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What Is a 3PL? How They Work and When to Use One

Third-party logistics providers, also known as 3PLs, specialize in order fulfillment for e-commerce businesses. But how do you know if now is the time to hire one?

It probably doesn’t feel like it, but finding the right 3PL is a great problem to have. It means the online orders are pouring in and your business is growing.

If you just can’t keep up anymore, a reliable 3PL partner can definitely help. With a strong 3PL, you can access a broader fulfillment network, offer faster shipping, and elevate the customer experience.

In this article, we’ll cover what a 3PL is, how it works, and tips to help you choose the best partner for your business.

What Is Third-Party Logistics?

Third-party logistics (3PL) is the practice of outsourcing order fulfillment and shipping to specialized providers. These third-party logistics providers, also known as 3PL companies or simply “3PLs”, take on key logistics functions for e-commerce businesses, including order process, order management, shipping products and returns processing.

Certain 3PLs may also offer a range of additional services, such as overseas shipping and trade compliance when expanding abroad.

When Should I Hire a 3PL?

If you’re struggling to keep up with sales, slipping from same-day or two-day orders to third- or even fourth-day orders, or storing inventory in an empty swimming pool somewhere — it’s probably time to hire a 3PL.

Here are some common signs it’s time to take the leap:

  • You struggle to fulfill orders in a timely manner.
  • You’re quickly running out of storage space.
  • Your parcel bill just keeps growing

At the end of the day, if your costs are rising faster than your revenue, third-party logistics companies can help you plan a more efficient and profitable path forward.

However, of course, costs are increasing for 3PLs too. Warehouse rents have grown by nearly 67% over the past three years, labor rates are rising, and even the most common inventory mistakes are more expensive than ever.

With the right 3PL, you don’t just outsource fulfillment. You also outsource the cost pressure. 

The right partner will help you access a larger storage and distribution network at a fraction of the cost required if you decide to keep fulfillment in-house.

How Do 3PL Providers Work?

There is a huge variety of 3PL providers, each with their own culture, specialty areas, and service offerings.

Needless to say, not all 3PLs work exactly the same way. However, there are a few key areas most of them can cover for you, including:

Procurement and Receiving

You or your suppliers deliver your inventory to your 3PL’s fulfillment centers, where they take responsibility for organizing and storing each of your products until an order is placed.

Order Receipt

Your company shares order information with the 3PL so they can handle the fulfillment process. You may be responsible for manually forwarding each order, or orders may be transmitted by an automated system, in real-time.

Picking and Packing

3PL or warehouse employees pick and pack orders and prepare them for delivery. In some cases, the 3PL might also be responsible for steps like assembling materials to create a final product, or kitting multiple SKUs to create order bundles. The 3PL might also purchase and print shipping labels for you.

Shipping Services and Last-Mile

Packages are handed off to a shipping carrier or other last-mile delivery service. In some cases, they may also be delivered directly by the 3PL, if it has its own fleet of vehicles.

Order Insight

The 3PL provides order tracking information and/or services, for you and your end customer. They may also provide access to order analytics to help you boost last-mile delivery times, or improve your post-purchase experience.

Reverse Logistics

A 3PL may also take responsibility for processing, accepting, refurbishing, remanufacturing, recycling, or disposing of returned items. Some 3PLs may even handle things like diagnostics, repairs, and related customer interactions.

Additional 3PLs services

Certain 3PL companies may also offer the following services: 

  • Blister packaging
  • Item personalization
  • Freight-forwarding
  • Order consolidation
  • Accounting and cost management
  • Call center management
  • Customer support
  • International services (compliance, customs, etc.)

Amazon FBA is great for what it does, but it can only take you so far.

Whether your growth strategy includes expanding into new markets or selling on new channels, the more complexity you add to your supply chain, the more time and labor intensive fulfillment becomes.

If you’re like the many business owners who have other things to worry about, it might be time to hire a 3PL. Let’s take a closer look at some of the top benefits and potential drawbacks of partnering with a 3PL.

Pros and Cons of Working with a 3PL

There are many advantages of working with a 3PL. Perhaps the biggest one for time-strapped e-commerce merchants is that it frees up your focus and resources.

Let’s take a closer look at the pros and cons of outsourcing fulfillment to a 3PL.

Pros:

  • Reduces overhead costs, like storage and shipping
  • Custom packing and boxing for a better customer experience
  • Demand surges are more manageable due to existing systems and infrastructure
  • Easier to test and expand to new markets
  • Access to cutting-edge fulfillment solutions and technologies
  • Better speed, accuracy, and efficiency
  • No sudden rises in warehouse rent or real estate costs
  • No need to plan for seasonal hiring
  • Existing risk management procedures minimize the impact of weather events and supply chain disruptions

Cons:

  • May have high startup costs and/or unexpected fees
  • Must give up some control over fulfillment
  • Sharing customer information means potential increased risk of data breach
  • If 3PL experiences a disruption it could impact customers
  • Limited in certain decisions like choice of shipping carriers

Types of 3PL Companies

Following the e-commerce boom of the pandemic era, there has been a huge increase in the number of 3PL companies available to work with.

