Order fulfillment serves as the backbone of your eCommerce business. However, as order volume increases, managing fulfillment in-house may not always be the most productive option.
Businesses now outsource order fulfillment to third-party logistics (3PL) companies to scale their fulfillment strategy and avoid mismanagement. In this article, we’ll explore what 3PL is and how it can streamline supply chain and warehouse management software.
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What This Article Covers:
- What Is 3PL?
- How Does 3PL Work?
- The Evolution of 3PL
- Types
- Primary Benefits
- Key Processes
- Value-Added Services
- 3PL vs. 4PL
- How To Choose the Best 3PL Provider
- FAQs
- Next Steps
What Is 3PL?
3PL is the process of outsourcing eCommerce order fulfillment processes like inventory management, warehousing, shipping and receiving to a third-party logistics service provider. Third-party logistics providers help streamline fulfillment, mitigate errors and reduce overhead costs. They also offer several value-added services such as kitting, returns processing and cross-docking.
The Council of Supply Chain Management Professionals (CSCMP) defines 3PL as:
A person who solely receives, holds or otherwise transports a consumer product in the ordinary course of business but does not take title to the product.”
A 3PL service provider can help you manage individual modules like warehousing, transportation or shipping. Some providers also offer a comprehensive suite of services to manage the entire supply chain.
In an interview with SelectHub, Jim McClellan, Co-founder of Fort Systems, explained:
3PL services are basically a solution for companies looking to outsource elements of their logistics and supply chain management functions to specialized firms. It’s an option that can make sense for small to medium-sized companies that lack the infrastructure for efficient fulfillment and WMS operations, but also for large companies looking to gain efficiencies and focus on core competencies.”
How Does 3PL Work?
Imagine you own a local farm that delivers fresh vegetables to the market. You’ve hired staff to manage farming operations but lack the expertise to handle order management and logistics. So, you outsource these two functions to company A and company B.
Now, companies A and B have become 3PL providers. However, if there’s a company C that can handle both order management and logistics, it’s also a 3PL provider offering comprehensive services.
Unfolding the working process of 3PL providers, McClellan said:
- Once the business rules for a 3PL client have been put into place, clients will move all or some of their inventory to one or more of the 3PL’s facilities and work with the 3PL on the details for setting up inventory, receiving, shipping, notifications, etc.
- Once these details are in place and [the] product is warehoused, a multi-tenant 3PL platform will provide clients real time access to all relevant information, including inventory quantities, order statuses, tracking information, returns and client messaging.
- A 3PL provider regularly communicates with the client, providing updates on logistics activities, performance metrics and any issues or challenges encountered. They may also generate reports and insights to help the client make informed decisions and improve their overall logistics strategy.
- As a client becomes established in terms of overall structure, order volume and other factors, the 3PL provider may need to adapt the logistics solutions accordingly. This may involve scaling up or down resources, expanding into new markets, incorporating new technologies or adjusting processes to accommodate changing demand patterns or business requirements.
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The Evolution of 3PLs
The rapid scaling of the logistics industry in the last 40 years resulted in the growth of the 3PL industry. Here are a few notable events that contributed significantly to this growth:
The Motor Carrier Act of 1980
The Motor Carrier Act of 1980 deregulated the traffic industry, significantly increasing the number of trucking companies in the U.S. Observing this growth, exclusive warehousing service providers expanded into trucking and supply chain management. With increased competition, these trucking carriers eventually became 3PL service providers.
Globalization and E-Commerce Boom
In the 1990s, emerging economies like China and India disrupted the logistics industry by opening up their markets globally. This led to a surge in demand for logistics management services, ultimately increasing the number of 3PL providers in the eCommerce landscape.
Technological Leaps of the 2000s
The rapid integration of technology in businesses since the 2000s empowered 3PL providers to increase supply chain efficiency and extend their reach to global markets. Using advanced platforms like radio frequency identification (RFID), Internet of Things (IoT), telematics and more, they improved resource and operational optimization.
The global 3PL market is predicted to reach $2.8 trillion by 2031, registering a CAGR of 8.8%.
Robert Khachatryan, CEO at Freight Right Global Logistics, said:
The 3PL sector has seen exponential growth, driven by the eCommerce boom and globalization. Businesses are increasingly relying on 3PL providers to navigate the complexities of international logistics, leading to a significant annual growth rate in the 3PL market.”
Types
There are a variety of options, differentiated by location, industry and specialization. While most offer several services, they focus on one of these functional areas:
- Transportation: Partners focused on transportation services manage inventory shipments from manufacturers to warehouses or from a company to buyers. This type of service also includes transportation management, such as route optimization, carrier selection and shipment tracking. 3PL providers that offer these services have a network of carriers that they work with to ensure the timely and cost-effective delivery of goods.
- Warehousing and Distribution: The most common type of support provides basic storage and fulfillment services such as receiving, pick and pack, shipping and returns.
- Financial and Information: Suited for large-scale companies, these providers optimize their client’s logistics network by offering services such as inventory tracking, cost control, accounting, freight auditing and more.
Larger vendors offer a full suite of services and customization to meet specific business requirements.
