If “eCommerce isn’t the cherry on the cake, it’s the new cake,” as Jean-Paul Agon framed it in his famous quote, then third-party logistics (3PL) companies are the talented bakers behind all the dough work.
And it’s sweet to say third-party warehousing and distribution services make order fulfillment a piece of cake for eCommerce retailers, handling almost 60% of all shipments. 3PL warehousing companies are perhaps the most consequential vendor-partner for your eCommerce business.
A reliable and efficient 3PL partner like ShipNetwork (formerly Rakuten Super Logistics) will help you deliver your order fulfillment promise and become a customer favorite. In contrast, a sloppy 3PL company will earn you all sorts of customer complaints, from late and incorrect deliveries to damaged packages.
The delicate and pivotal role a 3PL partner plays in your eCommerce success means you cannot afford to work with the wrong one. To choose the right 3PL company, you must first understand what they’re all about and how their services and operations influence your online business. Knowing the interplay and interdependence between your eCommerce store and 3PL warehousing companies will help you make the right pick and get maximum contractual value in the long term.
This in-depth post will dive into the nitty-gritty of third-party warehouse services to keep you in the know. At ShipNetwork, we’re committed to providing you with the best eCommerce fulfillment services and informing you about the industry’s goings-on to help you make savvy decisions for your online business.
That said, let’s get to it.
What Is Third-Party Warehousing?
Put simply, third-party warehousing refers to storing your inventory in a warehouse you don’t own or manage. You trust outsourced warehouse providers to receive and keep your inventory units in their commercial storage facilities.
At the bare minimum, third-party warehousing may only involve receiving and storing inventory. This introductory level service works well if you have an established delivery network with enough vans and workforce but lack sufficient storage space. In such cases, third-party warehousing would only mean renting extra storage space for your inventory.
Here’s a case in point:
Say you’re a local electronics dealer based in Nevada, and you import supplies via the Port of Long Beach. You also have an in-house fleet of delivery vans and trained personnel — enough to serve your Nevada customer base. But you either lack storage space to store your inventory, or your in-house warehouses are operating at capacity.
Instead of limiting your orders to your in-house storage capacity, you find a third-party warehouse near you and rent extra storage space for your merchandise. With this arrangement, you may have your supplies from the Port of Long Beach delivered and stored in the local warehouse, then pick up your stock when fulfilling orders. That’s third-party warehousing at its basic level.
At the premium level, third-party warehousing involves receiving, storing, kitting, packaging, and distributing inventory. This is the standard that the top 3PL warehousing companies operate at. It works well when you have no delivery network or personnel to handle order delivery and want to keep your fulfillment costs at a minimum. Here’s a case in point.
Let’s refer to our previous example but without the fleet of vans and personnel. In this instance, your warehouse provider would receive your inventory from the Port of Long Beach, store it, repackage or kit it to your specifications (when you request), and then distribute it to your customers in different locations in Nevada. That’s third-party warehousing at its prime level.
3rd party warehousing is one component of a larger logistics infrastructure that makes eCommerce order fulfillment work. With third-party warehousing, you outsource your inventory management to a 3PL company, which assumes custody of your supplies until you sell. And that’s where the next phase, third-party distribution, kicks in.
What Is Third-Party Distribution?
Third-party distribution is the last phase of 3PL logistics that completes end-to-end order fulfillment. It’s when your 3PL partnership sends orders to your customers on your behalf. This may take different forms depending on the fulfillment options your 3PL company offers and those the end consumer has selected.
For instance, ShipNetwork offers 1-2 day ground shipping to 98% of the United States. Thus, if you choose us as your 3PL partner, you can offer same-day delivery to most of your U.S. customers, knowing your 3PL logistics partner (ShipNetwork) will deliver on time.
3PL companies work with national and international shipping carriers such as DHL, USPS, and UPS to make third-party distribution work. Playing to the economies of scale, 3PLs can negotiate for better carrier rates and top-tier services like expedited delivery.
