Growth may come with opportunity, but it also invariably comes with growing pains.
If you’re in the process of scaling your ecommerce business, you probably already know this to be true, particularly when it comes to logistics, shipping, and fulfillment. It’s difficult to focus on marketing, product development and relationship building when you’re devoting all your time to negotiating shipping contracts or putting out fires.
As the ecommerce market has grown exponentially, so too has the 3PL (third-party logistics) market, which will reach $1.59 trillion by 2028.
There’s a reason the services of 3PLs are in high demand within ecommerce, no matter the industry. These shipping and fulfillment experts house your inventory in their warehouses, and pick, pack, and ship products to your customers.
If you’re ready to partner with a 3PL for the first time or considering multiple 3PL partners to diversify and mitigate risk, here’s what you need to know to find and select the right vendor.
Table of Contents
- What is 3PL?
- How does 3PL work?
- 3PL myths and misconceptions
- Why do companies choose to work with a 3PL provider?
- Benefits of 3PL
- Disadvantages of 3PL
- What are the types of 3PL companies?
- What are the services a 3PL provides?
- How to choose a 3PL provider
- 3PL FAQ
What is third party logistics (3PL) ?
Third-party logistics, or 3PL, is the practice of outsourcing logistics and supply chain management functions to external service providers. These providers offer a range of services, including warehousing, transportation, inventory management, and order fulfillment, allowing businesses to streamline operations, reduce costs, and focus on their core competencies.
Partnering with a 3PL ultimately allows a merchant to focus on other aspects of their business.
Instead of managing your own warehouses and doing distribution in-house, you can store your stock in a 3PL vendor’s warehouse, with the stock shipped directly from your manufacturers. When a customer places an order online, items are then automatically shipped from the 3PL’s warehouse. Because the process is simple and seamless with a 3PL, customers never think twice about the handoff between received orders and fulfillment. That gives ecommerce merchants the capacity to do what they do best: develop, market, and sell products.
For many successful ecommerce businesses, 3PLs have been—and will continue to be—the secret ingredient that have allowed them to weather challenges like a supply chain crisis. Unfortunately, acts of political instability, natural disasters, human resources shortages, and regulatory challenges aren’t an exception to the rule. Supply chain disruptions happen with increasing severity and frequency with experts reporting significant disruptions occur every 3.7 years.
How does 3PL work?
While the 3PL fulfillment process can vary depending on the provider and services you’ve agreed on, the typical process looks like this:
- The 3PL receives your inventory at its warehouse and organizes each SKU.
- When an order is placed on your ecommerce site, it’s either manually forwarded to the 3PL or automatically pushed (if its software integrates with your online store).
- A warehouse team member gets a picking list to collect the items that have been ordered.
- The items are packed in boxes with the receipt and order details.
- The 3PL prints the shipping label or uses one of its shipping carrier partners.
- The shipping carrier collects the package from your 3PL’s distribution center and delivers it to your customer.
- Tracking information is uploaded to the 3PL system and synced with your order management software.
So, what’s the difference between a freight forwarder, 2PL, 3PL, and 4PL?
- 2PL: Couriers collect parcels from your warehouse and deliver them to an end customer.
- 3PL: Inventory is stored, picked, packed, and shipped by a third-party company.
- 4PL: Providers manage the fulfillment partners (3PLs) you’re working with. Their team negotiates the contract with a partner, resolves any issues, and communicates between your internal team and the distributor.
- Freight brokers: Act as intermediaries between brands and drivers. Freight forwarders are different from 3PLs in that they’re specifically dedicated to matching up brands with drivers or carriers.
3PL myths and misconceptions
Plenty of myths and misconceptions exist about working with 3PLs. Here, we’ll break down three of the most common ones.
“When you hand things over to a 3PL, you lose control.”
It’s true that inventory stored in a 3PL’s warehouse won’t be immediately accessible to you, which may feel disconcerting at first.
But working with a 3PL actually allows you to regain control. When the pressure of shipping and fulfillment is taken off your plate and handed over to the experts, mistakes are less likely to occur. A good 3PL should also be able to provide reports and analytics, which lets you manage the process remotely and help you make better business decisions in the future.
“3PLs are only for enterprise-sized businesses.”
On the contrary. If you have plans to scale or grow your business, a 3PL might be for you. Don’t assume that the cost of third-party warehousing and distribution is out of your price range—as we explain below, it can actually reduce your overhead costs and free up capital.
“3PLs have too many hidden fees.”
It’s true that pricing for 3PLs can be complex, with additional fees that include inbound costs, storage costs, outbound costs, customs and duties, and even custom packaging.
But these fees aren’t hidden—they’re clearly laid out, provided you know the right questions to ask before signing a contract with a 3PL.
Why do companies choose to work with a 3PL provider?
If you’ve never worked with a 3PL before, it might sound like an expensive solution to an albeit annoying workflow. After all, picking, packing, and shipping orders from your warehouse or brick-and-mortar store can be a cheaper option than hiring third-party help.
