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Warehousing & Distribution
Should You Insource or Outsource?
I’m Nick Luni,
My family has been in warehousing and distribution for three generations. I’ve been in the moving business all my life. Logistics is in my blood.
I’ve pulled together my knowledge and experience to give you some tips about how to choose the best logistics solution for your business.
As Director of Sales and Marketing at Allstate Moving Systems, I’ve helped our clients/customers make wise decisions about warehousing and distribution for years. This position paper outlines your choices and the pros and cons of keeping it all in-house or outsourcing.
I will share the ins and outs of using a Third Party Logistics provider. You may have never thought about the good, the bad, and some proven solutions.
When you’re done, let me know what you think.
Call me at 800.897-6683 or click here to contact one of our helpful representatives.
Introduction
Whether you want to enter a new market or improve and expand your services within an existing market, the decision to insource or outsource warehousing is critical to your business.
With the pressure to serve your customers faster and at a lower cost, you need a good strategy and a clear focus on execution.
This white paper will look at both the advantages and disadvantages of insourcing and outsourcing (or using a blend of the two) and offers best practices, pitfalls to avoid, and case studies to help you navigate the process.
For many companies, the decision to keep their product inventory and distribution processes in-house is the best choice. That said, for most companies, you will experience a huge amount of savings and other advantages attributed to outsourcing warehousing and distribution.
For some companies, outsourcing it all is the solution. They simply are not in the position to manage warehousing and distribution internally. This paper attempts to give a framework to help you make your decision and tips to make either decision go smoothly.
In addition, you will discover ways to evaluate and manage outsourced 3PL’s (Third-Party Logistics providers) and to find partners that can provide a service that improves your speed to market, your customer service, and inventory turn rate – which will, ultimately, improve your return on investment (ROI).
Companies choose in-sourcing to streamline planning and forecasting, implement lean cost control, and manage physical location and distribution.
First, let’s look at some reasons to remain in-house.
Control – Control is the most often cited reason to keep warehousing and distribution in-house. In-house you maintain your own storage and distribution facilities as well as your workforce and you are more able to define processes. When you remain in-house, you have direct oversight and physical control of the inventory and staff. Your data is often more real-time and immediately actionable.
Confidence – Because you have more control or perceived control when you insource, your customers and other internal and external stakeholders often have a higher comfort level. They can hold you and your company completely accountable and they only have one organization to worry about. This offers considerable value when you have long-term contracts with demanding clients and customers.
Specialization – For companies with specific requirements, warehouses require highly specific equipment and staff-training to operate. Sometimes storage facilities may need to be custom designed. Also, when your company performs value-add activities to products, keeping inventory in-house can be more manageable than outsourcing.
Flexibility – Often working with a 3PL may require a long-term contract (more on that later, See page 9) and requires significant overhead in teaching and managing the vendor about your business and your clients. It can be hard for a vendor to be as nimble as you can be internally.
You have more time than money - A business that has cash flow issues may manage cash best by keeping logistics in-house. Consider whether you have more staff time to spend than money.
Tax incentives - Some states offer tax incentives to businesses that locate operations and provide jobs there.
Now let’s look at some of the problems you can face when you keep your warehousing and distribution in-house.
Initial Investment - If your business does not have a lot of liquid capital to work with, it may not be best to insource. The capital for creating and maintaining warehouse and distribution services is significant. Renting or buying a space, insurance, equipment, and extra salaries are all expenditures necessary with in-sourcing and this only accounts for a small portion of all associated expenses with in-sourcing. For a full list of additional expenses to consider, please see Appendix 1. By outsourcing, you avoid these upfront costs. Often available capital answers the age-old question of Rent vs. Buy.
Regulations – Compliance to health and safety regulations can become an administrative nightmare. These requirements can be complex. It can be time consuming and expensive to achieve and maintain these standards and to develop a subject matter expert in-house. A 3PL has met and will continue to meet these regulations, so you don’t have to.
