I recently read some survey results that claimed that fast-growing DTC/E-commerce companies tend to use a 3PL. I have no doubt that is true, but I strongly believe that more businesses should run their own operations. I am going to make a case for that in this post.
To start, let’s get some background out of the way. If your company ships physical products to consumers, you basically have a choice: either fulfill those orders yourself or use a 3PL (a company that handles those operations for you).
The case for a 3PL goes like this: a 3PL takes a big responsibility off your plate so you can focus on other things like marketing and product development. You do not have to rent a warehouse and fill it with people. You don’t have to negotiate with shipping companies for better rates. You don’t have to deal with returns and other time-consuming tasks.
That all sounds attractive, but there are two little gotchas:
- 3PLs are expensive and hidden costs abound to make them more expensive.
- 3PLs generally are just not very good, especially for low-volume clients.
3PLs are expensive
Up front, let’s acknowledge that 3PLs can sometimes offer cost savings on two levels.
First, in theory, their volume should result in lower shipping costs (if they will pass them on to you). And, if they have your products in multiple warehouses scattered around the country, that should help shipping costs as well. Your mileage may vary on whether these savings actually show up on your P&L. My experience is that we are generally able to get equivalent or even cheaper rates with the major carriers.
Second, there is an efficiency that comes with scale. In other words, a 3PL should have tight operations, processes, and equipment that makes it cheaper for them to do the work rather than you. For example, you may not have a forklift to unload a truck, but they almost certainly will have a forklift. Their processes for receiving should be way better than yours. Again, I am skeptical. Our receiving costs are a fraction of what a 3PL has quoted us in the past. Granted, our operations are tight, and if they were not, it might be a very different story.
Outside of these two possible savings, a 3PL is not a great deal. With a bit of investment in good operations, you can fulfill orders yourself far cheaper than you would pay a 3PL. That is true even if you pay your operations team well. How much cheaper? I can tell you that when we have shopped our warehouse operations to 3PLs in the past, they have quoted us prices that are 3-4 times what we pay in labor costs today. Granted, we have infrastructure costs that need to be added in, but even after doing that, our operations are about half of what a 3PL would charge.
There are other costs as well that you need to consider. 3PLs typically have many fees on top of basic picking/packing/shipping such as storage and receiving. If you need special labor done such as applying labels, God help you.
And then there are hidden costs: lost/damaged inventory (no 3PL is going to care for your inventory like you would), inefficient box selection that costs you additional shipping fees, the cost of having someone on your team act as a liaison to deal with mistakes, the cost of integration with them, and more.
So, overall, assuming that your operations are tight, 3PLs are generally going to cost you far more money.
3PLs are just not very good, especially for smaller clients
It is tough to be a successful 3PL. Like many other service companies, a 3PL has to sell a service in which it is using low-paid employees but charging a premium price. I appreciate the difficulty in that, especially with our current post-covid employer difficulties.
But, the reality is that a typical 3PL is not able to provide that premium service using cheap labor. Most of them fail miserably. I am not just talking about the easiest 3PL to beat up on (ShipBob). I am referring to about all of them. And when things go wrong, a 3PL prioritizes its clients. That is why during the last Black Friday season, I have peers in the DTC space that use 3PLs and were unable to get their orders shipped for up to a month.
We in the DTC space have lots of vendors with which we have legitimate beefs: marketing agencies, Amazon, Meta, etc. But, complaints about 3PLs are legendary. I know of very few people in the industry that are happy enough to recommend their 3PL. Actually, many of them are actively looking for a new one.
Benefits of doing your own fulfillment
Certainly, some companies probably should use a 3PL. But many companies (especially smaller ones) really should consider keeping those operations in-house. Here are the major two reasons why:
- A better customer experience. You have far more control over fulfillment speed and quality. You can also personalize the customer experience far more. In-house operations can be a powerful customer retention strategy in itself.
- Saves money.
In short, doing your own fulfillment creates a competitive advantage for you. It increases your margin and allows you to improve customer satisfaction. And frankly, if done well, it comes without the major headaches of dealing with a 3PL.