Blog > The Ultimate Guide to Third-Party Logistics (3PLs) and how They Handle Order Fulfillment

The Ultimate Guide to Third-Party Logistics (3PLs) and how They Handle Order Fulfillment

3PL, Blog, Ecommerce

One of the main activities of a small business is order fulfillment. The process starts when a customer submits the order and finishes when the product reaches their door.

What seems like a simple process can become quite complex depending on the storage location of your company’s inventory, the customer’s location, the size of the order and the timetable for delivery. When you factor in the potential for returns, it becomes even more complicated.

If you can’t handle order fulfillment in-house anymore, you may need to consider letting a third-party logistics (3PL) company take over.

Keep reading to learn everything you need to know about 3PLs.

What Is a Third-Party Logistics Company?

3PL companies offer various eCommerce logistics processes to online businesses. Some of the services they offer include warehousing, inventory management and order fulfillment.

3PL involves the business, the logistics provider and the shipping carrier. In simple terms, a 3PL provider offers logistics services to manage certain aspects of a company’s shipping operations. 3PLs are renowned for their logistics industry expertise and can help companies better fulfill orders to keep their customers happy.

In most cases, a 3PL becomes integrated into the company’s inventory storage and transportation procedures. Rather than storing, packaging and shipping orders, companies hire a 3PL to manage the entire process. The 3PL owns or leases its storage and transportation assets to fulfill the client’s orders from a remote location. By handing over the management of order fulfillment logistics to a third-party provider, companies can focus more on growing and developing their business.

Third-party supply chain models first appeared in the 1970s when intermodal marketers took packages from businesses and brought them to rail stations for delivery. People developed 3PL software to help companies manage inventory and deliveries as the field grows. Nowadays, all kinds of businesses, from Fortune 500 to small businesses, use third-party logistics.

Benefits of Third Party Logistics in Supply Chain Management

Working with a third-party logistics company offers many benefits for your business. Here are some ways third-party logistics help your company:

Reduce Logistics Costs

Third-party logistics companies often have connections in the sector, meaning they have better access to vendors and can negotiate higher discounts for you. By partnering with them, you can use their connections and influence to reduce shipping supply and warehousing expenses, ultimately saving you money.

Receive Logistics Experience

Many third-party logistics providers have decades of combined experience in the industry. When you hire a 3PL company, you get access to this expertise to help you navigate hurdles like transport documentation, shipping regulations and other logistics issues.

Focus on Critical Functions

Running an in-house logistics division takes a lot of time and money. By hiring a 3PL company, you can instead focus on core business processes and competencies without dedicating any internal staff or resources to run an in-house logistics division.

Scale With Your Business 

3PLs provide custom-made services based on your company’s needs. If your business grows and product orders increase, you can sign them for a bigger contract with more services. Conversely, if you’re considering downscaling your business, you can opt out of some of their services.

Third-Party Logistics Business Model

As the name implies, 3PL involves three parties that help bring products to the market. Here are the three parties involved in the 3PL model:

The Business

The business is your company – you’re responsible for producing goods and running the eCommerce business. Once people buy your products, you send the orders to your logistics company.

The Logistics Company

The logistics company is the intermediary between your company and the shipping providers. Third-party logistics companies offer many services, including warehousing, packaging and inventory management.

The Shipper

The shipper carries your products to physical stores or the buyers’ doors. Major shippers include USPS, UPS and DHL.

What Services Does a 3PL Provide?

A 3PL can scale and customize its services according to the client’s specific needs, and the client still retains some oversight when managing shipping operations. Before signing a contract, you can outline what services you want the 3PL to provide and what services you will retain in-house. As your business grows and changes, your 3PL provider can take on a more significant role by adding additional services or expanding operations.

Here’s an overview of services a 3PL typically provides:

Product Storage Solutions

3PL companies provide warehouse spaces so they can handle order fulfillment for multiple companies in one place. This improves efficiency and reduces costs because they don’t have to switch between numerous warehouses to finish orders.

Inventory Management

Managing inventory involves more than simply storing your company’s products. Integrative technology also syncs your inventory with your online store in real time, so you can track inventory and predict demand to avoid sell-outs.

Inventory Distribution

Most 3PL providers have fulfillment centers across the country to store your products. 3PL companies distribute your inventory across the country to ensure fast shipment times. 

A 3PL routes orders to fulfillment centers automatically based on where the customer resides. 3PLs use extensive automation to save costs on inventory distribution, raising their clients’ profits.

