Considerations for Outsourcing with a 3PL
When to Keep In House and When to Outsource
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.