When to Consider Outsourcing to a 3PL with Valentin Kuznetcov

In this podcast episode, Nathan and Val discuss the topic of 3PLs (third-party logistics providers). They cover the factors to consider when deciding whether to use a 3PL, such as cost, volume, and customer service. They also explore the differences between in-house fulfillment and outsourcing to a 3PL, and the considerations for brands with low volume and high ticket products. Val provides insights into the 3PL landscape in Australia and the United States, and emphasizes the importance of conducting a cost-benefit analysis and asking the right questions when evaluating 3PL partners.

Takeaways

• The decision to use a 3PL should be based on a cost-benefit analysis, considering factors such as current costs, order volume, and the level of service required.
• There is no one-size-fits-all solution when it comes to 3PLs. Each business needs to assess its own needs, resources, and goals to determine whether in-house fulfillment or outsourcing is the best option.
• The 3PL landscape varies by country, with the United States having a more mature market and a wider range of options compared to Australia.
• For brands with low volume and high ticket products, it may be necessary to negotiate with 3PL partners to find a cost-effective solution that meets their specific needs.
• When evaluating 3PL partners, it is important to consider factors such as employee turnover, infrastructure maintenance, and the ability to provide customized services.
• Having an open mind and being willing to explore different 3PL options can help businesses optimize their fulfillment operations and cut costs.

Chapters
00:00 Introduction and Background
02:00 3PLs in Australia vs. Canada and the US
04:22 The Inflection Point: When to Consider Outsourcing
09:33 Cost-Benefit Analysis: Quantitative and Qualitative Factors
12:56 Considerations for Low Volume, High Ticket Brands

Transcript

0:02

Welcome back to the Blues Brothers podcast. In this podcast, I'm joined with a Vell and we'll be talking about three PLs. Probably one of the most common questions I get asked by clients on the operational side is, should we be using a three PL? At what point should we be using a three PL? And then all of the various questions that come with vetting a three PL. So I want this podcast to stand as a resource for any time I get this question moving forward. I just link this one hour chat with Vell. So, Vell, obviously you have a lot of experience in 3PLs historically. I'll pass to you to speak to that experience so that people understand where all of this information is actually coming from. Sure. Yeah, it's a very important topic and to give some context and background into my experience, I actually started out as a CFO and COO with at a small business in London, Ontario, and they had no operations. They had in -house fulfillment and they wanted to expand into the U .S. focus on D2C and add a 3PL partner on top of that. So they wanted to have in -house fulfillment in Canada and outsource fulfillment in the United States, which is why I have this unbiased experience of judging whether in -house is better than... Then outsourced. And of course, there's going to be some pros and cons, which we're going to discuss and cover in this podcast. But I think it's important to understand that there's no one single partner that fits all. And there's no one single business model that fits all. So when we talk about in -house versus outsourced, you've got to understand each business's needs. You got to understand their situation, their resources, their plans and goals for the future. And that will dictate. you should take your fulfillment out of house or keep it in house and keep scaling, keep growing. How do you see the sentiment for 3PLs versus in -house management in Australia versus Canada and the US? Yeah, I've worked with clients both in Australia and the United States, and I can see that Australian based businesses are way more cautious about outsourcing to a 3PL and rightfully so. It seems like there is the 3PL space is in its infancy, so to speak, in Australia, not so much organizational prowess, not so much, you know, social trust credibility to show for. And that's why a lot of businesses in Australia lean towards in -house fulfillment and operations. Whereas in the United States, that's been running for a few years now. And you have Amazon, who's kind of like setting the pace for everyone, setting the... the standards for the space. And that's why you have a lot of three PLs who have to step up to stay profitable and make money. And that's why they have to continuously optimize and improve their operations. And of course, there's different types of three PLs. We've got, you know, bigger three PLs, serve Shopify brands like ship, Bob ship hero. We've got smaller three PLs that are just focusing on a small portfolio of clients. And we've got boutique three PLs for Taylor to specific niche. So when you talk about those three PLs, they're all different. They have standards, they have different practices, they have different costs. And when you keep that in mind, you make decisions that way. But in Australia, it doesn't