What Is 3PL? A Guide to Third-party Logistics Services
This article is part of a larger series on Retail Management.
A 3PL (or a third-party logistics provider) is an outsourced partner that handles logistics processes for other businesses. 3PLs are commonly used by ecommerce companies that still manage product- and order-related tasks but want to delegate inventory management, warehousing, and fulfillment (including shipping, distribution, returns, and exchanges). Partnering with a 3PL company allows merchants to focus on other aspects of their business.
It’s crucial to understand what 3PL is before you decide to work with a 3PL provider. This guide covers how the 3PL process works, the different types of 3PL services you can use, and how to choose the right 3PL provider for your business.
Already decided to outsource your fulfillment operations? Check out our top recommendations for the best 3PL companies.
How 3PL Works
3PL providers offer different logistics services depending on the company. Order fulfillment companies are 3PL providers that offer warehousing, inventory management, order processing, order packaging, and shipping. Other 3PL companies may specialize in freight, import/export, or distribution services.
Did you know?
3PL is often used interchangeably with order fulfillment, fulfillment center, or fulfillment warehouse. However, order fulfillment companies are a type of 3PL that ecommerce businesses use to outsource their fulfillment process. A fulfillment center is a 3PL, but not all 3PLs are fulfillment centers.
Most businesses that use 3PL fulfillment companies still manage product sourcing, manufacturing, and procurement. Third-party logistics start when your products are shipped to a 3PL warehouse.
- Receiving/warehousing and inventory: The 3PL provider receives product inventory and organizes each SKU in its warehouse facility. Product inventory is ideally synced with your online store(s).
- Order management: When an order is placed on your ecommerce site, it is manually forwarded to the 3PL or automatically pushed through an integration with your ecommerce platform.
- Picking: Warehouse staff gets a picking list to collect the ordered products.
- Packing: The items are packed in boxes with the receipt and order details.
- Shipping: The 3PL uses one of its shipping carrier partners to print a label for each order. The shipping carrier collects the package from your 3PL’s distribution center and delivers it to your customer.
- Tracking: Tracking information is uploaded to the 3PL system and synced with your store’s order management or inventory software.
Outsourcing logistics operations can be done using different business models. Here, we briefly explain the differences between 1PL, 2PL, 3PL, and 4PL.
- 1PL: A merchant that sends goods or products from one location to another is a 1PL. For example, a local coffee roaster that transports coffee beans directly to a cafe or coffee shop for sale is a 1PL.
- 2PL: Couriers collect orders or parcels from your warehouse and deliver them to the customer. That same local roaster might hire a 2PL, like UPS or FedEx, to transport coffee beans from their facility to the cafe.
- 3PL: Inventory is stored, picked, packed, and shipped by a third-party provider. In our example, a 3PL may be responsible for storing the roasted beans, receiving orders from local cafes, packing bags of coffee beans into boxes, and shipping the orders from the warehouse to the cafe.
- 4PL: This type of provider takes care of all logistics-related activities for a business, including managing the fulfillment partners (3PLs) you’re working with. Its team negotiates contracts and communicates between you and the distributor, as well as handles the logistics of product sourcing and other parts of the supply chain. In this case, the 4PL may manage the process of importing raw coffee beans, managing the fulfillment company, and communicating with the roaster to produce more beans as the cafe’s needs increase.
3PL companies provide distribution, storage, transport, and fulfillment services. They usually offer logistics services that support some or all aspects of fulfillment and shipping and are typically integrated into a company’s warehousing and transportation operations.
The different types of 3PL providers you can partner with are the following:
- Distribution-based: These 3PL companies store your products until you send them orders. Once your 3PL provider receives these orders, it picks items from its stock, packages the items, and ships them to the recipient.
- Financial-based: These 3PL companies specialize in the finance side of ecommerce logistics, such as freight payment, audits, and accounting and financial management of inventory.
- Forwarder-based: These 3PL providers focus primarily on directing your stock from your warehouse to a mail carrier that handles delivery.
- Information-based: These 3PL companies are based online and focused primarily on B2B operations. They leverage electronic markets to power their logistics and transportation services.
- Transportation-based: These 3PL teams focus on transportation from factories to warehouses and then to customers.
Here are some 3PL logistics examples of services that outsourced partners can provide:
- Warehouse and inventory management: A 3PL provides storage space (warehousing) for inventory as well as inventory management solutions to help manage it. 3PLs usually have multiple warehouses, which keep your products within close range of customers so you can provide faster shipping turnaround. They can relocate inventory based on where most of your orders are coming from, too.
- Order management and fulfillment: 3PLs have an order management system that tracks stock levels across warehouses and integrates with your ecommerce platform, so you can still manage or oversee shipping. They send order confirmations to customers as well as shipping and delivery notifications.
- Value-added specialized fulfillment services: Custom fulfillment services like kitting, bundling, personalized notes, gift wrapping, and more are also offered by 3PLs.
- Shipping and transport coordination: 3PLs work with established shipping companies or maintain their own shipping fleet. Beyond shipping, they may provide services like freight brokering and/or freight forwarding.
- Reverse logistics (returns): Full-service 3PLs also manage returns and exchanges, along with customer service.
- International logistics: Some 3PLs have locations in multiple countries so that you can perform local fulfillment in foreign markets, which saves on shipping and customs costs. Many domestic fulfillment providers have options for cross-border shipping, such as DDP (delivery duty paid) options 3PLs can also offer customs clearance and international freight forwarding for import/export needs.
