When is it a good idea to outsource e-commerce logistics?

Outsourcing logistics processes is a serious dilemma facing practically every online retailer. Contrary to appearances, the answer to this question is not simple and is not always clear-cut.

The decision to outsource logistics services is influenced by a number of factors, including:

• Increasing scale of operations, entailing infrastructure and capacity constraints
  and capacity constraints;
• The weak negotiating position of individual players in dealing with courier companies
  and packaging manufacturers;
• the need to focus on the development of key areas for e-business (sales, marketing, positioning, social media, product category development).

Looking for an outsourcer as early as the first period of operation may not always make sense. With a small scale of operations, the owner of the e-store will be its best operator, and operations conducted in-house from an apartment or garage will be by far the cheapest. However, as the number of operations increases, not only does the amount of work to do increase, but also the need for the storage space necessary to ensure the continuity of sales. The e-commerce operator then faces a choice: whether to hire employees and rent warehouses or to entrust the handling of logistics processes to a professional entity.

Disadvantages and advantages of the internal model

When developing an e-business on your own, you cannot guarantee its full scalability and adaptation of resources under periodic fluctuations in sales. In times of high volume of orders it is difficult to handle them in a timely manner, on the other hand in weaker months the store is left with a baggage of fixed costs, not covered by reduced revenues. A positive aspect of handling logistics processes in -house is direct control over the entire operation and the ability to react more quickly to possible irregularities concerning, for example, customer service or the products themselves. In  the case of small and medium-sized stores with stationary points of sale or their own production or warehouse, the in-house logistics model may prove cheaper, due to the use of their own infrastructure, the costs of which and are incurred anyway.

Benefits of outsourcing

Entrusting operations to a professional entity provides the comfort of a certain scalability of the process and flexibility of costs - in proportion to size and number of sales transactions. The advantages of such a model also include:

• Access to cheaper courier and shipping services,
• Access to cheaper packaging,
• The ability to focus on developing the core business and cede responsibility for logistics management to an external partner.

 The terms and conditions of the outsourcers' cooperation with courier companies allow same-day shipping even of orders arriving after 6 p.m. Outsourced partners serving multiple stores have the knowledge and experience to advise e-shops on how to optimize processes and make logistics their competitive advantage. The challenge for the e-store remains to maintain quality parameters and control over both the process and the products.

External model costs

The cost of an external e-commerce service depends on many factors. To compare the offers of different service providers, it is worth considering prices:

• packing a line or piece in an order,
• administrative handling of the order (printouts of documents, receipts),
• storage for a comparable unit of volume (pallet, shelf),
• acceptance of delivery with a description of this activity (acceptance of a pallet / carton / piece, quantitative and qualitative inspection, placement of goods in the warehouse),
• Consumables (types and weights of cartons, tape, fillers, film),
• Shipping of the order (which courier company, matching the weight range and prices
  to the assortment of a particular e-shop),
• handling complaints and returns,
• contract service (whether there is a contract supervisor, what are his responsibilities, whether there is a contact phone, email, hotline).

Regardless of the level of costs of individual operators, it is necessary to analyze, first of all, the share of logistics expenses in the product margin. If our average basket is 40 - 50 PLN, the cost of courier shipping of goods alone (including carton and packaging) can reach 12-15 PLN. In the case of selling on low margins, an external operator may prove to be too expensive and it will be cheaper to do this kind of business in -house.

Another issue is the share of losses in overall logistics in relation to expenditures on minimizing losses. For a store that sells 100-300 jars of jam in a month, breaking each product in transport is a huge loss. To prevent this, outlays for safety materials are often raised in magnitude disproportionate to margins. An outsourcer, because of the scale of its operations, is able to ship and secure the product at a lower cost, which allows the final price to remain attractive to buyers.

When not to outsource?

Regardless of the scale of operations, certain types of e-commerce marketplace activities are difficult to spin off to outsiders. This is true though for products such as handicrafts, proprietary products or goods requiring special treatment. Currently, there are not many operators on the market ready to provide the right logistics process for highly sensitive or food products with specific storage and shipping requirements. Goods that are difficult to store in proximity to other products, such as pet food, chemicals or highly aromatic products, can also prove problematic.The number of variables affecting whether outsourcing an e-commerce store will be profitable is quite large and requires careful analysis. Choosing a partner is a decision that has a huge impact on business development, so it is worth looking for a responsible and experienced operator. Such an outsourcer will analyze the needs of the store, assess the risks and openly communicate whether he or she will be able to - with benefit to both parties - undertake comprehensive logistics services for a given e-business.

Krzysztof Wieczorek, director of e-logistics process implementations at Cursor SA, OEX Group