External warehouse or internal: find out what's best for your business

Optimal inventory management and smooth supply chain operations are impossible in today's lightning-fast logistics industry without external warehouses. Many benefits are available to businesses that seek to enhance their logistics operations through the usage of these warehouses, which are also known as third-party logistics (3PL) facilities.

What exactly is an external warehouse?

If you outsource your warehouse operations to a third party, you are engaging in external storage. This company, which is usually rather good at logistics and storage, takes over the responsibilities that would normally be handled in-house.

One company tactic is storage outsourcing, often called third-party warehousing. In this model, a company contracts with an outside entity that specializes in warehousing goods for other companies. In particular, a third-party warehouse is established when one company (the depositor) contracts with another (the warehouse keeper) to hold its goods. A commercial warehouse keeper, often a shipping business or warehouse itself, is responsible for storing the goods. Products inspection and maintenance are common services that are often included.

A wide range of services, including warehousing, packing, shipping, and customer support, are all part of external storage. So, it's a one-stop shop for companies who want to make their logistical processes more efficient and productive.

One of the key advantages of external warehouses is their flexibility. Businesses may easily adapt to changes in demand or market conditions by quickly increasing their storage capacity without requiring large infrastructure investments or long-term commitments. Firms are adept at managing inventory levels due to their capacity to adjust to changing customer requirements and market conditions.

The proximity of external warehouses to customers also has the potential to significantly reduce transportation costs and times. By strategically positioning their warehouses closer to their end customers, businesses may boost customer satisfaction and speed up order fulfillment. That may be a lifesaver for online retailers that are attempting to give their customers faster shipping options.

Foundational Concepts of an Offsite Warehouse Management System

An external warehouse management system often keeps tabs on all the inventory for standard warehousing services. Everything is prepared, loaded, positioned, kept, and then selected. All of these processes are interconnected with accounting software, which generates invoices and updated inventory data automatically. Through additional portals and collaborations with vendors, sales associates, and clients, the logistics management firm's WMS system allows all in-house warehouse services to be linked to external data. This gives a single business an accurate view of its supply chain at all times, allowing them to respond quickly to changes in demand by adjusting product flow rates. Here are a few benefits of using an external system for warehouse management.

External warehouse building types

• Camp for segregation

In a segregated warehouse, each company has its own designated space to hold its goods. The storing company is the one that pays for the storage unit. The needed storage space is made available to it alone.

• Group data storage

The German Commercial Code defines community storage as the practice of many enterprises sharing a single physical location.

All the depositors have made a pact to keep like-quality things in one place. After then, the deposited objects are either jointly owned or each depositor receives a piece of them.

Following that point, the depositors will no longer require the approval of their fellow depositors in order to disperse their goods. Because everyone uses the same storage facilities, everyone saves money.

• Rentable storage

When a warehouse owner leases out a whole floor for storage, this is called rental storage. The party making the deposit is thus held liable for the items kept, the condition of the warehouse, and any inspections or repairs needed to the goods.

Formats for extended external storage and its applications

Outsourcing supplementary logistical services in addition to basic warehousing is a more all-encompassing definition of third-party warehousing. Packaging, returns processing, inspection of incoming and outgoing items, and even goods selection might all fall under this category of services.

Companies usually choose for long-term third-party storage so they can focus on what they do best and enhance their operations even more. It should be noted that if other services are provided, the cost of lengthier third-party storage can go up. Further cooperation and coordination with the service provider could be required to ensure that everything operates according to plan. Some potential uses for the enhanced third-party warehousing model are as follows:

• Enterprises that have complex supplier chains and buy in bulk.
• Companies that lack the internal space or financial resources to manage their own storage facilities.
• Companies want to delegate logistics so they can concentrate on what they do best.
• The enlarged version of third-party warehousing is typically used by online stores that outsource all of their logistics to specialized service providers. These providers handle receiving, preparing, packing, and shipping.

Using an external storage equation

When deciding on an external storage device, price is a typical consideration. Therefore, it is essential to predict future costs and compare them to potential savings. One such formula for the price of external storage is:

“Total costs of external storage = Leasing costs + External service costs + Transport costs”

Keep in mind that this is only an estimate, and that the actual cost of using a storage facility may vary depending on factors such as the number of items stored, the length of time they are held, the complexity of the logistics involved, and so on. To calculate the price of storage outsourcing, it is necessary to first identify and quantify the various cost components. The most important ones are as follows:

• Expenses linked to leasing: This amount covers the expense of utilizing the storage space provided by the service provider.
• The expense of third-party services: Services such as product assembly, packaging, shipping, return processing, and so on are all part of this category.
• The costs associated with transporting goods from the company's location to the third-party warehouse and back again are known as transport expenditures.

