What Is 3PL? How Third-Party Logistics Companies Work for Small Businesses
Katie-Jay aims to put answers in the hands of small business owners by leveraging over 10 years of retail and hospitality experience. With a background in gemology, she specializes in jewelry and luxury ecommerce.
This article is part of a larger series on Retail Management.
Third-party logistics (or 3PL) companies handle outsourced functions within the retail supply chain—chiefly procurement, transportation, and/or distribution. Some 3PL companies also manage growth and revenue services for their client companies.
Certain 3PLs focus on specific segments (like product sourcing), while others fill multiple needs (like freight brokering, warehousing, and distribution). We’ll explore how different third-party logistics companies work and how to choose the right 3PL solutions for your business.
Check out our ranking of the best 3PL providers for small businesses.
3PL Services Overview
The availability of 3PL services in every sector makes it possible for small businesses and startups to tap into specialized expertise during every step.
Plus, it enables small businesses to outsource labor- and cost-intensive operations to companies with more resources and well-developed infrastructure. Both of these advantages promote expansion and growth.
Is 3PL Right for Your Business?
Many retailers oversee all of the above functions in-house. But when you figure in labor, overhead, required expertise, and associated risk, a fully in-house solution isn’t always the most profitable.
A common challenge small business owners face when outsourcing is determining which functions are best handled in-house—and which can be better managed by 3PL experts.
To make this decision, you first need to understand what 3PL companies offer and then identify your operating strengths and weaknesses. After considering these factors, you can pinpoint where 3PL services can help you cut costs and increase efficiencies.
Here’s what you need to know about using 3PLs for your business:
3PL Procurement Services
Procurement describes a range of activities involved in obtaining the goods or services you sell. It can include buying raw materials, sourcing pre-made products, negotiating terms, making purchases, and maintaining records.
Procurement can be broken down into two categories:
- Direct procurement: Applies to goods and services that ultimately find their way to the customer or client of the business (such as car parts, raw materials, or finished products like clothing)
- Indirect procurement: Applies to goods and services that support daily operations and overall business functionality (such as office supplies, cleaning supplies, warehouse equipment, and support software)
Many 3PL companies focus on procurement processes and can help you develop, manufacture, and/or source goods to sell. These services include:
- Product development: Assisting in designing and engineering an item—and even securing patents
- Raw materials sourcing: Identifying the best materials and suppliers, and configuring a sustainable, cost-effective sourcing plan
- Production: Working with an array of global production facilities and matching the right factory to your product
- Manufacturing scheduling: Developing cost-effective production plans and scheduling manufacturing runs based on forecast demand
- Finished goods sourcing: Sourcing or customizing ready-made goods to meet your needs
Working With a 3PL Procurement Partner
Depending on the complexity and frequency of your needs, 3PL procurement companies charge either per-project fees or account retainer fees.
If you’re looking for a one-time manufacturing run for a product, procurement 3PLs may charge a service or consultancy fee. Alternatively, they may simply mark up the manufacturer’s cost plus any inbound transportation fees into one final charge to you.
For ongoing manufacturing needs, procurement 3PLs typically work on retainer. This allows them to constantly monitor materials and capacity markets to buy raw materials and schedule production runs at the lowest possible costs.
Ultimately, procurement 3PL service fees are determined by the types and quantities of products being made, the materials that go into them, where they’re produced, and how often.
Looking for a procurement 3PL partner? A good place to start your search is Thomasnet.com. It’s a large supplier discovery and product selection network that also lists procurement 3PL and consultant services. The site allows you to search by industry, materials, and other factors to find services that fit your unique production needs.
3PL Transportation Services
Transportation in retail can describe inbound shipping from a domestic manufacturing facility, importing from an overseas supplier, outbound movement of products to distribution centers, or other logistical tasks.
A transportation 3PL service can help you find the right carriers, streamline the paperwork, facilitate your schedule, and accomplish it all cost-effectively.
The main modes of transportation used by 3PLs are rail, air, road, and maritime shipments.
(Source: Armach Logistics)
There are three primary types of 3PL transportation services:
- Domestic freight: 3PL freight brokers and consolidators help you get the best deals on domestic US rail and truck freight. Plus, they help manage pickup schedules, delivery schedules, and all paperwork.