Learning Curve - As with any new business operation, there’s a learning curve. While it is possible to implement a great warehouse and distribution process for your company, it will most likely take time to operate at the same capacity of a 3PL. If resources and focus are concentrated on this aspect of business, you may be neglecting your core operation. This can hinder your overall growth and profit. You also risk being responsible for and having to correct any errors and being liable for any issue that may arise like injury, lawsuits, theft, etc..
Wasted Space - Whether renting or buying space, the cost for warehousing your inventory is significant. It’s not easy to adjust based on the current inventory when doing this yourself. If space goes unused, the price may not be worth what you are paying. If your storage needs exceed the available warehouse space, you are left with having to find another warehouse.
A common mistake companies make when calculating space requirements and the associated cost is not accounting for isle space. As a rule of thumb, unusable isle space accounts for 25% of a well laid out warehouse.
If you do decide to keep things in-house, you need to focus on some key objectives.
In-house logistics has many moving parts. As your business grows, you’ll need to ensure that you manage the key elements of logistics for continued business success.
Core elements of lucrative in-house management are key to getting your products to the right place, on-time, while minimizing risk.
Keep products moving. Products sitting in a warehouse take up space and don’t improve ROI.
Implement lean logistics / supply chain management. Minimize waste and increase supply performance.
Improve supplier performance. Deliver quality items with accuracy and in a timely manner.
Compress cycle time. Minimize the time between the request for a product and delivery of goods.
Maximize inventory yield. Combine sustainable maximum pricing with the shortest delivery window.
Utilize meaningful metrics. Use the metrics that mean the most: order delivery complete, accurate and on time. Monitor days of inventory on hand and cycle time.
Segment the supply chain. Segment supply chain according to goods for lean logistics. Focus performance on where it is most beneficial.
Employ supply chain technology. Provide visibility throughout the supply chain cycle. Manage the key issues from customer purchase through delivery.
As you can see, In-house supply chain management is a comprehensive component to any business that requires management and ongoing monitoring for efficient and effective delivery.
Let’s look at outsourcing and how it can relieve that pressure on your business.
You’ve seen how managing in-house can be rewarding or challenging. Now let’s look at outsourcing.
Outsourcing to a third party (3PL) can take away the complications of in-house logistics. These service companies manage services like warehousing, transportation, order fulfillment, delivery and other operations.
Before you decide, examine the problems that can arise and then the solution benefits. This time, let’s start with some potential roadblocks to outsourcing.
Sticker Shock - The recurring cost of outsourcing may be a reason some stay away from outsourcing. Adding up the costs a third party will charge you may surprise you. The cost may appear high at first, but keep in mind that a 3PL’s rates include all charges.
Picking a Provider - Selecting and managing a warehousing and distribution vendor can come with significant overhead. The process of a vendor bake-off (researching and evaluation different providers and the process by which your organization chooses your partner) can be lengthy and costly.
Returns - If a third party is in control of your inventory they may be the ones deciding whether or not a returned item is fit for resale. You may miss feedback on items if this process is through a third party and not managed by you.
Trusting a Third Party - By outsourcing, you are trusting another business to carry out your expectations for a long period. You are reliant on the company even if they have financial issues or if the company shifts in values, management, etc.
Communication - Communication needs to be crystal clear when working with another company handling a big part of your business. You want to be able to reach them when necessary and make sure everything is interpreted and carried out in the way you expect.
So, with all those reasons not to outsource, why outsource? Because with due diligence, a fair deal, agreement, and solid oversite, all those issues can be overcome.
Let’s talk about the good parts of outsourcing.
Scale - A 3PL has the flexibility to scale to your needs. Your inventory and distribution demands will naturally fluctuate over the year. Rather than getting stuck in long-term leases, some 3PL’s offer, or will allow you to negotiate, month-to-month options. Rather than overspending or potentially being under prepared, let a third party accommodate your needs. A 3PL will make sure the demand is adequately fulfilled, without the guesswork or unnecessary expenditure. A 3PL will accommodate you and your business at every stage.
