What is a 3PL? Guide to Third-Party Logistics for eCommerce

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Scaling an eCommerce business can make logistics and order fulfillment increasingly challenging, particularly if you do everything in-house. Handling everything, from inventory management to shipping, can consume significant time and detract you from focusing on other critical areas of your business, such as developing new products and initiating marketing campaigns.

The growing demands that come with surging order volumes are precisely why third-party logistics are in high demand. Many eCommerce businesses rely on these expert logistics partners for their order fulfillment and find that doing so saves them time and money and affords them the freedom to scale their business to greater heights.

This guide covers everything about 3PLs, how they work, and the benefits of partnering with one. It also discusses how you can find the right provider for your business.

Introduction to Third-Party Logistics

3PL, short for third-party logistics, refers to outsourcing various logistics functions to external providers, including inventory management, warehousing, order fulfillment, and shipping. 3PL companies have the necessary infrastructure and systems to streamline supply chain management and automate the order fulfillment process.  

Rather than managing stocking, inventory, and distribution in-house, collaborating with a third-party logistics vendor involves renting storage space in their warehouse for your products. This setup lets you ship items directly from your manufacturer to the 3PL’s warehouse. Upon receiving an order, the 3PL handles the picking, packing, and shipping processes, dispatching the order directly to your customers from their warehouse.

Some third-party logistics providers may offer additional services, including:

• Freight Forwarding
• Customer Support
• Kitting
• Customization
• Returns (Reverse Logistics)
• Advanced Data Analytics
• International Fulfillment

Benefits of Third-Party Logistics

Outsourcing logistics to experts enables eCommerce businesses to offload logistics operations to concentrate on their core competencies,  invest in strategic planning, and allocate more resources toward expanding their business reach.

While each 3PL logistics company has its distinct features and offerings, they all excel in warehouse management, order fulfillment, and shipping. Partnering with one guarantees a reliable and streamlined logistics system, which improves operational efficiency and significantly enhances your business’s overall profitability.

Below are some benefits of outsourcing to a 3PL:

Cost and Time Savings

All the substantial upfront costs and operational challenges that come with in-house fulfillment, such as leasing warehouse space, hiring staff, and investing in equipment and technology can be quite hefty for a growing business. For example, consider the expenses involved in leasing a typical U.S. warehouse, which averages 180,000 square feet at a cost of around $7.96 per square foot. Additionally, operational expenses such as taxes, insurance, janitorial services, and electricity can add another $2 to $5 per square foot. Furthermore, commercial lease agreements usually span three to five years, or even longer, committing the business to a long-term financial obligation. By partnering with a 3PL, you only pay for the warehouse space you occupy and benefit from their experienced warehouse staff and existing infrastructure and technologies, eliminating large upfront investments. 

3PLs capitalize on the collective volume from working with numerous clients. This allows them to invest in advanced infrastructure and technology that would typically be unaffordable for an individual business. At the same time, 3PLs handle high order volumes and frequency. For context, while shipping 10,000 orders a month may be significant for a large retailer, it pales in comparison to a 3PL that handles over 1 million shipments a month. This gives them the ability to strike exclusive relationships with various logistics providers and negotiate better rates on shipping services and materials. Consequently, this allows businesses to offer their customers lower-cost or even complimentary shipping options.

Wider Selection of Shipping Carrier and Methods

Working with a 3PL means you can benefit from their established network of shipping carriers. If you choose to do this on your own, you'll need to split your shipping volume across multiple carriers which lowers your volume per carrier, heavily diminishing your business's ability to leverage volume for better rates. 

Working with different carriers also means dealing with multiple carrier relationships, which involves handling claims, coordinating invoices, and arranging pickups with each carrier.  By contrast, a 3PL consolidates and handles all these operations so you only deal with one entity for all shipping-related issues rather than have multiple invoices from different carriers.

In addition, partnering with a 3PL provider allows you to benefit from economies of scale. This means that the costs are spread over a larger amount of goods, resulting in lower individual expenses than what you might incur if you manage all your operations in-house.

