When you first enter the marketplace with an eCommerce venture, it’s like bringing a baby into the world. Every order, every customer interaction, and every social media post feels deeply personal. This sense of attachment and passion for your business can be both a blessing and a curse.
For one, it can inspire entrepreneurs to work harder than they ever thought possible. But, it can also cause the same entrepreneurs to cling to every facet of the business and resist any kind of outsourcing or delegation.
Every growing business reaches a fork in the road — outsource, delegate, or plateau. There are too many important things to focus on and not enough time in the day.
If leaders are to stay sane and rational in their business decisions, they need to find a way to not be constantly putting out fires.
This is where 3PL comes in.
What is 3PL?
Third-party logistics (henceforth abbreviated as 3PL) is the practice of businesses handling eCommerce logistics for other businesses.
For an agreed-upon fee, 3PL providers will handle basic logistics for eCommerce clients including (but not limited to) inventory management, warehousing, and fulfillment.
Each 3PL vendor varies in its offerings, expertise, and ability to accommodate more complex supply chain tasks.
The main appeal of 3PL providers is a return on time investment. When business owners aren’t bogged down with fulfilling orders, they can utilize their time for more high-level tasks that leverage their unique expertise.
What’s the Difference Between 3PL and Drop Shipping?
No in-house inventory? Utilizing a 3rd party to facilitate logistics? This sounds a whole lot like everyone’s favorite side hustle — dropshipping.
On the surface, the two seem very similar. But there are significant differences.
Dropshipping entails listing products online that have yet to be produced or purchased. Once a customer purchases, this triggers the manufacturer to ship the product directly to the customer.
The dropshipper has no contact with the inventory whatsoever. While this is an attractive and potentially lucrative way to build some eCommerce income, it’s quite limited. For one, dropshippers almost exclusively sell other peoples’ products.
It’s much harder to sell custom, bespoke products when you have no contact with the product itself. You’re essentially taking the manufacturer at their word.
The entire model hinges on the idea of cutting out the middleman.
That leads to another issue — quality assurance. In dropshipping, it’s virtually nonexistent. Your customers’ experiences lie squarely in the hands of whatever manufacturer you’re working with.
3PL providers, on the other hand, specialize in storing, processing, and shipping your finished products. You send your products to your 3PL provider in advance (usually in bulk), and they take care of getting them into the hands of paying customers.
Another big difference between 3PL and dropshipping is in customer support and returns. Manufacturers have no interest in working with indignant customers. That’s not what we pay them for.
If a dropshipper has a quality assurance issue, they’re pretty much on their own.
Many (but not all) 3PL providers handle returns, so you can quickly remedy poor customer experiences.
To be frank, 3PL vendors are geared toward more growth-minded and brand-centric eCommerce companies.
The following are the most common services offered by 3PL vendors:
- Inventory management
- Preferred shipping
- Multi-site warehousing
- Shipping and receiving
- Picking and packing
- Kitting, assembly, or customization
- Reverse logistics (returns)
Examples of 3PL Providers
The most universally recognized 3PL provider is Amazon FBA (Fulfilled by Amazon). Vendors ship their finished products to Amazon, and the FBA service takes care of the rest.
Amazon stores, picks, packs, ships, and processes returns for their clients’ products. Other benefits include tapping into Amazon’s world-renowned shipping infrastructure and getting in front of its massive user base.
If this is new to you, we’ve written quite a bit on Amazon FBA. You can check out our blog series on the service here.
Other 3PL providers include Shopify Fulfillment Network, FedEx Fulfillment, and Shipwire, to name a few. Each vendor has its strengths and weaknesses.
Some “end-to-end” solutions are pricier than others, while the bare-bones logistics providers are easier on the budget.
Choosing the right vendor all depends upon your goals.
Throughout this post, we’ll discuss what you should look for when researching a 3PL provider (and if you’re even ready for one at all).
But let’s not get ahead of ourselves. First, we need to talk about the tangible benefits afforded to businesses that utilize 3PL providers.
Benefits and Challenges of 3PL
All inventory management systems, philosophies, and workflows have pros and cons. Just like no two businesses are the same, there is no one-size-fits-all approach to growth and profitability.
Here are some of the benefits and challenges to utilize a 3PL provider for your logistics.
Benefits of Using a 3PL Provider
3PL saves you time
One of the inevitable realities all business owners face sooner or later is the immutable law of opportunity cost. In other words, when you say “yes” to something, you’re saying “no” to something else.
One hour of stocking inventory is one hour you’re not working on your marketing strategy. One hour of printing labels is an hour lost on R&D. One hour processing orders is an hour you’re not building partnerships with industry peers.
Most of us got into eCommerce to build our own brand and make a living offering something valuable to the world. We didn’t get into it to become full-time warehouse managers.
This is probably the biggest “felt need” for businesses owners who turn to 3PL providers. They simply refuse to spend half their workday sweating down in the warehouse while their to-do list continues to pile up (and there’s no end in sight).
