Deciding whether to use a 3PL is a tough decision. But what if I told you there's a simple framework to make the decision easier? Read on to help you decide if a 3PL is the right next move for your business!
Welcome back to my blog series on optimizing shipping costs! For those who don’t know me, I’m Tyler, and I founded String to help eCommerce businesses save time and money on order fulfillment.
Today we’re going to focus on a topic people ask me about frequently. “Should we use a 3PL or should we fulfill in-house?” This is a hot button issue that has people with strong opinions on both sides. Frankly,I think most of the things people argue about are non-issues…
I’m here to tell you that making the decision really isn’t that hard! And in most cases the opinions of others regarding whether you should use a 3PL are mostly irrelevant and comedown to your personal circumstances.
In short, there are two reasons that matter when it comes to making this decision.
1. At this moment in time, is it cheaper for my business to fulfill orders in house or via a 3PL?
2. Do I want to be responsible for controlling the fulfillment process and customer experience?
That’s it - It’s really that simple! There’s a decision framework for each that we’ll cover in a second, but it boils down to these two things. To make this easier for you, I’ll walk you through the decision framework.
Financially, we have two factors in the decision framework at whatever stage you’re at. 1) what are the fixed costs for each option. 2) What are the variable costs for each option.
For our model, we’re going to say labor is a fixed cost. We can debate if labor is fixed or variable, but in our case let’s assume you’ll need to commit to some regularly scheduled payments to have the labor you need for in-house fulfillment.
With that in mind, until you are not able to fulfill orders with the personnel and space you currently have, your fixed costs difference is zero. Hence, it doesn’t make financial sense to use a 3PL because the main financial benefit of a 3PL is not paying for the additional fixed costs required to fulfill orders.
On the other hand, 3PLs will always have a higher variable cost per order fulfilled. So when your business starts to take off or you’re at the point where you can not physically fulfill orders in time, you’ll need to do some math to figure out what makes the most sense for you.
I’d recommend using a 3-year ROI period to calculate the net present value of each option. Of course, if you don’t have the money up front to invest in the necessary fixed costs then you already have an answer! But if you have enough that you can consider investing into your own resources, create a simple model using by adding the fixed cost investment to the variable cost to fulfill each order. Choose the cheaper one.
While the raw finances are important, what’s more important is what level of responsibility you really want over the fulfillment process and customer experience. To figure this out, consider two things.
1) How much time will you spend on this vs other things you can be doing to grow your business? If you’re planning to open new sales channels, actively develop new products, or focus on creating a solid brand foundation it might make sense for you to spend your efforts doing those things instead of fulfilling orders.
2) How important is the customer experience to you? A 3PL will not care about your customers as much as you do. To a 3PL, you’re their customer and they want to make you happy! But they probably also have 10 or more other customers that they need to care about too. If you use a3PL, know that your customers may not receive the same level of care and attention to detail that they would if you were leading the process.
Why it may not be the answer you wanted, deciding to work with a 3PL is a personal decision. Successful businesses have been built on both models and there are horror stories about each.
As a rule of thumb, if you’re doing less than 50 orders a day, you can probably handle it by yourself. Once you get to the 50-300 orders a day range, it probably makes the most sense to use a 3PL. And then once you get above 400-500 orders a day it would make financial sense to bring it back in house. At that point you just need to decide if it’s something you personally want to take on. Fulfillment is a lot of work and can suck the energy out of you. So, if you plan on doing it in-house prepare to put in the necessary effort or hire somebody who can.
If you need help finding a 3PL, I’d recommend using a service like fulfill.com who can find the best 3PL for you based on your unique setup. It’ll be faster and more effective than doing it alone.
If you’ve made it this far, thank you for reading to the end and let me know if there’s anything you’d like me to discuss next week!