Logistics is the management of the flow of goods between the point of origin and the point of consumption in order to meet some requirements. – Wikipedia
When we look at the successful Online Fashion brands, as fascinating as they may look from the outside, there is an extremely complex supply chain running these businesses.
To give you an idea, let’s think about a hypothetical order life cycle. Let’s say you’re in NYC and you bought a dress online that’s manufactured by a plant in China:
- Dress is manufactured in a factory in Shenzhen, South China
- It’s packed and put on a truck
- Truck is taken to a container at the Shenzhen Port
- Then this dress makes it to the Port of Long Beach, United States
- It’s taken of that ship and loaded on a truck or perhaps a train
- If there is a wholesaler on the way, it gets delivered to them
- Remaining dress items then goes to a warehouse or a fulfillment center
- From that fulfillment center, that dress is then delivered to you in NYC
All this is mostly invisible to the outside world, including the customers, fans and people who decide to enter in to this business.
Start-ups & Logistics
We know what it’s like being a start-up. You have few people doing multiple things at the same time: product sourcing, manufacturing, website designing, content production, online marketing, accounts, customer support etc. If that’s not enough, the moment there is a new order, the same people also work on Logistics and Order Fulfillment. And since these people don’t necessarily have prior experience, inevitably – there are some costly mistakes done that cause a steep drop in your customer happiness graph and all the hard work you did in acquiring this new customer is about to get washed out. Logistics can make and break e-commerce businesses. It requires serious logistics skills in order to get those boxes delivered to your customers every day, intact and on time.
And it’s not something that you can learn from reading books. It’s a constant fight to meet customer’s expectations to optimize performance and minimize cost and wastage, while meeting the expectation of the customers who’re spoiled by Amazon.
Thus to overcome all these challenges, many start-ups opt to outsource their order fulfillment to a Third Party Logistics (3PL) company.
[quote]A third-party logistics provider is is a firm that provides service to its customers of outsourced (or “third party”) logistics services for part, or all of their supply chain management functions. Third party logistics providers typically specialize in integrated operation, warehousing and transportation services that can be scaled and customized to customers’ needs based on market conditions and the demands and delivery service requirements for their products and materials. – Wikipedia[/quote]
Scalability benefit while working with a 3PL
When working with 3PL, since you’re mostly never more than 10% of their overall volume, it gives you the ability to scale-up and scale-down operations as per your order volume. They have significantly larger warehouses which means lower cost, square per foot and they have multiple locations from where they can ship your products faster.
3PL allows you to focus on your company’s strengths and core competencies, wherein entire logistics, such as – warehousing, order fulfillment and distribution is handled by specialized people with all the required resources.
The problem with 3PL
Every business is different and their logistics challenges are different. That’s why, it can be challenging to find a logistic partner that can match a start-up’s requirements. Moreover, it’s simply hard to switch to this kind of a system, because you become habitual of seeing all your inventory in your house and shipping it manually from there. It gives you a sense of being in control. Let’s talk about other challenges that start-ups face while with working with 3PL.
- High Monthly Order Minimum: Firstly, the main struggle start-ups face while working with 3PL is the economics of it all. There are many types of costs for these 3PL involved in storing and delivering your products, such as -human resource, IT cost and opportunity cost in terms of inability to bring in other inventory etc. From an efficiency standpoint, the cost of occupying space may outweigh the revenues for managing it; if you factor in the other associated costs. That’s why most 3PL’s have a high monthly order minimum. And the 3PLs that accept your inventory without monthly order minimum, they charge a much higher monthly storage and pick & pack costs.
- Less flexibility: You no longer have 100% control on your logistics after you outsources it. It’s especially a problem if you are a reseller; for example – if the customer changes packaging, net weight, color, etc. Such alternations become hard and complex to manage when the stock is not in your warehouse but with your partner company. This can cause delays and customer service related issues.
When to consider 3PL
It’s important that you partner with the right 3PL. It allows you to share some of their efficiencies and scale at your own pace. However, as a start-up brand, it’s important to identify what your strengths are. You should know what your competitive advantages will be in the long run. There are various cost and service related challenges which make many e-commerce start-ups outsource their logistics.
