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.
Whilst you might think it comes down simply to consideration of costs, there’s actually a lot more to it than that. Here is a brief rundown of some pros and cons of keeping warehousing under your own organisational roof, as well as those of the alternative; relinquishing it to a third-party specialist provider.
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. With structure, systems, reporting and KPI requirements, some companies find that 3PLs are too rigid and inflexible. This can stifle a company’s ability to be flexible on a day-to-day basis; therefore, they choose to retain their own operation so they don’t have to pay for every task variation that occurs each day.
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. Some companies are not able to find 3PLs with specialised equipment to handle their product range at an economic cost, particularly for items requiring gantry cranes, bulk items, or automated picking systems.
Stakeholder Confidence
Because you have direct control of insourced warehousing, your customers and other stakeholders know they are dealing with a single organisation. 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 amongst companies operating on thin margins. If margins are slim, keeping warehousing in-house can save the company from 5 to 20% that they would otherwise pay in the marketplace. In recent years this difference seems to matter, and firms are increasingly pulling warehousing back in-house.
Intellectual Property Protection
Something that often gets overlooked is the need to have an additional layer of security for your intellectual property, which keeping your warehouse logistics insourced can provide. One potential negative of third-party logistics is that you lack the control you get when dealing with things yourself.
When you have internal staff members who are bound by company confidentiality agreements, they are more likely to understand the sensitivity of the products they handle.
This can be particularly crucial for companies in technology, pharmaceuticals, or other innovation-driven industries where protecting trade secrets is a necessity.
Reasons to Outsource Warehousing
Service and Expertise
3PL warehouse providers do it for its own sake, 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. Organisations that judge themselves as poor at warehousing management and operation are likely to see 3PL as a solution, particularly when they simply need to get their products to market efficiently.
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. Whilst there is, of course, a cost associated with warehousing as a service, many companies find outsourcing to be a cost saver overall. Organisations that have property and equipment assets may elect to remove these from the balance sheet, obtain a cash injection into their business, and then lease both buildings and equipment.
Seasonal Flexibility
For businesses that have seasonal variations in demand, outsourcing to a 3PL can provide flexibility with your logistics operations. Instead of maintaining warehouse space and staff all year round, companies can scale their warehouse operations up or down as needed, which helps massively if you’re only busy at certain periods throughout the year.
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-utilised facility and workforce. Additionally, human resource management can be an Achilles heel for some companies, particularly those which have suffered significant industrial issues over the years. Such companies often choose to outsource to dispense with the hassle of handling industrial relations and enterprise bargaining.
Geographic Expansion
When entering new markets — especially internationally — supply chain operations become more complex, and outsourcing to a 3PL can significantly reduce the risks and capital requirements.
One of the main benefits of established 3PLs is that they often have extensive networks of facilities in multiple regions or countries, which allows your company to expand its distribution footprint without investing in new facilities. 3PLs typically have a network of distribution centres that offer expansion options to firms as their business grows. This is advantageous to companies that are growing or seeking to establish localised facilities across the country, without the need for significant capital investment.
This can be particularly advantageous when testing new markets or launching international operations, as it provides a way to establish a presence without committing to permanent infrastructure.
Reasons to Mix it Up
The decision to outsource warehousing or keep it in-house can be a particularly taxing one for businesses 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, whilst retaining some in-house. Many companies are finding success through strategic investment in technology, particularly in materials handling equipment that provides greater storage utility and performance on smaller footprints. These companies often maintain their core warehousing operations in-house while selectively outsourcing specific sectors when necessary.
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, whilst 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, whilst retaining your in-house warehousing for in-store retail.
- As mentioned above, 3PL can be useful for dealing with seasonality in your business. You may have a need to ramp up for peak season and deal with an overflow of customers that extends beyond your core business, such as for Black Friday or similar holidays throughout the year. One of the benefits of outsourcing to a third-party logistics company whilst maintaining your core competencies is that it allows you to mitigate risk if either operation runs into issues.
