3PL vs In-House Fulfillment: Which Is Better for Your E-commerce Business? 

An order is not the endpoint of the journey for an e-commerce business. It needs to handle its inventory, pick, pack and ship its orders in time, manage its returns and keep its customers informed about their delivery journey. 

With an increase in the number of orders, there comes a choice of whether to go for in-house fulfillment or third-party logistics (3PL). But which one is the better choice? 

The right choice depends upon the number of orders, budget, operational capacity, growth plans, type of product and the extent of control required by the business over its logistics. 

This guide covers e-commerce fulfillment, their costs, advantages, hidden costs, scalability and the key considerations for Indian e-commerce businesses when choosing between the two methods. 

What is In-House Fulfillment? 

It is an approach wherein e-commerce stores take care of all stages of order fulfillment on their own. The business needs to have their own or leased warehousing facilities where they store the inventory, employ workers, fulfill orders, pack them and deliver them to customers. 

As opposed to using third-party fulfillment companies, the business retains full control of their operations. 

How Does In-House Fulfillment Work? 

The in-house fulfillment flow works in the following way: 

Order placed by customer → Order received → Product picked → Product packed → Shipping label prepared → Package handed over to courier company → Product delivered to customer 

The business controls all stages of the process. It involves investment into the following areas: 

• Warehousing space 

• Storage infrastructure 

• Fulfillment staff 

• Packaging materials 

• Inventory management system 

• Order management software 

• Shipping integration 

• Quality control 

• Returns handling 

For businesses that do not have a high order volume, it can be an option to consider. 

Who Should Opt for In-House Fulfillment? 

In-house fulfillment may be appropriate in cases where: 

• There is a small business that has relatively few orders 

• The business deals in specialized products 

• The business needs custom packaging services 

• The business has a warehouse already 

• The business needs total control over inventory 

• The seller operates within a restricted geographical area 

• Order volumes are predictable 

But managing everything in-house becomes harder as order volume increases. 

What is 3PL Fulfillment? 

3PL fulfillment refers to hiring a third-party logistics company to handle warehousing and fulfillment needs. 

The 3PL company keeps your inventory in their fulfillment center, manages incoming orders, picks and packs your goods, and hands the orders over to the courier company for delivery. 

Rather than constructing and managing your own fulfillment facilities, you utilize the 3PL company’s infrastructure for warehousing and logistics. 

How does a 3PL Fulfillment Process work? 

A 3PL fulfillment process generally takes the following path: 

Sending of inventory to 3PL warehouse → Storing products → Customer places an order → The order is received by the 3PL company → Goods are picked and packed → Order is handed over to the courier → Customer receives the order 

Depending on the particular 3PL provider, it could also be responsible for: 

• Returns 

• Exchanges 

• Inventory management 

• Kitting and bundling 

• Quality control 

• Shipping coordination 

• COD reconciliation 

• NDR management 

• RTO management 

This allows e-commerce companies to devote more time to marketing, sales, product development and acquiring new customers rather than focusing on fulfillment and logistics. 

What kind of services does a 3PL company provide? 

Services provided by 3PL companies might vary depending on the particular service provider, but usually include: 

• Warehousing 

• Inventory storage 

• Pick and pack 

• Order processing 

• Shipment handling 

3PL vs. In-House Fulfillment: Comparing Costs 

Cost is certainly among the top considerations while comparing the two models. 

However, business owners shouldn’t limit their comparison to the cost of warehousing space and the 3PL provider’s fulfillment rate quote. There are more direct and indirect costs associated with fulfillment operations and the cost per order. 

Costs Related to In-House Fulfillment  

These include: 

• Warehouse rental or real estate cost 

• Security deposit 

• Utilities 

• Warehousing equipment 

• Racks and shelving 

• Salaries for employees 

• Packaging supplies 

• Warehousing software 

• Shipping software 

• Maintenance 

• Insurance 

• Loss of inventory 

• Returns processing 

• Courier services 

• Training 

Some of these are fixed costs, meaning that you will have to pay them even if the number of orders drops. 

Costs Related to 3PL Fulfillment 

These includes: 

• Storage 

• Receipt of goods 

• Picking and packing 

• Labelling 

• Shipping 

• Returns processing 

• Special handling 

• Integration/technology services 

• Monthly minimums 

It is important to note that pricing varies greatly from one provider to another. 

The benefit here is that you won’t have to develop the entire fulfillment solution on your own. 

How to Find the True Fulfillment Cost Per Order 

The equation is: 

True Fulfillment Cost Per Order = Total Fulfillment Costs / Total Orders Fulfilled 

Let’s say that your company spends ₹3,00,000 per month on the cost of renting out warehouses, paying salaries, packing, software, electricity and other related costs and you handle 10,000 orders. 

Your average fulfillment cost would be: 

₹3,00,000 / 10,000 = ₹30 per order 

To get a fair comparison, calculate the same number for a 3PL taking into account storage, pick and pack, handling, returns and other related charges. 

What Are the Hidden Costs of In-House Fulfillment? 

