time. If you have a small locality, this is less of an issue.
Don’t be afraid to contact freight providers for guidance on where to ship from. Major freight companies like FedEx and UPS have programs that can give you the number of people available for one and two-day shipping at a given address, allowing you to decide the best locations.
3. What is your plan for growth?
Your shipping and handling strategy depends on your forecasted growth. With internal logistics, you need a warehouse that isn’t too big or small and your order volume needs to stay relatively consistent.
Order volume increases and fluctuates over time. 3PLs provide a safety net for changes in product demand. You can avoid warehouse expansions and employee layoffs down the line if your products demand is forecasted to grow or vary month-to-month.
4. How do you handle your return process?
If your return process requires steps beyond replacing the item, like repairs or repackaging, you will need a 3PL that specializes in what you need. Otherwise, 3PLs can ship items back for you to handle.
5. What will the total fulfillment costs be?
Calculate an estimate of your shipping costs and average order value, and compare your costs with different 3PLs. One consideration is the size of your product. Bigger items need more space and thus cost more to store with a 3PL
Want help breaking down the cost of your distribution strategy? Contact us today!
6. How do you want to structure your business?
You now know that self-fulfillment takes a lot of time and internal expertise. If you want to focus your internal efforts on other parts of your business rather than on distribution and logistics, you can save time by using a 3PL.
7. Where could a 3PL help your supply chain?
Understanding your logistics and where to optimize your supply chain will help you determine if outsourcing is right for you. Some improvement goals are tangible for a small to medium business, others are easier done by 3PLs.
Even after reading this article, the right choice might not be obvious, and that’s okay! Our operations experts can walk you through your specific situation and help make sense of all the information that has been thrown your way. Need more help to make an informed decision or weigh the costs of each?