Third-party logistics providers (or simply 3PL) are critical for an eCommerce store. They will handle everything from storage to picking to packing and shipping your items for you as a third-party logistics provider (3PL).In addition, they can perform a variety of services that you may not even be aware of.
"As more companies seek to reduce costs and increase flexibility, an increasing number of shippers are turning to 3PLs for strategic sourcing and supply chain management services."
Marc Wulfraat, president of MWPVL International Inc.
Before you begin working with a third-party logistics provider, it's critical to understand what they do to fulfill your eCommerce store’s needs. This article explains how to use third-party logistics in your eCommerce business and how to locate the most excellent 3PL partner.
In this article, we’ll go over and answer these questions:
- What is a 3PL?
- Functions of 3PL
- What is the difference between 2PL, 3PL, and 4PL?
- Types of 3PL services
- Benefits and Disadvantages of 3PLs
- When is the right time to outsource eCommerce logistics to a 3PL partner?
- Things to watch out for when picking a 3PL
- Where to find 3PLs?
Let's go through more about 3PLs and how they can help you grow your business in this article.
What is a 3PL?
Before going into more details on how a third-party logistics company can help your business, let’s first understand what exactly a 3PL company does.
A 3PL provider helps your business to store, package and ship your products. They also offer inventory management services.
A third-party logistics (3PL) provider is typically an outside source that manages the entire supply chain of its customer; this includes warehousing, order fulfillment (transporting products from warehouses to customers), and reverse logistics (managing the return of defective or damaged products).
A 3PL provider helps your business to store, package and ship your products. They also offer inventory management services.
They are companies that provide services to other companies for their sales or acquisitions. These services can be from picking up products at warehouses and bringing them to customers, storing the products in bulk, or getting them ready for sale (sorting them by size, color, etc.).
And they are usually provided by a company specializing in these activities. They have developed unique software and equipment that enables them to provide these services at a lower cost than what it would cost you to do it yourself. One of the main reasons 3PL companies lower the costs of those services is that they augmented the concept of sharing economy. The Sharing Economy concept may be used to benefit logistics in a variety of ways, including sharing warehousing space, transport capacity, operational data, and staff.
Functions of 3PL
The 3PL companies are now expanding their offerings to include eCommerce fulfillment, reverse logistics, and other value-added services.
eCommerce Fulfillment: 3PL companies provide eCommerce order fulfillment services that range from order procurement, storage, and inventory management to transportation. eCommerce store owners who outsource their logistics require these services, which allows them to focus more on their core business and cut costs by not hiring additional staff or investing in new technology.
Reverse Logistics: After purchase, eCommerce stores often get stuck with inventory and need a way to get it back into inventory or clear the space necessary for incoming deliveries. This can be a significant problem for eCommerce store owners, who have limited space and want to avoid the costs of having to keep products in stock that may never sell.
This is where the value of 3PL companies and their reverse logistics capabilities come into play. While often seen as a cost, these services can save eCommerce store owners quite a bit of money. In addition, they can reduce the costs associated with warehousing, labor costs for labor-intensive tasks, and all the other expenses familiar with eCommerce operations.
3PL companies can also reduce the risks associated with slow-moving inventory, which can be pretty costly. If products are considered slow movers, retailers will likely lose money on them.
Their only choice is often to either give them away or sell them at a low cost and lose the product. However, retailers can turn these products into revenue with reverse logistics management rather than lose money. In addition, 3PL companies can repurpose slow movers into other products or find a way to recoup costs based on the time and effort they put into processing the product.
A store owner may have a clothing manufacturer that had sent them the wrong size of socks to sell on their site. 3PL companies can provide reverse logistics services, including taking the product, repackaging it, and sending it back for a refund. They can take those same socks and send them to a recycling center to be resold as scrap material. Thanks to 3PL companies, you will be able to create value from otherwise low-value inventory.
