Whether you’re experiencing it now or later, as an online seller, there will be a tipping point when your e-commerce order transaction volume has increased beyond your team’s current capabilities. As your business grows, so does the cost and complexity of running it.
The champagne problem: While this is a good sign for your online business’s revenue, with increased scale comes stock-outs, exhausted warehouse employees and ultimately missed sales.
This is a pivotal moment for your company and you have two options:
- You could buy/rent a larger warehouse space, and hire more employees
- Or, you could outsource your warehouse pick and pack fulfillment to a 3PL (third party logistics) company
In this post we will be discussing what a 3PL is, the advantages and disadvantages of utilizing a 3PL, an in-depth analysis of the #1 online home appliance filter and accessory business, Crucial Vacuum and their transition to a 3PL.
What is a 3PL?
A third party logistics provider (3PL) is an outsourced warehouse that provides you with most or all logistics services for your online business such as: picking, packing, warehousing, and shipping.
Fulfillment and storage becomes a service provided to your business; therefore they have their own operation but follow the guidelines you give them.
What are the advantages of using a 3PL?
- Reduction in long-term expenses that includes employee benefits, salaries, insurance, payroll expenses, warehouse rental/maintenance and transportation costs
- You’ll get access to better negotiated shipping rates with shipping carriers than going at it alone since the 3PL aggregates volume (this is important since shipping costs take a huge chunk of the e-commerce profits)
- 3PLs have warehouses in strategic locations all over the USA and in some cases the world, further expanding your business’s fulfillment capabilities (so if you’re located on the east coast, you can get a 3PL located on the west coast decreasing your lead time by at least a week!)
- Expand and contract your allocated 3PL warehouse space according to your business needs – if seasonality plays a factor in your e-commerce you can easily adjust the space/services a 3PL provides
- Since this is their dedicated business, you could expect the utmost professional and efficient service that has a more defined quality assurance for your e-commerce business and its success
Alleviate finances instead of tying up cash flow in infrastructure – redeploy and invest into your online products marketing and building your brand
- Focus on your core competency – having a firm handle on your logistics frees up your time and resources to focus on other aspects of your business such as customer service, web development, listing optimization and marketing
- Take back your time to do more important things – Often forgotten intangibles – Save a ton of time, reduce headaches, going for a jog in the park or take a nap on the hammock
What are the disadvantages of using a 3PL?
- Loss of control over the logistics function of your business. You become dependent on their services
- Loss of hands-on access on your inventory – sometimes it’s nice to see and touch the products you sell!
- The overall cost of the 3PLs services. Initial costs of converting to a 3PL can be very pricey depending on your goods and logistical setup. The time involved could also take quite a while, which will cost your business money while transitioning
Case Study: Crucial Vacuum transition from Warehouse Ownership to a 3PL Environment
Coming from humble beginnings Crucial has grown into a multi-million dollar a year business selling on several channels including eBay, Amazon, NewEgg, Rakuten, Sears, their own storefront and more.
Fulfilling over 60,000 orders per month Crucial, like many other online sellers, relies heavily on an optimized fulfillment and logistics workflow to ensure customer satisfaction and retention.
But how do you go about maintaining that level of operation?
When Crucial was first starting out they fulfilled orders themselves, first in his Upper West Side Apartment, then Harlem until they moved to a larger warehouse in Little Ferry, NJ. The concept of a SKU was non-existent and disorganization, overselling across multiple channels and high mistakes were very, very frequent.
“At the time I ran my business using Shipstation. It was a big mistake letting a ‘shipping tool’ run my e-commerce business.” Chad Rubin, CEO Crucial Vacuum.
By having to both manage a warehouse and establish his brand, Chad faced:
- A disorganized warehouse
- Managing warehouse workers who were inefficient
- Growth at an overwhelming rate
Crucial Vacuums former warehouse in Little Ferry, NJ:
There was no time to focus on long-term growth. It became a matter of putting out daily fires and struggling to keep up with the business.
“Most days I would focus on picking & packing as opposed to focusing my efforts on creating optimized listings, marketing effectively and building a brand people would trust. I was working IN my business not ON it.”
A change had to be made, because the daily struggle of keeping up with their own company’s growth became too much to bear. Work/life balance was non-existent as workdays became longer and longer.
The decision to utilize a 3PL was not instantaneous as one may hope. There’s no designated point in your business where you should switch, however the longer your business has been around, the harder the transition typically is.
Crucial Vacuum’s daily struggle inside their former warehouse:
Chad’s business, Crucial Vacuum, made the switch late in its life and because of it, the overall transition took months to complete.
