How Companies Save Money Using Third-Party Logistics (3PL)

   

3PFFor more than 30 years, we have assisted clients in the selection, evaluation, and implementation of third-party logistics (3PL) projects. Clients using 3PL applications span a wide range of companies and industries, including ecommerce, wholesale, retail companies, pharmaceutical samples, collateral distribution, and more. While third-party logistics can benefit a variety of industries, 3PL is not for every company.

Much of our consulting has been in internal fulfillment. This experience provides us 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.
Let us help with 3PL vendor selectionHere are 6 major ways multichannel businesses benefited from using 3PL and 19 examples of how companies used 3PL profitably:

6 Benefits of Using Third-Party Fulfillment

The following are six major benefits of companies using 3PL experience:

Reduces 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 allows cost justification of:

  • WMS
  • voice picking
  • 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

Lower capital investment

The right 3PL partner can help your company reduce or avoid capital outlays for new or upgraded warehouse facilities, order management and warehouse systems, and telephone technology.

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

Major projects such as these capital projects often have project overruns, too.

Changes fixed costs to variable costs

With internal fulfillment, more than 50% of the total costs of fulfillment is labor.  There is a fixed investment in facilities, material handling and 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:

  • facilities
  • 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 cost is based on the usage of product storage space and services for orders and returns.

Reduced time-to-customer and shipping costs

Amazon can already ship to 72% of US population in one day. More than 40% of the USA population in less than four hours with facilities in key hubs in every state. Other major retailers and ecommerce companies are following suit with fulfillment capabilities from multi-distribution centers and stores.

Customers are highly influenced by the delivery time and shipping cost when choosing where to make a purchase. Strategic location of a 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 ecommerce fulfillment network. 

Read: How to Assess If Multiple Distribution Centers Can Reduce Shipping Costs and Time to Customer

Scalability for growth and peak volume

There are two major ways 3PLs assist companies with processing in growth environments:

  1. efficiently handling holiday peak
  2. expanding the distribution capabilities needed to meet a company’s strategic plan

During the holiday season, some of our clients have 10:1 or higher order ratio when comparing peak weeks to 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.

Focuses management time

A 3PL allows companies to concentrate management time on core competencies, such as marketing, merchandising, and ecommerce analysis. One of our clients has used a 3PL since 1988 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 ecommerce, Fulfillment By Amazon (FBA), or big box retail replenishment could distract from other responsibilities.
Speak with an expert about 3PL

Using Third-Party Logistics Profitably

Here are 19 examples divided into six categories of how businesses use 3PLs profitably:

Ecommerce order fulfillment

Brick-and-mortar retailers sometimes contract with 3PL partners to ship direct orders from their ecommerce websites, rather than bringing small-order pick/pack/ship into their retail DCs.

Small to moderate sized ecommerce businesses can often benefit from 3PLs because it will lower their cost per order in the off-peak times during the year. Here is a case study of how one small apparel company achieved this.

For small ecommerce 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 comparing to the 3PL option.

As the unemployment rate remains low, it’s harder to find the 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!

International order fulfillment

Many multichannel companies use 3PL partners to ship customer orders world-wide. We are working with one 3PL that consolidates US consumer ecommerce orders to the former Soviet Republics.

Another large multichannel wholesale and ecommerce 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.
  • they use a small parcel carrier’s 3PL facility in the Netherlands for EU ecommerce 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 ecommerce orders across Canada.

Many 3PLs have enterprise-wide shipping systems, which ease the preparation of international shipping documentation and maintaining international shipping rates.

Implementing big box retailer, Amazon FBA, marketplace compliance policies

Many ecommerce companies are multichannel businesses selling product on Fulfillment By Amazon (FBA), other marketplaces such as eBay, and in big box retail stores, such as Walmart, CVS and Walgreens. 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.

Increased sales

We find that 3PLs are becoming more involved with the sales support of client businesses. Here are several examples:

  1. Third-party logistics can assist you with managing multichannel platforms connecting to Amazon, eBay, and big box retailers such as Walmart. This creates totally new channels for products.
  2. 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.
  3. Another strategy some companies are employing is vendor drop ship. The major benefit is the ability to show a widely expanded product assortment without purchasing slow moving or low demand inventory. Many ecommerce companies got into the business without inventory, fulfillment, and systems by using a 3PL.
  4. Some ecommerce companies launch advertising campaigns to generate pre-orders. Then, the companies source the product from the manufacturer and fly it in via air cargo. They advertise there may be limited availability and four to six weeks lead time. From a marketing perspective, what are the requirements for your business?

Expanded distribution network

Several of the larger 3PL companies have literally dozens to hundreds of locations. 

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 which receives product 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 customer and shipping costs. Quick delivery builds sales, too.

In our blog, we have discussed the factors that go into assessing the expansion of your ecommerce fulfillment network. These principles are valid regardless of the type of warehousing and distribution business that supports your business.

Specialized distribution functions

3PLs can be used as specialized facilities in support of retail, ecommerce, and other warehousing functions:

Reverse logistics (processing returns)

Several large 3PLs specialize in reverse logistics and returns processing of ecommerce 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 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.

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 lady’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 is 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.

Summary

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
Speak with an expert about 3PL