[EP 9] Modern Merchant Podcast: In-house Fulfillment vs 3rd Party Logistics w/ ShipHero

Below, you will find a transcript of the episode.

Austin Rose:

All right, we’re getting started today. Welcome to the ninth episode of The Modern Merchant Podcast. Today’s going to be a fun one. We are going to be talking about in-house fulfillment versus third-party logistics fulfillment. We’ve got a special guest on with us today. It is Aaron Rubin. He is the CEO of ShipHero. Thanks for jumping on, Aaron. Appreciate your time.

Aaron Rubin:

Thanks for having me. Exciting and third-party logistics, I’ve never heard those put together in the same sentence, but we’ll do our best.

Austin Rose:

I know. I’m sorry. We’re going to stick with 3PL. We’ve got Travis on today, as well. Usual suspect. We decided to switch out Matt for Aaron. But we really wanted to talk about a lot of cool stuff in regards to fulfillment. Right? So, there’s a lot of people selling through their own in-house fulfillment using 3PLs. Obviously, we talked about drop ship fulfillment in the last episode. But before we get started, Aaron, why don’t you give us a quick background about yourself and ShipHero?

Aaron Rubin:

Yeah. Aaron Rubin, CEO of ShipHero. ShipHero has two divisions. One is a warehouse management software for e-commerce, so brands that ship from their own warehouses. Typically 10 to 500 million in annual revenue, our customer base there. And then we also provide outsource fulfillment services under ShipHero fulfillment, which is basically using the same software, but we’re shipping it out of our buildings. That’s who we are.

Austin Rose:

Got it. Perfect.

Travis Mariea:

Aaron’s here after a long, quick flight With the daughter yesterday?

Aaron Rubin:

Yep. I did a day trip to see a customer in one of our warehouses in Dallas and back from New York, so it was a long day, long [inaudible 00:01:56] yesterday.

Travis Mariea:

Nice. Appreciate you being here.

Aaron Rubin:

Thanks.

Austin Rose:

Yeah, we appreciate you being here. So, we’re going to start off in a second real quick. We want to give a breakdown on what’s been happening in e-commerce and retail. I grabbed some stuff that caught my eye in regards to what’s been going on this past week. Something that a lot of people have seen, stamps.com agrees to a $6.6 billion buyout. That was really recent. This was something that I saw you mentioned and talk about, as well, Aaron, because it’s in our space, is ShipBob raising $200 million in funding. That was a big thing that happened recently. One thing that stuck out to me, I don’t really hear about a lot of this going on, but Eddie Bauer, one of the apparel retailers, they just recently launched a rental gear program which will arrive outdoors and do more in the outdoor space. So, it was kind of cool to see them going into the D2C model. A lot of brands are going that way.

Austin Rose:

A really interesting one, Sam’s Club is launching a new app called Scan and Ship for their bulky items. You can scan it with your phone and purchase it, and then they ship it from one of their locations to you, instead of you having to worry about getting it in a cart and then getting it into your car. So, that was a cool, little feature that it looks like they’re coming out with. And then a really big one in our space was BigCommerce is integrated to Amazon’s multi-channel fulfillment. I guess has like a more in-house application and integration with Amazon. So, that was another big feat that BigCommerce came out with this week. What stands out to you, Travis? Anything else happens that I’m missing?

Travis Mariea:

Well, I think we missed, and might as well start out at the top, ShipHero raising $50 million. I figured we might as well start with that since we’re talking about the other raises and all that in the space. It was something that I was talking to earlier, before the show started, with Aaron. We’ve gone through the process. We raised a very small friends and family round that mostly had been self-funded to some extent, but we went through the process of at least talking with investors. So, always really curious to get thoughts from other entrepreneurs and companies out there.

Travis Mariea:

Aaron, I saw a podcast with you, man, probably three years ago or something like that, where you talked about we’re not raising right now because I don’t have the formula to tell the investor, you put X amount of dollars in here, and then you get X amount of dollars out. You must have figured that out in the last year. Can you talk about what was that change in mindset, or what clicked that you were like, “This is the time to go raise?”

Aaron Rubin:

Yeah. I don’t think we have figured that quite out yet. Because we were bootstrapped until… Well, we raised 435,000 from friends and family, and that’s all we had raised. And we were through 30 million in annual revenue when we did the raise. I don’t think we didn’t quite have a super slick story or really that exact formula of what we’re going to do with money we raised, but we had a lot of [inaudible 00:05:01] interest. And some of them are some top tier firms with good offers, so we decided to go ahead with it.

Travis Mariea:

Gotcha. And then using the money, looking forward, is it going to be split between the two, like you said, departments or business units, I guess you will? Where are you focusing on that?

Aaron Rubin:

Yeah. Yeah. Well, so we’ll spend them both. We already have, before the money, we already have 55 engineers, so we had a pretty robust team so we didn’t need the money to develop the core product. But now that we have some more money, we’ll push a bit faster. And then we’re also acquiring [inaudible 00:05:43] warehouses, so more than half of the money will go in that bucket.

Travis Mariea:

Very cool.

Austin Rose:

Go ahead.

