Some of the best business advice I’ve ever heard is to double down on your strengths and lean on experts to help you with your weaknesses.
Most eCommerce business owners find it hard — even emotionally taxing — to relinquish any aspect of their business. Perhaps you can relate to this feeling.
It’s tempting to try to manage everything yourself. But it’s the sign of a mature and scalable business when you start delegating systems and processes to others.
This is the precise idea behind eCommerce 3PL services. A third-party logistics strategy is perfect for owners who don’t want to be stuck in the inventory management world.
They know that the only path to growth is to outsource those things to the experts and stick to the high-level tasks that really move the needle for their business.
In this post, we’ll go over:
- What is 3PL for eCommerce?
- The benefits of 3PL services for eCommerce businesses
- When you should (and shouldn’t) invest in a 3PL service
What is eCommerce Fulfillment?
eCommerce fulfillment describes the entire series of steps required to get a product from a warehouse or storage facility into the hands of a customer following an online purchase. It includes, but isn’t limited to:
- Receiving inventory from manufacturers
- Storing inventory
- Picking, packing, and processing outbound orders
- Transporting processed orders to the customer
How do growth and fluctuations affect eCommerce fulfillment?
Most eCommerce businesses don’t have dedicated storage or transportation assets. This means it’s a challenge to manage fluctuations in supplier relations and customer demand.
I’ve spoken with many local businesses who live day-to-day in a perpetual state of anxiety due to the supply chain disruptions of 2020. This fear is compounded when they are producing, shipping, and processing all their orders in-house.
Leaning on a 3PL provider can help alleviate some of the growing pains of an eCommerce business.
The Differences Between 2PL, 3PL, and 4PL
2PL, 3PL, and 4PL are all acronyms that mean 2nd-party logistics, 3rd-party logistics, and 4th-party logistics respectively. These terms refer to companies that provide services to facilitate fulfillment.
Each “party” refers to another step between the company and the end-user. Here’s a more detailed breakdown.
2PLs are transportation carriers
If you’re reading this post, you probably don’t own a fleet of transportation vessels. In that case, you’ll need to hire someone to transport your eCommerce products to your customers. Namely, you’d hire a 2PL provider like FedEx, UPS, or Maersk. 2PLs are companies that own transportation carriers and lease them out to businesses that need transportation.
3PLs maintain your logistics
A 3PL provider is a company that manages your entire logistics pipeline from start to finish. These companies (which will henceforth be the subject of this post) handle some or all of the requisite fulfillment tasks. Most 3PLs offer fulfillment, storage, distribution, processing, shipping, and sometimes additional services like freight brokerage and analytics.
4PLs optimize your logistics
A 4PL does everything a 3PL does and more. They not only manage the entire logistics pipeline but go above and beyond to broker arrangements with shipping providers and analyze and optimize all aspects of the supply chain.
They often stay independent and even work with competitors to find the best deals for their clients.
4PLs are great for large eCommerce companies who want to remain completely hands-off in their logistics process.
What is the Difference Between a 3PL and a Broker?
The difference between a 3PL and a broker (also called freight broker) is that freight brokers work on only one aspect of the logistics pipeline while 3PLs often manage the entire process.
The sole value of a freight broker is negotiating the best rates with transport carriers for businesses. 3PLs sometimes offer freight brokerage services that automatically select the most cost-effective and fast shipping method to best serve their customers.
Therefore, 3PLs may offer freight brokerage services, but freight brokers don’t offer full 3PL services.
How Does the 3PL Fulfillment Process Work?
While every 3PL provider is different, most handle at least the following processes in the eCommerce logistics cycle:
Step 1 – Receiving
Receiving processes vary from provider to provider, but everything starts with eCommerce businesses actually getting products to the 3PL provider.
Most 3PLs want businesses to have products packaged exactly how the customer will receive them, though it’s worth mentioning that some offer assembly services for an extra cost.
Once the 3PL receives your products, they scan them in and log your on-hand inventory. If you use an inventory management system (IMS) like SkuVault you can monitor each step of the process and replenish inventory as needed.
Depending on your business and tolerance for storage costs, you may want to replenish on a monthly, quarterly, or bi-annual basis.
Step 2 – Distribution
One of the benefits of using a 3PL is distributed inventory. For example, Amazon FBA promises 2-day shipping for most of its FBA products. How can this be possible (or cost-effective) if you’re in Florida and your customers are in Oregon?
Answer: A distributed inventory infrastructure. 3PLs like Amazon FBA (and others) have warehouses and fulfillment centers all over the country. It’s becoming more common for 3PLs to use AI and machine learning to dictate how much of your inventory should be spread across certain regions.
Step 3 – Cataloging and Warehousing
Once the 3PL receives the products and gets them where they need to be within their national or international infrastructure, they catalog and store them.