Picking and Packing

Alongside storage, 3PL companies assign staff to pick products for each order and package them for delivery.

Freight Forwarding

Once the products are picked and packaged, the 3PL forwards them to a shipping carrier for delivery. Different 3PLs work with other carriers and a good 3PL will choose the one that offers the best price and delivery speed. Some 3PLs even work with local carriers for less than truckload (LTL) shipping for local orders.

Expedited Shipping

Working with a 3PL enables your company to offer expedited shipping options to your customers because fulfillment centers send out orders daily – much more frequently than you would be able to provide if you handled orders in-house. 3PLs often negotiate discounts with carriers like FedEx, DHL, USPS and others to offer faster delivery speeds at a manageable cost.

Shipment Tracing/Tracking

In addition to handling the shipping process, a 3PL will also manage the tracing and tracking process. Customers will receive shipping information, so they can easily track their order throughout the order fulfillment process.

Reverse Logistics (Returns)

Not only do 3PLs offer shipment services, but they can also provide reverse logistics to handle returns. A 3PL can provide customers with return labels to drop the item off with a carrier for return to the fulfillment center.

Again, when you sign a contract with a 3PL company, you can customize its services according to your business’s needs. An experienced 3PL provider will be able to handle the logistics of the entire supply chain from when your customer submits their order to when it arrives on their doorstep.

How 3PLs Handle Order Fulfillment

So you can visualize what this looks like, here is an outline of the order fulfillment process from a 3PL provider’s perspective:

Step 1: Receiving

A 3PL needs inventory to complete customer orders, so your first act should be moving inventory to their warehouse. Depending on your business’s size, your inventory may be divided among several fulfillment centers to fulfill orders more quickly and efficiently. Each 3PL has its process for receiving and storing inventory, and most providers can customize this service according to the client’s needs.

Step 2: Picking

Depending on the 3PL’s software, your partner may get the orders automatically or you may have to send them manually. After the order is placed, the 3PL starts the order fulfillment process by packing the items at the warehouse and then passes it to the next stage of the supply chain for packaging.

Step 3: Packing

Once the 3PL has picked all ordered items, they are then prepared for delivery.

Standard shipping materials for your products include cardboard boxes, poly mailers, bubble wrap, packing tape and bubble mailers. The best 3PL company can balance package protection and small dimensional weight so your products arrive safely and within budget.

Some 3PL companies charge extra for packing material, but others fold the costs into the service fee. Depending on your working relationship, 3PL companies may also let you customize your packaging with branded material.

Step 4: Shipping

After the products are prepared, they’re sent to a mail carrier for delivery.

Some 3PLs partner with specific shipping carriers, while other companies have a rotation of carriers to get the best deals. These carriers usually pick items up from your 3PL partner’s warehouses.

Step 5: Returns

The order process doesn’t always finish once the package is delivered to the customer’s door. Specifically, product returns can get complicated if you manage large amounts of inventory stock yourself. When you’re working with a 3PL partner, they receive all returned products to be restocked, scrapped, or processed.

To make the return process easier, you can ask the 3PL company to provide shipping labels in every package, so customers can fill them out and send your packages back if something goes wrong.

By now, the benefits of a 3PL partnership should be obvious, but how do you know whether your company can benefit from such a partnership? Keep reading to learn the signs that it’s time to hire a 3PL.

When Do You Need a 3PL?

Unless you’re running a small retail business out of your garage with no more than a dozen orders a week, the chances are good that your company could benefit from hiring a 3PL provider. To help you decide, here is an overview of the benefits associated with working with a third-party logistics provider:

  • Time savings: Outsourcing your company’s logistics means you have more time to focus on critical business processes.
  • Cost savings: 3PL companies offer lower prices for warehousing, shipping and inventory management, which is cheaper than building in-house logistics departments.
  • Improved compliance: 3PL companies help you stay updated with the latest logistics technologies and regulations.
    • Service customization: When it comes to warehousing, shipping and distribution, a 3PL provider can customize its services according to your needs and adjust as you grow.
    • Access to resources: Hiring a 3PL gives you access to the best inventory management software and other integrative technology you might not get on your own.
  • Expanded reach: 3PL companies have more experience negotiating with shipping carriers and other vendors, so that you can get the best logistics services at low rates.
  • Risk reduction: Outsourcing operational logistics to a 3PL company means fewer labor and financial risks than building an in-house logistics department.

