The Downside of On-Demand Warehousing

The rise of the shared economy means we can get practically anything on-demand: housing, cars, bikes, musical instruments and even kitchenware. Therefore it should come as no surprise that on-demand warehousing is now a thing, too.

On-demand warehousing lets customers who don’t have inventory storage capacity to rent warehouse space and fulfillment/logistics services on a pay-per-use basis—instead of entering into long-term contracts with third-party logistics providers (3PLs). Airbnb-style warehouse brokers, such as Flexe and Stord and Ware2Go, match businesses having excess storage space with small to medium-sized e-commerce companies seeking flexibility in their warehouse arrangements.

On-demand warehousing advocates claim it’s the perfect solution to scalability problems e-commerce retailers face. It lets them expand storage as a variable cost, as opposed to a long-term fixed cost.

But the reality is that such warehousing comes with serious disadvantages and risks that can cause more headaches than it resolves. E-commerce companies should think long and hard before signing up for temporary warehousing.

Here are three reasons why:

Inexperienced Warehouse/Fulfillment Service Providers

On the surface, warehousing appears to be a straightforward concept. A provider with adequate space accepts bulk pallets, retains them for a period, then ships them out. Simple, right? Any company with experience in shipping orders can do this. But this isn’t necessarily so—particularly when it comes to fulfillment services.

A fulfillment service packages, prepares, and ships merchandise to customers. Often outsourced, it facilitates inventory management for e-commerce companies, enabling the latter to focus on other aspects of their businesses.

But order fulfillment can be complicated, even for highly experienced 3PL warehouses running sophisticated computer systems. It’s all too easy to send the wrong product or an incorrect number of items. Items can also become damaged during shipping, or a customer may decide to return an item.

An ad hoc warehouse unlikely to be experienced in handling such matters, especially on a large scale. The more merchandise such a service provider ships out, the more you may find yourself confronted with shipping mistakes and disgruntled customers.

Your Business Won’t Receive Priority

On-demand warehousing and fulfillment services cater to multiple tenants, and their core business interest differs from yours. When a time shortage or conflict occurs, their needs come first. As a result, your business orders and shipments aren’t likely to receive anything resembling priority attention.

Also consider that your payments are only supplemental income for the on-demand group. Contrast this with a traditional 3PL who focuses equally on every customer; your business is their primary revenue source. So is your satisfaction, lest they lose your business.

For example, during a single day both your business and the on-demand entity unexpectedly experience a surge of orders that have to be shipped immediately. They’re quite unlikely to have the available labor required to fulfill both orders in a careful, timely manner. Whose shipments get handled first? (Hint: Not yours.)

You’re Unlikely to Save Money

On-demand warehousers claim that you’ll save money because, by spreading their fixed costs across many customers, they can offer lower rates to each. But in reality warehousing and fulfillment is a low margin, high volume industry, so realistically there isn’t a much wiggle room for rate reduction.

Most on-demand entities are backed by venture capitalists looking to recoup their investments, so it’s unlikely that on-demand warehouses are offering services at a lower rate.

To remain competitive, the warehouse brokers must be compelling on-demand warehouses to either operate on meager percentages or to mark up from traditional 3PL pricing to match industry-standard margins. Our research []shows you’re likely to pay $4 – $9 more per pallet for in and out handling using an on-demand warehouse.

And should an on-demand warehouse beoperating with an artificially low margin, then expect compromised quality and performance—they go hand in hand. Either way, e-commerce firms are at risk of losing money: Either you’ll pay more for warehouse/fulfillment services outright or you’ll alienate and lose customers through subpar performance.

Bottom Line

On-demand warehousing can sometimes work out. Itfunctions best when a e-retailer has a temporary capacity shortage or merchandise overflow due to seasonal demand—a short-lived problem.

But for the long term, on-demand warehousing offers too simplified a solution for a complex supply chain issue. If your customers have a negative experience related to product shipping, they’ll be blaming your company—not the warehouse.

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