Third-Party Logistics – Welcome to the Wonderful World of 3PLs

by Sabah Sohel

Order fulfillment is an important part of operations for any e-commerce business. As your e-commerce business grows, you may find that fulfilling customers in-house is no longer feasible.

Online sellers must now be equipped to deal with peak ordering sessions in their industries, as well as provide fast and affordable shipping for every order. Up to 12% of merchants are unprofitable simply due to distribution costs.

At this point, when your in-house fulfillment strategy is no longer workable with your growing volume of orders, you will need to expand your fulfillment strategy. For many businesses, this means outsourcing to a third-party logistics company. 39.4% of merchants outsource at least some of their fulfillment operations.

As a business owner, it is important to understand how 3PLs work to make the most of your e-commerce fulfillment strategy so that you can grow and scale your business.

What is Third-Party Logistics?

At the most basic level, third-party logistics (3PL) refers to the outsourcing of certain aspects--and sometimes all aspects--of shipping operations including inventory management, order management and processing, reporting, and domestic freight and distribution.

3PL providers allow e-commerce merchants to accomplish more by integrating warehousing and transportation procedures as well as automating order fulfillment.

The Difference between 3PLs and Freight Forwarders

To put it simply, a freight-forwarder is a company that handles the logistics of the shipping of goods from Point A to B using a single carrier or multiple carriers. Freight-forwarders offer a broker-type service. They use established relationships with domestic and international carriers, from air freighters and trucking companies to rail freighters and ocean liners, to move shippers’ goods along the most economical route that balances speed, cost, and reliability. Their services begin and end at organizing how your products will get from point A to point B. This means that e-retailers have to organize warehouse storage, picking and packing, and other tasks. That’s where a 3PL provider comes in.

In most cases, eCommerce merchants use freight forwarders to ship their goods from the shipper to their own in-house fulfillment center. If they don't have their own fulfillment center, they ship their goods to their 3PL company. The 3PL accepts the goods from freight forwarders and then acts as the keeper of warehoused goods, packer, and biller—all in one.

Using a 3PL Service vs. In-House Fulfillment

Ecommerce merchants have the option of either fulfilling their orders in-house or outsourcing order fulfillment operations to a third-party logistics provider. Figuring out whether to keep your order fulfillment in-house or to outsource to a third-party isn’t always easy. Identifying what you want out of a warehousing service and whether or not it suits your goals can make the choice much easier.

For some eCommerce merchants, in-house fulfillment (or self-fulfillment) may be the best option.

Here are some reasons why e-retailers manage fulfillment operations in-house:

  • They like to retain control over their warehousing and fulfillment operations.

    When companies self-fulfill, they get to decide how their products are warehoused, packed, and eventually shipped to their customers. E-retailers who manage their order fulfillment operations in-house do not have to use the one-size-fits-all solution offered by third-party logistics service providers, enabling full customization of warehouse space and maximizing the efficiency of their supply chain.

  • They like to be able to offer a fully customizable experience to their customers.

    The ability to offer special packaging and order customizations can also encourage e-retailers to manage their own fulfillment, as 3PLs typically charge a premium for customized packaging like made-to-order packages and subscription boxes.

Not all businesses are the same and while in-house fulfillment works for some e-retailers, it may not work for your business. Most growing businesses find that outsourcing order fulfillment to a 3PL service provider is the most ideal and cost-effective course of action.

Here are some reasons why e-retailers choose to outsource fulfillment operations to 3PLs:

  • 3PLs help businesses save time and money.

    The average cost to fulfill an order in-house is 70% of the average order value. By partnering with a 3PL, you can bypass a lot of these costs by removing the need to buy or rent the warehouse space, logistics operations, labor, and technology required for in-house fulfillment.

    You also save time by outsourcing fulfillment tasks to a 3PL. Instead of spending time packing boxes, standing in line at the post office, or building out fulfillment infrastructure, working with a 3PL gives you time back to focus on more strategic initiatives, such as customer acquisition, product development, and marketing.