Travis Mariea:

[crosstalk 00:05:54] some shade on the BigCommerce/Amazon announcement.

Austin Rose:

Let’s do it.

Aaron Rubin:

I don’t remember what year it was. It was that unite where Shopify announced the Shopify Fulfillment Network, which uses our software in the background. So, I don’t remember what year that was, but I think it was at least three years ago now, but BigCommerce had something with Amazon. It took them three years, but they’re trying to catch up.

Travis Mariea:

Yeah. What was it? I saw, it was like someone said [inaudible 00:06:20] like Shopify is funding the rebels and Amazon is partnering with the giant, or something like that.

Aaron Rubin:

BigCommerce is.

Travis Mariea:

Oh, yeah. Oh, yeah. BigCommerce is partnering with the giant, like obviously being Amazon. It’s a funny, different take from both sides of the spectrum there. But then also, in general… I don’t know. I don’t see a lot… Multi-channel fulfillment, I guess it might be a strategy in the future from Amazon. I don’t know. We don’t see a lot of people leveraging it. I’ll be curious to see how that plays out and if that’s a big part of the strategy. But if you have your items on Amazon, I feel like 95% of the time, you’re just selling it on Amazon. Curious how much people are actually leveraging that or going to be.

Aaron Rubin:

Yeah. We see people that are like 80% Amazon and then 20% everything else, and then they just say, “Oh, just ship the other 20% through Amazon,” which makes perfect sense. It’s just like that’s my core business. I don’t know anyone who’s 20% Amazon, 80% BigCommerce who’s actually going to rely on Amazon for the logistics. Amazon has made it super clear who their customer is, right? The customer is you and I buying stuff on amazon.com, not you and I selling stuff on amazon.com. You choose who you want to work with, and I think most internet sellers are savvy enough to know that this is who Amazon cares about and you probably don’t want to rely on them for their outsource logistics for your non-Amazon sales. For your Amazon sales, it’s great, but for your non Amazon sales, it gets bumped to the back of the line. I know they said [inaudible 00:07:54] I guess we’ll improve it as part of this program, but I think let’s see it.

Travis Mariea:

Let’s see it. Right.

Austin Rose:

Yeah. It’s always let’s see it. No, that’s some great insight on that. I definitely wanted to dive into this type of fulfillment. Right? Different multi-channel fulfillment. We’re talking about different types of fulfillment. And the topic today is talking about in-house and third-party logistics. I know ShipHero, you guys have solutions and services for both customers doing those different types of fulfillment. Obviously in-house fulfillment, I’m getting an order in, and I’m sending it out from my in-house warehouse, whether I’m working right there, it’s next to me, or I’ve got my team at my warehouse and they’re fulfilling those orders. Pretty standard, traditional retail. Right. And 3PL is outsourcing the logistics side. Travis, correct me if I’m wrong, it’s like buying space. Right? We’re buying different sections and space of the warehouse of the 3PL, and they’re doing the logistics for me for whatever orders are coming in and I need to fulfill that to my customers.

Austin Rose:

Aaron, what’s a quick definition that you say, or you talk about, when it comes to 3PLs and in-house fulfillment? And I saw Travis, you put something down here that you wanted to talk about 3PL versus 4PL, which is a really interesting topic. I think you guys wrote something on this, too, of the, what was it, like 2PL versus 3PL versus 4PL versus 5PL I guess, per se. So, what’s your take on the differences between those two fulfillments?

Aaron Rubin:

Yeah. Well, I’ll jump in first on the in-house versus outsource. So, I think outsourcing is the traditional mail order way, and then with the internet and people selling really small quantities, they couldn’t get a good 3PL, so they ended up doing it in-house and just doing it that way. And I think the world’s been going more now back towards the outsource model. I think the reason why a lot of e-commerce companies did it in-house, and I had an e-commerce company for 15 years, and we did it in-house until we outsourced to a company that went bankrupt and almost took us with them. That was as bad an experience as you could have, but I think these days there’s a lot of good options.

Aaron Rubin:

So, five years ago, if my best friend asked me, “Should I outsource or do it in-house?” I probably would have said in-house. These days, I lean more towards outsourcing because there are quality providers who are stable, who you can rely on, who will actually work with you if you’re even a $2 million brand. Where in the past, if you weren’t doing 20 or 100 million, you couldn’t really find a quality provider. Anyway, We can talk about that more if you want, but let’s go to my quick overview of in-house versus outsource.

Travis Mariea:

Oh, yeah. Just to double click into that, someone that goes from in-house to outsource, like they’ve already been doing it in-house, what’s that breaking point? Is it a certain [inaudible 00:10:52] theme can you look at? It makes sense to move to an outsourced operation. But what do you see as the common themes when they make that change?

Aaron Rubin:

Yeah. So, a lot of times people get to that point when they need to sign a lease on a larger space and they’re not sure if they want to. So, an example, a customer of ours is Adams [inaudible 00:11:12] heard of their brand. So, they have a warehouse that uses our software in Brooklyn, but they were scaling up a lot, and if you want to get more space, you typically have to go and sign a multi-year lease on more space. If you’re not sure if the demand is going to be there to support that space, or if you think, “Hey, I might actually grow out of this space,” losing five year leases is not very flexible. So, they did a hybrid approach where they kept their warehouse that they had, but they didn’t get a larger warehouse, they just outsourced some of the stuff to some of our warehouses. So, a typical breaking point is, “I don’t want to sign a lease on a larger space.” That’s one.

