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Outsourcing e-commerce logistics: pros and cons.

White Paper. Outsourcing e-commerce logistics: pros and cons. 2

Introduction 3

The need for e-fulfillment warehouses 4

State of the market 6

Outsourcing logistics activities 7

Insourcing logistics activities 9

Custom solutions 10

Sources 11


Contents

While traditional retail sales are increasing

by around 4–5% per year, growth ratios in

e-commerce are at least three times higher.1

Growth is even stronger in some countries. Such

as China and India, which experienced growth of

43% and 30% respectively in 2015.2

But online consumers have high expectations,

and retailers must offer flexible delivery options

to keep them happy. One in two online shoppers

abandons the transaction before completion due to

dissatisfaction with the available delivery options.3

Above all, consumers want insight into the delivery

process. Many retailers are still lacking in this

area.4 However, in recent years, there has been

lot of investment in track-and-trace solutions,

enabling the status of orders to be monitored

online.

A great challenge facing retailers is that the supply

chain network of the future will no longer be linear

— from factories by way of distribution centers to

stores.

Instead, products will move through complex

networks and interconnected facilities, including

bricks-and-mortar shops, distribution centers,

“click and collect” pick-up points, and so on.

In their attempts to satisfy demanding online

consumers, many retailers are gradually reaching

the limits of what existing supply chains can do.

Over the next few years, there will be a strong

focus on logistics networks in retail.5 The key

question of whether e-commerce logistics should

be kept in-house or outsourced also needs to be

answered.

Introduction



Over the next few years, there will be a strong focus on logistics networks in retail.

There are several reasons why traditional

warehouses are not best suited to e-commerce

logistics. Firstly, the choice of online consumers

is no longer limited to the products available in

the shop.

Consumers want to be able to order any product

at any moment in any quantity. As a consequence,

there is a shift in supply-chain thinking from “push”

to “pull”.6

In a push model, suppliers “push” their products

to consumers through the distribution channel. In

the pull model, consumers create the demand and

suppliers respond.

Secondly, in e-commerce order quantities are

smaller than production quantities that are

typically sent to stores.

On average, online consumers spend around

$56 (€51) per order. Top 10 consumers spend an

average of $167 (€153) per order.7 This impacts

the way the warehouse is set up. E-tailers need to

keep loose products in stock rather than lots of

pallets. So e-fulfillment sites are typically equipped

with shelving racks and mezzanines to increase

floor space.

Thirdly, e-commerce

is bringing sales and

marketing aspects into the

warehouse. E-commerce and

digitization are driving demand for personalized

products. As a result, some value-adding steps

have moved from the production environment to

the warehouse. An example is product labeling and

repackaging.8

A fourth important reason for separate

e-commerce warehouses is the need to deal

efficiently with returns and demand peaks. In

addition to seasonal variability, which also plays

a role in the traditional supply chain, the online

channel must also take daily peak patterns into

account.9 Typically, the peak for an e-commerce

warehouse is toward the end of the afternoon and

lasts throughout the evening. There is also a peak

on Mondays following weekend orders, and usually

on Fridays too, to ensure all orders are dispatched

before the weekend. The average order

turnaround time in the supply process must be

less than an hour to ensure orders are delivered

fast enough. This demands enormous flexibility

from e-fulfillment warehouse staff.10



The average order turnaround time in the supply process must be less than an hour to ensure orders are delivered fast enough.

The need for e-fulfillment warehouses

In addition, at least three times as many employees

are needed as in a traditional distribution center,

due to the required speed, additional handling and

stricter quality checks — because goods go directly

to the end customer.

One thing that does not differ between traditional

and e-commerce fulfillment centers is the

importance of the location. That said, as well as

being as close as possible to the most important

– and the largest number of – customers,

e-commerce warehouses must also be connected

to the network of express services, logistics service

providers and postal operators.

Establishing e-fulfillment centers as close as

possible to urban areas is advantageous, as big

cities are home to the largest number of consumers

and tight transport networks are already in place.

However, generally expensive warehouse space

must also be factored in those locations where

every square foot is precious.

Which is why the focus at e-fulfillment centers is

increasingly on building warehouses higher so that

more goods can be stacked in a smaller floor space.

To maintain the required picking speed, active

picking locations can be set up containing a small

quantity of each product, which can be continually

restocked.11

Bearing in mind all the requirements an e-fulfillment

warehouse must satisfy, retailers clearly face many

challenges in adapting their traditional supply

chain infrastructure to the needs of online retail.

At the same time, it is important to switch to online

retail quickly so as to be able to meet to current

consumer demand. So outsourcing e-commerce

logistics is worth considering.





In Europe, logistics is the third-most outsourced

activity. But the extent to which companies

outsource their activities differs from sector to sector.

The Fast Moving Consumer Goods (FMCG) sector

outsources the most, followed by the automotive

industry. This could be due to the high price

pressure and consequently lower profit margins in

these sectors, which place more emphasis on cost

efficiency.12

The pressure on margins is definitely a concern with

online orders, given that many businesses must

account for a part of the fulfillment and delivery costs

themselves. Hardly any online stores charge end

consumers the full cost of fulfillment and delivery.

