Deciphering 3PL: Exploring the Function of Third-Party Logistics in 2024

Introduction

Expansion often accompanies opportunity, yet it also inevitably brings about challenges.

For those engaged in expanding their ecommerce ventures, this reality is all too familiar, especially in the realms of logistics, shipping, and fulfillment. Juggling tasks like negotiating shipping contracts or resolving logistical issues can consume valuable time that could be spent on marketing, product innovation, and fostering customer relationships.

With the exponential growth of the ecommerce sector, the 3PL (third-party logistics) market has likewise surged, projected to reach $1.59 trillion by 2028.

The high demand for 3PL services in ecommerce transcends industries for good reason. These specialists manage inventory within their warehouses, handling tasks such as picking, packing, and shipping products directly to customers.

Whether you’re venturing into a partnership with a 3PL for the first time or contemplating multiple 3PL collaborations to diversify and mitigate risks, understanding how to identify and select the right vendor is paramount.

Table of Contents

• Understanding 3PL
• Operational Mechanisms of 3PL
• Debunking 3PL Myths and Misconceptions
• Reasons Behind Choosing a 3PL Provider
• Advantages of 3PL
• Drawbacks of 3PL
• Varieties of 3PL Companies
• Array of Services Offered by 3PL Providers
• Selecting the Right 3PL Provider
• Frequently Asked Questions about 3PL

What is Third-Party Logistics (3PL)?

Third-party logistics, abbreviated as 3PL, refers to the outsourcing of logistics and supply chain management functions to external service providers. These providers deliver a spectrum of services encompassing warehousing, transportation, inventory management, and order fulfillment. This approach enables businesses to streamline their operations, curtail expenses, and concentrate on their core competencies.

Partnering with a 3PL enables merchants to redirect their focus towards other facets of their business.

Rather than overseeing their own warehouses and managing in-house distribution, businesses can opt to store their inventory in a 3PL vendor’s warehouse, facilitating direct shipment from manufacturers. When customers place orders online, products are automatically dispatched from the 3PL’s warehouse. The seamless nature of this process ensures that customers perceive no friction in the transition from order placement to fulfillment. This affords ecommerce merchants the opportunity to concentrate on their core strengths: product development, marketing, and sales.

For numerous thriving ecommerce enterprises, 3PLs have served as the crucial element enabling them to navigate challenges such as supply chain crises. Unfortunately, occurrences such as political upheavals, natural calamities, labor shortages, and regulatory hurdles are not uncommon. Supply chain disruptions are increasingly prevalent, with experts noting significant disruptions occurring approximately every 3.7 years.

How does 3PL operate?

While the specifics of the 3PL fulfillment process may vary depending on the provider and agreed-upon services, a typical process unfolds as follows:

• The 3PL receives your inventory at its warehouse and categorizes each SKU.
• When an order is placed on your ecommerce platform, it is either manually forwarded to the 3PL or automatically transmitted if its software integrates with your online store.
• A member of the warehouse team receives a picking list to gather the items ordered.
• The items are packed into boxes along with the receipt and order details.
• The 3PL generates the shipping label or utilizes one from its shipping carrier partners.
• The shipping carrier collects the package from the 3PL’s distribution center and delivers it to your customer.
• Tracking information is uploaded to the 3PL system and synchronized with your order management software.

Now, what sets apart freight forwarders, 2PL, 3PL, and 4PL?

• 2PL: Couriers retrieve parcels from your warehouse and transport them to the end customer.
• 3PL: Inventory storage, picking, packing, and shipping are handled by a third-party company.
• 4PL: Providers oversee the fulfillment partners (3PLs) you engage with. Their team negotiates contracts with partners, resolves any issues, and serves as the liaison between your internal team and the distributor.
• Freight brokers: They serve as intermediaries between brands and drivers, facilitating connections between brands and carriers. Unlike 3PLs, freight forwarders are specifically focused on matching brands with drivers or carriers.

Myths and Misconceptions Surrounding 3PLs

Numerous myths and misconceptions circulate regarding the collaboration with 3PLs. Below, we dispel three of the most prevalent ones.

• “Handing tasks over to a 3PL means relinquishing control.” While it’s true that immediate access to inventory stored in a 3PL’s warehouse might be restricted, partnering with a 3PL actually facilitates regaining control. By entrusting shipping and fulfillment responsibilities to experts, the likelihood of errors decreases. Additionally, a reputable 3PL should furnish reports and analytics, enabling remote management of the process and facilitating informed business decisions.
• “3PLs exclusively cater to large enterprises.” On the contrary, 3PLs are not limited to enterprise-scale businesses. If you have aspirations to expand or grow your business, a 3PL could be a viable option. The expense associated with third-party warehousing and distribution might not necessarily exceed your budget, as it can potentially reduce overhead costs and release capital.
• “3PLs impose excessive hidden fees.” While the pricing structure of 3PLs can be intricate, incorporating various fees such as inbound, storage, outbound, customs, and duties, as well as custom packaging, these fees are transparent and explicitly outlined. It’s crucial to pose the right questions before entering into a contract with a 3PL to comprehend the fee structure comprehensively.

