By Ian Hobkirk
Managing Director of Commonwealth Supply Chain Advisors
Over the last twelve months I’ve had more and more conversations with companies that are considering outsourcing distribution to a third party logistics provider (3PL). Third party logistics providers have been around for decades and have evolved significantly since they first emerged on the scene as public warehouses-places where companies could store pallets and goods and retrieve them when they needed them. Today, modern 3PL providers offer a host of distribution services including outbound order fulfillment, piece picking and packing, custom labeling, kitting, light manufacturing, and many other value-added services. So what sorts of companies should consider using a 3PL provider?
There are several reasons why a 3PL distribution outsourcing relationship could be more viable than operating an internal distribution center.
Reason #1: Flexibility and Scalability
A 3PL may be worth considering for companies that have an unpredictable growth model. When a company is experiencing very rapid growth, it can sometimes be challenging for them to acquire additional distribution real estate quickly enough to keep pace. Furthermore, when a business is rapidly evolving, business requirements are in a constant state of change with new customers, new distribution requirements and new processes. Maintaining a properly trained staff that can quickly respond to all these different business needs is challenging at best. Fast growing companies with unpredictable growth patterns may want to consider a 3PL, at least in the short-term. Third-party logistics providers typically have additional real estate and labor readily at their disposal to be able to respond quickly to changes in the business.
Reason #2: Expansion into New Geographic Regions
Companies considering adding a distribution center for the purpose of expanding their sales reach into a new geographic area may also wish to consider using a 3PL. Because it can be hard to predict how rapidly the business will grow in a certain geographic region, a company may not wish to buy or lease real estate and go through the time consuming process of hiring employees and procuring material handling equipment to bring a new distribution center online. A 3PL may make perfect sense in these instances as they can rapidly set up a new operation, scale it quickly, if needed, and adjust to volatility of demand. A 3PL in this instance may simply be an interim step before a company brings the operation in house once the business model stabilizes.
Reason #3: Lack of Distribution Capabilities
For many companies, distribution is simply not a core competency. These companies may wish to focus their expertise and talent in areas such as product development and sales and marketing and leave the business of distribution (and perhaps also transportation) in the hands of trained professionals. In these instances using a 3PL may simply be the pragmatic choice for handling an aspect of the business that the company simply isn’t good at internally.
Reason #4: Start Up Companies
New businesses may not wish to devote time and energy to operating their own distribution center. Furthermore, they may simply be too small to have the economies of scale to profitably manage distribution. A company must be a certain size to justify the amount of overhead costs required to operate a distribution center with a certain minimum amount of square feet, dock space, dock doors, lift trucks, managers, offices, cafeterias, break areas, etc. For companies too small to meet this minimum threshold, a 3PL provider may be a good solution. However, a word of caution, some 3PLs are not interested in working with start up companies. They perceive the risk to be too great relative to the modest amount of revenue that they will be able to generate. Even if a 3PL can be found that is interested in working with start up companies, they will likely have a minimum monthly charge which should be determined upfront and factored into the cost model. As with everything, proper planning can help make this scenario successful as well.
Of course for some companies outsourcing distribution is not the best choice. For some businesses, especially those engaged in wholesale distribution, the warehouse and the supply chain are a major part of the value proposition to clients and it may not make sense to outsource these. Additionally some companies may have very special requirements, special handling needs, sensitive information that may need to remain in house, or specialized tasks for which it might not be beneficial to utilize the services of an outside provider.
Whatever a company’s situation is, however, it may make sense to, at least, investigate the feasibility of outsourcing given the rapid advancements that many 3PLs have made in recent years and the numerous new services offered by such companies.