Afterward, compare these total costs to the costs of internal storage and logistical management. Once that is out of the way, you may assess the pros and cons of storage outsourcing for your company.

The advantages of external storage facilities

External warehouses are beneficial for companies that want to grow or improve their logistics in a number of ways.

First of all, they give firms more room for storage, enabling them to accumulate inventory without having to make significant facility investments. For firms that are seasonal or have varying demand, this flexibility is very helpful.

Second, modern logistics infrastructure and technology, such automated storage and retrieval systems, are frequently installed in exterior warehouses. These features can lower operating costs and increase productivity.

Furthermore, businesses may focus on their core capabilities by freeing up critical time and resources by outsourcing their storage to a third party.

In addition, exterior warehouses are frequently placed in a strategic location close to important transportation hubs, allowing for quicker and more economical delivery of goods. All things considered, using external warehouses may assist companies in improving customer happiness, cutting expenses, and improving supply chain management. Let's take a closer look now.

1. Cost-cutting measures

Being a warehouse owner demands a large time and financial investment.

Warehouse outsourcing changes what would otherwise be fixed expenses into variable costs that may be changed dependent on the volume of business by eliminating the need to make these investments. The same may be said for the time invested in altering buildings, hiring specialized personnel, investigating technologies, and searching for a warehouse.

2. More technology

Compared to a small, internal warehouse, an external warehouse that manages the goods of several clients has more capital to spend in state-of-the-art automations and technology. Some of the essential elements of the warehouse include the WMS software (Warehouse Management System), item identification systems (by barcode or by radio frequency), shipping order traceability systems, alarm systems, and interface with other systems, such the customer's ERP.

An external warehouse can also build up a customized dashboard for the customer to track the chosen KPIs and/or get ad hoc data. The customer is therefore still informed about the warehouse's activities.

3. Experience in management

Thanks to the help of an outside warehouse, many newly established enterprises may profit from this expertise. By doing this, they start from an advantageous position and avoid having to cope with the frequent blunders made by those who are new to the area.

4. Key location

To expedite transit, external warehouses are positioned strategically. They are usually located in areas with excellent road connections and proximity to large cities in order to expedite the process.

5. Error prevention and security

An external warehouse has the capacity to manage the needs of a wide variety of products and the know-how to anticipate any problems and errors. To ensure the security and integrity of the package, they also employ surveillance equipment.

6. Value addition

One alternative is to hire an outside warehousing provider that provides value to your company, like “solidarity” value.

7. Lower Warehouse Expenses and Enhanced Staff Efficiency

An external management system lowers labor expenses by enabling a more effective placement. More inventory may be managed in less area with the help of an external management system.

8. Ideal Systems for Supply Chains

Some people lose all use for storage space. Thus, having too much inventory is a financial waste. However, an external management system removes ambiguity. Every link in the supply chain, including warehouse services, may lower inventories and safety supplies to ideal levels thanks to external management systems.

9. No More Unexpected and Serious Delivery

Transparency is made possible by external management systems, since demand fluctuations may be predicted more quickly than before. Consequently, there won't be any unforeseen or urgent deliveries, and inventory might be modified sooner to accommodate any sudden changes in demand.

10. Inventory Control That Works Automatically

The components of warehouse services are integrated via an external management system. For example, upon receiving a single order, the inventory begins to move automatically, invoices are generated, trucks are loaded, and delivery dates are set.

11. Effective Manufacturing

Effective production is facilitated by an external management system that provided real-time inventory information and shared predictions. It also allows purchasing and production managers to optimize product flows by aligning forecasts with delivery times and inventory. In addition, it may increase accessibility, enabling important staff members to view data from anywhere at any time using any device. The customer, the warehouse, and the shipping providers may all follow the same product and delivery status data thanks to numerous access possibilities.

The drawbacks of outside storage

The drawbacks of outsourcing to a third-party warehouse

Although there are numerous advantages to outsourcing, there are certain drawbacks that need to be taken into account. Among the difficulties are:

• Reliance: you may be less in control and more reliant on the logistics service provider if you don't have your own warehouse and don't have digital access to your inventory.
• Variable expenses: effectiveness, adaptability, and proficiency come at a cost - excellent warehouse logistics are not inexpensive.
• Loss of control: You give up some degree of control when you hire a third party to handle your storage. If the service provider does not live up to expectations, this might become problematic.
• Difficulties in communication: It may be more challenging to efficiently coordinate and interact with all facets of the warehousing operation when the warehouse is operated off-site.
• Possible expenses: while outsourcing can save money in many situations, there are other situations when it will cost more.