No Staff - Hiring and managing to fulfill your own logistic needs is no small task. Outsourcing your work releases that responsibility as well as the risks involved with staff and employees.
Your Team’s Capacity - When order fulfillment takes away from your main business focus of growth, it may be time to start outsourcing it. Your main business concern needs to be product development and sales for long-term sustainability.
Range - You may be thriving in a local market, but what if you want to expand? A 3PL has the knowledge and resources to expand your reach, whether it be nationally or internationally. The best way to grow is to get into the markets you are not already in. To do that you can rely on a third party who has current insight about and operations in the new markets and has local logistics expertise. Storing product in multiple locations nationwide can help to improve your supply chain by reducing shipping costs and reducing delivery times.
Be More Effective - Allowing a third party to handle your inventory and distribution needs enables you to excel at what you do best, run your business, focusing on your core business facilitates more growth and momentum. The things you can outsource allow for more focus on the most important parts of your business and frees up management to focus on growth.
Save Money - While serving multiple businesses, a third party can lower the cost and time it takes to hold and distribute your inventory. Consolidating resources enables a level of efficiency in every step of the supply chain that you will not be able to achieve on your own
Uneven Sales Cycles - If the number of orders you process fluctuates throughout the year or your product is seasonal, it probably doesn’t make sense for you to commit to staffing and supervising your own warehouse. A third-party logistics solution can adapt to your needs while reducing cost.
Each of these situations is a sign that you may want to consider third-party logistics. And, if your business is experiencing two or more it’s time to start exploring what a 3PL can offer as a solution.
Now that you know the benefits of using a third party service, you’ll want to know how to make the best selection and manage your relationship with your 3PL (Third Party Logistics) partner.
Let’s look at some guidelines.
3PL used to mean transportation and warehousing, but now you can outsource virtually everything.
Most of what 3PLs are hired to do involves the basics. About 80% of companies outsourcing their warehousing and distribution use 3PLs for domestic and international transportation, 67 percent use them for customs brokerage, and 51 percent for their freight forwarding.
If you need more, 3PLs are evolving rapidly from tactical providers of transportation and warehousing services to strategic partners providing a wide range of products.
Some of the Services 3PLs Offer:
Warehousing – all basic functions - receiving, storage, picking, packing and shipping
Cross docking
Order fulfillment
Yard management
Shared, multi-client DCs
Transportation
Transportation sub-contracted to asset-based carriers
Transportation sub-contracted to non-asset brokers
Fleet management
Consolidation
Cost and service improvement
Freight billing management and processing
Cargo insurance and claims management
Small package services
Big box services
Green logistics, and sustainability services
Labor recruiting, hiring and management
Returns processing
Light manufacturing
A quick look shows you that not only do 3PLs relieve the burden of many services for your company, but that the services can be extensive saving you time and money.
How do you make a choice? And how do you manage that service relationship. Let’s get to it.
Choosing a 3PL provider requires a good look at what you currently need and what you will need in the future from a provider.
Hiring a logistics company is not just picking a vendor, it’s choosing a partner. So, how do you choose? What are the key criteria that go into making the decision and making sure you have the right fit?
Before you can find the right 3PL for your company, you need to know what services you need. Beginning your search without an internal needs assessment (both current and future) limits your ability to match the provider with the services necessary for your business. You’ll be off to a good start on minimizing costs and avoiding services you don’t need.
Be sure to check the list above to plan for services to fit your business growth plans. Does the 3PL offer what you need next year? Or five years from now?
Many 3PLs specialize in particular industries or types of business.
One of the most important things you should examine when choosing your warehousing and fulfillment partner is whether they specialize in your business area. Find a company that has experience in your business model.
Try to find a 3PL currently working with businesses like yours.
With the goal to make your warehousing and logistics vendor a strategic partner, look for direct and current experience with clients that are like you.
