Building vs. Outsourcing Your Warehouse: Pros and Cons

Get the information you need to make an informed decision about building vs outsourcing warehouse services in this article.

When it comes to meeting the warehousing need for your business, there are two main options: running your own or outsourcing to a third-party provider. Each option has its own set of pros and cons, which can be difficult to evaluate without understanding the specifics of your business.

In this article, we will compare the pros and cons of building vs. outsourcing your warehouse, so that you can make an informed decision about what is best for your company.

The Pros and Cons of In-House Warehousing

Evaluating the pros and cons of doing in-house warehousing is an important process for any business. There are a variety of factors to consider, from upfront investment costs and staffing needs to the potential for increased profitability through cost efficiencies and improved service levels.

One of the primary benefits of doing in-house warehousing is control over operations, allowing you to customize processes and systems to best meet your company’s needs. Additionally, doing everything yourself gives you direct control over inventory management. If you want faster order fulfillment services or improved customer service levels, then you can make the changes necessary to accomplish that.

However, there is a significant upfront cost associated with building a new warehouse, which may require investing in equipment and staffing. Additionally, there are ongoing operating expenses such as utilities and maintenance costs.

In-House Warehousing Pros & Cons

Complete control over operations
Direct inventory management
Lower internal fulfillment costs

High up-front capital expenditure
Requires additional staffing & equipment
Increased operation expenses
Less location options

The Pros and Cons of Outsourcing Warehousing

Outsourcing warehousing operations has several advantages over running your own facility. For one, there are no upfront investment costs associated with setting up a 3PL provider, allowing you to save on capital expenses.

Additionally, third party logistics providers offer access to a larger pool of supply chain professionals and the latest in logistics technology. In turn, you get faster order fulfillment times and improved customer service levels without the need to invest in additional staff or equipment. Additionally other shipping costs and transportation costs are generally more competitive through fulfillment centers rather than an internal fulfillment or in-house logistics management system.

However, outsourcing your warehouse does come with its own set of risks and challenges. For example, it is important to understand how your 3PL provider operates so that there is no disruption in services or mistakes that could affect customer satisfaction. Additionally, the fees associated with using a 3PL provider should be factored into your budget planning process.

Outsourced Warehousing Pros & Cons

Reduced operational and overhead costs
Zero capital expenditure
Reduced risk of cost overruns
Accessing more capabilities
Many location options
Lower shipping costs

Lack of control over inventory
Potential higher fees
Less flexibility to scale space
Risk of data breach and security

Let's Talk About 3PL Fees

One of the pros and cons of building vs outsourcing warehousing services is the cost. As you’ve already read, it generally costs more to build your own warehouse. But running the warehouse (with your own staffing and infrastructure) could cost less than outsourcing.

But depending on the circumstance, this may not be the case. Why is that? It all comes down to the scale and level of efficiency that your potential outsourcing provider is capable of.

For example, many order fulfillment companies have deep volume-based discounts with shipping supplies and carriers. Depending on your business, the cost savings in this area alone may be greater than the total operational and capital expense in your entire in-house logistics plan.

This is why any time a company is considering building its own warehousing facility we recommend also pricing out a third-party logistics provider (3PL) option at the same time.

Let’s take a closer look at the costs…

Comparing costs of 3PL vs own warehouse

When deciding between building vs. outsourcing warehousing operations, pricing is an important factor to consider. Any business is going to favor the most cost effective option, all else being equal. Building an internal warehouse operation requires a significant upfront investment in equipment and staffing, as well as ongoing operational costs such as utilities and maintenance.

On the other hand, to outsource fulfillment and warehouse management does not require any upfront capital expenditure. However, there are fees associated with outsourcing to a third party logistics company. The option that is best for you depends on your business needs and budget.

What is the average cost to build your own warehouse?

The average cost to build your own warehouse varies widely depending on the size, type, and location of the facility. Generally speaking, it is estimated that a building can range from $40 per square foot (including land) for a basic and utilitarian structure to upwards of $300 per square foot for a larger, more complex, and energy-efficient facility.

Location plays a significant role as well, as inner-city plots will cost more. In addition, there are operational costs to staff, equip, and run the business (we will estimate these later).

Building out the assumptions...

(ha, did you see what I did there?)

For this comparison, we will assume that the total required square footage to meet our business needs is 15,000 sf. This includes shared space and offices. We decide to build a fairly modest building.

Building Size

15,000 square feet

Land cost. Prices range all over the map depending on zoning, location, geographical features, and more. However, in Texas (which is where we are) the average cost of commercial acreage cost about $500,000 per acre. One acre is just under 50,000 sf. A central location like inside the Austin city limits could cost a lot more.

If you assume parking requirements drainage and other engineering requirements, it’s reasonable that a half-acre would be enough to fit your building requirements. So the total cost could be $250,000 (possibly more since you are only purchasing a half acre) for the land, assuming a seller is willing to subdivide. Assuming there are no improvements necessary (which there always are) to make to the land (tree clearing, etc.) let’s use $250k for our cost assumption here.

Land

$250,000

Infrastructure cost. $20-60 per square foot. Let’s assume $40 as a “middle of the road” structure. $40 X 15,000 = $600,000. When we add in the cost of racking and other equipment, we could use $65 per pallet position. In a 15,000 sf warehouse, our total pallet spaces are 535 with a standard racking configuration, pallet sizes, and shared space.

$65 x 535 pallet positions = $34,775 (rounded to $35k). You could double this cost to cover a used forklift, pallet jacks, desks, and computers. So the total infrastructure cost could look as follows:

Infrastructure

$250,000 - Warehouse Structure
$35,000 - Racking
$35,000 - Equipment

$920,000

Utility cost. Again, the cost can range widely based on the infrastructure such as the amount of climate-controlled space or high-energy equipment like welding machines. For our scenario, let’s assume that only the shared space (like office space) is climate controlled (assume 3,750 sf). Based on that assumption, a good average cost of utilities is about $3.50 per square foot annually.

