What Is 3PL? | [Full Guide] To Third-Party Logistics Inside
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One of the fastest-growing businesses in the world is currently eCommerce. However, many eCommerce businesses run on a very tight budget and do not handle their own order fulfillment. This is where a third-party logistics provider can come into play. 3PL providers can save your business lots of time and money while providing expertise that your business might not otherwise have. So, exactly what is 3PL, and how does it work? Keep reading as we tell you all the benefits of 3PL plus how to select a provider and how much much it might cost you.
What Is 3PL (Third-Party Logistics)?
At its most basic level, 3PL is the outsourcing of logistics operations. While this is common in eCommerce businesses, other businesses also use 3PL services. A third-party logistics provider typically handles both inbound and outbound logistics, including receiving, warehousing, inventory management, and the entire order fulfillment process. In some cases, your 3PL provider might even handle customer returns and exchanges.
Some providers specialize in certain types of goods. For instance, a cold 3PL provider might specialize in frozen or refrigerated products. 3PL companies bring in-depth expertise in supply chain management and operations to your business. These logistics services have become crucial to many businesses today who could not otherwise afford to handle all the fulfillment services on their own. In addition to cost savings, they provide many other great benefits that will be discussed later in this article.
Do not confuse 3PL services with fourth-party logistics (4PL). 4PL adds an extra layer to the process. A 4PL provider works with your business to find and secure a 3PL. Sometimes, this process is called double brokering. This can sometimes have a benefit, although you can also work directly with a 3PL on your own.
How 3PL Order Fulfillment Works
So, how does fulfillment work with a third-party logistics provider? While you can customize the services provided by the vendor you select, we will discuss some of the most common services provided and how they work.
The process starts with your 3PL company receiving goods from your supplier. Most of the time, businesses are receiving large freight shipments of items. Perhaps you order from AliExpress or some other provider. These may be FTL or LTL freight shipments. Depending on the number and type of items your business receives, your 3PL partner can advise you on the best option. They typically have partnerships with many freight carriers, and they can arrange favorable transportation services for you to save money on shipping costs. Though 3PL services do not usually include procurement, they will offer freight forwarding and process the incoming items according to your business needs once they arrive at the 3PL facility. From here, the items are typically moved into the provider’s warehouse.
Warehousing is a critical piece of 3PL. Most eCommerce companies do not have the budget for their own warehouse space. A lot of space is needed to store pallets and racks of items to keep them ready for shipping. Using a third-party logistics company is often the most cost-effective way for small businesses to obtain warehouse management services. Businesses are able to store all their inventory at a 3PL warehouse and avoid the expense of securing their own space. This includes maintaining an effective inventory system. 3PLs offer a great way to streamline your warehouse operations and improve customer satisfaction through accurate and real-time inventory information.
— Pick & Pack
Once an order is placed, the eCommerce fulfillment process starts. It is time to pull the item from inventory and pack it for shipping. When an order is pulled, the inventory level for that item will also need to be updated. This can be an expensive and time-consuming process if you are utilizing your own internal resources. However, your 3PL service provider should be an expert at picking and packing. Since their warehouse operations are typically streamlined, they can pull and pack orders in no time. Many providers offer same-day shipping services. This means that they will guarantee your orders will be shipped the same day they are received. Not only will this keep your customers happy, but it allows you to focus on the broader initiatives needed for your company, like marketing. Having your 3PL company perform pick and pack services is usually much cheaper than trying to operate your own fulfillment center.
Not only will your third-party logistics service pick and pack your items, but they will also ship them as well. They usually have partnerships with different shippers, so they can find you the cheapest way to ship a package. The speed at which your products are shipped will often have an effect on the cost of your 3PL service. For instance, you might have a 2:00 PM cutoff on same-day shipping. You might be able to pay a higher fee to extend that to a 5:00 PM cutoff time. Shipping options will also depend on the options that you offer your customers. Perhaps your business only wants to use UPS. Then your 3PL partner will work according to your rules and make sure that everything is shipped with UPS.
