Third-Party Logistics 101: The Ultimate Guide to 3PLs

If you are an ecommerce business owner, order fulfillment is an integral part of your operations. As your business grows, you may find that fulfilling customer orders in-house is no longer feasible. At this point, you’ll need to expand your fulfillment strategy; for many businesses, this means outsourcing fulfillment to a third-party logistics (3PL) company.

As a business owner, it’s vital to understand how 3PLs work in order to make the most of your fulfillment strategy and grow and scale your company. Here’s what you should know.

What is third-party logistics?

Third-party logistics refers to the outsourcing of ecommerce logistics processes, including inventory management, picking, packing, and shipping of orders.

Online merchants can outsource the entire order fulfillment process to a 3PL. 3PLs take care of the fulfillment-related tasks that can often be too costly and unproductive to manage in-house.

We don’t know for sure who coined the term “third-party logistics,” but companies began trending toward outsourcing logistics services to third parties in the 1970s and ‘80s.

With the introduction and growth of ecommerce in the ‘90s and 2000s, the term 3PL has become ubiquitous, and 3PLs have expanded their services. The supply chain integration of warehousing and transportation services has become what we now call third-party logistics.

3PL vs 4PL

When researching 3PLs, you may come across the term 4PL. A 4PL adds an additional degree of separation between ecommerce merchants and the 3PLs shipping their products: When a business contracts with a 4PL, the 4PL manages and arranges 3PL services for a client. This is sometimes called “double brokering.”

4PL companies often offer end-to-end supply chain management for a client, including 3PL services, manufacturing, and more.

3PL order fulfillment process

If you’re considering working with a 3PL company or are new to outsourcing shipping, what goes on in a 3PL fulfillment center may seem like a black box.

But the 3PL fulfillment process doesn’t have to — and shouldn’t — be a mystery!

So what exactly happens at a 3PL warehouse once a customer clicks “Submit order” on your online store?

Receiving

A 3PL can’t ship orders without inventory on hand. The “receiving” of inventory in a 3PL warehouse refers to the acceptance of incoming inventory followed by its storage.

Each 3PL has its own processes and capacity for receiving and storing inventory.

For example, at ShipBob, we require clients to fill out a Warehouse Receiving Order (WRO) so that we know which products we will be receiving and how many units. This helps us stay organized and timely with receiving, meaning we can start fulfilling your orders more quickly and efficiently.

Once we receive your inventory, we store your items in our fulfillment centers. Each SKU has a separate dedicated storage location, either on a shelf, in a bin, or on a pallet.

Different 3PLs have different storage capacities; not all 3PL warehouse space is created equal. It’s important to work with a 3PL that has more than enough storage space for your current inventory — as your product line and order volume grow, your 3PL storage must be able to scale with you.

Depending on your products, you may also need temperature-controlled storage or refrigeration. Different 3PLs have different levels of accommodations available to meet these needs.

Picking

When a customer places an order, it’s time for the 3PL fulfillment process to begin. (You may have heard the phrase “pick-and-pack fulfillment” before — this is the first half of that.)

Some 3PLs require you to manually upload orders to their system. Sometimes, this involves spreadsheets including order details, customers’ shipping details, and more. This can be an inefficient and complex way to manage orders.

Other 3PLs have sophisticated technology that integrates directly with your ecommerce platform or marketplace. These 3PL fulfillment software integrations bring orders, shipments, inventory levels, and more together in one place to streamline and automate the fulfillment process.

This includes automatically pushing customers’ online orders to your 3PL as soon as they’re placed.

When an order is sent to your 3PL, it is assigned to the picking team. The picking team receives a packing slip of the items, quantities, and storage locations at the facility to collect the ordered products from their respective locations.

Packing

When all items in an order have been picked, it’s time to get them securely packed for shipping. The packing materials used will depend on your 3PL’s capabilities, your brand preferences, and the items being shipped.