  • 3PLs can help you scale your business.

    Third-party fulfillment providers can help you increase your supply chain capacity quickly and at a variable cost. With 3PLs, you only pay for what you use, so as your business grows you can easily balance growth with order fulfillment costs. This also allows you to manage high and low seasons more easily and respond to fluctuations in product demand in a timely manner.

  • 3PLs make it easy to integrate multiple sales channels.

    A tech-enabled 3PL, like Airlift, leverages technology to offer efficient, integrated shipping and fulfillment solutions for e-retailers on almost all popular eCommerce marketplaces. These integrations help you automatically push your orders to your 3PL, track your orders in real-time, and give you access to inventory reports. With seamless integrations, you are able to monitor your inventory levels and replenish them before the stock runs out. Depending on the integration technology used, you may also be able to push real-time stock counts back to your store's website. When 26% of shoppers found their merchandise out of stock, they received no indication of when the merchandise would be available — a factor that prompted them to either abandon their purchase or shop with another retailer.

    Find out more about Airlift’s integrations here!

  • 3PLs help you offer fast and affordable shipping to customers.

    Amazon FBA has made fast and free shipping the standard for eCommerce. But if you're self-fulfilling orders, offering fast and free shipping can prove to be very costly. According to a study from Arvato SCM Solutions, 24% of customers in the United States have canceled an order due to slow shipping and 54% of online shoppers abandoned their carts as a result of expensive delivery. Third-party logistics providers often have relationships with shipping carriers that allow them to negotiate discounted rates for their clients. This in turn allows for partner e-retailers to pass on those cost savings to their customers and offer free or affordable fast shipping.

    3PLs with multiple warehouse locations, like Airlift, can also leverage their network of fulfillment centers to help e-retailers position inventory in distribution centers closer to their customers so that products can be delivered quicker and more cost-effectively than when stored in one centralized location.

    Airlift’s eCommerce clients can offer fast shipping to their customers almost anywhere in the United States as they have access to strategic fulfillment centers located in major cities on both the East and the West Coast. Airlift's current fulfillment hubs are based in New York, California, Atlanta, and Virginia.

  • 3PLs can help you leverage industry expertise.

    BizJournal has reported that 52% of consumers blame the retailer if their orders are delayed or incorrect. For an e-retailer, fulfillment is only one aspect of their business and if they don’t have experience managing fulfillment, they risk providing subpar service to their customers. 3PLs, on the other hand, are experts in logistics, supply chain, and fulfillment. Staffed by eCommerce logistics professionals, 3PLs can help clients with their experience and connections to quickly streamline their eCommerce logistics.

How to figure out if your business should outsource fulfillment operations to 3PLs

Thinking of outsourcing to a 3PL? Here are a few questions to get you started:

  • How many SKUs do you need to warehouse?
  • Is freight too costly?
  • Do high sales during busier seasons stretch your warehouse capacity?
  • Are there kinks in your supply chain?
  • How much does your supply chain rely on technology?
  • Does a 3PL interface sound useful?

More important than asking the right questions is understanding your logistics: knowing where your supply chain can improve, and setting measurable and attainable goals for your operations to achieve.

3PL Order Fulfillment Process

Beyond shipping orders, 3PL fulfillment services can vary depending on the provider you choose. Here are the most common fulfillment center operations that take place between checkout and when the order arrives on your customer’s doorstep:

Receiving

First, we need inventory. The "receiving" of inventory refers to the acceptance of incoming inventory followed by its storage.

Picking

When a customer places an order, the fulfillment process begins. A big requirement for eCommerce customers is the ability to integrate their fulfillment process seamlessly. Using sophisticated tech, 3PLs can integrate directly with your eCommerce platform or marketplace, making order fulfillment easy.

