Everything revolves around the customer experience. Business owners of all sizes will tell you that customer satisfaction is a top priority, if not the top priority. Studies show that customers who receive their orders quickly and efficiently are more likely to become repeat customers. This is where third-party logistics come in.
This blog will answer the question of “what is third-party logistics?”, explore the importance of a third-party logistics provider (3PL), and help you understand how to determine if it’s time for you to outsource your fulfillment.
What Is Third-Party Logistics?
In third-party logistics, companies contract with third parties to manage their supply chains and logistics. As part of the fulfillment process, a third-party logistics provider will store, pick, pack, and ship a business’ orders. Other value-added services offered by 3PLs include inventory management, kitting and assembly, and specialty packaging, all of which we’ll cover in more detail below.
The benefits of partnering with a 3PL can be significant for a business facing more complex supply-chain management and logistics challenges due to accelerated growth.
Manufacturers and merchants benefit from the experience of third-party logistics providers in simplifying, speeding up, and cost-effectively managing fulfillment. By outsourcing to a 3PL, businesses can concentrate more on their core business objectives and leave the supply chain and order fulfillment worries to the 3PL.
3PL vs. 4PL vs. 5PL — What’s the Difference?
How do 3PL companies work? What about 4PLs or even 5PLs? It’s not so much about what type of logistics provider is better, but which one is right for you. While 1PLs and 2PLs are not as commonly used today due to the complexity of global supply chains, scaling up to a 5PL and beyond isn’t always the best thing for a business.
A 3PL is an ideal choice for many companies looking to outsource logistics and still maintain some sense of control. Typically more cost-effective than 4PLs and 5PLs, a 3PL can manage the fulfillment needs of small- to medium-sized businesses and provide the expertise needed to service large companies.
Core Services Offered by a 3PL
What is the role of third-party logistics in supply chain management? From picking and packing to shipment and returns, below are five of the core competencies every qualified third-party logistics provider should possess.
Receiving
A 3PL’s warehouse receives a company’s products and stores them until they’re shipped to the customer. Each 3PL’s size determines its storage capacity. The third-party logistics provider should have enough warehouse space for the manufacturer or merchant to not only store their current product output, but also expand as the company grows.
SKU (stock keeping unit) numbers and a designated warehouse location will be assigned to every product sent to a warehouse. As part of the receiving process, the 3PL confirms the SKUs received and verifies that they correspond to the Purchase Order (PO).
Depending on the product, there will be specific regulations and requirements for storage and handling, such as temperature and humidity requirements, certifications and training requirements, as well as items’ security. If you operate in an industry that offers products that fall under the dangerous goods or hazardous materials categories, it’s important to look for an FDA-registered 3PL with the necessary qualifications needed to carry out this type of fulfillment.
Picking
The picking stage of fulfillment begins after the order has been received by a third-party logistics provider. When a customer places an order, the order is sent electronically to the 3PL’s warehouse where the item ordered is held.
Some 3PLs require manual entry of orders into their system. This is time-consuming, inefficient, and expensive. Look for a 3PL that can integrate their warehouse management systems (WMS), directly with their clients’ shopping platforms or interfaces. This will help automate the order receipt process.
Upon receiving the order in the WMS, the products that make up the order are physically removed from the storage area in preparation for packing and shipping. Every 3PL has an agreement called a service level agreement (SLA), which specifies how fast the 3PL must process orders.
Packing
There’s more to the packing process than putting items in an envelope or box. A quality third-party logistics provider will be highly skilled at identifying the most cost-effective and reliable packaging solution to ensure product security during transit. Doing so will also help reduce shipping costs and support an on-brand unboxing experience for the consumer as part of the total customer experience.
Shipping
Upon picking and packing an order, the package is ready for shipping. Many merchants and manufacturers find shipping to be the most complicated and expensive aspect of their fulfillment process. This is mainly due to the price of carriers (DHL, FedEx, UPS, USPS, etc. ), service levels per carrier, shipping cutoff times, and shipping locations.
An experienced 3PL can provide a clear shipping strategy as well as significant savings on shipping costs. 3PLs can leverage their buying power with carriers to offer their clients better pricing than they could otherwise receive if they were handling fulfillment on their own. 3PLs with multiple fulfillment centers are able to provide high savings on shipping costs and decrease order delivery time.
Additionally, your 3PL should be able to handle the printing of the shipping labels, as well as provide tracking information to you and your customers so both parties can track the order’s progress.
Returns
No matter how many order accuracy processes are put in place, mistakes can happen. More and more, customers expect easy return policies. Whether the customer ordered the wrong item or the product was damaged during shipping, your 3PL should prioritize return services.
As part of the returns process — also called reverse logistics — items are received and tracked, verified physically, and returned back into inventory or disposed of as specified by the client. As required, additional services like parts harvesting or order filling can be integrated into this process. A high-level 3PL can provide detailed reports regarding returned goods and their management throughout the reverse logistics process.
What to Look for In a 3PL
Partnering with an experienced third-party logistics provider simplifies the fulfillment process, but that doesn’t mean choosing any 3PL on a whim will be in your best interest. When looking to outsource fulfillment, we recommend looking for the following traits in your potential logistics provider.
Inventory Management
There’s more to managing inventory than just storing your products. With a technology-forward 3PL center, you can easily sync inventory to your online store, view inventory levels in real-time at each fulfillment center, and proactively reorder inventory to prevent stockouts.
