When to Keep Warehousing In House and When to Outsource Warehousing
Many retailers and merchants are ultimately faced with the challenge of whether or not to keep the storage and distribution of their product in house or use the services of a 3PL (third party logistics) warehouse. Especially as companies struggle with the inherent difficulties of a sluggish economy, the appeal of gaining cost savings through the use of a 3PL can be very attractive. Furthermore, companies that sell product have to remain particularly competitive with regard to selling and marketing their products, as more and more retailers enter the market and cost of advertising increase due to increased demand. Being able to focus on the most critical function of the business, namely securing an ongoing pipeline of business, ultimately positions the company for the greatest amount of success.
3PL Warehouses Help Merchants Hedge Risk
One of the greatest benefits of using a third party warehousing company is that the 3PL ends up taking on much of the risk of the distribution channel. This can be seen in many facets of the relationship. First and foremost, the 3PL is responsible, in most cases, for the ongoing lease of the building, the procurement of any fixed capital required to run the warehouse, the labor to run the facility, and any technology needed to manage the process. There’s no need for the retailer to take on the risk of ongoing leases and to accommodate for lulls and surges in cyclical demand of their product. Rather, the 3PL takes on this risk. Second, the retailer has the opportunity to pass on the risk of any activity related to storage and shipping of their product. By writing into the agreement all of the performance metrics associated with the project, the merchant gains great control of the quality of the relationships and holds the 3PL accountant to this performance. This can take the form of shipping errors, charge backs, on time delivery of product, and many other specific items.
Outsourcing Can Decrease Costs
Perhaps the most attractive benefit of using an outsourced 3PL company for storage and distribution is the opportunity to decrease overall costs. After all, what good would it be to outsource and end up ultimately paying more than if managed in house. And 3PL firms can do just that – decrease your costs through specialization, more sophisticated systems, and leveraged contracts with their suppliers due to the aggregation of the collective volume of their client base. But sometimes this cost decrease isn’t easy to articulate and understand, because retailers don’t attribute all of the costs of performing in house operations into the analysis. So be careful to incorporate all costs of in house operations, including management time, supplies expenses, and software costs.
Not Always the Best Option
Even still, there are instances when using a 3PL company isn’t the best option. First, if the business isn’t large enough and literally requires ownership to perform some of the shipping tasks because sufficient cash flow isn’t present, then outsourced services obviously won’t be an option. Second, if the distribution process is a “core competency”, then keeping the process in house may serve the needs better for the company. Most importantly, retailers and manufacturers should look at their unique situation and weigh the pros and cons of in house versus outsourcing. This is a very important function of the business, so much care must be taken with the considering all factors within the equation.
Many growing businesses come to the point where they have to decide whether to lease out a warehouse and hire talent to manage order fulfillment or to use an outsourced warehousing company. Let's go over what goes into setting up a lease space and alternatively using a warehousing company.
When is it best to Use Outsourced Warehousing and Fulfillment?
Many third party fulfillment companies are constantly approached by retailers whose operations are bursting at the seams and who aren’t able to keep their fulfillment performance consistent in the face of their brand’s growth. By that time, it’s likely that customer service, order accuracy, and possibly your bottom line have already suffered in some way due to inefficient fulfillment practices. So stay ahead of the curve! If you’re experiencing any of these 9 signs, it may be time to consider outsourcing your order fulfillment operations.
#1: Other parts of your business are taking a backseat.
Operations are the backbone of a direct-to-consumer business, but good marketing and merchandising efforts are the keys to making it grow. Spending all of your time managing inventory, scheduling a labor force, and maintaining a warehouse makes it very difficult to implement new campaigns and pursue additional avenues for growth. If you find that other aspects of your business are getting pushed back in favor of current operational needs, outsourcing can help you get back on track.
#2: You’re growing faster than you can manage.
What a great problem to have! But rapid growth does have its drawbacks, too – and it’s pretty easy to tell if your operations are no match for your expansion. If you’re struggling to get orders out the door within 24 hours of receiving them, or are finding that your delays in the warehouse are causing packages to miss their delivery deadlines, you might need to turn to an expert.
#3: You’re terrible at returns management.
No retailer likes processing returns – but if you’re doing it inefficiently, you’ll be losing a lot more than just a sale. Proper returns management involves staff and warehouse space dedicated to opening returned orders, re-entering them into your inventory, then either refurbishing the product (if needed) and restocking it or preparing it to be returned to your vendor. If your returns process is costing you excessive time, money, or inventory that you can’t recover, talking to an outsourced provider can help.
#4: Poor operations performance is causing customer service issues.
Are your customers complaining about incorrect orders or damaged products? When warehouse staff are stretched too thin or operations are overloaded, things get chaotic. This leads to slipping order accuracy and a lack of quality control at the pack station. Never, ever let your operations affect your brand – because fulfillment can break promises as quickly as it can build loyalty.
#5: Your infrastructure isn’t prepared for your growth.
Another great problem to have – until you have to make a decision to sign a lease for more warehouse space, hire additional workers, and even update your ecommerce technology to support a rapidly-expanding business. Increasing these things all take time, expertise, and mostly important – capital. If you’re not prepared (or unwilling) to outlay those things to grow the back-end part of your business along with the rest of it, outsourcing may be a good alternative.
#6: Your shipping rates are killing your bottom line.
