Internal Warehouse vs 3PL Fulfillment Services: Choosing the Right Solution for Your Business

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Figuring out whether to keep your warehousing operations in-house or outsource them to a third-party isn’t always easy – especially if you’ve never worked with an order fulfillment service provider before.

However, identifying what you want out of a warehousing service and whether or not it suits your goals can make things much easier.

In this post, we’ll compare internal warehousing to 3PL fulfillment services to help you decide which option is right for you.

Managing an Internal Warehouse vs. Outsourcing Fulfillment Services to a 3PL Service Provider

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Companies have the option to handle their warehousing internally or outsource it to an order fulfillment service provider depending on what they’re looking to achieve.

Why Businesses Manage Fulfillment Warehouses In-House

Sometimes, handling order fulfillment in-house makes the most sense. Here’s why some businesses choose to handle fulfillment on their own:

Reason #1: To retain control over inventory and warehouse operations

One of the reasons why companies manage their order fulfillment by themselves is because they get to decide how their products are warehoused and delivered to their customers. Businesses spend a lot of resources building their distribution network and developing their supply chains which give them confidence in their internal warehousing operations.

By handling order fulfillment at your company, you don’t have to use the one-size-fits-all solution offered by third-party warehousing service providers. You can decide how much space to allocate to your goods and what picking and packaging equipment to use at your warehouse.

Reason #2: To be able to offer a customizable experience to customers

Another benefit of warehousing your inventory in-house is that you can provide customers with made-to-order services and charge extra fees for it. For instance, you can offer to gift wrap their ordered items or provide special packaging for fragile products.

Most third-party logistics services don’t give you the level of freedom you get by handling your warehousing and shipping yourself.

Why Businesses Outsource Fulfillment Services to a 3PL Company

For most growing businesses, outsourcing order fulfillment to a 3PL service provider is the best (and most cost-effective) course of action. Here are some of the main reasons why companies decide to outsource order fulfillment:

Reason #1: You don’t have to worry about setting up the infrastructure, managing workload, and maintenance

A third-party fulfillment service takes the heavy lifting out of establishing your own warehouse which typically involves setting up your infrastructure, hiring and training staff, and working out overhead and maintenance costs

More specifically, this involves:

  1. Procuring land for building a warehouse or renting one.

  2. Purchase shelves and pallet racks to store your inventory.

  3. Purchase warehousing equipment including conveyors, forklifts, and pallet trucks.

  4. Pay overhead costs like property taxes, rent, utilities, and administrative expenses.

  5. Restock packaging and shipping supplies for example cartons, wrappings, tape, printers, and labels.

  6. Purchase or build a warehousing management system (WMS) to manage your operations.

  7. Hire employees.

  8. Ensure compliance with safety regulations for handling warehousing machinery.

Several hidden costs can also arise as a result of handling your warehousing in-house. These include processing job orders and purchase orders. Products with seasonal demands can lead to a shortage of storage space in peak months and excess space in months with low demands.

Third-party order fulfillment services are well equipped to meet the varying demands of businesses. They have the resources and expertise to anticipate the variability in market demand. For this reason, many small and medium businesses find that they would be better off outsourcing their warehousing services to a third-party fulfillment service.

Reason #2: You’re able to tap into the 3PL company’s expertise

A third-party fulfillment provider specializes in warehouse management and shipping operations including collecting, picking, packing, labeling and handling returns and replacements.

By outsourcing your order fulfillment, you’re able to stay flexible with increasing order sizes as your business grows. In addition, you’ll be charged lower rates if you consistently ship larger volumes allowing you to shift your focus to product manufacturing.

Reason #3: Makes it easy to integrate multiple sales channels (e.g., e-commerce order fulfillment)

3PL service providers use cutting edge picking, packing, and shipping techniques and industry best practices to fulfill your orders. Their WMS automatically takes data from all of your online shops and sends it to the warehouse.

It lets you track your orders in real-time and gives you access to inventory reports. This way, you’re able to monitor your inventory levels and replenish them before the stock runs out.

Reason #4: Makes free, two-day shipping affordable

By outsourcing your warehousing operations, you can store portions of your inventory in warehouses closer to your customers’ geographical location. Doing so allows you to offer two-day delivery to your customers and, in some cases, same day delivery. In addition, you’re able to save on delivery costs as well as stay close to your target market.

Now that we have a basic understanding of why companies choose to outsource their warehousing or handle it internally let’s dig deeper to see which option you should go with for your own business.

Reason #5: Allows you to scale your business

Third-party fulfillment providers work with several companies at a time which means they’re in a better position to increase your supply chain capacity quickly and at a variable cost. It’s much easier (and more cost effective) for companies to scale their logistics operations (for example transportation infrastructure) by outsourcing to a 3PL as opposed to managing operations in-house.

In addition to this, by enlisting a 3PL service provider, you’ll be able to manage high and low seasons more easily and respond to fluctuations in product demand in a timely manner.

Reason #6: Use innovation to grow

Since 3PLs usually work with a wide range of clients in a number of different markets, they’re often able to develop innovative solutions based on their experience with their other clients.

