All of us make decisions about what tasks we are willing to do ourselves and what tasks we would rather hire someone else to do for us. Should we mow our own lawns, clean our own houses, change the oil in our own cars, and do our own taxes? Or should we hire a pro to handle these kinds of chores for us? In other words, do we outsource these activities? The answer, of course, depends on our unique needs and situations. Businesses commonly make insource-versus-outsource decisions too, and one of the key decisions for an e-commerce business is whether to outsource logistics operations to a third-party logistics (3PL) company.
Since the rise of 3PLs in the 1970s, the term “3PL” has evolved to mean different things to different people, even to the point of becoming ambiguous. Just as there are many types of warehousing and distribution operations, today there are a variety of generalized and specialized 3PLs in the marketplace. Because 3PL services vary, businesses can outsource their supply chain functions and pay only for what they need. This trend, along with the rise of e-commerce over the past two decades, has resulted in hundreds of 3PLs that specialize in providing e-commerce fulfillment services. Deciding whether a 3PL makes sense for your e-commerce business can be a challenging exercise, let alone deciding which 3PL is the best fit.
E-commerce businesses can select from an extensive menu of 3PL fulfillment services, in nearly any combination. For example, on the warehousing and distribution side, these services include: receiving, storage and physical inventory management (tracking, cycle counting, etc.); order picking; sorting; value-added services (VAS, such as kitting, light assembly, personalization, gift wrapping, packaging, and labeling); packing; shipping; and reverse logistics and returns.
When it comes to inbound and outbound transportation, 3PLs commonly offer additional services, including: carrier and freight procurement and management; fleet management and routing optimization; freight forwarding, consolidation, audit, and payment; carrier rate shopping; customs brokerage; shipment tracking; and last-mile delivery.
It’s also common for 3PLs to complement warehousing, distribution, and transportation services by offering additional support services, including:
• Management and optimization of inventory (forecasting, procurement, replenishment, etc.)
• Vendor compliance
• Inbound and outbound carrier compliance
• Accounting functions
• Customer service (such as a call center, order entry, and return authorizations)
To provide these services effectively, a 3PL’s contract with an e-commerce company is likely to include a blend of the following components:
• Facilities for warehousing and distribution
• Staffing (labor)
• Material handling, storage, and packaging equipment and related tools
• Physical automation (such as conveying and sortation systems, shuttle systems, and robots)
• Information systems (such as a warehouse management system [WMS], a transportation management system [TMS], and a labor management system [LMS])
• Facility and equipment maintenance
• Utilities, communications, and waste removal
So, if you’re in the e-commerce business, the big question is, why would you hire a 3PL to manage your fulfillment operations? On the other hand, you might be asking, why wouldn’t you?
There’s no one-size-fits-all answer to this question. The right answer for your business depends on the unique goals and challenges of your business. Let’s look at some of the pros and cons of hiring a 3PL for e-commerce fulfillment.
On the positive side, hiring a 3PL can add value to your e-commerce business in several practical ways:
- Flexibility – A 3PL can accommodate fluctuations in your business cycle due to seasonality and economic volatility. You will only pay for their services when you use them.
- Expertise and experience – Logistics is 3PL’s last name, right? Its only business is to manage its customers’ supply chain operations. So, your 3PL will give you access to professional logistics experts who specialize in managing e-commerce fulfillment operations.
- Convenience – Setting up your own warehouse or distribution center (DC) takes time and effort. If you hire a 3PL, they will run your e-commerce fulfillment operations for you and take the monkey off your back.
- Scalability and rapid expansion – If you are expecting significant growth but are unsure when (or if) it will come, you can conserve your capital. You won’t pay for your 3PL’s services until you need them, when you experience that growth spurt.
- Lower startup cost and time – Similarly, if your business is in startup mode, the services your 3PL provides can grow with you, without the need for capital investment upfront. You can crawl, walk, and then run. Plus, your 3PL’s existing organization, experienced staff, stable infrastructure, and logistics network can save you time and help you hit the ground running.
- Industry relationships – It pays to know the right people. Your 3PL is likely to be knowledgeable about and have existing working relationships with other constituents in the supply chain ecosystem, including carriers, trading partners, ports, regulatory agencies, and suppliers of equipment and software.
