One of the tougher financial decisions for a new company, especially one that can be considered a small-to-medium-sized business, is whether and how much to outsource certain functions, tasks, and processes to a third party. The initial impulse with a new company is to try and save as much money as possible by establishing efficient in-house teams.
While there are reasons why in-house teams may be the right choice, it’s not guaranteed to be more efficient or financially prudent than hiring a third party vendor. In fact, by the time many companies end up conceding and crawling to a third party, they have many tales of woe regarding their in-house failures.
On the other hand, many bigger corporations establish robust in-house teams for things like logistics, ecommerce fulfillment, and security and only use 3rd parties for specific kinds of partnerships and business collaborations. Just as there are horror stories from in-house fails, there are plenty of horror stories of small business owners wasting precious money and time on inept third parties.
So, what’s the right answer? Well, unfortunately, there is no 100% right answer on when to go in-house and when to outsource to a third party. There are a variety of specific factors that must be assessed on a case by case situation.
Ecommerce is critically important these days. It has surpassed traditional commerce in global sales and the survival of most companies depends on it. Ecommerce fulfillment involves six basic components: inventory management; warehousing and storage; receiving; pick and pack; shipping; and returns.
The decision of whether a company’s ecommerce fulfillment should be handled in-house or by a third party should be evidence-based and data-based. Generally speaking though, it has to do with your inventory volume. If your business pipeline is relatively small, involving shipping fewer than 100 items in a month, your ecommerce fulfillment is probably best handled in-house.
Many ecommerces businesses that consist of one or two-person selling operations on Etsy and other C2C platforms usually do not have the inventory volume or capital for more elaborate warehouse solutions.
The advantages of in-house ecommerce fulfillment are: simpler implementation, lower startup costs, custom packaging, and control.
It may sound kind of counterintuitive but the bigger the company is the more third-party logistics come into play. You might think that the bigger you get, the more space and resources you have to do your own operations. But it’s more complex than that.
Third party logistics (3PL) in ecommerce fulfillment appeals to companies who need supply chain management. Supply chains are critically important to business growth. They include: sourcing transportation; inventory storage and management; freight forwarding; shipping/receiving and distribution; customs brokerage; cross-docking; and picking and packing.
Outsourcing to a 3PL gives your business more time to scale up your marketing and business development. It also allows you to tap into your 3PL’s data insights, shipping networks, and buying power.
Both in-house and 3PL have their own drawbacks, of course. In-house ecommerce is difficult to scale, time-consuming, and limited in labor and storage space. On the other hand, 3PL forces you to give up control over aspects of your customer service and makes your supply chain totally reliant on another company.
If both of these options make you nervous, there is a third path you can take to handle your ecommerce fulfillment. It’s called dropshipping and it has become increasingly popular aas behemoth corporations like Amazon continue to dominate the market.
Dropshipping means that the orders from your ecommerce store are handled by your supplier. This supplier/manufacturer will pick, pack, and ship the order directly to the customer. The advantages of dropshipping are lower startup costs and inventory costs. It also means you only pay for what you sell.
However, dropshipping has its disadvantages, too. You will have no control over shipping or handling and are reliant on supplier stock. You can also count on lower profit margins, shorter lead times, and no bulk pricing.
In the end, the business decision of how to handle your ecommerce fulfillment is a highly specific one that must be considered based purely on your company’s financials. In-house, third-party, or dropshipping can all work well. At the same time, they may not be right for you at this specific time in your growth. It’s your job to find the right match for the present.
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