Warehouse, 3PL, distribution center, what’s the difference? Which one do you need?

If you’re planning on shipping a physical product to customers, you’re going to need a location to store your inventory. The type of location you choose will vary depending on the types of customers you need to ship to, but before we get into that, let’s define some of the different terms you may have come across so far:

Warehouse: A warehouse is a building that is used to store commercial merchandise. A warehouse generally acts as a longer-term storage solution and are used by importers, exporters, and wholesalers/distributors. They’re equipped with loading docks so products can be shipped or received by transport trucks. Warehouses can be owned directly by a wholesaler or operated by a Third Party Logistics provider.

Third Party Logistics Facility (3PL): 3PL facilities are outsourced warehousing options used by the majority of Fortune 500 companies. These facilities can receive, hold and transport product, but they never take possession (ownership) of the goods.

Distribution Center (DC): A distribution center is a specialized warehouse used for temporary storage and redistribution of goods. Mass retailers use a network of distribution centers as a storage center for retail locations to pull inventory from.

Indoor Warehouse

Warehousing - Receiving, storing, and shipping your inventory
Warehousing - Receiving, storing, and shipping your inventory

Key Warehouse Considerations

So, your product design is nailed down and your supplier is about to begin production but needs to know where it will be shipping the finished product. What’s next?

Shipment Volume

First, you will need to consider the volume of product you will be receiving. If you have a small business and only plan on receiving a few boxes of product at a time, a local storage facility or your parent’s garage might do just fine. If you plan on receiving pallets, containers, or truckloads, you will need to have access to a loading dock in a warehouse. Fortunately for small businesses, in North America, there are large networks of third-party logistics facilities that can receive, store, pack and ship your product for you. With these 3PL providers, you will pay a monthly storage fee (usually per pallet) while incurring variable charges for receiving and shipping your product. Many of these service providers work with all sorts of different small business and can provide a helping hand along the way.

Identifying key customers

The second variable you need to consider is who your customers are. Online sellers who are are shipping directly to consumers can often operate cost-effectively right out of their garages until the volume becomes too much to handle, Small businesses working with mass retailers, on the other hand, are often required to ship product on pallets which means they will need to have access to a shipping door at an owned warehouse or 3PL facility. To make your life easier, it will be important to select a 3PL provider that already has experience working with the retailers you will be shipping to. This can save time while avoiding financial penalties of improperly shipped product.  

In the early stages of your business, it’s important not to overextend yourself while planning for future growth. If you don’t yet need the services provided by a 3PL, there’s no harm in starting small in the space you already have (spare room, garage, ect). As the volume starts to pick up and you find yourself in a time crunch, it might be wise to consider moving your inventory to a 3PL facility or even moving into an office with warehousing space and loading docks while bringing on experienced personnel to manage the logistics side of your business.

Packaging and Display

Inventory and forklift in shipping container

Choosing a Storage Location

If you’ve decided that working with a 3PL facility is the best option for your business, the next step is determining the best location for your inventory to be stored. This requires a balance between proximity to supply and proximity to demand. Warehousing in the Los Angeles area can be a great option as it’s close to the shipping ports and provides a cost-effective option for receiving inventory from Asia, however, if the majority of your customers are on the East Coast, your FedEx bills will quickly erase any gains in freight savings. For our consumer brands with higher volume, we usually activate a 3PL facility on the East Coast and one on the West Coast. The price to get a container to the east is more expensive but we make up for it very quickly in savings on direct-to-consumer shipments.

Indoor warehouse

Warehouse and product

Understand Your Costs

Every business has different needs and there are many factors to take into consideration when determining how to store and ship your products. Spend the time building out different models to give yourself a full understanding of where your costs will be coming from and where there are opportunities for increased efficiency. While it’s important to choose a solution that allows you to scale, remember not to overburden yourself so much early on that you don’t have the resources to invest in growing your business.