Some costs of in-house fulfillment are easy to identify, while others can be harder to estimate. 

They might include: 

• Employee training 

• Staff turnover 

• Warehouse downtime 

• Inventory shrinkage 

• Product damage 

• Order picking mistakes 

• Packing mistakes 

• IT infrastructure costs 

• Overtime for peak periods 

• Warehouse expansion 

• Underutilized warehouse space 

• Time of management 

And there is another significant hidden cost – the opportunity cost. 

When the management of the company spends too much time resolving warehouse and fulfillment problems, there is not enough time left for business growth. 

What Are the Hidden Costs of 3PL Fulfillment? 

3PL fulfillment also has additional costs beyond those listed above. 

The costs may include: 

• Storage cost 

• Receiving cost 

• Monthly minimum commitment 

• Additional handling cost 

• Returns handling cost 

• Packaging customization cost 

• Inventory storage cost 

• Technology/integration cost 

• Special handling cost 

• Termination cost 

This is why companies must assess a 3PL provider’s total cost structure and not only compare the quoted fulfillment cost per order. 

Benefits of In-House Fulfillment 

In-house fulfillment comes with several benefits and these are mentioned below: 

Increased Control Over Operations 

In-house fulfillment allows for complete control over warehouse operations, staff, inventory, quality control and order fulfillment process. 

If there is a problem, it can be quickly investigated and changes can be made. 

Increased Control Over Packaging & Branding 

Brands that depend a lot on packaging to create an experience can benefit from conducting fulfillment in-house. 

Here you will be able to control: 

• Packaging material 

• Inserts 

• Thank-you cards 

• Promotion material 

• Product presentation 

• Packaging customizations 

This is especially beneficial for premium and luxury brands. 

Direct Inventory Control 

Having your own internal warehouse will give your people direct control over your inventory. 

It may be much easier to do inventory checks, manage high-turnover items and quickly look into any inventory inconsistencies. 

Tailoring Processes According to Specific Products 

Companies selling delicate, large-size, customized, and highly specialized items can definitely consider having their own fulfillment operation. 

In-house teams can tailor their processes according to the specific requirements of the product. 

Independence from a Third-Party Warehouse 

When you have in-house fulfillment, you do not rely on the procedures and priorities of a 3PL provider’s warehouse. You keep full control over the fulfillment process. 

Benefits of 3PL Fulfillment 

Some of the main advantages of 3PL Fulfillment services are listed below: 

Less Investment in the Infrastructure 

First of all, unlike companies that have their own infrastructure, a 3PL company already has the infrastructure, employees, equipment and software necessary for fulfilling orders. 

Improved Scalability for Business Growth 

As order quantities increase, scaling an internal operation requires building new warehouses, hiring more employees, purchasing additional equipment and managing everything properly. 

It is easier for a good 3PL company to cope with this challenge. Therefore, third-party logistics is especially helpful for fast-growing e-commerce businesses. 

Access to the Infrastructure of Professional Fulfillment Centers 

Your business will be able to get access to professional fulfillment centers without owning or renting each facility. 

Some 3PL providers even have several warehouses which means that inventory can be located closer to customers. 

Potential Lower Shipping Costs 

Since 3PL companies might process a large number of shipments, they might benefit from lower courier costs. 

Less Workload for the Team 

Outsourcing the fulfillment will help your team save time on: 

• Picking 

• Packing 

• Labelling 

• Inventory 

• Warehouse management 

• Returns 

• Order processing 

Increased Order Processing Speed 

There is the capability of having established standard procedures for receiving, picking, packing and shipping orders. 

This may facilitate quicker order processing and better customer experience. 

Technology and Automation 

Most 3PL companies utilize technology for: 

• Inventory management 

• Order processing automation 

• Barcode scanning 

• Shipment tracking 

• Warehousing 

• Reporting 

Integration with e-commerce stores 

This makes it possible for firms to automate their order fulfillment operations without having to create all the necessary technology themselves. 

Easier Entry Into New Markets 

As a firm opens up new markets in other cities, they do not necessarily require establishing their own warehouses. 

Collaboration with 3PL firms that have strategically positioned facilities can support geographic expansion. 

At What Point Do You Make the Transition from In-House Fulfillment to 3PLs? 

There is no magic number of orders to trigger the transition from in-house fulfillment to a 3PL solution. However, you can transition from in-house to 3PL fulfillment services when: 

Your Order Volume Is Increasing Month on Month 

An increase in order volume on a month-to-month basis could mean that your current fulfillment operations will soon become a bottleneck. 

A 3PL company can offer you extra capacity without necessarily having to scale up your own operations right away. 

Your Warehouse Lacks Space 

Lack of space in your warehouse could lead to poor inventory management, delays in picking and difficulties adding new products to your offerings. 

If building a bigger warehouse is going to cost too much then it might be time to consider outsourcing. 

Fulfillment Operations Take Up a Significant Share of Employee Working Hours 

If a significant share of your staff’s working hours are spent picking, packing, labeling and shipping orders, outsourcing to a 3PL can help reduce the load. 

