3PL vs In-house Fulfilment: Which Solution Is Right for Your Material Handling?

By Jonas Tersteegen and Gregor Baumeister

This decision is not a straightforward one and requires careful consideration of various factors.

We explore the advantages and disadvantages of both solutions and the key considerations your logistics department should take into account when deciding on an outsourcing strategy or investing in your own system.

Benefits of an efficient material handling system

A material handling system will provide numerous benefits to your fulfilment centre, if designed well to meet your business needs. An effective material handling system should enable your fulfilment centre to have the necessary stock in smaller spaces where possible, reduce time spent on internal operations, reduce operational costs and optimise the overall flow of goods in its facility.

But the question is, should you invest in your own system for your material handling or find a third-party logistics (3PL) solution?

The answer depends on your financial, business and logistics requirements. These can influence your decision in choosing between using a 3PL or investing in your own material handling system.

There are pros and cons to both approaches to your material handling. We take a look at each.

Using a 3PL provider: The pros and cons

There are pros and cons to deploying a 3PL provider for your material handling fulfilment.

Advantages of using a 3PL provider

If logistics is not your business’ strong point, you will ultimately save costs by entrusting it to an external expert.

Using a 3PL provider will:

• Give you greater access to specialised expertise
• Enable your business to scale and be more flexible in accordance with its growth and changing capacities
• Involve significantly less initial capital investment

Essentially, there are three scenarios where outsourcing your logistics makes sense (although they are all interlinked):

1. If your company is looking for a flexible solution – you could be in the start-up phase, for example – you will need to devote your attention to other business matters. Employing an external expert will not only lower the barrier to having your logistics taken care of but will be able to scale more cost-effectively than you can.
2. If your company wants to expand its logistics infrastructure but does not have the requisite finance.
3. If your company operates in an environment in which sourcing staff is difficult, a 3PL provider will be contractually obliged to have sufficient staff to fulfil your orders and will manage the sourcing of qualified resources.

In addition, a 3PL provider that manages both the fulfilment and distribution part of your operations may be advantageous because it can control supply from fulfilment and distribution all the way to the last mile.

Disadvantages of using a 3PL for material handling fulfilment

However, there are also downsides to outsourcing logistics to an external supplier.

Using a 3PL means:

• There is less chance to generate revenue from the logistics process as a 3PL doesn’t pass any margins on to you;
• While it may be cheaper at the start, the ongoing costs are higher; hiring a 3PL provider will avoid the startup costs but avoiding the capital expenses will be traded against ongoing operating expenses;
• There will be the loss of some control over your operations;
• There is the potential for poor logistics performance, making it necessary for the two parties to identify appropriate KPIs to measure the agreed service levels and cost; and
• There’s also the potential for integration risks. Your business and your 3PL provider will need to be exchanging data so your information systems must be effectively integrated with your 3PL’s systems to ensure exchanges are timely, secure, complete and error-free. (Although there are solutions on the market that use standardised interfaces to solve the integration problem.)

Investing in an in-house material handling system: The pros and cons

Just as there are advantages and disadvantages to utilising an external provider for your material handling operations, so too is the case of deciding to invest in your own material handling system and performing your own fulfilment logistics.

Advantages of in-house material handling fulfilment

There are some clear advantages of investing in your own material handling system.

Firstly, you can design and build to your exact business needs, creating greater opportunity for customisation and optimisation from which you can gain directly. Conversely, a 3PL often has a multi-use system fit for more than one e-tailer and if it designs a system to your specific requirements, will demand a longer contract of service to justify its investment.

Secondly, investing in your own fulfilment system offers cost savings in the long-term. While there is a substantial capital investment upfront, the ROI can be gained through optimisation of processes in ways that generate revenue. But you will have to make a business case for deploying your own system and this involves meeting some key factors.

Thirdly, you can influence your logistics arrangements on the commercial side. You will be 100 percent in control of the service agreements with your end customers and if you have the right expertise and resources, you can realise an income from this part of the process.

Disadvantages of in-house material handling fulfilment

For all the many advantages of investing in your own material handling system, however, there are also some disadvantages.

The most obvious downside is that you need to have the capital for this type of upfront investment and a fast ROI to justify the investment.  (That being said, there are always workarounds, such as renting equipment such as autonomous mobile robots (AMRs) for peak periods to scale up a base system.)

The other downsides to internal fulfilment are that you will need to have the space, the resources and the technical expertise to operate your own fulfilment logistics and these are costly.

Not having the necessary know-how in your team is particularly problematic because this will need to be purchased – at a cost. Moreover, your in-house knowledge may not be up-to-date and this is one of the primary reasons why companies use 3PL consultants to gain the most up-to-date industry knowledge.

Finally, you may not have the space to expand your existing sites with a logistics centre, especially if you’re located in a built-up area.

Takeaway

Considering whether to invest in your own material handling fulfilment or use the services of a 3PL provider is never black and white. Moreover, there are a mix of other solutions, such as the co-ownership partnership arrangement or installing your equipment in another party’s building or investing in your own equipment to an extent and renting further equipment (or services) to cope with peak times that you may need to also consider. It means assessing your business on a regular basis to understand which solution suits your current business environment and strategy.