Third-party logistics (3PL) providers can be an effective strategy to more efficiently manage order fulfillment and supply chain logistics .…
A Comprehensive Guide to Third Party Logistics (3PLs)
For any company, from a large ecommerce business to one just getting off the ground, customer satisfaction is a top priority, and nothing keeps a customer happier than getting their favorite products quickly and efficiently. Getting products into your clients hands efficiently and cost effectively are the core of any business operation. Yet as your business expands, managing that supply chain becomes difficult and costly; mistakes made in logistics can damage the customer experience, stunt your business’ growth, and eat into your profits. To alleviate a lot of these issues, companies often outsource their fulfillment and logistic operations to a third-party logistics company, also known as a 3PL.
Outsourcing to a 3PL can mean significant benefits for a business as it grows and faces more complex supply-chain management and logistics challenges.
What is third party logistics (3PL)?
Third party logistics is outsourcing the supply chain operations and logistics to get a company’s products to their customer. Most basically this includes receiving, storing, packing, and shipping services. Some 3PL companies also provide value added services like inventory management, kitting and assembly, postponement packaging, and others.
Because 3PLs have been managing these kind of logistics for years or decades, they have the expertise and leverage to make the process simpler, quicker, and more cost effective for the seller.
What’s the difference between a 3PL and 4PL?
In a 3PL model, the business maintains management oversight, but outsources the logistics operations to a 3PL provider. The 3PL provider has complete control of the fulfillment facilities, operations, and inventory within the facilities.
In a 4PL structure, the business outsources all or most of the company’s logistics operation. In this case, the 4PL is often the single point of contact between the seller and multiple logistics providers, making decisions regarding all aspects of the supply chain. Often a 4PL will work with other 3PLs to manage some of the logistics.
What are the core services 3PLs provide?
If you are new to the idea of outsourcing and managing a 3PL, it may seem like a daunting and expensive process, but it doesn’t have to be, and it certainly shouldn’t. It also might feel strange relinquishing control of the fulfillment process to an outside company. But by working with a 3PL, you can leave all the operational details to them, freeing you up to focus more on your core business goals.
The topics below illustrate what a typical 3PL might handle for a seller from a fulfillment perspective, as well as some value added benefits that not every 3PL offers.
The first step in getting inventory to the 3PL so that they can fulfill orders and ship.
A 3PL’s warehouse will receive your company’s inventory and then store your products before they go out to a customer. The size of each individual 3PL will dictate how much capacity they have for a seller’s products. It is important for the seller to work with a 3PL that has the warehouse space to not only receive and store your company’s current product output, but be able to expand its capacity as your business grows.
Each individual product will have its own SKU (stock keeping unit) number, as well as a dedicated location in the warehouse. During the receiving process, the 3PL will confirm the SKUs received, the quantity and verify that it matches the Purchase Order (PO).
A 3PL should also be able to meet each individual sellers storage needs, such as temperature requirements, security, and keep products within a relatively close distance to your customer base (farther distance means higher shipping rates and slower delivery times).
Additionally, some 3PLs are able to provide what is referred to as distributed inventory. This means the 3PL has more than one facility that they can store and process orders from. In these cases, the sellers can split their inventory and ship their products to each facility or the 3PL can receive the inventory at one facility and manage the distribution to the other facilities themselves.
The next step happens when a customer places an order, which is known as picking. This is really where the 3PL fulfillment process begins. Once an order is submitted it is sent to the warehouse where it is being stored.
Some 3PLs require orders to be uploaded manually into their system. This can be time consuming, inefficient, and costly. A 3PL should have an automated system that allows it to receive orders directly from the seller’s shopping platform or retailer and passed to the 3PL’s warehouse management system (WMS).
When the order is received in the WMS, the products that are part of the order are physically “picked” from the storage area in preparation for it to be packed and shipped out. Each 3PL will have an agreement in place, called a service level agreement (SLA), which states the requirements of how quickly the 3PL needs to process an order once it’s received. Most sellers require a 3PL to ship out their orders the day it is received.
