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.
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.
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!
I think that might best be covered in a video on our YouTube channel. https://www.youtube.com/user/robobyrne/
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
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 ?
Check out our YouTube Channel (Supply Chain Secrets) https://www.youtube.com/user/robobyrne
Or if you want more in depth we have a free trial on our online education program: https://www.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
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
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. These videos might help: https://www.youtube.com/playlist?list=PLAI2rbd3NwK5tgIQeNNkNAe47GDOqyqpb
A great article indeed. Thanks for sharing.
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Thanks, Whitney! Glad you enjoyed it.
Hi Thanks for sharing the information. This is very unique content that I have read today !
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.