The most common standard packing materials include:

  • Unbranded boxes
  • Bubble mailers
  • Poly bags
  • Packing tape
  • Bubble wrap

Some 3PLs will charge for packing materials as a separate line item, while others include them as part of their fulfillment services.

The 3PL will choose the best packing materials to both protect your products and achieve the lowest practical dimensional weight.

Dimensional weight is a shipping pricing technique that takes into account package dimensions to determine shipping rates. Using the right packing materials can help keep shipping costs low.

If you want your brand to shine through your shipping, make sure you partner with a 3PL that allows you to use custom packaging, such as custom boxes and inserts. Oftentimes, receiving a package is the first in-person experience a customer has with your brand, so branded packaging can make a big impression.

Shipping

The next step is shipping your order. Most 3PLs will purchase and print shipping labels on your behalf. Some 3PLs have preferred carrier partners, while others compare shipping costs from a variety of carriers. The latter helps 3PLs offer clients the most affordable pricing possible for the delivery speed that each customer chooses.

Carriers such as DHL, USPS, and UPS pick up orders from 3PL warehouses to ship. The carrier and shipping speed for each order depend on the 3PL’s partnerships and policies as well as the ship options offered by the client and selected by the end customer.

Once the order ships, 3PLs with the integrated technology mentioned above will automatically push tracking details to merchants’ online stores.

Returns

Many 3PLs also offer return processing services. If a customer returns an order by shipping it back to your 3PL, your 3PL will process the return and restock or dispose of the item depending on their policies and your preferences.

You can choose to have your 3PL provide return shipping labels for your customers. This offers convenience for both you and your customers; you won’t have to handle returns in-house, and customers can easily track the status of their return shipment.

What services do third-party logistics solutions provide?

Beyond shipping orders, 3PL fulfillment services can vary depending on the provider you choose. Here are some of the most beneficial features and logistics services offered by 3PLs.

Inventory management

Managing inventory involves much more than just warehousing your products. A 3PL should allow you to easily sync inventory with your online store, view real-time inventory counts at each fulfillment center, and proactively reorder inventory to prevent stockouts.

Once your 3PL receives and stores your inventory, you can check the quantity on hand and units sold per day for each product. This offers full visibility into what is available to ship to your customers at any given time.

Depending on your 3PL’s technology, you may also be able to push real-time stock counts back to your store’s website, so your customers immediately know if items are out-of-stock.

Two-day shipping

Consider the following stats:

Combine these trends with the fact that the most popular online retailers offer two-day shipping and free shipping options, and it’s clear to see: Customers expect both fast and affordable shipping at the click of a button.

As we’ll cover in the next section, 3PL warehouse location can make or break your ability to deliver on customer expectations by storing inventory closer to your shipping destination. Working with the right 3PL can help you offer 2-day shipping to your customers at an affordable price.

Third-party logistics providers often have relationships with shipping carriers that allow them to negotiate discounted rates for their clients; however, the biggest cost savings for 2-day shipping come from distributing your inventory across fulfillment centers in different regions.

Distributed inventory

When working with a 3PL that has several warehouse locations, you can split inventory across fulfillment centers to ship each order out from the 3PL warehouse that is closest to your customer. This model is called distributed inventory.

With the right technology in place, 3PL companies can automate the order fulfillment process using powerful algorithms that route each order to the optimal fulfillment center.

If your customers are geographically distributed across the country, you will likely want to distribute your inventory to multiple fulfillment centers. This puts your inventory closer to your shipping destinations, meaning you can offer guaranteed two-day shipping via ground for customers in those surrounding areas. This can be much cheaper than expedited air shipping.

Distributing inventory won’t necessarily be cost-effective for everyone, especially if you don’t yet have a high volume of shipments. As your online business grows, however, having a network of fulfillment centers can help you efficiently reach more customers.

Splitting inventory across 3PL warehouses can also help you be prepared in the event that your orders can’t leave a particular fulfillment center (for example, in extreme weather conditions). Distributing inventory also helps with inventory management: When you store products in multiple geographic areas, you will have backup stock if you run out in one.

