As your ecommerce business grows, the pressure increases to obtain more SKUs, staff, and facility upgrades. There are two paths you can take to invest in your growth: in-house managed expansion, or outsourced expansion through a third-party logistics provider (3PL).
Generally, your available resources, immediate needs, and planned rate of growth all factor in to deciding which path offers the better ROI. Since each strategy has its pros and cons, choosing between the two can be harder than it sounds. To help you decide which expansion path is best for your business and long-term strategy, you should consider the following areas.
Packaging & kitting considerations
Do your orders require simple packaging that can be prepared inexpensively in bulk quantities, or do they demand a more complex packaging procedure? If an intricate package is part of your product’s appeal or branding strategy, it may be worth keeping production in-house to maintain close control over the process and/or avoid transitional hiccups. But, if you have no such customization concerns, a 3PL may be a more cost-effective option. Although, depending on your customization needs and the 3PL’s capabilities, outsourcing may still be a good choice. For example, at Fulfillment Works, we have lots of resources to design and produce custom packaging for our clients at minimal cost.
Human capital considerations
3PL providers usually have all the resources needed to help clients start expanding right away. If you have a small staff or your executive team lacks the experience or availability to execute on growth initiatives in a timely manner, outsourcing is typically the better path for expansion.
Technology & equipment considerations
Upgrading to a new WMS or adding new equipment to distribution facility requires a sufficient budget and an integration strategy that minimizes operational disruption. The more complicated your expansion needs are, the more difficult they will be to accomplish entirely in-house. Since 3PL providers already have the technology and equipment in place, they may be the better choice for businesses that need rapid expansion of facilities or operational capabilities.
At some point, every ecommerce business asks itself, "is it time to partner with a 3PL provider?" The answer depends on several variables such as your long-term business goals, availability of internal resources, and your level of operational efficiency. Every business has different needs and priorities, so 3PL partnerships aren't the best answer for everyone. However, if you find yourself dealing with any of the following challenges on a regular basis, it may be time to bring in a 3PL provider.
Third-party logistics and fulfillment providers are among the best strategic options for helping ecommerce retailers (especially new ones) efficiently set the stage for rapid growth and/or improvement of services. Since 3PL providers already have robust distribution networks established, they can often help clients ship products to more customers, faster and at reduced cost.
In some cases, partnering with a 3PL provider is a better alternative than investing in new facilities or technology. For example, upgrading to a new order processing system or adding new equipment to an already-full warehouse may require enormous amounts of time and capital to implement properly. However, 3PLs have already gone through those processes – and fine-tuned the results to accommodate the needs and demands of their clients.
Order fulfillment is a complex and demanding aspect of ecommerce. If you find yourself already stretched thin with marketing, merchandizing, customer service, and other initiatives that are critical to the success of your business, outsourcing to a 3PL provider can help you keep your focus on those areas rather than managing fulfillment.
Since order fulfillment is a "behind the scenes" process, newcomers to ecommerce don't usually have a strong strategy in place for efficient fulfillment processes. In this post, we'll cover some fulfillment fundamentals to help beginners avoid the costly mistakes of over-stretching or over-complicating their fulfillment operations.
Free shipping vs. fast shipping
Yes, offering free shipping is a surefire way to increase sales. However, it's not free for the seller – and the costs can add up. Fortunately, there are many strategies you can use to reduce or recoup the costs of free shipping. For example, increasing the transit time decreases the cost while still appealing to most customers. In their 2016 "Pulse of the Online Shopper" study, UPS reported that 85% of shoppers are willing to wait 5-7 days for delivery if shipping is free.
Larger orders give you better margins on shipping
Packaging and fulfillment expenses aside, it's cheaper to ship two units instead of one. The profit margin from selling an additional unit will offset the increased shipping costs that result from sending a bigger, heavier package. This is important to remember when adding new SKUs or running promotions. For example, it may be more cost effective to kit products together, rather than offering them for sale individually. When it comes to promotions, the above UPS survey also found that 52% of consumers added items to their cart to qualify for free shipping.
Too many SKUs can negatively impact fulfillment
It can be a great idea to provide flexibility for your customers by offering multiple SKUs containing variations of the same product. However, it’s important to strike a balance. While larger orders return higher margins, too much variety and volume can increase the costs and reduce the efficiency of your inventory management and order fulfillment processes. Before running a promotion, adding SKUs, or entering peak season, don't forget to account for the impact on your fulfillment operations.
Improving the efficiency of your fulfillment operations is something you should always be striving for. Because the peaks in your annual sales cycle test the maximum capacity of your operations, these times are an excellent opportunity to identify challenges or inefficiencies. Unfortunately, this can be almost impossible to do while you're in the thick of things - even outside of peak season.
A 3PL provider is an invaluable solution to this common problem. Not only can they objectively analyze your current operations, but they can also leverage their experience to find solutions that work for your unique situation. In this blog post, we'll cover a few of the main areas your 3PL provider will investigate at the beginning of your partnership. The more data that you can provide, the better that they can help you. During your peak season when you are facing the most challenges, try to be cognizant of the following areas so your 3PL provider can learn where the best opportunities for improvement are.
- What are your current procedures for recruiting and training?
- When hiring for peak season, which areas do you hire for?
- What is the average number of staff used to accomplish different types of workloads?
- Are there recurring tasks that are overly complex or time-consuming?
- When productivity drops occur, are there identifiable causes?
Warehouse layout and inventory storage
- Are there ways to reorganize or upgrade pallet racks and storage systems to get more capacity?
- Are there bottlenecks in your current layout that affect picking productivity?
- Would a new warehouse facility be a cost effective solution?
There comes a time when ecommerce start-ups must decide whether to expand their internal fulfillment capabilities, or outsource to a third-party logistics and fulfillment provider. However, making that decision requires more consideration than a simple cost-analysis. While an internal fulfillment department comes with flexibility advantages, a partnership with a 3PL company also has perks that can benefit an ecommerce company as a whole. More...