As retailers scale their business efforts, they inevitably reach a point at which an enormous amount of time and money is being allocated to operations that could be automated or outsourced. One major example is order fulfillment and warehouse operations. While your decision will likely be dependent on factors such as your order volume and growth trajectory, there are some very compelling reasons to outsource this function to an established third party logistic (3PL) provider.
Focus on your core competency
Is running a warehouse and processing orders the best use of your team’s time? Or, would you rather them focus on developing and growing your business? Fulfillment is a 3PL’s core business. They have accumulated years of operational experience dealing with handling peak volume, scaling labor, managing inventory, EDI, returns, etc. Your company’s expertise is in developing and marketing your product line and retaining and growing your customer base. By partnering with a seasoned 3PL, you’ll have more time and resources to devote to these core competencies.
Will your in-house operation be prepared to scale as you grow? As your business grows, you will need more space, materials, and staff. This means more of your management team’s time will be spent on fulfillment operations, as opposed to the jobs they were hired to do and in which their expertise lies. A seasoned 3PL is prepared to grow with you seamlessly while allowing your team to focus on what they do best.
Variable vs Fixed Costs
When you partner with a 3PL, you are replacing a fixed cost with a variable one. You benefit from having predictable costs independent of volume since you pay by the unit shipped. An in-house operation requires you to pay for labor, space, and expenses, whether you are shipping one or 1000 orders per day.
Multiple Warehouse Locations
Because a 3PL can host inventory in multiple locations (for example, they might have warehouses in California, Texas, and New York), they can route orders in the most efficient way possible, expediting the delivery process for customers and lowering your shipping costs.
There is a significant additional cost benefit in using a 3PL:lower freight costs. A 3PL ships hundreds of thousands of packages each year and has therefore negotiated substantially discounted freight rates. Since freight rates are a function of volume, you’ll enjoy significantly better rates than you would ever be able to secure for yourself.
Let’s look at a sample customer shipping profile and compare an outside 3PL’s cost against an in-house cost.
Using very conservative cost estimates, let’s assume the 3PL charges the following:
Order Processing: $3.00/order
Warehouse: $15.00/pallet storage/month
Receiving: $15.00 pallet
Account Management: $2,500/month
Also assume you are:
Shipping 100 orders/day or 2,500 orders/month (2,500 x $3.00): $7,500/month
Warehousing 35 pallets/month (35x $15.00): $525/month
Receiving 15 pallets/month (15 x $15.00): $225/month
Total Monthly Outsourcing Cost:
($7,500 + $525 + $225 + $2,500): $10,750/month
Since you do 2500 orders/month, on a per order basis this is:
Now let’s estimate what your in-house per order cost might be:
Direct Labor: 2 full-time clerks ($4,500/month w/benefits: 2 x $4,500): $9,000
Indirect Labor: 50% of manager ($7,000/month w/benefits: 50% x $7,000): $3,500
Warehouse Space: 100 pallets (5,00SqFt @ $1.00/SqFt/month: 5,000 x $1.00): $5,000
Cost of Capital: equipment, racks, etc (3/4%/month x $50,000 investment): $375
Misc Costs (IT, Expendable supplies, etc): $300
Total monthly in-house cost:
($9,000 + $3,500 + $5,000 + $375 + $300): $18,175/month
Or on a per order basis
At $7.27 per order, the in-house cost is close to twice that of the $4.30 you pay when outsourcing to a 3PL. While this is just one example, it is an indicator that one should evaluate outsourcing your fulfillment on the financial benefits alone. Aside from just the numbers, you should assess all the considerations to determine if you wat warehouse management to be one of your core competencies.
If you’re concerned about how partnering with a 3PL might fit into your current workflow, they can often integrate directly with your other order management and inventory systems, providing you with even more visibility and data into how your business is running.
Comfortable Club, a customer that uses DCL Logistics and Stitch Labs, said of our integration, “it couldn’t be more perfect; all my eCommerce platforms land into one platform and then Stitch pushes it out to the 3PL for fulfillment. How much better could it get?”
Photo Credit: DCL Logistics