For more than 30 years, we have assisted clients in the selection, evaluation, and implementation of third-party logistics (3PL) projects. Clients using 3PL solutions span a wide range of companies and industries from consumer e-commerce, wholesale and distribution, traditional retail companies, pharmaceutical, collateral distribution, and more. While third-party logistics can benefit a variety of industries, 3PL solutions aren't for every company.
With our consulting expertise being around the use of internal fulfillment as well as 3PL solutions, this provides our perspective on how to compare the cost, service levels, and benefits of both fulfillment models. It is important to fully understand the potential benefits for your company if you are considering 3PL to augment or replace internal fulfillment and distribution. Here are 6 major ways businesses have traditionally benefitted from utilizing 3PLs in their supply chain.
3PLs Help Reduce The 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 is often true for small to moderate-sized companies that don’t have four-season businesses.
The larger order volume 3PL facilities allow cost justification of:
- Voice picking
- Automated picking solutions
- Automated sortation
- Conveyance systems
In this instance, 3PL reduces costs and improves order fulfillment time. Additionally, it can mean lower shipping costs from volume discounts by carriers when you use the 3PL’s shipping accounts.
Determine whether these cost savings are true for your operation. To get an accurate assessment, do a fully loaded cost comparison as you do the detail selection and compare pricing.
Read: How to Compare Internal Fulfillment Costs to Third Party Logistics
3PLs Lower Capital Investment
The right 3PL partner can help your company reduce or avoid capital outlays for new or upgraded warehouse facilities, warehouse management systems, and automated fulfillment solutions.
3PL can help with longer-term projects which often distract management from servicing the customer and controlling costs, such as:
- adding fulfillment centers
- product storage capacity
- increasing order throughput
- implementing WMS solutions
Major projects such as these capital projects often have project overruns, too.
3PLs Change Fixed Costs To Variable Costs
With internal fulfillment, more than 50% of the total costs of fulfillment are labor. There is a fixed investment in facilities, material handling, conveyance, and IT systems irrespective of the transactions processed. When you're using 3PL services, this is not the case. You can expect to see the cost of transaction processing rise and fall with volumes processed.
Fulfillment and distribution require major capital investment in:
- material handling
- sortation and conveyance systems
- warehouse management systems
- data collection systems
When all of these costs are taken into account, your fixed costs for facility, MHE, and systems are variable costs. Variation is the cost based on the usage of product storage space and services for orders and returns.
3PLs Reduce Time-To-Customer And Shipping Costs
Large retailers such as Amazon, Walmart, Target, and Wayfair have such significant reach from a distribution perspective, that they can easily deliver in two days or less utilizing a variety of shipping methods - including same-day delivery. Small to mid-sized retailers can benefit from 3PLs by being in strategic locations that allow for reaching 72-75% of the US population in a two-day ground shipping model.
Customers are highly influenced by the delivery time and shipping cost when choosing where to make a purchase. The strategic location of 3PL Distribution Centers (DCs) can give your company competitive delivery and cost options. In our blog, we discussed the factors that go into assessing the expansion of your e-commerce fulfillment network.
3PLs Provide Scalability For Growth And Peak Volume
There are two major ways 3PLs assist companies with processing in growth environments:
- efficiently handling holiday peak
- expanding the distribution capabilities needed to meet a company’s strategic plan
During the holiday season, some of our clients have a 10:1 or higher-order ratio when comparing peak weeks to an average week. Using internal fulfillment during the fourth quarter typically leads to a headache of recruiting, hiring, and training peak staff while addressing greater DC capacity needs.
As businesses grow, 3PLs can scale up to increase staff and product storage capacity. This eliminates the time-consuming and costly activities involved in recruiting and training new employees.
3PLs Allow Focused Management Time
A 3PL allows companies to concentrate management time on core competencies, such as marketing, merchandising, and e-commerce analysis. One of our clients has used a 3PL for 25+ years for this very reason. Some large companies, such as manufacturers, understand fulfillment isn’t their core competency. For these companies, entering a new channel such as e-commerce, Fulfillment By Amazon (FBA), or big-box retail replenishment could distract from other responsibilities.
Using Third-Party Logistics Profitably
Here are 19 examples divided into six categories of how businesses use 3PLs profitably:
3PLs For e-commerce Order Fulfillment
Brick-and-mortar retailers sometimes contract with 3PL partners to ship direct orders from their e-commerce websites, rather than bringing small-order pick/pack/ship into their retail DCs.
Small to moderate-sized e-commerce businesses can often benefit from 3PLs because it will lower their cost per order in the off-peak times during the year. For small e-commerce companies that are just getting into the business, it will be less expensive to implement 3PL fulfillment than building internal fulfillment including facilities, acquiring and implementing systems, and building a year-round staff. Estimate cost projections for internal fulfillment when compared to the 3PL option.
As the unemployment rate remains low, it’s harder to find quality and available warehouse labor, especially part-time. Businesses have a harder time recruiting, hiring, and training staff. Let your 3PL partner handle this aspect.