Utility

$3.5 x 3,750

$13,125

Labor cost. Assume 100 orders per day managed by 3 people. 8 hours per day @ 20/hour. 125k in raw labor cost per year. 8.45% taxes and unemployment. Another 5% for retirement benefits = 13.45% for employee costs. Add $500 per month for medical and dental for each employee times 3 employees equals $18,000 annually.

Labor

($125,000 x 13.45%) + $125,000 + $18,000

$160,000

Shipping

Assume $15 per order at 100 orders per day
$15 x 100 = $1500 per day
$1500 x 252 business days

$378,000

Annual Operation Cost

Excluding capital cost

$13,125

$160,000

$378,000

$407,125

How much does it cost to outsource warehousing services?

The cost of outsourcing warehousing services can vary greatly depending on the provider, the size and complexity of the facility, and various other factors. Generally speaking, 3PL providers charge a fee that is based on the volume of order fulfillment. This fee may include a fixed cost per order, as well as other fees for any specialized services such as custom packaging or order tracking. Additionally, third party logistics services charge for storage space, usually on a monthly rate.

Let’s assume the same figures for our outsourced warehousing service. For help calculating the average actual usage of pallets for your warehouse, you can use our pallet capacity calculator.

15,000 square feet
100 orders per day at 1 item per order
535 maximum pallet positions
80% average on-hand
535 pallets x 80% average usage = 428 total pallets
$20 per pallet per month average storage fee

Storage Fees

428 pallets x $20 = $8,650 per month
$8,650 x 12 months

$102,720

Order fees. For our project, let’s assume a $4 per pick average (some 3PLs are higher some are lower but carry higher storage fees.) Let’s add $0.50 for inbound fees and miscellaneous other fees and hourly labor projects. = $4.50 per pick average

Order Fees

100 orders x $4.50 = $450 per day
252 business days per year
$450 x 252 = $113,400

$113,400

Shipping Fees

Assume $11 per order
(fulfillment center gets better discounts)
$11 x 100 orders per day = $1100
252 business days per year
$1100 x 252 = $277,200

$277,200

Annual Service Cost

$102,720

$113,400

$277,200

$493,320

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Conclusions From the Cost Comparison

Based on our assumptions, building a warehouse is the less costly option by about 17.5%. However, this does not include many of the other costs that can stack up such as insurance, regulatory fees, and business software. Additionally, the outsourced option does not include any capital expenditure, which we calculated to cost $920,000 to build the warehouse.

Outsourced vs. Built Warehouse Cost Comparison

Utility - $13,125
Labor - $160,000
Shipping - $378,000

$407,125annual

Storage - $102,700
Pick & Pack - $113,400
Shipping - $277,200

$493,320annual

What about the capital expense?

Let’s not forget the almost $1 million dollars in capital costs to build the warehouse. How do we account for that?

Assuming there are not any additional costs in the build model, it will take roughly 9 years to pay off the cost of the warehouse. That is, when we compare the difference in cost between the to options alone.

However, this is a big if! Many buildings are financed and carry an interest rate. In general, this is one of the risks of doing your own warehousing – the potential for extra costs.

But what does this mean? Is one of these the clear winner? Let’s discuss…

So, which scenario should you choose?

In our scenario, the outsourced warehousing option is the less costly option. It’s important to note that the cost to build a warehouse becomes significantly more competitive as the size of the operation increases. For example, if the warehouse is 4x the size, a full acre of land may cost less per square foot than only purchasing a half acre. The same goes for the number of packages shipped. A business may negotiate better rates if its volume of shipments increases.

With our scenario in mind, it may be tempting to think that the least costly option is the best choice. However, some businesses may (and do every day) choose to outsource warehousing even though the cost is greater.

While it may sound silly, this illustrates the main point of this article. That is, while cost is definitely a driver of business decisions (and an important one) it’s not the only consideration. Some businesses feel that the value of not having to deal with warehousing operations is worth the extra cost. Perhaps they can achieve better service like same-day shipping for all orders whereas they could not by doing it themselves. Some businesses just want to focus on making great products, leaving the mechanics to someone else.

On the flip side, a finance-savvy entrepreneur may consider land investment and infrastructure improvements a long-term investment strategy for the business. Alternatively, they may consider purchasing a larger plot of land so they can scale their business with greater ease than typically found with an outsourced warehousing solution.

Overall, there are plenty of reasons why a business may choose to go with one option over another – even if on paper it’s more costly. The decision is all about risk & reward and what is most important to you.

Overcoming the Scalability Concern

As mentioned above, one of the biggest challenges that I hear for outsourcing warehousing is the ability of the outsourced fulfillment company to grow with its business. Many startups and eCommerce businesses need to be able to scale up rapidly as their demand increases.

However, most third-party providers aren’t able to expand with this business growth. Even if they can expand, it’s usually not fast enough to handle the fulfillment volume needed by the customer.

At AMS, we invested early on into the land so that we could offer our customers not only the necessary infrastructure to meet their needs, but scalability in a timely manner.

Key Takeaways For Building vs Outsourcing Warehousing

Deciding between building vs. outsourcing your warehouse operations depends on the specific needs of your business.

In this article, we saw that building your own warehouse space can certainly cost less to run annually. However, in total it may take many years to break even when compared to the cost of outsourcing. Yet, the decision is never based on cost alone. Many other elements play into it.

When evaluating the pros and cons of each option it is important to consider factors such as upfront investment costs, scaling capabilities, customer service levels and inventory management.

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