Warehousing operations are an essential pillar for business. As your manufacturing company grows, the scope and complexity of your warehousing processes can increasingly become overwhelming. When this happens, it may be most prudent to leave this critical component of your supply chain in the hands of experts by hiring a third-party warehousing company.
Third-party warehousing companies vary in the range of services they provide. Apart from storage and general warehousing, third-party warehouses could be involved in retail inventory, assembly and kitting, distribution, pick and pack, expiring/expired product handling, and reverse logistics. As with any major business decision, you have to weigh the pros and cons of third-party warehousing to determine if it is the right move for you. Here, the founder of InsightQuote, Will Schneider, discusses the Top 10 pros and cons of third-party warehousing.
Pros of third-party warehousing
1. Cost savings
Third-party warehousing may initially appear costly. However, these higher costs make sense when you think about the value that a third-party expert brings. They likely have warehousing infrastructure that’s substantially more advanced and efficient than your own. Effectively, you enjoy more value out of each dollar invested.
2. Current warehouse technology
Warehouse operations can be complex. The right technology can help streamline your operations and improve your ability to automate, track shipments, and manage inventory. That said, warehouse technology is not a monolith. The more advanced the technology, the greater the potential benefits.
Yet, sophisticated systems are expensive and many small and medium-sized manufacturers wouldn’t have the financial capability for this. As their core business, third-party warehouses have no qualms about investing in the best technology.
3. Subject-matter experts
As warehousing specialists, a third-party warehousing service has the benefit of encountering and resolving numerous scenarios. For you, on the other hand, warehousing is likely an area that sits well outside your central skill set.
When you hand over your warehouse operations to a third-party service provider, you gain from the knowledge of a company for whom logistics is their core business. They can anticipate and preempt less obvious hurdles.
4. Navigating warehousing regulations
Warehousing is more than just storing and moving products. There are numerous rules and regulations governing the industry, sometimes specific to particular items. This gets even more complicated if you have to ship products across borders.
Regulatory penalties can eat into your profit margin and, in the worst case, see the revocation of your business license. When you outsource to a third-party warehouse, you hand over operations to a company that has a deep understanding of warehouse regulations — everything from custom bonds to product labeling.
Business managers hope for exponential growth but realistically expect a gentler curve. Still, it's best to be prepared for times when you experience a burst of orders either due to seasonality or your product’s unexpected virality.
If you are accustomed to fulfilling 100 orders per day with in-house warehouse operations, you will probably be overwhelmed and lose sales when orders suddenly spike to 1,000. With third-party warehousing, you can switch up operations on demand to handle exponential growth and unexpected surge in volume.
Cons of third-party warehousing
1. Lack of control
A shift of operations to a third party comes with a loss of complete process control. When warehousing is in-house, you can make crucial decisions on the fly and improvise fast when needed. Once you start relying on a third party, your options are constrained by the capabilities of that third party.
For example, as your business expands the third-party warehouse may not necessarily have the capacity to scale accordingly.
2. Inadequate transparency
Working with a third-party warehouse means extracting yourself from this process. You no longer have direct engagement with the people that do the actual work. If something is off and requires immediate intervention, you now have a middleman to contend with. This creates a visibility barrier and may slow down your ability to get things moving fast.
If the warehousing provider does not have a well-oiled communication and escalation process, this could create and/or exacerbate delays.
3. Distance from inventory
When you are running warehouse operations in-house, you pick a warehouse location that is near to you for ease of access when needed. On the other hand, a third-party warehouse will choose locations that are most advantageous to their overall operations and routes.
This is not necessarily a problem unless you prefer a more hands-on, on-the-factory-floor approach to running your business. Such distance would either require some getting used to, adjusting your management style, or incurring transportation costs from frequent visits.
4. System integration
You want a smooth hand-off between your orders database and the third-party warehouse systems. Since you and the warehouse provider did not consult each other before acquiring your respective system of choice, there are no guarantees there will be smooth integration.
An advanced system at the warehouse service provider will not matter much if it isn’t interoperable with your own.
5. Customisation limitations
A third-party warehousing provider may work with dozens or hundreds of customers. They can offer this service at a relatively affordable fee due to the repeatability of the process at scale. While they may provide some options for customisation, these will be highly constrained.
The profitability of the third-party warehousing model comes down to repeating a similar process for a large number of clients. If you want to customise your warehouse operations, you are better off keeping things in-house.
Wrapping up third-party warehousing
Picking the most appropriate warehousing approach for your manufacturing business requires careful thought. As a general rule, if your business is growing fast, third-party warehousing may be a better option. That way, you can focus your resources and energies on further scaling your business.