What is 3PL? Everything Business Owners Need to Know

What is 3PL? 3PL, or third-party logistics, is a service that allows you to outsource your inventory management, warehousing, and shipping to a team of experts. Also known as fulfillment services, many brands feel relieved to let go of the stress of supply chain logistics and instead focus on what they do best.

In the early days of building an ecommerce brand, perhaps you’re perfectly happy storing products in your basement, packaging them in front of the television, and waiting in line at the post office. But as your business grows to thousands of orders and beyond, you’ll need to call in experts to support you as you scale—especially if you have ambitions to grow significantly. In fact, as you get larger, it becomes a necessity: 80% of all Fortune 500 companies and 96% of Fortune 100 use some form of 3PL services.

3PL is more than just warehousing. It’s connecting your orders to deliveries, and the entire process in between. 3PLs are specialized experts who help with many of the logistical challenges that can throw a wrench in your workflow. For example, documentation, customs, duties, and varying shipping regulations for international shipments. A 3PL provider not only keeps your customers happier – with quick and professional shipping – it is also integral to building a profitable, scalable business.

In this article, we’ll cover everything you need to know about 3PLs, including:

  • What 3PL is and how it works
  • The difference between 3PL and 4PL
  • How 3PL works
  • The cost of 3PL
  • The advantages and disadvantages of 3PL
  • The top 10 3PL companies
  • How to find the right 3PL company for your business

What is 3PL and How Does It Work?

A 3PL is third party logistics, where a company has a third party perform their logistics tasks. This can include storing inventory, packing orders, and working as a last mile carrier.

How does a 3PL work? There are seven main components, and we’ll break them down here:

1. Receiving

Receiving refers to a warehouse accepting your inventory. Most 3PLs require you to fill out a warehouse receiving order (WRO) to let them know which products you’re sending them, how many units, as well as other pertinent details to keep organized.

2. Storing

3PLs store your products in a warehouse or “fulfillment center.” Some 3PLs operate their own fulfillment centers, but others partner with fulfillment centers that operate separately.

3. Ordering

When your customer hits “order now,” the 3PL will receive the order, either manually through a spreadsheet upload or automatically through software that integrates with your online store.

4. Picking

After the order comes through, it’s assigned to the warehouse picking team, who is responsible for order fulfillment. They’ll grab the items from the warehouse, according to customer specifications. 

5. Packing

Next, the warehouse team will package products in boxes or bubble mailers. They’ll optimize to reduce dimensional weight, and combine packages to avoid split shipments. 

Note that this is not a place to cut corners—it’s a crucial part of the customer experience and reflects upon your brand. Seventy-eight percent of customers are more likely to purchase from companies that put a priority on sustainability in the delivery process. A great 3PL partner will allow custom packaging (like gift wrapping) and inserts (like brochures or coupons for repeat purchases).

6. Shipping

After packing, 3PLs purchase and print shipping labels, then ship the packages—either through a carrier like Canada Post, USPS, or DHL—or through their own fleet. Ideally, customers can track the status of their order, and your carrier will provide customers with delivery updates. Each 3PL will use a slightly different shipping process workflow, so it’s important to make sure it’s compatible with your business.

7. Returns

Finally, 3PLs handle returns and exchanges, also known as reverse logistics. They provide friendly service to customers, and can provide them with return labels. They’ll receive returns, update it in your inventory software, and quickly put the product back into circulation for another customer to purchase.

So, What is a 3PL vs 4PL?

Fourth-party logistics (4PL) is one step further than 3PL. It involves outsourcing all of the logistics in your supply chain, including the 3PL part. Sometimes referred to as double-brokering, 4PLs will often act as intermediaries between multiple 3PLs to keep your business operations running as smoothly and profitably as possible.

What Does a 3PL Cost?

The fee structure of 3PLs is typically modular, with packages ranging in price based on a variety of factors. You can expect to pay for each of these components:

  1. Onboarding costs. For initial setup, you’ll be charged a fee to hand over your products, and get your account up and running. The warehouse will designate a special area to store your inventory.
  2. Receiving and intake fees. On an ongoing basis, you’ll be charged each time you push product to the warehouse for the administrative work needed to process your inventory.
  3. Storage costs. You’ll be charged a fee based on how many items or how much space your inventory takes up. Storing bed sheets is obviously cheaper than storing baby grand pianos.
  4. Order fulfillment charges. There’s a fee for each order fulfilled for the supplies and labor to do so.
  5. Packaging costs. You’ll need to pay for duct tape, envelopes, boxes, and any custom-branded packaging.
  6. Shipping costs. You’ll pay for each time you ship inventory to a customer. Most 3PLs have relationships with mail carriers to pass on a discounted shipping price.
  7. Kitting costs. These fees are for any assembly that’s required for purchases. 

