As a business owner, do you find yourself managing logistics most of the time?
It’s about time you reconsider your supply chain strategy. Though logistics management is not a revenue-generating activity for your business, it’s significant enough to determine the success of your online store.
As per statistics, eCommerce sales account for more than 19% of the total retail sales globally and it will continue to rise. Today, if you want to scale up your business consistently, you need a flawless supply chain. That’s why it makes sense to let a competent third party company handle your logistics because managing logistics is their core business.
Following the eCommerce bandwagon, the third-party logistics (3PL) market has seen a steep rise and is likely to touch $1.3 trillion by 2024. With this in mind, let’s understand what is 3PL, how it works, its benefits, and how you can choose the right 3PL partner for your brand.
What is a 3PL?
To put it simply, 3PL or third-party logistics is outsourcing your supply chain process to a business that provides such services. But before we dive into 3PL, let’s understand the evolution of first, second and third-party logistics.
First-party Logistics (1PL)
It is the business or an individual that wants to send cargo, freight, or parcel from one place to another. This arrangement requires only two parties: you, the manufacturer or distributor and the retailer or end-user that receives the goods. Thus, no middleman is involved as you self-manage your logistics.
Second-party Logistics (2PL)
The 2PLs are ideally the carriers that operate the cargo fleet such as ships, aircraft, and trucks. They accept shipments from you and deliver them to your customers. For any growing business, it is difficult to handle their end-to-end logistics. As a result, 2PL companies emerged as a solution and took the transportation burden off the businesses.
Third-party Logistics (3PL)
With the exponential growth of eCommerce, merchants realised the need for a comprehensive logistical solution to run and scale their operations.
Enter 3PL: also known as order fulfilment services.
The 3PL service providers can take responsibility for your entire supply chain and logistics with their expertise, advanced technologies, and infrastructure. In other words, you only need to focus on growing your business without worrying about inventories, storage and shipments.
Services and Step-by-Step Processes of 3PL Providers
Whether you are a startup or an established organisation, a 3PL partner can customise their services according to your business needs. So before you sign a contract with them, you can specify the functions you would like to outsource to them. As your business grows, you can ask your third-party logistics provider to take on further responsibilities.
With that said, here is a detailed description of services that a 3PL provides during each stage of the order fulfilment process.
Warehousing & Storage
Before you start selling products on your e-store, you need to procure and store the inventory. There are two ways you can do this: one you can rent or purchase a warehouse or you can partner with third-party logistics.
When you partner with a third-party logistics provider, you don’t need to invest in your own warehousing space. You can send your inventory to your 3PL partner. They will receive and store your inventory in their warehouse.
Depending on your business size and storage needs, you can either opt for a dedicated or shared warehouse for your inventory. This helps you store your goods economically considering the high costs of purchasing or renting warehouse space.
The next step after the storage is to systematically organise and track your inventory. Unless you want to manage your storage space and goods on your own, a third-party logistics service can also manage inventory on your behalf.
The 3PL tasks at this stage include:
- Inventory count
- Inspection of products to check any damage
- Creating Stock Keeping Unit (SKUs) for products
- Product entries into the warehouse management software
Once they receive your inventory, it is distributed across several fulfilment centres to fulfil your orders quickly and efficiently. Moreover, 3PL providers invest in advanced Warehouse Management Systems (WMS) to track inventory levels across all the stages of the fulfilment cycle.
Thus, real-time stock updates help you act proactively to place orders and negotiate product deals from your vendors.
Picking & Packing Orders
Now that you have your inventory procured and stored in various fulfilment centres of your third-party logistics provider, it’s time to welcome some revenue.
Let’s say, you received a few orders on your e-store. This is where the 3PL fulfilment process starts. Some third-party logistics providers may require you to upload the order details manually to their systems.
However, the sophisticated third-party logistics providers would have their systems synchronised with your eCommerce site. So they receive the fulfilment requirement in real-time. Then, a WMS generates a picking list and the picking team collects the items.
Now, the picked items are handed over to the packer or packaging team. They package the products keeping the product safety and dimensions in mind. Depending on your budget and your 3PL’s scale, they can also customise the packaging materials as per your branding needs.
However, the most common packing materials are:
- Unbranded cartons
- Bubble bags
- Poly mailers
- Plastic or paper-based dunnage
While most 3PLs provide packaging materials as part of the contract, some may charge extra for it.
Once your products are picked and packed, your 3PL prints and pastes the shipping labels on your packages. In other words, they make it ready for shipping.
