The primary purpose of a third-party logistics (3PL) partner is to efficiently manage the receiving, storage, picking, packing, and shipping of products to consumers and retailers. There are many ways to approach this work, and 3PLs often specialize based on product type, order volume, and distribution needs. But how do you know if a 3PL is for you? Are there any 3PLs that can be personalized? What do you look for?
Determining if a 3PL is right for your business and which type of 3PL to use can be a daunting project requiring in-depth analysis. This article will help you better understand some questions and perspectives you need to consider to deepen your understanding of 3PL so you can make the right decision for your business.
Factors to Consider
When evaluating the strengths of various 3PLs to identify a partner, there are many factors to consider. These include:
- The size of your business and potential growth plans
- The type of product sold
- Active SKU count
- Inventory management approach
- Sales channels (e.g. Direct to consumer, wholesalers, Amazon)
- Order volume per sales channel
- Shipping options, cost, and delivery time
- Current distribution (in house vs. 3PL)
- Commitment to making a move
- What 3PL fits best (local 3PL or national with multiple locations)
These and other factors are important to understand as you dive into your 3PL options. Not all of these factors are applicable to your specific situation, and there are probably factors not mentioned in the list above that are important to your business. Take time to understand your needs, and conduct your 3PL search accordingly.
Your Business and Growth Plans
It is becoming more common for businesses to have only a handful of full-time staff and to outsource functions such as legal, financial, human resource, and operations. But the outsourcing approach may not align well with how you run your business and envision growth. Ask yourself the following questions:
- How do you like to spend your time in the office and what do you focus on?
- What do you like to control and what are you okay with letting other companies manage?
- Would you rather grow your in-house team or pay outside experts to manage some things?
- Do you feel like your growth is being hindered because operations can’t keep up with demand?
- What is your financial motivation and does outsourcing make sense for that motivation?
Be honest with yourself; you don’t want to outsource operations (or any other functions) if you know you would rather manage growth with an internal team. This isn’t to say that you can’t evaluate 3PL and change your mind, but keep in mind the quantitative and qualitative factors that are important to you.
Owning and managing your own warehouse and distribution center requires significant capital investment in the facility, equipment, and people to operate it. This is especially true if you are in, or anticipate, an aggressive growth period, including seasonal sales spikes. This is neither good nor bad, but it’s important to understand in terms of your business philosophy and potential financial impact. Our white paper on Saving Money With a 3PL provides a more detailed look at the financial considerations to keep in mind.
Product Type and Order Volume
It can be easy to think that 3PLs are largely the same, but this is far from the truth. Understanding your products, typical order characteristics, sales channels, delivery expectations, and nuances of your products and orders will help you identify a 3PL that has the expertise and infrastructure to meet your requirements. Some questions to ask yourself about your products that will be important to potential 3PL partners:
- What type of products do you sell?
- Do your products require special shipping or handling?
- Are they big and heavy, or small and lightweight?
- Does your typical order have 1–2 items or 7–8 items on average?
- Do your retail clients have detailed routing requirements?
- Are your products subject to government or industry regulation?
- Do your products contain any type of hazardous materials?
- Do your products require FDA certifications?
If you sell high-end furniture, you should seek a 3PL that has the infrastructure and equipment to handle heavy products. If you sell thousands of apparel items every day and have several hundred SKUs, you should look for a 3PL that has the infrastructure and technology in place to handle high order volume across many SKUs. If you sell food or beverages, you need to find a 3PL with the right certifications and facility to store and handle your products correctly. As the requirements increase and become more complex, it gets more challenging (and expensive) to find a good 3PL partner.
Conversely, if your product and order fulfillment requirements are simple and straightforward, you will find more 3PLs available to you, and your cost will likely be less. These are just a few of the variables and 3PL areas of expertise to consider. To sum it up, you need to have your product and order fulfillment requirements clearly identified so you can share them with potential 3PL partners and make sure they can meet your needs.
Sales and Distribution Channels
The sales channels available to companies are changing. For many years, only two basic options existed:
It’s no secret that eCommerce continues to grow each year, gaining more market share. What is less known is that other, newer sales channels are gaining traction too. Amazon programs, drop ship options, and site-to-store delivery are becoming more popular all the time. Within the Amazon umbrella, you have a couple of options, including:
Fulfillment by Amazon
Amazon FBA has been around a long time, and many Amazon sellers use this program. When you (or your 3PL) ship orders to Amazon, they warehouse your product and fulfill your orders as people purchase your products on the Amazon website. Many people find value in this program and like the idea of a “one-stop shop,” while others feel like they lose control of their brand and order fulfillment expenses creep up over time.