That’s not a path to good growth.
Outsourcing the storage, processing, and shipping of your product to a 3PL provider can shave significant hours off of your workweek, allowing the margin for these growth-minded tasks.
3PL saves you money
In addition to the time savings, 3PL providers can offer significant money savings (especially over the long term).
There are intangible financial benefits, such as earning the business of customers who demand fast shipping (and not for a small fortune).
This is no small matter. Studies and surveys from Bamyard Institute routinely show that high or unexpected shipping costs are among the top reasons for cart abandonment (nearly 60% of abandoned carts).
The expanded, multi-site warehousing strategy of most 3PLs eliminates this problem altogether.
But there are also more clear-cut benefits of going with a 3PL vendor. Chief among them is the cost savings of not needing to rent out a warehouse or hire warehouse employees.
3PL providers often have greater leverage with shipping and freight companies than individual businesses. This means they’re professionals at negotiating prices and building strategic partnerships with transportation providers.(I know what you’re thinking: how dare they have all the fun. Aren’t you jealous you don’t get to negotiate shipping rates with freight providers?)
Another significant (but oft-forgotten) cost saved by utilizing 3PL is that of demand fluctuations. As demand for your products goes up and down, you don’t need to worry about either expanding or downgrading your own warehouse to keep your costs intact.
3PL offers industry expertise and peace of mind
Freight rates. Returns processing. Par levels and reorder points. All this is a lot to keep in your head. And most of us weren’t trained in warehousing best practices.
While we firmly believe that anyone with the right tools can handle inventory management, you may not want that responsibility — especially when precious customer experiences are at stake.
When you hire a 3PL, you’re hiring people who’ve dedicated their lives to perfecting the craft of supply chain management. When something goes wrong transporting a product, they scramble to fix it, not you. And if a product is damaged or a shipping deadline isn’t met, most providers will compensate you accordingly.
For folks who don’t have the bandwidth to manage in-house inventory, there’s no shame in leaning on subject matter experts.
3PL offers expanded reach
It’s not uncommon for entire regional markets to be inaccessible to businesses due to their managing inventory in-house.
For example, let’s say you own an outdoor clothing brand on the East Coast. You’ve got West Coast fans gearing up to hike in Yosemite, but it makes no sense for them to purchase your product.
Thanks to Amazon, they (like most other consumers) have come to expect two-day shipping. But shipping that weight across the country in two days is astronomically expensive.
You want to lower the cost to get the business, but then you’re cutting deeply into profits. See the problem?
This is why most 3PL providers have warehouses dispersed throughout the country (and sometimes internationally).
Shopify Fulfillment Network (which we’ve also written about here) even utilizes machine learning algorithms to inform how they distribute inventory. If you sell 20% in the mid-West and 80% on the East Coast, they’ll keep corresponding product numbers at those warehouse locations.
This doesn’t need to end with your U.S. reach, though. Many 3PLs have international warehouses as well as domestic ones. This affords the ability to test new markets (all while your 3PL takes care of all the requisite customs and imports responsibilities).
3PL offers better customer experiences
We’ve mentioned several times already how accustomed customers are to fast, cheap shipping. It really has become the new standard.
Not only that, but most customers also expect speedy, seamless reverse logistics. Meaning if a product isn’t to their liking, they expect to be able to return it for free and get it processed, replaced, or refunded just as quickly as they received it.
Imagine if you processed and shipped inventory in-house at standard rates and timelines (5-7 business days). How much more frustrated would a customer be if they weren’t happy with the product after a long shipping timeline?
On top of that, now they have to send it back and wait for another 5-7 days before seeing their refund or a product replacement.
3PLs not only enable access to new markets, but cheap and fast shipping anywhere you find customers. This wide distribution network is what you pay a premium for when you contract logistics experts to help.
Downsides to Using a 3PL Provider
Every inventory management strategy demands a bit of give and take. Here are some downsides to be aware of as you explore 3PL.
3PL offers less control
Depending on your personality and unique goals, you may see this as a positive. For many, it’s tough to let go of control of any aspect of your business. By nature, you have to entrust much of the customer experience to someone else.
If you’re someone that agonizes every detail of your packaging, product aesthetic, or assembly, 3PL may not be for you. It can be tough for eCommerce owners (especially those that sell highly customized products) to get over that psychological hurdle.
3PL providers can demand a steep investment
There’s no getting around it — 3PL is expensive. Although, we fully acknowledge that “expensive” is a relative term. You may find it chump change for the benefits it affords.
Any way you slice it, migrating to 3PL will require you to fundamentally alter your supply chain. This likely means a significant investment of both time and money in onboarding.
You’ll want to budget at least 3-5 business days to:
- Integrate your inventory management software (you do have inventory management software, right?)
- Jump through all the onboarding hoops your 3PL throws at you
- Troubleshoot problems
- Ship your product
- And potentially create new systems and processes
Thankfully, most inventory management platforms offer seamless integration with your 3PL, so you can monitor your orders and stock from anywhere with a web browser.
