- 3PL is the outsourcing of e-commerce logistics processes – including inventory management, warehousing and order fulfillment – to a third-party company.
- Some advantages of 3PL outsourcing are quicker and more affordable delivery, easier scaling, more service areas and more satisfied customers.
- Your 3PL provider may offer services such as picking and packing, expedited shipping, and distributed inventory.
- This article is for e-commerce business owners interested in outsourcing their logistics processes to third-party logistics (3PL) companies.
For many entrepreneurs, the fun part of owning an e-commerce business is connecting all kinds of consumers with various products. The logistical part of this all – inventory management, packaging, shipping, tracking and more – might not be as enjoyable for these entrepreneurs.
If this sounds like you, or if your company has grown too large to handle your e-commerce logistics processes in-house, you might benefit from hiring a 3PL company.
What is third-party logistics (3PL)?
Third-party logistics, commonly known by the abbreviation 3PL, is the outsourcing of e-commerce logistics processes to a third-party company. These processes may include warehousing, inventory management and order fulfillment. If you own an e-commerce business, outsourcing your logistics processes to a 3PL provider can allow you to focus on other business ownership needs while automating your order fulfillment.
Key takeaway: 3PL is the outsourcing of your company's inventory management, warehousing, order fulfillment and other e-commerce needs to a third-party company.
What are the basic types of 3PL firms?
3PL companies can be broken down into several categories:
- Distribution-based: These 3PL companies store your products until you send them orders. Once your 3PL provider receives these orders, it picks items from its stock, packages the items and ships them to the recipient.
- Financial-based: These 3PL companies specialize in the finance side of e-commerce logistics, such as freight payment, audits, and accounting and financial management of inventory.
- Forwarder-based: These 3PL providers focus primarily on directing your stock from your warehouse to a mail carrier that handles delivery.
- Information-based: These 3PL companies are based online and focused primarily on B2B operations. They leverage electronic markets to power their logistics and transportation services.
- Transportation-based: These 3PL teams focus on transportation from factories to warehouses and then to customers.
Key takeaway: The five categories of 3PL companies are distribution-based, financial-based, forwarder-based, information-based and transportation-based.
3PL vs. 4PL
As you learn more about third-party logistics, you might also encounter the term "fourth-party logistics." 4PL companies are not themselves involved in e-commerce logistics as are 3PL companies. Instead of overseeing warehousing, inventory management, and order fulfillment, 4PLs find a 3PL for you and manage the 3PL's work on your behalf. This is why these companies are called 4PLs: They're the fourth party in your e-commerce logistics chain after your company, your customers and your 3PL provider.
Key takeaway: 4PLs are companies you can hire to find 3PLs and oversee their work on your behalf.
Benefits of using 3PL providers for your e-commerce logistics
These are some reasons your e-commerce company might benefit from working with a 3PL provider:
- Faster, more affordable e-commerce operations. Yes, you'll pay to hire a 3PL, but the money you'll likely save on inventory management software, shipping software and other e-commerce platforms will almost certainly offset this cost. So will the time you no longer have to spend tracking your inventory, ordering stock, printing labels and bringing packages to your nearest mail carrier.
- Easier scaling. If your company grows to the point where it receives more orders per day than a small team can easily manage, 3PL providers can help you scale more easily. That's because 3PL companies have their own warehouses, stock, forklifts, inventory management software and other tools that would likely be a headache (not to mention a financial burden) for you to obtain. You'll also get time back to focus on tasks that might better suit an entrepreneur, such as marketing.
- Access to industry expertise. Whereas you might be more familiar with entrepreneurship and business management, 3PL companies live and breathe e-commerce logistics. You can rest assured that a good 3PL is capable of elevating your product delivery operations to their maximum potential.
- More affordable shipping. Let's say you're starting an e-commerce company from the comfort of your home. This doesn't just mean a lack of inventory storage space; it also means that your shipping costs will vary significantly based on where your customers live. Hiring a 3PL can lower these variable costs, since your shipping payments are included in the 3PL's work.
- More shipping locations. The same shipping cost concerns can make reaching certain customers far tougher without 3PL. For example, if you're based in California, shipping to Maine might be far more expensive than shipping to Nevada, thus discouraging you from selling to Maine-based customers. 3PLs eliminate this barrier, since they have warehouses all over the country (and the world), so you can ship to pretty much any customer.
- More satisfied customers. The faster you can deliver items to your customers, the happier they'll be. With 3PL, this rapid delivery is far more feasible than it would be if you handled shipping in-house. That's because 3PL providers have warehouses all over the country, so they have extensive control over delivery times.
- Less risk. We've all had packages arrive late and felt impatient as we awaited them. With 3PL services, you can set up alternate shipping arrangements in the case of delays or even lost packages, keeping your customers satisfied. You'll also be legally protected in this scenario; since the 3PL company is handling your shipping, the 3PL, not your company, is on the line for shipping issues.
Key takeaway: The benefits of outsourcing your e-commerce logistics to 3PL companies include quicker and more affordable operations, easier scaling, a larger potential customer base, and more satisfied customers.
What services do 3PL providers offer?
