What you need to know before choosing a 3PL Company

Learn about the many details important to selecting, contracting, and implementing 3PL fulfillment and logistics.

Retailers and e-commerce companies often turn to 3PL companies to streamline their operations and enhance customer satisfaction. By outsourcing logistics tasks such as warehousing, distribution, and transportation, these businesses can focus on their core competencies, like product development, marketing, and customer service. 

3PL logistic companies bring expertise, technology, and a scalable infrastructure to the table, allowing for efficient inventory management, faster delivery times, and overall cost savings. This partnership not only improves operational efficiency but also provides a competitive edge in today's fast-paced, customer-centric market.

What is a 3PL Company?

Top down view of two warehouse workers managing product inventory

If you are in the business of delivering products, it's likely you’ve heard the term 3PL.  But what are 3PL companies?  What is a 3PL warehouse?  A 3PL (Third-Party Logistics) company is a provider of outsourced logistics services. These services can encompass a wide range of operations that involve the management or handling of goods, including:

  • Transportation: This involves the movement of goods from one location to another, which can include inbound freight, outbound freight, and parcel shipments.
  • 3PL Warehousing: 3PL companies often provide storage facilities where businesses can store their products before they are shipped to customers or retail outlets.
  • Distribution: This involves the process of managing the flow of goods from the point of origin to the point of consumption. It can include picking and packing orders, inventory management, and order fulfillment.
  • Value-added services: These can include packaging, cross-docking, door-to-door delivery, product mixing, supply chain management, and more.

By partnering with a 3PL warehouse, businesses can focus more on their core competencies, such as product development and marketing, while leaving the logistics to experts in the field. This can lead to increased efficiency, cost savings, and a smoother supply chain operation overall.

Why Selecting a 3PL Company on Your Own Can be Difficult

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According to a recent report by CBRE Group Inc., 3PL companies secured the largest amount of leased big-box warehouse space in North America during 2022. This marks the first time since CBRE started collecting data in 2012 that 3PLs have dominated the warehouse leasing market.

The report reveals that 3rd party fulfillment companies accounted for 41% of all large warehouse spaces, defined as those measuring 200,000 square feet or more. In comparison, retailers, and wholesalers, who held the top spot in 2021, came in second with a 35.8% share of leasing activity. The food and beverage industry followed behind with 8.7% of leasing activity.

Here are 7 reasons why it can be difficult, or risky, to select a 3PL company on your own:

  1. So Many 3PL Companies. There are thousands of companies involved in 3PL supply chain and logistics.  Knowing where to even begin is the most challenging aspect. Do I look for the top 3pl company? Or do I look for a 3PL company near me?
  2. Lack of Industry Knowledge. Without a deep understanding of the logistics industry, it can be difficult to evaluate the capabilities and reliability of different 3PL providers.
  3. Complexity of Services. 3PL companies offer a wide range of services. Understanding which services are necessary for your business and ensuring a potential 3PL can provide them effectively can be a complex task.
  4. Contractual Pitfalls. Contracts with 3PL partners can be intricate and filled with industry-specific language. Without expertise in this area, businesses may overlook unfavorable terms or fail to negotiate necessary provisions.
  5. Scalability Concerns. As your business grows, your logistics needs will change. It can be challenging to assess whether a 3PL can scale its services to match your future needs.
  6. Technology Integration. Your 3PL company will need to integrate its systems with yours for seamless operations. Many companies underestimate the efforts needed to fully determine the business rules, and to test these integrations. 
  7. Cost Evaluation.  Understanding the true cost of a 3PL's services can be difficult. Hidden fees or costs associated with service failures may not be immediately apparent.

3PL Company Selection: The Crucial Role of a Consultant

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In the complex and rapidly evolving world of logistics, the expertise of a 3PL consultant can be invaluable. A consultancy, like F. Curtis Barry & Company, brings a wealth of industry knowledge to the table.  Providing insights into the latest trends, technologies, and best practices that can help businesses stay ahead of the curve.