Your best bet? Get on the phone or send an email. Chat with someone one-on-one about your business. Don’t be afraid to ask a lot of questions, including asking for references. Most importantly, be upfront and clear about your needs so there are no surprises down the road.
Don’t choose on price alone. Cost management is likely your number one priority and 3PLs often have a scale advantage across their entire operation. But, price is not the only factor.
Get competitive pricing quotes from three or four vendors if available in the market. Don’t base your decision solely on price. You need quality throughout the process. If you get fixed on price, your business can suffer through lack of quality logistics. When shipments are delivered with the wrong item or not delivered on time, your business will suffer.
Take your time and check out the 3PLs carefully. Talk with them and make sure they’re able to meet your needs. Ask how they work with businesses similar to yours. Talk to them again and keep asking questions. and don’t just talk to their management or salespeople. Get references. Talk to the references. You DO NOT want to have to change providers six months later.
My advice, if you are outsourcing for the first time, is to do exhaustive due diligence on all the vendors you are considering. You cannot be too careful. Make sure to check references and double-check all the vendor’s claims. Go visit their site and visit with their customers. Check out trade references and validate their company stability. This is like a hugely critical hire. Taking the time in the decision can save enormous costs if you have to switch to another 3PL or bring in-house.
Ask a lot of questions. If you have doubts, press on the vendors to give you answers. Don’t get sold.
Once you have picked your 3PL partner, you need to manage the partnership to get what you want and need and to keep getting it throughout the course of the relationship.
Here are some of the best practices I have learned over the years:
First, focus on three critical things:
Expectations and Responsibilities - Both parties expectations and obligations, the deal and the contract.
Metrics. How are you going to measure your partner’s performance?
Feedback - How and how often you will communicate and manage this vendor and how to make sure it is a two-way street.
It is always better if the deal is fair and balanced for both the client and 3PL. You are looking for a successful long-term working relationship.
Clear communication is the first step to managing your relationship.
Make sure your Request for Proposal (RFP) is detail rich. Thoroughly state all your logistics needs. The 3PL can’t know what you need unless you give them the details.
Invite your 3PL to visit your company. Give them a first-hand experience of the challenges you want to meet.
Be involved in governance. Once you establish your service with a 3PL, establish communication channels to monitor performance. Set in place ongoing reporting channels for frequency, depth, data, and response times. Just because the 3PL is doing the work for you doesn’t mean “hands off.”
Expect and demand meaningful data that pertains to your business goals. You will want to see:
On-Time Shipping
Warehouse Capacity
Accurate Order Fulfillment
Proper Storage of In-Coming Product
Total and Individual Cycle Times
Damaged Products
Accurate Trailer Tracking
Depending on your business and products you will want more details like warehouse temperature recording.
What’s important is the data you get from your 3PL pertains to your business.
A collaborative mindset is key to getting the information you need from your 3PL. Think of it as working together to create your business success.
Establish clear expectations on both sides about the frequency of communication and the topics you will cover.
Set and keep communication dates to discuss ongoing operations.
Review data reports to understand the basics, but focus on how the entire logistics sequence is working in favor of your business.
Restate your expectations at every communication meeting. Listen to what the 3PL needs from you.
Expect your 3PL to be a solution provider. If something happens, you want to know. Let them know you want to know about issues or problems when they happen. You want your 3PL to minimize risk.
Your communication is about managing performance. A successful relationship evolves over time.
Feedback on both sides is instrumental in creating an ongoing, long-term relationship.
To see how it all works, let’s look at how successful business work with the right 3PL.
The end goal of every business is customer satisfaction. Outsourcing to Third Party Logistics saves money and improves customer satisfaction.
Case Study: An example of how outsourcing to Third Party Logistics saved money and improved customer satisfaction.
A specialty goods retailer LGND Inc. sells Nootropic Energy Drinks through distributors but also online. Products, comprising two lines, needed to be received, stored, and delivered to all customers both distributors and direct buyers. LGND Inc. had low-no access to their product and was geographically far from their main target consumers. The company could not manage the significant costs for supplier management within budget constraints.