Value-Added Services: 3PL companies also provide value-added services like shipping, packaging, labeling, receiving, kitting, etc., to help you handle the different aspects of fulfilling orders. These third-party service providers will typically manage all aspects of order fulfillment, including picking products from your inventory, packing them into boxes, and shipping orders to the customers.
What is the difference between 2PL, 3PL, and 4PL?
The difference between second-party logistics, third-party logistics, and fourth-party logistics in eCommerce is the number of parties involved between the manufacturer and the consumer.
This is how it breaks down:
The transport of items between different points in the supply chain, particularly rail, road, sea, or air, is known as second-party logistics. The asset-based carriers and firms who provide transportation via ships of their own or on behalf of airlines they are linked with are known as second-party logistics providers.
They are mostly used for the transportation of large and wholesale items as well as trading goods. Freight forwarders, freight brokers, customs brokers, export management firms, exporting trading companies, shipping associations, shipper's agents, and export packing enterprises are just a few examples of 2PL.
This is the most common type of model in China, where there are hundreds of millions of online buyers and millions of merchants selling through a Taobao or Tmall platform.
3PLs offer complete fulfillment, warehousing, and transportation services that can scale as your business expands. This is common for department stores that sell their products through online retail marketplaces like Amazon or Shopify.
Examples of this model can be found in countries where department stores already exist, such as the United States. The headquarter of the department store owns all inventory and may fulfill orders itself, or it may partner with a third-party logistics service provider to deliver goods from its stores to customers.
4PL refers to a situation involving four parties: the retailer, manufacturer, an eCommerce company, and the consumer. In this case, manufacturers own inventory that is sold through multiple retailers. The retail store purchases inventory from the manufacturer in bulk and sell it to consumers at a discounted price.
Types of 3PL Services
We can consider 3PL providers are in three main types which eCommerce store owners can engage:
- Full-service logistics (3PL) companies offer a wide range of services to help move, store and manage inventory and facilitate customer service. They often help companies with shipping, distribution, and warehousing to packaging, labeling, and order tracking.
- Contract logistics (3PL) companies specialize in managing the logistics needs of multiple, often geographically dispersed companies. They provide expert knowledge and skills that help streamline transportation and distribution contracts and negotiate rates and service levels with various carriers.
- Third-party fulfillment (3PF) companies specialize in product movement and fulfillment. They pick, pack, and ship products either to a retailer's distribution center or to the customer's home.
Types of third-party logistics services are as follows:
- Transportation management services
- Freight brokerage
- Inventory management
- Warehousing and distribution
- Supplier management system
- Reverse logistics
- Maintenance, repair, and overhaul (MRO) services.
Benefits and Disadvantages of 3PLs
The benefits of employing a third-party logistics service are numerous, including the ability to scale your operations as demand increases.
Here is an overview of the advantages associated with using a third-party logistics company:
- 3PLs can handle many different types of products and business models.
- 3PLs help businesses manage the complete supply chain efficiently and cost-effectively by providing a more comprehensive network and access to vendors and carriers. In addition, they provide warehousing, transportation, last-mile delivery, and inventory management services to their customers, allowing them to focus on their core business. At the same time, they manage the complete supply chain.
- 3PLs provide consulting expertise to help businesses enhance the value of their products and services by improving service quality and taking advantage of new opportunities related to globalization.
- 3PLs can help businesses reduce costs by reducing warehousing capacity and improving order accuracy with the help of technology.
- 3PLs can increase revenue by building long-term relationships with their customers.
There are disadvantages as well as benefits to outsourcing your logistics activities. The following list provides some of the most commonly voiced complaints about 3PLs:
- Third-Party Logistics providers sometimes charge a fixed price for a fixed service, which does not include special handling fees, late delivery fees, or damage claims resulting from poor packaging conditions.
- It may be difficult for a business to have all parts of its supply chain managed by one logistics provider. Multiple third-party 3PLs can lead to inefficiencies due to a lack of coordination between the providers since each provider will have its system, often not integrated.