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Primary Benefits
As businesses expand, they can benefit immensely from outsourcing their logistics operations to 3PL companies. Here are some of the common advantages of working with a provider:
Save Time and Costs
Save time and money by eliminating the need to invest in multiple warehousing tasks such as transportation, workers and technology to execute supply chain operations. With a 3rd-party logistics provider, businesses don’t have to invest extra in renting out warehouse space.
They prevent costly shipping mistakes while optimizing paperwork, audits, billing, staffing and more.
Enhance Efficiency
Access to technology and infrastructure provides complete shipment visibility and helps manage inventory better. Businesses can communicate with carriers and navigate during obstacles like weather conditions, service constraints and traffic congestion.
It improves inefficiencies, blockages and supply chain issues by providing real-time inventory insights.
Mitigate Risks
Partnering with 3rd-party logistics provides warehousing solutions such as seamless order fulfillment processes. It procures and stores stock from eCommerce companies in different warehouses while fulfilling orders from the nearest warehouse.
It offers high-level logistics expertise and risk management solutions for companies that don’t have an in-house supply chain management department. It also identifies potential risks and provides solutions for immediate recovery.
Improve Inventory Management
Most eCommerce companies partner with 3pls due to their high inventory reliability. In inventory management, you can label items with SKUs and store them in bins, while 3PLs use order management or warehouse management software to update inventory. It automatically displays available and fresh stock on virtual marketplaces or the company’s eCommerce website.
Boost Customer Experience
Hassle-free delivery with customized packaging, safe order transit, timely status updates and more keeps customers happy. Partnering with third-party logistics provides delivery benefits such as same or next-day delivery.
They can scale transportation needs, inventory requirements, labor and warehouse space without hassle. Since 3PLs have an expanded network of interconnected routes, shipping is simple.
Despite the above benefits, there is a flip side to using third-party support for supply chain operations. The companies who opt for working with one should be ready for:
- Less control over inventory and delivery process
- Larger upfront investment
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Key Processes
Here are some core services third-party logistics provides.
1. Receiving and Warehousing
The first step of order fulfillment begins with accepting inventory into a warehouse or a fulfillment center for storage, known as receiving. Coordinate inbound shipments through a freight forwarder, manually or through software and store them in a bin, pallet or shelf for visibility.
Each provider has a different capacity and strategy for receiving and storing inventory.
2. Picking
The next step is assigning placed orders to the warehouse picking team. While some partners follow a manual procedure to upload orders, others use integrated technology to connect shipments, inventory levels and orders from a single interface.
On submitting the order and item locations, they identify item locations to ‘pick’ out of the warehouse based on suitable pick types.
3. Packing
After picking, organize the items and pack them based on the client’s preference. Providers offer several packing materials to ensure items are secure and presentable while maintaining optimal dimensions and weight.
4. Shipping
After packaging, shipping is up next. Some clients have preferred carriers, while others might require assistance to frame an ideal shipping strategy. 3PLs print shipping labels and assess partners to compare options for shipping cut-off times, costs and more. Once shipped, tracking is available to all parties involved.
5. Returns and Reverse Logistics
Many 3rd-party logistics providers offer order fulfillment, returns management and reverse logistics services. Whether item delivery takes place by mistake or is damaged during the shipping process, 3PL partners follow a standard procedure to receive products, document receipts and follow the client’s reverse logistics strategy.
The item returns to the warehouse for refurbishment, recycling or destruction.
In addition to order fulfillment and reverse logistics, 3rd-party logistics offers other core functionalities, such as:
6. Transportation
Third-party logistics partners can handle transportation functions by analyzing their shipping, demand cycle and supply chain. They offer real-time visibility into moving inventory.
They also audit freight performance, identify efficiencies, optimize loads and reduce transportation costs.
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Value-Added Services
Beyond the core functionalities, there is a wide array of value-added services such as:
Inventory Management
Inventory management is a critical aspect of supply chains. These partners go beyond just storing products in a warehouse and provide real-time visibility into inventory. They sync digital storefronts with inventory at each warehouse location, track real-time records, order more inventory and push out-of-stock notifications to the end customer when required.
Kitting
Kitting involves assembling multiple individual items into ready-to-ship sets and easy-to-track SKUs before order fulfillment. It streamlines the packing and shipping process and improves customer satisfaction by ensuring quick receipt of bundled products.
Distributed Inventory
Many vendors have multiple strategic locations for their warehouses and fulfillment centers to ensure time-and cost-efficient delivery solutions. Clients can have their products at numerous geographical locations and ship each order from the storage location closest to the customer. This model is known as distributed inventory.
Labeling
This step involves attaching product information and shipping details to packages before dispatch. It ensures that products are correctly categorized, tracked and routed throughout the supply chain and remain compliant. Different markets have different labeling requirements, so re-labeling is also vital for international shipping cases.
Technology and Expertise
Logistics is a huge undertaking as it constantly evolves. An experienced provider imparts their knowledge and expertise to streamline each aspect of the supply chain. They provide technical solutions to simplify processes and deliver promising results.
