Determining whether your supply chain business should retain an internal warehouse operation or outsource to a 3PL is not a decision to take lightly. Like any supply chain strategy, there are advantages and drawbacks to both insourced and outsourced warehouse models.
While you might think it comes down simply to consideration of costs, there’s actually a lot more to it than that.
Here then, is a brief rundown of some pros and cons of keeping warehousing under your own organizational roof, as well as those of the alternative; relinquishing it to a third party specialist provider.
Finally, since first releasing this post, we’ve updated it with a new section, looking briefly at scenarios in which you might think about a mix of insourced and outsourced warehousing.
Reasons to Keep Warehousing In-house
Control – This is the rationale behind most decisions to keep warehousing in-house. The control of processes, physical inventory and data is obviously harnessed most effectively when your organisation maintains its own storage and distribution facilities and workforce. Naturally, if your company operates warehouse facilities and systems as a core competency, outsourcing is unlikely to offer many advantages, and could even be detrimental to service and quality.
Specialisation – For some companies, warehouses require highly specialised skills and equipment to run. Even the storage facilities may need to be specially designed. Similarly, when your organisation performs a number of activities which add value to products or services, keeping inventory under your own roof can be more viable than outsourcing.
Stakeholder Confidence – because you have direct control of insourced warehousing, your customers and other stakeholders know they are dealing with a single organization. This can be important when your business relies on long-term contracts or service agreements with sensitive or demanding customers.
Operating Costs – You might be surprised to see costs as a reason to insource warehousing operations, but we haven’t made a mistake. Companies often expect that outsourced warehousing will reduce operating expenses, but in many cases, the opposite is true. Indeed, the opportunity to save costs is increasingly being viewed as a reason to take outsourced warehousing operations back in-house, particularly among companies operating on thin margins.
Reasons to Outsource Warehousing
Service and Expertise – 3PL warehouse providers do it for the sake of it, whereas your company might do it only because it’s necessary—warehousing that is! When your company contracts with a good outsourcing partner, great service backed by a comprehensive agreement is provided by people who really know what warehousing is about.
Reduced Capital expenditure – With no in-house warehouses, your company is free from the associated property leases and the costs of warehouse manpower and equipment. While there is of course, a cost associated with warehousing as a service, many companies find outsourcing to be a cost saver overall.
Shifts the Risk – With outsourced warehousing, your third-party provider takes on all the risk associated with managing people and processes. Similarly, your business won’t get caught out by peaks and troughs in demand, which can otherwise leave you with an under or over-utilized facility and workforce.
Reasons to Mix it Up
The decision to outsource warehousing or keep it in-house can be a particularly taxing one for business experiencing growth. In the two previous sections of this article, we have taken the polarised perspective, discussing the choice between insourcing and outsourcing of an entire warehousing operation.
However, if your company is scaling or diversifying, you might find it pays to look at partially outsourcing your warehousing activity, while retaining some in-house.
Situations in which a mix of insourced and outsourced warehousing could make sense include:
- When your company already possesses some warehousing assets, but is expanding geographically: You might choose to outsource warehousing in your new regions or areas, while maintaining an in-house operation where existing assets are in place.
- If you are adding an ecommerce channel to an existing retail sales model, you may wish to consider outsourcing ecommerce warehousing and logistics to one of the growing number of 3PL providers that specialise in ecommerce logistics, while retaining your in-house warehousing for in-store retail
Start with an Objective Analysis
Realistically, the decision to insource or outsource your warehousing should be based on extensive analysis of your own particular business and its requirements. Many businesses can benefit from warehouse outsourcing, hence its growth as a supply chain strategy.
The important thing though, is to understand your operational objectives well, and apply whichever model best enables them to be met, without sacrificing any competitive advantage.
What To Do Next
If you were thinking about outsourcing your warehouse operations, please feel free to contact me on the details below.
Or you can visit our Warehouse Outsourcing page to get more details.
Editor’s Note: This post was originally published in April 2015. It has since been revamped and updated with information that is more comprehensive, and has had a new section added. The most recent updates were made in July 2020.