The Complete Guide To Third-Party Logistics (3PL)

Congratulations! Business must be booming if you’re looking to outsource your logistics. Partnering with a 3PL can have multiple benefits for your Ecommerce business. With that being said, it can seem overwhelming at first glance. This guide will cover the key components of third-party logistics and how to select the ideal 3PL for your Ecommerce business.

 

Contents of this guide:

• What is Third-Party Logistics?
• The Growth and History of 3PLs
• How Does The 3PL Process Work?
• What’s the Difference Between 3pl & 4pl?
• What's the difference between 3pl & drop shipping?
• Beneficial features of a 3pl service
• What Are The Benefits Of Outsourcing To A Third-Party Logistics Provider?
• Understanding 3pl pricing
• When Is It Time For A Business To Consider Outsourcing To A 3PL?
• How Can Your Business Choose The Best 3PL Company?
• How Can You Measure Your 3PL's Performance?
• How Can SEKO Help Optimise Your Company’s Logistics?

 

What Is Third-Party Logistics?

Third-party logistics (3PL) is the outsourcing of logistics operations and supply chain management to an external company. Third-party logistics (3PL) companies offer a wide range of services to different industries, including transportation, warehousing, inventory management, order fulfilment, and shipping. 

In addition to these core services, a 3PL company offers value-added services like customised packaging, labelling, returns management, customs brokerage, and supply chain consulting.

The main objective of 3PL companies is to streamline your brand's supply chain operations and improve operational efficiency. Outsourcing logistics operations to a 3PL company allows your Ecommerce business to benefit from economies of scale, specialised expertise, and a vast network of carriers and warehousing facilities.

3PL Functions Include:

• Transportation
• Warehousing
• Inventory management
• Order fulfilment
• Shipping
• Reverse logistics
• Technology integrations
• Data Analytics

Outsourcing these functions to third-party logistics providers can save your company time and resources while improving your supply chain efficiency.

The Growth and History of 3PLs

Before the 1980s, companies usually managed their logistics and supply chain activities internally. However, the emergence of 3PL companies transformed the industry.

The Motor Carrier Act of 1980 in the USA deregulated the trucking industry. This increased the number of carriers and allowed warehousing companies to expand into the transportation of goods. Information technology advancements saw the rise of third-party logistics (3PL) companies, which took over supply chain management from manufacturers.

In the 1990s, there was a surge in demand for logistics services in countries with emerging economies. This led to 3PL companies beginning to specialise within certain industries, providing customised vehicles and transportation methods for certain types of goods and produce.

The 2000s led to further technological innovations within 3PL, with the growth of the internet. This allowed 3PLs to modernise and adapt to their customers' needs, offering businesses more flexibility and cost savings.

Today, 3PLs help companies save money and improve their efficiency, with the outsourcing of supply chain management. 3PLs have expanded to offer solutions to businesses of all sizes by increasing capacity and reducing prices.

 

How Does The 3PL Process Work?

Third-party logistics (3PL) requires the coordination of many transitory stages to create a streamlined order fulfilment process. A basic understanding of these stages can help you identify the logistics solutions you need most and tailor your service agreement with a 3PL accordingly. Third-party logistics typically involve the following stages.

Receiving

Your third-party logistics (3PL) company receives your products from your domestic or overseas supplier, or your manufacturing facility. The inventory is checked for accuracy and quality to ensure nothing is missing or damaged. Your 3PL will log your products into an inventory management system and store them in their warehouse.

Warehousing

A 3PL stores your products in strategically placed fulfilment centres to ensure your products can be shipped to your customers quickly. This responsibility includes managing and organising the inventory to make products easily accessible for fast picking.

Picking

Tech-enabled 3PLs use software integrations to connect directly with your Ecommerce platform or marketplace. When your customers place an order, your 3PL provider receives it directly, and the fulfilment process begins. A fulfilment team locates the products in the warehouse and picks the items to fulfil the order.

Packing 

The fulfilment team packs your customer’s order in packaging materials best suited to protect the product during shipping. Most carriers calculate shipping rates based on packaging dimensions. A 3PL may use different types of packaging material to secure the lowest dimensional weight and minimise logistics expenses.