A good example is ShipNetwork’s Xparcel feature, which empowers you to shop for the best value of service and price for every order shipped. These cost advantages trickle down to you, enabling you to offer competitive or free delivery when feasible.
Better yet, third-party distribution enables you and your customers to track orders in real time by integrating cutting-edge 3PL software into your eCommerce website. This way, your customers can track the status of their orders on your eCommerce website from their phones or computers without calling your sales department constantly for order updates.
Third-party warehousing and distribution are two main parts of the order fulfillment process, which goes as follows:
Receiving → Picking → Packing → Shipping → Returns
We have covered receiving under third-party warehousing and shipping under third-party distribution. Let’s now see what 3PL companies do during the picking, packing, and returns stages.
After receiving and storing your inventory in their warehouses, 3PLs wait for you to forward customers’ orders to their system for processing. Some 3PL warehousing companies have advanced software that allows them to see your customers’ orders as they flow in automatically.
Once your 3PL gets your order manifest, a warehouse picking team is assigned to pick the items in their stated quantity. Picking is a crucial stage in the entire order fulfillment process. If the warehouse staff picks the wrong items at this stage, they’ll result in a return, meaning the process will start over afresh.
Here, the items are packaged, kitted, assembled, or labeled to prepare them for shipping. Most 3PLs accommodate custom packaging, meaning you can choose how your orders are packaged. Custom packaging is an efficient branding strategy that helps market your eCommerce brand, so it’s great to partner with a 3PL with many customization options.
If you don’t opt for custom packaging, you’ll have to make do with standard packaging. With standard packaging, your 3PL will ship customer orders in unbranded boxes and packaging materials. An expert 3PL logistic provider will use high-quality packaging materials to protect your items and still keep the dimensional weight at a minimum, so you don’t pay high shipping costs.
After the order is shipped to your customers, as we explained in the third-party distribution section, there’s a chance some customers will return the products for various reasons. The customer may have ordered the wrong product, the 3PL may have mixed up the order, or the items may have sustained damage on arrival. In other instances, customers may change their minds and cancel an order midway.
The good thing about working with a 3PL is that order returns get rerouted to their warehouses. After assessing the viability of the products, they may either restock them to your inventory or dispose of them if they’re in poor condition. This saves you the logistical pressure of managing order returns, which can be overwhelming if you’re scaling up fast or have large inventory stocks.
So far, we know that 3PL companies offer third-party warehouses and distribution services. But, is there more to 3PL companies than order fulfillment? Also, how do 3PL companies compare to 4PL companies? Let’s discuss these topics in depth.
Origin of 3PL Companies & Their Role in eCommerce Transformation
Before the Information Age, logistics providers were mainly trucking and freight companies offering storage and transportation services. There were few players in the logistics industry, and each specialized in its niche. For instance, trucking companies handled transportation, warehousing companies dealt with storage, and freight companies did shipping.
It wasn’t until the passing of the Motor Carrier Act of 1980 that more stakeholders could be involved, as the act introduced sweeping changes that deregulated the trucking industry. As a result, more trucking carriers came up and began offering value-added logistic services to remain competitive. Steadily, the 3PL industry emerged as companies sought to provide one-stop-shop solutions. Logistic industry stakeholders regard this period as the birth of 3PL.
The trend snowballed in the 1990s and 2000s as internet use gained traction and the global economy opened up. Globalization allowed many U.S. businesses to relocate their manufacturing operations overseas to emerging economies such as India and China. Thus, there was a need for dynamic solutions to manage a global supply chain.
To serve the global supply chain effectively, 3PL providers started offering integrated logistics services. This involved integrating warehousing, transportation, and order management functions on a unified technology platform. The rapid tech advancement in the 2000s played into 3PLs advantage, and the 3PL industry has been on an upward tech trend since then.
