When an online store grows larger, logistics and shipping play an even bigger role so the business can run smoothly. Fulfilling orders consistently is paramount to success at a higher level and there comes a point where in-house order fulfillment is no longer feasible.

On satisfying customers on a larger scale, third-party logistics (3PL) is the right tool for the job. When you work with a reputable 3PL company, their expertise and knowledge is applied to your business. Ultimately, you save time and money — which you can now allocate more of to income-generating activities.

And this guide will show you what third-party logistics is all about and, hopefully, help you optimize your supply chain operations.

What is third-party logistics (3PL)?

Third-party logistics (3PL) is a service that provides logistics operations for your supply chain needs, from warehousing all the way up to delivery. As an outsourced service, 3PL companies only receive, hold, and transport your goods without taking title of your shipment.

Key solutions and services provided by a 3PL company

3PL companies provide essential services that allow e-commerce stores and online businesses to efficiently ship their customers’ orders. These services would mainly be inventory management, faster shipping, and inventory distribution.

Inventory management

When a 3PL receives and stores your goods, they are responsible for managing inventory as orders come through your online store. With the right software, they allow you to view up-to-date stock counts so you know what products can be shipped out immediately. They would also proactively place orders for new inventory so you avoid days or weeks without any sales.

Faster shipping

It’s no secret by this time that today’s customers expect fast and affordable shipping. Delivery options are a major factor when a person buys something online.

When you work with a 3PL, your goods are stored in a fulfillment center nearer to your customers. A shorter travel distance means faster delivery times.

And to attain fast and affordable shipping rates, they partner with certain carriers or choose the one with the best rates depending on the preferred delivery speed of the customer.

They’re also involved in these shipping-related operations:

Consolidate less-than-container-load (LC) and less-than-truckload (LTL) freight
Keep track of related expenses
Designate private fleets if necessary
Deal with customs when shipping internationally
Ensure trade compliance requirements and documents are met

Inventory distribution

If you have customers in different regions and different countries, working with a 3PL allows you to fulfill orders simultaneously by distributing inventory across different fulfillment centers.

And with the right technology, a 3PL can direct the order to the fulfillment center nearest to the delivery address. This can be even cheaper than expedited shipping and it allows you to guarantee fast shipping regardless where your customer is.

A 3PL also moves inventory from one distribution center to another in case stock runs out. They move surplus supply to an area with higher demand so you can fulfill orders faster.

Benefits of Third-Party Logistics

Because a 3PL specializes in order fulfillment and logistics, their tried-and-tested experience and know-how allows you to run this important component of your business smoothly.

Their expertise also offers a lot of advantages for your business, which we’ll discuss further.

1. Expand your reach internationally

Reaching international customers needs a global fulfillment network. Your business also has to comply with the many different requirements of customs departments around the world.

A 3PL company helps your business grow internationally because they are adept at the ins and outs of international shipping.

2. Flexible scaling

There are times during the year where certain products have higher demand and you have to scale up operations to meet the demand.

Working with a 3PL that can meet your changing shipping and fulfillment needs allows you to make the most out of your capital. You can deal with peak demand and also reduce taxes on capital costs.

3. Reduce overhead costs

Warehouse space, order fulfillment software and hardware, and a fulfillment team are big overhead costs. It also takes valuable time and energy to hire quality employees and to look for the right warehouse.

Working with a 3PL company removes this burden off your back so your resources can be directed towards revenue-generating tasks.

4. Minimize additional labor force responsibilities

Running a warehouse smoothly in and of itself is already a big management challenge. You’re responsible for labor force unions, wages, insurance, hiring, firing, and many more things.

Outsourcing the shipping and order fulfillment to a 3PL frees your business from these additional responsibilities so you can focus on other tasks.

5. Reach customers faster

The demand for many kinds of goods from many different places is much higher thanks to the internet.

Working with a 3PL allows you to fulfill orders faster because inventory is nearer to your customer. You satisfy customers thanks to the vast network of warehouses and other freight industry professionals of a 3PL.

6. Less headache with returns

Returns are inevitable. There is always one or two customers who will send their order back for whatever reason.

But a 3PL helps you deal with returns by handling the logistics as well as finding third-party wholesalers or secondary markets for “damaged” goods. You avoid totally losing money from these returned orders by selling them at lower prices.

