Successfully growing an e-commerce business means managing growth, just as it does in any other industry. Expanding too rapidly can strain your capital resources and your ability to fulfill orders reliably, but failing to take advantage of growth opportunities limits your potential upside.
One crucial decision along that path is whether and when to outsource logistics to a third-party logistics supplier (3PL). There’s a clear argument to be made for focusing on your core competencies and letting a specialist handle the logistics for you. The more pressing question is if you’ll get an appropriate return on your outsourcing investment.
What ROI Looks Like In the Logistics Marketplace
Returns can come in the form of reduced or avoided costs, which are relatively easy to quantify, or in the form of increased revenue. Those increases can be less straightforward to measure because the disruptions of 2020 will affect your sales trends, but you should still have a good feel for how things are going. Returns can also come in the form of new capabilities and opportunities. Suppose your 3PL partner gives you the leverage you need to break into new markets or compete effectively with more extensive and better-financed rivals. In that case, that’s revenue you wouldn’t have created without outsourcing.
The other factor is your cost — or the investment portion of the ROI equation. This includes not just the shipping costs you negotiate with a given 3PL but also the costs of doing diligence on multiple providers and then transitioning once you’ve selected the partner best suited to your needs.
Whether your enterprise is experiencing rapid and chaotic growth or methodically reaching milestones in a well-laid 10-year plan, identifying and quantifying its needs before reaching out to 3PLs is your best starting point.
Defining What You Need in a Third-Party Logistics Provider
The simple reality is that your needs will vary depending on the maturity of your enterprise. A newly launched e-commerce merchant might have a relatively small product line and be focused on fast, reliable B2C order fulfillment. A fast-growing vendor may have existing warehousing and logistics capabilities that have evolved on a haphazard, ad hoc basis and are limiting potential growth. More prominent merchants may have extensive and well-honed in-house capabilities but turn to a 3PL for “surge capacity” or specialized expertise.
As a rule, the simpler your needs, the less you’ll need from your 3PL provider, and the less you can expect to pay. At the lower end, you may simply need a quote for a given volume of monthly business. At the upper end, you may be auditioning for a logistics partner, or — if you “don’t know what you don’t know” — a firm with the skills to design and implement a logistics structure that will scale to meet your current and future needs. Once you’ve defined those needs, you can reach out to multiple 3PLs, work through the proposals process and arrive at a reasonably sound figure that will represent your investment.
If you aren’t confident about your self-assessment of what your business needs, or if you’d like some guidance on the kinds of services available from 3PLs and the questions you should be asking when comparing them, the University of Tennessee’s Haslam College of Business publishes an excellent primer to help you through the process.
Cost Reductions from Third-Party Logistics
Cost reductions and cost avoidance are some of the easiest returns to quantify, so they’re a logical place to start. For example, smaller merchants partnering with a 3PL may enjoy an immediate reduction in cost per shipment simply because 3PLs handle much-larger volumes and enjoy economies of scale. It’s the rough equivalent of getting wholesale rather than retail pricing.
Cost avoidance is a significant factor when building out an in-house logistics and warehousing capability. That is a capital-intensive project, and unless you have previous logistics experience, it’s hard to forecast those costs accurately. Growing companies seldom have large amounts of capital to spare, so avoiding that cost — and freeing up the corresponding capital for other priorities — can help fuel your growth. You’ll also lower your operating expenses because you won’t be on the hook for added staffing or corresponding costs in worker’s compensation, liability, and related issues.
A 3PL with a substantial investment in warehouse management systems and up-to-date technology can also provide more reliable fulfillment than many vendors manage in-house. When your orders are picked accurately and delivered on time, you’ll avoid lost revenues due to penalties, chargebacks, or returns.
Many other potential cost savings can be found through outsourcing to a 3PL, but this handful of examples makes the point.
Revenue Gains from Third-Party Logistics
Outsourcing your e-commerce fulfillment to a 3PL creates opportunities for revenue enhancement on many fronts. The most obvious is that, by contracting your fulfillment requirements to a high-volume specialist in that field, you’ll gain the ability to ship more orders in a given timeframe. The more orders you can process, the more revenue you can generate.
You’ll also remove many artificial ceilings placed over your sales potential by outside factors. In July of 2020, for example, Amazon announced that it would restrict warehouse space for its third-party sellers to carve out capacity for its own projected first-party sales. If you were one of those sellers, that would limit the inventory you could hold to meet orders and limit your earnings for the crucial holiday period. A 3PL with access to plenty of warehouse space through ownership, leases, or flexible on-demand warehousing won’t put you in that position.
The biggest potential gains come from capabilities you wouldn’t be able to match without a 3PL partner. Do you need two-day fulfillment to stay competitive? One-day fulfillment? Do you want to pitch major retailers but lack the resources to meet their standards for compliance? A 3PL can open those doors for you.
The Cart, the Horse, and Getting it Right
Once you’ve built a working history with your 3PL provider, you’ll be able to quantify your investment formally, along with the returns you’ve earned on that investment. Unfortunately, you won’t have those numbers until you’ve decided to outsource, which can feel like putting the cart before the horse.
There are a couple of ways to work around that dilemma. Potential 3PL partners should be able to provide you with real-world case studies of working with businesses similar to yours and the returns they’ve generated from outsourcing. This can serve as a “reality check” for your projections and help you with your planning.
Another is to build an escape hatch into your agreement with your 3PL provider. You can do this by laying out a set of key performance metrics — on-time delivery or accuracy of picking, for example — with mutually agreed-upon standards of performance. You should then have the contractual right to terminate the agreement after a set period if your provider doesn’t measure up.
Taking the First Meaningful Step
Suppose you’ve arrived at the point of actively considering a partnership with a 3PL, and you’ve already begun the necessary planning and research. In that case, it’s time to connect the dots by reaching out to a potential 3PL partner.
Well-run 3PLs usually target specific niches they serve well, and in the case of Taylored Services, that means retail and e-commerce fulfillment. Our state-of-the-art technology and well-tuned logistics network can help your business reach its full potential without the growth-related headaches that thwart so many promising enterprises. Contact us today for a consultation to learn more about our services and how they can work for you.
References
University of Tennessee Haslam College of Business: Selecting and Managing a Third Party Logistics Provider: Best Practices, https://haslam.utk.edu/sites/default/files/Kenco.pdf.
Supply Chain Dive: Amazon Preps for Peak With Restrictions on 3rd-Party Seller Warehouse Space, https://www.supplychaindive.com/news/amazon-peak-season-restrictions-third-party-seller-warehouse-space/581567/.
Supply Chain Brain: Why You Need Two-Day Shipping — and How to Do It https://www.supplychainbrain.com/articles/31122-why-you-need-two-day-shipping-and-how-to-do-it.