seem like there is a lot of options. And I've heard of a couple of them. I know Shibob has expanded into Australia. So they are an option in Australia. But there are still very few players who can deliver quality service and do so cost effectively in Australia. For an e -commerce brand, when is the inflection point in which they should be making the decision of whether the right route is to continue to invest into building our in -house warehouse management or outsourcing? Because I'm sure there is that tipping point in which you either have to really start to load up operating expenses to reinvest into your warehouse facility or you offload it and go to a 3PL. Yeah, it's a good question. I think it comes down to the cost and benefit analysis. Some 3PLs have minimum requirements for order volume or spent per month. So naturally, it becomes challenging for some brands to qualify for those. And it doesn't make any sense financially to switch to a 3PL. And they have to stick with their in-house fulfillment. But at some point, once you've hit those minimum levels, and typically, it's 1 ,000 orders. Once you hit 1 ,000 orders a month, you can start considering a 3PL. And of course, again, it depends on the business model of that 3PL and the location, geography, competition. So there's a lot of factors at play. But when we talk about Australia, then of course, a thousand orders should suffice to start considering a 3PL. And again, there is a lot of factors at play, financial levers that will dictate the amount of money that it will cost you. But once you've grown to, you know, to a certain... revenue threshold, let's say $10 million, you're now entering the amount of orders and volume that requires very solid operations and processes in the warehouse. And a lot of brands, just because they don't have that knowledge, don't have the ability to think through the processes and build out SOPs, build out the systems and implement the proper warehouse management solutions. it may become counterproductive for them to keep their operations in house. Because again, the goal of a D2C brand specifically is to market their products. So they have to build new products and market those products and build this brand in the market and position and focus on positioning. But when you waste a lot of resources and time and focus on improving your operations, which are not even that good at, and you will need to to learn, it's a huge learning curve and the more scale that requires the more challenging complex it becomes. So I will, I typically observe a lot of brands start to crumble under the volume and their operations kind of give in and it costs them too much to operate the warehouse overhead costs like rent, labor, utilities, equipment. maintenance, all those things add up to huge costs that far outweigh the fulfillment cost per order with a 3PL. And it makes financial sense to switch to 3PL to entrust them with your operations and focus on what you do best, which is building products and marketing those products. makes a lot of sense. I would think that a lot of smaller ecommerce operators would take the assumption. that vertically integrating their warehouse management would make more sense in terms of being cost effective and maximizing margins. But what you're essentially saying there and going down the route of is not necessarily, and particularly it's a, it could be a misallocation of time and focus considering that the highest leverage tasks within a DTC e -com brand are not generally speaking the fulfillment and warehouse management. Yeah, exactly. And again, if you're a D to C only business, then maybe it doesn't make sense for you to have in -house fulfillment. Maybe it's more cost effective, more rational for you to outsource fulfillment. But when we talk about omni -channel businesses like retail wholesale, then of course you might make a case for having in-house operations because you can utilize the infrastructure that already exists for to serve other channels like retail for example. and convert that infrastructure into fulfillment for your 3PL channel as well. Like, for example, I've seen some businesses who have retail presence convert their retail locations to fulfill orders for their D2C channel, which makes complete sense because you're going to. run that cost of overhead with retail anyways, you might as well utilize it to its full potential for other channels. But if you only operate a DTC brand with no retail or wholesale presence, then you're probably wasting a lot of resources and again, time, effort, focus, capital to deliver a certain level of operations and fulfillment. I think we've done a good job of contextualizing 3PLs and how 3PLs operate the lack of 3PLs in Australia as well as when you should specifically think about moving to a 3PL or investing into in-house management. My question now is that, let's say, you want to discover should we go to a three PL or not? What is the cost benefit analysis that a brand should be running? Is it just financial? Are there other cost benefit analysis that they should be running so that they can make an accurate decision on whether they should which route they should move down moving