Why Companies Opt for 3PL Providers

For those unfamiliar with 3PLs, engaging their services might seem like an expensive solution to an existing workflow issue. However, outsourcing packing, picking, and shipping orders from your warehouse or brick-and-mortar store can offer advantages even to smaller businesses aiming to scale.

As your business experiences growth, managing the surge in orders internally may become challenging and costly. Enlisting the assistance of a 3PL before encountering overwhelming order volumes can prevent fulfillment delays, safeguarding your brand reputation. Answering key questions can aid in determining whether partnering with a 3PL is warranted:

• Are you fulfilling more than 10 to 20 orders daily?
• Are you encountering storage space limitations for inventory?
• Can your current infrastructure accommodate a sustained increase in demand?

Benefits of 3PLs

• Facilitate testing and launching in new markets effortlessly.
• Unlock capital tied up in warehouse space.
• Lower overhead costs.
• Mitigate risks associated with supply chain disruptions.
• Entrust logistics to shipping and fulfillment experts, allowing focus on core competencies.

By delegating shipping and fulfillment to specialists, such as 3PLs, businesses can allocate more time to strategic endeavors. LA-based apparel brand CISE experienced firsthand the advantages of engaging the services of the Shopify Fulfillment Network (SFN), streamlining its order processing and enabling innovation in concepts like mobile storefront construction.

In conclusion, partnering with a 3PL can offer significant benefits, allowing businesses to operate efficiently and focus on growth initiatives.

Testing and launching in new markets with ease

Venturing into international markets necessitates a comprehensive global fulfillment infrastructure, adherence to documentation requirements, and accounting for customers and duties. If you aim to explore overseas markets but are unprepared to navigate the associated legal intricacies or invest in foreign infrastructure, collaborating with a 3PL can serve as a practical means to assess market potential.

For instance, if you’re a US-based merchant intending to evaluate your products’ reception in the UK, it’s prudent to stock a modest inventory batch in the country utilizing a 3PL. Doing so alleviates the complexities of familiarizing yourself with local real estate and labor laws before gauging the market’s viability. Outsourcing these responsibilities can accelerate delivery times, enhance customer satisfaction, and reduce shipping costs—three significant advantages poised to positively impact your bottom line.

Freeing up capital tied up in warehouse spaces

Investing in proprietary warehouses and distribution centers entails ongoing costs that are unlikely to diminish soon. Projections indicate a 10% increase in warehousing rents over the next 12 months, coupled with an anticipated shortfall of 140 million square footage of warehouse space by 2024, inevitably driving up storage facility prices.

In contrast, 3PLs possess established control over their storage facilities, with higher order volumes from their retail partners enabling them to retain warehouse space efficiently. By relinquishing control over self-owned warehouse space, you gain access to additional capital for deployment in revenue-generating endeavors.

Reducing overhead costs

Partnering with a 3PL offers the benefits of skilled warehouse personnel and warehouse automation technology without the need for significant investment in proprietary infrastructure. For instance, robotic machinery streamlines the picking and packing process, eliminating the need for constant human oversight. With machinery operating 24/7, retailers can capitalize on extended order cut-off times for immediate shipping. Notably, some entities such as Ocado Retail have transitioned to fully automated warehouses.

Another area where potential cost savings accrue is in carrier rates negotiation. Given the bargaining power of 3PLs, they can secure preferential shipping rates, thereby reducing shipping expenses. Subsequently, these savings can be passed on to consumers through offerings such as free shipping.

Insulating your business against supply chain disruptions

Possessing an established network of fulfillment centers worldwide and prenegotiated carrier contracts renders 3PLs less susceptible to global shipping and fulfillment disruptions. While partnering with a 3PL may not entirely eliminate shipping surcharges, it serves to insulate your business from such fluctuations and diversify risk, given that 3PLs typically maintain relationships with multiple carriers.

Moreover, an increasing number of 3PLs are investing in their delivery vehicles, enabling support for shorter distances and more frequent deliveries while circumventing bottlenecks in the broader supply chain. For example, Shopify merchant Manly Bands has successfully mitigated delivery delays by leveraging 3PLs for order fulfillment, thereby retaining control over shipping commitments.

Disadvantages of 3PLs

• Upfront investment: Establishing a partnership with a 3PL provider entails significant upfront costs, including software integration with your ecommerce platform, SKU upload, and account access. These costs are typically categorized as transportation costs, receiving costs, warehousing fees, pick-and-pack fees, shipping costs, account set-up fees, and minimum spending requirements.
• Varied hours or workflow: The operational hours and workflow of 3PLs may differ from those of your business. This divergence can pose challenges when attempting to expedite orders during backlog situations, as direct involvement in the packing process may not be feasible.