These are the most prominent services that 3PL providers offer:
- Alternate shipping arrangements. If an order is lost or won't make it to your customer quickly enough for their needs, you can set up alternate shipping arrangements with your 3PL far more easily than if you handled logistics yourself. Your 3PL provider likely has several warehouses throughout the country, so it can quickly resend an item with expedited shipping at far less cost than you can.
- Distributed inventory. This is the e-commerce term for the storage of stock at several locations rather than one warehouse. With stock distributed among several locations, your 3PL provider can deliver items to customers from the locations nearest to it rather than a faraway warehouse. With this physical proximity comes faster and less costly shipping.
- Expedited shipping. Let's say your e-commerce company has just one warehouse, located in Oregon. In that case, overnight shipping to Florida is a significant challenge. However, since your 3PL provider likely has distributed inventory, expedited shipping may become more realistic – reaching Florida overnight from a 3PL warehouse in the Southeast is entirely feasible.
- Inventory management. Although hiring a 3PL company removes the burden of inventory storage from your business, you should still know which of the items you sell are in stock, nearly sold out or out of stock at any given moment. Your 3PL provider can manage your inventory for you and keep you in the know about your stock levels without any extra work on your behalf.
- Kitting and assembly. This process entails piecing separate inventory items into one product to be packed and shipped to the customer. Outsourcing this task to a 3PL saves your company manual labor and thus time and money.
- Picking and packing. This process involves finding the appropriate items in a warehouse and adding them to a package in a manner appropriate for damage-free shipping. Unlike kitting and assembly, picking and packing means the addition of several distinct products to a package rather than the assembly of several parts into one item. Put another way, picking and packing involves fitting all of a customer's items into their shipment, not preparing one larger item from smaller parts.
- Returns management. All e-commerce companies, even those supremely confident in their products, should have firm return policies in place. Your 3PL provider can help you uphold these policies. It will oversee all your product returns on your behalf, relieving you of the logistics that can accompany starting customer returns, generating shipping labels and reentering returned items into your inventory.
Key takeaway: Among the services your 3PL provider may offer are distributed inventory, expedited shipping and returns management.
Companies that use 3PL providers
If you go the 3PL route, you won't be alone. According to a 2017 study, 90% of American Fortune 500 companies hire at one least 3PL company. For example, 3PL company DB Schenker oversees logistics for Apple, Procter & Gamble, Dell, and more.
3PL use is also common among companies outside the Fortune 500, including the six small and midsize businesses that prominent 3PL company ShipBob describes on its website: nutrition company Ample Foods, grooming company BAKblade, apparel companies Brummell and Iloveplum, CBD company Nature's Ultra, and deodorant company PiperWai.
Key takeaway: SMBs as well as household-name Fortune 500 companies make use of 3PL providers.
Top 3PL providers
Dozens of 3PL providers exist, but many of them are geared toward Fortune 500 companies. That said, some 3PL providers that Fortune 500 companies use also offer services suitable for SMBs. The first three providers on the list below fall into this category, whereas the final two may be more obvious fits for SMBs. In all cases, you'll need to contact the company for a quote before opening an account.
C.H. Robinson is a freight and supply chain company that oversees logistics for hundreds of thousands of customers, including household names such as Microsoft and Lowe's. Its truckload and less-than-truckload (LTL) services can be ideal for SMBs, though its other services may better suit large corporations. Visit C.H. Robinson's full list of services to learn more, and contact the company for a quote if interested.
DB Schenker, like C.H. Robinson, serves Fortune 500 companies but offers part- and full-load services that may benefit SMBs. It also offers exclusive Smartbox technology that the company says offers more transparent, real-time tracking than any of its competitors. Visit DB Schenker's land transport services page to learn more, and contact DB Schenker for a quote if interested.
Kuehne+Nagel offers LTL services, through which e-commerce companies can provide their customers with accurate shipping prices, track and document shipments, more efficiently acquire stock, and transition from manual cataloging to digital inventory management. To learn more, read Kuehne+Nagel's brochure or contact the company for a quote.
ShipBob offers a tech-enabled fulfillment network, through which e-commerce businesses can enjoy fast, affordable shipping. ShipBob also says it can save your company time and money in the following ways:
- Up to 13% increase in bottom-line cost savings
- Up to 97% increase in average order value
- Up to 18% decrease in abandoned carts
- Up to 120 fewer labor hours
The company bases its quotes on your need for receiving, storage, picking and packing, and standard packing and shipping services. Visit ShipBob's pricing page for more information, and contact ShipBob for a quote if interested.
Warehouse Anywhere is a 3PL provider that owns over 10,000 warehouses. It offers delivery, online and mobile warehouse, and inventory management tools that allow for several users, real-time inventory tracking, and thorough warehouse leasing controls.
Unlike many other 3PL companies, Warehouse Anywhere explicitly states its plan tiers and features on its website. The company says that its Core+ plan is best for storage asset management, Pro (its most popular tier) and Enterprise are best for inventory and storage asset management, and Lightspeed is best for e-commerce. However, you'll still need to contact Warehouse Anywhere for a quote if interested.
Key takeaway: C.H. Robinson, DB Schenker, Kuehne+Nagel, ShipBob and Warehouse Anywhere are some 3PL companies that can work with small and midsize businesses.