For example, they might be able to guide you towards the most reliable or most cost-effective shipping and handling methods. Or they could potentially identify glaring inefficiencies and help implement and improve processes (such as supply chain automation through EDI).

Reason #7: You’re able to reduce SG&A costs

Cost comparisons often leave out the selling, general, and administrative (SG&A) cost benefit. By working with a 3PL, you might be able to simplify day-to-day operations and effectively reduce SG&A costs – even if you decide to grow your business or expand to a new market.

For example, if you have a 0.5 FTE for HR in supply chain that you’ve decided not to shed, freeing up the resources will have value in improved outcomes or in delaying increased costs as you grow your business. By enlisting a 3PL service provider, you’ll be able to improve internal processes and reduce SG&A costs to increase cash flow and bottom line profits.

Reason #8: Because 3PLs are management-focused

It’s no secret that most companies focus on their key business objectives and core competencies in order to remain profitable and ultimately grow. However, for non-logistics companies that rarely involves managing a supply chain.

By working with a 3PL, you no longer have to focus on overseeing logistics operations since you’ll be utilizing a network that’s built purposefully for maximum efficiency. A 3PL partner can take many management-related tasks off your plate including scheduling pick up and delivery, order tracking, billing, and performance reporting.

Internal Warehouse vs. 3PL Fulfillment: Which One Is Right for You?

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Regardless of the benefits of each mode of fulfillment, you need to decide which option meets your particular needs and requirements best. Here are some factors that’ll affect your decision to warehouse internally or outsource order fulfillment:

#1: Fulfillment Costs

Estimating shipping costs can be tricky, and it usually depends on several factors decided by the 3PL service you use.

For instance, items that are lightweight but large may cost you more to ship than smaller, heavier items. Similarly, they may charge higher fees for offering value-added services like assembling or customizing ready-to-order equipment or special packing for fragile items. In addition, you also have to take into account the internal costs linked to fulfilling each order.

To calculate internal fulfillment costs, you’ll need to take the total of all your operational expenses and divide them by the average number of monthly orders you receive.

For instance, if your ...

Operational expenses (e.g., payroll, utility bills, marketing and rent) = $15,000

Average number of monthly orders = 5,000

Handling cost per-order = 15,000 / 5,000 = $3

So, if you receive an …

Average customer order = $50

Your delivery cost = $5

Total internal fulfilment cost for an order = $8

Your total in-house internal fulfillment cost is $8 (or 16 percent of the average customer order of $50). Compare this with the total fulfillment cost incurred by hiring a 3PL to determine which option is more cost-effective for you.

#2: Number of SKUs

Another factor which decides whether you should outsource your warehousing operations or handle them internally is the number of SKUs you sell.

In-house warehousing allows you to sell as many SKUs as you want since you can modify your storage space to match your needs. On the other hand, a third-party order fulfillment company will charge an inventory fee for every additional SKU you sell.

For instance, if you have around 2,000 SKUs, you’ll be charged higher monthly warehousing fees – particularly if they have a low turnover rate. And if you have less SKUs, you’ll likely be charged less since they’re easier to manage.

#3: Shipping Orders to Customers

You can also benefit by locating your warehouses near your target market. A third-party fulfillment service allows you to do this which helps you complete your orders more efficiently.

Being closer to your target market gives you more flexibility in terms of how fast you get your items delivered and allows you to target a lower shipping zone – which means lower shipping costs. The same services will cost you large sums in the long-term if you decide to handle order fulfillment in-house.

#4: Business Growth

Most businesses experience fluctuations in demands throughout the year which determines their order sizes. If your company faces this variability in orders, you’ll have to make sure that your storage space follows the Goldilocks principle (i.e., it’s the right size).

In other words, it shouldn’t be so small that it can’t meet orders when the demand is high nor should it be too large that it’s mostly empty during the off-season and you end up overpaying for the warehousing facility.

By outsourcing your warehousing to a third-party fulfillment service, you’ll be able to pay regular storage charges when demand is low as well as when it peaks. In addition, you can forget about additional inventory management decisions like hiring new staff or buying extra pallet racks.

#5: Returns Processing

Most third-party order fulfillment services offer to replace or return items by themselves while others send them back to the seller. If your return policy requires you to take special steps, for instance, repairing a faulty device, you can opt to do it internally or look for a fulfillment service that has expertise in that particular area.

Conclusion

Of course, deciding to go with internal warehousing versus outsourcing to a 3PL fulfillment service has pros and cons. Once you’re able to consider the main factors involved objectively, it’ll be that much easier to make an informed decision.

Let’s recap the main points we discussed in this article:

  • Compare per-order fulfillment cost of handling order fulfillment internally vs. with a 3PL service to determine the most cost-effective option.

  • More SKUs means the 3PL will likely charge higher shipping costs.

  • Choosing a warehouse in close proximity to your target market allows you to offer customers fast delivery and save on shipping costs.

  • Opt for a 3PL service that offers you scalability in storage space throughout the year.

  • Your order fulfillment service provider’s returns process should match your company’s review process.

Between handing warehousing operations internally and outsourcing to a 3PL fulfillment service provider, which option are you leaning toward and why? Let us know by commenting below.