7. Test new markets or products efficiently

Getting insights from your target market allows you to create irresistible offers even if you’re just starting small. But new warehouse space and personnel quickly adds up to the required capital.

A 3PL helps you make the most of a small investment because they can get orders as fast as possible. You do less trial-and-error because of their supply chain experience in particular markets.

8. Improve supply chain security

As your freight is in transit, it is exposed to a lot of risk. Problems can come from just about anywhere — employee mistreatment, sunk ships, road accidents, delayed departures, and so much more.

Working with a 3PL helps you get around unforeseen circumstances because they arrange alternate routes for your freight. They also help you manage insurance costs and claims when these events happen.

How 3PLs work

When your customer has paid for their order, here’s what happens next in a 3PL facility.

Receiving

This refers to when the 3PL company receives inventory and stores it afterwards. Different 3PLs have different processes and capacities for receiving and storing inventory

Warehousing

Inventory is then stored in a fulfillment center and the items can be stored in a bin, shelf, or pallet. These are also given a stock keeping unit (SKU) number, an alphanumeric code that makes it easier to locate an item in a warehouse.

It’s also important to consider a 3PL’s capacity and ability to accommodate goods that have special storage requirements (e.g. temperature-controlled or refrigeration). Keeping these in mind will help you determine how fast you need to fulfill orders.

Picking

When your customer orders from your store, the fulfillment center picks out the item/s from storage. A picking team refers to a picking list that includes the SKU number, quantities, and storage location.

It’s important to remember that different 3PLs have different processes of receiving orders. Some require you to manually send order details and shipping details, which could be inefficient for bigger stores. Others use software that can integrate with your e-commerce platform and streamline order management, inventory tracking, and other parts of the fulfillment process.

Packing

Once all the items are picked out, these are packed with either bubble wrap, bubble mailers, poly bags, unbranded boxes, or other common packaging materials. The order is packaged so it has the lowest yet practical dimensional weight, which is heavily considered when determining the shipping rate. The right packaging materials can also save on overall costs even if it can be more expensive upfront.

Some 3PL companies charge you separately for packaging materials while some can also provide custom packaging based on your brand preferences. The latter can help your brand stand out and impress customers.

Shipping

After the order is packed, the 3PL prepares the package for delivery by also attaching the needed shipping labels (which most 3PLs print on your behalf). The package is shipped when the carrier picks it up at the warehouse and delivers it to your customer.

Types of 3PLs

We usually associate a 3PL as a service provider for warehousing and distribution needs.

But there are also other 3PL companies based on what kind of logistical service they provide the customer.

Being familiar with the different types allows you to determine which service provider best suits your needs.

Warehouse/Distribution based

This is the most common type of 3PL and they focus on shipping, warehousing, and distribution services. They have the warehouse and facilities to distribute freight and some even specialize in working in certain industries only.

Transportation based

They focus on transporting freight from point A to point B and carriers like DHL, UPS, and FedEx are considered as transportation 3PLs. Whether it’s getting inventory from your suppliers or delivering orders to your customers, they are the ones responsible for moving the actual goods.

Forwarder based

They serve as independent middlemen who provide different services like arranging smaller shipments and negotiating the transport of consolidated freight. Unlike a broker, however, a forwarder possesses the freight while it is in transit.

Financial/Information based

They focus on the financial aspect of supply chain operations and provide services like freight payment, cost accounting, and auditing. They also use management software that tracks and replenishes your inventory.

Management based

They focus on managing your supply chain from beginning to end and use technology to manage freight and transportation. They negotiate with carriers on behalf of you and manage real-time shipping information to improve logistical operations.

Common 3PL costs

When you enlist the service of a 3PL, they’ll charge you based on their pricing model as well as your specific requirements.

Here is a breakdown of the typical costs you’ll encounter:

Onboarding costs. This is for the initial implementation of their tools and services to your business.
Inventory receiving costs. This refers to the related costs for receiving your goods and is usually charged per-unit, per-hour, per-pallet, or a flat rate.
Inventory storage costs. This is for storing your products in the fulfillment center and you’ll be charged for how much space, bins, shelves, or pallets you use.
Order pick-and-pack costs. The costs to pick items from storage and pack them for shipping. Some 3PL’s charge you for each item or only charge you for a certain number of items.
Packaging costs. The costs for packaging materials like boxes and fillers, which can either be separate or part of the total cost already. This can be higher for customized and branded packaging.
Kitting costs. This refers to how your goods should be arranged in the packaging (either individually or grouped together in one box or bag) before being shipped. This varies a lot for many items and the fees depend on the 3PL.
Shipping costs. The costs to deliver an order and also considers the shipping speed, destination, and dimensional weight.

