How 3PL Companies Work: Your eCommerce Business Guide to Third-Party Logistics

How 3PL Companies Work: Your eCommerce Business Guide to Third-Party Logistics

How do 3PL companies work

If you ship more than 20 – 25 orders a day, or you’ve needed extra storage in the last year to house your inventory, you’re probably a candidate for outsourcing your logistics to a third-party logistics company, known as a 3PL. 

The same is likely true if your order volume has increased to the point where you’re finding it challenging to keep up.

Why?  Time and money, for starters.

For eCommerce businesses, order fulfillment is a key function of your operations. As your business grows, fulfilling your customers’ orders in-house (and for small businesses, literally “in your house”) no longer makes sense. 

This is because the more time you spend on activities that don’t specifically generate revenue, the slower your eCommerce company’s growth will be. And, unfortunately, the problem will only continue to get worse. 

For most eCommerce companies that are ready to grow, scaling your business means outsourcing fulfillment to a 3PL company.

If you’re in the early stages of considering outsourcing to a logistics company, you’ll need to know exactly how 3PLs operate.

How does it all work? Let’s dive in.

What is Third-Party Logistics (3PL)?

A 3PL is a company that allows you to outsource your eCommerce business’ operational logistics from warehousing your inventory to shipping orders to your customers, and even accepting returns. 

Outsourcing the logistics portion of your business can enable you to focus on other key areas, especially growing your business.

The logistics company can provide a number of other important services to manage your full supply chain. This can include services such as: 

  • Transportation
  • Storing Your Inventory in the Warehouse
  • Kitting and Assembly
  • Picking and Packing Shipments To Customers
  • Reverse Fulfillment
  • Forecasting Your Inventory Needs 
  • Providing In-Depth Reporting in Real-Time

3PLs are available in every sector of the eCommerce business. This allows small and mid-sized businesses,  as well as start-ups, to access the specialized expertise of professional logistics companies.  

This also enables smaller businesses to outsource both labor and high-cost operations to 3PLs with advanced infrastructure and deeper resources. 

As your eCommerce business grows, your 3PL can easily manage the additional order volume, enabling your business to expand its capacity without incurring additional labor costs. These key advantages help eCommerce businesses to expand and grow without requiring a significant outlay of capital.

Where Have 3PLs Come From?

The demand for 3PLs has exploded right alongside the massive growth of eCommerce businesses.

According to The Council of Supply Chain Management’s 2021 Third-Party Logistics Study , 3PL is now 25% of the freight industry. This fast-growing sector has more than doubled over the last decade and is expected to keep growing.

What is the Difference Between a 3PL and 4PL?

Third-party logistics (3PL) and fourth-party logistics (4PL) are both professional freight services that help eCommerce businesses plan and execute their freight management needs.

So, what is the difference between third-party and fourth-party logistics providers? 

A 3PL generally focuses on the discrete functions of an ecommerce business’s supply chain operations.

Conversely, a 4PL generally concentrates on the design and execution of eCommerce business processes as well as oversight of the various moving parts of a business’s supply chain. 4PLs often work together with multiple 3PLs such as transportation or warehouse-specializing 3PLs, as well as asset-based carriers and other warehouses employed by the business. 

 

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Why Do Companies Use 3PL Logistics?

eCommerce companies use 3PLs in order to save money, avoid unnecessary capital expenditures, and free up time so they can focus on expansion and scaling their businesses.

Some of the advantages of using a logistics provider include:

1. Faster Shipping Times

A 3PL can allow eCommerce businesses to offer their customers both same-day and two-day shipping options.

2. Reduced Shipping Costs

A 3PL’s negotiating power allows them to obtain lower shipping and freight costs and pass those cost savings on to their customers.

3. Greater Transparency of Your Supply Chain

A 3PL’s customer dashboard allows you to see your supply chain in real-time, offering a variety of reporting options to allow you to effectively manage your business.

4. Optimization of the Logistics Process

Logistics companies continually maximize efficiencies all along your supply chain. This optimization results in faster shipping times, lower costs, minimizing labor, and increasing customer service.

5. Managed Returns Process

Your 3PL effectively manages your returns process by inspecting returned items, returning undamaged items to inventory, and reshipping customer orders as necessary.

6. Improved International Shipping Logistics

A logistics company can efficiently manage worldwide shipping for your business from end to end, including taking care of additional necessary considerations such as customs, documentation, and duties.