To better understand the types of 3PLs in the market today, retail experts typically classify them according to the following four categories.

Keep in mind, the 3PL market is evolving all the time. You may find common areas of overlap between 3PLs. The main thing to look out for is a partner who aligns with your business needs, based on the types of services they offer, as well as other factors like scalability and price.

Standard 3PL Providers

Standard 3PL providers, like Fulfyld and Shipmonk, are streamlined, affordable options that offer key fulfillment services like warehousing and transportation. They can be especially helpful for younger operations, or those testing out their first 3PL. As you grow, there may be limits around order volume to stay aware of.

3PL Service Developers

These 3PLs typically offer additional digital and administrative resources to e-commerce businesses. For example, they might help with shipment or order tracking and give you more visibility into your inventory levels across your entire supply chain. They may also provide services like security, compliance, package selection, and cross-docking. Companies like Flowspace, ShipFusion, and Red Stag could be considered part of this category.

3PL Customer Adapters

There can sometimes be a fine line between a Service Developer and a Customer Adapter 3PL. Customer adapters, like ShipBob and ShipHero, are essentially the all-inclusive 3PL service providers. They take care of virtually all your e-commerce logistics operations — from the moment an order comes in, until it arrives on the customer’s doorstep. These types of 3PLs can even take on some key strategic tasks, such as negotiating better shipping rates, or offering deep last-mile visibility through specialized technology. 

3PL Customer Developers

These are typically the largest companies on the 3PL playing field, like XPO and DHL. Instead of working with a company’s logistics department, they essentially take over and become it. They handle every aspect of the e-commerce fulfillment process and the cost of their services often reflects this. These types of 3PLs may come with the highest price tag, but they can still be a great fit for large and growing e-commerce companies.

Tips for Choosing a 3PL Partner

Now that you’ve got the bird’s-eye view of the 3PL market, let’s dive into the key areas to consider when shortlisting potential partners.

1. Consider the Costs and Potential Savings

First, find out what you’re currently spending on fulfillment and logistics. This includes warehousing costs, labor costs, shipping carrier rates, the tools and subscriptions in your e-commerce tech stack, and more. Next, compare that to what you would be spending if you outsourced your fulfillment operations to a 3PL provider. 

Don’t forget to factor in initial investments like startup fees and other transitional costs. Finally, you’ll want to weigh those costs against the potential long-term savings that could come from enhanced fulfillment center automation, reduced warehouse costs, and stronger relationships with shipping partners.

2. Assess Your Business Needs Today

As a growing e-commerce brand, multichannel or omnichannel expansion is likely a priority. You need a 3PL that can handle diverse sales channels, regions, and revenue streams, while keeping costs low. Look for one that offers seamless integrations with your e-commerce store, marketplace pages, and other key channels and e-commerce platforms. Consider the level of inventory visibility they’re able to offer into each.

Consider whether you’ll need a 3PL who can make special considerations for small orders, oversized products, customized bundles, or exclusive branding and packaging. It’s common for retailers to outgrow smaller or more boutique 3PLs over time. Start with your most urgent needs today, knowing that it’s ok if they change in the future.

3. Consider Your Needs Tomorrow

While it’s best to go with the partner who fits your scope today, it’s also a great idea to take the temperature on how easy or difficult it will be for a potential 3PL to scale with you. If growth is imminent, look for a partner who won’t hold you back as you expand. The ideal provider will have plenty of warehouse space and an extensive fulfillment network.

Remember, real growth isn’t just about getting bigger. It’s about careful, strategic, and profitable expansion. Tailor your 3PL questions to find out how a potential partner accommodates seasonal changes and last minute adjustments when dealing with increased order volumes.

Choose a 3PL That Can Take Your Business Higher

Selecting a 3PL is a big decision. You’re entrusting a third-party with two of your most valuable business assets: your products and your customers.

Make sure you’re clear on your fulfillment needs as they stand today, with one eye toward where you’re planning to take your business tomorrow. Take time to ask the right questions, audit their reviews, read their case studies, or even secure references from other satisfied customers. 

The initial time investment may seem daunting at first, but the increase in sales, efficiency, and customer satisfaction could be just what you need to continue dominating your niche.

At SellersFi, we offer a range of bespoke e-commerce financing solutions to help merchants scale, without sacrificing sales or cash flow. Learn more about our solutions and start growing your business, your way.

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