Bill Ashton, SVP of Supply Chain and Operations at Herbivore Botanicals shares his insights into handling in-sourcing and out-sourcing when it comes to logistics, operations, and distribution.
Throughout his career, Bill has worked with many different brands, including Restoration Hardware and Ralph Lauren. His experience has given him an understanding of all the factors that go into making these decisions. Bill enjoys working with young startups because of the high-energy environment and the ability to wear many hats. Here are the main takeaways from the session. You can also watch the full video below.
A 2-3 year forecast is key
Bill noted that having a solid projection is essential when deciding how to scale your operations because it is a big investment. You want to be confident in your projections. The consequences are high as they can greatly impact your cost and desired customer experience.
There are 3 main pieces of information that you need to take into account when forecasting:
- Revenue goals: You want to define your revenue forecast for the next 2-3 years. Bill said the long-range revenue forecast was critical for projects like this. It’s a massive commitment and there are all kinds of implications to the business.
- Category growth: In line with your revenue goals, if you’re in a multi-category business, which categories are expected to grow and where? That will be the natural pull at your company.
- Geographical presence: The location of your facility is key. It is important for your distribution centers to be close to your customers as it can minimize transportation costs.
For businesses dealing with high uncertainty, building a forecast is still critical, according to Bill. He recommends working with sales, marketing, and finance to get a consensus and a buy-in on risk tolerance. There also needs to be contingencies built into the plan in case you have too much space or not enough. Luckily, with on-demand warehousing solutions like Flexe and Flowspace, backup options are more readily available. But if you have a very uncertain forecast, Bill recommends that startups leverage a third-party logistics company (3PL) until you have the historical figures to build a more predictable model.
In-house vs. 3PL: factors to consider
There are many factors that a business should consider when determining whether to manage fulfillment in-house or outsource. These include:
Customer experience: Decide what you want the final package to look like when it arrives at your customer’s door. Once you have a vision of the final packaging, you can work backward from there to create the right customer experience. If you’re a premium brand, like many of the brands that Bill has worked with, you’ll likely want the delivery to arrive like a present, which requires an incredible amount of care and packaging materials. With today’s social media, the consequences of a poor customer experience can go viral and damage the brand quickly. 3PLs oftentimes aren’t designed for a high level of customization. So if the customer experience is a critical factor for you, you may want to keep it in-house.
Adaptability: While 3PL offers flexibility, they generally operate slower. Bill said that while it’s a great option for commoditized products, you’ll want to choose wisely if you have a high-touch or small premium brand. Plus, if you want to add or grow your business with a 3PL, you may have to factor in more time.
Channel complexity: Bill said that if your order model is complex, it can be easier and cost-effective to do it yourself. Complexity can come in the form of value-added services like applying special UPC, packaging for specific channel partners, or international sales. At Herbivore Botanicals, they decided to manage big channel distributors in-house so they can feel confident about the process and also be able to quickly resolve any issues.
What to consider if you outsource to a 3PL
For those considering a 3PL, here are a couple of factors to cover:
Type of 3PL: The experience you are looking for will determine the type of 3PL that is right for you. For example, if you are a startup, Bill recommends using a boutique or smaller one. It might cost a little more but it will get you attention in a competitive market. You should expect a higher cost, as a smaller 3PL will likely use more labor, but you’ll get a better quality outcome.
Long-term capacity: It is essential to know the size of the 3PL and how much space they can offer you, not just today but a year from now. Bill said that it was common for organizations to sign on with a 3PL only to find a year later that they are out of space and want to move you. Any move can disrupt your operations, so it’s important to understand if they are able to grow and scale with you.
Lead time: While the implementation time period can vary depending on your requirements, Bill estimates about 4 months for a standard transition to a 3PL.
Tip: don’t be shy about seeing a 3PL in action. Bill advises taking a tour of the facility and seeing where they will be doing work for you.
What to consider if you build internally
If you want to build internally, Bill had some suggestions on thing to keep in mind, such as:
Setup investment: He advised that businesses should carefully consider the details when it comes to insourcing. In particular, the challenge of space and how to store inventory. If you build a facility for this purpose, you’ll need to purchase specialized equipment and machinery and possibly invest in automation.
High SKU count inventory: Splitting your inventory is a difficult problem to solve. Bill advised that you be strategic about where you want to place your distribution centers because you’ll likely have to redistribute among your facilities. There are some ways to mitigate the challenges, including:
- Plan to oversupply: To do this, tier your SKUs (1-3) and prioritize where you store your oversupply. Talk with your marketing and sales team to determine what each level of priority means. Your top SKUs are the ones that make up most of your sales. According to Bill, these are the SKUs you never want to be out of stock of, and you always want to have in the right place. These are the ones that you’re going to want some safety stock of so that you can meet orders.
- Use technology: Bill shared that distributed order management systems were an excellent tool for optimizing how to distribute orders and arrange inventory. While you may pay more to ship an item from a distribution center that’s further away, you save on having to redistribute costs.
Be strategic when hiring for supervisory roles: You’ll want to understand your needs when it comes to department/skills coverage, shift and location coverage, and the complexity of the work. For example, a person can supervise 50 people if it is robot-assisted and straightforward. If the work is more complex, a supervisor should oversee fewer people.
Warehouse labor staffing: The employment environment right now, as businesses are re-opening, is tight. Bill shared that his company decided to pay 2-3 dollars more per hour than the minimum wage in Seattle. Another way to overcome this challenge is to connect with local temp agencies. It is particularly key for smaller businesses to get ahead of larger operators when it comes to peak season. While it may seem more expensive to pay a temp worker, it’s not as expensive as losing business, hiring workers, or dealing with increased employment churn.
While monetary incentives are effective, it’s not the only lever. Read 4 ways companies are handling the post-pandemic labor shortage here.
Plan early for peak seasons: If you are using temp employees, it is crucial to have a plan for peak seasons. You’ll want to understand how many people you’ll need and where you’ll find the help. And be prepared to develop relationships with more than one temp labor agency.
Develop strong relationships with sales & marketing
What’s clear throughout is how Bill deeply understands the goals of the business and the sales/marketing plan to get there. At the same time, your sales and marketing counterparts should also understand the downstream operational implications of the business. Bill recommends investing in educating your colleagues early-- invite them to facility tours, core planning sessions, and sync regularly. It’s how he’s been able to get buy-in for the investments and resources to set his team up for success.
Watch the Q&A
The Q&A is packed with other valuable information. Here's the full session. Since we're all short on time these days, we've listed out topics below so you can jump straight in.
Click on the timestamp to jump to a particular section:
[6:28] What do factor into your projections and how to build around uncertainty
[24:00] How should a growing brand evaluate a 3PL
[32:00] When should a growing brand distribute themselves
[36:20] How to split inventory across distribution centers in a high-SKU count business
[43:39] How to attract and retain warehouse workers in the current labor shortage and planning for peak
[51:30] Bill's advice on how to be a better operations & supply chain leader