Still not sure whether hiring a 3PL provider is the next logical step for your business? Here are some of the top signs that your business could benefit from hiring a third-party logistics provider:

You’re Shipping More Than 100 Orders Per Month

There is nothing magical about the number “100” – the point is that your company is receiving more orders than you can efficiently manage in-house. Shipping hundreds of items per month means you’ll spend more time and effort fulfilling orders than doing core business tasks. Once you’ve reached over 100 shipments per month, it’s a good idea to hire a 3PL company.

You’ve Run Out of Storage Space for Your Inventory

Any retail company’s goal is to have enough orders that it becomes necessary to expand its inventory. Of course, when this happens, you’ll need space to store all of that extra inventory. Rather than dealing with this predicament each time you add a new product to your store, turn over storage logistics to a 3PL.

You Want to Offer Your Customers Expedited Shipping

Suppose you’re currently managing your order fulfillment in-house. In that case, you may struggle to make it to the post office even once a day, let alone often enough to give your customers expedited shipping options. With a 3PL handling your order fulfillment logistics, you’ll suddenly be able to offer one-day, two-day and maybe even same-day delivery.

You Want to Save Money on Storage and Shipping

Working with 3PL providers isn’t cheap, but it could save you a lot of time and money. Instead of spending a lot to lease storage space and build an in-house logistics division, consider hiring a 3PL so you can spend the savings to build your business. Additionally, 3PL services speed your product deliveries up and give you a competitive advantage.

You Want Your Company to Have Room to Grow

Every good businessman is forward-thinking. From the moment you start your business, you should know where you want to go and how you want to get there. If you’re going to expand your offerings throughout the country or internationally, a 3PL can help you get there with inventory distribution services. For example, some 3PLs offer the ability to leverage 2-day or overnight shipping to help eCommerce businesses keep up with Amazon and other giants.

Hiring a 3PL provider to manage your supply chain’s logistics is smart if any or all of the signs above are coming into play. Before you start shopping around for a 3PL, however, you should take a moment to consider whether doing so is enough. You may want to think about taking things one step further and hiring a fourth-party logistics provider – keep reading to learn more.

What’s the Difference Between a 3PL and 4PL?

First and foremost, you should know that 3PLs and 4PLs are professional, hired services that help businesses like yours plan and execute inventory management and order fulfillment logistics. You get much more flexibility than you would if you managed fulfillment in-house.

As you well know by now, a third-party logistics provider is a company that handles the logistics of your company’s supply chain and order fulfillment processes. Depending on how much control you want to hand over to your 3PL, they can do everything from storing and managing your inventory to picking, packing and shipping your orders. They can even handle the returns process for you.

So, what is a fourth-party logistics provider and how does it differ from a 3PL?

A fourth-party logistics provider adds another element to the equation, bringing together various resources and technologies to optimize your supply chain’s design and execution. You can still keep your 3PL to manage the day-to-day details of order fulfillment, but a 4PL will become the “control tower” that oversees supply chain management. They will supervise your 3PLs and any other resources or providers you use to ensure that your supply chain operates smoothly, efficiently and cost-effectively. For businesses that want total supply chain visibility, a 4PL provider can be a great option.

The critical difference between a 4PL and a 3PL is that many 3PLs are asset-based – they own or lease equipment and warehouses that they use to provide services. As such, a 3PL is concerned with its costs and may not always seek the best deal for you if it means a better deal for them. In contrast, a 4PL’s only concern is integrating and optimizing your supply chain.

The Different Types of 3PL Providers

A third-party logistics provider can offer a wide range of services, though many focus on specific supply chain solutions. As a business, this might mean hiring multiple 3PLs to fulfill your supply chain’s different aspects – this is when hiring a 4PL may come in handy.

Here is a quick overview of the different types of 3PL providers you may come across:

Transportation

This type of 3PL specializes in transporting inventory between locations, i.e., shipping. When choosing a transportation 3PL provider, you’ll need to consider various factors such as the company’s location, the location of your customers, delivery timeframes, shipping methods, service options and pricing and discounts.

Warehousing/Distribution

The most common type of 3PL is warehouse and distribution-based. These providers handle the storage, shipment and returns of your orders. When considering a warehousing 3PL, you’ll need to consider the number of locations and their geographical locations, the pricing model for storage, negotiated shipping rates, delivery insurance, daily cutoffs for order fulfillment and management tools.