3PLs For International Order Fulfillment
Many multichannel companies use 3PL partners to ship customer orders worldwide. One example is a large multichannel wholesale and e-commerce client uses a combination of internal fulfillment and 3PLs:
- Their West Coast internal DC receives 100% of the purchases for all products and ships customer orders to the western states. The West Coast DC also replenishes a 3PL facility serving the eastern US.
- The eastern 3PL has only best-selling products to reduce inventory costs.
- The client uses a small parcel carrier’s 3PL facility in the Netherlands for EU e-commerce and wholesale customers. This facility manages all customs documentation and EU processes.
Similarly, a large gift company in the US uses a small parcel shipper’s 3PL facility in Canada to fill e-commerce orders across Canada.
Many 3PLs have enterprise-wide shipping systems, which ease the preparation of international shipping documentation and maintain international shipping rates.
3PLs Assist With Implementing Big-box Retailer, Amazon FBA, Marketplace Compliance Policies
Many e-commerce companies are multichannel businesses selling products through marketplaces and Big Box retailers such as Amazon, Wayfair, Walmart, Target, and others. These companies all have stringent vendor compliance policies and IT requirements as a condition for doing business with them. Companies often choose to use 3PLs that already have this IT capability, rather than building that expertise and implementing systems internally.
3PLs Help To Increase Sales
We find that 3PLs are becoming more involved with the sales support of client businesses. Here are several examples:
- Third-party logistics can assist you with managing multichannel platforms connecting to marketplaces and big-box retailers such as Walmart. This creates new channels for product offerings.
- Some 3PL have IT functionality to support unique brand and marketing strategies. For decades, 3PLs have specialized in marketing fulfillment, such as direct response TV, subscription programs, and club plans. These are high-volume transactions for a short duration where not all customers get the same product each month.
- Another strategy some companies are employing is vendor dropship. Companies can increase their sales by supporting drop ships from Big Box retailers who wish to expand the SKU assortment online but do not carry the inventory in their DCs. This can lead to significant increases in volumes.
3PLs Expand The Distribution Network
Many of the larger 3PL companies have anywhere from a handful of locations to dozens of sites across the US.
One of our clients, a branch of the Armed Services, contracted with a 3PL to receive and distribute tens of thousands of products through two major cross-dock distribution facilities. These 3PL DCs replenish hundreds of stores located on dozens of bases in the US and Asia. The base DCs were aging and required major facility upgrades and new WMS systems. The 3PL solution provided a much faster time-to-implement and at a much lower cost than undertaking DC replacements and upgrades on a dozen bases.
We have two clients (a food/gift company and an industrial supply company) that have implemented multiple 3PL DC strategies. Each has a central internal fulfillment center that receives products and replenishes four 3PL DCs. This multi-DC strategy allows them to reach 92% to 95% of the customers with one or two-day ground delivery - saving time to customers and shipping costs. Quick delivery builds sales, too.
In our articles, we have discussed the factors that go into assessing the expansion of your e-commerce fulfillment network. These principles are valid regardless of the type of warehousing and distribution business that supports your business.
3PLs Provide Reverse Logistics (Processing Returns)
Several large 3PLs specialize in reverse logistics and returns processing of e-commerce orders and retail stores. Typically, these are high return categories such as apparel, shoes, and electronics.
3PLs that specialize in this area typically offer:
- return processing
- customer credits and refund transactions
- merchandise disposition of the returned product
- testing and potential repair of electronic products
- refurbishment and repackaging of apparel and shoes for resale in a timely manner
- staging and transporting returned merchandise to your DCs or stores
These services can be cost-effective and streamline return processes and functions.
3PLs Process Inbound Ocean Freight And Distribution To DCs And Stores
Many of our clients use 3PL to process and ship bulk orders to DCs and stores. Here are a few examples:
- A large distributor of women's apparel uses a 3PL to receive color/size items in bulk. Their customers are department and women’s specialty stores. Store orders are picked, marked, and packed for shipment to customers’ DCs.
- Another client, a wholesaler of costume jewelry, uses the same type of receipt, breakdown, and shipment to major discount and department stores.
- A manufacturer and wholesaler of high fashion footwear are utilizing a 3PL for distributing 3.5 million pairs of shoes to 40+ various distribution centers around the US.
- A health and beauty aid catalog and eCommerce business consolidated fulfillment operations into one mid-west location in order to cut costs. With 3PL, they can still reach their customers within 2 to 3 days of ordering.
- A high-end specialty gift catalog and eCommerce business on the West Coast with an average order value of $500 utilizes a 3rd party fulfillment vendor to fulfill orders for their East Coast customers. We are also working with them to select a 3PL vendor in Europe to fulfill orders to their UK dealers in order to save money on shipping and get the product there quicker.
- The tourism board for a West Coast state selected a 3PL to send collateral on travel, site seeing, camping, maps, and other helpful materials to visitors making inquiries via online and magazine ads.
Third-Party Logistics isn’t for everyone. However, we have assisted clients in researching and implementing 3PL for high customer service and cost-effective fulfillment applications. A fully loaded cost study of 3PL versus internal fulfillment options is key to understanding the financial benefits. In many cases, using a 3PL has proven to provide a faster time-to-implement at a lower capital investment than building internal fulfillment facilities.
Need help with your 3PL evaluation? Read: How to Select the Best 3PL For Your Business