With the right technology, you can also check the units sold per day and quantities on hand for each product after your 3PL receives and stores your inventory. This offers your customers complete visibility into what is available to ship at any given time.
According to the technology and workflow of your 3PL, you may also be able to send real-time stock counts back to your store’s website. That way your customers know if items are out of stock immediately.
Faster Delivery Times
As consumer demand continues to trend towards convenience and faster delivery times, it’s important to consider the following statistics:
- 48% of online shoppers who abandon their shopping carts do so because of shipping and handling costs.
- 38% of customers have canceled an order due to slow shipping.
Customers expect fast and affordable shipping at a click. When looking for a third-party logistics provider, it’s important to find one with multiple locations in strategic areas of the U.S. Doing so will help you reach more of your customer base with quicker and less costly delivery times.
Distributed Inventory
You can split inventory among a number of fulfillment centers when you work with a 3PL that has multiple warehouse locations. This allows each order to be shipped from the fulfillment center closest to your customers.
This model is called distributed inventory. With the right technology, a 3PL can also automate the fulfillment process by using powerful algorithms that route orders to the appropriate fulfillment center.
Business to Business (B2B) and Direct to Consumer (D2C) Fulfillment
Keeping your inventory in multiple fulfillment centers is necessary if your customers are geographically scattered. As a result, you can offer customers in those locations faster shipping and delivery times via ground for your inventory, as shipping via air can be significantly more expensive.
By splitting your inventory between 3PL warehouses, you’ll also be ready in case one warehouse is unable to fulfill your orders (e.g. extreme weather conditions). By having backup stock if one location runs out of products, you can replenish it elsewhere.
Returns Management
3PLs can further streamline your returns management process by integrating with a returns software solution that further streamlines the customer experience. You may choose to have returns restocked, quarantined, or disposed of while gaining visibility into eCommerce returns.
Kitting & Customization
Creating an unforgettable unboxing experience can help your brand stand out from the competition and leave a lasting impression. 3PLs can help enable this in the following ways:
- Custom gift notes
- Custom packaging
- Kitting
- Custom sender labels
Advanced Data Analytics
Data can be a competitive advantage for brands. Providing free analytics is one of the most valuable services offered by a 3PL, as it allows you to see how much time it takes to deliver an order, how much stock you have at any point in time, and how much storage it costs per unit, for example.
The Advantages of Third-Party Logistics
From money saved to industry expertise gained, the benefits of partnering with a third-party logistics provider can help you scale your business while removing the headache of fulfillment. While far from exhaustive, we’ll explore three of the top benefits of partnering with a 3PL below.
1. Save Time and Money
Investing in a 3PL eliminates the need to purchase space, labor, and technology necessary for in-house fulfillment.
Fulfilling orders yourself becomes increasingly expensive as your business grows. Among these costs are warehouse space, forklifts, warehouse management software (WMS), recruiting and labor costs, workers’ compensation insurance, and liability insurance.
You also save time by outsourcing fulfillment tasks to a 3PL. Instead of spending time packing boxes, standing in line at a postal carrier, or building out fulfillment infrastructure, working with a 3PL gives you time back to focus on more strategic initiatives, such as product development and marketing.
2. Leverage Industry Expertise
You probably don’t have time to learn every detail about shipping and logistics. A 3PL can take these responsibilities from you. Your 3PL will have eCommerce logistics professionals who are knowledgeable and up-to-date on industry trends and complexities, all so you don’t have to be.
The 3PL’s systems and company network — including marketing agencies, custom packaging, and companies — allow it to make improvements to supply chain efficiency. This helps optimize supply chains to help further drive eCommerce success.
3. Expanded Reach
When you limit your business to one region, you limit its potential. Using a 3PL can help you reach markets previously untapped by your business. In-house fulfillment lacks an expansive network of fulfillment centers provided by 3PL companies. You can reduce the costs of shipping and transit time for orders by using a 3PL with fulfillment centers in major US cities.
When to Consider Outsourcing Your Fulfillment Logistics
Perhaps by now your question of “what is third party logistics?” has been answered. But knowing why a 3PL is important and what it is doesn’t answer the question of how to know when it’s right to make the move to outsource fulfillment. Below are three questions to consider that will help you determine if the time is right.
Are You Losing Money?
Are you spending more money handling your own fulfillment than you are making in profit? Utilizing a 3PL can reduce upfront investment costs associated with building or leasing warehouses and logistics resources. Additionally, it saves you money on costly fulfillment and warehouse management systems.
Can You Manage Orders In-House?
As your business grows or you experience unexpected seasonal fluctuations, how will you handle the rising costs of staff and facilities? Can you keep your shipping costs low if you ship nationally?
Partnering with a third-party logistics provider allows you to increase your inventory storage options during times of increased demand and cut back on inventory when sales are lower. This eliminates the necessity of paying and managing an entire warehouse yourself that may sit half-empty at certain times of the year.
Are You Struggling to Manage Inventory?
How efficiently do you manage your inventory? A 3PL can help you forecast sales for your business and better manage inventory to avoid stockouts.
At Jay Group, we understand the ins and outs of third party logistics so you don’t have to. Contact us today to see if we can help you better manage your supply chain process.
This blog was originally published on April 2, 2019. It was updated on May 17, 2022.