You Are Experiencing Frequent Order Errors 

Wrong orders, wrong quantities, damaged products or shipping label errors suggest that there are areas that your fulfillment process can be improved in. 

Peak Seasons Are Resulting in Fulfillment Delays 

Promotional campaigns, flash sales and festive seasons lead to a surge in the number of orders placed by consumers. 

If your team is unable to manage these peaks, a 3PL can offer you additional fulfillment capacity. 

You Are Interested in Entering New Cities 

When you see an increased demand from some other cities it makes sense to stock your inventory closer to your customers. 

You Have High RTO and NDR Cases 

The increase in Return to Origin and Non-Delivery Reports can take up a lot of your operational resources. 

A 3PL partner with a proper process in place will reduce your load. 

When Is It Time To Keep Doing In-House Fulfillment? 

There is no need to go for outsourcing just because you are expanding your business. You can continue with your in-house fulfillment center if: 

• Your volume of orders is less 

• Your warehouse costs are within the range 

• You have enough storage space 

• Your fulfillment team works efficiently 

• Your products require customization 

• Your business needs complete control over packaging 

• Your business operates within a limited geographical area 

• The cost of your current fulfillment operation is competitive 

• You have the capability to invest in technology and infrastructure 

Third-Party Logistics Fulfillment Versus In-House Fulfillment For Indian E-commerce Businesses 

Indian e-commerce businesses have a few more factors to consider while deciding between the two modes of fulfillment. 

COD Orders  

Many Indians e-commerce sellers consider COD as a critical point of fulfillment process. 

COD orders may have a higher risk of unsuccessful delivery. That’s why you will have to consider COD orders in your fulfillment process in order to manage them efficiently. 

Tier 2 & Tier 3 Delivery 

The demand for e-commerce is growing beyond metro cities. 

Businesses that sell their products in Tier 2 and Tier 3 cities must factor in serviceability, delivery time, shipping cost and risk of return on order while choosing the location of their inventory. 

Multiple Courier Partners 

In many cases, Indian e-commerce companies use more than one courier services to balance the following factors: 

• Cost 

• Serviceability 

• Speed of delivery 

• COD availability 

• Performance in regions 

It is essential that the fulfillment process be compatible with the business’s shipping and courier arrangements. 

GST & Warehouses 

GST implications may become significant in case inventory is spread across multiple states. 

Businesses need to consider all relevant GST registration and invoicing details before moving their inventory to warehouses in more than one state. 

In case of complex situations, consulting a tax professional is recommended depending only on the logistics provider’s advice. 

Interstate Movement of Inventory 

Moving the inventory between warehouses located in two different states has tax implications. 

It is important to put in place a process for the movement of inventory before using the multi-warehouse model. 

Seasonal Demand & Sales at Festivals  

There are times of the year when Indian e-commerce companies see a significant jump in demand. 

A 3PL could offer extra capacity to cope with this but it is important to check that there is enough warehouse space, staffing and fulfillment capacity available beforehand. 

How Does Hybrid Fulfillment Work? 

The hybrid fulfillment strategy includes a combination of in-house fulfillment and fulfillment services provided by 3PL. 

For instance, a company may decide to: 

• Provide in-house fulfillment services for high-cost items 

• Outsource fast-moving products fulfillment to 3PL 

• Fulfill customized items in-house 

• Use 3PL fulfillment for orders from specific regions 

• Process B2B orders in-house but outsource B2C orders 

This type of approach will help businesses to keep full control over their key processes while outsourcing those which are more effective to be handled by 3PL. 

The hybrid fulfillment strategy often proves to be reasonable for many developing companies. 

What Are the Criteria for Choosing the Right 3PL Partner? 

There are things to consider other than just price and these are mentioned below: 

1. Warehouse network – Does the provider have warehouses near your target markets? 

2. Technology – Can it integrate with your e-commerce site and logistics systems? 

3. Scalability – Is the provider capable of handling your anticipated future order flow? 

4. Service – What are the processing and fulfillment performance of the provider? 

5. Returns management – Does it have an efficient returns/RTO management system? 

6. Pricing transparency: Are all storage, handling, packaging and other charges clear? 

7. Customer support: Can you easily contact the team in case there’s a problem? 

8. Compatibility with products: Is the company able to manage your product category and packaging needs? 

9. Reporting: Does the company offer clear reporting on your inventory, orders, and fulfillment? 

10. Flexibility of contract: Can the contract be adjusted according to your evolving business needs? 

The best 3PL provider is not necessarily the most affordable one. It is the one that strikes the right balance between affordability and other factors. 

Conclusion 

There is no clear winner in the discussion of which is better – 3PL or in-house fulfillment. 

The in-house fulfillment strategy gives complete control and customization and allows you to have full control of your inventory. This is a good option for those who have manageable order volume and well-operated warehouse system. 

But the 3PL fulfillment can help you save on infrastructure needs, minimize operational efforts and support geographic expansion. 

The thing you should do is find out how much it really costs you to fulfill an order and analyse your capability, plans for development, service quality and costs of possible 3PL providers. 

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