What About 1PL, 2PL, & 4PL? | The Logistics Evolution
We know 3PL is outsourcing your online store’s fulfillment process to a third-party logistics provider that receives inventory from your suppliers and delivers it to your customers. While it’s the most common logistics method, it’s not the only available process. There’s also:
- First-Party Logistics (1PL)
This is when you supply goods directly to your customers without involving any other entity. You utilize your in-house transportation capacity to deliver orders straight to your customers.
- Second-Party Logistics (2PL)
Couriers or forwarders collect orders from you and deliver them to your customers. The couriers and forwarders are referred to as the 2nd party.
- Fourth-Party Logistics (4PL)
It’s an advanced version of 3PL where you outsource your order fulfillment plus your overall supply chain to one logistic company. You enjoy all the perks of a 3PL plus additional benefits such as project management, logistics analytics, and industry-specific data.
Fifth-Party Logistics (5PL) is a much newer term within logistics circles. It involves optimizing logistic integration to include the entire supply chain. In a 5PL set-up, fulfillment services are outsourced to multiple vendors and integrated under one platform to provide a birds-eye view of the whole supply chain.
Even so, 3PL is the most effective and relevant logistics process for most e-stores, particularly startups and mid-sized stores. If you’re unsure what method to adopt for your eCommerce store, you can always default to 3PL and work your way from there.
3PLs’ Role in eCommerce Fulfillment
Every item sold online goes through the order fulfillment process before reaching the end consumer. In-house order fulfillment is tenable with a fledgling eCommerce store. But as eCommerce businesses grow and start processing bulk orders, they soon encounter fulfillment bottlenecks. It becomes impossible to process large orders using the same team and equipment at their disposal. This is where third-party logistics companies save the day.
Here’s how 3PL companies foster eCommerce:
3PLs Support Expedited Order Fulfillment
The number of online shoppers in the U.S. is projected to reach 284.6 million users by 2025. Users expect fast order delivery from your eCommerce store, otherwise, they’ll jump ship and shop from your competitors. 80% of online shoppers want same-day delivery, while 61% desire faster delivery times, between 1-3 hours of placing an order.
Unless you have a robust and flexible in-house delivery network, it’s hard to meet the increasing customer demands for expedited delivery without losing a sizable chunk of your revenue to delivery costs. Conversely, third-party logistic providers have well-established and elastic delivery networks that sustain expedited delivery without snowballing costs.
For instance, ShipNetwork operates fulfillment centers in prime locations in the West Coast, South East, Mid West, Mountain Region, North East, and South Central. This way, if you partner with ShipNetwork, you can promise expedited delivery to your customers in Chicago while operating out of Las Vegas and without owning any warehouses or delivery infrastructure.
The promise of expedited delivery can get customers swarming your eCommerce store. In contrast, your cart abandonment rate will skyrocket if you don’t offer fast delivery — more than 25% of online shoppers abandon their carts when they don’t find a same-day delivery option. Partnering with 3PLs will help you bridge this gap, so you can promise and deliver expedited order fulfillment to your customers.
3PLs Lower Order Fulfillment Costs
You would agree the more you grow your online store, the greater profits you should make. Ideally, this should be the case if your overheads remain constant or increase with a small margin. If you have an in-house fulfillment network, you must upscale your delivery network as your orders surge and buy more packaging materials and insurance.
For instance, if you get new customers outside your traditional customer base, you would have to get more delivery vans and personnel to serve them. Doing so would eat into your profits, while you would have channeled the cash towards other activities with a better return on investment like marketing and branding.
However, outsourcing your order fulfillment to a third-party logistics company will lower your fulfillment costs. How? You may ask. For starters, you’ll use less capital to pay a 3PL than to expand your existing delivery network or build one from scratch. Secondly, a 3PL will leverage economies of scale to negotiate better shipping rates because they mainly ship in bulk.