Once an order is “picked”, the products in the order are organized and prepared for packaging. A 3PL will work with the seller during the initial setup process to identify the best way to package the product to ensure the seller’s products are secure, presentable, and packed in the most cost effective way possible.
In addition, some 3PLs will also be able to help with custom elements of the packing process, including custom inserts, special stickers or branded packaging for sellers.
Shipping can be the most complicated and expensive aspect of the fulfillment process. This is due to the large number of carriers, numerous shipping options per carrier, shipping cutoff times, and shipping locations.
An experienced 3PL can layout a clear shipping strategy and provide significant savings on the shipping costs. Given that most 3PLs have a number of clients that they are fulfilling orders for, they can leverage their buying power to offer seller better pricing than if they were shipping on their own. In addition, sellers can leverage 3PLs with multiple fulfillment centers to further save on shipping costs and reduce the time it takes to get to the customer.
A 3PL will handle all of the printing of the shipping label, as well as ensuring that tracking information will be sent out to sellers and their customers so they can follow along as they wait for your order to arrive.
Whether the item is ordered by mistake, damaged during the shipping process, or other various reasons, returns are part of the shopping process and an important part of the customer experience.
Not all 3PLs offer return services, but many of the most reputable ones can help with this cumbersome process. A 3PL will receive the return, track and physically verify the reason for return, place the return back into inventory, or dispose of your product based on the seller’s preferences. Also, depending on the agreed upon criteria between the seller and 3PL, the 3PL may automatically release a new item to the customer once the return is received.
A 3PL will be able to provide the seller with detailed reports on returned items and the management of the returned items.
Other than order fulfillment, how else can a 3PL help my business?
Aside from providing the ability to cost effectively and efficiently fulfill orders, a 3PL’s service can be quite different depending on which company you choose to work with. Below is a number of additional ways in which a 3PL and their expertise in logistics can benefit your business.
Inventory management is a key component of the order fulfillment process and your overall supply chain. It involves much more than the simple aspect of a 3PL warehousing your products to ship whenever an order comes in.
Ideally, a 3PL will have the technology to allow integration between your digital storefront and the warehouses that store your products. This will give the seller a real-time view of their inventory at each facility, helping them plan and ensuring they avoid running out of products, also known as stockouts. By having the proper integration, the 3PL can push real-time inventory counts to your digital storefront and retailers so customers know what is in stock and what might have to be backordered.
A 3PL will work with the seller to get advanced shipping notifications (ASNs) from the manufacturer with the inbound inventory. The 3PL and seller get a clear view on what products are coming, the quantity, what facility it’s being shipped to, and when. This is crucial for planning purposes as the seller can properly manage how much inventory is being stored and provide insights on what needs to be ordered.
Business-to-Retailer Fulfillment (B2R or B2B)
Most of what we’ve covered in this article is order fulfillment to the individual customer, also known as business-to-consumer (B2C). Another large sales channel for sellers are the retailers: e-tailers like Amazon and brick and mortar retailers like Target or Walmart. Sellers can use 3PLs to manage the order fulfillment directly to the retailers, referred to as business to retailer (B2R) or business-to-business (B2B).
The process for B2R fulfillment is similar to B2C, but on a much larger scale. The retailer submits the order and the 3PL picks, packs, and ships the order. Often times, the orders are being shipped in bulk on large pallets to several or dozens of the retailer’s stores. These orders require a lot more coordination with the shipping companies, labor, and retailers.
3PLs that handle B2R fulfillment require specific technical integrations with the retailers the seller is working with. When a retailer orders product from the seller, the transaction is done via a electronic data interchange (EDI) which sends the order details to the 3PL and manages the transaction. The EDI setup with the retailer and 3PL can be complicated and often requires a person or team of specialists.
