Keeping your warehouse operations in-house or outsourcing them to a third-party logistics (3PL) company? Each option has its benefits and disadvantages.
In internal fulfillment, the business handles the complete process of storing, packing and shipping. The company must have a warehouse to keep its inventory, and a logistics team to manage the goods for storing, ordering and shipping directly to stores/distributors or customers.
In contrast, 3PL services oversee the order fulfillment cycle on behalf of the company. Corporations manage 3PL warehouses with physical spaces and logistics teams. One 3PL can handle a multitude of clients at a time, and they store, manage and prepare the goods for shipment, process the orders and deliver them to customers via their partner carriers.
Many successful online retailers are choosing to outsource their operations to 3PL provider.
That way they can focus on their core business and also, they don’t have to invest in the expensive inventory and logistics software that 3PL companies are using. But maybe this is not the best solution for all businesses. Keep reading and discover which order fulfillment option is right for you.
Once a company reaches a certain level of growth, it has to decide between acquiring a warehouse and employing a full-time logistics team, or outsourcing to a third-party logistics (3PL) business — a decision that can impact the scalability and the business model of the company. But since the global market for 3PL companies is projected to reach $1.3 trillion by 2026, we can conclude that most companies are choosing to outsource.
A reliable 3PL should be able to adapt to your company’s growth and become a trusted partner from day one. Is the customer service team of the 3PL accessible and readily available to address any questions? Do they provide a personal account manager for your business? Will they regularly bring items that keep you ahead of the competition to your attention?
This level of support — a liaison between your business and the 3PL’s fulfillment staff — can help bring more advantages than an internal warehouse.
If you opt for in-house fulfillment you’ll need to ensure that the warehouse space you select is neither too large nor too small for the demand you experience and anticipate. Is your month-to-month order volume stable, seasonal or escalating over time? Will your business snowball so hard that it swiftly outgrows the new space? Or are you at risk of overpaying for square footage if you never reach the warehouse’s maximum capacity?
A 3PL provides a safety net for planned or unanticipated increases in demand, so you don’t have to worry about fulfilling scheduled orders or laying off employees when the busy season ends.
A 3PL’s value for a growing organization is the ability to quickly scale and send out more parcels than can be done in-house. Not only does the space of the facilities where you store goods and transport orders matter greatly, but also their location and proximity to your shipping destinations.
Countrywide coverage allows delivery of items to customers with one- or two-day shipping. Quicker delivery becomes even more important for products with short shelf lives, like fresh food or cold chain products.
3PLs are usually better equipped with technology meant for warehousing and logistics. They also tend to upgrade faster with changing needs to stay relevant for their customers.
If your company does not regularly invest in upgrading the IT infrastructure in an internal warehouse, it can result in lagging behind in customer service. Outdated IT can lead to legacy issues and frustrated customers and employees. In such a case, a technologically strong 3PL partner can be a better choice.
Consumers appreciate how swiftly Amazon delivers things, but it can be challenging to meet such high standards as a business. If you cannot fulfill orders at that rate and ship items with such diligence, your customer experience will suffer.
Many brands discover that outsourcing their fulfillment enables them to refocus their in-house efforts and allows their staff to devote more time to other fast-expanding areas of their business.
An internal warehouse requires a significant upfront investment, which affects the company’s cash flow. Apart from money, the company also has to invest time in managing warehouse operations. As the company grows, it will need to hire more staff or dedicate existing staff to the process. These actions violate lean business principles.
3PLs can be less flexible than internal warehouses, and depending on volumes, they can be more expensive than an internal warehouse. In contrast, internal warehouse savings increase with higher volumes.
Customization is easy with in-house fulfillment. The internal warehouse gives the company complete operational control. Since the company owns the warehouse, it can customize the size, location, order and inventory management. Also, packaging can be fully customizable. Employees will have more control over product storage, preventing damage or loss.
3PLs, on the other hand, handle picking, storing, packing, labeling, shipping and returns. 3PLs bill based on usage, so no upfront commitment is needed. 3PLs can scale up quickly, so growing quantities won’t hinder order fulfillment.
Businesses can arrange inventories near the customers, which decreases transportation costs and enables two-day and same-day shipping. These services promote ecommerce businesses and brands. 3PL warehouses are typically high-tech. They provide online tools that save time and manage complex shipments such as international exports.
Now that we have outlined all pros and cons of both order fulfillment options, you should be able to make an informed decision. And keep in mind that there is a third option! Yes, you can use a hybrid approach, using 3PL services as well as your own logistics to see what works best for you. There is no “one size fits all” solution here so it’s all up to you and your specific needs.
Will Schneider is the founder of InsightQuote, a match-making service for B2B services, and writes informative posts about fulfillment services at Warehousing And Fulfillment. He is passionate about helping businesses find the right solutions to improve their operations. When not working, he enjoys coaching youth basketball.