Advantages and disadvanatges of 3PL service providers

Throughout my career I have worked in organisations where I have managed a combination of both DIY and 3PL operations. I have experienced both the advantages and the disadvantages of outsourcing to 3PL service providers first hand.

Whether you manage your own warehouse operations or you outsource this function to a 3PL service provider will depend on the overall objectives of your business. Before making this decision it is important to understand the advantages and disadvantages of both options.

Disadvantages of 3PL service providers

Running your own warehouse provides greater control and more flexibility.

Being able to control your workforce and dictate the schedule of events is probably the single most beneficial aspect of running your own warehouse.

In a 3PL facility you will compete for resources. There will always be pressure on the 3PL service providers management team to ensure that all of the activities that they are performing are done so in a profitable manner.

For those of us that have managed our own operations there have been numerous occasions where we have prioritized customer satisfaction over cost. In the 3PL operation this decision is much more difficult to justify.

Running your own warehouse is typically less expensive than engaging a 3PL to perform this function on your behalf.

When comparing the costs of the DIY model against a 3PL operation we don’t always compare apples to apples. A 3PL service providers rates are based on the true cost of running an operation and will obviously include their profit margin.

In addition to the profit margin they will normally include allocations for management , shared services and indirect employee costs that are not necessarily included in a DIY costing. Most likely they will also include the capital or start up costs they want to recover over the course of the contract.

Having said that, on the DIY side we must not forget to factor in the costs associated with physically moving and the cost of disrupting the business are incurred as part of the transition from the DIY to the 3PL.

Advantages of 3PL service providers

Running your own warehouse requires significant upfront capital investment.

In addition to the initial startup costs for racking, materials handling and computer equipment there is also the ongoing cost of having to maintain and replace these items.

It is interesting to note however, that it seems to be the DIY operators that are making the big investments in automation and robotics. I suspect the main reason that the 3PL service provider are not investing in this area is that there is a mismatch between the average length of their agreements with their customers and the period of time that is take to get a return on this type of investment.

In the DIY model a large portion of your operating costs are fixed.

There will always be minimum costs associated with leasing facilities and equipment and labor regardless of utilization and activity volume. In the 3PL model, these costs are shared by the various customers within the facility and typically recovered by the 3PL service provider on a transaction basis. As a customer you should only pay for the space and services that you use.

The ability to leverage expertise for new business requirements is limited in the DIY model.

The very nature of the 3PL model means that they provide services for a wide range of customers within various industries and with various business requirements . In the DIY model it is incumbent upon ourselves to develop the expertise to meet the requirements of our customers. Whereas in the 3PL model it is most likely that this expertise has already been developed and is currently being provided to other customers.

Along similar lines to the potential lack of expertise in in the DIY model – the ability to scale in a timely manner can also be restrictive when running your own operation.

One of the major benefits of utilizing a 3PL service provider is the ability to expand your business at a much faster pace. In the DIY model business growth is often hampered by the speed at which we can access and set up new operations and source and train staff to support the new opportunity. In the 3PL model the facilities, the infrastructure and labor pools already exist. Whilst finding and implementing a new 3PL service provider relationship will also take time it is typically faster to do this than trying to set up your own operation.

From a 3PL selection perspective, I always consider the last two points as part of my selection criteria.

1. Firstly does the 3PL service provider currently have customers with similar business requirements to mine?
2. Secondly what other sites does the 3PL service provider operate that I might want to utilize in the future?

If you have managed your own warehouse operations in the past you will know that the ongoing management of staff can be a challenge.

Finding and retaining reliable and hardworking staff can be difficult at the best of times. There are also the compliance aspects in regard to Occupational Health and Safety and various other human resource regulations that must be understood and complied with. In the 3PL model these requirements become the responsibility of the service provider.

The advantages and disadvantages of both models are summarized in the table below.

Disadvantages of 3PL	Advantages of 3PL
Lack of control and flexibility More expensive	Requires less capital investment Operating costs are not fixed Ability to leverage expertise Growth is not restricted Managing staff is the 3PL responsibility