Aaron Rubin:

Two is personnel issues, so people just get sick of people keep calling out sick, I keep spending my days filling in for them packing orders, I’m behind on my marketing plan, I’m behind on my product development plan, because I just spent 12 hours packing orders to cover for the two people that missed today. And they’re like, “I want to get rid of this. I just don’t want to do it anymore.” Right? The other personnel issue that often happens is like, there’s one warehouse manager who they’re basically reliant on. And then if that person leaves, they also look at me like, “Okay, this isn’t good. I can’t be stuck with one person who’s mission critical,” so they outsource.

Travis Mariea:

Yeah. they’re either a brand or I would think mostly brands, maybe some retailers in there as well, that are their core business, pushing products or creating products. Right? And might as well outsource where you can where it’s not a core [inaudible 00:12:51]. That makes a lot of sense. The hybrid thing you brought up was interesting. For sure it’s a good way to hedge where you dip your toe into it. Do you see people using outsource for a strategic location, like a west coast and they keep theirs on the east coast? Is that common?

Aaron Rubin:

Yeah. Yeah. So, we see the amount of that. A lot of people that do that tend to just move to fully outsource. They realized that like, “Why am I even bothering? I can just do it fully outsourced.” We have a lot of customers that are doing that across countries. So, let’s say we’ve got a customer that sells beach towels, and they’ll ship in Australia using software, then they’ll outsource their US fulfillment because they live in Australia. Right? So, that’s where they started, but they have a huge base in the US and they don’t want to open another warehouse. So, hybrid cross-country [inaudible 00:13:40] a lot. Sometimes across different borders. Sometimes within the US where it’s like, yeah, east coast versus west coast, but that’s less common.

Travis Mariea:

And you guys, they got a partner network there for a little bit, but now with your own warehouses, you’re only on the east coast, or do you have any… How many warehouses do you guys run?

Aaron Rubin:

So, yeah, we started with partners, and we still work with some partners, but on our own, we have four. We’ve got Pennsylvania, Texas, I was there yesterday, Nevada, where we’re just moving from one facility to a much larger facility, and then Northern Florida. So, we’ve got four, and we’ll probably add a fifth this year.

Travis Mariea:

Gotcha. Cool. All right. Yeah. So, Austin, [inaudible 00:14:24] taking off [inaudible 00:14:25] too early, but we can get back to whatever [crosstalk 00:14:28].

Austin Rose:

He said northern Florida, so I’m wondering how close we are to that since you’re based here in-

Aaron Rubin:

Where are you guys?

Austin Rose:

Jacksonville.

Aaron Rubin:

Oh, you are Jacksonville?

Austin Rose:

Yeah.Arm.

Aaron Rubin:

I was just there. I’ll be back again soon. Yeah. We’ve got a decent amount of real estate down there.

Travis Mariea:

Yeah. We’re a good spot for that. I mean, Amazon’s got a fulfillment spot here. I mean, still relatively cheap land, I guess. Yeah. Might as well keep going off track. I got another question [inaudible 00:14:54] as well. Just speaking of my own interest here, how do you analyze where land costs are… You probably have a lot of data. I’d love to know how you picked Jacksonville and the spot in Texas and all of that.

Aaron Rubin:

It’s really where the customers are. The main costs are shipping, so you want to reduce the money you’re giving UPS and FedEx. So, the land costs, sure it matters, you’d rather be cheaper, but it’s not going to really move the needle. Same thing on labor costs. Labor availability is an issue, so that is one concern where you do have to have enough people. You have to make sure you have a minimum level of talent that you can pull from. But it’s basically just about getting as close to your customers and then avoiding states that you don’t necessarily want to be in, like California.

Aaron Rubin:

So, we’re international, even though we have a large customer base in Southern California, we keep our warehouse in Nevada in Las Vegas because it gets there one day anyways, and you avoid a lot of tax and regulatory issues by getting out of California. Same thing, we’re in Pennsylvania, we’re right on the border of New Jersey. It’s like 10 miles. But we’re on the Pennsylvania side. And if you look, you go on one side of the border, there’s barely any warehouses, you go to the other, it’s all warehouses. Right? Because Pennsylvania is just a more friendly business environment. So, there’s a little of that, but it’s about being close to the customer.

Travis Mariea:

Makes sense.

Austin Rose:

So, when it comes to… I want to actually ask this question, too, when it comes to 3PLs because… I don’t know if Travis gets this a lot. I’ve actually gotten this a lot in the past with customers that we worked with or leads that we’re talking to, and people never know where to start when it comes to outsourcing. Right? They never know where to start, who to talk to, where to research off of like… One, they need to do what you said. Right? They need to evaluate whether outsourcing is the right way to go about it for my business? But then once they decide, “I want to do a 3PL. I want to use a 3PL,” Aaron, what do you think are some initial questions people should be asking themselves? Or where should they be starting whenever they first decide, “All right, I’m going to start outsourcing my fulfillment. Where should I start?” What would be your tips?