As a start-up, here are some of the reasons why you as a start-up might want to outsource your logistics to a 3PL:
- Not enough space: If you don’t have enough space and enough capital to acquire warehouse space
- New markets acquired: If you’re getting lot of sales from a newly acquired market that’s far away from your warehouse, it’s better to partner with a 3PL.
- Different time zones: If you’re facing trouble managing inventory and orders when you’re not in the same time zone and you have deliver box immediately after order is received
- International Orders: If your targeted customer base is altogether outside your country. For example, while you might be manufacturing your products in Australia, you can send it over to your fulfillment center in the US. Moving to relevant geographic locations can lead to significant cost saving and decrease the transit time.
- High turnover: If you’re a start-up operating on lower margins and higher volume.
- Competitive Advantage: If Logistics is just not your competitive advantage or your core competency.
- Seasonal Sales: If you’re a sales are seasonal, it makes more sense to outsource.
Negotiate with your 3PL
While selecting a 3PL, you should negotiate with them. If you’re retailer just getting started, your volume discounts are going to be based on your actual volume of sales instead of projections. While going to your 3PL, make sure you have your sales figures on your fingertips or else you’re going to end-up taking more than what you need. If you’re using multiple carriers, try and concentrate your volume with fewer carriers to get better rates.
The best way is to talk to their competitors, get a better price sheet, and take it to the 3PL company you want to work with. There is usually high competition between 3PL companies, if they like your business, they will beat the offer from their competitors to win you. Having said that don’t be unfair or un-realistic with your 3PL vendors; don’t push them too much either. They are an extension of your brand experience; don’t give them any reason to compromise on the quality of service.
3 Important Questions to ask 3PL
When you go to a 3PL, make sure you ask the following questions for assessment:
- How many locations they have?
This will help you ensure that they’re able to efficiently cover your target sales territories
- What they specialize in? (competitive price?)
Every logistics company has its own specialty, for example – perishable items, electronics, metals, fragile products, apparels etc and all of them have different warehousing facility according to it. If a logistics company says they specialize in everything, may be they don’t specialize in anything.
- Who their competitors are?
If they’re giving you competitive rates and they’re current with what’s happening in the market, they will most likely give you the names of their competitors. If they don’t give you names, there are chances that they’re either overcharging you or they’re not keeping themselves updated with what’s current in the market.
Inspite of all the benefits, 3rd Party Logistic companies eventually depend on you to provide them all the business intelligence in order to provide quality service to your customers. That’s why if you’re an early stage e-commerce startup, you should try and manage the fulfillment yourself in-house before considering outsourcing it to 3PL. You may lose some money during the process but you will get first hand experience which will help you later in working with 3PL in future.
And there are also situation when it doesn’t make sense to outsource logistics. For example, if you have a large catalog and all your sales are well spread across it, there may be unique challenges in its distribution. Don’t expect your logistics company to figure out everything. Only if you have hands-on experience and inside understanding, you can help you your logistics partner in optimizing their performance and provide better service to your customers.
However, there is generally a big up-front fixed cost associated with handling all order fulfillment in-house, the biggest one being rent or capital to purchase a warehouse facility. If you can arrange a warehouse facility, it makes sense to start in-house until you find the right 3PL that can work like a partner and help you scale-up your operations.
Few Tips to better manage in-house logistics:
- Apart from box storage, make sure you have enough space to layout the orders and other paper work
- Set a realistic expectation of the customer on the product page upfront. Tell them on the product page that in how many days will the product be delivered to the customer. Remember, you must always look to under-promise and over deliver
- Be as transparent as you can. Tell the customers whether it’s going be shipped from a designer or from your own warehouse, tell them where the facility is located.
- There are always times when things get delayed. Be proactive and make sure that the customers stays updated.
- Use ERP software such as Quickbooks to to manage inventory to work with manufacturers and vendors better
- If you screw-up, give discounts, give free shipping or anything to compensate for a bad shipping experience of a customer.
- Most important, maintain higher average profit margins, so that even during the days of lower sales volumes, you can still bear the cost of your in-house logistics.
It makes sense to look at 3PL as a support system for your business. It should be your long-term goal to handle your logistics in-house by hiring specialized people. However, until you have those kinds of resources, working with 3PL is a good way for you to focus on what you do best at the early stage of your business and let 3PL handle your order fulfillment.