— Return Services
To improve the customer experience even more, you might work with your 3PL company to provide return services. This is also called reverse logistics. This means that your service provider will handle all customer returns in addition to handling incoming goods and performing order fulfillment. When a customer returns an item, it gets sent to your 3PL provider’s warehouse or processing facility. From there, the item is checked for damage and returned to inventory if appropriate. Since your eCommerce technology should be integrated with your 3PL provider, they can also process and issue the refund in some cases. This gives your 3PL company insight into your entire supply chain process and provides services across the entire chain to make your business more efficient.
3PL VS. Dropshipping — What’s The Difference?
Another term that you might often hear when discussing eCommerce is dropshipping. Some people might think that 3PL and dropshipping are the same, but these are two entirely different services. So, what’s the difference between the two? Dropshipping is a method that eCommerce sellers use to avoid handling and holding inventory. In this case, the manufacturer is responsible for shipping the item directly to the end customer. Here is how the process works.
Suppose you have an eCommerce business that sells footballs using the dropshipping method. You will have an agreement in place with the supplier that allows them to ship the product directly to the customer. So, when a customer places an order with you, that order gets forwarded to the supplier. The supplier charges you for the item and ships it directly to your customer. You never need to purchase inventory or store that inventory anywhere using this method. The product is not paid for nor shipped until a customer order is placed.
3PL, on the other hand, comes into play when you purchase inventory and need someone else to manage that inventory. The goods received and managed by the 3PL company are owned by your business. You simply pay the provider to store the goods in their warehouse and ship the goods as orders come in. Each of these business models can be successful, though dropshipping often comes with more problems. The supplier might decide to stop offering dropshipping services, or they might decide to raise their prices. Purchasing your own inventory and using a 3PL provider provides you with more flexibility in your business and the ability to set your own rules for your operations.
Benefits Of Using A Third-Party Logistics Company
So, why would anyone want to use a third-party logistics company? There are many benefits provided by these companies. Here are just a few of the benefits.
— Reduce Costs
One of the biggest benefits of these services is the cost. Most eCommerce businesses, especially those just starting, do not have the budget to handle their own fulfillment services. This means that they would need to arrange freight shipping for their items, secure a warehouse for storage, implement an inventory management system, hire people to pull and pack orders, and then ship the orders using standard rates from the available carriers. Since a 3PL company already has warehouses and workers, as well as shipping and trucking partnerships, they can provide all these services together at a much lower cost than purchasing them all separately on your own.
— Gain Efficiencies
Many of the 3PL companies out there today have been providing their services for many years. Over the years, they have learned the most efficient methods for performing their services. These insights are gained with years of experience, and they are not something that the average eCommerce business owner would know. So, by using a 3PL provider, you can automatically gain these efficiencies. This can be huge for your customer experience and satisfaction. This might mean that customer orders are shipped faster, returns are handled quicker, and overall costs are lowered. Regardless, these efficiencies will be a huge benefit for your business.
— Utilize 3PL Expertise
Your 3PL provider likely has many areas of expertise that can save you time and money. Logistics is their business, so they stay up-to-date on the latest industry news and trends. They are constantly finding new and better ways of performing these services, and that takes the burden off you. You no longer need to focus your time on fulfillment services, yet you can focus more on marketing, sourcing, and other key strategies for your business.
— Expand Service Areas
A 3PL provider often brings your business the concept of distributed warehousing, which allows you to expand your service area. Suppose you have a single warehouse in California. If a customer in New York orders your product, then it is likely to take several days for that order to arrive. However, your 3PL company might have a warehouse in California, Nebraska, and Pennsylvania. This may allow you to offer two-day shipping to all your customers because the fulfillment is taking place closer to the customer’s location. Depending on where the customer is located, the appropriate warehouse will be utilized to pull and pack the order. This expanded service area can allow your business to offer more services to more customers, thereby improving your bottom line.
