Time for a 3PL?

When a business’s growth outreaches its warehouse and fulfillment capacity, it may be time to turn to a 3PL. If you’re seeing more demand than your company can handle with its existing resources, congratulations! It’s time to decide whether you want to build or buy the additional capability. In this case, buying the capability means finding and hiring a 3PL.

But what is 3PL? 3PL stands for third-party logistics, an external company that specializes in warehousing and fulfillment on behalf of other businesses. 3PLs benefit from significant economies of scale across labor, physical space, and shipping costs. They pass on those efficiencies to their clients and can provide a scalable solution that costs the same - or hopefully less - than building all of that capability internally.

Working with a 3PL generates operating expense for your business, but it reduces or eliminates the capital expenditure for your logistics operations. You’ll pay monthly storage, shipping, and fulfillment costs, but there are no long-term warehouse leases to sign, no racking to buy, and no forklifts to rent and maintain.

What a 3PL Does - and Doesn’t Do

At the most basic level, 3PLs will receive your inventory, store it, and ship orders to your customers. Some 3PLs can provide additional services, like managing returns, and even providing customer service to your end consumers.

The depth of service offered within those categories can vary drastically between individual 3PLs. For example, some 3PLs specialize in eCommerce fulfillment, and can’t (or won’t) provide B2B or wholesale fulfillment to large big-box retailers. Some 3PLs don’t process individual customer returns, while others offer item cleaning and refurbishment onsite. With such a wide range of potential offerings, it’s important to verify exactly where a given 3PL’s capabilities begin and end.

Because 3PLs are so involved in the flow of customer orders, some brands expect the 3PL to take on activities that they aren’t able or willing to do - or do well. Generally speaking, your 3PL can’t get you IN to a big retailer - you’ve got to do the selling on your own. But a 3PL that underperforms can get you OUT of a big retailer pretty quick! Similarly, your 3PL can send packages to your clients, but they probably shouldn’t be tasked with sending the invoices. A successful partnership with a 3PL means carefully delineating the responsibilities and expectations on both sides.

How the 3PL Fulfillment Process Works

First, your chosen 3PL needs to receive your inventory. You may be required to fill out a Advance Shipping Notice (ASN) so that the 3PL knows which products are coming and how many units they’ll be storing for you. Then, each product or SKU gets a dedicated storage location within the facility. Make sure the 3PL you choose has enough storage space, not only your current inventory, but for your business to scale as your product line and order volume grows.

Then, you need to transmit customer orders to your 3PL’s warehouse management system (WMS). The WMS is the central operating system for the 3PL. It:

• Tracks physical locations within the warehouse and the inventory stored in each one
• Contains product data on each item
• Receives customer orders to be fulfilled
• Manages labor and work to be done within the warehouse
• Communicates tracking information to external systems

There are a vast number of WMSs out there, with a wide range of capabilities and complexity. Many of these systems were designed in the pre-iPhone (or even pre-internet!) era and can be a challenge to integrate. When selecting a 3PL, it’s wise to consider their WMS a link in your tech stack, and research how easy or difficult it will be to connect. In the worst case, you may need to manually upload orders to the 3PL’s WMS using spreadsheets. In the best case, you can integrate your 3PL into your stack, sending and receiving updates automatically.

After the order is sent to your 3PL, their fulfillment team starts to “pick and pack” the order. A person (or robot!) “picks” the items for the order out of a storage location, and brings them to another person (or robot) who packs the items into a shipping container like a box or mailer. Some 3PLs will charge for packing materials such as bubble mailers, poly bags, packing tape, dunnage, and unbranded boxes. If branding is a priority, make sure your 3PL has the ability to use custom packaging.

Once the order is packed, the 3PL prints a shipping label for small parcels (most common for eCommerce fulfillment), or arranges a freight truck for large shipments (most common in B2B fulfillment). Many 3PLs will use the scale of their shipments with carriers like UPS and Fedex to negotiate steep discounts and pass those savings on to their clients. Some will also compare shipping carrier costs (called “rate shopping”) to get you the best deal for the delivery speed your customer chooses. The tracking number for the package should get communicated back to you, and from there, on to the customer.

Measuring 3PL Performance

Key performance indicators (KPIs) can be used to ensure accurate and timely shipment. Important metrics to track include:

• how often orders ship within an agreed-upon time frame (a Service Level Agreement or SLA)
• how often orders are shipped with incorrect items
• the rate of returns due to shipping damage
• Inventory accuracy during a quarterly or annual count

Most 3PLs will monitor fulfillment speeds themselves, in part because it is in their own interest to have high throughput. But a proactive approach to collaboratively define and align on KPIs increases the likelihood of a successful 3PL partnership.

To achieve the best possible outcome when working with a 3PL, a brand should consider the KPIs for their side of the engagement. 3PLs will be more successful and have a lower error rate when a brand:

• Provides accurate product data, including weights and dimensions
• Has well-documented rules and processes for each sales channel
• Uses a platform for real-time collaboration
• Builds a robust integration to the WMS with two-way sync
• Gives plenty of lead time for large or labor-intensive projects like flash sales

What Success Looks Like

A great 3PL engagement is a cost-effective, scalable, and accurate fulfillment operation that supports your brand's growth and exceeds your customer’s expectations. When it’s working well, your 3PL ensures that orders are processed accurately and on time, inventory is accurate and well-managed, and logistics remain efficient without unnecessary capital expenditures. Your team gets to focus their time and energy on sales, marketing, and new product development - on growing the business and differentiating from competitors. The 3PL becomes a trusted, expert resource that handles essential logistics activities at a higher level than would be possible internally, and grows along with you as you scale.

Brands that clearly define responsibilities, integrate effectively with their 3PL’s systems, and establish transparent KPIs will set themselves up for long-term success. Ultimately, the right 3PL might not be “just” a service provider, but could become a strategic partner and source of competitive advantage, enabling business expansion while maintaining high customer satisfaction.