The hybrid model can be suitable for some companies that are thinking about outsourcing warehouse operations, but it’s not always easy to know whether it’s right for your business.
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 management 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. For some international companies, there may be a policy to outsource across different markets, whilst others choose to insource in every market, mainly for reasons of complexity or privacy. For this reason alone, all other issues may be subservient.
If you are thinking about outsourcing your warehouse operations, we can help. Feel free to get in touch to discuss how we can help in more detail.
A very learning blog for everyone working in the field of supply chain management. I like the quotations you used.
Nice one. What a practical experience to achieve success.
This article was detailed and accurate. Just what you need to be to successfully manage your supply chain.
My dissertation is on value chain management, it’s impact on performance of an organisation. I have learned a lot
This is very important, I got something that I will apply in my everyday duties.
Thanks. Very informative and worh reading. keep up the good work.
All the best
Thanks for the feedback. Any specific topics you’d like to see more about?
Supply chain management with data analytics.
Hello Rob,
Thanks for the article. Well written and relevant to business today.
I’d love to hear your thoughts about supplier performance and relationship management.
-What metrics do you use to track performance and how do you hold supplier’s accountable?
-If you’re a small but rapidly growing retailer how does relationship management change vs. a more established retailer?
Any thoughts on how to improve supplier performance so we can pass the benefits of better in stocks to our customers would be appreciated!
Thank you!!
I think that might best be covered in a video on our YouTube channel.
Trent take note!
After reading this, i learned something new about logistics services.
Thanks a lot for such a informative blog.
absolute knowledge for the businesses depending on supply chain & logistics. i.e. e-commerce businesses
One thing that i noticed that,
” Returns are not return without supply chain.”
and that is absolutely correct,
There are lot of example we here that a little startup gained a robust success in their business for example , Alibaba.com start by jack maa
This globally known business also focus on their supply chain while focusing on business development and that is the combination make their identity globally.
Excellent! I have increased knowledge in procurement.
This line is very true. If a companies logistics partner is good than the company will grown. “The success of your business links inextricably to the performance of your supply chain”.
It matters to me, the case study is useful. Thank you so much
These all 7 Reasons are based on reality, I totally agree with you that Supply Chain Matters to Business Success. Thanks for sharing this information with us.
Excellent write up… Its even true for developing countries as well.
Thanks for the feedback, much appreciated.
It’s true failure to considered those factors know that you may not least long in the business.
very informative,good for exams preparations
Hi there,
Thank you for all the info you provided. I’ve got a question. I will have an job interview on supply chain analyist , any suggestion and materials to refresh my knowledge please ?
Thank you
Check out our YouTube Channel (Supply Chain Secrets)
Or if you want more in depth we have a free trial on our online education program (supplychainsecrets.com)
Excellent information and the case studies stuff. Do you have more material about mini case studies? I need real life case studies with solutions to guide my students. Looking forward a positive response from you
Thanking you
I’m sure we’ll have more coming up soon.
The blog truly justifies the importance of an appropriate supply chain in deciding the fate of a business. With the advent of digitisation having a good logistic experience has become indispensable.
This is very informing with details. Very useful
Truth
Hello Rob, i’m felling blessed you write this for enlightened us to SCM..
would you like to recommend which country or university i should apply to learn about SCM for plans to apply a master degree?
There are many great Universities in many countries. Check These Videos
Dear Rob,
A great article indeed. Thanks for sharing.
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good job
Thanks, Whitney! Glad you enjoyed it.
Hi Thanks for sharing the information. This is very unique content that I have read today !
Thanks
great summary!
for the cost benefit analysis do you have any simple model to refer to, Rob?
we are in the process of deciding if our E-com supply chain should be operated jointly to our existing brick and mortar channel in terms of warehouse operations due to lower initial amounts …
The solution is very specific to each business, so sadly there are not really any generic models. But happy to discuss your specific case if you want to book a call.