10 Considerations for Transitioning from a 3PL to Internal Fulfillment


Companies that utilize third party fulfillment (3PL) services sometimes reach a point where they consider transitioning from the 3PL services to internal warehousing and order fulfillment. Some of what drives these decisions is to control costs, whereas others have had a bad experience with 3PLs and now only trust themselves with their product. Using a 3PL isn’t for every company.

Deciding to move from a 3PL to internal fulfillment is done regularly by companies. However, it requires careful planning, good project management, upfront capital and a realistic risk evaluation. There are many moving parts and decisions that must be made in a timely manner.

To better understand the tasks to establish internal fulfillment, here are 10 major considerations:

1. Hiring and managing labor 

Key to taking fulfillment in-house is recruiting and hiring the right Distribution Manager and key department managers for receiving, put away and replenishment, picking, packing, returns and inventory control. Without them, your customer service and costs will suffer. Additionally, you must also attract and retain an hourly workforce. Are you prepared to handle the labor challenges that have plagued the fulfillment and distribution industry?

One major benefit to utilizing a 3PL is that the 3PL takes on the labor responsibilities. You also cant forget about the additional Human Resources needed. Additionally, if your business has seasonal swings, you must account for the increase in labor needed to handle peak times.

Employee benefits range from 20% to 30% over and above hourly wage costs. Many companies underestimate how much they have to pay to remain competitive. With an all new management and staff, the reality is that the first year’s turnover costs may be higher than expected.

2. Distribution and order fulfillment systems

If you haven’t been managing internal fulfillment, do you have the proper systems to support all aspects of your warehousing and order fulfillment process? Many companies bringing fulfillment in-house overestimate their systems capabilities, only to find out that the system cannot handle receiving, slotting, efficient pick batching, kitting, etc. In addition to warehouse functionality, do you have functionality to rate shop and provide proper systemic support to shipping. Unfortunately, companies find this out after they have opened the new fulfillment center.

Read: 6 Factors That Influence WMS Project Cost and Schedule Over-Runs

3. Performance measurement

What critical metrics and KPIs should be reported to ensure you are managing fulfillment appropriately as you make the transition? These metrics will allow the management team to understand the performance in the initial weeks after go live in the new facility. This will also lay the groundwork for managing the operations going forward. Some of the metrics FCBCO develops with clients include dock to stock times; order accuracy rates; order turnaround time; picks per hour; orders packed and shipped per hour; cost per order and a host of others.


4. Competitive freight costs

Have you negotiated the most favorable freight contracts? Many companies utilizing 3PL services also utilize the 3PL’s freight contracts. At a 3PL, your shipments are a portion of an overall volume and shipping profile. How do your costs compare? As FCBCO works with clients to negotiate freight contracts, companies quickly understand that package volume isn’t the primary factor that drives pricing. Have you analyzed the shipping zones, package weights and accessorial fees, and how these factors impact your costs?

Learn About Our FREE Freight Rate Analysis

5. Distribution center location

Where will you locate your distribution center? Many companies have a desire to locate the distribution center near their corporate offices. As we assist companies with analyzing metro areas and sites for distribution centers, we focus on where the customer base is located. In addition, how can we achieve the greatest reach to the population within two days shipping. Other aspects that come into play are whether the workforce is available, and what are the competitive wage rates.

Management will need to balance the time in transit, and lower freight costs, versus proximity to headquarters. Have you also considered what tax incentives are being offered by different markets around the country?

6. Efficient DC automation and material handling

Have you determined what type of material handling equipment and storage you will need for the business and do you have it adequately budgeted? 3PLs have to have flexible operations to deal with a wide variety of clients and product lines. At times this can minimize the amount of automation they can implement.

If you are trying to control costs, how much automation should you consider implementing? Have you properly budgeted for forklifts, racking, shelving, packing stations, etc. Will you require wire guidance for lift trucks; automation such as power conveyors; vertical lift modules or other goods to worker technology; sortation and print and apply, etc.?

How could different levels of automation reduce your labor costs and labor challenges, but increase your initial capex? What can you realistically stomach from an ROI timeframe perspective?

7. Efficient processes and organization

Do you know the processes that must be performed day to day, and how to hire for these roles? Most companies underestimate the need for experienced people to focus on inventory control, slotting, efficient replenishments, and proper order batching, etc. They focus on basic tasks such as receiving, picking, packing and shipping – opting instead to hold off on some of these critical positions. This often leads to very costly problems for companies transitioning from 3PLs. These are functions you have never had to manage, and never see behind the scenes at a 3PL.

8. 3PL to internal cost per order comparison

What is your budgeted cost per order versus the cost per order from your 3PL? If you can’t adequately answer this question, you should take a step back and determine these fully loaded costs. You must factor in the annual labor costs along with management salaries; facility lease costs including taxes insurance, depreciation and amortization of automation and material handling; common area maintenance and utilities; as well as the packaging and shipping supplies. FCBCO recommends leaving freight out of the equation and analyzing this separately.

Read: How to Calculate Fulfillment Cost Per Order

9. Risk Analysis

Do you have the experience in planning and opening a new facility? What is your implementation timeframe? Most companies under-estimate that it may take 12 months to hire the staff; set up the processes; purchase and install new automation. New WMS systems may take 6-12 months to select, contract and implement.

After opening, most companies do not reach the targeted productivity for the first four to six months. The first year’s turnover can mean providing lower than expected service levels and higher costs. All of these are risks you and your management team should objectively evaluate and weight out.

Read: Developing a Warehouse Move Plan

10. Management priorities

In small to moderate sized companies opening a new center, and then managing internal fulfillment, often distracts senior management from concentrating on  marketing, merchandising, overseeing web development and marketing. Companies need to ensure that this is the right approach, and that there are sufficient resources for transitioning successfully.

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