forward in time. Yeah, I typically break that analysis into two aspects, quantitative analysis and qualitative analysis. The quantitative analysis is about looking at your current costs, overhead costs of running a warehouse, paying people to fulfill orders, the shipping fees associated with your specific account rather than an outsourced account to a 3PL partner. And then comparing those costs to what a 3PL can deliver. So you will get quotes, you will get their pick and fees, you're gonna get their receiving fees, you're gonna get their labor cost per hour, for example, you're gonna get their storage fees, and you're gonna compare those costs to your current expenditure. And you will see more often than not that you're probably running a much higher bill for warehouse, in -house fulfillment. And that just doesn't make sense financially. Now on the... Qualitative side, of course, a lot of brands say, yes, we know that it costs us a little bit more, but we want to deliver that special experience. So when we talk about qualitative analysis, we have to look at SLAs, for example. How long does it take to pick and pack an order and then deliver it to the end consumer? So you have to look at the whole cycle of the order being placed and the order being delivered to the end consumer and then say, will that be much more efficient and faster than us fulfilling the order? and delivering to the end consumer. And if it's comparable, then of course it makes sense on the SLA side. Then you have to look at customer service. How does the 3PL respond to increase in customer service related issues? Are they prompt? Do they handle those issues effectively? Or do they respond 48 hours later, 96 hours later when it's been... a lot of time since you raised that issue to them. So then it becomes a front end issue with your customer because if you can't resolve that issue on the backend with your 3PL partner, that means the issue being escalated on the front end side. And now you have branding issue. Not a lot of customers want to go through that, especially when you have players like Amazon delivering products the next day. So then, again, there's a lot of factors at play. But the typical ones are the speed of delivery, how fast can you deliver the product to the end consumer, customer service issues, how quickly can you resolve those customer service issues. packaging requirements, can the 3PL partner provide you with custom packaging, kidding requirements, can they put pieces of the product together. You know, insurance requirements, can they ensure the goods stored at the warehouse because there's a huge risk there. Maintenance requirements, do they maintain their warehouse? Do they make sure that, you know, they don't need to, that the building will not collapse, right? These are all considerations to have because you're entrusting your, a good chunk of your business, which again, it can be anywhere from 15 to 20 % of your P and L to that three PL partner. You want to make sure that they deliver the best possible service. Otherwise it will cost you a lot. money and it will be a net negative for your business in terms of branding, in terms of P &L optimization. Yeah, so if you're a brand and you're going to market for three bills and you want to do the cost benefit analysis, is there going to be much difference just in costs, depending on different three PL providers, or will it end up all coming out to about the same? You know, there's a saying that you can't have all three, right? You can't have fast, you can't have quality, and you can't have cheap, right? So you have to compromise one of the things, and the same concept applies to 3PLs. You can't have a 3PL have great SLAs and cost nothing to you, right? or have great SLAs, cost little, and also deliver quality service. You will have to compromise something. And depending on what stage you're at, you might want to compromise one of the things. For example, speed of delivery is essential. You want the product to be delivered as fast as possible to the end consumer. That's kind of like a given for 3PL space. You've got to compete with big brands. However, there's still If you're not in a very competitive niche, you might make a case with your consumers to wait a little bit. And if you can make your consumers wait a little bit without them asking for refunds, then of course, then you can find something cheaper or more cost effective and quality. But if you need to deliver your products as fast as possible and to do a good job of this, then it will cost you a little bit more. So it's all about understanding that you have to compromise one of those three aspects and then make a decision that way based on your understanding of the market you serve, based on the understanding of your resources, your capabilities, and the goals that you have. Yeah. So we've gone through a lot of client side checks. There's looking at SLAs, there's looking at pick and pack phase, shipping accounts, packaging, receiving, getting storage phase. The list goes on insurance as well. Outside of the client side checks, is there anything on the backend with a 3PL that you should be considering? Are there deeper questions that you