What is a third-party logistics company (3PL) and is it right for your business?

There’s a lot that goes into getting your product into the hands of your customers. There’s warehousing, order fulfilment, packaging, shipping, and so much more.

Handling all of these things can get complex, which is why ecommerce businesses and retailers sometimes choose to outsource these tasks to a third-party logistics company, also known as a 3PL.

What is 3PL?

A third-party logistics company (3PL) is a logistics provider that businesses can outsource things like warehousing, packaging, and order distribution to.

A 3PL is a company that works with a large network of other types of companies and providers—think everything from software to shipping. This means they can offer a vast array of essential services to retailers, so those businesses can get what they need from a single point of contact.

Basically, think of a 3PL partner as an outsourced resource for inventory management, warehousing your products, packing them up, and shipping or trucking them to your end customers.

What services does a 3PL offer? 

Let’s dig a little deeper into the specific types of services a 3PL company can offer. A 3PL can handle tasks like:

• Product procurement
• Storage and warehousing
• Inventory management
• Order fulfilment
• Packaging and shipping
• Transportation
• Optimisation of fleets and routes

Many 3PL companies also offer other, more specialised services like:

• Freight forwarding: Some 3PLs are also freight forwarders, which means they handle the importing and exporting of goods and products.
• Reverse logistics: Some 3PLs will handle the backwards movement of goods through the supply chain, such as customer returns or products coming back for proper disposal.

Not all 3PL providers offer identical services, so it’s important to understand your logistics needs so you can find the right solution for your business. Don’t worry, we’ll talk more about how to do that a little later.

What’s the difference between a 3PL and a 4PL?

As you explore your options for logistics management, you might also come across the term fourth-party logistics (or 4PL). A 4PL provider has a lot of overlap with a 3PL company, with one notable difference:

• 3PL: Handles the logistics of inventory management and inventory levels, as well as a range of order fulfilment services, including product procurement, warehousing, packing, and transportation.
• 4PL: Handles the entire supply chain for a client and is the single point of contact for all related parties.

These two service providers undoubtedly have a lot in common.

But, the simplest way to think about it is that a 4PL will act as the main point of contact for all parties and aspects of supply chain management, while a 3PL stays focused on the logistics. With a 3PL, the business owner, retailer, or ecommerce company still manages the oversight and control of the whole supply chain.

Why do businesses use 3PL?

Here’s the most straightforward answer to that question: Because logistics operations are complicated, and a 3PL saves a lot of stress by managing the logistics process for their customers.

For example, when a company has increasing demand and needs more warehouse space (but can’t secure or expand their own warehouse), working with a 3PL can help them fulfil those orders in a streamlined and oftentimes cost-effective way. That’s why it comes as little surprise that a whopping 90% of Fortune 500 companies use a 3PL provider.

With all of that in mind, let’s cover some of the most notable benefits and drawbacks of partnering with a 3PL.

What are the benefits to using 3PL? 

We’ll start with the good news first: 3PLs offer a number of worthwhile advantages for retailers and ecommerce companies, including:

• Supply chain efficiency: 3PL providers are experts in fulfilling orders effectively and efficiently, which means products can get into the hands of your customers faster. That’s important for improving the customer experience and boosting customer satisfaction.
• Reduced costs: Because 3PLs work with many manufacturers and retailers, they can get bulk discounts on things like supplies, equipment, and even shipping costs. They’re also experts at streamlining and optimising the supply chain to keep prices low. While working with a 3PL comes with a cost, it often leads to more cost savings than managing the logistics on your own.
• Access to expertise and resources: Additionally, since a 3PL has a web of contacts and resources under one roof, you benefit from their expertise in areas like freight, shipping, and more. Plus, you get access to outsourced resources like order fulfilment staff and warehouse space.

What are the disadvantages to using 3PL?

Working with a 3PL does have a few drawbacks that retailers should take note of.

