When is it better to outsource online shop logistics?
Outsourcing of logistics processes is a serious problem faced by almost every business that sells online. Contrary to what it may seem, the answer to the question is neither straight nor simple.
A decision to commission logistics services to an external provider is determined by a range of factors:
- increasing scale of the business, which entails infrastructure and performance-related constraints;
- weak negotiating position of single businesses with courier companies and packaging manufacturers;
- need to focus on the development of areas of key importance for e-business (sales, marketing, positioning, social media, development of product categories).
It does not always have to be reasonable to look for an outsourcer already in the initial stage of the business. With a small scale of the business, it is the online shop owner who can be the best operator and operations performed from home or garage will certainly be the cheapest. However, the growing number of operations increases not only the amount of work to be done but also the required storage space necessary to ensure sales continuity. The online shop manager has a tough choice to make: whether to hire people and rent a warehouse or outsource logistics processes from a professional provider.
Internal model pros and cons
If you decide to grow your e-business on your own, you cannot be sure that it is fully scalable and adjustable to seasonal sales volatility. During peak times, it is hard to handle orders timely while on the other hand, in poorer months, the shop is left with the burden of fixed costs, which are not covered by decreased revenues. A positive aspect of handling logistics processes on your own is that you have direct control over the entirety of operations and the possibility to respond more quickly to any possible irregularities related to e.g. customer service or the products themselves.
In the case of small and medium-sized shops that have brick and mortar shops or their own production or internal warehousing facilities, the internal logistics model may turn out to be cheaper because it enables you to use your own infrastructure, for which you have to pay anyway.
The benefits of outsourcing
Commissioning operations from a professional entity ensures the comfort of some extent of process scalability and cost flexibility in proportion to the size and volume of sales transactions. The benefits of such model include:
- access to cheaper courier and forwarding services,
- access to cheaper packaging,
- possibility to focus on growing the core business and transferring responsibility for logistics management to an external partner.
The terms of cooperation between outsourcers and courier companies enable to dispatch on the same day even the orders placed after 6 p.m. External partners serving multiple shops have the knowledge and experience which enable them to advise online shops how to streamline processes and make logistics their competitive advantage.
A challenge that still faces the online shop is to maintain quality parameters and control over the process and products.
Costs of the external model
The cost of external service for the online shop depends on a range of factors. In order to be able to compare offers from various service providers, it is worth to consider the following prices:
- the price of packing of a line or a piece per order,
- the price of administrative handling of the order (document and billing printouts),
- the price of warehousing per comparable volumetric unit (pallet, shelf),
- the price of the acceptance of delivery along with a description of the operation (pallet/box/piece receipt, quantitative and qualitative inspection, placement of the goods in the warehouse),
- the price of consumables (types and weights of cardboard boxes, scotch tape, fillers, wrapping film),
- the price of order dispatch (which courier company, adjustment of the weight range and prices to the product range of the specific online shop),
- the price of handling complaints and returns,
- the price of account handling (is there an account manager, what is the manager’s role, is there a contact phone number, e-mail, a hotline).
Irrespective of the level of costs from specific operators, you should primarily analyse the share of logistics costs in your product margin. If your average basket is PLN 40 – 50, the cost of courier dispatch (along with the box and packaging) may reach PLN 12 – 15. If you sell at low margins, the external operator may turn out to be too expensive and it may be cheaper to manage these operations on your own.
Another issue is the share of losses in general logistics compared to the costs of minimising losses. For a shop that sells 100 – 300 jars of jam per month, every jar broken during transport is a great loss. In order to prevent that, you increase your investment in cushioning materials to a level that is incommensurate with the margin. However, the outsourcer – because of the scale of its operations – can dispatch and secure the product at a lower cost, which enables to maintain the end price at a level that is attractive for consumers.
When you should not outsource
Irrespective of the scale of your operations, some types of businesses on the e-commerce market are hard to outsource. This refers to such products as handicraft, your own products or goods that require special handling. There are currently few operators on the market that are ready to ensure a proper logistic process for very delicate products or foods that require special handling. It may also be a problem to outsource goods that are difficult to keep with other products, e.g. animal feed, chemicals or highly aromatic products.
The number of variables influencing the profitability of outsourcing in an online shop is high and requires careful analysis. Selection of a business partner is a decision that has great impact on the development of your business and this is why it is worth to look for a reliable and experienced operator. Such an outsourcer will analyse the needs of your shop, assess the risk and will honestly tell you whether they can offer – for mutual benefit – comprehensive logistics services for the specific e-business.
Krzysztof Wieczorek, e-Logistics Process Implementation Director at Cursor SA, OEX Group