Types of 3PL Companies

Full-service providers: Offering comprehensive end-to-end solutions, full-service 3PLs facilitate efficient order processing and delivery through a network of strategically located fulfillment centers.

3PL warehouses: These entities primarily specialize in storing, shipping, and managing returns, often providing expedited shipping options and aiding global expansion efforts.

Transportation-based 3PLs: Engaged in goods transportation between various locations, transportation-based 3PLs encompass traditional parcel transportation providers, same-day delivery services, and transportation marketplaces.

Financial- and information-based 3PLs: Focused on enhancing visibility into key warehouse processes and optimizing unit economics, financial- and information-based 3PLs provide insights into complex supply chain management and facilitate informed decision-making during crises.

Services Provided by 3PLs

• Warehouse and inventory management: A proficient 3PL should offer inventory warehousing, inventory management solutions, and software integration to facilitate efficient order processing.
• Order management and fulfillment: Leveraging a robust order management system, 3PLs track stock levels across warehouses and ensure prompt delivery to customers.
• Shipping coordination: 3PLs collaborate with established carriers or maintain their fleet for efficient shipping and order fulfillment.
• Order tracking: Providing order confirmation, shipping, and delivery tracking, 3PLs enhance transparency and customer satisfaction.
• Reverse logistics and returns: Managing return and exchange processes, along with associated customer service, is essential for a comprehensive 3PL service offering.
• International logistics: 3PLs with global presence and multi-country facilities simplify cross-border shipping and mitigate tax complexities, facilitating international expansion endeavors.

Choosing a Third-Party Logistics Provider (3PL)

When it comes to scaling your ecommerce business, selecting a third-party logistics service is among the most significant decisions you’ll face. Entrusting a provider with your brand’s logistics and customer experience requires careful consideration to ensure success.

The right partner can significantly impact your company’s logistics efficiency, customer service quality, and repeat purchase rates. However, entrusting someone with sensitive information like sales and inventory entails substantial risk.

Choosing the ideal partner involves striking a balance between quantitative data analysis and relationship building.

Key Considerations When Selecting a 3PL

• Future-oriented approach: Rather than basing your decision solely on your current needs, envision where your business will be in one to three years. Opt for a long-term partner who can evolve with your business and offer valuable insights into industry trends.
• Compatibility with your business goals: Look for a 3PL that aligns with your long-term objectives and is committed to fostering a lasting partnership. Seek partners who can advise you on maximizing sales, minimizing costs, and optimizing your supply chain.

How to Maximize the Benefits of a 3PL Partnership

• Assess their logistics operations: Evaluate the efficiency of your prospective partner’s logistics processes, including storage, packing, picking, and shipping. Consider factors such as warehouse locations, capacity, experience in your industry, and ability to handle order volume fluctuations.
• Understand the costs involved: While there may be upfront setup fees, partnering with a 3PL can lead to long-term savings on overhead and labor costs. Request a breakdown of costs and inquire about value-added services to ensure transparency and avoid hidden expenses.
• Establish communication expectations: Clear and timely communication is essential for a successful partnership. Set expectations regarding order processing, shipping notifications, returns management, and inventory updates. Ensure that your 3PL offers reporting tools to monitor key performance metrics.
• Define service level agreements (SLAs): Clarify contractual terms related to delivery times, compensation for delays, non-disclosure agreements, customer references, and financial stability. Determine whether you prefer refunds or credits for service failures and verify insurance coverage for stored and shipped items.
• Check for integrations: Confirm that the 3PL integrates seamlessly with your existing systems, such as inventory management and order processing software. Synchronization of systems ensures efficient order fulfillment and accurate inventory tracking.

Top Third-Party Logistics Providers in Key Locations

For businesses in the US, UK, Canada, Australia, and other regions, several reputable 3PL providers offer reliable services tailored to ecommerce needs. Some notable providers include C.H. Robinson, DHL International, FedEx Corporation, and the Shopify Fulfillment Network (SFN).

SFN stands out for its ability to handle order fulfillment with speed, reliability, and affordability. Merchants leveraging SFN benefit from faster delivery times, simplified pricing, and seamless integration with Shopify’s ecommerce platform.

Partnering with a 3PL can transform your ecommerce business by streamlining fulfillment operations and enhancing customer satisfaction. Conduct thorough due diligence to identify the right partner that aligns with your business goals and values.

In Conclusion

Choosing the right 3PL provider requires careful evaluation of their capabilities, costs, communication practices, and contractual terms. By selecting a partner that aligns with your long-term objectives and integrates seamlessly with your existing systems, you can optimize your ecommerce fulfillment operations and drive business growth.