In-House vs. Outsourced Fulfillment

This is a guest blog post written by Will Schneider with

Fulfillment and shipping is a critical aspect of the supply chain function. From one-day deliveries to the increased desire for free shipping, customer expectations are driving companies to not only provide exceptional logistics services but also leverage the fulfillment function as a source of competitive advantage. These increasing demands are causing more and more companies to look outside their own warehouse walls to pursue 3PL outsourcing. In fact, 66 percent of companies use outsourcing, according to the Current State of 3PL Market 2016 Study.

The potential benefits of outsourcing are many – improved flexibility, quality, and responsiveness, access to new markets, increased speed to market, decreased customer response time, and decreased costs, not to mention time savings from not performing the function in-house. But is outsourced fulfillment the right solution for your business? In this article, we’ll walk you through the decision-making process to help you determine if this avenue is the right fit for your company.

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There are many factors to consider when deciding whether to keep the fulfillment side of your business in-house or whether you should outsource this part to another company. Before jumping into the financial aspects to see if cost savings will be achieved, it’s important to take a look at some key strategic reasons that might deter you from taking this course of action.

Is Fulfillment a Core Competency?

A core competency is an area of the business that differentiates you from the competition (for example, being able to provide unique services, or doing them at a lower cost than the competition).  For most businesses, this will not be a relevant factor, especially since most 3PLs can provide similar levels of service and even perform the services at equivalent or even better levels. But for some companies, the supply chain, either in part or on the whole, is a true core competency – and outsourcing would potentially negate this advantage. In this case, it would be wise to continue operating the warehousing and fulfillment function in-house.

Are You Cash Strapped?

In some cases, especially for a startup, cash is a key barrier to utilizing a 3PL service. As an example, in the case of a single owner of a business without employees, his or her time can be used without an outlay of cash. Some companies simply don’t have the funds to pay a 3PL company to do the work for them. Bootstrapping is certainly one avenue that many choose, and may be necessary to get the company running and off the ground. However, don’t make the common mistake of misunderstanding the time value of money. Even though a single business owner doesn’t have to pay herself money to pack and ship orders, she still could choose to do something else with her time and earn money elsewhere, which means that her time is still theoretically worth something. You’ll have to value your own time according to the worth that you perceive individually. For example, a person who earns $75,000 per year in income will in theory spend more than $18,000 worth of time by working 10 hours per week in the warehouse! If you don’t have enough cash to pay for a 3PL, then you certainly can’t outsource, but don’t forget to appropriately value your time if you are able to afford outsourcing.

Are You Able to Give Up Control?

Some people just flat out have a difficult time letting go – which is totally okay. There isn’t necessarily anything wrong with this type of strategy, but in this case, it just might not be best to outsource. Knowing that another company is shipping orders and relying upon them to perform remotely could cause some sleepless nights. Just as is the case if you keep fulfillment services in-house, there will be some mistakes. But if you’re unable to give up control of a key business function, then you should definitely pass on outsourcing fulfillment.

Do Your Products Require Anything Out of Scope?

One final reason to potentially forgo any outsourcing is if your company offers a unique product that would require out-of-scope functions to be performed by a third party. Outsourced fulfillment services offer a wide variety of services for a vast array of products, such as pharmaceutical products, frozen foods, and hazardous chemicals. But certain functions definitely fall outside of the scope of a typical fulfillment provider. As an example, while many companies perform fulfillment services for apparel products, you’ll have a difficult time finding one that actually takes care of dry-cleaning services that might be needed for a clothing subscription rental service. Depending on how unique your product is in the marketplace, you may be better suited to keep warehousing and distribution in-house.

Comparing In-House Versus Outsourced Fulfillment Costs

Now that you’ve made sure that outsourcing is at least a viable option for your business, you can begin to compile some of the financial information to perform a sophisticated analysis that will show if you’ll achieve cost savings. Some basic costs to consider are:

  • Salaries
  • Benefits
  • Insurance
  • Customer Service Time
  • Management Time
  • Warehouse Lease Costs
  • Utilities and Depreciation
  • Shipping Costs
  • Materials and Packaging
  • Equipment Costs
  • Software Costs

Note and include in your comparison anything you can think of that you’re paying for right now to perform the fulfillment services in-house. There may be some aspects of your business that will change the above costs, but these are the core costs of most businesses. Be careful to include all costs. Some of the most overlooked costs when performing this analysis are supplies costs, software costs, and managerial time. Once you’ve gathered all of this information, it is time to start doing some research on the outsourcing of your business.

When looking at what costs to consider when outsourcing the fulfillment side of your business, the most common fees will be comprised of:

  • Setup Fees (any costs associated with integrating with your systems and setting up your account)
  • Receiving Fees (any costs to count, receive, and enter products into their system and locate your products in their warehouse)
  • Management Fees (any costs to provide additional service or manage your account)
  • Storage Fees (any costs to physically store your inventory in their warehouse)
  • Pick and Pack Fees (any costs to prepare orders for shipment)
  • Materials Fees (any costs for additional packaging or boxing to ship your orders)
  • Shipping Fees (any shipping costs – for example, parcel, LTL, or truckload shipping)
  • Returns Fees (any costs to process returns of orders)

You can visit for a detailed breakdown of all of the fulfillment costs and pricing and to see an actual “mock” proposal. Shopping around for these prices and obtaining competitive quotes will play a crucial role in your decision to keep doing this work in-house or outsource it.

Making Your Final Decision

After you’ve gotten all of the costs together, there are a couple more things to consider before making the final decision. There are some pros and cons we will list here to help you decide. When you keep the fulfillment side of your business in-house, you’ll be able to maintain control. Once this is outsourced, most of that control will be in the hands of the fulfillment company. Of course, you will receive reports when you choose outsourcing, but it is definitely not the same as being able to decide what happens with your product from start to finish. The second pro to keeping fulfillment in-house is that you have the product knowledge. If something goes wrong, you will likely know how to solve the problem with the product. You know exactly what you can and cannot do to rectify a certain situation. It’s your product. You know what to do and are in full control. Depending on your business, these reasons may be strong enough to not consider outsourcing, no matter the cost savings.

Now we’ll address the cons of keeping this function in-house. You might get locked into a lease if you need warehouse space yourself. If anything goes wrong, you are still responsible for this lease, so it is something to consider before signing your name on the dotted line. Another con would be that it is time consuming. This is all time that could be better used growing your brand and focusing on the marketing side of your business. Lastly, these fulfillment companies generally know what they are doing. It is their expertise and more than likely not your expertise. Why not hand this side over to someone who has the know-how to efficiently pick, pack, and ship for you?

So why would you outsource? First, fulfillment companies usually have multiple customers and, in turn, ship a higher volume of orders, which means that they get better shipping rates than individual companies would get. This could lead to some significant cost savings for you. Secondly, they are logistics experts. They know how to run this side of the business most efficiently both time-wise and cost-wise. Most fulfillment companies have a streamlined system for best fulfilling your orders. Unless this has been a core part of your business, these fulfillment companies will likely know how to better serve your business’s needs.

Outsourcing also has its negative aspects. There is a learning curve when you outsource your business. The fulfillment company has to get used to your product, and you have to get used to working with a third party. Then there is shared attention. You might be one of many, so your business is not their only priority. And the final point is that it is not their product. A fulfillment company may not treat your product the way that you would. Of course, a fulfillment company will do its utter best to fulfill all of your needs.