should be asking aside from costs and operations related directly to? your product handling. Yeah, when I was the CEO at the company I mentioned, I was actually responsible for implementing processes and systems in our in -house fulfillment warehouse and integrating those operations with the 3PL partners. So we kind of built out this nice system in place to... to reconcile operations across different channels, to serve the wholesale channel in Canada, again, with in -house fulfillment and 3PL partner to serve the D2C channel in the United States. And when we managed and built processes for the in -house fulfillment in Canada, we ran into a ton of issues as a business. And that impacted our ability to fulfill orders. And 3PLs are no different. They also have their own operations and processes that must be kept up to par. And some of those being employee turnover. As you know, or may guess, the 3PL and warehouse space doesn't really pay a lot to people, right? So you will attract a certain type of individuals, certain type of talent. And that means certain baggage of... you know, social issues, for example, like one of the examples, and it's a very anecdotal example, of course, and I never really managed a lot of three PLs in my life, but we had someone who had a drug addiction, for example, working on our warehouse, and on occasions they would have a relapse, for example, and that, you know, impose certain complications on the fulfillment side. So we had to make sure that that person was actually in place, reliable. delivering their service to us as a business and fulfilling the orders on time. And some days that wouldn't happen. So of course we had to make sure that the employee turnover was not quick because we had to train people. We had to make sure that they were the right people for the role and they would deliver work on a timely basis and according to the agreement that we signed. And sometimes that didn't happen. So with 3PLs, when you search for the right partner, you have to look at their operations as well and understand that employee turnover is a big risk factor in the 3PL space. And most of the downtime actually is because of labor hours. Just because someone didn't show up to work or had something come up, they couldn't fulfill the orders. And again, 3PLs are very... tight margin businesses. So they have to schedule their labor hours very meticulously. And if someone doesn't show up, that creates a whole set of issues for them and the SLAs go out the window. So you gotta make sure that the partner that you're looking for has proper procedures, proper processes in place that allows for... Employee satisfaction, the employee turnover is not as high and it attracts the right type of people because again, I'm not speaking to all 3PLs. Not all 3PLs employ, you know, lower income individuals. Of course, there's going to be good 3PLs that look after their employees and they pay them well. And that's why the turnover is not as high, but employee turnover is a big, big risk factor. And on the other hand, something that I mentioned is the equipment and the infrastructure of the 3PL. they look after, do they maintain the racking, the equipment? Will it not give in and you know... let you down as a business at the worst time possible when the Black Friday Cyber Monday is around, right? Just because of the volume, the maintenance is not there and the whole rack collapses. Some pallets just break apart, your inventory is damaged. So you got to make sure that they have proper processes, procedures, employee training, employee satisfaction in place. before you even consider them as a partner. Otherwise, again, you're giving a good chunk of your business to someone that cannot be trusted, who doesn't have credibility, and you put yourself in some sort of jeopardy. So when I talk to clients, I typically recommend to visit a 3PL. That is a question if that's a possibility. So if they can go and visit the warehouse, see how the operations are performed in the warehouse, that will go a long mile. and it will help you better understand if you should trust this partner or not. Is there anything to say about the cleanliness of the warehouse if you do get the opportunity to go and walk through it? I think so. I think it speaks volumes. If everything is maintained to its standard and the way it should be, you will see that translate into little things like cleanliness of the warehouse. Is there a lot of wrapping laying around? Card boxes thrown around? Garbage is not taken out. These are little things that you should pay attention to because if they can't take out a trash bin for a few hours, and it's sitting there, just taking up space, not really, you know, really like clogging up the space. And you can't really trust them to deliver quality service with every single order. It means that they will not pay attention to some of the orders. And again, that affects your brand. And you... you better pay attention to all these little details, raise that as a concern, as a question to those three PL partners, discuss that and see if that's something to worry about, if it's just a temporary, you know. issue of garbage not being taken out because