Logistics providers have deep expertise and knowledge of industry best practices. 3PLs are continually refining logistics practices, staying up-to-date with changes in manufacturing, logistics technology, and inventory management. This expertise is passed along to their eCommerce business partners in the form of cost savings and increased efficiency.

7. Increased Shipping Volumes

As your business grows, or during high-volume seasons, your 3PL can seamlessly accommodate increased shipping volumes.

8. Better Customer Service

Faster shipping and more efficient customer returns create happier customers.

9. A Dedicated Team of Logistics Professionals

Your 3PL company provides a dedicated team of logistics professionals whose goal is to keep your costs low while maximizing customer satisfaction.

10. Greater Opportunity to Focus on Your Core Business

Perhaps the greatest advantage that a 3PL offers is the opportunity to spend your valuable time and energy where it matters most: focusing on scaling your core business.

The 3PL Order Fulfillment Process

How does it all work?  Whether your eCommerce business is considering working with a logistics company, or you’d just like to know more about how the 3PL order fulfillment process works,  you may be uncertain about all of the various functions a 3PL company can manage for your business. 

It’s important to note that your 3PL  can tailor its pricing and many of its processes to the individual needs of your eCommerce business.

Additionally, if your inventory requires specialized handling such as oversized packaging, climate control, or enhanced security, this can be facilitated by many 3PLs.

Let’s take a look.

Shipping and Receiving

Because logistics companies manage freight for a large number of businesses, they are able to negotiate better deals with freight companies, saving you both money and time via affordable and efficient shipping services that best meet your company’s needs.

Whether your business relies on interstate or global shipping, your logistics partner can ensure reliable service wherever your customers and suppliers are in the world. 

Intermodal 3PL companies can offer businesses a wide variety of shipping options, including rail, truck, or by ship. 

Additionally, the 3PL company will accept your incoming inventory, check it for quality control, and store it safely in an ideal location in their warehouse. 

Of course, all logistics companies have their own processes by which they receive and warehouse your products.

Warehousing

Once inventory is received in your logistics company’s warehouse, your 3PL will store your stock in their fulfillment centers. Each item, sorted by SKU number, has its own dedicated storage location, maximized to reduce labor costs during the picking and packing process.

You’ll want to make certain you are working with a 3PL that has plenty of warehouse space for your current inventory. And, as you grow your eCommerce business, your 3PL storage needs will scale as well.

Inventory Management

Of course, some logistics companies specialize in different types of inventory, but many of the processes are the same across the industry.

One of the key advantages of working with a logistics company is their valuable inventory management experience across a variety of industries. This insight can help you to better manage your company’s inventory levels, supply chain management, and seasonal stock levels.

In addition, this can help save your company money by reducing your inventory holding costs.

FTL and LTL Freight Shipping

Full truckload (FTL) and less than truckload (LTL) freight can be indispensable tools to save your business money on its freight costs. 

If your business regularly ships wholesale orders to its retailers or large orders to your commercial customers, this can be particularly significant. 

Your 3PL can negotiate the most cost-effective deals and arrange for FTL or LTL freight services to transport your products between warehouses or distribution centers.

Picking and Packing

Picking, packing, and shipping are the essential functions of order fulfillment.  As soon as your customer hits that ”Order” button,  your 3PL’s fulfillment process begins. 3PL warehouses are designed to maximize both speed and efficiency.

Most logistics companies have sophisticated technology that can effortlessly integrate directly with your eCommerce platform, or support your multi-channel sales across multiple sales platforms. 

This means the fulfillment process begins seamlessly and automatically, without any further action by your eCommerce business. Additionally, your eCommerce business is able to track the progress of your customer orders via your 3PL’s online dashboard in real-time.

This advanced fulfillment software integration increases efficiency by tracking inventory, orders, shipments, as well as your stock levels.  This streamlines the order fulfillment process, making it highly efficient.

Once the order is relayed to your logistics company, it is delegated to the 3PL’s warehouse picking team. A picking list of items and quantities in the warehouse is received by the picker. At that point, the picker collects your customers’ ordered items from their locations in the warehouse.

Once all the items in a customer’s order have been picked, team members pack them securely for shipping. Your 3PL will utilize packing materials based on your eCommerce business’ preferences and the particular items being shipped to the customer.