Choosing A Third-Party Logistics Provider
Now that you know how 3PL works and the benefits it can provide, perhaps you have decided that it is the right choice for you. There are many providers out there, so how do you pick the right one? There are a few key things that you need to examine when selecting a provider to make sure they are the best fit for your business. Here are the things you should look at.
— Examine Their Technology
You should be able to easily integrate your eCommerce technology and platform with your 3PL provider. Make sure that you take a close look at their technology stack to ensure that the integration will be seamless. If you have to spend hours resolving tech issues with your provider, then the efficiencies they might save you will be lost. This could lead to lost or incorrect orders, incorrect inventory information, and decreased customer satisfaction. Make sure that their technology is a good fit with yours before entering into an agreement with any 3PL service.
— Location Of Fulfillment Centers
The location of their warehouses and fulfillment centers is a crucial element of their overall service. For example, you might serve customers mostly in the Northeast. If their centers are located on the West Coast, then that is likely not a good fit for your business. However, you might have a nationwide business, and the 3PL company you are considering has distribution centers all across the country. This could be a huge advantage to your company, and it would make sense to use that provider. Just make sure that the location of their warehouses and fulfillment centers aligns with your business needs and strategy.
— Available Services
It is crucial to select a vendor who offers all the services that you need. If you need a provider who can offer reverse logistics, then confirm with your selected provider that they can provide these services before you sign any agreements with them. Similarly, you might need someone who provides special packaging or kitting services. Each provider offers slightly different services, and each one has different rules when it comes to customizing its services. Make sure you work with a provider that will completely meet your needs and offers all the services that you require.
Cost Of 3PL Services
So, how much are 3PL services going to cost you? That answer varies widely and depends on several factors. When it comes to receiving services, most 3PL providers will charge somewhere between $25 to $65 per hour to perform these services. Others will charge a flat-rate per pallet of inventory received. Next are the storage fees. These can range anywhere from $10 to $45 per pallet per month. Finally, order picking and packing services usually cost around $3 to $4 per order.
You will find that some providers will consolidate all these costs into a combined monthly rate for your business. In that case, there are generally limits to the number of orders that can be processed or the amount of inventory that can be stored in their warehouse. The more services that you use from your 3PL provider, the lower the rate on each service will usually be. Even though these prices might seem a little high, they are usually much cheaper than attempting to perform these operations on your own. Renting warehouse space and hiring workers to perform these tasks can be extremely expensive.
The Bottom Line
Third-party logistics services are crucial to many businesses, and they allow these businesses to operate efficiently while serving customers all across the country. These providers can handle almost everything pertaining to your supply chain, from receiving inventory to processing customer returns. Using 3PL services can provide a great cost-effective way to streamline your operations and keep customer satisfaction at a maximum.
Frequently Asked Questions
Is Amazon a 3PL?
In some cases, Amazon acts as a 3PL provider for sellers. You can pay Amazon to store your inventory at their warehouse, pull orders as they are received, and ship items to your customers. They can even handle your customer returns as well. So, yes, Amazon does act as a 3PL. However, this is not the only service they provide. They are also a retailer, so they perform these logistics services for their own goods as well.
What are the differences between 3PL and an FCA?
FCA is an incoterm for Free Carrier. This is typically used in international shipping, and it means that the seller must obtain export clearance for the goods and load them for delivery. 3PL, on the other hand, deals with order fulfillment. Though 3PL providers may assist with shipping in some cases, shipping is not a core service offered by most providers.
What is the difference between 3PL and Fulfillment by Amazon?
There is not much difference between 3PL and Fulfillment by Amazon. When Amazon fulfills orders, they act as a 3PL provider. They store items in their warehouse, package them for delivery, and ship them to the end customer. The seller pays Amazon to provide these services, and it is essentially the same as hiring a 3PL provider.