they're overwhelmed and of course in a couple of hours they will come by and take it out. So I know I'm taking it to an extreme but again all those little details if they can't handle their garbage I'm not sure they can handle thousands of orders on a Black Friday Cyber Monday. Fair enough. I've got a pretty specific question for you here. In paid media, one of the hardest types of brands to work with is low volume, high ticket brands. And the reason for that is because within Google, within Facebook, if you don't have a lot of conversion turnover, you don't have large data sets that can be used in the modeling of targeting. And so you end up with Less conversions being tracked, which results in worse performance at a campaign level. And not only that really high ticket products end up having really long, confusing customer journeys. And so it's very hard to identify what is actually generating first click and then pushing a user through the funnel to purchase. And I say all that to say that those kinds of brands are also going to suffer on three PLs. I imagine because they might be selling very large high ticket products. but incredibly low volumes. They might only be doing a hundred orders a month, but if you're selling a 2000, $3,000 product at a hundred orders a month, you're actually doing a lot more revenue than a counterpart brand who might be doing way more volume in orders, but way less revenue and way less profit. So my question is, what's the solution for those low volume, high ticket product brands? Can they go into 3PLs? Do they make adjustments? Are there particular boutique 3PLs that... are factored in for higher ticket brands with lower volume with larger dimensional wets. Yeah, it's a good question. And I think it's important to know that volume equals leverage in negotiations in life in general. If you have a lot of volume, you're in a much better position to negotiate good terms with any vendor, with any partner, from the suppliers to 3PL vendors to marketing agencies. Volume is always leverage. So when it comes to low volume, you will have to pay more for that. How much more depends on your negotiations with each individual 3PL partner. I've seen 3PL partners accommodate low volume brands with a certain minimum spend per month or by increasing the fulfillment fee, for example. So just because you're high ticket, it means you have more contribution margin to play with. And they might raise it up. a bit per order just to make up for the fact that you don't have as much volume. It just depends on how much more that is compared to high volume brands. And if you run an analysis and it makes sense on the margin side, you might want to go that way as well. Because again, at some point you will grow to a volume that is good enough for their minimums and they will still... build that partnership with you and provide you with a more cost effective structure, fee structure down the line. Yeah, it makes sense. I have one more really specific question for you, but I think it will relate to some people watching the podcast, which is those that already have a three PL. so they're already at scale. They've already moved their fulfillment into a three PL, but they're questioning whether it's the right one. How do you best advise that someone number one questions, whether they're with the right three PL and then number two, whether they should move three PLs, because I know that you've supported a lot of your clients. in actually transitioning to more cost effective 3DLs, which makes an enormous difference for the unit economics because you cut cost of delivery, but also the entire P &L by cutting quite a large line item on that P &L. What's your advice to those brands currently in an existing 3DL? Yeah, it's a good question. I mean, if you have that question already, that's not a good sign, typically. If you say, do we have the right 3PL partner? Maybe not if you ask yourself this way. So there's got to be some root causes for that line of questioning. Again, do you feel like the customer service is bad? Do you feel like you're being overcharged? Do you raise these concerns to the 3PL partner and they just ignore you? All those things are kind of red flags. So if you can open a conversation with a 3PL, bring up these concerns to them, discuss them, and they come up with a solution that makes sense and kind of allows for a long -term relationship, then that's a good sign. At least they're open to a conversation. But on the other hand, you also need to understand what the industry standards are and what kind of... thresholds you could be looking if you were to switch to another 3PL partner. For example, when you work with Shibbub, you got to remember that they have huge... List of clients. They optimize for volume. They optimize for a large number of customers. That's how they negotiate better terms with carriers so that they can ship on account and cut the cost there. That's how they maintain that for free picks per order, for example. And it's a very cost effective way to get started. But if you want tailored customer service, you want custom packaging, you want special treatment and handling, you want the best SLAs possible, then