What are the benefits of working with a 3PL?

There are many benefits to outsourcing fulfillment to a 3PL. While different 3PL companies have different capabilities, all 3PLs offer solutions for managing inventory, packaging, and shipping, ultimately providing reliable logistics and helping to maximize profitability for a business.

Save time and money

By investing in a partnership with a 3PL, you eliminate the need to buy or rent the warehouse space, transportation, labor, and technology required for in-house fulfillment.

As your business grows, fulfilling order yourself becomes more and more expensive. These costs include warehouse space, forklifts and other equipment, warehouse management software, recruiting and labor costs, workers comp, and liability insurance.

You also save time by outsourcing fulfillment tasks to a 3PL. Instead of spending time packing boxes, standing in line at the post office, or building out fulfillment infrastructure, working with a 3PL gives you time back to focus on more strategic initiatives, such as product development and marketing.

“ShipBob can process things more quickly than we could in-house and at scale. These time savings translate into cost savings as well.”

Sarah Chalos, Co-Founder and President, I Heart Keenwah

Leverage industry expertise

As an ecommerce professional, chances are you don’t have the time to become well-versed in every detail of shipping and logistics. That’s where a 3PL comes in: staffed by ecommerce logistics professionals, your 3PL will be knowledgeable and up-to-date with the latest industry trends and complexities — so you don’t have to be.

3PL companies also have the technical resources and partner network — including marketing agencies, custom packaging providers, and more — that allows them to constantly optimize and make improvements to the supply chain and help drive ecommerce success.

Expand your reach

If you’re only selling in one region, you’re limiting your business’s potential. Working with a 3PL can help you expand your reach.

3PL companies have an expansive network of fulfillment centers that in-house fulfillment lacks. A 3PL with fulfillment centers in major US cities across the country can help you reduce the time in transit and cost of shipping customer orders.

Shipping orders out from a single location can also mean more expensive postage for packages that travel across multiple shipping zones.

“When we joined ShipBob, only 20% of our customers were in the US. By the end of the year, that number will be around 40%.”

Greg MacDonald, CEO & Founder, Bathorium

What types of online stores should use a 3PL?

Nearly any ecommerce store — regardless of ecommerce platform, industry, or product category — can benefit from outsourcing fulfillment. Here are three signs you’re ready to outsource fulfillment to a 3PL:

1. You’re shipping over 100 orders per month

While there’s no magic number, if your order volume has increased and you can’t keep up, it’s time to outsource. It’s at the point when you’re asking friends and family members to help you pack boxes or you’re staying up into the late hours of the night just to meet demand.

This is a problem because you’re swamped by low-dollar activities that don’t generate revenue, and it’s holding you back from achieving growth. And as you continue to grow, you will spend more time on fulfillment and less time running your business

Every hour you spend reacting to new orders that come in — packing items, printing labels, driving to the post office, waiting in line, and so on — you’re missing the opportunity to acquire more customers, develop new products, and launch marketing campaigns.

2. You’re running out of space to store inventory

As your order volume grows, you’ll need more inventory on hand at any given time. If you’re fulfilling orders from home, it can be hard to find the storage space. A 3PL warehouse can save you from a garage or living room filled to the brim with product — and arguments with significant others or roommates.

Outsourcing inventory warehousing and order fulfillment to a 3PL can help you stay organized and manage inventory more efficiently. You can also grow your product line without worrying about storage limitations.

“We started filling the bottles with syringes ourselves on the living room floor, packing the orders, and waiting in line at USPS. Fast forward 2 years, and we work with Shipbob to fulfill our orders globally.”

Tamarin Oblowitz, Co-Founder, Baja Bae

3. You want to offer free 2-day shipping

Amazon has made free 2-day shipping the standard for ecommerce. But if you’re self-fulfilling orders, offering free 2-day shipping can take a huge toll on your margins — especially if you’re offering expedited 2-day air rather than ground shipping.