Once an order is sent to your 3PL, it is assigned to the picking team. The picking team receives a list of items on the order, quantities, and storage locations so they can collect the products and get them ready for the next step, which is packing.

Packing

The 3PL will choose the best packing materials both to protect your products and achieve the lowest practical dimensional weight. They will also optimize packages so that you don’t have to split shipments.

If you want your brand to shine through your shipping, make sure you partner with a 3PL that allows you to use custom packaging, such as custom boxes and inserts. Often, receiving a package is the first in-person experience a customer has with your brand, so branded packaging can make a big impression.

Shipping

The next step is shipping. Third-party logistics providers often have relationships with shipping carriers that allow them to negotiate discounted rates for their clients. 3PLs purchase shipping labels on your behalf. 3PLs work with carriers such as DHL, USPS, and UPS that pick up orders from 3PL warehouses to ship. Having relationships with a variety of carriers allows 3PLs to compare shipping rates and offer clients the most affordable pricing possible.

Once the order ships, 3PLs with the integrated technology mentioned above will automatically push tracking details to merchants’ online stores.

Returns

Many 3PLs also offer return processing services. If a customer returns an order by shipping it back to your 3PL, your 3PL will process the return and restock or dispose of the item depending on their policies and your preferences.

You can choose to have your 3PL provide return shipping labels for your customers. This offers convenience for both you and your customers; you won’t have to handle returns in-house and customers can easily track the status of their return order.

Most common 3PL costs

A 3PL’s pricing model usually includes variable costs associated with all the activities involved with their order fulfillment process. 3Pl service pricing will generally depend on your business's specific needs. Here are some of the most common 3PL costs:

Onboarding costs

These are the costs associated with integrating with your 3PL’s tech, setting up your fulfillment service, and getting your systems up and running.

Inventory receiving costs

Costs associated with the acceptance and storage of incoming inventory. Receiving costs vary depending on your 3PL. Receiving costs can be based on per-unit, per-pallet, flat-rate, or per-hour.

Inventory storage costs

Costs associated with storing inventory. Fees can range from per-SKU or per-unit storage to a fixed fee for each bin, shelf, or pallet used.

Picking and Packing costs

Some 3PLs charge on a per-pick basis, meaning you pay a fee for each item included in order.

Packaging costs

Some 3PLs will charge for packing materials such as boxes and air-fill as a separate line item while others include them as part of their fulfillment services.

Kitting costs

Kitting and assembly refer to any unique accommodations for the way in which items are arranged or packed before shipping. Kitting fees are specific to each client and costs can vary depending on the needs of the client.

Shipping costs

The amount a 3PL service charges to ship an order from their fulfillment center to your customer's doorstep. Shipping costs take a variety of factors into account, including shipping speed, shipping zones, and dimensional weight.

Use our handy cost-calculator to estimate how much fulfillment will cost with Airlift.

Best KPIs to measure performance for a 3PL

Once you have selected a 3PL company to handle your shipping logistics, it’s important to continually measure performance to make sure that you are getting the best value from your 3PL service. Here are some useful key performance indicators (KPIs) that successful businesses use to measure 3PL performance:

  • Rate of returns due to shipping damage or error

    This KPI ensures there is a continued focus on shipment quality and accuracy.

  • On-time delivery

    This KPI provides insight into whether or not there is a bottleneck in the current fulfillment process that needs to be addressed to provide maximum efficiency.

Final thoughts

After thoroughly evaluating your eCommerce logistics, if you've determined that your current supply chain solution does not have the capability to reach your business goals, then it is time to outsource your eCommerce fulfillment to a 3PL. Airlift can help.

We only work with the best warehousing facilities and inspect each of our fulfillment hubs to ensure they meet security and quality standards. Our fulfillment hubs are staffed with experienced professionals who are available to receive your inventory, palletize your goods, and perform custom services like barcoding, kitting, or labeling. You will always receive the best customer service with us. Get started today!