Big Box or Scatter Shot? 3PL's Can Help Both
Won't I Lose Control? An important psychological barrier that any first-time outsourcer must cross is the fear of losing control if internal employees are not running the warehouse.
Let's analyze the "control" issue. If you don't outsource, and it's a slow time at the warehouse, your employees are drinking coffee on your dime. Not so in a cross-utilized third-party logistics (3PL) environment, where labor can be shifted to other contracts during periods of slower activity.
If a major screw-up occurs, you can do two things with your own warehouse employees: scream at them, and fire them.
In an outsourced environment, however, you can still scream at the 3PL and fire them but you also have the option of building penalty clauses and gainsharing programs into your contract to ensure that the 3PL pays you if anything out of the ordinary happens. That option is not available using your own labor. In fact, most companies that outsource warehousing operations find they gain more control than they ever had.
What Kind of Warehousing Should I Outsource? Warehouses come in many shapes and differ in their design and operation. Some common warehouse operations include:
Direct to Consumer fulfillment (often for catalogues and web sites)
Vendor-Managed Inventory (VMI)
Returns (Reverse logistics)
Each type of warehouse is fundamentally different from the next, but in most cases, companies can consolidate several of these functions into one location, rather than operate numerous warehouses around the country.
Although every company's requirements are different, many opt for the "warehouse-within-a-warehouse" function -- replenish across the aisle, rather than across the country -- to keep customer satisfaction high while avoiding ballooning facility costs.
And remember, there is a fundamental difference between "public" (multi-client) warehousing for small footprint and/or short-term users, and contract (single-client) warehousing for larger companies with multi-year demand.
Costs vs. Client Happiness
1. Big Box: These companies operate one or more large warehouses or distribution centers, but don't realize they are using more labor than they need. Big box companies often use order picking, rather than more efficient zone or wave picking algorithms typically employed by 3PLs to dramatically cut down the required head count.
These companies are delighted to discover that the 3PL needs only 80 workers, instead of the 100 workers the company employed, and that the 3PL will hire their best 80 people. These big box companies get the best of both worlds: they significantly reduce costs and maintain a trained and right-sized warehouse team.
2. Scatter Shot: These companies scatter inventory around the United States with impunity -- placing inventory in a small, public warehouse every time they get a new customer. Then 20 years go by, and now they operate 30 warehouses.
Sound familiar? Sales has told corporate management that they'll lose customers if they don't operate this way. Operations hasn't realized that with the advent of modern logistics concepts, customers can still receive one- to two-day delivery service with a consolidated, optimized small warehouse footprint.
30 warehouses can be consolidated into five without disrupting customer deliveries, and costs can be rationalized.
Will Freight Costs Rise?
Third-party logistics providers are standing by to help both big box and scatter shot organizations. Remember, they do this for a living.
Frequently those considering outsourcing will ask: "If I consolidate my warehousing network, won't my freight costs rise because some customers will now be farther away from a warehouse?" Yes, some costs will rise, but others will fall.
Remember, three costs are involved: the freight, of course, but also the capital warehouse expenses, and the labor component to move merchandise to your customers.
Third-party logistics providers are trained to combine all three costs, rather than look at only the cost of transportation, to give you a lower total distribution cost than before you outsourced.
For companies trapped in the "we've always done it this way" mindset, a whole new world of cost-avoidance opportunities are waiting for you.