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In house vs 3PL: which logistics option is right for you?

12 September 2019

John Perry, managing director at SCALA, weighs up the pros and cons of big picture logistics options.

Over the past few decades, we have seen a considerable shift away from businesses running their own logistics operations, with many companies choosing to outsource to third-party logistics providers (3PLs).

The reasons for this have been varied, ranging from businesses taking the strategic decision that logistics is not a core competency and opting to focus on their perceived strengths instead, to 3PLs’ capability to provide increased flexibility, cost savings and service benefits. 

Interestingly, however, there now appears to be a move back in the opposite direction.

Many of the major retail disruptors, including Amazon, Alibaba and JD.com, see logistics as a fundamental aspect of their service offering to their customers. As a result, all of these companies have either been investing in developing their own logistics infrastructure or have acquired logistics companies.

Amazon already sends almost half (46.7%) of its own shipments in the United States, and an announcement in June from FedEx that it would not be renewing one of its contracts with Amazon would suggest this figure is set to increase. Meanwhile, JD.com’s logistics arm recently raised a $218 million investment fund, which it says will focus on smart logistics and smart supply chain technology.

While bold moves like this are expected from the industry’s leading innovators, British high street stalwart Debenhams has recently made the decision to take its distribution operations in-house as of August 2019. Debenhams will take over the operation of its distribution centres at Peterborough and Sherburn, with plans to close its Sherburn distribution centre in August 2020 and manage all of its distribution operations at Peterborough.

So, given this emerging trend, what exactly are the relative benefits of relying on a 3PL versus going it alone? And how do businesses know which is the right choice for them?

Evaluating the pros and cons

The benefits of outsourcing logistics can be substantial. However, loss of control over any outsourced business function can be a potential business risk.

One of the main advantages of outsourcing logistics is scalability. A 3PL can scale up or down quickly to respond to demand, without the business incurring any overheads. For early-stage companies, their 3PL can provide the requisite level of service without capital investment. As a company grows organically, or through mergers and acquisitions, the 3PL can add services and capacity as necessary.

Bringing a 3PL on board can also help a business to make substantial time and cost savings. Rather than allocate money and resources towards building and maintaining their own logistics infrastructure, businesses can instead focus on their core activities. This allows staff to concentrate on strategic planning and operational processes that better enable business growth.

However, choosing to work with a 3PL also results in an organisation giving up a certain amount of control. The 3PL will be responsible for a significant portion of the company’s relationship with its customers, but any lapses in service will reflect badly on the company itself, not the 3PL. They must entrust the 3PL to meet the required service level, which if not met can have a significant impact on customer satisfaction, and therefore the future success of the business.

On the other hand, when a business chooses to handle its logistics itself, it has complete control over the entire process. This means that, in theory, it can ensure it is consistently offering the perfect service for its customers. It also reduces the risk of communication issues, as there are only two parties involved from order to delivery. This reduces the potential for communication barriers or breakdowns.

An in-house team may be a better choice for businesses in highly regulated industries, or those with very specific needs, where choice of 3PLs may be restricted by the specific expertise required. Having no contract obligations with a 3PL can also make it easier for a business to be agile and adapt more quickly to a changing market.

Despite these benefits, the costs of establishing the appropriate logistics infrastructure can be prohibitive, particularly at the outset. It can also be much more difficult for a business to expand into emerging markets and new territories. 3PLs will already have distribution centres and warehouses in place and have obtained the proper accreditation to offer global services. Without the help of a 3PL, businesses may find these new markets are inaccessible or unaffordable. 

Making the right decision

To put it simply, there is no single answer that is the right fit for all companies. Each organisation needs to consider its options carefully in light of a number of key factors, including:

• Company culture - does the company consider logistics a core element of its business? 

• Company investment strategy - is the company prepared to invest capital to set up and maintain logistics operations, including buildings, equipment, vehicles, IT systems, and people?

• Company staffing approach - is the company prepared to invest in the management expertise that is required to set up and to effectively manage logistics operations?

• The nature of the logistics operation – is the company able to cope with the degree of complexity, from product range through to individual customer delivery requirements? 

• Future proofing – has the organisation considered all of the possible future scenarios that may impact its logistics requirements?

• Flexibility and agility – is the company in the best position to meet changing customer expectations?

These are just a few of the considerations that need to be taken into account when a business is deciding whether or not to outsource their logistics. However, while large companies especially may have the capacity to run their own warehouses and shipping operations to large volume customers, most companies are unlikely to have the scale to undertake small drop deliveries to a wide range of disparate customers, including parcel delivery to eCommerce customers. This means that, even if certain logistics operations are brought in-house, the majority of businesses will still require the services of a 3PL.

In order to make these partnerships a success, companies should not just look at it as an outsourced activity, leaving all of the management to the 3PL. Company management input is essential to ensure that the supply chain and logistics operations are continually being developed to meet the future needs of the business.

Additionally, making the right choice of 3PL is absolutely essential. This begins with ensuring the company is adopting the right strategy, and then undertaking the tender process in a way that guarantees the chosen partner is totally aligned in terms of business values, as well as fully able to provide the necessary logistics capabilities – both for now and in the future.

It’s clear that outsourcing logistics and running the operations in-house both have their own distinct advantages and disadvantages. Businesses must think carefully before making a decision, however most companies will likely require the help of a 3PL at some stage. It’s therefore essential that businesses ensure they understand how to select the right 3PL for their needs, and understand how to nurture the relationship. Only then can both partners benefit from the relationship in the long term.