Article

The Guide to Understanding 3PL

About the Article

If you're an eCommerce entrepreneur who spends more time shipping packages than fine-tuning other aspects of the business, it is time to rethink your workflow. Fortunately, with third-party logistics (3PL), businesses of all sizes can outsource their logistics and focus on growing their brands without financing large capital expenditures.

What is 3PL?

3PL is the outsourcing of a company’s inventory management, warehousing, fulfillment, and shipping to third-party vendors. This service allows small and mid-sized companies to take advantage of the economies of scale and geographic distribution of larger warehouse providers. This can help businesses save on otherwise significant investments to implement these processes themselves.

eCommerce stores often use 3PL, which allows them to have their suppliers ship inventory directly to the third-party fulfillment centers. These centers then store the products and fulfill customer orders as they come in. Some 3PLs also provide companies with the option to store inventory in multiple geographic locations which can potentially reduce shipping time and costs.

3PL Services

Typically, 3PLs introduce a number of beneficial services within the supply chain.

Receiving and Warehousing

To begin the logistics relationship, businesses need to send products to their 3PL vendors. Providers typically have large centers where they’ll receive the physical products – often sent directly from a supplier or producer – then register the inventory in their systems. From there they will move them to a storage facility where the products will remain until they need to be packed for shipping.

Inventory Management

Products need to be tracked when they’re moved in and out of the warehouse. Third-party logistics providers have systems to register inventory when they’re received and released when shipped. Many have online portals to show the live inventory counts while others have integrations with eCommerce platforms like Magento Commerce to ensure customers cannot order more products than are available at the warehouses.

Fulfillment

When a customer places an order, the eCommerce brand will send a fulfillment request to the 3PL, often automatically. The logistics provider handles all aspects of order fulfilment, which include:

  • Picking the product from its warehouse
  • Scanning and releasing items from inventory
  • Packing and Labeling in preparation for shipping

Shipping

As another benefit, 3PLs often have pre-negotiated rates with major shipping providers such as FedEx and USPS. By working with a 3PL, businesses can take advantage of volume discounts across all of their customers. This can be particularly useful if a brand needs to ship to multiple regions. Working with a 3PL vendor allows an eCommerce brand to work with the cheapest carrier based on the required shipping time and shipping zones.

Returns

Most businesses need a way to handle returns so many 3PLs have processes for receiving returned packages, inspecting the products for damage, entering them back into inventory, and restocking them for future orders.

3PL vs 4PL

Fourth-party logistics (4PL) goes beyond 3PL, managing the whole logistics process end-to-end. This includes often working directly with one or more 3PLs to optimize the supply chain, shipping, and costs. They also manage receiving, storage, fulfillment, and shipping.

For example, many businesses will send inventory to multiple warehouses or various 3PL providers. While 3PLs will handle a significant share of logistics, deciding on how much inventory to send to different warehouses based on expected demand and optimizing for costs is no small task. In comparison, 4PLs can consult on and fully manage these processes so the business can focus on essential tasks like marketing, design, and customer service.

Benefits of 3PL

In addition to freeing up business resources, 3PLs offer a number of benefits to help brands efficiently scale and expand their operations

Cost Savings

Using a 3PL can help smaller businesses achieve similar economies-of-scale as larger companies managing their own supply chains. This is because 3PLs can share resources across multiple customers. For example, if your business runs its own warehouse, you have to cover operations overhead – such as rent and employee wages – during low-revenue periods. With a 3PL vendor, the costs are distributed across many businesses so fluctuations in demand for individual products doesn’t impact relative costs.

Scalability and Geographic Distribution

The reason large businesses like Amazon ship items to customers incredibly quickly is because they have many strategically placed warehouses with similar inventory. This allows them to  fulfill orders from locations near the customers, reducing transit time and related transportation costs. Smaller businesses can leverage 3PLs to do this as well by sending inventory to multiple warehouses. Many 3PL providers also have automation to help decide on which warehouse to fulfill orders from and alert when inventory is getting low so businesses can order more from their suppliers.

Industry Expertise

Rather than reinventing the wheel, it often makes sense for businesses to partner with 3PLs, many of whom have mastered their logistics operations over a long period of time. The level of expertise 3PL vendors bring to the partnership ensures smooth operations and minimal mistakes. 

How to Choose a 3PL

There are a number of different 3PLs with unique trade-offs. Business owners should ask the following questions to understand how the 3PLs you are considering can assist your brand:

  • What technologies do they have? 
    You’ll want to ensure their systems are easy to use, provide accurate inventory management, and have integrations with your other providers. For example, if you’re using Magento Commerce to sell products, inventory should be updated in real-time, allowing order details to be sent automatically.
  • Can they handle your volume of business? 
    When comparing providers, make sure to check they can handle your base rate of business and your expected peaks in demand. Holiday times can be a strain on supply chains, meaning you’ll want to ensure your expected volume is within their capacity.
  • What are their pricing structures? 
    Pricing models for 3PLs may include monthly recurring fees for business elements like receiving, order picking, and storage. Depending on product sizes and order volume, you’ll want to compare your specific needs to see how these different pricing models affect your costs.
  • How competitive are their shipping rates?
    With a large 3PL, you can often offset costs by utilizing their volume discounts with shipping providers. For heavy or large products, this is particularly important. Compare rates and analyze how they compare across different shipping zones.
  • How much of the supply chain do they manage? 
    Some 3PLs will take more of the management process on, such as helping to optimize for which warehouses to stock inventory and fulfill orders in. Depending on your team's sophistication and associated costs, it’s important to understand how these services will impact operations.

Find a 3PL that Works With Your eCommerce Platform

Using a 3PL to help manage your eCommerce logistics can free up resources, letting you focus on other business priorities while reducing operating costs. However, you’ll want to ensure the 3PL you choose can integrate seamlessly with your eCommerce platform to automate fulfillment and inventory management while minimizing operational errors. Fortunately, Magento Commerce has numerous integrations with 3PLs.

Get a free demo of Magento Commerce to see how an integrated 3PL can help your business scale more efficiently. 

The Guide to Understanding 3PL