Amazon SFP is a more prestigious program that allows you (or your 3PL) to fulfill the orders that you receive via Amazon’s website if you qualify for the SFP program. Amazon has requirements around how quickly these orders must be fulfilled and how they can be delivered. Many companies find this program valuable because they are included in the “Prime Family,” and that often gets more attention from buyers than products not available in the Prime program.
Choosing the Right Option for You
For either Amazon program, it is important to know if 3PLs you are considering are familiar with these programs and have the capacity and expertise to participate in them on your behalf. Ideally, they will already have clients participating in these programs, further validating their expertise.
Drop Ship and Site-to-Store options are young by comparison to the other channels noted, but they appear to be gaining traction. In part, they are offered by large retailers like Walmart and Target to further compete against the Amazon programs mentioned. Convenience for customers who already shop at these retailers, and the sheer number of locations to which they can deliver, make them attractive to consumers.
It will be interesting to see how sales and distribution channels evolve in coming years. For the purpose of identifying and selecting the right 3PL for your business, it is important to know:
- Which channels you sell in
- New channels you are considering
- Whether your 3PL can accommodate your current and future needs
Shipping Cost and Delivery Time
Freight costs continually increase as carriers like UPS, FedEx, DHL and USPS increase rates. This means delivery time and cost will continue to erode the gross margin for all businesses, which is a problem without an easy solution.
However, as a general rule, a 3PL should always be able to offer you better rates than what you can secure on your own. This is a benefit of the buying power a 3PL has by leveraging the combined volume of all its clients as compared to any of those individual clients buying on their own. 3PLs do (and should) make money on their freight rates, but again, they should be able to lower your freight cost as well.
Delivery time is an important variable in the freight equation. The quicker you want your orders delivered to your customers, the more expensive it will be. An interesting twist in recent history has been the move toward two-day delivery anywhere in the continental United States. Amazon was a driver of this, and the other large carriers followed suit. However, it is worthwhile considering whether your customers truly want (and perhaps expect) two-day delivery and if so, how your business should approach it. You can find interesting insight on this topic reading our “2-day Delivery” white paper.
Advantages and Disadvantages of 3PLs
There are pros and cons to partnering with a 3PL, many of them the same as those associated with any new business partnership.
- Allows you to focus on products, sales, service
- Lower per order and freight cost
- Warehouse and order fulfillment expertise
- Avoid the big investment to operate your own
- Team that catalyzes and scales with your growth
- Holidays and other seasonality better managed
- It may be hard for you to “let go” of control
- You may lose some existing vendors
- They probably won’t do things the way you did
- You may be letting people go if you outsource
- There are always unknowns in a new partnership
- 3PL will have many clients busy during holidays
We suggest taking your time to conduct a thorough evaluation of several 3PLs with various members of your team and approaching the process with an open mind. If you proceed in this manner, the odds are you will find the right 3PL partner for your business. This partnership will likely lead to many benefits, perhaps the most important being the ability to grow your business as quickly as you can, without being encumbered by operations that can’t keep pace.
Every company and situation is a little different, but hopefully you now have new and valuable perspectives that can help you move forward without hesitation.
Making the Move
Making the move to a 3PL can be worrisome, particularly for companies currently handling their own order fulfillment operations that don’t have the benefit of understanding what working with a 3PL is like. Feelings of “losing control” of a critical function such as order fulfillment adds to the worries and can cloud the decision-making process. With this in mind, it is important to remember that no 3PL will do things the way you have done them — but this is the reason you are outsourcing this work.
There are many things you can do to prepare for a successful transition to a 3PL, many of which you can read about here. In simplest terms, make sure the 3PL you select has a detailed and comprehensive new client onboarding process and plan. Ideally, they will have a department (or at least some employees) who are dedicated to leading new client onboardings and will manage the project from beginning to end. With this type of process and person in place, your transition will be much less worrisome, and you will recognize the benefits of working with a 3PL sooner rather than later.
Despite the stress of making this type of move, don’t step over dollars to pick up dimes. If your in-house operation or current 3PL can’t keep up with sales and is slowing your growth, it is time to make a move to a partner that will energize sales and support growth.