- Import/export: If you’re bringing goods into the country or exporting goods made here, 3PLs ensure no surprises with paperwork, duties, and transportation costs.
- Overseas shipping: 3PLs can help you get the fastest air, transoceanic, and freight shipping for the lowest cost, which is useful for businesses manufacturing goods overseas.
Some 3PL companies that offer procurement and distribution services also cover these transportation needs.
Many small ecommerce businesses benefit from using a transportation 3PL that specializes in brokering freight. These companies tap into a huge network of freight carriers to find the best fit for your shipment.
FreightPros ranks No. 1 in our guide to the best freight brokers thanks to its wide network of vetted carriers, deeply discounted rates, and helpful extra features (included for free). Visit FreightPros to get a free freight quote.
Working With a 3PL Transportation Partner
Most transportation 3PL companies charge for their services by adding a percentage onto the carrier’s final rate.
It’s important to note that these third-party companies work with many clients, so they book logistics services in great volumes. Because of their overall volume, they receive deeply discounted rates from trucking, shipping, and rail lines. So, even with their markup, 3PL providers’ fees are consistently lower than what you’d pay working directly with a carrier.
In addition to getting you lower rates, transportation 3PL services also work to minimize errors and find the best carriers and methods for your unique shipments. By partnering with a 3PL, even occasional shippers or first-time shippers can tap into the expertise needed to make the most out of every load.
To learn more about 3PL transportation and your provider options, read our guide on how to get a freight quote.
3PL Distribution Services
Distribution describes the steps that go into making a product available to customers by dispersing it through the market. It mainly includes warehousing, transportation, and packaging and shipping, and many 3PL distribution providers function as fulfillment centers.
Some of the steps of distribution comprise the fulfillment process—which involves storing goods, packing orders, and shipping products to buyers.
Distribution processes often take place in a warehouse facility like the one shown above.
3PL providers deliver a full range of services that deliver goods to both B2B and B2C end users, including:
- Warehousing: Storing merchandise in strategically-located warehouses
- Inventory management: Efficiently receiving inbound stock shipments, sorting goods, and tracking inventory
- Product packaging: Creating specialty packaging and/or dunnage to protect the contents or display branding
- Order processing: Receiving and processing orders from online, spreadsheet, and other inputs
- Assembly and customization: Configuring or customizing products from parts
- Batching and kitting: Assembling kits of pre-set product combinations or batches of orders for product launches and crowdfunding campaigns
- Order packing: Picking products and packing parcels according to your inbound orders
- Bulk shipping for B2B sales: Working closely with carriers to transport goods between businesses
- Parcel shipping for B2C sales: Shipping parcels to residential customers via domestic carrier partners such as UPS, FedEx, and USPS, or international methods
- Returns management: Receiving, processing, and restocking (or dispositioning) returned goods
- Stock forecasting: Evaluating stock levels and estimating reorder quantities needed to meet future order demand
Distribution is a fast-growing sector of the 3PL industry, largely due to the fulfillment needs of ecommerce companies.
This has spawned new, innovative services designed to bridge the gap between outsourced and in-house fulfillment. These solutions combine the hands-on control you get from managing distribution yourself with the scalability, ease, and expertise of outsourcing.
One example of this new breed of nimble 3PLs is Saltbox. It allows businesses to enroll in an all-inclusive membership that provides enterprise-grade warehouse, office, and operational spaces—plus supplies, logistical resources, and flexible staffing. The company has large facilities in five major US cities that are divided into private and shared spaces for Saltbox members.
Working With a 3PL Distribution Partner
Many distribution-focused 3PL companies tailor their pricing to the specific needs of each client. Every cost center (warehouse storage, packaging materials, shipping, and labor) is typically charged by usage, and discounts often apply to high-volume clients.
If your products require special handling (such as climate control, advanced security, or oversized packaging) they can be facilitated by a specialty 3PL like Red Stag Fulfillment. These add-on services are usually billed additionally.
To learn more about how 3PLs charge for common services, read our guide to third-party fulfillment pricing.
We evaluated fulfillment companies based on their pricing, functionality, ease of use, specialty services, and user reviews—and found that ShipBob is the best third-party fulfillment service for small businesses. It delivers fast two-day shipping, outstanding accuracy, and no minimum volume to get started. Visit ShipBob to get a free quote.