Working with a 3PL can make offering free 2-day shipping more feasible and affordable for merchants of all sizes.

How to choose a 3PL company

Partnering with a 3PL may seem like a no-brainer by now — it can help your business save time and money, freeing up resources to focus instead on product development, marketing, and business growth.

However, when it comes to choosing a 3PL partner to handle your online store’s order fulfillment, the options can seem endless.

It’s important to find a fulfillment company that you trust to handle your inventory, provide a positive experience to your customers, and ultimately help you grow your business.

Here are three paramount questions to ask a potential third-party fulfillment provider to make sure you find a partner that is a great fit for your business.

1. How are you different from a traditional 3PL?

When outsourcing order fulfillment, it’s important to look for a solution that goes beyond the traditional pick, pack, and ship model. This means that, instead of only facilitating one isolated part of the fulfillment process, the 3PL coordinates with all aspects of the supply chain.

This modern approach to fulfillment can help your business make more informed decisions about supply and demand and give your customers a better overall experience.

2. How does your technology work?

One of the most important elements of choosing a fulfillment solution is finding technology that works not just for you, but with you. There are two main technological elements to look for:

  1. How the 3PL’s technology will connect to your online store(s)
  2. How the 3PL’s software helps you leverage data

These two elements make up what we call a tech-enabled 3PL. A tech-enabled 3PL is a technology company that has developed streamlined, integrated shipping and fulfillment solutions for ecommerce businesses.

In addition to traditional fulfillment services, such as warehousing, picking, packing, and shipping, the 3PL’s technology helps with everything from order and inventory management to tracking orders and managing ecommerce returns.

“We use Shopify as our ecommerce platform. The seamless integration between the two systems has made it very easy to do everything from manage inventory to create prepaid orders.”

Greg MacDonald, CEO of Bathorium and Customer Success Manager at Shopify

3. Where are your fulfillment centers located?

When it comes to considering a 3PL’s location, we aren’t just talking about where their headquarters or offices are. You also need to know how many fulfillment centers the 3PL owns and operates, as well as where each one is located.

This information will help determine if you can offer the fastest delivery and most affordable shipping options to your customers. As mentioned above, the number and location of 3PL warehouses can help inform your shipping strategy, including distributed inventory and two-day shipping.

How does 3PL pricing work?

3PL pricing depends on the 3PL’s pricing model and your business’s specific needs. Here are some of the most common 3PL costs.

Cost Definition
Onboarding costs Costs to get 3PL fulfillment services and tech up and running.
Inventory receiving costs The acceptance and storage of incoming inventory. Different 3PLs charge for receiving in different ways, including per-unit, per-pallet, flat rates, or per-hour.
Inventory storage costs When you store your inventory at a 3PL’s fulfillment center, you will be charged for storage space. Warehousing fees can range from per-SKU or per-unit storage to a fixed fee for each bin, shelf, or pallet used.
Order pick and pack costs Some 3PLs charge on a per-pick basis, meaning you pay a fee for each item included in an order. Other 3PLs, like ShipBob, don’t charge pick and pack fees for orders under a certain number of items.
Packaging costs Some 3PLs will charge for packing materials such as boxes and airfill as a separate line item, while others include them as part of their fulfillment services.
Kitting costs Kitting refers to any unique accommodations for the way in which items are assembled, arranged, or packed before shipping. Because this service is so specific to each client, kitting fees can vary.
Shipping costs The amount a 3PL charges to ship an order from their fulfillment center to your customer’s doorstep. Shipping costs take a variety of factors into account, including shipping speed, shipping zones, and dimensional weight.

Learn more

Understanding the right questions to ask a potential partner is key to finding a 3PL company that you trust to handle every part of the fulfillment process, from inventory management to returns processing.

We created an e-guide to help you choose a fulfillment provider that meets your business’s needs, provides a positive experience to your customers, and ultimately helps your business grow and succeed.

Download the Guide