Owning a Warehouse Vs. The 3PL Model

Discover More

Meeting customers’ ever-changing expectations of shipping and delivery can cost you time and money; it's crucial to consider what this means for your supply chain.

Ecommerce was responsible for $461 billion in sales in 2017 (13% of all U.S. retail sales).

By the end of 2019, total e-commerce sales were just shy of $601 billion, which represented nearly 16% of all U.S. retail sales. Some industry analysts are projecting that 25% of all retail spending will be eCommerce by 2025. 

With statistics like that, there’s no doubt that consumers’ purchasing habits are changing—but these trends are also impacting how businesses operate. Business-to-business customers are reporting higher demands for traditional eCommerce functionality, such as two-day shipping availability, self-service access to accounts, and scheduling-delivery functionality.

Whether you're primarily focused on B2C or B2B, eCommerce will make a big difference in how we interact with our customers moving forward.

How to adapt to shifts in customer demand

The changes that come with the shifting of customer demands are not restricted to online payments or website design and functionality. Perhaps the largest impact is happening behind the scenes on the supply chain. The supply chain consists of moving and storing products from the start of the manufacturing process to the final delivery to the customer's door. When the end-customers begin to change requirements on how and when those products are delivered, that creates havoc up the supply chain.

Addressing these issues to satisfy customer demands can be costly and require significant amounts of new cash investments, but this doesn’t have to be the case.

The case study

Let’s assume that your customers are demanding faster delivery times. In order to serve these customers, you decide you’ll need to shift some of your inventory into a new market closer to those customers.

You identify two possible options: 

  1. Rent a warehouse in the new market and staff the new space with four new employees. 
  2. Hire a Third-Party Logistics (3PL) provider to manage the inventory for you.

The analysis below illustrates a high-level cost comparison of renting new warehouse space and operating yourself versus utilizing a 3PL to expand into the new market. This example was pulled from an actual customer analysis completed in early 2020. 

Cost to operate warehouse directly: fixed and variable Costs    

Total Cost: $1,515,381

  • Rent and CAM
  • Material Handling
  • IT Infrastructure
  • Utilities
  • Insurance
  • Janitorial
  • Salaries and Benefits
  • Supplies

Cost to Subscribe with a 3PL: Labor and Fees    

Total Cost: $1,416,441

  • Inbound Handling
  • Outbound Handling(Pallet Out, Pick, Pack)
  • Storage
  • Orders(rush orders, cancellations, processing)
  • Labor(non-standard work)
  • Supplies(wood pallets, stretch wrap, Labels)

Assumptions: 360 containers with 4,500 pallets, turning four times a year, with most retail distribution, and nearly 52,000 square feet of required warehouse space. 

In this case, the 3PL option saves the company nearly $100,000 a year in warehousing costs, which represents a significant 6.5% decrease in costs. Perhaps even more important than the cost savings is the fact that utilizing a 3PL allows your team the ability to focus on your business model and not become distracted by trying to efficiently run a warehouse.

Plus, the flexibility of working with a 3PL allows you to shift inventory into new markets quickly—something you can’t do if you were to sign a lengthy lease to rent space directly.

Want to learn more about optimizing your e-commerce business? Read our latest blog on managing e-commerce fulfillment in a COVID-19 world.