The Benefits and Drawbacks of Outsourced Warehousing

From the January-February 2016 edition of Supply Chain Management Review.

January-February 2016

It’s a new year. Most of us will have new budgets to meet and new expectations for the performance of our supply chains. Many will look to best practices from industry leaders to improve our operations. But, are…

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Organizations have been outsourcing non-critical functions within the enterprise for years. Logistics activities such as transportation, warehousing, and distribution are no exception. The prevalence of 3PLs allows organizations to evaluate whether it makes more sense to outsource logistics activities that can be better performed by a specialized vendor. Although much attention is paid to the outsourcing of transportation, APQC's Open Standards Benchmarking® data in logistics indicates that nearly 58 percent of responding organizations outsource the management of their warehouses or distribution centers to a third party. Specifically, 40 percent outsource this to some degree, and nearly 18 percent outsource this function extensively.

The question is: Does outsourcing the management of warehousing and distribution activities result in advantages when compared with keeping these functions in-house? To find out, APQC compared the performance of organizations that have outsourced this to any degree against the performance of organizations that have not outsourced warehousing and distribution center management at all. The data indicates that, not surprisingly, outsourcing organizations spend slightly more on warehousing than organizations that do not outsource. Outsourcing, however, is no guarantee of superior performance in other aspects of warehousing and distribution.

Cost to Operate Warehousing
APQC's data indicates that organizations outsourcing the management of warehouses and distribution centers to any degree spend slightly more on these functions than their counterparts that do not outsource. This is not surprising given the additional cost associated with hiring a third-party to oversee these activities. As shown in Exhibit 1, at the median organizations outsourcing the management of their warehouses and distribution centers spend $1.71 more per $1,000 in revenue on warehousing.

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Organizations have been outsourcing non-critical functions within the enterprise for years. Logistics activities such as transportation, warehousing, and distribution are no exception. The prevalence of 3PLs allows organizations to evaluate whether it makes more sense to outsource logistics activities that can be better performed by a specialized vendor. Although much attention is paid to the outsourcing of transportation, APQC's Open Standards Benchmarking® data in logistics indicates that nearly 58 percent of responding organizations outsource the management of their warehouses or distribution centers to a third party. Specifically, 40 percent outsource this to some degree, and nearly 18 percent outsource this function extensively.

The question is: Does outsourcing the management of warehousing and distribution activities result in advantages when compared with keeping these functions in-house? To find out, APQC compared the performance of organizations that have outsourced this to any degree against the performance of organizations that have not outsourced warehousing and distribution center management at all. The data indicates that, not surprisingly, outsourcing organizations spend slightly more on warehousing than organizations that do not outsource. Outsourcing, however, is no guarantee of superior performance in other aspects of warehousing and distribution.

Cost to Operate Warehousing
APQC's data indicates that organizations outsourcing the management of warehouses and distribution centers to any degree spend slightly more on these functions than their counterparts that do not outsource. This is not surprising given the additional cost associated with hiring a third-party to oversee these activities. As shown in Exhibit 1, at the median organizations outsourcing the management of their warehouses and distribution centers spend $1.71 more per $1,000 in revenue on warehousing.

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