Internal vs. External Warehouses: The differences and benefits for your online store

As an entrepreneur, you have to ask yourself many questions over time. Deciding whether in-house or external storage is the better option for your business is one of them. Basically, you decide which type of storage is the most cost-effective alternative for your company. You can find out how to make this choice in this article.

Comparison: own warehouse vs. external warehouse

In general, small online shops tend to use their own warehouse, especially if the storage requirements of the products or the storage capacity are manageable. Larger online shops in later growth phases and companies that have established their own brand often benefit from an external warehouse, as it offers a high degree of flexibility and scalability.

But how can you answer this question for your company? As this strategic decision has a significant impact on your internal efficiency and cost structure, you should consider the benefits and challenges relevant to your company and weigh up which of the two options is right for you.

In-house storage

With in-house storage, you as an entrepreneur have full control over your goods and store your items in your own company building instead of having them stored by an external service provider.

However, if you decide to handle the logistics and shipping yourself, you will have to expect monthly fixed costs such as labour costs and warehouse rent. You are also responsible for setting up and managing the warehouse. To ensure that all goods in your warehouse are always in stock, you should also have a good handle on purchasing and ideally introduce automated procurement.

In addition, you should continuously scale your fulfilment and all logistics processes to be as cost-efficient as possible.

Let's first take a look at the pros and cons that you should weigh up when considering in-house storage:

Advantages of in-house storage

• Better control and overview: With in-house storage, your company has complete control over all warehouse processes, which enables precise inventory management and operational control.

• Greater degree of customisation: With an in-house warehouse, you can implement specific warehouse strategies and methods that precisely match your company's individual requirements.

• Greater customer proximity and flexibility: An in-house warehouse allows you to react more quickly and flexibly to customer requests and market requirements.
• Dedicated employees: Staff who are directly employed by your company are more likely to identify with your company and are generally more motivated and committed to their work.

Disadvantages of in-house storage

• High fixed costs: An in-house warehouse is accompanied by continuous, sometimes considerable fixed costs for personnel, storage space and maintenance, which are incurred regardless of your current stock levels.
• High investments: If you want to operate your own warehouse, you should factor in high initial investments for buildings, warehouse technology and IT infrastructure.
• High expenditure: You should expect a high administrative and operational outlay for the administration and organisation of your own warehouse.
• Surpluses and bottlenecks possible: With an in-house warehouse, you as an entrepreneur:in run the risk of excess stock or shortages if, for example, your stock levels are not quite optimally balanced.

External storage

As already described, there are many arguments in favour of external warehousing, especially for rapidly growing companies. To ensure the smoothest, fastest and most efficient logistics process possible, you can hardly avoid using an external service provider. At least not if you lack the logistical expertise. Outsourcing also gives you more time for your core business - because growth is undoubtedly the most important thing for your business.

Advantages of external storage

• High scalability: External storage service providers usually offer flexible customisation options for your storage capacities, e.g. for changing business requirements.
• No large investments necessary: With an external warehouse, you don't have to invest significant financial resources in setting up or equipping your warehouse.
• No fixed costs: With third-party storage, you don't have any fixed costs for storage space or personnel, as these are covered by your service provider.
• Less effort: Outsourcing your warehouse management significantly reduces your internal, administrative and operational workload.
• Lower risk: The warehousing risks, such as maintenance costs or warehouse wear and tear, are borne by your service provider with an external warehouse.
• Expertise from experts: External service providers have specialised knowledge and experience that contribute to the efficiency and quality of your warehouse processes.
• Focus on the core business: With external warehousing, you can focus more on your core business activities as you don't have to worry about your warehouse logistics in-house.

Disadvantages of external warehousing

• Less control over processes: External warehousing also means that you relinquish some of your direct control over your warehouse processes to your service provider.
• Dependence on the service provider: With external storage, you are dependent on the reliability of your external storage service provider.
• Hardly any customisation options: External storage often offers you less flexibility and customisation options to meet the specific needs of your company.

Cost comparison of in-house and external warehouses

Entrepreneurs like you are often faced with the question of whether internal warehousing (own warehouse) or an external warehouse (third-party warehouse) makes more organisational sense. Both options have advantages and disadvantages, which are inevitably reflected in your costs. While an in-house warehouse offers you more control and flexibility, you can benefit from cost savings and operational advantages with an external warehouse. You should therefore carry out a cost comparison between these two alternatives, taking into account your fixed and variable costs as well as another key figure, the so-called critical quantity, from which one of the two options is more economical.

Example cost calculation

Be sure to carry out a detailed cost calculation to help you weigh up the two options. The following example shows you how you should proceed.

Let's assume your company produces and stores electronic components and you are faced with the decision of whether to use an in-house warehouse or an external warehouse.

Assumptions

• Your company plans to store 5,000 units per month.
• Fixed costs in-house warehouse = 24,500 euros/month
• Fixed costs external warehouse = 0 Euro/month
• Variable costs per unit in own warehouse = 3.50 euros
• Variable costs per unit in external warehouse = 7.00 euros

Calculations

Own storage costs per month = fixed costs + variable costs per unit × quantity

Own storage costs per month = 24,500 euros + 3.50 euros × 5,000 units = 42,000 euros

External storage costs per month = fixed costs + variable costs per unit × quantity

External storage costs per month = 0 euros + 7 euros × 5,000 units = 35,000 euros

Result

For a stock quantity of 5,000 units per month, external storage is significantly more cost-effective than in-house storage.

Critical quantity calculation

In order to calculate the critical quantity for our exemplary assumptions, we equate the costs of both storage variants and solve the equation according to the quantity:

24,500 euros + 3.50 euros × quantity = 7 euros × quantity

Subtract €3.50 x quantity from both sides of the equation to get all variables on one side

24,500 euros + 3.50 euros × quantity - 3.50 euros x quantity = 7 euros × quantity - 3.50 euros x quantity

This simplifies to:

24,500 euros = 3.50 euros × quantity

Now divide both sides of the equation by 3.50 euros:

Quantity = 24,500 euros / 3.50 euros

The final result is

Quantity = 7,000 units

This means that the external warehouse is cheaper for less than 7,000 units per month. For more than 7,000 units per month, however, the in-house warehouse is more cost-efficient.

Conclusion

An in-house warehouse offers you extensive control and long-term cost benefits with high storage volumes. However, it usually requires a high initial investment. With an external warehouse, on the other hand, you benefit from a high degree of flexibility and do not have to make any initial investments. However, you should expect significantly higher variable costs per unit. The right choice for you depends on your specific operational requirements, storage quantities and strategic considerations in terms of company growth.