This is a guest blog post by Tom Wicky, Co-Founder & CEO, MyFBAPrep.
Fulfillment is the unsung hero of your brand’s reputation and growth, especially as you scale to global proportions. But as your reach extends, the complexity of managing inventory and shipping can feel overwhelming.
For large brands especially, whether to keep fulfillment in-house or outsource to a third-party logistics (3PL) provider is a critical decision. That choice will have a significant impact on their bottom line, operational efficiency, and customer satisfaction.
To take off some of that pressure, we’ll unpack the costs of in-house fulfillment versus working with a 3PL so you can grasp the implications of these strategies and make an informed decision.
A brief overview of in-house fulfillment
In-house fulfillment gives your brand control over the entire order fulfillment process. Everything happens under your direct supervision, from storing inventory to picking, packing, and shipping orders.
But this option isn’t simply another business task; you’ll have to keep overhead expenses in check, hire and train employees, provide benefits, and manage day-to-day operations. Large brands additionally need to build complex infrastructure, oversee a sizable workforce, and invest in technology to keep operations running smoothly.
The key components of in-house fulfillment include:
- Advanced infrastructure and warehouse setup: You own or lease warehouses and equip them with storage systems, conveyors, and even automation tools.
- Workforce management: It’s crucial to form a dedicated team to deal with inventory, process orders, and ensure timely shipments.
- Technology requirements: Warehouse management systems (WMSs) or inventory tracking software are imperative to maintain on-time shipping and scale efficiently.
The pros and cons of in-house fulfillment
When you manage fulfillment internally, you’re in the driver’s seat and enjoy the resulting benefits, including:
- Full control of operations for brand consistency: You oversee every detail, from how products are packed to how quickly they’re shipped, ensuring brand consistency at every step.
- Customization opportunities: You have the freedom to create branded packaging and unique unboxing experiences that align with your brand vision.
- Clear oversight: Everything happens internally, so it’s easier to address issues quickly, monitor performance, and maintain closer customer relationships.
However, in-house fulfillment isn’t without its challenges:
- High up-front costs: Setting up warehouses, buying equipment, and investing in technology requires significant capital.
- Scaling challenges: You need ample time and resources to expand warehouse space, hire more staff, and upgrade systems as your business grows.
- Operational inefficiencies: Without the expertise or infrastructure of a dedicated logistics provider, inefficiencies can cause problems that weaken customer satisfaction.
A brief overview of 3PL
3PLs are logistical experts your business can partner with to handle fulfillment operations, including warehousing, shipping, and inventory management. These providers offer certain core services that make them an attractive option to large brands in particular:
- Global access to shipping networks: With warehouses and logistical hubs worldwide, 3PLs can easily accommodate international shipping.
- Advanced analytics: 3PLs reveal insights into inventory levels, shipping performance, and customer trends.
- Omnichannel fulfillment support: 3PLs can manage multiple fulfillment channels simultaneously, whether you ship orders for eCommerce, brick-and-mortar stores, or B2B clients.
The pros and cons of 3PLs
Outsourcing your fulfillment to a 3PL can bring significant advantages, including:
- Cost efficiency: 3PLs can save on overhead expenses by sharing resources like warehouses and shipping networks between clients.
- Access to expertise and technology: These services specialize in logistics and often use advanced tools like AI-driven analytics or automated warehouses for greater precision.
- Flexibility and scalability: 3PLs are equipped to handle fluctuations in demand, making them versatile partners for large brands.
However, contracting with a 3PL also gives rise to a few hurdles, such as:
- Less control over branding: Since fulfillment happens externally, you’ll have less say over your packaging, presentation, and the overall customer experience.
- Dependency on an external partner: Delays or errors on the provider’s part can diminish consumer satisfaction.
- Hidden costs: From unexpected fees for returns processing to seasonal surcharges, additional expenses from a 3PL can add up if not carefully managed.
Cost breakdown: In-house fulfillment
Running your own fulfillment operation comes with both predictable and unpredictable expenses. Let’s break down the costs you need to consider with this option.
Fixed costs
The following big-ticket items stay relatively consistent over time, no matter how much you ship:
- Software upgrades: Managing fulfillment at scale means investing in systems like a WMS or inventory tracking tools. However, regular updates and advanced features to keep up with technology trends can accumulate.
