What to Look for in a 3PL Provider (and How They Can Improve the Customer Experience)
No company handles everything internally. Even small businesses still work with a range of service providers, covering everything from accounting to safety equipment. Why shouldn’t you do the same for logistics operations? Third-party logistics (3PL) companies manage your inventory and shipping for you, so you don’t need to worry about storage and fulfillment. Even better, since they specialize in this work, these companies can leverage their expertise and offer greater scalability — helping with important factors like reduced logistics costs, enhanced customer satisfaction, and strengthened bottom line. Take Amazon, for example — one of the most well-known 3PL providers. Businesses of all sizes use Amazon’s logistics network to scale operations, reach more customers, and streamline delivery.
When should you choose 3PL instead of internal logistics and warehouse management systems, and how can you be sure you’re getting the logistics service level your business needs?
Why Should My Business Work With a 3PL Partner?
Most companies go this route because they need help with their logistics system. A 3PL can help you cover disruptions in warehousing, inventory management, and order fulfillment without the upfront costs of internal development.
A 3PL can also help you expand without restructuring your in-house logistics. This is especially useful for adding new retail channels and e-commerce businesses — whether that means selling through third-party websites, expanding your internal online sales channels, or entering new markets.
What Does a 3PL Provider Do?
Third-party logistics companies help with the most difficult, capital-intensive parts of inventory management, order processing, and shipping.
Store Products
A 3PL stores your products in a warehouse until they’re ready to ship. They also store products in strategic locations, cutting shipping times to consumers. This could be a warehouse close to a shipping hub or in a foreign country, so there isn’t overseas shipping and customs to deal with on each order.
Pick, Pack, and Ship Orders
When you receive an order, it’s passed onto the provider, who handles packaging, labeling, and shipping out what the customer orders. Companies that provide “reverse logistics” handle returns, picking up products from customers and returning them to a warehouse for repair, sale, or disposal.
Coordinate Shipping
3PL companies work directly with shipping companies on deliveries of all sizes, from small packages for individuals to truckloads for retailers. They leverage their size to negotiate better rates, and they can manage multiple carriers to get the best results.
Provide Order Tracking and Inventory Management
When you have multiple warehouses and shipping partners to deal with, it can be hard to keep track of your inventory. The 3PL consolidates this information under one identity for each asset. You can see each item’s progress from entry into the warehouse to delivery, giving you an accurate picture of your inventory.
Access New Technology Capabilities
Automation streamlines warehouse tasks and lowers operating costs, but upfront costs are often out of reach for small businesses. Since you’re buying into a large, well-funded system, you can get the benefits of these upgrades immediately. It’s a cost-effective way to reduce turnaround times.
How Does 3PL Differ from Other Logistics Solutions?
Logistics options can be divided into tiers based on the amount of involvement from the partner company.
First-Party Logistics (1PL)
First-party logistics (1PL) uses only internal systems to move and store products. 1PL is used by companies that operate at a large enough scale to justify in-house management, as well as companies that specialize in large shipments to a few resellers or consumers.
Second-Party Logistics (2PL)
Second-party logistics (2PL) companies handle shipping for any part of your supply chain operations. This includes sending finished products to customers, as well as shipments to warehouses or between production facilities. 2PL includes trucking companies and parcel services like USPS, UPS, and FedEx.
Fourth-Party Logistics (4PL)
Fourth-party logistics (4PL) provide complete supply chain management, including contracting providers for everything covered by a 3PL. 4PL is used by large businesses with complicated supply chains covering multiple channels.
Fifth-Party Logistics (5PL)
Fifth-party logistics (5PL) providers manage the entire supply chain — from production all the way to delivery. Dropshipping is one example of a 5PL model, where your company collects orders while a third party handles product sourcing, storage, and shipping. Partnering with a 5PL can also be a smart way to offer complementary products without managing additional inventory in-house.
For most companies, 3PL services are a sensible choice for product management. This hands over shipping, storage, and tracking to a company that specializes in these aspects of logistics. That way, you can concentrate on manufacturing and marketing your products.
Types of Third-Party Logistics
3PL providers can be divided into two types of business relationships: contract and flexible.
Contract Logistics Providers
Contract providers are set up to provide end-to-end logistics for large volumes of orders. They require a contract for a long-term business relationship. In return, they build a shipping and warehouse system tailored to your specific needs. Contract 3PL makes the most sense for logistics channels with reliable, long-term demand. This includes direct shipment to consumers and retailers across an established sales network.
Flexible Logistics Providers
Most new 3PL providers are built around flexibility. They mostly target small and medium-sized businesses, with a focus on e-commerce. A flexible 3PL partner provides services on demand and can cover part or all of your logistics system. Often, companies with a contract provider will work with a flexible provider for help outside the contract’s scope. This includes covering shipments during busy seasons and entering new retail channels. Smaller companies can work with a flexible 3PL without going into a long-term business relationship.