Aaron Rubin:

Yeah. So, I think it’s definitely a problem in the industry where there’s not a lot of brand names. There’s no McDonald’s of 3PL. Right. So, no one really knows, “Oh, McDonald’s is going to be this, Shake shack’s going to be that.” It’s like all these companies they’ve never heard of. Right? So, how do I know who’s got the burger I like? So, it’s definitely a problem. A lot of people rely on word of mouth, whether it’s forums or real life word of mouth like, “Hey, this is who I use. And was it good or bad?” Review sites are another good one. You just have to be careful which ones they are. So, for example, if you go on the Shopify app store, those reviews are not pay to play, they’re legit. Right? You can’t fake it. There’s other sites that pay much more to play.

Aaron Rubin:

And a good way to know if one is paid to play is you can look at… Actually, Shopify, I’m using them again, but they’re actually a really good example where you go on some sites and review Shopify [inaudible 00:18:13]. Look at Shopify reviews versus, and I’m way off topic but whatever, look at Shopify reviews and, I don’t know, pick some other not good software, OpenCart or whatever, and you’ll see that like, “OpenCart, five stars. Shopify, three stars.” You’re like, “We all know Shopify is a way better product than OpenCart.” Why is that? Right? Because it’s a pay to play site. Anyone gets five stars if you’re willing to write a big enough check. Right? So, you got to know where you have legit data sources, people that are not paid to play, so Shopify app store is a really good one.

Aaron Rubin:

And yeah, look at that. That’s where you start. And then the questions you ask are… I’ll tell you the question that everyone asks is the wrong question. Everyone asks, how much are you going to charge to pick and pack my order? Right? And what people fail to realize is when you’re a brand, you’re going to spend 75% of your money with Ups or FedEx and 25% on the pick and pack. But the people doing the pick and pack have their own UPS accounts. The rates on those vary widely. Everyone will tell you they have the best rates. It varies widely.

Aaron Rubin:

But on top of that, UPS and FedEx would give kickbacks to the 3PLs of varying sizes. So, you can basically go to UPS and say, “Here’s what I want you to charge me, but give me 5% back,” and they’ll do it. So, then they go to you as a merchant and say, “I’m going to charge a dollar to pick and pack your order.” Cheapest ever. Right? But then they tell UPS, “Hey, put another dollar on each order and kick it back to me.” So, the merchant is paying $2, but they’re like, “This is better than the guy who’s going to charge me a buck 50. Right?

Aaron Rubin:

So, what I always tell people if you have to look at your all in cost. How much is it going to cost to get it to the customer? Don’t worry about how that’s divided up. You just care, is it going to cost me $5 to get it to my customer? Is it going to cost me $5.50? Pick the one there. I mean, obviously, price isn’t the only thing that matters, but you need to have this ability [inaudible 00:20:06] price. And what a lot of people say is, “Well, I can’t really get that information. It’s hard to know, blah, blah, blah.” And it’s like, well, anyone who’s not being forthcoming with that sort of information, there’s a reason. Right? It’s because you’re not going to like it when you see how the sausage is made. Right?

Aaron Rubin:

So, go with someone who will give you transparent pricing, who will tell you exactly what it’s going to cost. And if they can tell you what it costs, run the other way, because it’s not… They’re not hiding data to help you out. Right? They’re hiding it to help themselves out. So, the number one things to look at are what’s the quality and what am I actually paid? And everything else doesn’t really matter compared to those two things.

Austin Rose:

No, that’s a really good point. Travis, you got any thoughts on that?

Travis Mariea:

Yeah. No. I mean, transparency is [inaudible 00:20:54] the first one to [inaudible 00:21:01] usually it can run away with it. Right? So, it sounds like you guys actually are transparent with the pricing upfront. Is that a competitive differentiator for you guys?

Aaron Rubin:

We put the pricing out there. I mean, other people do, so there’s plenty of others… I’m not saying we’re the only option, there’s plenty of other options, I’m just saying ask them for it. Right? Not everyone wants to put it on the website, that’s fine, but if you email them and say, “What’s my pricing?” and they give you this complicated formula rather than a number, that’s bad.

Travis Mariea:

Yeah. Yeah, yeah.

Austin Rose:

And I feel like a lot of people are upfront with telling you our price, because I feel like that’s the shift now, it’s like winning your business, they need to tell you exactly who it is. It’s the same thing with us. Right? When we’re talking to people, we’re more than happy to be like, “Here’s our plans.” I mean, we have them on our front website, compared to… Actually, a lot of people don’t. No, that’s some really good thoughts. I, honestly, haven’t even thought about that.

Austin Rose:

Let’s segue into, honestly, probably the most… The one question that I wanted to ask that I feel like both of us all have really good domain knowledge on is how important software comes into play when it comes to not just in-house fulfillment, but 3PLs as well? I know you guys handle both. Right? You guys have done the partner network of 3PLs, and now you guys are doing your own 3PLs, but you guys also help out from an in-house perspective as well. What’s something that jumps off the page to you initially in regards to how important good software is when it comes to these two types of fulfillments, to you, Aaron?