3PL vs. 4PL
A 4PL, also known as a lead logistics provider (LLP), is another type of logistics outsourcing service that offers the same services as 3PLs but comes with additional responsibilities and accountability. 4PL providers often deal with multiple 3PL companies and manage several supply chain modules like shipping and end-user support.
While 3PL providers offer a specific set of logistics services such as transportation, warehousing, freight forwarding and distribution, 4PL providers offer a broader range of services that extend beyond traditional logistics functions. These include supply chain strategy, network design, vendor management, procurement and overall supply chain optimization.
How To Choose the Best 3PL Provider
While outsourcing fulfillment operations to third-party logistics providers is no longer a no-brainer, you must not rush to make a decision. The first step in choosing the right 3PL provider is determining whether you need one.
Here are a few questions you can ask yourself while evaluating your requirements for 3PL outsourcing services:
- What are our key business goals, and how do our logistics operations align with them?
- How are our current logistics operations affecting overall business efficiency and customer satisfaction?
- Do we have the necessary technology and expertise to optimize our logistics operations?
- Can we scale our logistics operations efficiently to meet fluctuating demand?
- What’s the cost-benefit analysis of managing logistics in-house versus outsourcing to a 3PL?
- Can we effectively manage compliance, risk and international shipping challenges with our current resources?
Once you’ve evaluated your core requirements, proceed to evaluating 3PL providers.
Khachatryan advised:
When selecting a 3PL provider, consider their industry expertise, technology capabilities, network strength and customer service record. A successful partnership hinges on alignment with your business needs and the provider’s ability to adapt to changing market dynamics.”
McClellan suggested some other requirements that you must look for in a successful 3PL provider:
- In addition to assessing general experience and expertise, evaluate whether there are industry-specific requirements (there are many in beverage alcohol, for example) and whether the 3PL has a proven track record in those areas. Client references are always helpful as well.
- Evaluating technology capabilities is key in determining a 3PL’s success. Do they have a central system to manage the core business, or have they integrated several disparate systems? Do they have real-time tracking and visibility tools and integration capabilities with your existing systems?
- When important functional areas rely on other companies’ platforms, such as compliance or transportation management systems (TMS), assess how well these systems are delivering accurate and timely information to clients.
- Some other important factors to consider are geographic coverage, scalability (will the 3PL be able to manage your volume if you double in size?), provision of performance metrics and data analytics, the 3PL’s financial stability and the 3PL’s record of client support and overall communication record.
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FAQs
Why Is 3PL important?
To survive in the current and competitive marketplace with eCommerce giants like Amazon and eBay, you must offer fast and accurate shipping and order fulfillment to your customers. Managing every step of the process, from storage to shipping in-house, is prone to errors and results in higher costs. Outsourcing these services to a 3PL provider ensures streamlined and cost-effective fulfillment and order management.
What’s the difference between freight forwarding and a 3PL?
Freight forwarders specialize in arranging the transportation of goods across international borders, handling logistics, documentation and transportation carrier selection.
On the other hand, 3PLs offer a broader range of logistics services that extend beyond transportation. These include warehousing, inventory management, order fulfillment and sometimes even freight forwarding.
What are some examples of 3PL companies?
Some well-known 3PL companies are DHL, ShipBob, AFS Logistics, RedStag, FedEx and UPS.
Can Amazon be considered a 3PL company?
Amazon offers 3PL fulfillment services via two of its business entities: Amazon Multi-Channel Fulfillment (MCF) and Fulfillment by Amazon (FBA). While FBA handles fulfillment exclusively for orders on Amazon’s website, MCF extends fulfillment services to orders from various sales channels beyond Amazon’s platform.
What is a 3PL warehouse?
A 3PL warehouse is a facility operated by a third-party logistics provider that manages services like storage, inventory management, packaging and shipping. Companies typically build these warehouses in strategic places to ease warehouse management and shipping.
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Next Steps
Businesses don’t always have the bandwidth to manage end-to-end logistics operations. Outsourcing to the right 3PL provider can streamline supply chains and bring focus to core operations while leveraging their partner’s experience to expand into new territories, mitigate risks and handle supply chain disruptions.
Choosing the right 3PL provider requires thorough software requirements evaluation and analysis. Our free requirements template can be a valuable tool for identifying specific needs and evaluating potential providers based on their capabilities
Which 3PL capabilities do you find most useful — and why? Drop your thoughts in the comments!
SME Contributors
A veteran of classical brand management and business development, Jim has over 25 years of experience building brands. He’s the co-founder of Fort Systems, which offers fulfillment services.
Jim began his career at Kao Corporation, a multinational consumer products company. He focused on brand management and business development throughout Japan and Asia, with an emphasis on implementing multinational ECR-based initiatives with major retailers. Jim received his BA from Haverford College and a Master’s degree in international affairs and Japanese studies from Columbia University.
Robert Khachatryan is the CEO and founder of Freight Right Global Logistics. He has more than 20 years of experience in logistics and expertise in supply chain design, eCommerce shipping, freight marketplaces and booking automation. With a background in rates and supply chain dynamics, he offers insights into current industry trends and challenges.