When should a business use a 3PL?

There comes a point where outsourcing the logistics of order fulfilment is more beneficial. Here’s three indicators that you’re ready to enlist the service of a 3PL.

1. You’re spending more time on non-revenue generating tasks

When you’re spending more time on non-revenue generating tasks, you can’t grow your business as much. Packing orders, printing labels, and going to the post office eats up a lot of time and you miss the opportunity to launch marketing campaigns and develop new products.

But a 3PL gives you more time to focus on revenue-generating tasks because they can handle fulfilling more orders for you.

2. You’re running out of storage space

As the number of orders increase, you’ll also need more space to store inventory. Not to mention certain times of the year where demand can be higher. The decreasing space at home can also be a point of argument between other family members.

Hiring a 3PL to store inventory and fulfill orders increases efficiency and helps keep things organized. The right 3PL can help you expand your product lines and also allow you to be flexible in terms of storage space.

3. You want to offer faster shipping

As your customer base grows, you’ll have more people who want to receive their order immediately. Trying to meet that need on your own sucks a lot of time, money, and energy from you.

But working with a 3PL allows you to deliver orders to more customers faster. Since their fulfillment centers are nearer to your customer, you can now offer faster and even cheaper shipping options.

Cons of 3PLs

Now that hiring a 3PL is looking like the next best move for your business, it’s also important to be aware of its drawbacks.

1. High upfront costs

Partnering with a 3PL is an investment and getting their tools up and running for your business costs a lot initially. If you don’t need a lot of storage space or don’t fulfill as many orders, it can be a liability in the long run.

2. Your inventory is further away from you

Sometimes, the 3PL’s warehouse is significantly further away from you. It’s more inconvenient if you run into quality control issues and you have to inspect your goods for any reason.

3. Less control in order fulfillment

If there are delays or problems in shipping an order, your customer would approach you for answers even if you don’t have total control over what happens in the 3PL’s fulfillment center.

How to choose the right 3PL company for your business

Partnering with a 3PL is one of the biggest decisions you’ll make for your business. Choosing the wrong one will cost you more time and money than you should ever spend but the right one becomes an invaluable partner in growing your business.

It takes a lot of trust to delegate order fulfillment and sensitive data to a third party. Not to mention that there are also a lot of options out there to choose from.

Here are several aspects to look into so you find the right 3PL.

Ability to handle current and projected volume

Find a 3PL who can handle your current volume of orders as well as your projected volume over the next few months. This includes new products you’ll add in the near future and peak seasons for your current products.

Warehouse network

If you want to offer fast shipping, the location of the fulfillment centers is fundamental to being able to deliver orders quickly.

Shipping rates

Evaluate how much they’re paying for shipping and negotiate with them if they’re open to it. Larger 3PL’s can usually offer lower rates because of their size.

Insurance

Find out if you need insurance when shipping your products and be sure to clarify that it’s on top of the carrier’s liability.

Cutoff time for fulfilling orders

Check what time of the day does the 3PL stop fulfilling orders and orders placed after the cutoff time won’t be fulfilled until the next business day. Knowing this allows you to avoid problems due to mismanaged expectations.

Compatibility of technology

Make sure that the 3PL’s software can integrate seamlessly with your online store. Their inventory management, order management, and/or warehouse management tools should synchronize to smoothly fulfill orders and automatically update inventory levels.

Delivery service levels

This pertains to how a 3PL treats small details that can possibly become bigger liabilities, which include refunding, crediting delayed orders, and accounting for lost or broken packages.

Pricing model

Check their pricing model and how costs would adjust as your business grows. Insist on transparency by asking what are the costs for additional services like returns management and kitting.

Past performance

Confirm their track record through references and quotes from their customers. Look at particular details like on-time deliveries and how they handle challenges from different points of the supply chain. When a 3PL’s customers have been with them for a long time, you can be assured that they can build the same relationship with you.