Aaron Rubin:

Yeah. So, we power more outsource fulfillment than we do in-house, so yeah, we do a lot of that. So, yeah, to throw some more shade at random companies, I was talking to someone who was at Saddle Creek Logistics, and they’re working on moving out of there, but the software… I can’t remember which one… It might’ve been SnapFulfil. I don’t remember. But anyways, it doesn’t have a direct connection to Shopify, so they poured everything through a middle layer, but the middle layer doesn’t have product photos. So, when the product comes in, I can’t match it based on that. So, he creates an [air 00:23:14] table of every new product… And you could already see where this is going? Right?

Austin Rose:

Yeah.

Aaron Rubin:

Don’t do that. So, there’s that. And then there’s speed and accuracy with your… The`re’s speed accuracy capability, so speed and accuracy of inventory. Right? So, real-time inventory syncing is super important so you don’t oversell or undersell. Complexity is to be able to handle use cases like I want my 3PL to ship these products, but not these, but maybe it’s all going to flow through. Right? So, how can we do that? So, you’ve got to build some complexity. Or maybe it’s like, these products, I want to go this method, these products I want to go this way method. If it’s some combination, I want to do X or Y or Z, or I want to use a different packaging if it’s…

Aaron Rubin:

For example, a common one is if there’s one of these items, you don’t need to put it in a box because it’s in a box, slap a label. If it’s two, then you need to take a box to put both of them in there. Right? And they combine it so it’s not two shipments. So, you just need software that can understand those rules and spit that out. Right? So, depending on what your needs are, just make sure they have the software to do it. Don’t assume they do because some do and some don’t.

Aaron Rubin:

And the last one just would be on the ability to handle the volume. Right? So, depending on what you’re doing, like our biggest single day, a single store was like 150 something thousand orders in 24 hours. Right? If you’re doing that volume, make sure you’ve got software that’s not going to choke. Right? Because then you’re [inaudible 00:24:45] you don’t want software that’s going to choke.

Travis Mariea:

Yeah. Yeah. I mean, I think you’ve pulled out a lot of good stuff around what we can ask upfront and what we can… Looking at different 3PLs, 4LS, I want to dive into that. Right? The 3PLs, 4PLs, there’s been a lot written about it out there, but just the value that… Someone’s got a warehouse, someone calls with 3PLs, [inaudible 00:25:07] because of all the value that they add. Can you help us define the different 3PL versus 4PL and how to look at the value that might be layered on top of one company to the next company? Right, is it defining what box you use, like helping that customer through that process? What’s the value that you’re adding on top, and how’s that relate to a 3PL versus 4PL? Or is that something completely different?

Aaron Rubin:

Yeah. So, just definitionally, 3PL is third-party logistics, so that’s your typical I’m working with a warehouse. 4PL means I’m working with a company, but it doesn’t actually own the warehouse. It’s someone else’s warehouse. It’s a common model. Some Shopify Fulfillment Network, it’s not Shopify owns warehouses. They’re outsourced warehouses. Right? There’s nothing wrong with that. It’s just it’s another party in the relationship. If all the parties are really good, then you end up with a great experience. If the parties are the lowest bidder, you might not get the best outcome. Right? So, you want to make sure that there’s a reason behind them using other people’s warehouses versus…

Aaron Rubin:

What you don’t want to do, and what some of the models out there are, is a 4PL whose model is, “I’m going to take your volume and then I’m going to spread it out to the lowest bidder. And what I’m going to do is I’m going to go, I’m going to get a bunch of companies in an area, and then I’m going to give them some volume. And if someone else comes in cheaper, I’ll either shift the volume or force everyone… cram down out a price decrease.” And the way they’re making money is the 3PL, let’s, would typically charge a dollar for the service, they’re going to charge you a dollar for the service, but they’re going to cram down the price on the 3PL and the warehouse [inaudible 00:26:52]. Right? So, in that case, you’re not really benefiting from the 4PL, and you’re going to end up at… You never want to be with a company that bid the least. Right?

Aaron Rubin:

So, there’s different 4PL models. It’s not a bad word, 4PL, it’s not necessarily a bad thing, but it’s something you just need to be aware of why they’re doing it. And we started, like you said, with a 4PL model, and we still have a couple, but we went to the 3PL model where we own our own because… Quality was good, but it wasn’t to the level we wanted, and in-house gives you a little bit more control.

Travis Mariea:

Right. Right. Vertically integrating, I mean, you see it with Tesla buying their batteries, tons of companies out there where they just want more control. Amazon buying their own logistics and freight. Right? And last mile delivery. So, it makes complete sense, so 4PL, they’re just adding another party, another link in the chain there. Makes sense. So, when you’re looking at 3PLs, or even 4PLS, even probably more so 4PL, what kind of value is on top of the pick, pack, and ship… Right? Everyone can pick, pack, and ship, there’s some value in the cheapest rates, everyone says they got it, like you said. But are there any other value-added services these guys should be looking for, whether they’re brands or retailers, they should be asking things like, “Hey, you can do everything that everyone else does, but can you do X, Y, or Z?” What kind of value added services are out there?