The next step is, they compare the shipping costs of various carriers and select the most competitive pricing options to ship your orders to their destination. Established 3PL players have contracts with major carriers like DHL, USPS, and UPS. These shipping companies also pick up shipments from 3PL warehouses, depending on their agreement.
Once the order is shipped, 3PL’s system will automatically push the shipping information on your e-store along with links for real-time tracking.
Similarly, your customers also receive real-time updates for each stage such as packaging, shipping, estimated time of arrival, and the last-mile delivery. This helps your shoppers know the exact whereabouts of their orders and instils the confidence that their products will arrive in time.
Your order fulfilment process doesn’t always end once the customer receives their products. According to the statistics, 30% of online orders are returned.
For instance, your customer requested to return or replace the product you delivered last week. Now, the entire logistics process starts again, in reverse order this time. This can be a real struggle if you are managing logistics in-house. If not executed well, you end up spending a lot on reverse logistics, or worse, lose your loyal customers.
In such situations, third-party logistics providers can be a blessing due to their logistical expertise and network. Your 3PL partner picks up the products from customers and restocks them into your inventory or disposes of them as required by you. Again your customers are updated on every step of the reverse logistics process.
Additional Service Features
Besides the above-mentioned services in the order fulfilment flow, 3PLs also offer the below service features.
FTL and LTL Shipping
Your 3PL partner can arrange for a Full Truck Load (FTL) or Less-than Truck Load (LTL) for your shipments based on your requirements.
FTL shipping is ideal if you have large or high volume shipments that require the entire loading space of the truck, or close to it. You can also use FTL shipping even if you don’t require all the space in cases such as:
- You prefer having the truck exclusively available for your shipment
- Time-sensitive deliveries
- Fragile or hazardous goods, etc.
In case you want to ship less than six pallets and it’s not an urgent delivery, then your 3PL can reserve an LTL shipping arrangement. Here, you share the truck space with other LTL shipments. Hence, it’s an economical transport solution.
Custom Bundling and Fulfilment
Bundling or kitting refers to combining multiple products in a single package under one unique SKU.
Let’s say it’s a festive season and you want to offer your customers attractive offers like gift sets, product kits, or “buy one get one” deals etc. While you can virtually kit the products and display the deals on your online store, your 3PL partner can bundle them physically and ship them as a kit.
Here are a few more benefits of bundling the products:
- Reduced fulfilment costs
- Easy to track, pick, and ship
- Low chances of error in handling
- Increased order value
Comprehensive SaaS Software
When you hire a third-party logistics company, you get access to their comprehensive SaaS software. You can integrate this system within your eCommerce website to automate and streamline your order fulfilment process.
Third-party logistics providers use the combination of multiple programs to make a seamless 3PL system. The primary three types of software are:
- Standalone Warehouse Management Systems (3PL WMS): This system increases the efficiency and productivity of 3PL warehouses. It also helps you administer and control the operations across various fulfilment centres.
- Enterprise Resource Planning (ERP) Systems: To put it simply, ERP systems help you integrate the processes that run a business across different departments. This includes operations, order fulfilment, finance, human resources (HR), and customer relationship management (CRM).
- Integrated Supply Chain Management (SCM) Suites: Supply chain functions begin with product manufacturing and ends with product delivery. The latest SCM suites combine all supply chain activities that provide thorough visibility and security. Moreover, it also helps you lower your operating costs.
Why Do You Need a 3PL Provider?
Having discussed the services of a third-party logistics provider, now let’s take a closer look at what it means for your business.
Your 3PL partner takes care of your entire order fulfilment process that includes storage, inventory management, packaging, shipping, and returns. So, when you outsource all these tasks, you can dedicate a lot more time to your productive activities like:
- Improving your products and production processes (If you are a manufacturer)
- Optimizing the product portfolio of your eCommerce store
- Negotiating better products deals
- Sales, marketing, and support activities
- Growth strategies
Thus, you can focus more on the business growth while your 3PL system manages your order fulfilment.
The eCommerce boom has led to a shortfall in the availability of storage space over the years. As per Prologis — a logistics real estate solution provider, there will be a shortage of 140 million square feet of warehouse space by 2024. This is likely to add fuel to the already rising warehousing costs.
So as a business owner, you must look at the most cost-effective ways to store and manage your inventory. While renting or leasing your own warehouse not only raises your storage costs, but you also have to employ manpower to manage the space and the stock.