Businesses can monitor all of this either through a proprietary dashboard (such as in the case of Amazon, Shopify, and Walmart). However, if you have a multi-channel eCommerce strategy, you’ll want something that can aggregate all your channels in one place.
That’s where an IMs like SKuVault comes in — which of course has built-in integrations for all major 3PL providers.
Step 4 – Order Processing
Once a customer places an order, that’s where the real fun begins. Warehouse teams pick, process, pack, and ship your products on your behalf. Of course, you can see all of this in real-time via the aforementioned dashboard or your IMS.
This means you can monitor the progress of all your on-hand and in-transit products.
Many 3PLs will also help choose a shipping provider that fits within your budget and the expected shipping timeframe.
Step 5 – Returns Processing (reverse logistics)
If a customer wants to return a 3PL-fulfilled product, most services will cover that responsibility completely. For some, this benefit alone is worth the price of admission.
And since fulfillment centers for most 3PLs are all over the country, getting the product back into circulation and stocked for the next customer takes far less time.
Some 3PLs will even handle customer service issues on your behalf and compensate customers for damaged or late products.
Benefits of Using a 3PL Provider
Here are some of the benefits of working with a 3PL. Some are more obvious than others, while some are more hidden benefits that could be game-changers for your business.
3PLs let you outsource inventory management to the experts
I don’t know about you, but most eCommerce business owners I’ve met didn’t start their business to manage inventory all day.
One of the signs of a mature business (and business owner) is the ability to let go and delegate responsibilities to others. This is the chief benefit of utilizing 3PL. You can finally get rid of all that packing foam, label printers, and cardboard boxes cluttering up your home office — and focus on what really matters.
3PLs can help you save money
You want to make sure any service you invest in will produce a positive ROI for your business. And while 3PLs obviously cost money, they may be saving you far more. How? Opportunity cost.
Simply put, opportunity cost is the cost of doing one thing over another. Think of it this way. Let’s say your time is worth $150/hour. Is picking and packing inventory, sorting through spreadsheets, and printing labels really worth that time?
What if, instead of those tedious tasks, you could be:
- Creating new content for your website
- Optimizing your social media strategy
- Entering new markets
- Forming partnerships with influencers
These are the things that will truly drive progress in your business. The initial investment in a 3PL may seem scary, but it could free you up to experience unprecedented growth.
3PLs help you focus on scale
The number one enemy of scale is a lack of systems, processes, and a team. Many eCommerce business owners are solopreneurs or part of small teams.
Until we figure out a way to clone ourselves or slow downtime, you cannot grow if you’re doing everything yourself. There’s only one of you and only 24 hours in a day.
If there’s one thing I’ve learned from growth-minded eCommerce businesses, it’s that trying to be a jack of all trades and do everything yourself will hamstring your growth.
Focusing on the things we mentioned in the last section requires you to free up your time. And freeing up your time requires delegation, processes, and a team. The best things to delegate are repeatable, predictable tasks. Inventory management falls squarely in that category.
Outsourcing to a 3PL can help you focus on things that will actually facilitate growth in your business.
3PL offers expanded reach
It’s not uncommon for entire regional markets to be inaccessible to eCommerce businesses due to their managing inventory in-house.
For example, let’s say you own an outdoor clothing brand on the East Coast. You’ve got West Coast fans gearing up to hike in Yosemite, but it makes no sense for them to purchase your product.
Thanks to Amazon, they (like most other consumers) have come to expect two-day shipping. But shipping that weight across the country in two days is astronomically expensive.
You want to lower the cost to get the business, but then you’re cutting deeply into profits. See the problem?
This is why most 3PL providers have warehouses dispersed throughout the country (and sometimes internationally).
Shopify Fulfillment Network (which we’ve also written about here) is one of those brands that utilizes AI to inform how they distribute inventory. If you sell 20% in the mid-West and 80% on the East Coast, they’ll keep corresponding product numbers at those warehouse locations.
This doesn’t need to end with your U.S. reach, though. Many 3PLs have international warehouses as well as domestic ones. This affords the ability to test new markets (all while your 3PL takes care of all the requisite customs and imports responsibilities).
3PLs offer fast shipping and reverse logistics
Customers are used to fast, cheap shipping. It really has become the new standard.
Not only that, but most customers also expect speedy, seamless reverse logistics. Meaning if a product isn’t to their liking, they expect to be able to return it for free and get it processed, replaced, or refunded just as quickly as they received it.
Imagine if you processed and shipped inventory in-house at standard rates and timelines (5-7 business days). How much more frustrated would a customer be if they weren’t happy with the product after a long shipping timeline?
On top of that, now they have to send it back and wait for another 5-7 days before seeing their refund or a product replacement.
3PLs not only open up new markets, but cheap and fast shipping anywhere you find customers. This wide distribution network is what you pay a premium for when you contract logistics experts to help.