Wider Business Reach

3PLs often have fulfillment centers spread around different regions, allowing business to expand their reach. Partnering with a 3PL with warehouses scattered around the country facilitates faster delivery and cost-effective shipping for eCommerce businesses since fulfillment centers are closer to your customers, leading to lower costs and faster delivery times -- the secret behind same-day or guaranteed two-day shipping big brands offer.

Working with a 3PL with several distribution centers also gives you options regarding where to house your inventory. If your customer base is widespread, distributing your inventory across several locations can be beneficial. Meanwhile, if your customers are concentrated in a specific, smaller region, it might be more practical to utilize a smaller network of warehousing centers.

Partnering with a 3PL is a strategic move for businesses looking to explore international markets.  You can work with a 3PL in that country and gauge market interest before making more substantial commitments and navigating their labor laws. At the same time, 3PL providers typically work with different carriers. If you have international customers, working with fulfillment centers that can accommodate shipping to these countries is crucial.

Maximize the Efficiency of Having Multiple Facilities

Leveraging a distributed fulfillment strategy through a 3PL offers significant advantages, particularly in shipping efficiency and cost reduction. By utilizing multiple fulfillment centers, often strategically located in different regions, businesses can drastically decrease the distance to the end customer. This approach leads to reduced shipping zones, directly translating to lower shipping costs and faster delivery times.

Initially, you can begin with a bicoastal fulfillment strategy – operating out of facilities on both the East and West coasts. As your business grows, you can expand into more facilities across various locations. This expansion not only optimizes shipping logistics by covering more ground but also enhances customer satisfaction with quicker delivery times. 

Access to Industry Expertise and Resources

3PLs offer expertise gained from years of industry experience, extensive resources, and a broad network of providers. This allows them to offer tailored, cost-effective, and efficient solutions aligned with your business’s specific requirements. 

Depending on what a 3PL can offer, you can have access to value-added services like kitting, subscription, and customization for your eCommerce business. These can enhance your business operations and boost customer satisfaction. 

Protection Against Supply Chain Disruptions                             

3PLs typically have established relationships with international, national, regional, and local carriers, which can make your business less vulnerable to shipping and fulfillment disruptions.  For instance, Xparcel, exclusively for ShipNetwork clients, dynamically routes packages to circumvent transit delays and supply chain bottlenecks that may arise from carrier limitations and adverse weather conditions.

Greater Customer Satisfaction

Managing all operations internally can overextend you and your staff, increasing the likelihood of errors. Partnering with a 3PL helps reduce such mistakes, including incorrect orders and shipment delays, and efficiently streamlines the fulfillment process. This collaboration results in quicker shipping, more effective customer service, and a swifter return process. Ultimately, all these significantly improve customer experience and satisfaction. 

How Does the 3PL Process Work?

Services vary among third-party logistics providers, with some specializing in unique offerings tailored to specific niches and providing value-added services beyond basic fulfillment. Here’s an overview of what a typical eCommerce 3PL process looks like:

Platform Integration

Contemporary 3PL providers often leverage technology, employing shipping and fulfillment solutions that integrate smoothly with popular eCommerce platforms and marketplaces like Shopify and WooCommerce. This integration extends to any existing inventory management systems and software you might be using. If you sell across multiple channels, the 3PL vendor should ideally provide omnichannel support or develop custom API integrations tailored to your unique needs.

Here is what happens at a 3PL warehouse as soon as a customer checks out an order from your online store.

Receiving

The 3PL coordinates and schedules inbound shipments from manufacturers, typically through freight forwarders. 3PL companies can also help businesses find the best freight deals based on the products and order volume.

Warehousing and Inventory Management

3PLs store your inventory in their fulfillment centers and sort and store each stock-keeping unit (SKU) in a particular storage location -- which could be on a storage bin, rack, aisle, or pallet. 