Unless you’re an expert negotiator, love working with freight carriers, and ship millions of packages per year, you probably aren’t a fan of your current freight rates. Third-party fulfillment providers ship far more packages per year than the average retailer can achieve alone, so outsourcing allows you to take advantage of the economies of scale and experience lower shipping rates for both inbound and outbound freight. In fact, outsourcing to a fulfillment provider can often improve your shipping times-in-transit, too!
#7: You struggle with inventory management.
Receiving product, reconciling inventory, rotating stock on the warehouse shelves… all of those need to be done frequently (even daily) and with a strict attention to detail. An incorrect inventory count can throw everything else out of sync – including making your customers very unhappy. If you don’t have the technology and expertise in place to manage it effectively, find somebody who is to manage it for you.
#8: Dealing with vendors isn’t your strong suit.
Managing multiple product vendors can be a tricky task for any retailer to executive effectively. If you don’t have staff with the skill set or bandwidth to maintain these relationships, it’s wise to allow an expert to step in. A good outsourced fulfillment partner will often take over the vendor management process for its clients, overseeing everything from stock reorders, to inbound freight, to accounting and returns processing.
#9: You want (and need!) to expand your capabilities.
Maybe your customers are clamouring for overnight or next-day shipping, but that’s not economically or operationally feasible in your current situation. Perhaps you want to offer more personalization options to your customers, such as embroidery or engraving but don’t have the ability to do it in-house. Through outsourcing, you can select the perfect partner who already offers all of the services you need to continue growing your business – and at a much lower cost than implementing them yourself.
Managing Your Own Leased Space and Hiring Warehouse Staff
You may be thinking about leasing a space to handle more order fulfillment needs as your company grows. Here are some questions to include in your research:
- What size of warehouse will I need to handle busy seasons and future growth?
- How many people do I need to hire including supervisors and operational staff?
- Will I need seasonal staff?
- What location has the best tax benefits while being centralized for my customer base?
- What inventory software, computers, and IT experts will I need to invest in?
- What kind of insurances are needed to ensure my business is covered?
- Will I need to add extra staff for clerical duties and inventory management?
There are many topics that must be addressed prior to committing to leasing a space to ensure your businesses success. The other option is outsourced warehousing which takes the burden off your shoulders and takes less of your time and resources to get started.
If you want to keep more of your money in inventory and marketing, consider outsourcing warehousing operations. You pay for the space you use throughout the season. This gives you opportunity to expand during busy times with worrying about hiring temporary workers. The warehousing company will allow you to focus on the other aspects of your business that will help you to succeed.
If you're thinking about outsourcing your warehousing needs, there are a number of things to consider. The decision shouldn't be taken lightly as there are several pros and cons for outsourcing.
Pro: Storage that Grows and Shrinks as You Need It
If you have used your own warehouse for more than a year, you'll understand how the flux of orders can require a bigger warehouse at times and a smaller one during slower seasons. Paying for a warehouse that doesn't fit your needs doesn't make sense, so outsourcing to a warehousing facility that will grow and shrink to fit your needs is a good idea.
Con: Inventory Won't Be Onsite
One of the biggest problems with outsourcing your warehousing needs is that your inventory won't be onsite with the rest of your business. Unless you choose a warehouse facility in your own town or city, you won't be able to see or access your inventory very often.
Pro: Detailed Reports
Though you may not be able to see your inventory in person, warehouse facilities offer their clients up-to-date software that allows them to track inventory and more from their office. Also, the fact that a warehousing company is storing and reporting on your inventory means that you won't need to hire someone for the job, saving on staff costs.
Con: Immediate Response
Since your warehouse may not be physically accessible, it may be hard to fix a problem as quickly as if the warehouse was onsite. Making back and forth phone calls can lead to frustration and delays on fixing problems. If you make sure to choose a reliable warehouse company with multiple customer service contacts, though, this con can be minimized.
Pro: Shipping Time and Cost Savings
When choosing a warehouse company, you can pick one that will also ship your inventory directly to customers. They will take care of updating inventory spreadsheets, ordering shipping labels and boxes, handling returns and every other aspect of shipping. Allowing a warehouse company to take over these aspects allows you and your staff to focus on growing the company. And a lot of times, warehousing companies will be able to get you better rates than you could get yourself.
Con: Travel and Proximity
If your warehouse isn't nearby, you will need to travel there for the initial inspection and periodically to check on how well your inventory is being taken care of. This added expense may not factor into your budget.
Overall, outsourcing your warehouse can be a good fit for most businesses. It can save you time and can save your money as opposed to running your own. A warehousing facility allows you to hire fewer staff. Plus, you will always have a warehouse that is always the right size, with no wasted space. You will never be paying for more space than you need, nor will you need to move to a bigger facility and waste money on moving costs. If the pros outweigh the cons for you, make sure to choose a qualified warehousing company that will work with your company's needs.
Are you considering the costs and benefits of outsourcing fulfillment services versus keeping your fulfillment operations in house? We've compiled a simple graphic to help you navigate some of the most important decisions to make during this analysis. From the considerations a small start up should keep in mind to the most commonly overlooked components of a detailed analysis, we hope this tool will provide you with the top things to keep in mind in order to make the best decision for your company.
Since 2005 We've Been Helping Companies Just Like Yours
Your contact information is held in the strictest of confidence. We will contact you before we connect you with vendors so that we can learn about your situation, obtain any of your contact preferences, and answer any of your questions.
YOU have control over your contact details:
- No unwanted contacts - you control how vendors respond to you
- Remain confidential if you wish
- No commitment to choose any of our vendors
- Ask our Fulfillment experts any questions you have!