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Real Estate Corner: Making the Choice Between Owned Warehousing and 3PL Outsourcing

Welcome to the latest installment of FN’s new monthly column, “Real Estate Corner,” which will explore the changing landscape of brick-and-mortar and how retailers can thrive in this environment. As brands embrace a truly omnichannel approach, the physical store remains a critical revenue stream – but one that now looks a little bit different. This column will dig deeper into that new reality.

Last year saw significant expansion of the DTC market and the launch of many new e-commerce channels, which provided valuable revenue streams for brands facing store closures. But while these new platforms offer substantial opportunity, they also require their own logistics and fulfillment strategies; most of these orders require shipment and delivery to a customer’s chosen address.

As a result, many businesses have been tasked with deciding which fulfillment strategy is the right option for them. And one of the critical components of this decision is whether a brand wants to maintain ownership of its operations and manage these orders in-house, or whether it wants to outsource these processes to a 3PL service.

“A lot of retailers, especially smaller retailers, go through this evolution where they’re sourcing direct from the manufacturer for a couple of stores until they hit a certain tipping point where it makes sense to have their own warehouse,” said Joe Dunlap, managing director and global head of supply chain advisory at CBRE. “And then this question ensues: Should I run it myself or outsource it? At the end of the day, it’s all about cost. Can I save 5-10% or am I doing it well enough?”

One challenge that many newer businesses face is that warehouses and distribution centers often require long-term leases that a younger company might be wary of committing to. However, if a business is confident of that geographical location and the overall need, it can be a smarter investment to take on the lease itself; many 3PLs make money on the rent margins.

Portrait of happy young attractive asian entrepreneur woman looking at inventory in warehouse using smart tablet in management technology,  interconnected industry, asian small business sme concept.
Managing warehouse operations internally is recommended if products require particular care or complex packaging.
CREDIT: Chaay_tee - Adobe Stock

Additionally, owning the storage facility and running it in-house may be the better option for brands that sell products with complicated packaging or that require special maintenance. Footwear benefits from its standardized packaging, which makes it easier to store and pick, but the large variety of SKUs mean that a 3PL must have reliable accurate rates that can handle subtle variations in color and style.

“Outsourcing requires a degree of simplification in operations with things like packaging strategy and unboxing experience,” said Sarah Siwak, co-founder of 3PL platform Airhouse. “If you make products in-house, have a unique business model that cannot be easily standardized like rent-and-return services, or absolutely require complex and highly customized packaging that can’t be handled before working with a warehouse, it is better to fulfill in-house.”

However, Siwak highlights that any brand doing over a few hundred shipments per month should be looking to outsource, if they don’t already own a warehouse for manufacturing. While it demands an additional upfront cost, this investment can free up employee resources and allow staff to focus on product, marketing and financial management.

For brands that want to test a new market or launch small scale in several markets at once, it can make more sense to partner with a service that has fulfillment locations in multiple geographies. This allows the brand to maintain consistency across all markets without needing to oversee daily operations themselves. However, successful partnerships will depend greatly on making the right choice of solution.

business supply chain
A 3PL service can be employed to handle all inventory storage and fulfillment, or only the operations within an owned warehouse.
CREDIT: TMLsPhotoG - Adobe

“Outsourcing fulfillment means you are trusting a 3PL to have the same quality, speed, and customer care that you’d maintain in house,” said Siwak. “Warehouses with high-quality operations often have archaic proprietary software that doesn’t work with modern e-commerce systems, or that has limited features and functions, so it’s important to consider this before working with a warehouse.”

To ensure success in a 3PL partnership, businesses may want to consult with a supply chain expert. Dunlap at CBRE oversees a team that regularly works with brands to help determine the right warehousing solution for them. He has seen a number of brands choose to rent their own warehouse but then outsource its management to a 3PL, showing that there is the opportunity to employ a hybrid model if the brand has reliable credit and the long-term strategy to support a five- or ten-year lease.

Data from CBRE shows that in 2020, 3PLs occupied the most market share of bulk real estate transactions of 100,000 sq. ft at 25.2%. But e-commerce companies took 20.9% of the market, showing that there is still an interest in owning the operations. It really comes down to whether the brand is confident it can build a strong relationship with the right 3PL, while maintaining costs.

“There is no reason in 2021 that a brand shouldn’t outsource their fulfillment to a 3PL unless they are manufacturing their items themselves and already have a manufacturing facility,” said Siwak. “The biggest challenge for brands will be to ensure that their workflows mesh with those of the 3PL: how they take in orders, how they report on inventory, how they stock and carry packaging. Never assume that a process is standard, because every warehouse is extremely different.”

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