A 3PL provider may also handle customised labelling and packaging. This allows you to create a more personalised customer experience. For example, WOLFpak, a provider of ultra-durable backpacks, includes various items in their packaging:

• WOLFpak Token with engravings and flags of different countries
• A velcro patch that reads, “Trust Your Instincts”
• WOLFpak Sticker

These items help create a deeper emotional connection making customers feel like part of a community.

Shipping

Your 3PL ships the orders to your customer using a preferred carrier. Shipping and tracking information is updated in the inventory management system for transparency. 3PLs with integrated technology will automatically push tracking details to your online store for customers to track their orders. The shipping speed for each order will depend on the 3PL’s partnerships, policies, and selected shipping options. 

Returns

In the event of product returns, your 3PL provider should take full responsibility for the process. They receive the returned products, inspect them to ensure they meet the required criteria for reselling, and then update inventory accordingly. From there, they manage the return process, ensuring that the products are restocked or reshipped with speed and efficiency. 

Learn more about reverse logistics by reading our article: Overcoming Ecommerce Return Processing Challenges With a 3PL.

What’s The Difference Between 3pl & 4pl?

Understanding the logistics landscape can be challenging. This is especially the case when differentiating between the services and roles of 3PLs and 4PLs in supply chain management. Key differences between 3PLs and 4PLs include their areas of focus and distinct operational approaches.

ORDER FULFILMENT

3PLs are responsible for handling the physical movement of goods, with tasks such as picking, packing, and shipping orders. In contrast, 4PLs take on a more comprehensive role by managing the entire fulfilment process. They coordinate with multiple 3PLs to ensure seamless logistics operations. This includes overseeing and integrating various activities to optimise efficiency.

SUPPLY CHAIN OPTIMISATION

While 3PLs focus on specific logistics functions such as transportation and warehousing to enhance efficiencies within those domains, 4PLs adopt a broader approach. They develop comprehensive supply chain strategies that span the entire logistics spectrum. This allows 4PLs to streamline and optimise the entire supply chain, ensuring all components work together.

COMMUNICATIONS

Communication within 3PLs revolves mainly around their individual logistics services, providing updates on warehousing and transport status. On the other hand, 4PLs act as a centralised point of contact for all supply chain activities. They streamline communication between various logistics partners. This reduces the complexity associated with managing multiple service providers.

AREAS OF FOCUS

3PLs specialise in specific logistics services such as warehousing, transportation, and order fulfilment. 4PLs offer end-to-end supply chain management solutions that focus on the integration of all logistics components. This ensures seamless operations across the entire supply chain.

RELATIONSHIP

In terms of relationships, 3PLs typically engage in more transactional interactions. This allows 3PLs to concentrate on executing agreed-upon tasks. In contrast, 4PLs create long-term partnerships with clients, 3PLs, and other logistics providers. These relationships are strategic and collaborative to achieve long-term supply chain goals.

RESOURCES

3PLs own and operate physical assets such as trucks, warehouses, and distribution centres. 4PLs take advantage of strategic management capabilities to coordinate and optimise logistics activities performed by several 3PLs. They do not own physical assets, but instead bring together resources and services to achieve efficient supply chain management.

WHAT’S THE DIFFERENCE BETWEEN 3PL & DROP SHIPPING?

Some businesses prefer to use a drop shipping model, instead of a 3PL company. The key difference between drop-shipping and 3PL is your inventory. With drop shipping, you integrate your online store with your supplier's order fulfilment system. This means that products are shipped directly to your consumer, without having an inventory yourself. 

WHAT IS DROP SHIPPING?

Drop shipping is an Ecommerce business model where SKUs (stock-keeping units) are for sale on your online store, but are only purchased when a customer makes a purchase. This model requires little upfront investment, so can be a great way to start a new business on a small budget.

As soon as a customer places an order, the manufacturer makes and ships the product to them. This removes the need for the business to purchase inventory upfront and manage warehousing costs.

THE PROS AND CONS OF DROP SHIPPING

Managing a business with a drop shipping model has both positive and negative aspects.

Pros

• Little upfront investment limits startup costs. You don't need to have warehouse stock to begin selling products.
• You only pay for the products that customers want. This removes the need to hold stock and pay for it to be in a warehouse. If a product isn't selling, you can remove it from your store without losing money.