Advanced warehouse management systems utilized by 3PL warehouses efficiently track each SKU’s location, enabling quick and efficient order fulfillment. These systems are also in sync with your eCommerce platforms, allowing them to feed you real-time updates on order statuses and warehouse stock levels. This seamless connection also helps you avoid stockouts and manage your inventory more effectively.

Picking

When an order is placed on any of your sales channels, it is automatically pushed to the 3PL’s distribution center. A staff from the warehouse picking team gets a picking list and collects the ordered item/s from their respective storage locations. 

Packing

After all the items have been picked, the order is prepared for packaging. Warehouse staff utilize efficient packing techniques and the appropriate packing materials to ensure product safety during transportation while achieving the lowest dimensional weight for lower shipping costs. 

The types of packing materials used for the orders will also depend on what the 3PL offers. Common product packing materials include bubble mailers, boxes, and dunnage. Some companies include these as part of their eCommerce fulfillment services, while others charge it separately. Some 3PLs also offer custom packaging.

Once the package is securely sealed, packers at the warehouse print and attach the shipping label to it. Scanning the label automatically updates your inventory levels within the 3PL system and informs the system that the package is ready for shipping.

Shipping

Once an order is ready, carriers collect it from the 3PL warehouse. They scan the package at the time of departure, initiating its tracking process. Since shipments often travel long distances, moving through various regional sorting facilities, carriers employ barcode scanning to capture and update real-time tracking information. This data is automatically uploaded to the 3PL’s systems and then synchronized with your online store’s platform, letting you and your customers monitor the package’s journey from the moment it departs the warehouse until it arrives at the customer’s location. 

Reputable 3PLs typically work with multiple carriers, allowing businesses to offer their customers a range of shipping options. Some 3PLs even provide expedited shipping for orders that need quick delivery. For instance, ShipNetwork can deliver your products within two days via ground shipping using their 1-2 day US ground delivery network.

Returns

Many 3PLs also offer return processing services. When a customer decides to return a product and request a refund, it is sent back to the 3PL warehouse, where a team evaluates whether to dispose of or restock it based on the seller’s preferences. 

Return rates can vary, often influenced by the type of products sold -- for instance, clothing and shoes typically see higher return rates. However, partnering with a 3PL with a low fulfillment error rate can help reduce returns caused by issues like delayed shipping or shipping damage.

Working with a 3PL to manage your eCommerce returns can streamline the process, offering reduced processing times and lower operational costs. These providers often furnish return shipping labels, which ease the tracking of returns for both businesses and customers. Some 3PLs include a return label with every shipment, offering convenience and ease of tracking to customers but incurring additional costs for printing and including these labels. Alternatively, others require customers to request a return label from the customer support team, which can be more cost-effective for the business but potentially less convenient for customers.

Additionally, there are numerous returns platforms available that brands can integrate into their WMS, optimizing the returns process. These platforms can streamline returns management, improve customer satisfaction, and enhance efficiency in handling returned products, whether they are to be restocked or disposed of, according to the seller's preferences.

Notably, efficient reverse logistics is a significant contributor to customer satisfaction and loyalty. A survey by Invesp, a leading provider of eCommerce conversion rate optimization software and services, shows that an easy return process leads 92% of customers to be more inclined to make repeat purchases from a brand. This integration of 3PL services in the return process can be a critical factor in enhancing customer experience and encouraging brand loyalty.

Is Third-Party Logistics Cost-Effective?

Partnering with a 3PL is cost-effective for various reasons. By sharing resources among multiple clients, a 3PL can offer significant cost savings compared to operating an independent distribution center, which demands substantial upfront and ongoing investment in facilities, equipment, labor, and infrastructure. This means your business pays only a fraction of these capital expenses, avoiding the full costs of running a standalone facility. However, for small businesses or startups selling only a few orders daily, a 3PL might not be the most cost-effective choice due to setup and tech integration costs. If you're a small business, it's often more practical if you handle fulfillment in-house until you can no longer handle your order volume, and a more robust solution, like a 3PL, becomes necessary and cost-effective. 

