If You're Expanding Your Customised eCommerce Shipping Solutions, Should You Build or Buy?
In the business world, the question of whether to build or buy new capabilities is always a tricky one.
March 3, 2023
In the business world, the question of whether to build or buy new capabilities is always a tricky one. For large companies who have decided to embrace e-commerce, they might need more from their logistics operations than just picking and packing parcels.
They may need specialised shipping solutions like return deliveries or cash on deliveries that are hard to find in the eCommerce logistics market. As a result, in cases where buying is cheaper than building, many companies will choose to outsource these new requirements to 3PLs that have specialised in managing customised and urgent shipping solutions if they are not able to build these capabilities in-house.
Considering that building or buying any sort of new capability is a heavy commitment, BCG offers a build or buy framework based on an assessment of strategic value and relative cost positions to help figure out what works for your company.1
The matrix above contains the scenarios built using the steps below. These steps have been adapted for eCommerce logistics:
Know where you stand
Identify the operations capabilities, consignee expectations and lanes that you need new capabilities for
Review the costs of logistics itself and costs of managing logistics for the lanes and types of shipping needs you have
Forecast your product-type and lane demand and capacity utilisation
Assess your advantages
Identify the strategic value of each part of the delivery journey in terms of costs, brand experience and control
Determine your relative cost position
Identify parts of the delivery that should be prioritised for in-house handling rather than outsourcing
Conduct a high-level qualitative evaluation – e.g. weighing the costs, benefits, urgency, and other requirements
Select scenarios for further elaboration
Pick the best scenario
Evaluate financial and non-financial criteria in more detail
Create a multiyear business case for each scenario and select one
Make it happen
Request for Proposals from outsourced network partners based on your make-or-buy decisions
Design an implementation plan
To help you apply BCG’s matrix above to eCommerce logistics, we’ve listed some strategic considerations you should factor in while building your scenarios:
1. Go-to-market speed
In-house Deliveries Give Greater Control, But is Expensive and Cannot Scale Overseas Quickly
In the United States, everyone is familiar with seeing the branded vans of Amazon, Walmart and the like with companies competing with each other on delivery performance such as same-day and next day delivery.
When you choose to “build” your operations capabilities, you’re building up supply chain capabilities in-house for greater control and many of the key benefits below:
Allocation of manpower and drivers
Warehouse and fulfilment centre capacity and location
Faster customer service speeds
Full visibility over every leg that your staff are in control of
Having your brand at every touchpoint, etc.
However, choosing to build capabilities in-house takes time, such as needing to set up assets, licences and hiring people, it is not conducive for expanding internationally quickly. What companies usually do is outsource their deliveries in new overseas locations during the time they are setting up their assets and processes before transitioning fully to their in-house arrangements later.
Building delivery capabilities in-house also comes at a high cost. One of the biggest online retailers in the United States has spent around USD 150 billion in shipping and fulfilment costs alone.
The costs of logistics include managing the deliveries, hiring logistics talent, procuring capacity, buying physical assets like vans, trucks, conveyor belts and warehouses along with much more.
The costs of managing logistics includes the tech and managerial man hours invested in-house in order to control and coordinate all delivery activities your company is in charge of. Which means that it may not be realistic for many businesses to run 100 percent of their supply chain operations in-house.
With that in mind, most companies outsource their delivery solutions to 3PLs as it helps you get your products to the market faster. But how many 3PLs you need to work with and how you manage them still depends on the different needs and goals your company has. Below are further considerations to factor in:
International Express 3PLs vs Local Standard
Some asset-based 3PLs have built up their capabilities over many years and are capable of covering almost all your shipping needs in one place. With established assets, processes and talent, these 3PLs provide consistently high delivery performance. However, this high performance is also charged accordingly.
Local specialist 3PLs may be more limited in which countries and legs of the deliveries they can handle but are able to bring similar levels of service quality as established players at lower rates. However, this brings us back to the “build or buy” dilemma as your company would still need to build the capabilities of managing multiple 3PLs if you choose to do this.
On the other hand, if you are working with a 4PL with access to both types of 3PLs, they will be able to allocate your volumes according to your needs for you.
3. Bulky vs Non-bulky Deliveries
Weight Breaks, Price Points, and Your Partner’s Capabilities
Once your eCommerce marketplace or eCommerce logistics company gets big enough, you’ll be handling stock-keeping units (SKUs) with sizes, ranging from envelopes to refrigerators and furniture. However, not all 3PLs are equipped or trained to handle all these different size requirements at once.
Most 3PLs won’t turn down requests for quotation, but have a tendency to charge a lot higher for jobs that they are not equipped to handle. Bulky carriers have different assets, manpower and processes from those who specialise in smaller packages.
Last mile carriers who specialise in smaller packages are likely to have assets that cater to smaller package sizes like conveyor belts and sorting machines that work well, but can’t handle larger packages. As mentioned above, any quotation for products that are too big or too heavy to fit their current sorting limitations will be charged much higher.
Carriers who specialise in bulky deliveries are less likely to invest in sorting machines and more likely to invest in more manpower and processes. This is because bulkier deliveries require manual handling and hand-scanning. They are also sorted and delivered in a completely different way from smaller packages, usually involving larger vans and lorries for larger consolidated bulk deliveries.
