To Outsource Your Warehousing & Distribution Or Not?

Warehousing and distribution operations are an essential part of any business. But when a company gets bigger, the complexity and scope of these important supply chain steps can become overwhelming. Businesses often consider whether it’s best to start outsourcing its warehousing and distribution operations and engage a 3PL company. First off, it’s important to assess the advantages and disadvantages of third-party logistics.

Third-party logistics (3PL) companies can help your business in a multitude of ways, but there are trade-offs to consider. Weighing the third party logistics advantages and disadvantages will help you decide the best way to grow your business.

As you evaluate whether to enlist a third party logistics company to handle your warehouse and distribution functions, first make sure you understand what 3PL services are available.

You might think of logistics in the general sense of coordinating a complex process. But when it comes to businesses that sell products or require raw materials, logistics refers more specifically to the movement of items along a supply chain. Logistics services include:

• Warehousing and storage

• Retail inventory management

• Kitting and assembly

• Reverse logistics or Returns

• Fulfilment and distribution

• Expiring product fulfilment

• Pick and pack fulfilment

• Storage

Some companies coordinate their own warehousing and distribution in-house. Third-party logistics, or 3PL, is when a business instead outsources these responsibilities to another company that specializes in shipping, fulfilment, storage and other aspects of supply chain management. You might also see 3PL referred to as outsourced logistics.

More and more major companies are opting to outsource their logistics services. A survey released in 2017 found that 90 percent of Fortune 500 companies in the United States make use of at least one third party logistics company, according to Logistics Management. Compare that figure to just 46 percent in 2001.

The global third-party logistics market now stands at around $700 billion. In the United States alone, the 3PL market’s gross revenue increased nearly 16 percent last year to over $213 billion, according to Transport Topics.

Top companies, it’s clear, have evaluated the advantages and disadvantages of 3PL solutions and come out emphatically in favour of them. Working with a 3PL can make aspects of your business more efficient and cost effective. However, in-house logistical services have benefits of their own for certain companies. Let’s run through the pros and cons of third party logistics to help you make the right choice for your business.

Now that you understand what a 3PL company offers, you need to carefully review the advantages and disadvantages of outsourcing your logistics/warehousing and distribution/shipping services.

A third-party logistics provider can improve your business in ways you might not realize at first. On the other hand, any adjustment to your warehousing and distribution operations deserves serious consideration. The change will have ripple effects to other areas of your business.

There are many reasons why a company should look into outside fulfilment and distribution services. You should consider tapping a 3PL company for your logistics needs when your business is growing in a way that makes it difficult to keep up with these services internally. You may also want to focus your business more narrowly on your core competencies.

Factors to consider in making the decision to switch to a 3PL provider include costs, efficiency, scale, flexibility, level of control, customer service and much more. Smaller businesses and larger ones will prioritize different elements. There’s no one right answer to this question -- rather, it’s about finding out what’s the best logistical solution for your business.

Let’s start with the positives of third party logistics. There are many clear benefits that an outsider operator can bring to your business. They break down into a few broad advantages -- a 3PL can help your business achieve the following:

• Increase efficiency and productivity

• Maintain flexibility

• Access to special logistics expertise

• Stay current with the latest logistics trends

• Expand logistics services

• Scale your business

Third party logistics services might seem expensive at first glance. If you already have your own fulfilment and distribution processes in place, you might be surprised by the upfront costs that 3PL providers require.

The best 3PL companies, however, justify those costs by maximizing value -- because of the logistical infrastructure they have in place, you can get more out of your dollar. This can save you money in the long run by cutting out inefficient processes.

The top third party logistics providers will have global networks with routes that span the country and warehouses in prime locations. These offerings allow them to consolidate storage and shipments, saving money for their clients. The most efficient operations will lead to cost savings for client and provider alike.

Your 3PL provider should also be well equipped to handle any surprises or hurdles that they encounter during the process of moving products, materials or other items along a supply chain. Since logistics is their core business, they know the ins and outs of solving problems on the fly. For their clients, this means cutting down on unforeseen expenses. Meanwhile, in-house logistics requires your own company to devote your own energy and resources to countering any issues.

In the competitive logistics field, 3PL providers survive by keeping up with the most advanced technology for inventory management, shipment tracking, automation and more. Innovators are always coming up with breakthroughs that make processes more efficient and customer-friendly.

To stay current, the easiest way is to enlist a 3PL company that makes it their business to keep moving forward. If you’re handling logistics operations in-house, it falls to you and your team to stay up to date on these ever-changing systems.

The range of new technologies relevant to the logistics operations span every step in the supply chain. You may be surprised by the variety of new platforms, tools, machines, and software that 3PL providers use to remain competitive. A few examples include:

• Warehouse robotics Companies are reducing labour costs, abating safety risks, and improving efficiency by turning to machines to handle jobs once taken by humans.

• Real-time tracking platforms and web portals. Companies are stressing technologies that allow visibility into every step of the supply chain. Doing so lets them anticipate issuers and respond more promptly.