Working with a 3PL instead of running your own facility also offers easy scalability to accommodate your growth and changes in market demand without the unnecessary costs. For instance, businesses with busy and slow periods can scale their logistics operations up during fulfillment peak seasons and scale down during off-peak seasons without incurring extra expenses during less busy times.

Working with multiple clients lets 3PLs leverage their buying power to secure better rates for packing materials, freight, and shipping than individual sellers. A recent report showed that nearly half of customers worldwide want faster delivery, and almost as much (43%) expect cheap shipping costs. With multiple fulfillment centers spread across the country, a 3PL lets you place your products in warehouses closer to your customers, which translates to lower shipping costs and faster delivery. 

Choosing a 3PL Provider

Every 3PL logistics company is different. The logistics services and value add-ons you can get varies from provider to provider. If you’ve decided to work with a third-party logistics company, here are some factors you should consider:

Business Needs

The first step to choosing the right 3PL company for your business is assessing your specific logistics operations and order fulfillment needs. For most businesses, these are costs and transit needs. Consider your goals. Are you aiming to boost profits through cost reductions, enhance customer satisfaction with faster delivery, or achieve a blend of these outcomes? Understanding your specific goals is crucial in guiding you to a 3PL provider that aligns well with your business’s unique needs.

You also have to consider a 3PL company’s expertise and product limitations. Fulfillment providers do not take all kinds of products. Some may not have the facility for perishable products while others specialize in certain product types, like pharmaceuticals. ShipNetwork, for instance, does not handle alcohol and tobacco products. 

Logistics Operations

Check their existing logistics process and their scope. Most 3PL companies handle the entire order fulfillment process, from receiving to returns, while others handle only some parts of the process. It is also essential to look at their track record.

Here are some important questions to ask:

• What systems and technology do you use for your order fulfillment process?
• Do you offer customization in your services?
• Do you provide real-time order status updates?
• Do you handle reverse logistics?
• How many orders do you ship every month?
• How do you handle spikes in order volume?
• How do you handle expedited shipping?
• What is your maximum capacity?
• Does your customer service offer responsive and timely support?
• Do you support international shipping?

Expertise

When choosing a 3PL provider, it's essential to consider their specialization in specific verticals and their experience with companies in your industry. As important as looking for a 3PL that not only has the necessary expertise, equipment, packaging materials, and space to handle your products, it's crucial to look for one that possesses specialized knowledge in key logistics areas like expertise in packaging techniques, understanding and managing Material Safety Data Sheets (MSDS) for hazardous materials, employing strategies like zone skipping to reduce shipping costs, navigating the complexities of international shipping, and calculating dimensional weights for cost-effective shipping. Partnering with a 3PL with these nuanced skills in logistics and supply chain management can significantly influence the efficiency and cost-effectiveness of your logistics operations.

Technology

One of the most important aspects to consider when looking for the ideal 3PL is the technology that powers its entire process. Ask how their technology helps with the entire fulfillment service and if and how it can connect with your existing order management system. Some of the technologies 3PLs utilize to streamline the logistics process include:

• Warehouse Management System (WMS)
• Shipping Dashboards
• Routing Capabilities
• Integration Capabilities
• Picking and Sorting Capabilities

 To add, check if they offer advanced analytics, which you can use in making informed decisions about your business. 

Warehouse Location

Working with a 3PL with fulfillment centers spread across the country lets you split your inventory so you can ship your orders from warehouses closest to your customers.The broad geographic spread of warehouses can also drastically cut down the distance to your end customer, which not only lowers shipping costs and speeds up delivery times, but also ensures that you cover a wider market more effectively and respond more rapidly to customer orders.

That being said, asking the 3PL provider how many warehouses they operate and where they are is vital. Finding a 3PL with a warehouse in your high-volume areas is vital especially with 23% of buyers abandoning their carts because the delivery was too slow.

Costs

Pricing in 3PL varies from provider to provider. Some choose to charge an all-in rate while others break it down for more transparency. They may break down pricing to include fees for different aspects of the fulfillment process, like inventory storage and pick and pack costs, along with add-on services like bundling and kitting.

