What are third-party logistics (3PL)?
Published on: September 14, 2023
Updated: October 4, 2023
Third-party logistics, often abbreviated as 3PL, refers to the outsourcing of ecommerce logistics to a third-party company.
These logistics services can range from warehousing and distribution to transportation, parcel monitoring, last mile tracking, and even customer service. In other words, 3PLs can look after the backstage tasks that ensure customers receive their orders promptly and efficiently. 3PL companies are experts in handling all the nitty-gritty of getting orders from point A to B.
As for how 3PLs providers work, they typically integrate with ecommerce platforms using APIs or plugins. This integration allows for seamless order fulfillment, inventory management, and shipping. You can automatically forward orders to the 3PL, and they will take care of storing your products, packing orders, and shipping them to your customers.
Depending on your business and current setup, you can also decide to work with multiple 3PLs. Merchants who choose this route do so because it enables them to cover multiple regions. This strategy can optimize shipping times and costs, but it might also increase complexity in terms of management and coordination.
What are the advantages and disadvantages of using a 3PL provider?
|Pros of working with a 3PL||Cons of working with a 3PL|
|Provides specialized expertise||Less control over the customer experience|
|Can scale up or down based on your needs||May run into dependency if you don’t have the right partner(s)|
|Gives you the ability to focus on core business strengths||May encounter integration challenges|
Like with any business decision, working with a third-party logistics provider has its advantages and disadvantages. Consider the following.
Advantages of working with a 3PL provider
Cost-effective. 3PLs can leverage their network and economies of scale to negotiate better rates on warehousing, transportation, and packaging. They can also provide variable cost models depending on your business’s needs.
Expertise. While ecommerce brands have tremendous product and industry expertise, they don’t always have the know-how to navigate the complexities of shipping and order fulfillment.? 3PLs have extensive experience and knowledge in logistics and supply chain management. They stay updated on industry regulations, best practices, and technologies, providing expertise that businesses might not have in-house.
Scalability. As your business grows or experiences seasonal fluctuations, a 3PL can easily scale its services to match your needs. This flexibility is much harder to achieve with in-house logistics.
Focus on what you do best. When you have a 3PL provider, you can rest easy knowing that they’re handling logistics. This means you can focus on core business activities like product development, sales, and marketing.
Specialized technology. Most 3PLs invest in the latest logistics technology, giving their clients access to advanced tracking, reporting, and forecasting tools without the upfront investment.
Disadvantages of working with a 3PL provider
Less control. When outsourcing logistics, businesses give up some control over that aspect of their operations. This can be a concern, particularly for brands that want to own the entire customer experience (including post-purchase evaluation).
Dependency. Over-reliance on a 3PL can create issues if the provider experiences problems or if the business relationship ends. As such, it’s always important to work with a stable 3PL or have multiple partners to take care of your order fulfillment needs.
The good news is, forward-thinking 3PLs are taking measures to be more competitive. According to McKinsey, some providers are implementing a multi-client fulfillment model that allows resources such as labor, automation, and real estate to be shared among e-tailers, resulting in cost savings and greater flexibility. This approach provides a broader footprint, helping e-tailers get closer to customers, reduce lead times, and compete with fast delivery offered by market leaders.
Cost issues. While using a 3PL can lead to cost savings, it can also be expensive if not managed properly. Some businesses might find hidden costs in the contract or experience rate increases over time.
Integration challenges. Integrating a 3PL’s systems with your existing processes and software can sometimes be complex and time-consuming.
Reduced customer contact. Depending on how much you outsource, you might have less direct contact with your customers. This might impact your ability to gather valuable insights or provide personalized customer service.
Can a 3PL provider handle returns?
Yes, most third-party logistics providers are equipped to handle returns—with some even offering omnichannel returns capabilities. Often referred to as “reverse logistics,” here’s how a 3PL would handle an ecommerce return.
- Accept the return. The 3PL provider accepts returns from customers, which involves receiving the items at their warehouse or fulfillment center.
- Inspect and sort the product(s).? The provider inspects the returned items to determine their condition and decides whether they can be resold, need to be repaired, or must be discarded.
- Determine the right course of action for the product. Depending on the state of the item, the 3PL provider can choose to take one of the following steps:
- Restocking the item if it’s in good condition.?
- Refurbishing or repairing the product if the item is damaged but can still be fixed.?
- Disposing or recycling the item if it can’t be repaired or resold.?
- Issue credits or refunds. In some cases, 3PL providers can also handle the process of issuing refunds or store credits to customers once the return is processed.
- Data tracking and reporting. Monitoring returns can provide valuable insights about product quality, customer satisfaction, and other business aspects. Many 3PLs provide data tracking and analytics as part of their reverse logistics services.
What should brands consider when choosing a 3PL provider?
If you’re considering working with a third party logistics provider, here are some factors to weigh in your decision-making process.?
- Geographical coverage. Choose a 3PL with a strong national (or global) network. Make sure they understand the necessary shipping regulations and customs processes.
- Industry experience. Does the 3PL have experience in your industry? Do they understand the specific challenges and requirements associated with your product types? Are they up-to-date with the latest logistics trends and technologies?
- Services provided. Ensure the 3PL offers all the logistics services your business needs, from warehousing and distribution to returns management and customer service.
- Cost. Understand the 3PL’s pricing structure. Are there hidden costs or fees for additional services? How will costs change as your business grows?
- Tech capabilities and integrations. A good 3PL provider should offer modern technology solutions for inventory management, order tracking, and data analytics. Their system should ideally integrate smoothly with your existing ecommerce infrastructure and post-purchase experience software.?
- Customer support. Check the 3PL’s reputation for customer service. They should provide accurate and timely services since their performance directly impacts your customer satisfaction.
- Sustainability. If environmental responsibility aligns with your brand values, consider whether the 3PL has eco-friendly practices such as energy-efficient warehouses or carbon-neutral shipping options.?
- Disaster recovery and business continuity. Check whether the 3PL has robust plans in place to handle potential disruptions, like natural disasters, strikes, or global events that could impact the supply chain.
How to assess 3PL providers
You can evaluate all of these factors by researching various providers. Start by checking out their website to get an overview of their offerings. You can take things a step further by reading online reviews or by checking websites like the Better Business Bureau to evaluate the provider’s ratings.?
Doing this initial step should help you create a shortlist of third party logistics providers you can work with. From here, you can start connecting with different providers and asking them more detailed questions about their services.
Be sure to discuss their technological capabilities, how their systems integrate with your current platforms, and what data analytics they provide. If possible, ask for a demo or trial of their platform.?
It’s a good idea to have several rounds of discussions and negotiations before making a decision. And remember, the cheapest option is not always the best. Focus on the value they can bring to your business, not just the cost.
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