- Using multiple third-party logistics providers for different services can sometimes result in data inconsistency since they use additional software to track their items.
- The lack of integration between different 3PLs and the differences in package handling procedures can lead to confusion when tracking shipments, making it difficult for a business to have complete visibility over its supply chain.
When is the right time to outsource eCommerce logistics to a 3PL partner?
Outsourcing logistics for eCommerce companies is a strategy to meet the increasing demand for customer satisfaction, reduce costs and increase revenue.
However, it may be challenging to know when is the right time to engage with a 3PL partner.
Here are some questions that you might ask before deciding to outsource eCommerce logistics to a 3PL partner.
- What is the average of how many orders are fulfilled daily?
- Are your products delivered to customers in a trustable way? Do you have packaging and transportation partners for that?
- Have you considered expanding your inventory storage space?
- Does your current team meet with these orders? Do you have enough individuals on staff to handle fulfillment?
- Is your fulfillment process fast enough to keep up with your client’s demands?
- Are your customers delighted with their shopping or are there any complaints about their order?
If some of your answers point to an issue about your eCommerce fulfillment, it might be the right time to partner with a 3PL company.
Things to watch out for when picking a 3PL
So you’ve decided to engage your eCommerce store with a 3PL partner. That’s an intelligent choice. However, the question we hear most often is:
What 3PL works best for my business?
Of course, the answer to this question is determined by several factors, including size, location, technology integration, and the type of products being shipped.
Below are some fundamental indicators that may help direct you towards a few 3PL that might be a good fit for your company.
- Geographic location of where you ship your items will play a role in determining the 3PL to use. If your business services a large number of national accounts and you ship to multiple regions, or if your company primarily services customers close to your facilities, you are more likely to get the most benefit from a 3PL that has nationwide capabilities, rather than one that is primarily focused on the regional market. You'll also want to consider the proximity of local warehouses where your items will be stored and packed for shipment. The closer the warehouse, the faster your goods will be on their way to market.
- Knowing what products you ship is another major factor in determining which 3PL is right for your company. If you are shipping small, lightweight items, it would be more cost-effective to look for a 3PL with a flat-fee structure rather than one that may charge a percentage of the value in your shipment. This is because you would not be paying for any overhead on more oversized, more expensive items. Because 3PLs are ideal for companies that ship a large number of different SKUs. If you have just a few SKUs and can afford to store all of your inventory in a single central location, you may want to consider contract logistics. This option is ideal for companies that have unique or time-sensitive supply chains.
- It's also important to consider how long you'd like an item to be in transit. If you are a product-driven company, it might be more cost-effective to use contract logistics since your time to market is critical for your company. On the other hand, if your products are not time-sensitive, you'll want to consider cost over the transit speed when choosing a 3PL.
- A 3PL company you are going to be partnered with should be integrated with technology.
This is the conclusion reached by industry experts who meet at the 15th annual Third-Party Logistics Providers Conference.
Speakers said that to remain competitive, third-party logistics (3PL) providers should look to technology as a means of improving service. Since you are an eCommerce store, The 3PL service should have the ability to connect your ordering system and eCommerce platform with your warehousing inventory, providing real-time information.
Where to find 3PLs?
Lists and directories that will guide you for the best options.
3PLs can be found in many places: online, print ads, or by referral.
Referral sources are usually the best because they have worked with the 3PLs and can vouch for their work. Another way to find a good 3PL is by checking if they are members of an association such as APICS (Association for Supply Chain Management). The association will have a list of member companies that can be checked out.
You can also check the A&A’s Top 50 Global Third-Party Logistics Providers List.
👉 And if you are running ❤️ Shopify store, you can partner with a 3PL on Shopify Fulfillment Network.
The 3PL is a crucial part of the eCommerce process. Therefore, it’s essential to find one that will work best for your company and make sure you pick the right time to outsource logistics.
We hope this blog post has helped give some insight into how these companies can help your business! What do you think? Is outsourcing logistics too much responsibility? Let us know in the comments below!