On occasion we have completed client projects to compare third-party logistics and fulfillment (3PL) services and costs to the cost of expanding a company’s internal fulfillment operations. These have included ecommerce, wholesale and retail companies. Just to be clear, much of our client work is with improving internal fulfillment operations, so we are objective when it comes to helping them determine when a 3PL is the right decision.
In the late 1990s or so, we saw 3PL operations which were not always cost-competitive or stable. But in the past five years some large companies have entered the market with extremely competitive services and costs.
To help in the decision process, here are 10 ways multichannel businesses we’ve worked with have used and benefited from 3PLs:
1. Cost per order
A 3PL can provide a lower cost per order when compared to internally managed operations. This isn’t always true but it can be for small to moderate sized companies that don’t have four season businesses.
2. Focusing management time
A 3PL allows companies to concentrate management time on marketing, merchandising and ecommerce analysis. One of our clients has used a 3PL since 1988 for this reason. Some large companies such as manufacturers understand fulfillment isn’t their core competency, and entering this new channel makes dollars and sense.
3. Scale to peak
During the holiday season, some clients have 10:1 order ratio (peak weeks to average week) or higher. A 3PL allows them to successfully process customer orders during the 60 days at peak without hiring additional staff and requiring greater internal capacity.
4. Lower capital investment
The right partner can help your company reduce capital outlays for new fulfillment facilities, order management and warehouse systems, telephone technology and in some cases website platforms. This lets you use capital to grow the business in other ways.
5. Reduced time-to-customer and shipping costs
We have two clients north of $40 million in sales that each has five 3PL DCs to get orders to customers in a minimal time. A 3PL can provide distribution across the country so that you can deliver one day by ground to a high percentage of your customers. Some 3PLs can deliver items within hours of receiving an order in certain cities. To reach 90%+ of consumers you may have to have three or four 4 facilities. This multi-DC strategy is the best way to save shipping costs.
6. Process inbound receipts at port, distribute to stores
Another retail client uses a 3PL to receive and break down bulk purchases for shipment to stores.
7. Distribution of international orders
Multichannel companies use 3PL partners to serve Canada, Europe and Asia. We are working with one 3PL that consolidates consumer orders from domestic multichannel companies to the former Soviet republics.
8. Direct shipping
Brick-and-mortar retailers sometimes contract with 3PL partners to ship direct orders from their ecommerce marketplaces, rather than bring small-order pick/pack/ship into their DCs.
9. Additional 3PL services
These services can include transportation, distribution and cross-docking. One of our clients, a branch of the armed services, contracted with a 3PL to distribute to U.S. and Asian DCs and hundreds of stores. It provided much faster time-to-market and at a much lower implementation cost than replacing outdated DCs and systems. Another large wholesale client uses East and West coast 3PL facilities to distribute to major retailers.
10. Returns processing in high-return business (apparel, electronics, etc.)
These activities can be cost competitive, include testing and refurbishment and processing customer returns in a timely manner. You can stage and transport returned merchandise to your DC.
Third-party fulfillment and distribution isn’t for everyone. However we feel it can be a cost-effective strategy to consider as you expand your direct and retail distribution. In many cases using a 3PL has proven to give you faster time-to-market than building internal fulfillment.