Pros & Cons of 3PL
| PROS | CONS |
|---|---|
| Fulfillment and logistics expertise | Upfront investment |
| Discounted shipping rates and reduced overhead costs | Different operations and operating hours |
| Takes care of resource-intensive tasks | Loss of control over service quality |
| Distributed inventory for faster shipping | Inefficiencies reflect on your business |
| Scalable warehousing | Difficult to customize orders and fulfill special requests |
3PL has its benefits as well as risks and disadvantages. As a business owner, it is up to you to weigh if the risks outweigh the benefits your business will get.
Is 3PL Right for Your Business?
To know if it is time to use third-party logistics for your ecommerce business, here are some telltale signs:
You Ship Over 100 Orders a Month
If that’s where you are, compare the costs of partnering with a 3PL so you can maintain or even improve your profit margins. Outsourcing packing, picking, and shipping can save you a lot of time as well as money. Growth potential also heightens when you decide to outsource fulfillment to a 3PL.
You’re Running Out of Inventory Space
As sales grow, you will need more onhand inventory, and if you’re fulfilling orders in-house, finding storage space can be a problem. A 3PL warehouse can help with more inventory space, and outsourcing inventory and order fulfillment to a 3PL will help you efficiently manage inventory. Moreover, you don’t have to worry about inventory storage limitations if you plan to expand your product line.
Your Existing System Can’t Handle a Surge in Demand
Suppose you have flash sales or go through the usual sales spikes during holiday seasons. Will you be able to handle the influx of orders? If these spikes create the need to hire seasonal staff and/or rent temporary working spaces, outsourcing to a 3PL might be a more cost-effective solution.
You Want to Offer Free Two-day Shipping
These days, online shoppers expect two- to three-day shipping, and 83% prefer stores that offer free shipping. Offering these can take a considerable toll on your profit margins. Working with a 3PL provider gives you access to lower shipping costs and faster delivery times, as these companies are volume shippers and have special discounted rates with courier companies. Also, their fulfillment centers are strategically located in key parts of the country, allowing for faster delivery.
How to Choose a 3PL Provider
If you are ready to partner with a 3PL or are considering multiple 3PL providers, here’s what you need to know to choose the right vendor.
Know Their Area of Expertise
Expertise is vital in helping you identify which 3PL provider can meet a specific fulfillment need. For example, if you sell bulky or heavy products over 10 pounds, Red Stag Fulfillment is our recommended provider for oversized shipping and special handling needs. If you have manageable and lightweight items and want extensive integrations, startup-friendly rates, and a vast distribution network, we recommend ShipBob (our top pick among the best 3PL providers).
Evaluate the Scale of Their Operations
One of the advantages of going with a 3PL provider is that you can leverage their existing logistic operations—from storing, picking, and packing to shipping orders. You need to evaluate their operational efficiency and find out about the following:
- The number of warehouses they operate, their locations (consider if their locations are in areas where you commonly receive high-volume orders)
- Their monthly volume shipments in the following categories: B2C, B2B, domestic, and international
- Operational hours
- Value-added or specialized services such as kitting, custom packing slips, gift messages, or gift cards
- Their maximum capacity
- Reverse logistics (returns) options
- Next-day fulfillment execution and cutoff times
- Workflow for order volume spikes
Knowing these factors will help you gauge whether a 3PL can handle your business as it scales.
Ask About Fulfillment Costs
There are associated fulfillment costs when you partner with a 3PL, like warehousing, storage, and shipping fees. Let them provide a quote so you can calculate your potential savings or compare their prices against your current in-house fulfillment costs. It’s a good idea to get quotes from multiple 3PLs to compare rates and get the best deal.
Ask About Contracts & Service Level Agreements (SLA)
Ask about contract agreements and SLAs before signing up with a new 3PL provider. Some details to look out for or ask about include inventory turnaround time, order processing time, error and reimbursement policies, insurance availability, contract requirements, and the process involved in terminating services.
Determine the Level of Support They Provide
Find out what kind of support the 3PL provider offers by asking about the communication channels their service team uses, their average response time, and whether the team is employed domestically or outsourced. Will you have a dedicated customer agent for your account? Also, ask about their reporting tools and communication policies about new orders, shipping notices, returns, adjustment notifications, etc.
Check for Available Integrations
This is usually the dealbreaker if you already have a shortlist of 3PL providers. You need to confirm if they can integrate with your existing ecommerce platforms as well as inventory, order management, and warehouse management systems. They should be able to synchronize with your current systems to fulfill orders and update inventory levels automatically.
What Is 3PL Frequently Asked Questions (FAQs)
A 3PL (or a third-party logistics company) is an outsourced provider that businesses hire to handle logistics processes on their behalf. 3PLs take care of tasks such as inventory management, warehousing, order fulfillment, and shipping.
Some 3PL examples are:
- Fulfillment centers (like Fulfillment by Amazon and ShipBob)
- Freight brokers (like Redhawk Logistics)
- Shipping carriers (like UPS and FedEx)
- Freight forwarders (like Flexport)
Examples of 3PL services include outsourcing logistics operations such as warehousing and inventory, order management and fulfillment, product distribution, and product returns and exchanges.
Ecommerce businesses choose to go with a 3PL provider because they cannot handle their order volumes anymore, are running out of storage space for their inventory, or want to offer fast shipping for their products. Most businesses that are scaling or growing can benefit from partnering with a fulfillment 3PL to automate their logistics processes.
Bottom Line
Small businesses can benefit from outsourcing to 3PLs since it minimizes the risk of funding and staffing your own operations. Understanding how 3PL solutions work helps you identify which services would be beneficial for your business to outsource and which partners are the best options for you.
If you’re searching for the right 3PL company for your operation, we recommend starting with the logistics matchmaker FulfillmentCompanies.net. It’s a free service that matches your business’ distribution needs to hundreds of 3PL companies. Get free 3PL quotes by visiting their site today.