Downsides to Using a 3PL Provider
Every inventory management strategy demands a bit of give and take. Here are some downsides to be aware of as you explore 3PL.
eCommerce 3PL offers less control
Depending on your personality and unique goals, you may see this as a positive. For many, it’s tough to let go of control of any aspect of your business. By nature, you have to entrust much of the customer experience to someone else.
If you’re someone that agonizes every detail of your packaging, product aesthetic, or assembly, 3PL may not be for you. It can be tough for eCommerce owners (especially those that sell highly customized products) to get over that psychological hurdle.
3PL providers can demand a steep investment
There’s no getting around it — 3PL is expensive. Although, we fully acknowledge that “expensive” is a relative term. You may find it chump change for the benefits it affords.
Any way you slice it, migrating to 3PL will require you to fundamentally alter your supply chain. This likely means a significant investment of both time and money in onboarding.
You’ll want to budget at least 3-5 business days to:
- Integrate your inventory management software (you do have inventory management software, right?)
- Jump through all the onboarding hoops your 3PL throws at you
- Troubleshoot problems
- Ship your product
- And potentially create new systems and processes
Thankfully, most inventory management platforms offer seamless integration with your 3PL, so you can monitor your orders and stock from anywhere with a web browser.
3PLs will often charge based on your individual needs, which is why there’s no one-size-fits-all approach. For example, someone who requires storage for bulky items that require some assembly will be a lot more expensive than someone storing pre-assembled, homemade jewelry.
3PL adds distance from your products
If you’re dealing with highly customizable products that require kitting or assembly, 3PL may make you a bit nervous. If something happens to a product — say it needs to be altered, modified, or fixed in a way that requires your unique skills — you’re completely cut out of the supply chain.
This physical (and logistical) distance from your products can thus jeopardize your customers’ experiences.
3PL may cause customer satisfaction issues
If you’ve built a solid rapport with your customers, 3PL may feel a bit like you’re outsourcing your social capital.
When you’re a small and scrappy eCommerce store, you can afford to respond to each customer personally. You can coordinate their returns, offer extra products, or offer them special deals.
When you transfer all of these responsibilities to a 3PL, you’ll have to coach your customers a bit. When something goes wrong with shipping timelines or a customer receives a defective product, they’ll need to go through the appropriate channels.
That means not blowing you up on Facebook messenger. They’ll need to process their returns with the 3PL from which they’ve purchased.
Please note: they will come to you with problems, regardless of whether or not it’s your fault. It may be confusing and inconvenient to direct customer returns back to the 3PL.
This is why it’s important to do your research and choose a 3PL provider that’s trusted and validated by plenty of social proof from other businesses.
What Types of eCommerce Models Can’t be Supported by a 3PL?
While 3PLs can service most eCommerce businesses, there are some that should probably develop an in-house team. If any of the following sounds like your business, you should probably look into other options:
- You have proprietary formulas that require in-house equipment to produce and package
- You have extra-large items that would be cost-prohibitive to store in a third-party warehouse
- You’re a brand-new eCommerce business without capital or demand forecasts to inform your fulfillment strategy
- You have items prohibited by the terms and conditions of most 3PL providers
- Your products are so small that outsourcing storage and logistics wouldn’t add significant value
When Should You Hire a 3PL for Your eCommerce Brand?
You should now have a thorough understanding of the 3PL process and how it helps eCommerce business owners. It’s now time to evaluate whether or not 3PL is right for you.
We’ve compiled six questions to help you discern if 3PL is the right move. Consider these in the context of your business:
- Are you spending at least 30-50% of your working hours handling orders and logistics-related tasks?
- Do you process 100-300 orders per month?
- Have you hired (or are you planning on hiring) warehouse employees?
- Are you reaching the capacity of your warehouse space?
- Do you sell a product that doesn’t require customization, complex kitting, or expert assembly?
- Do you find yourself unable to penetrate certain markets due to shipping costs and complications?
If you answered yes to the majority of these questions, you’ll likely benefit from utilizing 3PL. Of course, that begs the question: how do you find a high-quality 3PL?
How Do you Choose the Right 3PL for Your eCommerce Business?
A 3PL is quite literally a strategic business partner. Therefore, making the leap to a vendor should be a deliberate and well-researched endeavor.
Before diving headlong into the world of third-party logistics, it’s imperative that you’ve got your own house in order, so to speak.
The best way to understand, manage, and streamline your inventory management is through an IMS like SkuVault.
As you introduce more moving parts into your supply chain, you introduce complexity. We’ve built SkuVault to be a one-stop-shop for all inventory reporting and supply chain monitoring.
We’d love to chat more about your unique goals and how we may be able to help you reach them. Reach out to our sales team for a live demo of the product today.