However, when you partner with a 3PL service, it saves your overheads because you don’t need to rent an entire warehouse. The third-party logistics provide you with the required storage space and their team also manage your inventory and the further fulfilment processes such as packaging and shipping.
Therefore, you can reduce expenditure on storage as well as labour.
Higher Quality and Accuracy
Since 3PL providers’ core business is logistics management, their operational quality and efficiency are much higher than a non-logistics company. For instance, the task of packing a product may take you 15 minutes. Whereas they might complete the work in 5 to 10 minutes with higher quality.
Similarly, 3PLs also help you improve your order and shipping accuracy with:
- State-of-the-art warehouse management and order fulfilment systems
- Integration of 3PL software with your online store
- Real-time updates during every stage of order fulfilment
Hence, it’s no surprise that 83% of the shippers said that using the 3PL system has helped them improve their service standards.
You are mitigating two types of risks when you outsource your logistics to a 3PL. They are:
- Safety risks: Such as accidents during handling goods, loading, and transporting
- Business risks: These risks include bad inventory management, liability for loss or delays, damaged shipments, inaccurate deliveries etc.
So when you hire 3PL professionals, you automatically reduce the above risks because you’re not handling the logistics in-house. Moreover, you can fulfil your orders faster with high accuracy and efficiency.
Access to Experts
Any business would try to achieve expertise in their core activities that generate sales. As an eCommerce seller, you excel at selling online because that brings you revenue. But logistics is a support function of your business, so you may not be a master of it.
Similarly, 3PL companies generate revenue by solving your logistical challenges. It’s their core activity and they are the experts of logistics. In a Twitter poll, 55% of the respondents said they use third-party logistics services to leverage their expertise.
3PLs are well equipped with a team of logistics professionals, the latest industry trends and challenges so that you don’t have to do all these.
Thus, you get direct access to your 3PL provider’s technical expertise, resources, and network by partnering with them.
Expands Your Reach
With a third-party logistics provider, you can reach the buyers who you could not support with your in-house logistics. Since 3PL companies have multiple warehouses at several locations, you can get the benefit of storing your inventory closer to your customers’ location and deliver faster.
Scale Your Business
If you want to scale your operations in multiple cities and countries, 3PL providers can make it easier for you since they have a presence across the globe. Moreover, they also comply with international regulations and take care of the documentation for international cargo.
Agile Return Processing
Reverse logistics is one of the biggest logistical challenges if you handle your logistics in-house. This is where 3PL can make your life easy. In case of product returns, they swiftly pick up the products from customers and also check their condition before placing them back into your inventory.
How Does 3PL Pricing Work?
Now that you know the services and benefits of a third-party logistics provider, you might as well want to know how much it can cost you. Below we have discussed the factors that impact 3PL service charges and the popular pricing models.
Factors Determining 3PL Costs
- Onboarding Fees: Integrating your systems with a 3PL partner can take some time. Some third-party logistics providers charge onboarding fees for setting up the software and tools in your online store.
- Storage Fees: The warehouse costs depend on your storage needs. If you prefer a dedicated warehouse, it will cost you more than the shared storage.
- Packaging Costs: Some 3PLs include the packaging material costs in the contract prices, while some charge it separately. If you need custom packing, it will cost you extra.
- Bundling/Kitting Fees: If you want to bundle different products together and make a kit with a unique SKU, your third-party logistics service may charge kitting fees for the same.
- Picking and Packing Fees: Some 3PLs include these fees in their overall service package, while others may charge you picking and packing fees per item.
- Shipping Costs: Since third-party logistics providers have commercial pricing options with their preferred carrier, it can help you reduce your shipping costs. However, the charges may vary depending on the 3PL and shipping company.
Popular Pricing Models
- Total Fulfillment Costs: This pricing model indicates the end-to-end order fulfilment costs. Here, 3PLs charge you only for receiving, storage, and shipping instead of charging fees for individual services.
- Fulfilled by Amazon (FBA): This is the fulfilment service for the merchants selling their products on the Amazon marketplace. Amazon offers discounted fulfilment fees since they charge a seller fee for every sale. On the other hand, you lose opportunities to highlight your brand as your order will be shipped in Amazon-branded packaging and the entire customer experience takes place on Amazon’s platform.
- Pick and Pack: Pick-and-pack pricing model charges for each item picked from the warehouse. The fees can vary from $0.20 to $5 depending on the 3PL.
When Should You Partner With a 3PL?