Understanding a provider’s pricing model is key to making informed decisions choosing the most cost-effective 3PL to partner with. Here are some of the most common 3PL costs:

• Onboarding Costs: Creation of account and software set-up and integration
• Inventory Receiving Costs: Offloading and storage of inventory from transportation provider to warehouse; this can be a flat, hourly, per-unit, or -pallet rate
• Inventory Storage Costs: Fee per storage space; this can be per SKU or unit or a fixed fee per container type (bin, shelf, pallet) used
• Pick and Pack Costs: Fee per item included in an order
• Packaging Costs: Some 3PLs include this as part of their service while others charge for packing materials such as boxes and dunnage
• Kitting Costs: Add-on fee for other packing and assembly accommodations
• Shipping Costs: Delivery of the product to the customer; this varies depending on factors like dimensions, shipping zones, and delivery speed

Challenges of Implementing External Logistics

While utilizing third-party logistics comes with numerous benefits, outsourcing your eCommerce order fulfillment to a 3PL may also have potential drawbacks.  

Substantial Upfront Costs

Partnering with a 3PL provider comes with upfront costs, like transportation fees, receiving costs, and onboarding. But it's important to recognize that transportation fees are a common logistical expense, whether or not you partner with a 3PL. The key difference lies in the destination of your inventory, which would be routed to the 3PL’s facilities rather than your own.  

At the same time, you should consider the expenses you no longer need to spend, like labor and equipment procurement and maintenance fees which overtime will likely result in savings from reduced overhead and labor costs. Additionally, contrary to concerns about setup fees for 3PL services being steep,  they're actually a small one-time fee to get your account setup and integrated into the system. 

Loss of Control

When transitioning your logistics operations to a third-party logistics provider (3PL), it's natural to worry about losing control over key processes like delivery and inventory management. However, it's important to understand that while a 3PL manages the physical delivery, your business retains significant authority over how this process is executed. You can establish specific delivery protocols, timelines, and quality standards that the 3PL is required to follow. 

You also maintain control over inventory management. You can continue to use your existing inventory management systems and simply integrate it with the 3PL's Warehouse Management System (WMS), allowing for seamless communication and coordination between the two. 

At the same time, you have complete visibility into the 3PL’s inventory management systems, with 24/7 support with a human representative to help ease any worries. 

Differences in Workflow and Operating Hours

3PLs operate with their own set of operational hours and workflows, which may initially seem inflexible to businesses, particularly when these schedules do not match the business's immediate needs and preferences. Often, businesses opt for in-house management for greater control, believing that this level of direct intervention isn't possible with a 3PL due to their independent operation and adherence to their own schedules. This concern is especially relevant in scenarios such as sudden increases in orders from flash sales or viral products, where businesses desire the ability to rapidly process orders. However, it's crucial to recognize that 3PLs can be quite flexible and collaborative. They typically operate within standard business hours, but are willing to extend these during peak periods. If businesses anticipate an unusual surge in order volume, due to events like promotional sales or seasonal demands, they can communicate these projections to their 3PL partner. With advance notice, a 3PL can adapt their processes to accommodate these needs, ensuring timely processing and shipping of orders.

While the restricted hours of some 3PL providers can affect how quickly they can process and ship orders, having a Service Level Agreement (SLA) with a 3PL can greatly mitigate this risk. A SLA, included in the contract, precisely and measurably outlines the services a 3PL provider will deliver to the customer. This agreement provides customers with confidence and certainty that their orders will be processed and shipped as expected, thereby minimizing the risk of order fulfillment delays. On the other hand, managing order fulfillment internally can often lead to delays, especially during periods of peak volume.

Difference Between 3PL and In-House Logistics

In-house logistics, also called self-fulfillment and internal fulfillment, is when an eCommerce business fulfills orders independently instead of outsourcing the fulfillment process to a third-party provider. 

