06/03/2024
Should you get your own warehouse?
Or should you hire a prep center?
This is probably the most common question I get.
This issue lays out the pros and cons of each model so you can confidently answer that question.
This is a meaty issue packed with tons of value so be sure to read to the end.
"Getting this warehouse will lower our prep costs a ton!
All we need is a couple workers and some shipping supplies and we'll be off to the races."
This was many people thought process in early 2021.
Warehouse
Alright, let's start by looking at having your own warehouse.
Pros:
-much cheaper to operate at scale
-higher level of quality control
-help you appear more professional to potential vendors
I'll quickly elaborate on each point.
Cheaper to operate at scale:
Most of your warehouse costs are fixed.
So as the number of products you prep increases, your costs don't necessarily increase linearly.
This is why mega sellers (I'm talking 8 figure and multi 8 figure sellers) tend to have their own warehouses.
It is much cheaper at scale.
Higher level of quality control:
When you are responsible for 100% of your FBA prep you have tons of control over the process.
You're not worried about a prep center (or your vendor) bungling the prep and costing you tons of money as a result.
When everything is done in-house, quality tends to be higher.
Help you appear more professional to potential vendors:
If they're on the fence about granting you an account, this can help push them over the edge.โ
Cons:
-dealing with unskilled labor is a headache
-large capital investment required
-your costs are largely fixed (regardless of workload)
โ
Dealing with unskilled labor is a headache:
Your typical warehouse employee will be an unskilled, blue collar laborer.
And there is absolutely nothing wrong with people like this.
But they can (and will be) harder to manage than more skilled employees.
Be prepared to train them well and to deal with high turnover.
Large capital investment required:
The physical warehouse space you rent (or buy) is not your only cost.
There are costs you've probably never considered.
Things like trash pickup, sourcing pallets, workers comp insurance, shipping supplies, payroll taxes.
The list goes on.
This doesn't even include essential warehouse tools like forklifts, industrial shelving, and much more.
Your costs are largely fixed (regardless of workload):
You still pay your warehouse lease (or mortgage) every month, regardless of how your business is performing.
If one supplier makes up the majority of your revenue and they cut you off, you're in a tough spot.
Employees still need to be paid.
Make sure that if you go the warehouse route you have plenty of products to be prepped and a diverse supplier mix.
Prep Center (3PL)
Now let's discuss using a prep center (also referred to as a 3PL) for your prep/shipping needs.
Pros:
-allows you to be fully remote
-focus on what you're best at
-variable cost (as opposed to fixed)
Allows you to be fully remote:
The location freedom that a prep center provides is the single biggest pro.
Focus on what you're best at:
Chasing down employees and packing boxes was taking me away from my core competencies.
My core competencies = building relationships and sourcing products.
Variable cost (as opposed to fixed):
Some may see this as a con but truly it can be both.
I see it as a pro because I don't have to worry about a huge fixed cost hanging over my head each month.
If my business grows, my costs go up.
If my business slows down, my costs go down.
It's a give and take but one that is worth making for the flexibility that this model provides.
Cons:
-costs more to scale
-a bad 3PL can hurt (or kill) your business
-requires ongoing communication and supervision
Costs more to scale:
When using a prep center, the cost of doing business increases as you scale.
Since a 3PL is a variable cost, you're virtually guaranteed to pay more over time.
A bad 3PL can hurt (or kill) your business:
Choosing the wrong 3PL can kill you.
Amazon will suspend your account for too many prep or inbound shipping errors.
This is why vetting your 3PL and choosing the right one is essential.
Requires ongoing communication and supervision:
Even the best 3PL is not a "set it and forget it" relationship.
You must always be "managing the manager."
Weekly check ins are encouraged if you're doing a large volume of shipments.
This will keep everyone on the same page and minimize errors (on both ends).
The choice is yours.
~
Arman Tawab