There is no perfect time to hire a 3PL partner as it entirely varies from case to case. However, most businesses keep struggling with their logistics problems for a long time before they realise the need for an expert’s intervention. Considering this, we have outlined some indicators that suggest it’s time for you to partner with a 3PL service.
You Ship 150+ Orders Every Month
The specific number “150” isn’t gospel truth. It only indicates that you have an increasing number of orders coming in than what you can manage in-house.
As your business and inventory grow, you may find that most of your time is going towards order fulfilment rather than acquiring new customers or running marketing campaigns. If you are already going through a similar situation, it’s time to bring a 3PL partner onboard.
You Want to Provide Faster Delivery
Amazon has set the standards for eCommerce companies by offering two day free deliveries. But if you are fulfilling orders in-house, expedited deliveries through air transport can eat up a huge chunk of your profit margin.
So if you are losing business to competitors who offer faster shipping or you simply want to delight your customers with these options, you need to partner with third-party logistics. A 3PL system can allow you to offer same-day, one-day, or two-day deliveries at much more affordable rates.
You are Running out of Storage Space
Have your garage and living room become a warehouse and you are still not able to figure out where you are going to store the goods coming in today?
If the answer is yes, then it’s certainly a time to get in touch with a third-party logistics provider and let them store and manage your ever-expanding inventory. With 3PL warehouses, you can add new product lines without worrying about storage space limitations.
Your Warehousing and Shipping Costs are Skyrocketing
It’s great that your business is growing and you are receiving more orders than ever. However, if warehousing and shipping costs are leaking too much profit out of your revenue bucket, you need to consider partnering with a 3PL.
Hiring third-party logistics services is not a cheap option, but it can save you from spending on warehouse lease and salaries of the team that manages the storage space. Since 3PLs move shipments in large volumes, they also get better rates from carriers and they pass this benefit to you.
Furthermore, you can level up your customer experience by providing real-time updates, faster deliveries and logistical excellence through your 3PL partner.
You Want to Scale Up the Operations
You need a robust fulfilment network when you want to scale your eCommerce business on a national and global landscape. Especially when you consider international orders, it requires flawless documentation for custom & duty purposes.
So, when you outsource these responsibilities to experts i.e. 3PL system, cross-border sales become much easier.
You Want to Automate Your Processes
Let’s say you are shipping 30-40 orders a day. Now, calculate all the time it would take you to pick, pack, ship, and track all the shipments manually.
With that said, also consider the potential growth opportunities that you are not able to encash due to lack of time. Then compare the cost of lost opportunities with the 3PL service charges and you’ll realise that you can be in a much better position by automating your order fulfilment process with a third-party logistics service.
You Have a Large Customer Base in a Specific Region
When you have a large customer base concentrated in a specific zone, it’s advisable to outsource your logistics to a 3PL system because they let you store your inventory in distributed fulfilment centres. Thus, you can keep your stock in that region and offer same-day or next-day deliveries to your customers.
How to Choose the Right 3PL Provider?
Onboarding a third-party logistics provider can be one of the most crucial decisions you would make for your eCommerce business. Basically, you’re trusting your 3PL partner to represent your brand and serve your customers.
In other words, your 3PL alliance can make or break your supply chain and logistics. So you don’t want to leave any stone unturned to ensure that you’re partnering with the right third-party logistics provider.
Here’s how you can do it.
Assess their Track Record
First, shortlist a few of the 3PL service providers that you want to consider partnering with. Then assess each of the third-party logistics services based on their performance in:
- Shipping accuracy
- On-time shipping performance
- Order accuracy
- Inventory management accuracy
- Return processing time
- Returns due to shipment damage
You may also want to check how long they have been operating and the company’s financial health.
Visit and Gauge their Facilities
By visiting their fulfilment centres you can get a clear understanding of their operational efficiency, work ethics, and company culture. This will also help you envision how your products will be stored & managed, and also how they will move through the 3PL system.
Ask About the Offered Services
The main benefit of partnering with a 3PL service is that you can leverage their well-established infrastructure and fulfilment network. Hence, you must set expectations with each other before signing a contract.
Besides the basic order fulfilment services like receiving, warehousing, packaging, shipping, and processing returns, ask them:
- How many warehouses or fulfilment centres do they operate?
- How are their locations the right fit for your high-volume regions?
- What is their daily domestic and international shipping capacity?
- How do they manage the sudden spikes in order volume?
- How do they handle returns?
Understand the Software Used
It’s your 3PL partner’s technology that’s going to automate your entire order fulfilment process. Therefore, you must thoroughly understand their:
- Warehouse management software
- Inventory management system
- Order processing software
Moreover, you also need to get an idea of how their software will integrate with your eCommerce store.