Financial/Information

Once your company expands beyond the eight or nine-figure mark in annual revenue, you may want to bring a financial 3PL on board to help you optimize your operations for the industry and to evaluate current trends. These 3PLs offer freight auditing, cost accounting, bookkeeping, tracking, tracing and inventory management.

How 3PL Pricing Models Work

Now that you have a better understanding of the different types of 3PL providers, you may wonder how much it costs to hire a 3PL. Third-party logistics pricing depends on the services you require and the scope. Several factors that determine 3PL pricing include:

  • Onboarding: Getting a 3PL partnership up and running can take anywhere from 3 to 6 months, so some companies charge onboarding fees to get your company set up with integrated technology to manage order fulfillment services.
  • Inventory Receiving: Before a 3PL can start managing your supply chain, they need to receive your inventory from your suppliers or manufacturers. Some companies charge per unit or pallet, while others charge by the hour or a flat rate for receiving and storing inventory.
  • Inventory Storage: Different 3PLs offer different storage fees depending on the warehouse. You may be charged a lower rate for shared storage but will share the fulfillment center with other companies. You may be charged per item, bin, shelf, or pallet for storage.
  • Order Picking and Packing: Many 3PLs charge a fee for picking each item in orders while others include this cost in the total order fulfillment price. Some companies offer discounted rates for orders under a certain number of items.
  • Packaging: Some 3PLs include packaging materials in their shipping costs, while others charge a fee. You may have the option to customize your packaging materials, or you may not.
  • Kitting: This refers to any unique accommodations you request for assembling, arranging, or packing orders before shipping. Fees vary according to your individual needs.
  • Shipping: Most 3PLs have relationships with shipping carriers to reduce their own costs, which means more significant savings. These costs consider various factors, such as shipping speed, shipping zones and packages’ dimensional weight.

In addition to considering these individual costs, you should also know that most 3PLs offer three pricing models. Here is a quick overview:

  1. Total Fulfillment Cost: This pricing model reflects the total fulfillment cost for direct-to-consumer orders, charging only for receiving, storing and shipping inventory instead of charging fees for individual services.
  2. Fulfillment by Amazon: Abbreviated to FBA, Fulfillment by Amazon is a model in which products are sold on the Amazon marketplace and orders are fulfilled by Amazon. Because Amazon receives a cut of every sale, they can offer discounted fulfillment fees. This offer is convenient for some companies, but for others, it means sacrificing a portion of profits and losing the ability to highlight their brand. Amazon also charges long-term storage fees for unsold items.
  3. Pick and Pack: As you can guess from the name, this pricing model is based on individual charges for each item picked and packaged. Most 3PL providers charge between $0.15 and $5.00 for each pick, so costs can add up quickly with this pricing model.

When choosing a 3PL provider, you must consider all aspects, including costs. Keep reading to receive some additional tips for choosing a 3PL provider.

Tips for Choosing a 3PL Provider

If you’ve decided that hiring a third-party logistics provider is the next logical step in expanding your business, congratulations! Now comes the hard work – choosing the perfect provider to meet your business’s current needs while offering room for growth.

Here are some simple tips to keep in mind when choosing a 3PL provider:

  • Ask the provider if they have an enforceable non-disclosure agreement (NDA).
  • Take a look at the company’s track record in terms of financial stability and client satisfaction.
  • Book a consultation to visit a nearby 3PL warehouse or distribution center to see if their operations are up to code.
  • Consider the company’s hours of operation, including weekends and holiday hours.
  • Ask what services the company provides and which, if any, they consider their specialty.
  • Determine what third-party logistics software they use.
  • Ask how the company is different from other 3PLs and what makes them worthy of your business.
  • Consider the options for customization and scalability of services.
  • Inquire about their relationships with shipping carriers and their negotiated rates.
  • Ask about their options for expedited shipping as well as guaranteed deliveries.
  • Determine how many warehouses they operate and their locations.
  • Ask about their customer service policies and how they help you when an issue occurs.
  • Ask what the costs and process is. If you’re not happy, choose to switch to another 3PL.
  • Find out what their typical customer profile is. If their profile is disjointed or you’re not similar to their other customers, they might not be the right 3PL for you.
  • Try to find reviews and/or talk to existing or past customers.

