On-Demand Warehousing and Fulfillment – Don’t Believe the Hype

Suddenly, warehousing and fulfillment has become popular. Yes – packing and shipping is now “sexy”. Why, you might ask? Over the last few years, e-commerce sales have grown at an exponential rate, and where growth is, so too will be interest and opportunity. But the growth in e-commerce fulfillment hasn’t been the only fuel to fire the flame of interest in this otherwise dull industry. Fulfillment and warehousing have been amplified to a new height within the news and media due a new way of doing business within the industry – on-demand warehousing and fulfillment.

On-demand warehousing has captured the hearts of venture capitalists and big businesses alike. Over the last few years, significant money has been raised to start-up and grow multiple new on-demand warehousing businesses. Flexe has raised over $20 million in venture funds, Stord has raised $2.4 million, and Flow Space has raised $2.2 million. Venture capitalists aren’t the only ones entering the fray either – UPS just launched its new Ware2Go platform in an attempt to capture some of the forecasted $26 billion market for on-demand warehousing and fulfillment services.

So on-demand must be the next big thing in logistics that every online retailer should choose, right?

What is On Demand Warehousing?

On-demand warehousing is quite simply an online marketplace of warehousing services where users of warehouse space can tap into the network and use warehouse space on an “as needed” basis, and providers of warehouse space can offer excess warehouse space to other companies as it is available. Popularized by the consumer facing Air BNB and Uber, on-demand warehousing, in theory, connects ANYONE with additional warehouse space, regardless of background in commercial warehousing or traditional 3PL warehousing. In essence, anyone can offer their excess warehouse space as it becomes available, to be used by those in need for short or long-term projects. On demand warehousing attempts to disrupt the commonly used channels of either acquiring leased space as needed or using a 3rdparty warehouse by creating an Uberized platform to “exchange” these services in real-time.

On Demand Warehousing and Fulfillment

Companies such as Flexe, Stord, Flow Space and Ware2Go have each built an online platform where warehouses can list their space and those in need of services can acquire space. These online platforms are built in such a way that the entire transaction is run through the platform, from listing and acquiring warehouse space, to the management of inventory and shipping of orders, as well as the final billing of the customer for services rendered and payment of the warehouse operator. In exchange for providing this platform, these on-demand companies earn a commission for serving as a medium for the exchange.

As you might have guessed, on-demand warehousing companies aren’t only geared towards the exchange of seasonal or additional warehouse space. Rather, they’ve even ventured into the realm of attempting to exchange more complicated “fulfillment services,” so that companies with extra space can earn money by not only storing pallets in their warehouse but also picking, packing and shipping orders for those in need.

The “Apparent” Advantages of On-Demand Warehousing

Initially, on-demand warehousing was started in order to solve the ever-growing warehouse space dilemma. Businesses that need additional warehouse space, whether on a short-term basis or in another location, have traditionally had to search for a warehouse space to lease or use a 3PL warehouse, as there haven’t been any avenues for this need in the past, especially for non-3PLs.

Some of the most common reasons that companies need additional warehouse space are:

  • Seasonality
  • Product promotions
  • Bulk buying
  • Lead time variability
  • Same/next day shipping demands
  • Business contraction
  • Growing into new space
  • New products
  • End of year challenges
  • Expansion into a new territory
  • Buying discount
  • Product recalls

According to Stord (with an admittingly small sample size), only 80 percent of warehouses are utilized fully, meaning there is 20% capacity at any given time within industrial warehouse space. On the opposite side of the coin, nationwide, the industrial vacancy rate is 5.3 percent, and industrial rents were up 8.2 percent in 2017, after increasing 8.7 percent in 2016, according to the JOC.com. These unique circumstances have created an environment that both presents an opportunity to fully utilize excess warehouse space as it becomes available and also circumvent some of the challenges of finding and acquiring additional warehouse space that is needed. In the past, the only solutions were to sign a short-term lease, shift to another DC if relevant, sell off inventory, hire a 3PL to take care of it, sign a long-term lease, or search for and solidify some sort of alternative off-site storage solution.

On the surface, it seems like there could be some use for on-demand warehousing.

