October 23rd, 2023
In-house or outsource?
What factors to consider?
Pros and cons to both
There are various methods a company could use for its fulfillment purposes including integrated fulfillment, dedicated fulfillment, store fulfillment, flow-through fulfillment, drop-shipping, and lastly, the one I will be focusing on during this blog post, outsourced fulfillment.
Order fulfillment is the entire process of receiving goods, processing these goods, and getting these goods to the customer. The fulfillment process begins once the order is placed and finishes once the customer receives it. Fulfillment and distribution centers are the physical location where this process occurs. The order is picked, processed, packaged, and shipped all from this hub. However, to specify a little farther, a fulfillment center is more focused on e-commerce only.
As previously mentioned, there are various methods and strategies to fulfillment and different advantages and disadvantages to each. However, one of the larger decisions that need to be made is whether a company wants to outsource its fulfillment and use a 3PL or operate an in-house system. In the remainder of this article, I will be dissecting why or why not a company would choose to outsource, and what are the benefits or negatives of doing so.
According to an article from wearedrew, before the 2000s, logistics and transportation were primarily handled by the same company that provided the product or service. However, over time, supply chains have gotten more complex, there have been various disruptions along the way that have increased prices and customer expectations, so outsourcing logistics has become a much more popular practice and has continued to come up in discussion regarding business strategy.
Outsourcing fulfillment means using a third-party logistics provider (3PL) for the fulfillment process. A 3PL is an external company that would be contracted to handle every component within the logistics process ranging from transportation, warehousing, inventory management, distribution, payment, etc. There are many reasons why a company may choose to hire a 3PL to manage their logistics. A company might do this if they have limited space or insufficient labor or other resources to meet demands, if the costs of handling it themselves are too expensive (i.e., rent, insurance, labor costs, utilities, supplies, etc.), if the company is expanding quickly and it is getting too difficult to maintain, or if perhaps handling logistics would be too time consuming and the time spent here could be better spent trying to maximize a company’s capabilities somewhere else and innovating.
There are many advantages to deciding to use a 3PL fulfillment partner. 3PLs are often experts in the practice and have a wide range of experience and expertise to make sure the fulfillment process is being managed and executed in the most effective and efficient way. They are also experts in the documentation associated with logistics and transportation of products, along with compliance, regulatory, and other kinds of requirements. A 3PL can almost guarantee properly filed paperwork and documentation to reduce risks associated with these errors ranging from not just delays, but also potential fines and/or legal issues. Additionally, there can be a large cost savings associated with using a 3PL. Using an in-house fulfillment process includes costs for building, buying, or renting a warehouse; freight/other forms of transportation and determining which carriers to use; updating/maintaining new technologies and innovated practices within the warehouse(s), labor/employees within those warehouses, renovating/maintaining the building/capital, and not to mention extra costs if there are ever mistakes made along the way in terms of damaged goods, incorrect documentation that may lead to fines, etc. Another advantage is scalability; a 3PL will be able to respond to the up-scale or down-scale in demand quickly and effectively without many additional costs. Their services are often made to handle expansion and movement into new markets, like e-commerce. Lastly, using a 3PL does not only lead to cost savings, but also ample time savings as well. Designing a logistics process that is equipped to handle expansion or fluctuations in demand and continuously trying to innovate and improve this process can be extremely time consuming. However, an outsourced company would ensure these challenges are handled and regularly improved so that their process always runs as efficiently as possible. This would allow for the time originally spent focused on logistics and fulfillment, to go towards improving other areas of the company.
On the other hand, using a 3PL also comes with some disadvantages. The biggest disadvantage associated with using a 3PL is the loss of control. Hiring a 3PL means that they essentially oversee every aspect of fulfillment from receiving goods, to processing them, to packaging them, to finally delivering them. Relying a 3PL to complete these activities that directly pertain to customers requires a lot of trust, and if a mistakes are made, they may be slightly more difficult to correct. Therefore, it is crucial that a company has a good relationship with their 3PL and that there is an open, reliable line of communication and trust. Additionally, if a 3PL is unclear about a business’s goals and KPIs, there can be conflicts of strategies and overall goals, which can in turn result in an unsuccessful fulfillment process and poor relationships. Lastly, another challenge with outsourcing logistics can be the long-term costs. Although it may be cheaper and a cost reducer in the short-term, if demand increases or the company expands, services also need to increase, and they may eventually become more expensive than an in-house operation.
At the end of the day, whether a company chooses to use an in-house logistics service or outsource is up to the discretion of the company. However, there are many factors that need to be considered when making the decision. In addition to just weighing out the pros and cons and deciding if using a 3PL is the best decision for the business, it is crucial to make sure that the 3PL is reliable, trusted, efficient, and most importantly, that it is a good communicator that understands your business needs and strategies so that your goals are aligned.
The haiku provides a very brief summary of essentially what the rest of the blog post will dive deeper into. It breaks down the key questions and concepts to consider when choosing whether a company should outsource their logistics process or maintain an in-house process. It is difficult to make this decision because there are lots of factors and variable involved, as briefly questioned in the second line of the poem. However, once a decision is made, there are lots of advantages and disadvantages to both options, as highlighted in the third line of the haiku.