Date: December 1, 2020
Left or right, Coke or Pepsi, private or public. A seemingly binary choice, but it has far more meaning and nuance than people realize. On the one hand you have private warehouses, or warehouses that own their own inventory or work solely with a single business to manage and ship their inventory to their customers. On the other hand, you have public warehouses, commonly referred to as third-party logistics (3PL) warehouses. These 3PL warehouses hold, manage, and ship inventory of multiple businesses, and work as the outsourced logistics operations for these businesses often specializing in one or two areas or industries.
There are times when companies might start by building their own private warehouse to manage their inventory and own the logistics element of the business. Then somewhere along the way, they reach a cross roads where they need to consider outsourcing to a 3PL warehouse to scale or want to minimize a cost associated with their private warehouse by looking for ways to turn it into a profit center. But what does this switch from private to public warehouse look like? And what are the areas one would need to know?
To start, first we must recognize the attributes of each warehouse type in order to determine what needs to be done to successfully make the switch.
A public third-party logistics (3PL) warehouse provides advantages in terms of growth opportunities, negotiation power, and flexibility. With 79% of 3PLs experiencing growth in 2020, there are many opportunities for warehouses to enter new industry segments, specifically in ecommerce and omnichannel fulfillment.
In terms of negotiating power, by holding the goods of multiple businesses, warehouses increase the opportunities to see frequent inventory turnover. As a result, with high volume shipping orders coming through on a frequent basis, 3PLs are often able to negotiate rates with carriers and see additional profit from their customers.
As a 3PL warehouse, you will not own your own inventory which can offer flexibility for your business. If necessary, your warehouse can move into different segments and industries that may be more profitable- like the aforementioned ecommerce or omnichannel industries, where a warehouse business can scale and grow.
Brands often choose to build their own warehouse due to necessity, growth stage, and the high degree of control that comes with it. These businesses control their logistics as an extension of their brand, and make sure they control every facet of the brand experience. They control exactly what is carried and stored in the warehouse. They track the internal flow of inventory or material, which is important for many manufacturers. They even control reorder limits and product diversification based on first party data and insight. With these various control levers to pull, private warehouses that own their product and can choose their warehouse’s, and in turn their brand’s, fate.
The caveat to this control though usually comes in the form of higher costs and being viewed as a cost center. Costs to design, operate, maintain, and costs associated with holding products if inventory is not turned over quickly. Additionally, cost associated with having geographically dispersed warehouses to service next day delivery requirements can be prohibitive, serving as a competitive disadvantage. Also, depending on the items being stored, private warehouses may also require special certifications and insurances. As a result of the high cost, private warehouses often face significant scrutiny for every dollar spent and can lag in terms of investment in automation and efficiency.
Warehouses can certainly switch from private to public if they so choose, but exceedingly rarely the other way around. Modern private warehouses continually find themselves in situations where they are purely a cost center and have to explain extra space and labor costs. In fact, many have extra space in their warehouse they can rent out to other businesses to offset costs. With warehouse vacancy rates being at a near all-time low of 4.7%, this is the pivotal moment when a private warehouse can transition from a private to hybrid warehouse, or a warehouse that combines both elements of a private warehouse with a 3PL. Once they begin to take on clients of their own and manage the inventory and shipping of other businesses, they become 3PLs to the businesses who rent their space.
But simply renting out the space and holding another’s inventory is not enough. Those companies looking to make the transition also need to accommodate the multiple clients’ inventory management needs, carrier choices, accounting or billing needs, and more. It’s not enough to merely add their inventory to the existing operations and technology. Certain elements of the software are required in order to effectively adapt existing operations.
In terms of the software that public and private warehouses use, they often use technology that has the same end goal, but the features needed to get there differ greatly. For example, while both 3PLs and private warehouses need to keep accounting records of their warehouse inventory on hand, 3PLs more frequently use a warehouse management system (WMS) customized to allow for multiple clients to keep track of all their customers’ inventory. Smaller private warehouses on the other hand are more likely to use an inventory management system that allows them to track their own product inventory. In most cases, inventory management systems have far less features are not always suitable to help a 3PL manage multiple workflows. While larger private warehouses may use a WMS, they are frequently designed to only manage a single process or workflow.
3PLs also need to make sure that their WMS can integrate into multiple shopping carts for multiple customers. Private warehouses must only manage their own storefront’s shopping cart system or the marketplaces they operate in.
Billing is one of the largest differences between a 3PL and private warehouse. 3PLs need software that can manage multiple billing scripts, schedules, anniversary billing, and more when charging their customers for different operational tasks like shipping and storage. Private warehouses do not require this functionality as they only service their own inventory.
While both private warehouses and 3PLs use shipping notifications as a form of transparency to their client, when you have multiple clients, it becomes far more difficult to know everything that relates to every single business you manage. Using a software built for 3PLs so they may automate these notifications is crucial to their customers’ success.
At the end of the day, the software used by a 3PL requires far more complexity than private warehouses, because it will be doing the same things as a private warehouse, but multiple times over for each 3PL customer.
If this is all new to you, then you will want to do more research about the third-party logistics industry and how other 3PLs operate. Check out the State of the Third-Party Logistics Industry to learn about the industry climate as a whole or download the Third-Party Logistics Benchmark Report to see the fastest growing 3PL warehouses are approaching the market and current opportunities.
Daniel is an experienced digital marketer, having formerly worked for some of the biggest digital marketing agencies in Southern California. Now tackling the logistics industry, he specializes in utilizing the right medium to find and show customers WMS solutions to pain points they face every day.
3PL Central provides cloud-based WMS solutions for 3PLs so they can transform paper-based, error-prone businesses into service leaders focused on customer satisfaction, efficient operations, and growth.