External storage disadvantages at a glance

The challenges of outsourced storage can have significant disadvantages. For example, if you lose control of your warehouse, you could experience problems such as late deliveries, incorrect inventory or quality issues. If communication with the service provider is not effective, information could be missing or misunderstood, leading to inefficient processes or errors. Finally, unexpected costs, such as fees for additional services or contractual penalties, could increase the overall cost of outsourced storage. These disadvantages must be carefully considered and weighed against the potential benefits before making a decision to outsource storage.

External and internal warehouses: what is the difference?

Choosing between external and internal warehouses is a crucial decision for businesses, impacting logistics, costs, and operational efficiency.

Understanding the key differences can help companies determine which option best aligns with their strategic goals and resources.

External Warehouses

Definition: Storage facilities operated by a third-party logistics (3PL) provider.

Key Points:

• Ownership: Managed by an external company.
• Location: Off-site.
• Control: Handled by 3PL.
• Cost: Involves rental and service fees.
• Flexibility: High scalability and adaptability.
• Focus: Allows companies to focus on core activities.

Pros:

• Lower upfront costs.
• Access to logistics expertise and technology.
• Easy scalability.

Cons:

• Less direct control.
• Potential coordination challenges.
• Additional service fees.

Internal Warehouses

Definition: Storage facilities owned and operated by the company itself.

Key Points:

• Ownership: Managed by the company.
• Location: On-site or nearby.
• Control: Full control by the company.
• Cost: High capital investment.
• Flexibility: Limited by physical capacity.
• Focus: Requires dedicated management resources.

Pros:

• Complete operational control.
• Customizable processes.
• Potential long-term cost savings.

Cons:

• High initial investment.
• Responsibility for all operations.
• Less flexibility.

Summary

• Control: Internal warehouses offer full control; external ones are managed by third parties.
• Investment: Internal requires high capital; external involves service fees.
• Flexibility: External is more scalable; internal is limited by capacity.
• Focus: External allows focus on core business; internal requires resource allocation for management.

To sum up, choosing between external and internal warehousing depends on the specific needs and capabilities of a company. External warehouses offer flexibility, lower initial costs, and access to expert logistics services, making them ideal for companies seeking to scale quickly and focus on their core business. Conversely, internal warehouses provide complete control and potential cost savings over time, suitable for companies willing to invest in dedicated management and infrastructure. Evaluating these factors will guide businesses in making the most strategic and cost-effective decision for their warehousing needs.

Which type of warehousing is right for me?

In summary, it can be said that the decision whether in-house storage or external storage is more beneficial for your company is ultimately yours. However, we can give you some help in making your decision:

If you feel like you don't have enough time for your core business, that your logistics processes aren't as efficient as they could be, or that you're slowly but surely losing track of things... well, then it's high time to find your fulfillment partner in crime. Ideally before everything escalates. Don't let that give you too many gray hairs. We want to avoid that at all costs!

If, on the other hand, you still feel that you can handle the costs of warehousing and still have a good overview of everything, then having your own warehouse also has its advantages. However, make sure you acquire the necessary specialist knowledge on the subject of fulfillment and logistics if you don't already have it. There is great potential for savings in logistical process optimization that you, as a layperson, can easily miss without noticing.

Conclusion

External warehouses offer significant flexibility, scalability, and efficiency for businesses looking to optimize their logistics operations. By leveraging third-party expertise and infrastructure, companies can reduce costs, enhance customer satisfaction, and focus on their core competencies. However, this comes with potential drawbacks such as loss of control, dependence on service providers, and potential additional costs. The decision between internal and external warehousing depends on a company's specific needs, resources, and strategic goals. Careful consideration of these factors will guide businesses in making the most effective and strategic choice for their warehousing needs.

FAQ

What should be considered when choosing between internal and external warehousing?

When choosing between internal and external warehousing, consider factors like cost-effectiveness, scalability, control over operations, and proximity to customers and suppliers. Internal warehousing provides more control but can be costly and less flexible. External warehousing offers scalability and cost savings but less control over operations. Choose based on your business needs and long-term goals.

What else does an external warehouse include besides warehousing?

External warehouses can include a range of additional services besides just warehousing. These may include inventory management, order fulfillment, distribution, transportation, and sometimes even value-added services like kitting, assembly, and packaging. Some external warehouses also offer technology solutions such as inventory tracking systems and reporting tools.

In what areas is the extended form of external warehouse used?

The extended form of external warehouse, often referred to as third-party logistics (3PL) or fourth-party logistics (4PL), is used in various areas such as e-commerce, retail, manufacturing, and distribution. These services are valuable for businesses looking to outsource aspects of their supply chain management to experts, allowing them to focus on their core competencies.