Determine the Quality of Customer Service Policies
Before entering into a contract with third-party logistics check their quality of customer service by learning about their:
- Compensation policy for delayed shipments
- Non-disclosure agreement
- Service Level Agreement (SLA)
- Compensation policy for damaged or lost items
Assess Legal and Regulatory Compliance
You must ensure that your preferred 3PL provider complies with domestic and international regulations of logistics and supply chain management.
Ensure that they have Omnichannel Expertise
The omnichannel fulfilment method is about fulfilling the orders that come from multiple channels and customer touchpoints. These channels include e-store, social commerce, product pick-up from store or warehouse, etc.
Therefore, if you’re selling products on multiple platforms, you would require a 3PL system that synchronises with all these channels and provides real-time updates.
Check Presence at Preferred Locations
It may also happen that a third-party logistics service checks all the requirement boxes we discussed above, but they have a limited presence at your preferred locations.
Hence, you must make a list of the locations that you think are strategically profitable for your operations and check whether the 3PL provider has fulfilment centres in those places.
Check Security and Surveillance Systems
You need to make sure if your 3PL partner provides round the clock security and surveillance to protect your inventory in warehouses. Also, probe into their backup systems for power and internet so they can give uninterrupted services.
Seek Client Reviews and Testimonials
Another way you can check about third-party logistics’ service standards is by checking client reviews and testimonials online. You may also want to talk to their clients directly to find out about their performance and quality of work.
Look for Special Services
Customers love brands that go the extra mile to delight them in such an increasingly competitive eCommerce marketplace. Hence, as a business owner, you should look at how your fulfilment partner can help you achieve this goal.
Here are some of the value-added 3PL services that you should look for:
- Expedited deliveries like same day, overnight, two-day free delivery etc.
- Kitting or bundling service
- Personalised or branded packaging
- Product destruction if required
- Swift return processing, etc.
- Documentation for international shipments
Is a 3PL Different From a traditional warehouse, order fulfilment centre and dropshipping?
Let’s understand the difference between a traditional warehouse, order fulfilment centre, dropshipping, and third-party logistics service.
- Traditional warehousing: This is the past generation of current warehouses. They lack advanced technology and most of the work is done manually including inventory tracking, loading, and dispatching.
- Order fulfilment centre: These are the modern-day storage facilities also known as 3PL warehouses. The merchants can send their inventory to them and they take care of the rest of the order fulfilment process such as storage, inventory management, order processing, picking & packing, shipping, and reverse logistics. These are state-of-the-art automated facilities with warehouse management software that integrates with your online store for real-time tracking.
- Dropshipping: The only difference here is that you don’t need to buy inventory in advance. You take orders on your website and forward them to the manufacturer or supplier. They directly send the products to your customers through 3PL fulfilment centres.
- Third-party logistics: 3PL service is the umbrella under which all of the above services can be included.
If you want to automate your logistics and scale your business, third-party logistics is the answer. They can take care of your entire order fulfilment process so that you can focus more on revenue-generating activities like marketing, sales, and strategy.
Whether you are a startup that is considering partnering with a 3PL or an established business looking for an option to outsource your logistics, give yourself enough time to perform due diligence before finalising your third-party logistics partner.
Frequently Asked Questions (FAQs)
What is logistics?
Logistics is the process of sourcing, storing, managing, and transporting goods to their destination. It is also referred to as a supply chain. Whether you are a manufacturer, retailer, or eCommerce merchant, logistics plays an important role in the overall success of your business.
What does 3PL stand for?
3PL stands for Third Party Logistics.
What is a 3PL?
3PL or third-party logistics provide end-to-end supply chain solutions to businesses. These services include warehousing, inventory management, picking & packing, shipping, and handling returns. You can choose whether you want to hire them for total order fulfilment or a specific service.
What does a logistic company do?
A logistics company provides expert solutions for storing, managing, and transporting goods to their destination. The third-party logistics companies also take care of reverse logistics as required by eCommerce merchants.
What is warehousing?
Warehousing is the process of storing goods safely and securely before they are sold or further distributed. You can rent a dedicated warehouse or use 3PL warehouses to store your inventory.
What is a 3PL warehouse?
A 3PL warehouse is a storage facility that third-party logistics companies provide their clients to store and manage their inventory. If you have a limited need for space, you can opt for shared warehouse space and save costs. Otherwise, you can take a dedicated storage space for your goods.