Is Third Party Warehousing More Cost Effective Than In House Warehousing?
by Will Schneider
A great number of product based businesses consider outsourcing with a third party warehousing company as a viable option for handling the warehousing and distribution of their product. But once they begin researching these third party providers, they oftentimes get hit with “sticker shock” in terms of storage and fulfillment fees. They often think to themselves, “Is it cost effective to outsource?” Or better yet, “Will cost savings be realized by outsourcing warehousing and fulfillment?” These are extremely important questions that need to be analyzed from a detailed financial perspective in order to gain appropriate insights to make the best decision.
Do You Know All of Your Warehousing Costs?
One of the most difficult aspects of any in house versus outsourcing financial analysis calculations is the gathering of ALL “in house” costs. If any of these costs are left out of the equation, you’ll surely not be able to gain the proper perspective in your decision. What kinds of costs need to be included?
- All salaries, benefits, insurance, and employee related expenses
- All management expenses related to storage and distribution
- All warehouse lease fees, including insurance
- All materials costs, including packaging materials, etc.
- All equipment costs, including ongoing maintenance costs and support equipment such as pallets, racking, computers, scanners, scales, etc.
- All customer service expenses for support with your customers and any related benefits, insurance, and employee related expenses
- Any software expenses related to inventory management and order management
Some of the most commonly overlooked areas are equipment purchases and adequate measures of management support related to the fulfillment process. Without a thorough analysis, you’ll potentially be left thinking that outsourcing isn’t the best option when in fact using a third party warehousing solution would be the best way to go.
The Added Benefits That Get Overlooked
In addition to forgetting to include certain in house costs, another common mistake is not accounting for other added benefits of outsourcing your third party warehousing. Some of these “intangibles” can really provide significant savings. They include:
- Ability to use as much or as little space as needed for warehousing, thereby eliminating the risk of warehouse leasing and time spent negotiating
- Synergy from opportunity cost of not having to spend valuable internal resources on distribution, thereby increasing time spent on other more important functions such as sales and marketing
Properly accounting for all costs and benefits will help you make the best decision regarding the use of third party warehousing. Don’t be short sighted when looking at the pricing proposals from fulfillment companies. Take into account all costs and you’ll set your business up for the greatest success possible.