Cons

• Profit margins are lower with drop shipping. This is because you will pay a higher wholesale price for products.
• Lead times may be longer as products are prepared when purchased. This may lead to lower customer satisfaction and negative reviews. 

BENEFICIAL FEATURES OF A 3PL SERVICE

Taking advantage of the right 3PL services can help to improve your efficiency, as well as customer satisfaction. Here are some of the most valuable features offered by leading 3PL providers:

INVENTORY MANAGEMENT

Effective inventory management goes beyond mere storage. A good 3PL integrates with various platforms, TMS systems, and carriers, enabling a seamless experience.

This integration provides real-time visibility of stock levels, proactive inventory replenishment, and smooth integration with your online store. This ensures products are available for prompt order fulfilment.

FAST SHIPPING SOLUTIONS

3PL services meet Ecommerce demands by offering expedited delivery experiences. Unlike standard next-day services with early cut-off times, some providers extend their order windows until midnight, ensuring late orders are delivered the next day.

By partnering with specialised last-mile delivery experts, 3PLs maintain extensive driver networks across major cities. This guarantees consistent, flexible service to handle varying delivery volumes. Features often include scalable fleet capabilities, real-time tracking, optimised driver routing, live delivery updates, and photographic proof of delivery. This infrastructure supports swift and reliable order fulfilment across key locations.

MULTICHANNEL & INTERNATIONAL FULFILMENT

Ecommerce thrives on global connectivity. A good 3PL has an extensive network of multichannel fulfilment centres worldwide. This enables you to enter new markets and expand your reach.

These providers facilitate sales and scaling operations, tapping into international markets, maximising sales potential, and achieving growth. Their logistics infrastructure spans millions of square feet, fulfilling thousands of orders daily and handling millions of parcels monthly.

These services include access to distribution centres in core markets, optimised delivery logistics, reliable service, and a streamlined integration process.

RETURNS MANAGEMENT

A streamlined returns management service simplifies the complex process. Leveraging a global hub network, a good 3PL ensures efficient handling of returns, reducing unnecessary logistics costs and expediting the process.

By centralising returns, businesses can maintain customer satisfaction and operational efficiency, ensuring returns are processed swiftly upon receipt and customers are quickly credited.

ADVANCED DATA ANALYTICS

3PLs can take advantage of advanced data analytics to enhance decision-making across strategic and operational domains.

By analysing data from transportation, warehouse, and inventory systems, 3PLs gain real-time visibility into orders, shipments, and inventory levels, meeting customer expectations for transparency.

• Analytics tools optimise route planning based on traffic patterns and weather forecasts, reducing transit times and operational costs.
• In warehouses, granular data refines layouts, labour allocation, and picking processes, boosting efficiency.
• Predictive analytics improve demand forecasting accuracy, aiding in capacity planning and inventory management.
• Benchmarking against industry standards supports competitive pricing and efficiency improvements.
• Proactive risk management using sensor data and weather feeds prevents shipping delays.

Integrated data analysis across functions enables optimised workforce planning and operational efficiency improvements.

PACKAGING SERVICES

A top 3PL provides high-speed packaging solutions tailored to retail and consumer goods products. Typical packaging and kitting services include:

• Sub-assembly
• Kitting
• Retail packaging
• Automated labelling
• Cartooning
• Rapid shrink-wrapping
• Clamshell packaging
• Construction of point-of-purchase displays
• Gift-wrapping
• Re-work/re-dressing initiatives

These services ensure products are prepared quickly and professionally, meeting specific requirements effectively.

What Are The Benefits Of Outsourcing To A Third-Party Logistics Provider?

With consumers demanding faster delivery options, companies are turning to third-party logistics (3PL) providers to help optimise their fulfilment processes and stay competitive. The sizable investment to build an internal supply chain network isn’t practical for most businesses. When your company reaches a certain level of growth, it’s more efficient and cost-effective to outsource your logistics for the following reasons.

Faster Delivery Options

If you only have one fulfilment centre in Boston, it will be a challenge to offer next-day or two delivery for your customers in San Diego. A 3PL can store your products at warehouses near key markets for faster delivery.