Not Just Warehousing – On-Demand Extends into Fulfillment

These on-demand solutions claim to be the answer to not only warehouse space needs but also fulfillment. On-demand companies have upgraded from tracking inbound and outbound pallet shipments, to facilitating the exchange of carton and single unit order fulfillment. Using the provided system, users of on-demand fulfillment can have another business in another location ship orders for them. The primary goal of on-demand fulfillment is to fulfill shipping needs in additional locations and to enable smaller and growing retailers to compete in the “same-day” or expedited shipping environment without opening up additional in-house locations.

On Demand Warehousing and Fulfillment Has Serious Weaknesses

Sounds like an interesting proposition, right? But can ANYONE fulfill orders for another business? Is on-demand warehousing and fulfillment actually beneficial from a cost perspective? We answer these and other questions below.

Can Anyone with Warehouse Space Fulfill Orders?

Companies like Uber and Air BNB work well because anyone with a license can drive a car and anyone with a home can rent out space. But is the same true for warehousing? Certainly, it’s easier to be convinced that a business with additional warehouse space can without tremendous headache accept bulk pallets, store them, and occasionally send them back out from time to time. As long as the systems are streamlined and the business has some idle labor, storing and shipping pallets is “doable.” But what about complicated pick, pack, and fulfillment operations? Can any business add this to their list of capabilities? On-demand companies want you to think that as long as you have experience shipping orders, you have the ability to handle fulfillment for other companies.

The reality, however, is that there are a few large obstacles to making on-demand fulfillment work. First, the company offering on-demand fulfillment services must have significant idle capacity on the labor side in order for fulfillment and shipping to be more than an “afterthought”. One can easily pull a pallet and leave it at the dock for pick up, but it’s far more challenging to pick, prepare, and ship 100 orders in the afternoon on a busy day.

Second, non-3PL warehouses will always battle the “priority” problem. A 3PL warehouse has to serve all of its customers or risk losing any one of them. But a company that has a primary business will almost always put the needs of their business first, above any need of a fulfillment customer that they’re simply earning some incremental revenue from.

By the way, most professional fulfillment companies with years of experience make mistakes – even with the latest and greatest in technologies and staff that are geared towards that singular focus. Companies that don’t focus on being a fulfillment operate will, without a doubt, make more mistakes even still than warehousing firms.

Which is why 3PL warehouses are likely going to be the primary warehouses used by on-demand solutions, since they’re already geared towards providing this service and detail. But is it better to use an on-demand fulfillment service (only to use a 3PL that they’ve matched you up with), or are you better off just going straight to a 3PL? We’ll touch on these questions below.

Is There Really a Cost Savings Using an On-Demand Warehousing Solution?

The concept behind cost savings in on-demand warehousing is that they will leverage their overall volume of deals to get better individual rates. But this doesn’t really work. Here’s why:

First and foremost, the warehousing and fulfillment industry is a very low margin, high volume business. You have to understand that there isn’t a huge amount of “play” in rate structures. If rates are decreased significantly without a corresponding synergy due to volume, performance and quality will diminish as a result. There’s only so much room to squeeze out of fulfillment pricing.

Therefore, an Air BNB warehouse must either force the warehouse to operate at a lower than acceptable margin and mark up this cost (in order to remain competitive with stand-alone fulfillment solutions), or they must accept a much smaller margin and simply mark up the costs to customers slightly, or they must be marking up costs over and beyond the pricing of a traditional 3PL in order to make appropriate margins. Because most of these companies are venture backed, you can be certain that their business model isn’t to make a small margin of profit. Because of this, it’s reasonable to assume that they are either forcing businesses to offer service at a lower rate or they’re marking up costs above fulfillment companies in order to make their desired margin.

Paying too much for on demand fulfillment

This is a recipe for disaster. If on-demand providers are forcing businesses to operate at a lower than desired margin, performance will dip. There is just no way to complete the same amount of work at a lower margin. The warehouse may decide to make this additional money while they have some capacity but once they have a source of revenue that provides a better profit margin, they will ditch it in a heartbeat. And if they’re simply marking up costs above those of a 3rdparty warehouse, then eventually the market will bear that imbalance and companies will switch as they realize that they can get better rates elsewhere.

It’s extremely difficult to add an unnecessary third party to a transaction, add the additional fees necessary to pay this third party, and not have a resulting increase in costs – especially in the case of a very low margin business.