Best 3PL Companies for eCommerce and Small Businesses

There are dozens of 3PL companies vying for your business, so choosing one is challenging. To help you decide, here are three premiere 3PL company options for your eCommerce and small business:

ShipBob

ShipBob is a third-party logistics company that helps you ship products anywhere in the world. It promises global shipping through fulfillment centers in North America, Australia and Europe. 

ShipBob offers these 3PL services:

  • Warehouse storage
  • Pick and pack
  • Product receiving
  • Standard product packaging
  • Product shipping

Additionally, ShipBob offers integrations with many major eCommerce platforms like Shopify, BigCommerce and Squarespace.

Whitebox

Whitebox offers end-to-end 3PL services to help your products go from the factory floor to the buyers’ doorstep. Whitebox even has an in-house advertising agency to help you market your business.

The services offered by Whitebox include:

  • Product packaging
  • Shipping
  • Quality assurance
  • Warehouse management
  • Order fulfillment
  • Product description creation
  • Professional product photography

FedEx Fulfillment

FedEx Fulfillment is the 3PL subsidiary of FedEx, which offers third-party logistics to small businesses. It boasts excellent customer service and a resource hub to help new business owners learn entrepreneurship.

Here are the services you’ll get from FedEx Fulfillment:

  • Warehouse and storage management
  • Order fulfillment
  • Product packaging
  • Reverse logistics

How to Choose the Best Third-Party Logistics Company 

Choosing the right 3PL company can help you cut costs and improve efficiency. Follow these tips to pick the right 3PL provider:

  • Research the company’s reputation and track record.
  • Find a company that offers all the services you need.
  • Look into the 3PL company’s technology.
  • Ask about their inventory and packaging customization offerings.
  • Pick a company that offers multiple fulfillment centers across your target regions.

Why ShipHero Should Be Your New 3PL

ShipHero is one of the best third-party logistics services for online retailers providing order fulfillment for more than 4,000 eCommerce businesses. Here’s why you should consider partnering up with ShipHero:

Various Delivery Options

Want to offer shipping speeds comparable to Amazon so you can fulfill more orders? ShipHero offers various delivery options like two-day and overnight shipping to help you compete against Amazon and similar eCommerce companies. We also offer shipping discounts so you can take more orders and expand your brand.

Nationwide Fulfillment Center Network and Returns Management

ShipHero has fulfillment centers located across the nation, which means all orders are routed to the one closest to your customer. This helps you reduce shipping costs and ensures faster deliveries.

ShipHero can also process all returns for your customers. Unlike other 3PLs that don’t offer returns management, ShipHero makes it easy, so your customers are happy.

eCommerce Platform Integrations

ShipHero offers eCommerce integrations with major platforms like Shopify Plus, BigCommerce, Shopify, Amazon, WooCommerce and many more. These order fulfillment integrations are simple to activate and allow us to get orders from multiple platforms. Moreover, all your order information will be compiled in one platform, so you don’t have to switch between several apps to get the data you’re looking for.

Price Transparency

Here at ShipHero, we believe in transparency. We offer a simple pricing model without hidden fees, unlike other 3PLs. We also charge a flat fee for all our logistics services across the entire contiguous United States. Moreover, we don’t lock you in lengthy commitments or contracts, so you can stop using our services anytime.

Closing Thoughts

Once you’ve narrowed your list to a few different 3PL options, it’s time to start digging deeper to find the best match for your company. Before talking to any 3PL in-depth, ensure they have and sign a non-disclosure agreement to protect your company. In addition to talking to the 3PL’s representatives, you should also ask for references in the industry to determine whether the company has a solid track record and a positive reputation. Over time, it will become clear whether any of the 3PLs on your list are the right fit for your company or not.

Finding the perfect third-party logistics partner that will keep your company’s best interests in mind may not be a quick and easy process, but it is important that you do it right.

For help finding a 3PL provider, check out our online directory or contact ShipHero directly to learn how we can help you with fulfillment.

Third-Party Logistics FAQs

 What are third-party logistics (3PLs)?

Third-party logistics involves handing your logistical operations over to another company. A third-party logistics company usually offers warehousing, shipping and inventory management services.

What’s the difference between 3PL vs 4PL?

The main difference between 3PL and 4PL is the number of parties involved. A 3PL company still works under your management to handle your inventory and shipments, while a 4PL company contracts different 3PL providers to handle your products.

What are the benefits of working with a 3PL?

The main benefits of working with 3PLs are cost and time savings. You also gain access to their expertise, meaning you don’t have to train in-house logistics personnel to handle warehousing and shipping.

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