• Transportation management systems. These systems organize the planning and execution of the supply chain process, allowing users to evaluate different options for their freight.

• Inventory management software and mobile applications. Retailers and distribution want to know instantaneously the status of their items. New systems for keeping track of warehouse stock are making this easier and more convenient.

• Automatic guided vehicles. Using radio waves, magnets, wire or lasers, these machines follow a set path along warehouse floors to complete

• Cybersecurity systems. Keeping your data safe from malicious actors has never been more important. With the breadth of information companies store these days, it’s essential to invest in robust cybersecurity.

• Barcode scanning systems. A must for any warehouse, storage centre or distribution centre, barcode scanners keep getting more advanced.

• Autonomous delivery, driverless vehicles and unmanned aerial systems. The future of fulfilment and distribution is leveraging driverless cars and drones to provide the fastest service possible to customers and clients. We could be seeing highways teeming with driverless trucks before long.

If you’re not in the business of shipping and logistics, your business is likely stepping out of its comfort zone when it takes on the responsibilities of shipping, fulfilment, distribution and other supply chain operations.

For 3PL providers, meanwhile, these processes are their entire focus. Their operations are built around providing efficient transportation and well-managed warehousing and storage for their clients’ items. The best third party logistics companies have the experience necessary to get the job done, and a deep understanding of the hurdles that you’ll encounter in moving products or materials.

A major advantage of enlisting a 3PL company is making use of the logistical infrastructure that these providers already have in place. A major 3PL will have a vast network of interconnected routes that allow them to maximize efficiency while shipping different clients items across the country and beyond. They will also have access to warehouses and distribution facilities in prime locations to make for convenient warehousing and distribution.

One of the main reasons that companies look to outside help for their logistics services is to help their business grow. The logistical infrastructure a 3PL provider offers will let a company scale the footprint of its fulfilment and warehousing/distribution with ease.

Rather than dedicating your company’s time and resourcing to setting up your own distribution channels, locating and securing new warehouses and storage facilities, and hiring and training new workers to handle the influx of new shipments, it’s simpler to hire a company that has all of these things already in place.

A third party logistics company will be able to optimize your inventory and routing management with advanced WMS (warehouse management systems) developed through years of learning what works best for clients. Their expertise and consolidation can be used to find previously unavailable efficiencies that make these critical processes work better for you and your customers.

Consolidating your shipment items with those of the 3PL provider’s other clients benefits everyone. The 3PL company can coordinate where each item needs to end up and when that should happen, bundling products and materials with similar timelines and destinations. Because the clients now don’t need to coordinate an entire route for only their own items, the cost is shared among them.

The principle is the same when it comes to warehousing. By consolidating an array of inventory from different clients that all require the same storage conditions and location, they can lower storage costs for everyone.

One of the major advantages of 3PL companies is the wide variety of ways they can improve your company’s supply chain processes. While you might approach a 3PL provider with specific needs in mind, you should ask about the other services that the company offers. You might not realize the breadth of ways that a 3PL can add value to your operations.

It’s important to learn about all of the possible logistics services relevant to your business model that can expand your reach, improve your processes and make your shipping. Here are just a few 3PL offerings to consider.

• Temperature-controlled and refrigerated shipping. Many items require specific temperature conditions to be stored and shipped properly. The best 3PL providers will have no problem arranging this service.

• Customs brokerage. A top 3PL company will guarantee your items make it across international borders without a hitch.

• Order consolidation. Grouping items together can improve efficiency in your fulfilment, distribution and warehousing.

• Freight audit. This is the process of examining freight bills and records to ensure everything adds up.

• Shipment tracking. You should expect easy and convenient visibility into the status of your shipments.

• Reverse logistics. Discover the best ways to reuse and reclaim products and materials in your supply chain to increase value.

• Pick and pack : 3PL companies can find the best warehouse staff to handle the selection of correct quantities of items and then choosing the correct packing materials to send off the order to the recipient. This is a popular service that many ecommerce retailers desire in their fulfilment centres.

• Packaging, assembly and kitting. In order fulfilment, kitting is the process of grouping together distinct items in a single “kit” to be shipped out collectively.

• Consulting services. Looking to forge into uncharted territory with your logistics? 3PL providers can offer their insights into how to accomplish your goals.

THE DISADVANTAGES OF THIRD PARTY LOGISTICS

After that long list of benefits to 3PL companies, you might think this decision is a no-brainer. And it’s true that there’s a strong case to be made for outsourcing your logistics operations. But before you commit to a 3PL provider, it’s important to consider the possible downsides.

Third party logistics isn’t the right call for every single business -- if these drawbacks would be a major impediment to your company’s success, it might be best to keep things in-house.

LOSS OF CONTROL

The most obvious and frequently cited disadvantage of third party logistics is the loss of complete control over your supply chain operation. When these services are handled internally, a company’s decision-makers have the final say in all matters, and can customize their routes, strategies, systems, and technology to the particular needs of the business.