But to further illustrate the pricing dilemma, we found the following related to on-demand warehousing and fulfillment rates:

  • You pay $10-15 per pallet for storage, the local warehouse gets $5, and the on-demand warehouse gets $5-10 (remember – the on-demand warehouses have to provide a return to all of those shareholders that invested millions of dollars in their idea!). We found the average pallet rate going direct to be around $9 per pallet.
  • You pay $7-12 per pallet for in and out handling, when the average for the industry is typically around $3-5.
  • The on-demand warehouse prices fulfillment at $1.85 per order plus $.85 per item (which is lower than the fulfillment pricing industry averages we uncovered during our last survey), forcing the local warehouse to operate well below their normal operating margin, which makes one wonder are shipping prices used as a cover for lower fulfillment fees (see below…)
  • Promising a very non-detail-oriented “shipment fee per shipment”, which is most likely marked up to a degree to offset the lower fulfillment fees

Pricing will be higher for your business using an on-demand solution – guaranteed.

If You Won’t Necessarily Get Better Rates, Why Should You Choose On Demand?

And this is where it gets interesting – the claim of on-demand warehousing and fulfillment is that not only will you save money versus using a traditional 3PL warehouse (which we rebutted above), but you’ll also get better performance than managing a 3PL fulfillment company relationship yourself. From Flow Space itself:

FlowSpace

A few thoughts on the above graphic. First, due to changes in the industry and pressures from customers, many 3PLs have adopted month-to-month or ‘no-commitment’ contracts. Similarly, many warehousing firms have opted to charge no or very little minimums. These claims are simply inaccurate for many fulfillment options.

Second, the claim that 3PL warehouse software is more difficult than on-demand software is simply an advertising ploy. Unlike on-demand warehousing which has been around a few years, 3PL warehouse software has been around for decades. In this time, the software providers have adapted, evolved, and done everything they can to make their systems more user-friendly. In fact, many 3PLs themselves have built their own 3PL software to make things even better for their specific needs and the needs of their customers.

Third, the claim that 3PLs are poorly organized is highly subjective and not backed by data. Fulfillment companies oftentimes have dedicated account management staff, so you’d be hard pressed to find a better solution for customer service. In fact, getting someone on the phone to be able to answer questions is oftentimes more desirable than email communications.

Which leaves us with hard to scale integrations among multiple fulfillment centers and confusing pricing. If a company uses multiple fulfillment centers that aren’t the same company, then perhaps the on-demand solution is less cumbersome. One of the main objections people have with fulfillment houses is that they have pricing that is difficult to understand. However, this isn’t necessarily lost in on-demand solutions, who charge in a very similar fashion to most 3PLs.

What About Using On-Demand for Increased Delivery Times?

Let’s focus on another big area of emphasis within the on-demand world – fast delivery – You keep hearing about how everyone wants their product in 2 days or less (popularized by Amazon Prime services). But is this statement really true? Yes, Amazon has helped push the limits on same day or 1-2 day expedited delivery, but how many orders are really shipped within hours or next day? We can tell you through our site that the number of people that request multiple locations due to the need for same day or expedited delivery options is less than 5%, indicating a small desire for this service – at least today.

Actually, many recent studies have shown that low shipping costs fully trumps speed – 87% of shoppers like free shipping over fast shipping. In another study, 74% of shoppers said cost is more important than timing. According to a recent Shippo survey, 3% of those polled want same day shipping, 44% want 4-7 days and 53% want 2-3 days.

The Amazon effect (because so many people use Amazon Prime) has created a bit of an expectation, but it’s not translating into absolute expectation. This is not to say that shipping speed isn’t important, but it’s just to say that warp speed shipping isn’t an absolute necessity yet, especially for smaller and mid-sized retailers. Therefore, the argument to use on-demand fulfillment services to exploit expedited shipping advantages seems like more of an emotional ploy than a fact at this point.

Is On-Demand Good for Small Businesses?

Another unstated reality is that most on-demand companies are geared towards mid-tier and larger companies. It’s been reported that only one of the new on-demand companies listed above really focuses on smaller and growing companies. But the interesting part is that this company, Stord, apparently focuses on small as being 50 to 100 pallets of storage, or hundreds if not thousands of orders processed per month. Many small business clients have storage needs that are far less than 50 to 100 pallets, and may only ship a few hundred orders per month or less.