3PL Value Added Services
Customer demands can be high, and businesses have to adapt quickly to keep customers happy. A 3PL partner can provide a lot of value in helping with solutions. Some 3PLs provide value added services (VAS) outside of the basic services listed above, to provide solutions to meet their customers’ needs.
Here are some examples of value added services a 3PL might provide:-
Kitting and assembly
Taking any number of SKUs and combining them into a single unit. A new SKU is created for the combination. Kitting and assembly is often required for retail distribution and special promotions.
Whether it’s laser etching a customer’s name on a product or inserting a personalized note into the order, a 3PL can add customization. This means a more personal touch, and hopefully better customer loyalty.
This is a technique used where the products are sent from the manufacturer and the packaging for the products are sent separately. Once the product and packaging arrive at the 3PL facility, the staff assembles it. This can save sellers time and money.
3PLs can provide services to dispose of obsolete products or returned units. This includes breaking down the product, recycling them, or disposing of them in an environmentally and cost-effective manner.
In-house Technology Expertise
Over the past decade, there’s been an explosion in technological advances in the logistics space. From shopping cart platforms to Enterprise Resource Planning (ERP) systems to EDI connections with retailers. The complexity of how these systems work together has grown exponentially. A 3PL can leverage their expertise and in-house technology team to ensure these connections are setup correctly and maintained.
A 3PL can provide the necessary tools to give their sellers a real-time look of their inventory and fulfillment processes. It’s important that the seller understands the tools and technical support they’ll have access to when evaluating a potential 3PL partner.
Most 3PLs have multiple locations that are strategically spread throughout the country or globally, thus ensuring the quickest and most cost effective process to deliver products from the seller to the consumer.
A 3PL will automate the order process to ensure products leave from the right locations, delivering optimal results for timeliness and shipping costs. Depending on a seller’s individual needs, having products located at numerous fulfillment facilities could facilitate a much quicker delivery process at a fraction of the cost compared to having all their products at one facility.
This is a particular area where choosing the right 3PL, with the best locations and distribution points can maximize the benefits for a seller.
What are the benefits of working with a 3PL?
Though the idea of outsourcing to a 3PL can seem expensive, complicated, and time consuming, choosing the right 3PL can actually help grow a business effectively.
Often business owners don’t have bandwidth to think about getting their product from the manufacturer to the end consumer. Product iteration, marketing, and company operations should be their focus. But logistics, returns, order fulfillment, and quick shipping are what will keep customers happy. And ultimately if the customer is happy, the business will thrive.
The four biggest benefits of working with a 3PL are:
- Delegate – outsourcing is a hassle free way to offload one of the most cumbersome, time consuming elements of a business. This allows you to focus on your core business: build, market, and sell great products.
- Cost savings – it’s substantially cheaper from a time and money standpoint to outsource your logistics. A 3PL can help lower your operating costs by getting bulk shipping discounts, plus property and labor costs are absorbed.
- Operational expertise – a good 3PL can smooth out the seller and customer experience by getting the products out faster and cheaper. Every business owner knows that return logistics can be a verifiable nightmare to track and manage. A 3PL can take on this task, so that your customer is happy and you can keep your sanity.
- Technology – in recent years, this has become a bigger benefit of working with a 3PL. As all businesses are coming online and using different tech tools to manage operations, logistics vendors have ever-changing requirements to connect with the customer, the seller, and the fulfillment centers. A 3PL has the industry knowledge to adapt and keep up with these changes efficiently. A 3PL can also use their own tracking technology to retrieve data and key metrics to help inform larger business decisions.
There are many benefits to working with a 3PL, if you are seeking logistics support we’d love to hear from you. You can read DCL’s list of services to learn more, or check out the many companies we work with to ensure great logistics support. Send us a note to connect about how we can help your company grow.
We will post more soon about the many benefits of working with a 3PL; look for an upcoming post about finding the right 3PL for your company.