While completing order fulfillment in-house creates a lot of work, it offers complete control over inventory and warehouse management. It allows businesses to decide on their products’ storage, picking, packing, and shipping methods, ensuring each step of the fulfillment process aligns with their specific preferences and standards. 

In-house fulfillment lets you easily personalize your customer’s experience by offering unique packaging and customization on every order. In contrast, while some 3PLs might offer customization options, they often come at additional costs.

In the same way, it’s also easier to resolve changes and issues since no outside parties are involved. This direct management can lead to quicker adaptations and resolutions.

The chart outlines the primary differences between in-house logistics and using a third-party logistics (3PL) provider:

Importance of Technology in 3PL

Technology-enabled 3PLs utilize advanced technologies to streamline eCommerce logistics on top of traditional services like warehousing, picking, packing, and shipping. Their sophisticated software systems merge data from diverse sources, providing comprehensive insights into an order’s lifecycle. This includes real-time tracking of inventory and order statuses across the 3PL’s warehouse network and seamless integration with online platforms and marketplaces, ensuring that your online stores display accurate stock levels and allow for the real-time tracking of all orders and returns.

This level of automation reduces the reliance on manual processes. Unlike traditional methods, where sellers must send orders to the 3PL before a daily cut-off time, this automated system ensures orders are processed immediately upon placement. It also streamlines traditional services. For instance, technology helps with the picking process, ensuring that the right products in the right variants and quantities are picked, increasing order accuracy and efficiency while reducing the likelihood of errors.

Additionally, adopting technologies minimizes human errors such as data entry mistakes and order duplications, which can otherwise lead to time-consuming processes like exchanges, replacements, and returns, not to mention frustrated customers.

The software 3PLs use also generates large amounts of data that businesses can use to identify trends and make more effective supply chain and logistics decisions. The data provided can include metrics like daily orders shipped, warehouse stock levels, and sales figures across different channels.

Conclusion

Outsourcing your eCommerce brand’s fulfillment process is a great way to grow and expand your business’s reach. Aside from leveraging the expertise, extensive resources, networks, and sophisticated technology of third-party logistics, working with a 3PL lets you offload the most time-consuming and labor-intensive elements of a business. 

3PLs streamline the fulfillment process, which is critical to reducing errors and inefficiencies that could negatively impact your finances and customer satisfaction. However, not all 3PL companies are the same. This makes it crucial to carefully analyze your specific needs and meticulously review the services and pricing structures of potential 3PL partners.

While outsourcing fulfillment might initially seem daunting or expensive, collaborating with a 3PL can significantly enhance the efficiency of your business operations, support its scaling efforts, and save you money in the long run. So, if you’re looking to scale your business or optimize your supply chain, finding a reputable 3PL with a track record of excellence and reliability is a smart move.

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FAQs

What is 3PL?

Third-party logistics, or 3PL, refers to outsourcing the eCommerce fulfillment process and management to a third-party company. The logistics services 3PL companies provide include warehousing, inventory management, shipping, kitting, and returns.

What is the difference between a 3PL and a 4PL?

3PL providers manage the daily activities of eCommerce order fulfillment, which includes warehousing, picking and packing, and shipping orders. On the other hand, 4PL goes beyond this. It manages and oversees the entire supply chain. This means that 4PL providers manage processes other than order fulfillment, including supplier coordination, transportation, and distribution networks. A 4PL manages other vendors, including 3PL providers.

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What is the difference between a 3PL and a freight forwarder?

A freight forwarder primarily focuses on transporting goods from one location to another, coordinating across different modes of transport (e.g., rail, air, or sea). They handle crucial tasks associated with the shipping process, including preparing and handling custom documents and duties and negotiating the freight fees on behalf of their clients. While they may offer limited storage or warehousing services for goods in transit, their primary function is managing the transportation process​.

On the other hand, 3PLs offer many more services than a freight forwarder. It provides comprehensive logistics services, from warehousing to shipping. 3PLs are more deeply integrated into business operations as they receive orders directly from sales channels and prepare them for shipment. Some 3PL providers, like ShipNetwork, also offer freight forwarding services.