Running a successful eCommerce business is a ton of work. You have to set up and maintain a website, find great products to sell, market your business, and keep your customers happy. A big part of that is making sure you get items into your customers' hands safe and sound. Unfortunately, this is often easier said than done.
Many eCommerce owners start out by shipping their own items. For a little while, this can work out well. However, as a store grows, it can quickly become overwhelming to ship items.
For this reason, many eCommerce businesses outsource order fulfillment and returns management to third-party logistics companies, or 3PLs. Yet many who are new to the eCommerce world find it tough to understand what exactly 3PLs do.
In this post, we'll talk about what 3PL companies are and what they do. We'll talk about why outsourcing to 3PLs can be a good thing, and what tangible benefits your business can see from outsourcing. Finally, we'll talk about how you can choose a 3PL that's right for your business.
A Brief Overview of Supply Chain Management
To understand the purpose of third-party logistics, you must first understand supply chain management in general. Speaking broadly, supply chain management involves everything needed to get items from Point A to Point B. As we see it, there are ten parts to this:
- Planning for demand
- Creating a continuous flow of information
- Materials management
- Inventory management
- Manufacturing and production
- Warehousing and distribution
- Order fulfillment
- Returns management
- Customer experience
What is Third-Party Logistics (3PL)?
Individual bits and pieces of supply chain management can be outsourced to different companies. Specific companies tend to specialize in specific functions, which is why you see terms like "first-party logistics (1PL)", "second-party logistics (2PL)", and so on.
A 1PL company is any company that needs goods moved. This includes manufacturers, traders, wholesalers, and resellers.
A 2PL company is a company that moves others' goods. That includes shipping lines, air lines, trucking companies, and postal carriers.
A 3PL company, like Fulfillrite, handles order fulfillment, returns management, and other similar functions on behalf of other companies. (We'll talk about this in more depth in a bit.)
Finally, you might hear about fourth-party logistics companies, or 4PLs. They handle supply chain management - all of it, from start to finish - on behalf of other companies.
What Do 3PLs Do?
Most 3PL companies specialize in a variety of activities, including engaging with carriers, consolidating loads of goods, managing inventory, and handling shipping. Inventory management and shipping can further be broken down into specific tasks, including:
- Receiving shipments
- Warehousing inventory
- Retrieving items from inventory (picking)
- Packing one or more items into a package
- Shipping items to customers
- Handling returns
- Maintaining inventory data
As stated in the beginning of this post, many eCommerce store owners start by shipping their own items. In an extremely small company, receiving just means getting inventory in the mail, warehousing means putting them in your garage, picking and packing means putting them in a USPS box, and so on.
As time goes on, though, receiving means taking in entire pallets of items. Warehousing means finding a safe place to store large quantities of goods. Each individual task becomes more complex and requires more expertise.
When the burden becomes overwhelming, they outsource these business processes to another company.
Why are 3PLs Useful?
In general, outsourcing fulfillment to a 3PL comes with six benefits:
- Outsourcing simplifies the order process. Without outsourcing, fulfilling an order means someone in the business must pull inventory out of storage, packing it in a box, and applying postage so that it can be sent to the customer. After outsourcing, the business integrates their shopping cart system with the 3PL. When new orders come in, the 3PL is notified with all relevant information. The business owner doesn't have to do anything else.
- Inventory management becomes easier. Keeping track of inventory on your own means keeping a running tally of when goods come in and when they leave. Most 3PLs have systems that allow them to manage inventory very easily, allowing business owners to simply check a dashboard to see how much inventory they have left.
- Returns are streamlined. When fulfilling your own orders, returns are a significant inconvenience. Typically it involves corresponding with the customer, providing a return mailing address, and reimbursing them for postage. Most 3PLs have a streamlined system for managing returns, meaning the business owner doesn't have to worry as much about a burdensome returns process.
- Receiving is handled by the 3PL. When using a 3PL, businesses no longer have to receive large pallets full of items. That means businesses don't have to do the unpacking, heavy lifting, quality inspection or clean up themselves. The more efficient 3PL staff can take care of that instead.
- Integrations take care of the work. Like we mentioned above, once you connect your eCommerce store with a 3PL's systems, you don't have to transfer or monitor data. You can take a two week vacation with no access to email and orders will still be fulfilled because the systems are integrated.
- Business constraints disappear. Order fulfillment can quickly become stressful, hard, and distracting. Fulfilling orders in-house puts hard limits on how fast a company can grow. Those limits disappear once outsourcing to a 3PL.
When does a company need to outsource work to a 3PL?
Of course, it doesn't always make sense to outsource work to a 3PL. Generally, speaking, you need more than 50 orders per month before you seriously consider outsourcing to a 3PL. Of course, not every company is going to make the switch as soon as they clear that threshold, though.
A much better way to know if you need to outsource to a 3PL is to ask these six questions:
- Is our customer base growing faster than we can keep up?