Many e-tailers try to offset this “loss” by increasing

their product margin, but an efficient fulfillment

chain remains one of the main strategic drivers of

competitiveness for e-tailers.13

A Capgemini study reveals a relatively predictable ebb

and flow pattern when it comes to outsourcing versus

insourcing. When viewed over a long period, there is a

gradual trend toward outsourcing logistics services.

Shipping companies that source logistics services

from third parties will, on average, spend 36%

of their total logistics budget on these services

this year. Domestic transport (80%), international

transport (70%) and warehousing (67%) are the

most frequently outsourced logistics activities.

The top five are all operational and repetitive activities.

More strategic, customer-oriented and IT-intensive

logistics activities, such as order management and

fulfillment, are outsourced least often.14

State of the market

67%

70%

80%

Warehousing

International transport

Domestic transport

Most frequently outsourced logistics activities



There are various reasons to outsource logistics

activities, but optimizing costs is number one.

Shippers say that by outsourcing logistics

activities they cut costs by 11% on average,

hold 6% less stock and save an average of

23% on fixed logistics costs.15

By outsourcing their activities, e-tailers have fewer

fixed costs, such as labor and warehouse rental.

Cost savings can also be achieved through

economies of scale — which is especially true for

smaller businesses. Companies can get volume

discounts when contracting an e-fulfillment

business. Outsourcing also has a beneficial effect

on cash flow as shipping fees can be paid 14 to

30 days after the receipt of the invoice fees rather

than up front. That means e-tailers hold on to their

money longer and spend it on additional products

or extra marketing.

In a fast-changing market, outsourcing logistics

activities also means that businesses can stay up

to date without having to continually invest in the

latest e-fulfillment technologies. In e-commerce,

it is not unusual for the wrong product to be

shipped. This costs a lot of money in returns and

can also have a negative impact on brand image.

There are solutions that provide virtually 100%

quality assurance, such as weight checks and item

scanning prior to dispatch. However, purchasing

these solutions is a big investment for e-tailers.

A dip in quality is almost inevitable when online

stores experience strong growth. This is often when

businesses contract an e-fulfillment service provider.

22% of British e-tailers say not having to invest in

new systems is the main reason for outsourcing.16

Outsourcing logistics activities

6%

11%

23%

Less stock

Lower costs

Saving on logistics costs

Optimizing costs remains the primary reason for outsourcing.

Outsourcing also has advantages not directly related

to costs. For example, outsourcing logistics activities

can help deal with seasonal and daily peaks, enable

businesses without e-fulfillment centers to roll out

online activities sooner, and usually enable e-tailers to

offer consumers more delivery options.17

Another big plus in outsourcing e-commerce logistics

is that e-tailers can focus on their core activities.

Online retailers invest a lot of time in setting up a

good balance of online marketing and sales activities.

But this pays for itself, because web optimization,

social media strategy and digital marketing pull in

more online visitors and so generate more sales.

Additionally, organizing logistics activities can often be

time-consuming and e-tailers make meager savings

by doing so themselves.18

Businesses stand to further optimize their processes

by drawing on the knowledge and expertise of

external parties. In regions like Northern Europe, this

is a significant motivation for outsourcing.19 Logistics

service providers, express delivery companies and

postal operators have in recent years invested heavily

in IT systems that support track-and-trace technology.

Online consumers clearly demand this additional

transparency in the supply chain.



Logistics service providers, express delivery companies and postal operators have in recent years invested heavily in IT systems that support track-and-trace technology.



Outsourcing e-commerce activities demands trust in the third party – the logistics partner.

Although the general trend is to increasingly

rely on third parties for logistics services, some

organizations deliberately choose not to outsource.

They usually do so to maintain control over their

logistics chain, though other factors also play a role.

Businesses that view logistics as one of their core

competencies are not quick to outsource their

logistics activities. In particular, organizations that

have an extremely complex logistics network tend

to keep their logistics – and so their knowledge of

various processes – in-house. Such organizations

are closely linked with another often-heard reason

for insourcing logistics activities: “No one knows

our organization as well as we do.” 20

The belief that outsourcing logistics activities does

not cut costs also holds e-tailers back from working

with an e-fulfillment partner. The failure to meet cost

savings targets or optimize logistics processes are the

other most-cited reasons for taking these activities

back in-house.21

Another challenge in outsourcing logistics activities is

managing the performance of outsourced services.

In a recent survey by ChainLink Research, 55% of

respondents cited this as an obstacle to outsourcing

activities. Logistics activities are a critical component

in the organization of e-commerce businesses.

When goods delivery goes wrong it has a direct

impact on brand image and customer experience.

Logistics activities significantly influence customer

satisfaction and market share. As such, outsourcing

logistics activities is more critical than outsourcing

more internally focused functions, such as payroll

management. Plus, logistics activities cannot simply

be cast in a standard mold, meaning that outsourcing

still requires strategic partnerships to be developed.