Asset vs. Non-Asset Providers
3PL providers can also be divided into asset and non-asset companies. An asset 3PL owns warehouses, trucks, and equipment. Since everything is in-house, these companies can provide consistent quality and pricing with little to no fluctuations. These companies usually specialize in specific industries. A non-asset provider contracts out these services. These 3PLs acquire services as needed, so they can scale to your company’s logistics needs. They also deal with a wide range of products, focusing their services on optimization through management. Since the companies they work with change, service quality and pricing structures can vary.
How Does Working With Third-Party Logistics Work?
First, you need to prepare items for collection by the 3PL. We make automatic labelers that allow you to apply any required labels to containers, including barcodes, tracking numbers, and RFID tags. Depending on the shipment and the service provider, assets may be handled in one of two ways. Some companies collect items packaged individually on-site and put them directly on warehouse shelves. Others collect bulk containers, then separate, label, and shelve individual items on site.
Products are picked up at your production facility or an agreed-upon meeting place. They are taken to the warehouse for processing and shelving. When the warehouse receives an order, the items are picked, packed, and labeled for shipping. The package is then handed off to a shipping agency, or delivered by the company’s trucks.
The 3PL provides detailed inventory management information, including real-time stock levels, stock rotation, and location. This coverage starts when they pick up an item and ends when it’s in the customer’s hands.
When Should I Consider Third-Party Logistics?
Trying to decide if 3PL makes sense? Start by asking these questions.
1. Do You Have Difficulty Fulfilling Orders?
For small companies, the tipping point for outsourcing to a third-party fulfillment center is around 20 orders per day. At that point, it starts to make financial sense to hand off fulfillment services to a third party, freeing up labor for other work.
2. Are You Running Low on Storage Space?
Working with a 3PL gives you access to more warehouse space without having to build or rent a new storage facility.
3. Can You Handle Surges in Demand?
Flexible 3PL lets you add more capacity as needed, instead of having capacity that remains unused most of the year. For example, they can take on more orders when you see an uptick in sales during the holiday season.
4. Do You Want to Speed Up Shipping and Order Fulfillment?
Partnering with a 3PL lets you store products in locations that are closer to customers, cutting shipping times and ensuring on-time deliveries. They’re also able to use their expertise to optimize picking and find the fastest shipping options.
5. Is it Cost-Effective?
Since 3PLs handle more orders, they can negotiate better rates with shipping companies. They’re also able to operate at a scale that decreases the cost of warehouse space and automation. This gives your business the benefits of these cost savings no matter your size.
6. Do You Want to Enter a New Market?
Do you want to enter a new market? Adding new retail channels and expanding into new territories is risky. A 3PL can handle the logistics services for you, reducing your upfront costs. If the venture is a success, you can continue working with a 3PL or develop an in-house fulfillment system.
What Should I Look for in a Logistics Partner?
While 3PLs can do everything from warehousing your inventory to handling returns, they don’t all offer the same services. When you look for a provider, you need to consider each aspect of your relationship with them.
How far do they reach? 3PLs range in size from local shippers to worldwide agencies. Choose an agency that can reach your client base.
Do they have experience handling your product? Along with general contractors, some companies specialize in handling assets with specific requirements, including hazardous materials, cold chain products, and even baked goods.
How do their rate plans fit your business needs? Long-term contracts often have minimum requirements, including volume and speed. If you can’t operate near those targets, you’ll end up spending more than you intended on their services. Using flexible providers usually means spending more per asset but without the worry of falling below minimums. In either case, it’s important to get a complete breakdown of fees. You also establish clear performance indicators the potential partner needs to meet to maintain the business relationship. This includes on-time shipping, order accuracy, time-to-fill, and damage prevention.
How do they handle shipping? Do they move products themselves? How many shipping providers do they work with, and how do they choose which one is right for your products? Do they ship in the volumes you need? Depending on your product’s final destinations, this could be truckload, less than truckload (LTL), or individual shipments.
Will their services integrate into your existing logistics system? Is it easy for them to pick up products from your facility? Will their reporting system integrate with your customer relationship management (CRM) and enterprise resource planning (ERP) systems? What steps do you need to take to prepare items for collection from your facilities?
Ready to Improve Your Logistics?
Accurate, legible labeling is critical for tracking assets through your logistics process. If you’re looking for a solution that works with in-house and third-party logistics, contact CTM Labeling Systems. We have a proven track record, including working with Amazon, one of the most notable 3PLs in the world, so you can trust our solutions are built for performance at scale. Our applicators can print unique barcodes and apply RFID tags to a wide range of container shapes and sizes. Our distributors will work with you to find a solution that fits the unique needs of your company and your partners.