One of the key benefits of working with a 3PL consultant is the time and resource savings they offer. Selecting a 3PL company can be a time-consuming process, involving extensive research and vetting. A 3PL consultant can handle this process on behalf of the business, freeing up valuable time and resources.

Moreover, 3PL consultants have access to a broad network of 3PL companies. This allows them to match businesses with a provider that best fits their specific needs and requirements, something that can be challenging to do without this extensive network.

Additionally, working with a consult to select the right 3PL company includes:

  • A significant advantage of using a 3PL consultant is their negotiation skills. They have the experience and expertise to negotiate 3PL contracts on behalf of businesses, ensuring that the terms and conditions are favorable and meet the business's needs.
  • They can help businesses identify potential risks in their supply chain and develop strategies to mitigate them. This can include everything from ensuring compliance with regulations to managing potential disruptions in the supply chain.
  • A 3PL consultant also provides an objective perspective. They can evaluate potential 3PL companies without any bias, helping businesses make more informed decisions.
  • When it comes to onboarding a new 3PL company, a consultant can provide invaluable support. The transition to a new 3PL can be complex, and a consultant can help ensure it goes smoothly, minimizing disruption to the business.
  • Finally, a 3PL consultant can provide ongoing management and review of the 3PL relationship. They can monitor performance, address any issues that arise, and make adjustments as necessary to ensure the relationship continues to meet the business's needs. This ongoing support can be crucial in maintaining an effective and efficient supply chain.

10 Benefits of Using a 3PL Company

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In today's competitive retail and ecommerce landscape, efficient logistics operations are more crucial than ever. Businesses need to ensure that their products are stored safely, managed effectively, and delivered promptly to their customers. 

This is where 3PL companies come into play. By offering a comprehensive suite of services, from warehousing to transportation, 3PLs can significantly enhance the efficiency and cost-effectiveness of your supply chain operations. 

Here are ten key benefits that 3PL companies can bring to your retail or ecommerce business:

  1. Efficient Logistics Operations: 3PLs offer comprehensive logistics operations, streamlining processes such as inventory management, order fulfillment, and transportation, allowing businesses to focus on their core competencies.
  2. Expertise in Pick, Pack, and Ship: 3PLs offer specialized pick, pack, and ship services, ensuring orders are accurately fulfilled and dispatched in a timely manner, enhancing customer satisfaction.
  3. Reduced Shipping Costs: By leveraging their network and volume of shipments, 3PLs can negotiate lower shipping costs, making logistics more cost-effective for businesses.
  4. Competitive Shipping Rates: 3PLs offer competitive shipping rates due to their relationships with multiple carriers, enabling businesses to provide affordable shipping options to their customers.
  5. Cost-Effective Solutions: 3PLs offer cost-effective logistics solutions by eliminating the need for businesses to invest in warehousing, technology, transportation, and staff for logistics operations.
  6. Comprehensive Fulfillment Services: 3PLs offer a range of fulfillment services, from receiving and storing inventory to picking, packing, and shipping orders, ensuring a smooth order fulfillment process.
  7. Access to 3PL Warehouses: Partnering with a 3PL company provides access to their warehousing facilities, eliminating the need for businesses to lease, staff, and manage their own warehouse.
  8. Use of Fulfillment Centers: 3PLs offer the use of their fulfillment centers, which are strategically located to ensure quick and efficient delivery of orders to customers.
  9. Reliable Transportation Services: 3PL companies offer reliable transportation services, ensuring goods are delivered on time and in good condition, enhancing customer satisfaction and trust.
  10. Scalability: 3PL companies offer scalable solutions, allowing businesses to easily scale up or down their logistics operations based on demand, ensuring efficiency and cost-effectiveness during peak and off-peak seasons.

Misconceptions of Using a 3PL Company

Interior warehouse photo displaying organized inventory on pallets and pallet racking

For retail and ecommerce companies, the decision to partner with a 3PL company can be a game-changer. However, misconceptions about 3PLs often cloud the decision-making process, potentially leading businesses to miss out on the significant advantages these partnerships can offer. 