3PLs will often charge based on your individual needs, which is why there’s no one-size-fits-all approach. For example, someone who requires storage for bulky items that require some assembly will be a lot more expensive than someone storing pre-assembled, homemade jewelry.
3PL adds distance from your products
If you’re dealing with highly customizable products that require kitting or assembly, 3PL may make you a bit nervous. If something happens to a product — say it needs to be altered, modified, or fixed in a way that requires your unique skills — you’re completely cut out of the supply chain.
This physical (and logistical) distance from your products can thus jeopardize your customers’ experiences.
3PL may cause customer satisfaction issues
If you’ve built a solid rapport with your customers, 3PL may feel a bit like you’re outsourcing your social capital.
When you’re small and scrappy, you can afford to respond to each customer personally, coordinate their returns, extra products, or offer them special deals.
When you transfer all of these responsibilities to a 3PL, you’ll have to coach your customers a bit. When something goes wrong with shipping timelines or a customer receives a defective product, they’ll need to go through the appropriate channels.
That means not blowing you up on Facebook messenger. They’ll need to process their returns with the 3PL from which they’ve purchased.
Please note: they will come to you with problems, regardless of whether or not it’s your fault. It may be confusing and inconvenient to direct customer returns back to the 3PL.
This is why it’s important to do your research and choose a 3PL provider that’s trusted and validated by plenty of social proof from other businesses.
What is the Typical 3PL Fulfillment Process?
As we’ve mentioned in this post, what each 3PL vendor offers varies significantly. Most all of them will cover the baseline essentials of logistics (warehousing, receiving, and shipping). Some go above and beyond that, and others are more bare-bones.
Here’s the typical 3PL fulfillment process:
Production & Purchasing
The first step is to purchase or produce your product, pack it up, and ship it out to your 3PL. Most of the time, this will be in bulk. This is one of the major differences between 3PL and dropshipping.
Before the 3PL facilities receive and integrate your products into their warehouse, they’ll likely require you to fill out some sort of order form. This will give them a heads up on how many products you’ll be shipping out as well as their weights and quantities.
Once the products arrive, they’ll be distributed throughout your 3PL’s infrastructure. Some 3PLs may allow you to choose where you’d like your products to reside to best accommodate customer demand. Others will distribute your products according to your sales patterns.
As you research your 3PL, be sure to read the fine print on how this works so their warehousing strategy matches your goals.
If you’ve got inventory management software serving as the hub for all your sales channels (Amazon, eBay, your website, etc.), your 3PL order management is a cinch. All orders placed on any channel will be sent to your 3PL to be picked, packed, and shipped.
Picking & Packing
Once the order is sent to the 3PL facility, your products are immediately picked and packed. This is where you’ll want to do your research.
Many brands pride themselves on a bespoke “unboxing” experience. If products require special assembly and packing, you’ll want to make sure your 3PL vendor can accommodate that.
For example, Amazon FBA does not accommodate special packaging, while Shopify Fulfillment Network does. If a unique packaging aesthetic is a key part of your brand identity, this may be a deal-breaker for you.
The packaged product is then shipped to the customer. Most 3PLs work with freight and transport companies to form partnerships. This means you can often be confident you’re getting the fastest and most cost-effective shipping method available.
If the customer wants to return their purchase, most all 3PLs will handle the reverse logistics of receiving the return, restocking the product, or returning it back to the business owner for repairs or refurbishment.
Who Should Use 3PLs?
You should now have a thorough understanding of the 3PL process and how it helps eCommerce business owners. It’s now time to evaluate whether or not 3PL is right for you.
We’ve compiled six questions to help you discern if 3PL is the right move. Consider these in the context of your business:
- Are you spending at least 30-50% of your working hours handling orders and logistics-related tasks?
- Do you process 100-300 orders per month?
- Have you hired (or are you planning on hiring) warehouse employees?
- Are you reaching the capacity of your warehouse space?
- Do you sell a product that doesn’t require customization, complex kitting, or expert assembly?
- Do you find yourself unable to penetrate certain markets due to shipping costs and complications?
If you answered yes to the majority of these questions, you’ll likely benefit from utilizing 3PL. Of course, that begs the question: how do you find a high-quality 3PL?
Next Steps: Finding a 3PL
A 3PL is quite literally a strategic business partner. Therefore, making the leap to a vendor should be a deliberate and well-researched endeavor.
Before diving headlong into the world of third-party logistics, it’s imperative that you’ve got your own house in order, so to speak.
The best way to understand, manage, and streamline your inventory management is through an IMS like SkuVault.
As you introduce more moving parts into your supply chain, you introduce complexity. We’ve built SkuVault to be a one-stop shop for all inventory reporting and supply chain monitoring.
We’d love to chat more about your unique goals and how we may be able to help you reach them. Reach out to our sales team for a live demo of the product today.