Are on-demand warehouses really helping small companies? Because margins are lower for low margin scenarios, the resounding answer is NO!

Does On-Demand Warehousing Work for Seasonal Needs?

Let’s tackle seasonality of needs. One big timeframe where service is needed is during the holiday rush, which is quite common for retailers and 3PLs. In other words, at least logically, the on-demand warehouses will have to match users during the holiday season with warehouses (non-retailers and non-3PLs) that don’t see peak activity in the holiday season, or else they too will be subject to limited supply and limited availability to help process orders.

Do you want a company that does something else completely to perform shipping services during a time when they’re already busy and your business is secondary to theirs? Otherwise, we’re really talking about just having 3PLs help out, which is already in existence and without the needless markup previously mentioned. So apparently there must be a big pool of non-retailer/non-3PL based warehouses that are willing to help you during your rush, have a slower season during the holidays and are itching to earn some extra dough at the end of the year and give you a priority status in their business. Something isn’t quite adding up…

Does On-Demand Fulfillment Software Really Simplify Processes?

The on-demand warehouses claim that their systems are extremely easy to learn and implement – and we will take them at face value that this is true. However, it’s important to note that this is essentially creating a new business for the warehouse using their software. For a non-3PL, this is a separate inventory/fulfillment/shipping system than the one they use, and there will be different packaging and labeling requirements, etc. Essentially the company is managing two businesses with two separate software systems.

For 3PLs, they will be utilizing another system that is separate from their core. They are probably best positioned to learn the new system and implement it, but it’s still secondary to their core processes, and their core customers that they don’t “share” with anyone else and that they presumably earn more profit from. You need to know that there’s a chance that the company will be faced with a last-minute crunch during a busy time and may be left with processing either your on-demand order where they earn less and use someone else’s processes and procedures or they will choose to help their existing customer where they earn more money and have to actively manage the client. Which path do you think they’ll take?

Will You Receive High Quality Customer Service?

The actual on-demand warehouse seems to be the one performing customers service. If you have a question you’ll contact them as opposed to the warehouse that has your goods and is shipping your orders. For some customer service this is understandable and workable, as much of the data is tracked in the inventory and shipping management system provided by the on-demand solution. However, there are many instances when answers won’t be easily obtained by looking at the system (such as changing an order, diagnosing an error, checking in on a return or receipt that hasn’t been entered, etc.).

In these cases, you will have to contact the Air BNB warehouse company, who will in turn contact the warehouse. Once an answer is obtained, you’ll be provided a response. This adds an additional layer of communication into the fold, and will definitely lower the overall response time. As opposed to simply calling a 3PL warehouse directly, you’ll be waiting longer to get a response. In the case of a very critical order or shipment, this increased time could spell disaster.

Bad Customer Service with On Demand Warehousing

Furthermore, another challenge is that the warehouse may start receiving customer service requests directly from the customer. As an example, once the user of the on-demand service finds out that it’s ABC Fulfillment Service shipping their orders, they may be inclined to contact ABC first for questions – and it won’t take long for them to figure out who is shipping their goods. This will add another layer of service for the warehouse processing the work, and if they’re already operating at a lower margin, it may serve as another challenge to continued participation in the network.

With so Many Problems, What is On-Demand Good For?

Warehousing on-demand is challenging for many scenarios, but it isn’t the wrong choice for everyone. In fact, in one area is could truly excel – connecting very simple pallet in/pallet out needs with warehouses that have excess capacity to handle the workload. Especially in cases where the pallet minimums are reached (e.g. over 50 to 100 pallet minimums) and in cases where the pallets are exact dimensions and not product that is subject to any warehouse condition requirements (e.g. non-food items that aren’t subject to temperature controls), on-demand warehousing could work out. Also, on-demand warehousing could be helpful in cases where you just simply can’t find an option in an area. These may be few and far between, but the on-demand service might have an option in an area that you can’t find on your own.

But in many other cases, on-demand warehousing and fulfillment appears to be extremely problematic. From a service and pricing perspective, following a more traditional 3PL warehouse route will be far more advantageous. Don’t be fooled by the fancy headlines and sales pitches – on-demand warehousing may seem like a great solution at first glance but it could end up costing your company severely in the end.

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