To clear the air and help businesses make informed decisions, we're debunking nine common misconceptions about 3PL companies and highlighting how they can truly benefit retailers and ecommerce companies:

  1. 3PLs are only for large businesses. 3PL companies cater to businesses of all sizes. They offer scalable solutions that can grow with your business, making them a valuable partner for small and medium-sized enterprises as well as large corporations.
  2. Using a 3PL means losing control over your supply chain. A good 3PL will provide transparency and regular communication, ensuring you maintain control and visibility over your supply chain. They can also provide valuable data and insights to help you make informed decisions.
  3. 3PL services are too expensive. While there are costs associated with outsourcing logistics, a 3PL can often help businesses save money in the long run by improving efficiency, reducing waste, and providing access to bulk shipping rates. They can also free up time and resources, allowing you to focus on core business activities.
  4. All 3PLs offer the same services.  3PLs can offer a wide range of services, from warehousing and transportation to inventory management and order fulfillment. It's important to find a 3PL that offers the specific services your business needs.
  5. Switching to a 3PL is a complex and disruptive process. While transitioning to a new logistics provider can require some effort, a good 3PL will work with you to ensure a smooth transition with minimal disruption to your operations.
  6. 3PL companies are only about warehousing and shipping.  3PL companies are far more than just 3PL warehousing.
  7. Many 3PLs offer value-added services such as packaging, kitting, labeling, and returns management. They can also provide strategic advice to help optimize your supply chain.
  8. 3PLs can't handle unique or specialized products. Many 3PLs have experience handling a wide range of products, including perishable goods, fragile items, and high-value products. They can provide specialized storage and handling to ensure your products reach their destination in perfect condition.
  9. 3PLs don't provide customer service. Many 3PLs offer customer service support, handling inquiries and issues related to delivery and returns. This can improve the customer experience and free up your team to focus on other tasks.

By understanding the realities behind these misconceptions, retailers and ecommerce companies can make more informed decisions about whether partnering with a 3PL company is the right choice for their business.

SECTION 6 How to Select the Right 3PL Company

Shipping containers being transported by sea

Many businesses, including direct and e-commerce enterprises, effectively utilize 3PL companies to streamline their warehousing and distribution operations, including order fulfillment. To ensure a suitable match for your needs and supply chain strategy, it is crucial to select 3PL companies that offer the right fulfillment services. The following six criteria can help you determine which 3PL company is the best choice:

  • Experience: Does the 3PL provider have experience working with businesses and products similar to yours?
  • Scalability: Can the 3PL company accommodate the growth of your business, including inventory and transactional expansion?
  • Technology: Do the 3PL companies possess appropriate systems and technology to meet your specific requirements?
  • Cost-effectiveness: Are the fulfillment services provided by the 3PL companies efficient and cost-effective?
  • Geographic Reach: Do the 3PL companies have multiple locations across North America to improve transit times for your customers?
  • Customer Service: Is the 3PL company known for its customer-centric approach?

Identifying Required 3PL Order Fulfillment Services

Before proceeding, it is important to define your objectives for engaging a 3PL company. Do you aim to reduce shipping costs, stabilize costs as your business grows, avoid expanding warehouse space, minimize shipping transit times, or delay investments in new warehouse management systems and automation? Clearly stating your project objectives in a request for proposal (RFP) will help you find suitable 3PL supply chain solutions and logistics services.


Utilizing a Competitive Bid Process with 3PL Companies

To streamline the evaluation process, it is recommended to implement a competitive bid process when assessing 3PL companies. Rather than haphazardly collecting information, focus your efforts on developing a detailed RFP that all interested 3PL companies can bid from. 

Include transactional volumes, growth rates, and specific service expectations in the RFP. By providing this information, 3PL vendors can offer detailed cost breakdowns for various services, including fulfillment, value-added services, and returns management. Implementing this approach not only leads to a more informed decision but also aids future planning.