Aaron Rubin:

Yeah. So, typically, a 4PL will have fewer value added services just because they need to standardize across multiple warehouses. Right? Versus an individual… If you want something really customized… I’m going to give you an example. There’s a long-time customer of ours, [Sosita 00:28:32] Industries in Austin, who used to work with Tacomas Foods and they would inspect the booths that came back to make sure they weren’t [inaudible 00:28:41] this whole complex process. Right? You’re not going to go to a 4PL and get them to do that. Right? But you can go to a business owner, someone who’s running… It’s a small business. It’s not a really small business. Right? But it’s still an owner operated small business 3PL, and they’ll do that stuff for you. Right? 4PL’s not set up to deal with that sort of complexity.

Aaron Rubin:

The value problem of 4PL is around the number of facilities and managing where the stock goes. So, the idea here is unless you’re a top 100 retailer, you can’t afford to have five, six, seven warehouses in the US. Right? You’re probably going to have one. By working with a 4PL, you now have access to this large network of warehouses without having to build all these different relationships. So, the 4PL builds the relationships so you don’t have to. What we’re trying to do is, we do the same thing, we actually take the product, we distribute it for you, so what happens is the merchant sends the product to our warehouse in Nevada and we actually move it for them to Jacksonville and all those other places. But that’s the value of the 4PL, you got access to a bunch of warehouses, but for you, it feels like one, you have one point of contact. Versus in the old days, you would have had to contact one here, one here, one there, one there, and that’s too many relationships to manage.

Travis Mariea:

Makes sense.

Austin Rose:

Is there any… I don’t know. This is kind of like a one-off question that popped in my head, and I feel like we get this a lot, it’s like packing slips and branding, everything to make the box look good, or even these custom boxes that people buy to have their logos actually on the box itself, I’m assuming we don’t really see that a lot in the 4PL side of things, but is that something 3PLs do as well? Is that another value add?

Aaron Rubin:

Yeah. So, custom invoices you’ll be able to get from any good, even, 4PL. In terms of fully custom boxes, it depends on which one. So, Deliver won’t, but Deliver is like a low cost leader so they wouldn’t do that. But some other ones like ourselves, like ShipMonk, who have multiple facilities, will do that. So, you can definitely get it. If you do 50 orders a month, no one’s going to do all that work for you, but if you’ve got decent volume, it’s not a problem.

Austin Rose:

Yeah. That makes sense. And I feel like a lot of the time, too, just with anything, 3PL related, software related, you would love to get someone that’s got good customer support as well. Right? I mean, anything can break or go wrong or shipments get sent to the wrong place, whatever. All this stuff, there’s always something that can happen, and I feel like deciding on a 3PL or a 4PL, which in-house, whatever you’re going with, they’ve got good customer service. They’re able to get back to you on things. We’re able to have a good business to business relationship. So, I feel like that would be another one as well.

Aaron Rubin:

Yeah, definitely. And that’s definitely something that the smaller 3PLs are better at, having the ability… I’ll give you an example. Let’s say the standard SLA is three business days to receive a container. Right? And you’re a summer brand and your product got late. Right? So, you’ve got all of these back orders, and now it just showed up on July 15th, and you don’t want it to wait two business days. You’re like, “I want to cut the line and get all my receipts in today.” A small 3PL, or a more entrepreneurial 3PL, will look at that, and the owner will say, “Yeah, that makes sense. I’m going to push this guy to the front of the line once because it’s going to help him out a lot, and it makes sense.” Right? Versus a larger 4PL will not be flexible like that. It’s like, “Nope. First in, first out.” Showed up today, it will be received on Friday or Monday. Right? So, you can get that better relationship with some of the smaller guys.

Austin Rose:

Yeah. Makes sense. Travis, what are your thoughts on software when it comes to either… I mean, we’ve been talking about 3PLs a lot, like anything from an in-house fulfillment side of things, like making sure you get the right… I mean, we see this all the time. Right? Are you an inventory management system? Are you a warehouse management system? Can you do barcode scanning? Can you not? Can you do this? Can you do that? I mean, what are your thoughts on the importance of software that we can talk about for our retailers that want to go in-house or go through a PL?

Travis Mariea:

Yeah. Like Aaron mentioned earlier, I mean, it’s a big piece of it. It’s a big part of the equation. You need to make sure that you can trust it. Right? Yeah. I mean, nowadays, you really need that. It’s a competitive advantage, I think. I don’t think it always was, but it definitely is now. Aaron mentioned earlier, if you’re doing high volume and you have something that can automatically pick the right box for you and reduce your order fees, I mean, that’s going to be a competitive advantage for you if you can drive margin like that. Yeah. Now, we’re bullish on it, obviously, with the rise of third-party logistics and distributed fulfillment, [inaudible 00:33:52] in general. I think softwares can continue to be more of a competitive advantage in helping you squeeze out margin, reduce shipping times, reduce your carbon footprint, potentially in a lot of cases, if you can ship to the closest warehouse and optimize packaging and things like that. Obviously, we’re pretty bullish on it being important.