With 3PL providers, you are limited by what an outside company can offer. Even if the 3PL company has everything you need today, as your business grows and changes they might not be equipped to take on new demands that you have. You never want to feel like your business’s potential is being constrained by a business partner.

As previously mentioned, a 3PL’s wide networks of routes and warehouses make it likely that they can satisfy the needs of most companies. But if you have very specific requirements that you can’t budge on, internal logistics might be the way to go.

We’ve covered how entrusting your logistics to an outside company that handles a variety of shipments can lead to more efficient processes and, as a result, cost savings. But make no mistakes: Enlisting an expert 3PL company to take on your logistics operations is not cheap.

Getting started as a new client of a 3PL provider can involve substantial upfront costs to launch the services. If you already have in-house logistics operations running, making the switch will inevitably lead to new short-term costs. Hiring a 3PL provider means thinking long-term about the potential to expand your company’s reach. Should such an investment limit your business, you might wait to jump to third party logistics until you’re more financially stable.

TRANSPARENCY AND COMMUNICATION WITH 3PL PROVIDERS

When you tap a 3PL company to take on your logistics responsibilities, you’re not only giving up control. You’re creating a step of remove between yourself and those who are doing the work of moving your products or materials along the supply chain. If situations arise where you need important information or have to convey something to the people on the ground, there will now be a middleman you have to deal with.

With in-house logistics, there are no barriers in the communications channels -- you can reach the people responsible for every step in the supply chain directly. A good 3PL provider, though, will be able to demonstrate how they keep up communication and transparency. This should be a priority for any decent 3PL company. Here’s what you should expect:

• Live, 24/7 support with an actual human representative

• Inventory management systems that allow you visibility into the processes

• A track record of satisfied customers

• A helpful and communicative main contact at the company

Don’t hesitate to request references -- or, better yet, get a referral from someone you know and trust. Poor communication can be a major impediment to smooth supply chain operations. When problems or challenges arise, you don’t want to be sitting around waiting for answers from your 3PL provider.

When using third party logistics, not only are you a step removed in terms of communication, you might a step removed from the physical items you’re receiving and distributing. While you might have previous made us of warehouse near to your own headquarters, a 3PL might find it advantageous to store your items elsewhere to make the best use of their established routes.

In most cases, this should not pose too many problems. But for those who take a hands-on approach to managing their business, such a separation from your items might require some adjustment.

Bringing a 3PL provider into your operations can be like solving a puzzle. After all, two companies are bound to have different ways of doing things -- it’s necessary to make sure your systems are compatible to make sure everything goes swimmingly.

One area where this is particularly relevant is IT. In order for your business and the 3PL company to keep up consistent communication and visibility, your computer and technology systems need to be interoperable. A highly advanced inventory management platform doesn’t matter if you aren’t able to access it easily.

Integrating your systems with the 3PL service provider is an essential step to keep in mind when consider your logistics options. However, in terms of disadvantages, this is short-term one: Once you go through integration, you shouldn’t have to worry about it unless one of the parties changes up their systems.

LIMITS ON INDIVIDUALIZED SERVICE

An experienced, professional 3PL will do everything in its power to customize its services to your business needs. But whenever you’re dealing with a separate company with its own practices and offerings, there will be restrictions on how far they can go in tailoring the services to suit a single client.

If you want free reign in designing your supply chain operations, it might be best to stick with in-house logistics. But don’t forget that in doing so, you’re sacrificing the efficiencies and scalability that a 3PL’s networks can provide.

If your business a rapidly growing start-up, it’s highly recommend to look into a 3PL company. In this situation, your rate of production will likely outpace your ability to adjust your in-house logistics operations on the fly. Additionally, you will want to focus your energy and resources on continuing to scale the business. Let an experienced 3PL provider worry about keeping up with your blossoming success.

For some smaller businesses just starting out, it might be wise to be patient before tapping a 3PL provider. If you don’t have a strong idea of the volume you expect to be shipping and storing, outsourcing your logistics might be too big of a commitment. However, if you are a small but established business, there’s no reason that you can’t benefit from the stability, consistency and efficiency of third party logistics.

Additionally, if your business is looking to expand into new areas -- whether that means a new product or a regional market -- a 3PL provider could very likely be the way to go. You can seek out 3PL companies that have experience in handling whatever your new endeavour entails. Rather than taking it upon yourself to brush upon on new, minute details, hand if off to the experts.

Whether in-house or off to a 3PL provider its important to do the sums. Obviously having a 3PL provider take on your warehousing and distribution is going to cost, after all they are in the business to make money as a business also.

Have “bullet proof” agreements and SLA (service level agreements) after all you are handing over the reigns of keeping your customers happy over to an out sourced business, you need to understand what service levels they are able to provide and what recourse you have if they don’t provide this service.

Ensuring transparent measures are in place and don’t assume just because the 3PL said they will provide 24 hour turn around they are.