Thirdly, you’ll benefit from a 3PL inventory management system that’ll help supply chain management more effectively. With increasing orders, 3PLs' robust inventory management systems are super convenient and cost-effective. By lowering your fulfillment costs, 3PLs enable you to retain more profits from your revenues. This way, you can expand your eCommerce store product offering or invest in other revenue-generating activities.
3PLs Support High Influx of Orders in Realtime
Depending on your product line, you may have peak seasons when demand is high, and you have to process bulk orders at short notice. Or, your eCommerce business is taking off faster than you envisioned, stretching your fulfillment capacity to the limit.
These are the momentous phases every e-retailer dreams of yet dreads at the same time. It’s disheartening when you fail to keep your delivery promise because of a limited delivery capacity to the same customers you’ve spent a lot of cash and time attracting. Even if you have a well-established in-house fulfillment system, managing order influxes without snags may be impossible.
On the other hand, 3PLs are designed to handle escalating order volumes. Contract logistics companies have enough warehouse space, trained personnel, transportation, and ongoing engagements with dependable shipping carriers. This way, 3PLs can process your bulk orders promptly without experiencing logistical impasses.
3PLs Ensure Order Accuracy
The eCommerce product return rate is much higher compared to brick-and-mortar. It’s estimated that almost 30% of all items ordered online are returned, while only 8.89% of products bought in brick-and-mortar stores are returned. Damaged products and wrong orders are common reasons for product returns. A high product return rate tints your store’s reputation and erodes your bottom line.
Online shoppers want you to guarantee order accuracy and often consider it a yardstick for measuring your competency. And it isn’t a tall order to follow, seeing that order mixups are caused by avoidable human and process errors.
For instance, a fatigued warehouse attendant may pick the wrong product or the incorrect amount when packing, or your inventory system may generate the wrong order number. 3PLs go to great lengths to avoid such subtle errors. In case of an order mixup, 3PLs have a rapid mitigation strategy to correct the mistake.
Reputable 3PLs leverage robust technology such as barcode scanners and Radio Frequency Identification (RFID) to ensure order accuracy. They also hire and train adequate personnel to expertly manage the order fulfillment process. Outsourcing your fulfillment process to a 3PL helps you avoid high product return rates and the humdrum cycle of dealing with product returns.
3PLs Kindle Your Overall Customer Experience
Order fulfillment is the last leg of customer service that can make or break your entire eCommerce customer experience. You may have the best-optimized eCommerce website, excellent sales and customer service reps, and a stellar product, but if your fulfillment service is subpar, you won’t impress shoppers.
Customers may have a smooth time ordering from your online store, but if delivery takes longer than promised, they’ll forget how good your website is and probably leave a negative review. About 52% of 1000 customers surveyed in a research study cited slow delivery as the second biggest turn-off of online shopping.
Partnering with a reliable and responsive 3PL gives you a better handle on your delivery experience without dedicating most of your time and resources. When your order fulfillment is well-managed, you’ll be confident in improving other facets of your customer experience. Ultimately, you’ll deliver a wholesome customer experience from the first point of contact to the last, where you deliver your customers’ orders on time and in perfect shape.
3PLs Shield You From High Shipping Rates
Shipping rates vary from time to time depending on aspects such as distance traveled, dimensional weight, and actual weight. Other surcharges such as Bunker Surcharge (BAF), Terminal Handling Charge (THC), Peak Season Surcharge (PSS), and Winter Surcharge (WSC) add to the shipping rates.
While 3PLs cannot control what surcharges shipping carriers charge, they can negotiate some rates and get substantial discounts. For instance, a 3PL can negotiate peak season surcharges or have such seasonal surcharges dropped entirely in their contractual agreement with freight carriers. The fact that 3PLs are critical customers of shipping companies puts them in an excellent position to bargain.
Your 3PL will pass down these cost benefits so that you won’t pay exorbitant shipping rates. Negotiating or shopping for the best shipping rates on your own can tie up much of your productive time, and you would likely end up with marginal discounts.
