This is the most controversial but the most important step in the framework. When does it make sense for you to bring fulfillment in house? The answer varies, but the general summary goes like this:

Up until this point, 3PLs have been an excellent option. But at about this stage, most companies start to see the volume-based pricing of 3PL business models negatively impact their own balance sheet. Important metrics like cost-per-unit start to become untenable and companies at this size start to get a bonafide COO with board mandates to improve cost structures.

Why is that?

The main reason is financial. 3PLs are financially modeled as operating expenses (opex). The more you use a 3PL (increased throughput), the more you pay (increased costs), because pricing scales linearly with your success. There is rarely a situation where the more you use a 3PL, the more you save. While 3PLs provide enormous initial ROI compared to the cost of building your own fulfillment, they provide poor ROI at scale.

So with enough volume, it becomes clear there are certain optimizations specific to your business that would have a meaningful impact on improving margin or customer experience that simply aren't being realized because the 3PL is optimizing for their economies of scale, not yours.

Therefore it is an inevitability that all companies eventually take fulfillment in house. The question becomes when.

To which the answer is... it depends. For a real-world example, a well known personal care brand sells around $1 billion of product online, but has a simple business profile of just a few SKUs all under 1 pound in weight and small in size. This company still uses a 3PL because the unit economics make sense.

Meanwhile, we have spoken to multiple apparel startups out of Los Angeles with similar complex SKU mixes, a concentrated customer base, and focused DTC strategy. For these companies, it made a lot of sense to stand up their own warehouse in Southern California as soon as possible, which meant before they were even to $20 million in annual sales. Why is that? Because with a very large SKU count (tens of thousands of unique items), storage is very complex and expensive, but with low order volumes, fulfillment is very easy. It's hard to find 3PLs who will cheaply charge for such large storage requirements when they can't make up the price through order volume or inventory turnover.

As this simple comparison shows, the properties of your business determine the inevitable "when" with the key properties being ASP, AOV, and CPU. But, in general, we have seen what we call the "Fifty / One Hundred Rule" — A company either gets to $50 million in annual sales or 100,000 in monthly shipments. At that point, order volume is high enough to invest capex in improving opex. The most meaningful vehicle to do so is migrating from a 3PL to an owned FC.