Because of the company size, the fixed costs of managing in-house would be too great. The amount of storage movement and shipping volume would also not motivate taking on extra storage, workers, and inventory tracking. Logistics was not the core business, and the owner did not have the experience necessary to include logistics.
Overall, the owner and management team were challenged by space limitation, manpower, and systems needs.
By preparing a free, no-obligation cost analysis Allstate could show the true cost of the current operation. By reducing storage costs and expediting shipment, Allstate was able to demonstrate the benefits of working with one company to manage the entire supply chain. Plus, LGND, Inc. then had one point of contact to connect with all transactions.
Allstate was able to manage the entire process and minimize transportation costs to important markets.
Our data showed that the company could improve costs and customer satisfaction by outsourcing fulfillment with Allstate. LGND, Inc. would
Significantly improve customer service metrics
Reduce warehousing and fulfillment costs
Serve as one point of contact
Once the owner outsourced fulfillment, we prepared a detailed and comprehensive transition plan in coordination with their operations team. During the transition, we held meetings and set a target cutover date.
Our detailed transition plan helped the business understand each step. We incorporated item details like the business standard operating procedures, routing guides, electronic data requirements, packaging and labeling requirements. To speed item delivery, we integrated with the business shopping cart platform.
During the warehouse transition, we used data to assign specific SKUs to assign storage by product family. We assigned product pick locations based on the velocity to maximize labor efficiency. The 60-day transition period minimized downtime on fulfilling new customer orders.
Once the system was up and running, we could report inventory accuracy, order cycle times, on-time delivery, and other key performance indicators we determined in consultation with the owner. Our real-time web portal gave the business 24/7 visibility on inventory, receipts, shipments, and tracking information.
Our reports showed inventory on hand, orders shipped, and other crucial data that helped run the business without adding employees or spending valuable time tracking. We reduced time and spend for the retailer so the business could focus on their products and customers. Most importantly, customers received their goods on time improving customer satisfaction.
Allstate provides a competitive storage price, and the location reduces transportation costs to main markets.
Reduced transport lead times
Reduced transport costs
Reduced storage costs
Overall, Allstate provides the flexibility and service that allows LGND, Inc. to find easy solutions to otherwise complex problems, like re-labeling.
LGND, Inc. owner, Joakim Stuart, says, “The friendly attitude and long-term thinking is really something that adds significant value for us.”
In an ongoing relationship, there’s always room for improvement. Allstate is working to improve communication frequency and develop and expanding processes.
Allstate provides the logistics so LGND, Inc. achieves the bottom line of satisfied customers.
The decision to insource, outsource or use a mix for your warehousing and distribution needs requires an extensive analysis of your industry’s and your company’s needs and requirements. Because many companies benefit from warehouse outsourcing, the industry is exploding as a supply chain strategy.
What you need first is to understand your operational objections. Then you can choose the model that best meets your needs while maintaining a competitive advantage.
Your partnership with your 3PL will be a source of competitive advantage for your business.
Nick Luni is the Director of Sales and Marketing, Allstate Moving Systems.
Allstate Moving Systems is an agent for United Van Lines/Unigroup Logistics, one of the most well-known, successful and dependable relocation and logistics providers in the nation. Founded in 1965, Allstate Moving Systems remains a third-generation family-owned business and is one of Southern California’s largest moving companies with locations in Poway, Oceanside, North Hollywood, and Ventura.
In addition to household moves, commercial moves, and International moves, Allstate Moving Systems offers a range of premium full-service warehousing and distribution, record storage hospitality installations, customs clearance, and freight forwarding.
With my years of experience, I can help you sort through the in’s and out’s of in-source, outsource, and managing your relationship with a 3PL service provider. Take advantage of my knowledge with experienced consulting to guide you through the process anywhere in the U.S., call us at 800.897-6683 or click here to contact one of our helpful representatives.
Call at 800.897-6683.