Austin Rose:

Yeah. Cool. Any closing thoughts, guys? We’re kind of wrapping up here a little bit. Travis, you got any more questions?

Travis Mariea:

Yeah. I mean, I guess, for all the listeners now or in the future, I definitely want to dive back into the business. I’m just here just wanting to learn more about ShipHero, so we might be done with some of the 3PL versus 4PL stuff. But before I do that, Aaron, is there anything else we didn’t talk about you think might be helpful that we didn’t touch on?

Aaron Rubin:

No, I think you’ve covered it. Double click on the carbon and environmental benefits, so a lot of companies… So, I like to use Zappos as an example. [inaudible 00:34:49] Zappos started, you would order at 10:00 o’clock at night, and they would throw it on a plane from Las Vegas, and it would get to me in New York the next morning. And while that was a great experience, and I probably didn’t think twice about it at the time, in retrospect, that’s probably not… We have a limited amount of carbon we could emit, and that’s probably not the best use of it. So, what Zappos has done is, they’re part of Amazon so now they’re distributed, so it ships from everywhere and they don’t have to do that anymore.

Aaron Rubin:

But I still see a lot of brands who are using that same approach, where it’s like, we’re not going to get smart with our logistics, we’re just going to throw UPS and second day air at the problem, and it’s costly. You talk about margin, it kills your margin, but also, it’s bad for the environment. And it’s one of those things that you don’t have to, you can just be smarter about where you stage your product and you could get the same delivery service level without the cost and without the environmental impact. So, I think that’s the place where software really still has a big part to play, and retailers, because we’re in this business, we see it, are embarrassingly behind. They might talk a lot about sustainability and net zero targets, but then they’re, I like to say, throwing toilet paper on airplanes. Right? My toilet paper doesn’t need to be here overnight. It can take a couple extra days. Yeah, I think brands need to catch up on that.

Travis Mariea:

You guys are really helping retailers, even the SMB, right? Like you said earlier, the top 1%, they’ve got warehouses all over the place, they’re already distributed, that’s fine, but you guys are helping that mid-market and SMB get there. And the software is part of the equation, and I’ve seen this as a common theme among a lot of companies in your space, like package it up with the 3PL side. That was the question I wanted to ask and get in and learn a little more about, when did ShipHero decide? Was it early? Was it late? Was there a decision point? We did software first and then we want to get into 3PL? What was that decision like? Did you guys always know it was going to be a route you’re going to take? Just curious to know more about that shift if it was a shift.

Aaron Rubin:

Yeah, no, we never wanted to do our own warehouses, so we always wanted to be software. And we wanted the way the software works is that the product shows up at one warehouse, and the 3PL distributes it to all the warehouses. Because the idea that, what many other 3PLs will tell you, it’s like I got five warehouses, ship your product to all five warehouses, and the reality is if you have a one container coming from China, how are you going to get that to five warehouses? Right? And it’s not only now I got to get five containers, it’s like our Pennsylvania facility needs 50% of the volume versus our Utah facility needs 10% of the volume. So, how are you going to do that? You’re going to send a quarter of a… It just doesn’t work. Right? It doesn’t work for individuals. Anyone doing less than $500 million a year in revenue can support sending containers the right quantities to all these warehouses.

Aaron Rubin:

So, you have to do it for them. We’re the software layer and we speak to a lot of these people and we tried to pitch several of them, “Hey, this is how you should do it. You should take ownership of, what we call, load balancing and moving the product around the country. Because you’re promising, hey, low carbon by having all these warehouses, but no one’s using it. Everyone’s using one or two.” And we couldn’t. We couldn’t convince anyone. We’re like, “This is the way it should be. No one else is doing it. We know what everyone’s doing. We see they’re not doing it. We’re just going to do it ourselves.” So, we started that just two years and a month ago.

Travis Mariea:

Yeah. Yeah. Well, I figured it was probably the case. Right? You want to stay focused, but you just had this problem that you guys were the best to fix. Yeah. It’s interesting. I’ve seen that, and we struggle with it too, what’s our focus, what do we get into? So, I really wanted to dig in there. Cool. And you guys, I’ve been seeing, obviously just the industry as a whole, but you guys are really raising the ranks and climbing. The pandemic, I’d just be curious to know, how has the pandemic affected you from a revenue perspective? How’d you guys get through it? Got to end with a pandemic question. Might as well get one of those in. And just, how has it changed business from a revenue perspective, but also how’d you guys get through it owning warehouses and having all those struggles there?