Save Time and Streamline Operations

First, a 3PL gives you more of the most valuable resource—time. With a dedicated 3PL handling your order fulfilment, you’ll have more time to strengthen other areas of your business. You also won’t need to hire staff, develop new technologies or build the infrastructure required for complex supply chains. Introducing these time-consuming and costly tasks could cause unneeded strain on your staff and disrupt your operations. 3PLs have the technology, trained personnel, and existing resources to provide end-to-end logistics solutions and streamline your operations.

Specialised Knowledge of Logistics

Top 3PL providers often have decades of experience in logistics and supply chain management. They’ve encountered everything from shortages of raw materials to disruptions in supply chains to political instability. Through this experience, 3PLs have learned valuable lessons and implemented systems to mitigate issues during the fulfilment process.

Provide Opportunities for Growth 

A 3PL provider gives you flexibility in your supply chain and growth opportunities. As your business evolves, it may experience fluctuations in demand and order volume. A 3PL can handle these fluctuations by scaling operations up or down to meet demand. Another growth opportunity is reaching global markets. A 3PL with a global supply chain network can help you navigate the regulations associated with international trade.

Read Irish at Heart’s case study to learn how SEKO Logistics helped the subscription box company manage their international expansion and fulfilment.

Gain a Competitive Advantage

Outsourcing your logistics to a 3PL gives you time to focus on your customer’s journey, improve your marketing, and expand to new markets. Companies that keep their fulfilment processes in-house or use inferior 3PLs may stagnate. With a top 3PL, you get access to valuable insights and guidance on supply chain optimisation, enabling you to make informed decisions and stay ahead of the curve.

Deliver a First-class Customer Experience

A 3PL can help your business improve the customer experience with faster shipping, accurate order fulfilment, and reliable tracking information. According to Verte, 90 percent of consumers track their packages, and 80 percent have “high or very high expectations when it comes to package tracking.” With these statistics in mind, it’s essential to provide complete transparency and visibility within a customer’s order.

Learn more about the difference between a 3PL and in-house logistics in our article: 3PL vs. In-house: What’s the Difference?

UNDERSTANDING 3PL PRICING

When you engage a 3PL provider, you're investing in a comprehensive suite of logistics services. These services should underpin your supply chain operations and form the basis of 3PL pricing and fees. These are the costs typically associated with a 3PL service:

TRANSPORTATION

These costs involve the movement of your goods, including domestic and international freight charges, customs duties, and taxes.

WAREHOUSING

Warehousing fees cover the storage of your inventory in a 3PL facility, varying based on space utilisation and storage duration.

PICKING AND PACKING

Essential for order fulfilment, these costs relate to retrieving items and preparing them for shipment, influenced by order complexity and volume.

INVENTORY MANAGEMENT

This includes tracking and managing inventory levels to prevent out-of-stock or overstock situations, and using systems for cost optimisation.

VALUE-ADDED SERVICES

Optional services like kitting, product assembly, labelling, and returns management are available, with costs tailored to specific operational needs.

Calculating these fees involves considering various factors such as the goods' nature, required services, and operational complexity. For example, special handling or storage conditions may be necessary for fragile items, impacting costs.

When Is It Time For A Business To Consider Outsourcing To A 3PL?

In general, every Ecommerce business should consider outsourcing to a 3PL provider. It may be prudent to conduct an analysis to identify potential cost-savings, efficiency gains, or the impact on the customer experience. One of the most evident signs is that logistics operations have become a distraction from allowing you to focus on core business functions. Check to see if your company has experienced any of the following indicators.

Lack of Expertise

If you feel your order fulfilment process and supply chains have become too complex to manage, it might be time to outsource your logistics to a 3PL. Continuing with inefficient processes can lead to higher costs and a poor customer experience.

Limited Resources

If your business lacks the resources to invest in logistics infrastructure, technology, and personnel, it can lead to capacity constraints and scalability issues. The last thing you want to do is cut into your profits or take on debt to expand your in-house warehousing or fulfilment services.