Larger companies tend to have multiple 3PLs that specialise in different areas to get bulky and non-bulky deliveries while being able to keep costs manageable.
4. Coverage and Risk Management
Particularly in developing regions like Southeast Asia, full country coverage could be challenging due to some countries’ fragmented geography and the distance of some areas from key city centres.
To get full coverage, you may need to work with a large fleet or at least a few network partners to gain full coverage of a country. If you choose to work with multiple 3PLs, you may also want to consider working with a few of them to manage the risk of one of them running into problems.
5. Delivery Duties Paid (DDP) vs Delivery Duties Unpaid (DDU)
DDP and DDU arrangements deal with who needs to pay for customs duties when the item is about to enter the destination country. Items that need to have their duties and taxes paid otherwise they cannot enter the country. It’s good to work with partners who are able to provide both DDU and DDP arrangements.
DDP – The shipper (e.g. the marketplace or seller) pre-pays the customs duties and taxes at the border through their shipping partner. The shipper will either pay the money for customs clearance to the shipping partner or the shipping partner will claim back the customs and duties amount from the shipper.
DDU – The recipient, such as the eCommerce customer, pays the customs duties and taxes to release the goods from customs. This isn’t always recommended if the customer hasn’t been informed in advance that they need to make these payments.
6. Cash on Delivery vs Prepaid Solutions
Especially in developing regions like Southeast Asia, cash on delivery still sees some prevalence as a mode of payment for online purchases. In Southeast Asia 2021, cash on delivery was used in the following countries for online purchases:3
Not all 3PLs are equipped to help you with cash on delivery collection and remittance. This also has the added complexity of the currency that your payments are remitted back to you in, as this could expose you to foreign exchange risk if not handled correctly.
If you are selling mass market profile goods, do take note of your buyer’s preferred payment methods and work with the right providers who can facilitate cash on delivery collection and remittance accordingly.
7. Returns, Dangerous Goods and Other Services
Return solutions are particularly important for retailers of fashion items, as many shoppers choose to try multiple sizes on before buying. However, returns were expensive enough to warrant retailers raising the cost of returns in late 2022 in the United States.4
Part of the returns puzzle is that returns require navigating many-to-one arrangements where a van or truck would need to travel to many different locations and pick up a small volume of parcels, which means that for the most part the van isn’t fully utilised while still burning the same amount of fuel and man hours per kilometre.
Some providers, including Janio’s 4PL solution, can provide drop-off points options that help to save returns costs over time, but this still depends on the kind of experience you want to provide to your buyers.
Dangerous goods refer to items that face additional restrictions or require additional paperwork before they can be airlifted. These include unassuming items like consumer electronics because of the batteries and health and beauty items that are in liquid or aerosol forms.
These sorts of goods require Material Data Safety Sheets (MSDS’s) which need to come from the manufacturer or supplier while the shipping partner you work with makes the appropriate arrangements with the airline they are working with. Not all 3PLs will accept dangerous goods shipments, but 4PLs would have some partners available who can help you out.
Conclusion: Managing 3PLs In-house or Hiring a 4PL
All these considerations only scratch the surface of the type of customised solutions that larger companies may need to plan for, which leads to the next step where you choose whether to manage these 3PLs in-house or outsource this management process to a fourth-party logistics provider (4PL), such as Janio. When managing 3PLs in-house, your team will be able to communicate with them directly and negotiate rates with them directly without any intermediaries. You will also have full control of the request for proposal process and can choose how many 3PLs you work with based on your company’s current requirements.
One quick example is having 2 or 3 last mile partners in each of your target countries who can ensure full country coverage while being able to back one another up in case one of them runs into issues for risk management. However, managing multiple 3PLs does have some costs attached. Each 3PL you work with has their own style of doing things, their own processes and their own ways of calculating rates. You’ll also need to build relationships with your 3PLs and get used to their style of working if you haven’t worked with them before this.
As you won’t be working with a single touchpoint, you will need to hire teams, build systems, integrate your databases with your partners, and standardise communications and delivery statuses between all your partners so you can get apple-to-apples comparisons and communications. For example, you won’t be able to run pricing simulations across multiple shipping partners without first standardising your different partners’ rates across the postcodes and delivery zones that they cover.
If you choose to work with a 4PL, you won’t be dealing with the 3PLs directly but you won’t need to worry about laying the groundwork and the costs of managing logistics either. 4PLs like Janio will act as a gateway to their network of 3PLs which they will manage on your behalf. 4PLs will have existing relationships with their network of partners that you can leverage on.
4PLs will run frequent, usually quarterly, RFPs to ensure that their clients regularly get the best rates that the 4PL can get them. The RFPs run by 4PLs also have economies of scale that come from the volumes of all the 4PL’s clients combined. All the standardisation of tracking data, communications, and processes are already managed by the 4PLs. 4PLs like Janio serve as your go-to supply chain partner and extension of your customer’s supply chain team. With our 4PL service, you can focus on your core business while we handle all your end-to-end logistics needs from reducing logistics costs, improving logistics performance and overall improving your customers’ delivery experience.
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