Understanding 3PL Order Fulfillment Pricing for Services

3PL companies typically employ a cost-plus model or a cost per touch/transaction when pricing their logistics solutions. While small businesses often focus on shipping costs, it is essential to consider other line-item charges that may vary between 3PL companies. 

These charges can include inbound receiving, order fulfillment, warehouse space, returns management, value-added services, systems and technology integration, and account management. When evaluating costs received from 3PL companies, consider your business volumes and project these costs annually, factoring in annual cost increases and growth rates.


Selecting a Qualified Shortlist of 3PL Companies

Due to the extensive investigation required when assessing 3PL companies, it is advisable to narrow down your search early in the process. Start by selecting three to five active vendors that can provide the necessary systems, technology, warehouse and distribution services aligned with your business objectives. 

As there are numerous 3PLs specializing in different areas such as e-commerce fulfillment, wholesale distribution, retail cross-docking, collateral fulfillment, and reverse logistics, it's crucial to focus on qualified companies that offer the specific fulfillment services, cost structures, and warehouse space that match your requirements.

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Creating an Informative 3PL Request for Proposal (RFP)

Regardless of whether you're a retailer or an e-commerce business, developing a detailed RFP is essential. The following sections should be included in your RFP:

  • Background and project objectives of your company.
  • Overview of your current system platforms.
  • Information on warehouse management and inventory systems.
  • Requirements for value-added services, such as kitting and returns management.
  • Standards and service level metrics for the 3PL to meet.
  • Specific operating procedures to be followed.
  • Requested client references.
  • Implementation methodology and associated costs.
  • Details of the desired warehousing and distribution services.
  • Instructions, deadline, and contact information for the project lead or consultants involved.


Additional 3PL Analysis Required

Depending on the size of the transition and your specific logistics requirements, you may need to conduct further detailed analysis and planning. This may involve:

  • Multi-year planning for orders, sales, returns, and packages shipped.
  • Evaluating changes in inbound and outbound freight costs based on facility locations.
  • Developing inventory strategies and SKU assortment for multiple facilities, if applicable
  • Establishing business rules for backorders and associated costs.
  • Seeking assistance from warehouse logistics consultants to aid in planning and analysis.


Defining Your 3PL Decision Matrix

It is important to determine the key decision data points that management will consider when selecting a 3PL company. This includes factors such as warehouse management system requirements, facility number and location, available warehouse space, and product knowledge. 

Knowing in advance what information is necessary for the decision-making process will help summarize proposals efficiently and prevent unnecessary back-and-forth communication.


Comparing 3PL Costs to Internal Fulfillment Costs

Once you have projected costs from 3PL companies for an extended period, calculate the cost per order and package shipped by dividing the total projected costs by the corresponding numbers. Compare these costs to your internal fulfillment costs and assess their percentage relative to total sales. This analysis will help you evaluate the cost-effectiveness of outsourcing fulfillment to a 3PL.


Narrowing Your Search to Two 3PL Companies

Throughout the evaluation process, it is wise to keep two vendors in consideration until an agreement is signed. This approach allows for flexibility and ensures you have a backup option in case the initial choice doesn't meet all your requirements or fails during negotiations. Keep the vendors' positions in the evaluation process confidential to maintain fairness and objectivity.

Conducting 3PL Due Diligence

Request a list of references from the 3PL companies that align with your business size, product type, required services, and system requirements. Prepare a set of standardized questions for the references and involve multiple stakeholders from your company to make reference calls. 

For the final two contenders, schedule site visits to their proposed facilities to gain firsthand insight into their operations. Engaging in thorough due diligence will help you make an informed decision.


Finalizing the 3PL Decision and Contract

Carefully review all agreements and ensure they include the desired service standards. It is advisable to seek assistance from an intellectual property attorney to review the agreements and ensure they are fair and balanced. Document any changes, special instructions, or agreed-upon processes as addendums to the agreement to ensure enforceability and clarity.