Shibob may not be the perfect fit because again, you're more brand driven rather than cost driven. So again, it's a kind of a choice between being... Are you trying to optimize for cost or are you trying to optimize for better customer service experience? Because if you can create better customer experience, then that can translate into higher LTV down the line. So again, it's kind of a short term versus long term look and how you can build your strategy around that. For brands that are, you know, Optimizing for first purchase profitability don't have that much repeat potential. It might make sense to switch to a cost effective solution that saves you money in the short term. But for businesses that have a consumable product, they have great retention, it might make sense to pay a little bit more, but find the right partner who will ensure the best possible treatment of each order. So then you would go with a boutique 3PL rather than mainstream 3PL like ShipBob or ShipHere in the United States. Yep, makes complete sense. Is there anything else that you think would be useful to add to this podcast as a all -encapturing 3PL podcast? Yeah, I think the 3PL discussion is very interesting. It's very deep as well. What I want people to take away from this conversation, again, we don't want it to drag out for too long and there's a lot of factors at play. And of course you have to like do your own due diligence with your existing 3PL and in -house fulfillment. But the main point I'm trying to make is to raise questions. I hear a lot of Australian businesses specifically. against 3PL fulfillment. And again, if there is some, you know, some backstory to it, or there's no solutions that you're aware of, that's a good point. But if you're just against the against the idea, because you want to have in house fulfillment, that seems irrational to me, right? Because why exactly do you want the in house fulfillment? Is it because you want to have control over delivery, you know, pick and pack and trying to control every aspect of the fulfillment? stages of each order, then there might be a 3PL who can deliver the same type of standard or same type of quality fulfillment. You just gotta look for it, right? So don't be against and don't have this... sort of prejudice towards 3PLs that they're a bad partner from the get -go and in -house fulfillment is better. Again, there's so much more to it and there's going to be a bunch of different options available. It doesn't necessarily mean that every single 3PL is bad just because one doesn't fit your needs. There's going to be other partners who could have a different business model, could have a specific focus in a specific category niche like supplements or clothing. For example, one of the Notorious 3PLs now is notorious in a good way. I'm not saying in a bad way, of course notorious and famous is nimble .ai and they do automated pick and pack for clothing brands specifically. So it's autonomous AI robots fulfilling your orders. Right. And that's a cool concept. And again, you don't hear too much about it in Australia, for example, doesn't mean that's not going to change anytime soon, but I just want people to have an open mind about 3PL partners. Not every single 3PL partner is the same. There's going to be mainstream 3PLs who focus on volume, don't care about accounts. They're just numbers on paper. It doesn't mean they're bad. You just got to take it as is and understand that they're good for cost cutting, not so much for great customer experience. On the other hand, we've got smaller 3PLs who want to make a name for themselves. So they're going to treat your brand quite nicely, but there's going to be some risks there as well. They may not have processes in place to maintain. as you grow. So there's going to be some trade -off there. And there's going to be 3PL, boutique 3PLs, who have a specific focus on a niche category and they will deliver the best possible customer service, customer experience for your customers as well, but not necessarily cheap, a cheap option. So again, it's all about trade -offs. Be open -minded and understand your needs, your goals, and then compare three PLs business models with your goals and needs. And that will make for a more productive conversation. And again, hopefully that will help you as a business cut your OPEX, again, the overhead costs associated with in -house fulfillment and potentially boost margins on the fulfillment side. Perfect. Thank you for taking the time, Val, to hop on and talk everyone through 3PLs. Where can they find more content from you? I post on LinkedIn and once in a while I do make posts about 3PLs, not so much at this stage, but if you have any specific questions, feel free to reach out. I'll share my experience. And of course, if you need help with expansion into the U .S. for example, and you're looking for a 3PL partner, I have a network of different 3PL partners that I can refer that I've sort of tested and basically trusted at this point to deliver good service. And if you're looking for a 3PL partner in Australia, hit me up as well. Might be able to give you some advice and share some tips. Perfect. Thanks, Phil. Awesome, Nathan.