Growth Services
Collecting, monitoring, and analyzing sales data is a key process some 3PLs use to drive clients’ growth.
While it traditionally falls outside the scope of logistics, some 3PL providers now help clients with sales and marketing efforts.
By promoting effective sales, product development, category expansion, and reordering, these 3PL amenities continue the supply cycle and encourage usage of the other primary services explained above. That said, growth is a relatively new category in the lineup of 3PL services, and not all providers offer it yet.
Here are some ways that 3PLs can promote growth and revenue by extending your sales and marketing reach:
- Develop branding: Solidifying your concept with logo design, brand messaging, copywriting, and branded packaging
- Manage multichannel platforms: Connecting your Amazon, eBay, Walmart, and even Facebook sales channels, and populating with SEO-driven product listings
- Develop and manage online stores: Setting up online stores for you on top ecommerce platforms and managing your product catalogs
- Collect and analyze data: Generating reports from sales data, customer reviews, spending, and more to enable informed decisions
Working With a 3PL Growth Partner
It’s possible to find a marketing agency or retail business consultancy to manage your growth and revenue. While this is a more focused option, hiring a 3PL that offers additional marketing services may be better for small businesses already outsourcing other tasks.
This is because your expansion is directly tied to your usage of their main logistics services—which often results in more effective campaigns. Plus, it’s helpful for your partner agency to have perspective on every aspect of your operation, and it can serve as a one-stop shop for busy entrepreneurs.
When using a versatile 3PL, growth agency services are often billed as a single commissioned percentage or multiple add-on fees. Some providers charge per-product fees for adding listings to websites or marketplaces, and others charge per project for a complete site launch or expansion into a channel.
One fulfillment 3PL that offers marketing and turnkey listing management on Amazon, eBay, and your own online store is Whitebox. Its growth agency services are charged as a separate program from its fulfillment partnership on a commission basis. Read our full Whitebox review here.
Management Services (4PL)
A 4PL (also known as a Lead Logistics Provider or LLP) manages your supply chain on your behalf.
Outsourcing procurement, distribution, transportation, and/or growth processes can save significant amounts of time—but you still need to source 3PL companies to provide these services, onboard with them, migrate your stock, oversee quality, and manage each business relationship.
A 4PL partner solves this problem by managing multiple 3PL providers for you and overseeing other parts of the supply chain.
4PLs can also ensure that your partnered 3PLs are the best fit for your business (through regular audits of the 3PL market). Being removed from the functional role also makes 4PLs impartial players when determining which business functions are best to outsource in the first place.
Once you and your 4PL have identified the most cost-effective functions to outsource, it will find, onboard, and manage 3PL providers under one umbrella. Then your 4PL will closely monitor the day-to-day workflow and performance of your team of 3PL providers and report the results to you as needed.
Working With a 4PL Management Partner
For growing businesses that juggle a whole host of operational details, partnering with a 4PL can take the place of hiring dedicated staff to oversee 3PL activities. With this off your plate, you can focus your energy on what you do best—be it product development, marketing, or whatever helps maximize growth.
There are many 4PL providers available, and their fee structures vary greatly. However, most provide services on a consultancy basis, and the account fees and retainers are wholly separate from the actual 3PL services costs.
When seeking a 4PL partner, keep in mind that there are two types of 4PLs you can contract with:
- Independent 4PL consultants and standalone businesses
- 4PL divisions within large 3PL companies
In most cases, 4PL services are geared to midsize and large companies with ample budgets. That said, If you compare outsourcing 4PL services against hiring and overseeing dedicated staff, a 4PL can be a cost-effective solution for even small business owners. Plus, it’s an option that easily scales to meet your needs.
Bottom Line
While enterprise-level companies often have the resources and expertise to support fully in-house logistics, small businesses can benefit from outsourcing to 3PLs.
Partnering with a third-party provider to accomplish procurement, transportation, distribution, and/or growth can save significant amounts of time and money. Outsourcing to 3PLs also minimizes the risk of funding and staffing your own operations.
By understanding how 3PL services work in each sector of the supply chain, you can identify which services would be better suited for in-house or outsourced operation. As an alternative, a 4PL provider can step in to evaluate your supply chain needs, find the right 3PLs, and manage it all on your behalf.
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.
Visit FulfillmentCompanies.net