Aaron Rubin:

Yeah. So, we actually only outsourced warehouses. We didn’t start our own until… Don’t remember the exact month, but I think May of 2020, so right in the heart of the pandemic. So, they couldn’t travel, they didn’t get out to our first warehouse for like a year. I physically wasn’t there so I had to do it all remote, and had a great team who did the set up. And then we did two and then we did three. Right? So, we got three done during the no travel period of the… or really hard to travel of the pandemics, so it was really tough, but we felt we had to… Yeah. There were concerns about, like you mentioned, quality, but also capacity and resiliency, where we had…

Aaron Rubin:

We didn’t know at the time what the odds were that any given facility would shut down, so we wanted to make sure that we had more facilities so that if there’s a COVID outbreak and we had to shut a facility for two weeks, which it seemed like that might be… It didn’t really turn out to happen, but we thought that might happen, we needed to be prepared where our customers wouldn’t get shut down because we had a bunch of facilities. So, we went all in during the early phase of the pandemic, really jumped right in and built out a lot of capacity, and worked out, from a financial perspective, worked out well.

Travis Mariea:

Gotcha. And you guys, seeing record growth right now? Has this [inaudible 00:40:47] the quickest year? I mean, in recent years, at least?

Aaron Rubin:

Yep. Yeah. No, it was a good year. I mean, we’ve grown… Being bootstrapped, you never grow super fast, but we have done pretty consistently every year. So, we’ve been growing nicely before that, but the pandemic definitely supercharged it, so we ended up doing 50% more growth than we expected. Yeah. Now, I think it’s back to normal, but off a much higher base.

Travis Mariea:

Right. Right. All right.

Aaron Rubin:

How is it by you? How’d the numbers play out for you?

Travis Mariea:

The same. I mean, we’ve been bootstrapped to some extent. We’ve taken on a million early… as far as early in the flex point era, basically a million to get flex point going. It’s been funded a lot by our inventory source brand, as well, helping it get off the ground. Yeah. I mean, in that March, April, May, we just saw it explode. And then it’s just continued to stay steady since then, in both brands really, which has been nice because we’ve been pivoting with pushing more marketing and just resources towards flex point and inventory sources keeping pace. We think there’s just a lot more…

Travis Mariea:

I’ve just seen, just from a search impressions and things like that, a lot more interest in dropship, a lot more interest in US suppliers, just a lot more interest in just distributed fulfillment. Right? If everyone’s going to a third-party warehouse and have their own, and then they’re starting to dropship as well, trying to figure out that puzzle, and that’s where the flex point side is really picking up. So, it’s been good. Yeah. I’d say now it’s back to steady instead of like a crazy rocket, but it’s been staying steady.

Aaron Rubin:

So, what are you seeing on the US manufacturing side? I hear a lot of talk, I don’t see it a ton, but you probably know better than me.

Travis Mariea:

I haven’t seen a lot from, “Okay, we were manufacturing somewhere else, now we’re manufacturing in the US,” but we have seen a lot more interest in, “I would like to source my goods from US distributors and suppliers,” versus trying to do the China sourcing. Right? Also just adding other brands and other products in general to try to capture this new market, whether it was, “I sold T-shirts and hoodies, now I want to get an athleisure because everyone’s staying at home,” we saw that too. Right? So, adding additional product lines was a big push into where inventory source plays. But yeah, it’s mostly about, “I want to be able to dropship. I want to be able to have a more flexible supply chain here in the states, versus completely shifting to manufacturing.”

Aaron Rubin:

Yeah. I mean, it’d be cool if it happened, but there’s so many pieces that we’re missing here in the US in terms of making that athleisure stuff. just the factory capacities there versus here are just orders of magnitude.

Travis Mariea:

No, it’s more or less just getting more of it here ready to be shipped in two days. Right? And getting it in here. And then if we can get more of this flexible supply chain on our side, dealing with a retailer and the suppliers and distributors keeping it into these warehouses and being able to sell it to a large network, then they can make bigger buys from China and they can keep it here and have it. The traditional method, if they’re looking for that same PO every quarter from Macy’s or Nordstrom and that’s their whole business, then it changes things, which stopped very much so when the pandemic hit. I think with the distribution of products across a lot of different channels and being dropshipped, we’re hoping to see that they’re just able to keep more stock in the States.

Aaron Rubin:

Yeah. And then when people realize that being able to air that product in when you need it at the last minute, and also the rates went up like 5X and you couldn’t afford to bring stuff in by air, or probably even more than 5X at the height of it because there were no commercial airlines, yeah. I think probably people were [inaudible 00:44:40] just in time, order at the last second, like, “Oh, put me out of business.”

Travis Mariea:

Yeah.

Austin Rose:

Yeah. Some crazy stuff. All right, cool. Thanks, guys. I mean, we hit the nail on the head on time-wise. This is perfect. Aaron, thanks for joining. Thanks for all your insight. I’ve personally learned a lot from this conversation. Give us a quick little ShipHero plug? Why would someone use ShipHero?

Aaron Rubin:

Yeah. So, if you need software for your own warehouse, shiphero.com, and if you want to outsource, we’ve got pricing right on the website, fulfillment.shiphero.com.

Austin Rose:

Perfect. Awesome. Thanks for that. Thanks for jumping on today. I appreciate it. Anybody that’s listening, tuning in, obviously the podcast is on YouTube, we’re on Apple, Stitcher, and Spotify. So, thanks for joining in, and make sure and look out on the next episode. Thanks guys for joining.

Aaron Rubin:

Thanks for having me.

Travis Mariea:

All right.

Austin Rose:

All right, see you, everybody.