With reasonable shipping rates all year round, you can offer free shipping to all your customers or those who purchase a certain threshold of products. With free shipping offers, you would capitalize on the psychology of free shipping and earn more loyal customers. Today, most online shoppers view free delivery as a standard perk of e-shopping.
What Is 3PL Experience & What Should You Expect as a Business Owner?
The three main elements of third-party logistics — are warehousing, inventory management, and order fulfillment. When you outsource order fulfillment to a third-party logistics company, the entire process your products go through, from receiving to shipping, can be summarized as a 3PL experience.
That said, here’s what you should expect from your 3PL partner.
A Customized 3PL Experience
A good 3PL company will take time to understand the individual needs of your eCommerce store so that they can deliver out-of-the-box 3PL services. Depending on your product’s nature or customers’ demands, you may need special handling, packaging, or shipping processes. For instance, if you sell luxury goods, you would need special packaging befitting your clients’ status.
In such a case, responsive 3PLs should go out of their way to customize their services to your clients’ liking without charging you excessively. Although customization attracts extra charges, your 3PL partner should charge you a manageable rate, so you don’t hurt your bottom line.
Substantive Oversight Control Over the Fulfillment Process
Although your third-party logistic provider does all the heavy lifting and groundwork, you should still have some control over the delivery process. In that respect, your 3PL should furnish you with episodic updates of all activities involved in order fulfillment. With the rapid advancement of order management and inventory management systems, providing real-time process updates should be easygoing for your 3PL.
Also, considering that the loss of control over the fulfillment process is commonly cited as the main drawback of the 3PL experience, a caring 3PL should do everything possible to give you some partial control over the process.
Flexibility to Attend to Supply-Chain Crises & Ideate Solutions
3PLs should be savvy and hawkeyed on the overall happenings of the logistics industry to stay ahead of supply-chain logjams. These include internal market forces like supply and demand and external forces like volatile geopolitical situations such as trade wars.
Staying on top of the variables that may affect supply chains empowers 3PLs to adjust accordingly and activate contingency measures to avoid heavy losses during crises. A considerate 3PL will advise you beforehand so supply-chain crunches don’t catch you off guard.
As your logistics partner, your 3PL should be your eyes and ears on the ground. Between running your eCommerce store and marketing your products, you may miss crucial developments in the logistics industry. But your 3PL partner should be well-informed about industry changes and leverage the information to cushion you from future losses.
Constant & Effective Communication
Effective communication is undoubtedly the backbone of any successful business relationship. In the case of your 3PL, communication breakdown would translate to substantial revenue losses, mainly when it’s about delivery hitches. Your 3PL should communicate in advance if they run into a logistical snag that may affect the fulfillment process.
With transparent communication from your 3PL, you’ll be well-positioned to convey important information to your customers promptly. It’s only courteous to inform your shoppers beforehand their order will be delayed, instead of them finding out at the last minute. Good and timely communication even when passing along negative information can soften a customer's stance, and alleviate customer churn.
Thus far, we have discussed the roles of 3PLs in eCommerce fulfillment and what you should expect from them as an e-store owner. Now, let’s explore the qualities you should consider when choosing a 3PL partner to work with.
Factors You Should Weigh When Selecting a 3PL Logistics Provider
It's not advisable to bring on board a random 3PL without first establishing important background information. Keep these critical factors in mind when comparing 3PLs:
Your 3PL’s Location vs Your Customers’ Location
With eCommerce, your store’s location is peripheral. What matters is your customers’ location. You want your 3PL to be closer to your target customer base because it’ll reduce the shipping distance. The less distance your packages travel, the fewer fulfillment costs you’ll pay. Additionally, when your 3PL is closer to your customers, it’s much easier to offer same-day delivery services.