• Loss of control: To work effectively with a 3PL, you need to be able to trust them to manage your logistics – which can be difficult for some businesses. And, misaligned expectations do seem to be somewhat common. In one 2019 report, 38% of 3PLs thought their clients were “very satisfied,” while only 18% of 3PL customers agreed. It speaks to the importance of finding a 3PL that you trust and can collaborate effectively with.
• Upfront investment:  Keep in mind that a 3PL can save retailers money (not to mention headaches) over time. But, the upfront investment required to work with a 3PL and ongoing costs can stretch a growing business’s budget and take a bite out of profit margins. How much you need to pay a 3PL will depend on the services you need and their pricing model (flat rate, project rate, per pallet, etc.), so make sure you get the cost details from a potential 3PL early if you’re exploring partnering with one.

Five factors to consider with 3PLs

If you’re considering outsourcing your company’s logistics operations it’s important to understand all your options and business needs to find the best fit solution.

The first thing to keep in mind is your budget. You obviously need a logistics solution that you can afford. But, beyond dollars, here are a few tips to keep in mind.

1. Know your products

Not all 3PLs are the same, and in fact, there are quite a few that are industry-specific. For example, do you need a cold storage warehouse for food products? Or do you need a fulfilment centre that specialises in chemical warehousing? Consider if the 3PL’s you are looking at has experience and expertise with your type of business.

2. Be mindful of location

Distance matters when it comes to keeping your costs down. Look for a 3PL that has fulfilment centres that are either close to your product manufacturer or close to your end customers. This means you won’t be constantly sending truckloads of products all over the country, which can add bloat and cost to your supply chain.

3. Consider specialised services

In addition to the products your 3PL will need to warehouse and manage, you’ll also need to consider any specialised services you want from a 3PL. Do you need a provider who is equipped to handle reverse logistics? Or, do you have custom or specialised packaging? Not all 3PLs are willing to work within those constraints, so make sure you know your must-have criteria so you can find a 3PL that has the competency you need.

4. Check out their reputation and reviews

The truth is, if you partner with a 3PL, you’re going to be in contact with them in some way on a daily basis. They will end up playing a critical role in your company and are going to be storing and handling your products. So, trust and communication are imperative. Scope out their reviews online and ask if you can talk to some existing customers. That will help you suss out whether or not they’re a partner you could work with effectively.

5. Think about your plans for growth

If you’re thinking about partnering with a 3PL company, keep in mind your company’s growth trajectory and if a potential partner will be able to support your strategy. Using services and software that grows with your business, like your accounting software, can help mitigate costly switches later down the line.

How does a 3PL logistics service work?

Once you’ve landed on the right 3PL provider, there’s one more thing you need to sort out: How do you actually work with them? What do you need to give them? How will the process work?

This can vary greatly depending on the specific service provider you’re working with, but generally the partnership looks like this:

• Provide the 3PL with what they need: This could include your physical products, contact information for manufacturers or shippers you’re already using, packaging materials if you have custom requirements, and anything else they might need to handle their responsibilities.
• Align expectations upfront: If you did your due diligence in selecting the right 3PL for you, then a lot of this hard work should already be behind you. But, it’s still smart to get on the same page about expectations such as how often you’d like to communicate, when you need to be looped in on problems, and more.
• Let the 3PL get to work: From there, the 3PL can handle the aspects of order fulfilment that you delegated to them, such as receiving, warehousing, picking, packing, and shipping.
• Prioritise transparency: Creating an effective relationship with a 3PL requires them to be looped in on all relevant conversations and given opportunities to truly get to know your business, suppliers, shippers, customers, and more. Remember, the more visibility you give them, the better equipped they are to serve you and your end customers.

Final thoughts

Finding and collaborating with a third-party logistics provider (more commonly referred to as a 3PL) is a common consideration for many growing ecommerce and retail companies.

But even so, outsourcing aspects of your business and order fulfilment has trade-offs that should seriously be considered.

Doing your due diligence to find a trusted 3PL partner is an essential part of finding a logistics solution and will give you peace of mind when you make your ultimate decision.

While every care has been taken to ensure the accuracy of the information presented as at 01 May 2023, Intuit is not providing you with professional advice and we recommend you obtain your own professional advice. Intuit is not liable for your use of the information presented.