- Information technology – These days, logistics is as much about exchanging information as it is about moving products. Leading 3PLs are wired to provide electronic data exchange (EDI) with your trading partners, connection with online logistics marketplaces, and real-time visibility, analytics, and reporting.
- Reduced freight costs – Your 3PL will likely be serving many customers, and their economies of scale result in consolidated shipping volumes with carriers and other trading partners. This means they can pass along lower inbound and outbound freight costs to you.
- Turnkey logistics solution – As your single point of logistics contact, your 3PL will serve as your traffic cop for all activities related to e-commerce fulfillment. They will be your knight in shining armor when your fulfillment operations run smoothly and efficiently, and your “single throat to choke” when they don’t.
- Freedom to pursue your passion – Let’s face it: Your top executives are passionate about your customers, your products, your marketing, and your sales, but not about logistics. Hiring a 3PL will allow your staff to focus on your core competencies and let your 3PL handle the hassles of fulfillment.
- Win-win scenario – Because your perceived value of a 3PL is tied directly to their performance, your relationship with your 3PL will be collaborative and strategic, by definition. When they succeed, you succeed, and vice versa.
Despite all these upsides, hiring a 3PL can have its downsides too:
- Loss of control – Control freaks and micromanagers beware! When you delegate, accountability and authority should go hand-in-hand. It’s unfair to hold your 3PL accountable for your fulfillment operations if you’re still in control, and if you relinquish control, you risk poor logistics performance.
- Higher ongoing costs – While hiring a 3PL might help you avoid many startup costs, you are also likely to pay a premium to outsource your fulfillment operations over the long term. With a 3PL, the reality is that you will be increasing your ongoing operating expenses in exchange for avoiding capital expenses and the hassles of managing your own fulfillment.
- Limited access – Your physical inventory and your fulfillment team will be remotely located at your 3PL’s facility, rather than just outside your own offices. This presents obvious challenges when you need to see your inventory in person, such as to inspect it for quality issues.
- Customer service risks – No doubt, your relationship with your customers is vital to the success of your business. Since your fulfillment operations directly touch your customers and inspire their satisfaction, hiring a 3PL to ship your orders accurately and on time will require a great deal of trust. And if they don’t, your customers will blame you, not your 3PL.
- Lack of attention – A 3PL wants your business, but they might also have contracts with thousands of other e-commerce companies who are competing for their attention. Unless your company is a big fish in their relatively small pond, it might be challenging to get responsiveness and action from your 3PL when you need it.
- Integration risks – You and your 3PL will be exchanging lots of important and often confidential data about your inventory, orders, and shipments. You can’t afford to have it fall in the cracks, so your information systems must be effectively integrated with your 3PL’s to ensure these exchanges are timely, secure, complete, and error-free.
- Loss of resources – If you close your warehouse or DC and outsource your fulfillment operations to a 3PL, you will be giving up existing internal logistics expertise and infrastructure. Consequently, if you later decide to bring fulfillment in-house again, you will have to start over and rebuild.
- Inefficiencies – It might seem contradictory, but when it comes to adopting the best practices of the warehousing and distribution industry, many 3PLs are lagging. Their desire to serve too many different types of customers and to avoid spending capital to gain efficiencies can result in antiquated processes and infrastructure. And they will pass these inefficiencies on to you in the form of higher costs.
So, What’s Your Decision?
As with most strategic business decisions, there’s no quick-and-dirty answer to this tough question. The devil is in the details. Here’s the smart way to find the best answer for your business:
1. Define your e-commerce fulfillment requirements discretely.
2. Document the tangible costs and intangible value of each fulfillment alternative (insourcing and outsourcing).
3. Compare the alternatives rationally and objectively.
4. Develop a comprehensive business case that determines the best direction.
When you take this structured approach, you might find that outsourcing your fulfillment operations to a 3PL wouldn’t be sensible. But if a compelling business case justifies it, you might find that hiring a good 3PL as your strategic logistics partner would be right for your business. Either way, you’ll avoid a costly mistake.
Steve Hopper is Founder & Principal of Inviscid Consulting, whose mission is to help business plan and streamline their warehousing, logistics, manufacturing, and distribution operations to drive down operating costs, boost capacity, improve service levels, and mitigate risk. He can be reached at firstname.lastname@example.org or 404.832.5326.
This article originally appeared in the January/February, 2020 issue of PARCEL.