The Value That 3PLs Should Offer Your Business
While all 3PLs offer fulfillment services, the service quality isn’t equal. Some providers will go the extra mile regarding tech investments, process improvement, or customer support to add more value to your business. Some of the value-add services you should scout for include:
- Blister packaging
- Product recycling
- Basic manufacturing and part assembly.
- Customization to leverage display advertising.
Small value-add services like product assembly make order fulfillment more efficient. For instance, if you sell electronics that need minor part assembly, you’ll want a 3PL that offers product assembly as part of their 3PL Experience. Go for the value ads that relieve pressure off your customers or optimize the overall fulfillment process.
Past Experience Managing Your Product Line
You may have heard the clever quote, “Nothing beats experience like experience.”
And it doesn’t get more apparent than in logistics. If you sell fragile products requiring special handling and packaging, you would be better off with a 3PL that processes similar products. While most 3PLs are well-equipped to handle nearly every product, it’s safer to pick one with prior experience with your product line.
A 3PL whose well acquainted with your line of business knows the demands of your products and customers and is less likely to make costly rookie mistakes. On the contrary, 3PLs who’ve never processed similar products will have a steep learning curve. This increases the chances of errors seeping in and undermining the fulfillment process.
Even if the 3PL is liable for any product damages that happen in their warehouses, it's way difficult to recover a customer's confidence after a poor first impression. To stay clear of operational risk factors, it's best to engage a 3PL with sufficient experience dealing with your product line.
If your customer base is spread around the country or you have an international reach, you’ll want a 3PL with a vast geographical reach. Your ideal 3PL should have operational warehouses and an established transport system in or near the locations of your target customers. Besides making your fulfillment costs more affordable, a 3PL with a country-wide reach is better positioned to offer superior delivery services even during peak times.
Additionally, 3PLs with a broad geographical reach come in handy when expanding your eCommerce business to new locations. As you earn more customers from different areas, you’ll not stress over fulfillment or use your energy and time searching for a new 3PL partner. That's why you should make a strategic decision from the get-go when choosing a 3PL.
Existing Partnerships With Shipping Carriers
3PLs who’ve built strong relationships with the leading shipping carriers have a greater latitude to negotiate shipping rates. They may also enjoy preferential treatment during peak times and be among the first to receive updates on shipping events. Partnering with such 3PLs will ensure smooth fulfillment service and inform you about the industry’s progress. If you stay in good books with your 3PL they may invite you to exhibitions, conferences, and other shipping events. This would give you a perfect opportunity to network and exchange ideas with like-minded stakeholders.
3PLs Will Continue to Drive eCommerce Fulfillment
Statistics indicate eCommerce sales will surpass seven trillion dollars by 2025, accounting for a quarter of total retail purchases globally. This means more Americans will continue to shop online, driving up the demand for fast and convenient third-party warehouses and distribution services.
There are more than 1.8 million eCommerce stores in the U.S., and more come up daily. For the most part, new eCommerce stores are too cash-strapped to afford a vast delivery network, and outsourcing fulfillment is their only viable option.
Even deep-pocketed online stores are choosing 3rd party logistics companies over in-house fulfillment, realizing the far-reaching benefits of outsourcing fulfillment. Thus, third-party warehousing and distribution will continue to influence eCommerce for both big and small players.
3PLs are heavily entrenched in eCommerce fulfillment, and this trend will not likely disappear in the future. A shift from 3PL would usher in 4PL and 5PL for companies that need advanced 3PL services.
Trust ShipNetwork With Your Fulfillment Needs
While there are many 3rd party logistic companies in the U.S., ShipNetwork is second to none in terms of capacity and stellar customer support. When you partner with us, you’ll benefit from our more than two decades of experience in the logistics industry. With warehouses spread in strategic locations across the country and our seasoned personnel who’ve worked in just about every industry, we’re your model fulfillment partner.
Request a quote today, and let our 3PL fulfillment experts design a fulfillment strategy that'll take your eCommerce store to the next level.