3PL Advantages and Disadvantages

While many companies use 3PLs to reduce logistical headaches and support their business growth, it’s not the right decision for every single business. Consider these pros and cons before you make your decision.

Advantages of a 3PL Provider

1. Less Expensive than In-House

The upfront costs of running your own warehouse is costly. You have to pay for the space, the staff, the forklifts. Outsourcing the operation tends to offer significant cost savings. Since 3PLs represent multiple customers, it gives them bargaining power to negotiate bulk discounts on your behalf with shipping companies.

2. Flexible – Scale Usage Up and Down

Many businesses experience some degree of seasonality. For example, winter holidays are often a peak for consumer goods. 3PLs allow you to invest more capital during peak season and pull back during shoulder season.

Since there’s less overhead, it’s very easy to turn spending up or down to accommodate your business’ varying needs.

3. Better Geographic Diversification

Most 3PLs have a wide network of distribution centers that allow you to spread small amounts of your inventory to more quickly deliver to more of your customer base—instead of investing in operating one or two of your own warehouses.

4. Accommodation of Speciality Needs

Let’s say you sell home decor items. If you’re shipping fragile mirrors, you need your items handled with care. 3PLs can help accommodate a wide variety of shipping needs. Similarly, if you’re a jewellery business, you’ll need fragile items handled with care, or if you’re selling hazardous materials like batteries or aerosol cans, you’ll need licensing.

5. Run Tests in New Markets

If you’ve got loyal customers in the U.S., but are wondering if Canadian folks will latch onto your product, 3PLs give you a less risky way to experiment. Instead of buying or renting your own warehouse space, you easily get started with a 3PL and have the flexibility to change your terms if it doesn’t pan out. 

6. Free Up More Time For Higher-Value Tasks

There’s a significant opportunity cost if you spend your precious time doing menial tasks that you could outsource. 3PLs allow you to use more of your time talking to customers, innovating and creating new products, expanding your product line, etc.

7. Faster Delivery and a Better Customer Experience

These days, most consumers expect lightning-fast delivery. In fact, 24% of consumers have cancelled an order because of slow delivery speeds at some point. 3PLs allow you to keep up with sharply rising consumer demands because 3PLs offer wide distribution networks.

Disadvantages of 3PL Providers

1. Less Control

If a disgruntled customer calls you and wonders where the shirt they ordered two weeks ago is, you’ll have an extra layer of folks to go through to get to the bottom of the issue. Some 3PLs handle customer service for you, but it also means you’re a little further removed from the crux of various issues that may arise.

2. Further From the Physical Product

It can be tough to address quality-control issues if you’re not geographically near all of your fulfillment centers. While it’s advantageous for the business to have fulfillment centers in many different cities, it also means it’s harder to show up on-site and inspect your products right away.’

3. Higher Overhead Investment

While you’ll likely end up saving money in the long run, you have to be prepared to pony up the initial overhead cost in the beginning.

How to Find the Right 3PL Company For You

You may need to talk to a handful of different fulfillment providers before you decide which is the best one for your brand. To evaluate which 3PL provider is right for you, here are some questions you may want to ask:

  1. Do they have capacity to handle more volume if and when you scale your business?
  1. Are they able to sync inventory with your online store? Do they offer integrations with other key platforms in your tech stack?
  1. Can you view real-time inventory levels at each third-party fulfillment center so you can proactively reorder inventory to prevent stockouts?
  1. Will they provide data on fulfillment KPIs like rate of returns, damage rate, or average delivery time?
  1. Do they have fulfillment centers in markets near your customer bases in order to provide quick, affordable deliveries?
  1. How many shipping options and carriers are available?
  2. Do they offer discounted shipping rates?

Parting Wisdom

Much of your brand experience hinges on seamless fulfillment—if something shows up damaged or broken, it’ll leave a sour taste in your shoppers’ mouths and sully the brand promise. It’s mission critical to get it right.

For Ben McLean, cofounder of Benji Sleep, outsourcing fulfillment to a 3PL has allowed him to “focus on the business instead of taping up boxes. Now we’re able to invest our time in steering the ship and coming up with creative new ways to get the word out there.” 

Without sinking major time into tasks like fulfillment, you can focus on the most genuinely fulfilling aspects of your business.