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External fulfilment vs. your own warehouse: Which strategy is better?

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Special challenge for online retailers: The logistics

In online retail, a large number of items must be stored, processed, packed and shipped to the customer as quickly as possible. Added to this are challenges such as fluctuations in demand, changes in product range and the frequently time-consuming processing of returns. There is no question that fast and reliable shipping is one of the key criteria for success in ecommerce. But what is the most efficient way to do that? As an online retailer, you have two basic options: Handle all logistics-related processes yourself or hire a fulfilment service provider.

Depending on the requirements, business model, and product structure, the advantages and disadvantages of the two options can vary. In this article, we offer a comprehensive overview of the two approaches.

Outsourcing to a fulfilment service provider

Probably the fastest and, in the short term, cheapest path to launching your own online shop involves outsourcing your goods management and order picking process to external fulfilment service providers. This allows a different degree of outsourcing of the processes related to warehouse management, order picking, inventory, returns management, stock monitoring and procurement.

For example, the goods can be self-produced or purchased and stored at the service provider for the shipping process. Whereas for dropshipping, the service provider also handles the purchase of the goods, subsequent deliveries and all other services related to shipping. As an online retailer, you benefit from a significantly lower time and financial resource commitment since you don’t have to pay for the goods in advance and these providers often additionally handle processes such as customer support or returns processing. 

Advantages:

  • Low investment costs and low start-up capital
  • No fixed costs for warehouse and staff
  • Variable costs depending on business volume
  • Great adaptability to temporary peak order periods
  • Scalability

However, these cost savings are offset by little control over the shipping process and the quality of the shipped goods. If support is outsourced too, you also lose an important personal customer contact point. Furthermore, part of your profit in such a business model goes to the service provider as payment.

Disadvantages:

  • Strong dependence on the service provider
  • Complex information flow
  • Low flexibility
  • No direct access to the product
  • Difficult control over processes and quality
  • Low influence on packing and delivery times
  • Standard processes without modification or prioritisation
  • Lower margins

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Own storage and order picking

At first, saving time and money by working with a fulfilment service provider may sound tempting. However, for most online retailers, own storage and order picking is the more meaningful alternative over the long term, under certain conditions.

One of those conditions is the use of an integrated ERP system, such as Shopware ERP system powered by Pickware, in conjunction with barcode-based process management in the warehouse. So you can always keep an eye on your stocks in your own warehouse, promptly reorder goods at the push of a button, or simply determine turnover rates. This allows you to keep the costs as low as possible and still have full control over your processes, handle delivery problems yourself and customise the shipping of goods.

For example, you can prioritise your customers, use specially designed packaging or choose the shipping service provider freely. In addition, your own storage saves you from paying and communicating with the external service provider.

Advantages:

  • Immediate access to items
  • Good overview of stock levels
  • Your own dedicated and involved staff
  • Better information flow
  • Option to offer individual package inserts, e.g. during promotions or for regular customers
  • Better ways to prioritise inputs and outputs
  • Increased control over the processes
  • Better adaptation of the warehouse to product-specific storage conditions
  • Closer relations with customers 

However, handling the fulfilment yourself requires a high level of resources right from the start of the company’s foundation since you need sufficient storage space and additional employees for order picking, depending on the size of the shop, and all goods offered must be paid for to ensure high availability. Also, the time required to solve problems and to process returns must not be underestimated. Barcode-supported software solutions for warehouse management and order picking can help with this process. For example, Shopware WMS allows you to handle all processes in the warehouse digitally with mobile barcode scanners that enable the automation of many process steps, such as the creation of shipping labels, and greatly reduce error rates.

Disadvantages:

  • Risk of idle capacity costs of the warehouse
  • High fixed and investment costs
  • Lower adaptability to temporary peak order periods
  • Staff costs

Bottom line:

Ultimately, all conditions and the individual situation should always be taken into account when making the decision on whether external fulfilment for your own online shop is an advantageous model or not. When selecting your strategy, you should always consider factors such as cost, quality and control. If you only run your online shop temporarily or sell only a few products in small quantities, outsourcing to a fulfilment service provider can be a suitable alternative. However, for most online retailers, own storage in combination with a solution such as Pickware is the more advantageous alternative in the long run since close customer relations, product proximity, process optimisation, profit maximisation and control over core processes are decisive factors for long-term success in the end.