“I kept asking myself ‘What if this doesn’t work, am I ready to give up control of my operation and is this going to be profitable for my business long term?’”
While owning a warehouse and having employees did cost a significant amount of money, it’s the business’s growth that became alarming. Chad needed to have more employees, more warehouse space and a lot of dedicated time for inventory handling when he wished to focus on marketing and selling his products. Chad needed his warehouse to support his business not prevent it from growth.
This is when Chad discovered a 3PL-warehousing firm located just 30 minutes away from Crucial Vacuum’s offices. This close proximity became a huge contributing factor in the selection of a 3PL-warehousing firm. This allowed Chad to drive to the warehouse, inspect his personal product, and instruct the 3PL’s employees on his preference of product shipping. Due to the outsourced warehouse being a smaller boutique player, the 3PL and Crucial Vacuum grew together, and provided constructive criticism to benefit each other.
While it was cheaper to own the warehouse and employ the staff initially, switching to a 3PL allowed Crucial Vacuum to grow further than just the one warehouse, allowing him to increase inventory size, overseas order fulfillment and focus on building a brand.
“I discovered with time that utilizing a 3PL has an inverse relationship with managing a warehouse when it comes to overall cost over time.”
- While using an in-house warehouse, as time goes by and your business grows, there’ll be more costs in order to fulfill the higher order volume. Costs include more employees, salary negotiations for higher pay, and benefits for the new employees.
- While using a 3PL, the cost initially will be high, but there would be less costs as your business grows allowing you to negotiate lower rates since your shipping volume is increasing.
One of the most significant changes we’ve seen since switching over to a 3PL, is our return rate . Within a year we went from having a return rate of 10% to having a rate of 0.2% . It’s incredible.
With the return rate dropping, Crucial Vacuum received less customer complaints via e-mail:
While the return rate was dropping, Crucial Vacuum’s order volume was growing tremendously. The gray line of the graph represents the amount of emails sent to customers with issues from their orders (August 2013) from before the 3PL implementation, while the green line represents post-3PL (August 2015). However, even with the highly increased order volume post-3PL, email correspondence has decreased nearly 28%, because of the efficient pick and packing of the 3PL.
By eliminating his warehouse management, Chad had a lot more time to focus on his marketing and product expansion. Now his business has grown much larger than before.
With the focus on Crucial Vacuum’s brand, marketing and product line, Crucial Vacuum had moved to an awesome new office without a disorganized warehouse next door.
For Chad and his Crucial Vacuum business, transitioning to a 3PL warehousing firm provided the opportunity to truly grow as a business. Going back to owning a warehouse is no longer on the roadmap as his 3PL partner grows as a business alongside Crucial Vacuum.
Should you consider going to a 3PL?
3PL warehousing is most useful to businesses that are either new, on the smaller side, or have experienced recent growth and are looking to further expand down the line and optimize.
From shipping your inventory out to the warehouse to the inventory reports from the 3PL firm, this transferring process can take months to even a year depending on your setup and size..
Take a look at your overall operation. Then ask the 3PL the following:
- What would the downtime be for my business?
- Do they fulfill from multiple locations on either coast?
- Do they have customers that sell on the same sales channels that you do?
- Does their warehouse experience flooding?
- Can they offer my customers same day shipping?
- Is there a contract minimum?
- How much space can they offer? Is there room to grow and scale?
- Does the warehouse communicate seamlessly with my software (cough* Skubana cough*)
- What technologies and services do they have in place to help my business?
- Are they capable of syncing up with an FTP?
- Can they handle FBA preparations?
- Are there referrals you can contact?
- Are you billed per item or per hour for picking/packing?
- Are there peak periods that prevent them from fulfilling in 1-day?
- Do you get discounts as you scale?
- Can their fulfillment team provide real-time bundling and kitting for your order level?
- How do they handle returns?
- What’s their error rate? Orders fulfilled accurately and on time.
Consider all that has been discussed in this article and make your decision from there with the right questions and research.
In the case of Crucial Vacuum this synergetic relationship proves that a 3PL with your e-commerce’s best interests in mind is an absolute solution to ensuring that you don’t work IN your business, but rather work ON your business to encourage future growth.
Work Smart. Sell More.
The More You Know: No matter how you fulfill whether it’s through a dropshipper, 3PL, in-house, or FBA Skubana has you covered. With the ability to seamlessly integrate to any 3PL with the click of a button, Skubana will automatically drop all of your marketplace/shopping cart orders onto the 3PL. Skubana then pushes that inventory to all your marketplaces and shopping carts. There’s no limit to the capabilities of your e-commerce business with the right software backing it.