Technology is providing many new ways to integrate

data and services over and above traditional

Electronic Data Interchange (EDI). An example is

the integration of real-time Internet of Things (IoT)

data.22 Yet IT integration and the lack of transparency

can sometimes be a barrier to outsourcing logistics

activities for many companies.

Outsourcing e-commerce activities also requires trust

in the third party. Sharing confidential information is

key to a smooth and efficient logistics service. For

organizations that have managed their activities

in-house for decades, handing over their supply chain

operations to a third party can be a difficult step.

Outsourcing logistics activities can sometimes be a

bridge too far, particularly for organizations that do not

view their delivery service providers as cooperative

partners.23

Insourcing logistics activities

The reality is rarely black and white. Every business

has to look at its own processes, requirements

and strategy, and decide for itself which logistics

activities can and cannot be outsourced. We, at

Landmark Global, have a strong belief in the need

for a constructive dialogue with our clients in which

we identify the advantages of each model together.

Last-mile delivery is a great example of a logistics

activity that is increasingly being outsourced,

especially in cross-border e-commerce. Customers

used to bridge the last few miles from shop to home

themselves.25 Landmark Global’s intricate network

now offers an excellent alternative. By outsourcing

fulfillment services, e-tailers can enjoy more

attractive rates. Online consumers in turn enjoy a

broad range of delivery options — it is a win-win

situation.

E-tailers that experience significant international

growth can outsource their e-fulfillment and last-

mile delivery to Landmark Global. We have various

fulfillment sites across the globe, allowing e-tailers

to compete on a level playing field with local

players by delivering faster and cutting costs. Our

technology also creates transparency across all

sites. This allows e-tailers to check their stock levels

in real time, no matter when.

E-commerce logistics poses complex supply-

chain challenges for e-tailers. Because not only

online consumers are demanding more; e-tailers

themselves are also making greater demands on

e-commerce logistics. It is our strong conviction

that by outsourcing logistics e-commerce activities,

e-tailers are able to concentrate on their core

activity and so safeguard their sustainable growth.

Partnerships enable businesses to respond to new

innovations and changing market demand faster

and more flexibly, giving them a competitive edge in

an increasingly aggressive, globalized market.



International Parcel Delivery

E-commerce Solutions

Fulfillment Services

Trade Services

Returns Management

Our e-commerce solutions

Custom solutions



1 The E-Commerce Imperative, Cassidy Turley, 2013.2 http://www.emarketer.com/Article/Global-B2C-Ecommerce-

Sales-Hit-15-Trillion-This-Year-Driven-by-Growth-Emerging-Markets/1010575

3 Econsultancy Multichannel Retail Survey 20134 Position Paper Cross Border e-Logistics, Ecommerce Europe5 The Shed of the Future, E-Commerce: its impact on

warehouses, Deloitte, 2014.6 Logistics and E-Commerce, The Impact of E-Commerce on

Logistics Real Estate, CBRE, mei 20137 The 3 most important e-commerce benchmarks and how you

can crush them, Big Commerce Blog, maart 2014.8 The Shed of the Future, E-Commerce: its impact on

warehouses, Deloitte, 2014. 9 Logistics and E-Commerce, The Impact of E-Commerce on

Logistics Real Estate, CBRE, mei 201310 http://www.logistiek.nl/supply-chain/blog/2014/1/vijf-tips-om-

supply-chain-klaar-te-stomen-voor-e-commerce-10113195511 http://www.inboundlogistics.com/cms/article/e-fulfillment-

strategies-that-deliver-the-goods/12 Outsourcing in Europe, An in-depth review of drivers, risks and

trends in the European outsourcing market, Ernst & Young, 2013.

13 http://www.logistiek.nl/supply-chain/blog/2014/1/vijf-tips-om-supply-chain-klaar-te-stomen-voor-e-commerce-101131955

14 19th Annual Third-Party Logistics Study, Capgemini, 2015.15 Outsourcing in Europe, An in-depth review of drivers, risks and


16 Logistiek & e-fulfillment: zelf doen of uitbesteden?, Logistiek, januari 2014.

17 Notable Views: Fulfillment Outsourcing, Pros and Cons, John Lindberg, 2011.

18 Logistiek & e-fulfillment: zelf doen of uitbesteden?, Logistiek, januari 2014.

19 Outsourcing in Europe, An in-depth review of drivers, risks and trends in the European outsourcing market, Ernst & Young, 2013.

20 Outsourcing versus insourcing, ASL blog.21 Outsourcing in Europe, An in-depth review of drivers, risks and


22 Meeting the outsourcing challenge, ChainLink Research, februari 2015.

23 http://theprogressgroup.com/white-papers/logistics-outsourcing-is-it-right-for-your-business/

24 https://www.shoppingtomorrow.nl/Cross_Border_(e)Commerce/Insourcing_of_outsourcing/

25 Developing the last mile of a parcel delivery service concept for consumers, Laurea Leppävaara, 2013

Sources


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White paper Outsourcing e-commerce logistics: pros … · White Paper. Outsourcing e-commerce logistics: ... be kept in-house or outsourced also needs to be ... White Paper. Outsourcing