The packing materials most commonly used are:

  • Branded or unbranded boxes
  • Bubble mailers
  • Poly Bags
  • Paper or Plastic Packing Tape
  • Dunnage (Including Paper, Wood, or Matting) 

As logistics experts, your 3PL will choose the ideal packing materials to protect your products as they are being shipped to your customers,  while simultaneously achieving the lowest practical dimensional weight. Dimensional weight is a shipping price reduction technique that considers box dimensions and packing materials to keep costs to a minimum.

Once your customer’s order is packed, the packer applies the appropriate shipping label and facilitates the handoff to the shipping carrier for delivery to your customer’s doorstep.

Your logistics provider may also be able to offer shipping options to your customers that you could not otherwise make available. 

For example, with same-day shipping, your customer orders are picked, packed, and shipped out on the very same day they are received via the eCommerce platform.

Generally, there is a time cutoff for same-day shipping availability. Many 3PLs  are able to offer multiple levels of same-day shipping service. For example, standard same-day service might have a 2 PM cutoff, whereas, if customers opt for premium same-day service,  the cutoff might be extended to 5 PM for an additional charge.  

Same-day shipping allows your customers to receive their orders as quickly as possible,  increasing their level of satisfaction.

Kitting and Customization

Many 3PLs offer both kitting and customization services. This means assemblers at the warehouse can configure or customize products for your customers from available parts in your inventory. In addition, kits of pre-set product combinations can be assembled for events such as product launches or crowdfunding campaigns. 

Reverse Logistics (Returns)

“Reverse logistics” is industry-speak for customer returns. 

Your eCommerce business’s return rate will depend on a variety of factors, particularly the specific type of merchandise your company sells. Sized products, such as shoes and clothing, have significantly higher return rates than non-sized products. 

Your 3PL will both accept and process your customers’ returned items and assess whether or not they can be returned to inventory and resold. 

In addition, your 3PL’s reverse logistics process can increase return efficiency to make the undamaged products available more quickly. 

Example of a 3PL Business

Let’s use a fictional jewelry maker named Laura as an example of how small businesses can utilize 3PLs to grow.

Laura started her handmade jewelry business working from her home. She sourced all of her materials herself, designed and made each piece of jewelry individually at her kitchen table, and sold the various pieces on Etsy.

As the popularity of her jewelry grew, Laura started a website and also began selling certain pieces from her jewelry line as a third-party seller on Amazon, while continuing to sell her work through her popular Etsy shop.

Initially, Laura took the orders as they came in from the various eCommerce platforms, packaging them at her dining room table, and then dropping the packages off twice a week at the post office. 

Some customers requested next-day shipping for special occasions, which Laura was happy to accommodate as often as she could. Unfortunately, there were times when she was out of town or had family responsibilities and had to decline her customer’s requests for next-day shipping.

As Laura’s jewelry became more popular, she found that she was spending all of her time fulfilling orders from three different platforms and shipping packages. Often she needed her kids to help her, and they would spend the entire weekend trying to get the orders packaged up so they could be shipped on time.

Laura had her inventory, jewelry bags, metals, supplies, and packing materials stored all over her house and garage. 

The more time she spent filling orders, the less time she had to create new jewelry designs, which was the reason she had started the business in the first place.

Eventually, Laura decided to partner with a 3PL company.

Laura shipped her jewelry stock directly to the 3PL warehouse, and they logged it into the inventory management system and began fulfilling her customers’ orders directly from the eCommerce platforms. 

At any time of the day or night, Laura could log into her 3PL dashboard and see exactly what her inventory for each piece was. The software also alerted her to when stock of her most popular items was getting low, and projected how much inventory she would need in the upcoming months.

Suddenly, Laura was able to offer not only free two-day shipping but also same-day shipping to all of her customers. She also began selling her jewelry in other parts of the world, something she had always wanted to do but had never had the time for.  

Laura also expanded the number of eCommerce platforms where her jewelry was sold.  Because these platforms easily integrated with the 3PL’s warehouse management system, this allowed her to expand her market without additional work.

Finally, Laura was able to focus her energy on creating new jewelry designs and growing her company. 

Final Thoughts

Utilizing a 3PL to manage your business’s logistics needs can free you up to focus on revenue-generating activities to scale your eCommerce business, ultimately saving you time and money.

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