- Is our in-house order fulfillment becoming slow or inaccurate?
- Are our employees working overtime to ship items to customers?
- Is the business becoming too complicated?
- Are shipping expenses becoming excessive?
- Have we run out of space?
If you answer "yes" to any of these questions, then it is probably time to contact a few 3PLs and get some quotes. Even if you don't end up working with one immediately, you still want that information handy because it's very likely that you'll need it within a few months.
What specific benefits do companies experience by hiring a 3PL?
When companies outsource fulfillment to a 3PL, they tend to see a number of benefits. We can think of ten big ones:
- Companies are able to scale faster. Without having to fulfill orders in-house, the number of barriers to scaling up your operation dramatically decreases. To a company fulfilling their own orders, the difference between 100 orders per month and 5,000 orders per month is huge. To a 3PL, it's hardly noticeable.
- It's easier to understand the business. When no longer forced to fulfill orders in-house, eCommerce companies do not need complex business processes around shipping. They no longer have to handle receiving, reordering of supplies, inventory storage and retrieval, or printing postage. This reduced complexity makes it much easier to understand the business's day-to-day operations.
- Labor costs drop. Between hourly wages, taxes for Medicare and unemployment, supplies, and real estate, labor costs can really quickly add up! This is especially true if employees find themselves working overtime on a regular basis. When no longer fulfilling orders in-house, the labor costs associated with getting items shipped either disappear or are put to better, more value-adding use.
- Shipping costs drop. Outsourcing to a 3PL can actually save companies money . One of the primary reasons for this is because 3PLs receive dramatically reduced shipping rates from carriers like USPS, UPS, and FedEx. By working with a 3PL, you benefit from their negotiated rates without actually having to do the negotiation yourself.
- Executives are able to focus more on what matters. It's a natural outcome of reducing operational complexity and reducing barriers to scaling. Executives can truly focus on generating revenue instead of making minute-to-minute microdecisions.
- Companies can take advantage of better technology. Advanced inventory tracking systems are expensive, as are cost-efficient postage printers. When outsourcing to a 3PL, you can benefit indirectly from this technology without actually having to make the capital investment yourself.
- Companies benefit from the experience of their logistics partners. Shipping items is not particularly hard, but doing it cost-efficiently and quickly every day with every single order takes practice. Third-party logistics companies have practical experience that would be otherwise inefficient for your business to acquire.
- Items ship to customers faster. Hiring a 3PL can speed up your order fulfillment process as well. This is really important when you consider that 79% of customers expect free two-day shipping. It's really hard to meet that standard consistently without help.
- Customer service and returns management improves. Customer service and returns management are time-consuming, and it's easy to put that on the backburner when you're swamped. Fortunately, for 3PL companies, returns are a part of day-to-day life, so they have efficient processes for handling them.
- Customer retention improves. Lastly, it's no secret that companies that retain customers do better than companies that don't. After all, it's relatively cheap to get an existing customer to buy compared to the cost of acquiring a new customer. Shipping quickly and providing good customer service, two things that 3PLs excel at, can increase your company's customer retention.
How do you choose a quality 3PL?
At this point, you may be pretty well convinced of the value of hiring a 3PL. We don't advise you to rush into a business relationship, though. Choosing the right 3PL will have a monumental impact on how customers perceive the quality of your business.
We therefore have twelve recommendations on how to choose the best possible 3PL company:
- Make sure the 3PL has good reviews. Check on websites like Trustpilot and Google.
- Figure out how old the 3PL company is. You want to make sure that you're choosing one that has been around for more than a year or two.
- Get some references and call them.
- Pay attention to how they treat you when you have questions. If their customer service or communication is not good at the start of the process, then it's likely that they will not be a good partner in the future.
- Ensure that their warehouse or warehouses are in good locations. You don't want to store your inventory in Maine if all your customers are in California.
- Ask about their order turnaround time. They need to consistently be able to provide same-day order fulfillment.
- Compare the prices of different 3PL companies. Make sure that whichever company you ultimately do business with is charging a reasonable price.
- Look out for nickel and diming. The cost structure should be straightforward and simple.
- Walk away from long-term contracts.
- Test drive the software before you start using the 3PL's services. If the software is difficult to use, you will regret working with them.
- Make sure the 3PL has a good process for handling returns.
- Above all, make sure the 3PL is transparent and easy to work with. Few business problems are quite as disconcerting as having a company you don't trust hold onto your inventory.
Outsourcing some of your business processes to a 3PL makes sense in many situations. Once you start shipping more than around 100 orders per month, it quickly becomes more of a necessity than a luxury.
It can be intimidating to find the right 3PL. First, you have to understand what they do and how they can help your business. Then, you have to find a company you can trust to hold onto your inventory!
With knowledge and research on your side, you can find the right 3PL for your business. Then you can relax a little bit more and focus on doing what you really want to do with your business!