- Equipment and infrastructure: Setting up your warehouse with the right equipment, from forklifts to conveyor belts and storage racks, is a major up-front expense. Then, you must add the cost of maintaining and expanding your physical spaces as your brand grows.
Variable costs
These costs can fluctuate depending on how much inventory you handle and the seasonality of your business:
- Labor/workforce costs: Hiring, training, and paying a skilled workforce can cause expenses to fluctuate. You also have to take into consideration overtime pay and the costs of replacing employees when turnover occurs.
- Machine maintenance: Repairs, replacements, and regular upkeep on everything from hardware to automated systems are essential to avoid operational downtime.
Additional costs
Some expenses sneak up on you and can eat into your bottom line if you neglect them. For instance, delays in receiving inventory, material shortages, or even global events can throw your operations off course. These disruptions may require costly adjustments, such as paying for expedited shipping or sourcing alternative suppliers.
Cost breakdown: 3PLs
Working with a 3PL can simplify fulfillment, but it’s important to understand the full range of costs involved.
Service fees
Service fees are the core costs you’ll pay for when you hire a 3PL:
- Storage and warehousing fees: These are typically calculated based on volume or pallet size, and costs can increase during peak seasons when space is in high demand.
- Pick-and-pack fees: These expenses cover the labor involved in picking items from inventory and packing them for shipment.
- Shipping rates: 3PLs often negotiate discounted shipping rates with carriers, which can save you money. But heads up — these rates may vary depending on order volume, shipping speed, and destination.
Additional fees
Aside from the standard offerings, 3PLs usually charge extra for add-ons:
- Advanced services: Custom packaging and priority shipping can enhance your brand experience but often incur additional fees.
- Seasonal surcharges: During high-demand periods like the winter holidays, many 3PLs apply surcharges to account for increased labor and space requirements.
Hidden costs
Although a 3PL partnership can simplify logistics, the below costs might catch you by surprise:
- Service delays or errors: If a 3PL fails to meet delivery timelines or makes mistakes in order fulfillment, you may face costs to compensate dissatisfied buyers, expedite corrections, or release refunds.
- Lost or damaged goods: While most providers offer insurance options, navigating claims for lost or damaged goods can be time-consuming and expensive.
Key fulfillment factors for large brands
Deciding between in-house fulfillment and a 3PL requires more than crunching the numbers. You need to determine which choice will most closely align with your brand’s unique needs and goals. Here are the major aspects to consider before making your decision:
- Order volume and geographical reach: If you handle high order volumes and ship to a global audience, a 3PL can provide the infrastructure and network to scale without breaking a sweat. For brands with concentrated markets or manageable order volumes, in-house fulfillment offers the control you need without excessive overhead costs.
- Brand control: In-house fulfillment lets you oversee every detail of the process, from custom packaging to shipping speed, to produce a consistent brand message. With a 3PL, you have less direct control, but many providers offer customizable services to help maintain your brand’s identity. Just keep in mind this may incur additional fees.
- Technological integration: To remain efficient, in-house fulfillment requires a significant investment in technology like a WMS and inventory tracking tools. On the other hand, many 3PLs come with advanced tech built in, featuring real-time analytics, order tracking, and integrations with your eCommerce platforms. However, you must ensure their systems align seamlessly with yours to avoid operational hiccups.
- Cost versus value: In-house fulfillment may require higher up-front expenses, but it can pay off in the long run if you prioritize control and customization. Meanwhile, a 3PL is more cost efficient and offers easier scalability, but you need to weigh those savings against potential trade-offs like hidden fees or limited branding.
Wrapping up — Choose the right logistics strategy for smarter fulfillment decisions
Fulfillment method is a critical decision for large brands. An internal operation gives you complete control over the process but brings higher initial costs and scaling challenges as your business grows. In contrast, 3PLs offer cost efficiency and access to advanced tech. However, you’ll have to compromise over the customer experience as well as absorb additional fees.
Further, as your brand evolves and market demands shift, it’s essential to reevaluate your fulfillment strategy consistently. What works today may not fit your needs tomorrow, especially when consumer expectations and operational complexities increase.
Still unsure which approach fits your business? Let our fulfillment experts at MyFBAPrep help you make a decision. Contact us for tailored advice and insights to select an option that aligns with your unique business goals.