When is 3rd Party Fulfillment the Right Outsource Option for You


Many multichannel merchants focus on how they can lower operating costs of their supply chain logistics when they consider outsourcing certain tasks. When you use third party fulfillment partners to outsource your operations, you also outsource the investment. Sounds obvious, but the magnitude isn't always clear until you're faced with replacing an order management system, moving into a new fulfillment space or upgrading your website and platform.

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When outsourcing your investment, you don't have to invest in those upgrades as your business grows and changes. Remember, evaluating various 3PL solutions,and proper due diligience is critical for companies to be successful.  Let's look at some examples that show the size of these investments.

    • Order management system. Software as a Service (SaaS) can free up a potential investment of $25,000 for an emerging company. If you're a $500 million company with several hundred users, adopting a SaaS mode can potentially eliminate an $8 million to $10 million investment. For a $20 million cataloger, the spend runs $280,000 to $400,000 to license and buy hardware. Once implemented you will have an order management system with a robust list of call center and supply chain logistics functions.
    • Forecasting and inventory management system (working in conjunction with your order management system). Learning from our decades of experience in inventory management consulting projects, the investment and implementation costs for a 10-user inventory management system will cost, on the low end, $150,000. Larger companies invest several million dollars.
    • Replacing an eCommerce site. SaaS business models can eliminate an investment of $750,000 to $1.2 million for a multichannel cataloger with sales in excess of $100 million. With the eCommerce that growing companies experience, there's also often a need for peripheral systems such as an email management or chat management system investment.
    • Call center operations. Partnering with a third party logistics call center eliminates investment in the required order management system, four wall space, telecom terminals, headsets, ACD, scheduling software, call monitoring hardware and software, email management, chat systems, etc.
    • Supply Chain Logistics operations. Partnering with a 3rd party fulfillment provider, you avoid investing in the construction and/or build-out costs; as well as the long term lease, racking, conveyors, material handling, warehouse management system, manifest and shipping systems, peripheral systems like RF/barcoding, furniture and fixtures. Plus, you avoid one of the top expenses in your supply chain logistics operation - direct labor (and the hiring, training and retention) to run the warehouse.

When looking at these investments on a 5-7 year basis, many would have been amortized and depreciated over that time. Yet, many companies struggle to make the initial and ongoing investments because of the competition for financial resources.

Here are some questions you need to answer as you look at evaluating a 3rd party fullfillment vendor, versus internal operations:

  • Are you keeping pace with investment in the infrastructure required?
  • What alternatives for capital use does your business have rather than investing in physical assets?
  • Does the potential 3PL  partner have the finances to grow and expand? What's their track record of doing this for clients?
  • How will those costs be passed onto your business as it grows and changes?
  • Can a major activity be outsourced to a third party logistics partner, and not result in a total loss of control (e.g., call-center overflow, peaks and weekends, returns processing)?
  • Which 3rd party fulfillment provider best understands your category of product (e.g., apparel with its high SKU storage needs, returns, etc.) and mode of operation (e.g., e-commerce, order management system, etc.)?
  • Which provider will be the best long-term partner?
  • How vulnerable will this leave you if the 3rd party fulfillment provider's performance isn't up to par?
  • If you wish to sell your business and don't own major assets, does this help you (the prospective owners are't paying for assets), or hurt you (you may need to remain operationally independent of the other businesses a prospective owner has invested in)?
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The Issue of Control
So why isn't outsourcing more commonplace? Most managers want to control their own destiny. Outsourcing means giving up some control.

Also in certain cases, the outsource industry providers have a less than stellar record of long term, reliable and cost effective service. Many, including myself, believe that SaaS business models will continue to change much of this. I've also seen many companies successfully use both domestic and offshore third party logistic call centers. We've had one client outsource all call center and supply chain logistics operations for its $25 million apparel catalog and eCommerce business since 1988 with great success.