Demand Fluctuations

Demand fluctuations can lead to challenges in inventory management, picking, packing, and shipping orders. Outsourcing to a 3PL gives you flexibility in your supply chain to spike sales with targeted marketing campaigns, match unexpected changes in demand, or achieve sustainable growth.

International Expansion

If your business plans to expand internationally, it can lead to challenges in navigating customs regulations, language barriers, and cultural differences. Outsourcing to a 3PL provider with a global supply chain network and expertise in international trade can help your business navigate these challenges and reach new markets.

How Can Your Business Choose The Best 3PL Company?

With many 3PL companies available, finding a logistics partner that meets your specific needs and requirements can be challenging. When performing your due diligence, consider the following factors.

• Expertise: Third-party logistics company's fulfilment services with end-to-end logistics can consolidate your order.
• Years of Experience: A 3PL company with decades of experience shows they’ve weathered past storms and built a proven track record of success.
• Technology Integrations: For a smooth and efficient order fulfilment process, top 3PLs should have a robust IT infrastructure to integrate with your Ecommerce platform, allow custom APIs, and support sales channels.
• Supply Chain Flexibility: The 3PL company you choose should be able to help you take advantage of peak season, handle new product launches, or expand into new markets.
• Level of Customisation: Look for a company that can customise its third-party logistics services to meet your needs and requirements.
• Customer Support: The best 3PL companies should provide excellent customer support with proactive and responsive resolutions to any issues.

If you still feel unsure whether to hire a 3PL or keep your logistics in-house, read our article: Ecommerce Fulfilment: Choosing The Best Solution For Your Company.

How Can You Measure Your 3PL's Performance?

Measuring the performance of your third-party logistics (3PL) provider ensures your money’s not being wasted. Monitor these KPIs and set benchmarks to track your 3PL's performance over time and identify areas for improvement. 

• On-time Delivery: Measure the percentage of orders delivered on time according to the agreed-upon delivery times negotiated in the service level agreement (SLA).
• Order Accuracy: Evaluate the percentage of orders fulfilled accurately with the correct products, quantities, and shipping addresses.
• Inventory Accuracy: Correctly measure the percentage of your inventory recorded in your systems.
• Order Cycle Time: Track the time it takes for your 3PL to pick, pack, ship, and deliver an order to your customers.
• Customer Satisfaction: Send out surveys, read reviews, track returns, and monitor customer complaints to measure customer satisfaction.

Beckman Coulter’s case study is a prime example of how SEKO can streamline processes and improve customer service.

How Can SEKO Help Optimise Your Company’s Logistics?

SEKO is a top third-party logistics provider due to its extensive range of services, innovative tech, and commitment to customer support. With over 150 offices worldwide, SEKO can offer your Ecommerce business end-to-end global logistics with award-winning solutions customised to your needs. SEKO has the expertise and resources to help your business optimise its supply chains, from warehousing and distribution to transportation and freight forwarding. 

Here’s what you get when you choose SEKO:

• Hands-on service and support
• Strong personal relationships
• Creative and configured 3PL logistics solutions
• Responsiveness and reliability
• Flexibility and consistency

Contact us today to speak with our logistics experts and discover how SEKO can help your business achieve greatness.

3PL FAQS

How do 3PL providers mitigate risks associated with disruptions such as natural disasters?

3PL providers develop comprehensive risk management strategies that include contingency planning, alternative sourcing options, and geographical diversification of warehousing facilities. They also maintain active communication channels to mitigate potential disruptions.

What role does blockchain technology play in 3PL operations?

Blockchain technology enables 3PL providers to create records of transactions, enhance traceability of goods throughout the supply chain, and improve transparency in compliance with regulatory requirements and customer expectations.

How do 3PL companies use AI to optimise supply chain operations?

3PL providers use artificial intelligence (AI) to forecast demand more accurately, optimise inventory levels across multiple locations, predict potential disruptions, and determine the best transportation routes for cost efficiency and lower environmental impact.

What’s the difference between a 3PL and a freight forwarder?

The key difference is that a 3PL provides comprehensive logistics services including warehousing and distribution, while a freight forwarder specialises in managing transportation logistics and customs clearance for shipments.

Which industries use 3PL the most?

Industries such as automotive, retail, healthcare, high-tech, and beverages we find use 3PL the most.