However, it’s sensible to choose a 3PL before you’re overwhelmed by order growth. Not just a solution for enterprise-sized brands, 3PLs are designed for merchants of any size with intentions to scale.
Suppose you have a flash sale or one of your products goes viral? It’s not always feasible (or cost effective) to handle that surge of orders in-house. Breaking fulfillment promises to customers can cause major damage to your brand, particularly in an era when 62% of customers only want to wait up to 3 days for a package.
Three key questions will help you determine whether it’s time to enlist the services of a 3PL:
Are you fulfilling more than 10 to 20 orders per day?
If that’s where you’re at, calculate the costs of partnering with a 3PL to keep your profit margins strong. Outsourcing packing, picking, and shipping can save time on manual labor, especially if you’re partnering with a 3PL that uses automation.
Likewise, estimate the growth potential—opportunities you’re not currently able to pursue—by outsourcing fulfillment to a 3PL.
Are you running out of inventory storage space?
Merchants often forget to include storage costs in their fulfillment expense calculations.
When deciding whether a 3PL is right for your retail business, compare your current warehouse expenses with estimates from 3PLs. Sometimes, bundling storage costs with outsourced fulfillment gives you better value for your money.
Can your existing infrastructure handle a surge in demand?
How much would a sustained spike in order volume (outside of one-off flash sales or marketing promotions) cost your business?
If you need to hire rapidly to increase in-house capacity or invest in automation yourself, it might be more cost effective to outsource fulfillment to a 3PL.
Benefits of 3PLs
- Test and launch in new markets with ease
- Free up capital that’s tied up in warehouse space
- Reduce your overhead costs
- Insulate your business against supply chain disruptions
You’ll be outsourcing your logistics to shipping and fulfillment experts
Do what you do best—and allow others to do what they do best. 3PLs are specialists in logistics. By allowing them to manage your shipping and fulfillment, you’ll have more time to invest in big-picture strategy.
That was what LA-based apparel brand CISE experienced when it engaged the services of the Shopify Fulfillment Network (SFN).
“We had so many orders, we would say, ‘Processing time can vary between five to nine days,’ or ‘It'll be between 96 to 200 plus hours,’” says CISE Founder Blake Van Putten.
"When we got onboarded with SFN, we had, like, 1,000 pre-orders backlogged. SFN pushed out the orders in literally a day and a half.”
Relying on SFN also gave Blake time to experiment with innovative concepts and ideas, like the construction of an entire mobile storefront housed in a 27-foot trailer. After entering and deciding what to buy, customers place their order on-site, which is then shipped to their doorstep by SFN.
Test and launch in new markets with ease
Expanding internationally requires a global fulfillment network, documentation, and accounting for customers and duties. If you want to try to sell your product overseas but aren’t prepared to navigate the legalities involved or invest in infrastructure abroad, working with a 3PL can be a good way to test the waters.
For example, if you’re a US-based merchant and want to test your products in the UK, it makes sense to store a small batch of inventory in the country using a 3PL. “This removes the complexity of learning about local real estate and labor laws before you know if the market is even worth it,” says Stephen.
Outsourcing these responsibilities can also expedite delivery times, improve customer satisfaction, and reduce shipping costs—three huge wins bound to have positive impacts on your bottom line.
Free up capital that’s tied up in warehouse spaces
If you’re investing in your own warehouses and distribution centers, costs aren’t set to decrease any time soon. Warehousing rents are predicted to increase by 10% over the next 12 months and a shortfall of 140 million square footage of warehouse space expected by 2024 is bound to bump up the price of storage facilities.
In contrast, 3PLs have strongholds over their storage premises, and higher order values from their retail partners gives them grounds to keep their warehouse space. As soon as you let your own warehouse space go, you’ll have more capital to direct toward return-generating endeavors.
Reduce your overhead costs
Relying on a 3PL means you get the benefits of skilled warehouse staff, as well as warehouse automation technology, without investing cash into developing your own. Robotic machinery to pick and pack orders, for example, means human staff don’t need to be on-hand to fulfill orders. The machinery works 24/7, so retailers can benefit from later order cut-offs for immediate shipping. Ocado Retail even overhauled its entire warehouse to be completely automated.
The other area of potential cost savings is carrier rates. Since 3PLs are able to negotiate preferred shipping rates, the cost of shipping is typically lower. And those savings, in turn, can be passed on to consumers by offering them free shipping.
Insulate your business against supply chain disruptions
With an existing network of fulfillment centers around the world and prenegotiated carrier contracts, 3PLs may be less vulnerable to global shipping and fulfillment disruptions. While working with one may not eliminate shipping surcharges altogether, it will insulate you from them and diversify your risk, as 3PLs typically have relationships with multiple carriers.
Increasingly, 3PLs are also investing in their own delivery vehicles, which can support shorter distances and more frequent deliveries, and avoid clogs in the entire supply chain.
For example, Shopify merchant Manly Bands—which sells wedding rings for men—has started to mitigate the impact of delivery delays by working with 3PLs to fulfill orders.
“By doing this, we have found that we have more control over our shipping commitments,” says Eric Farlow, Manly Band’s COO.
Disadvantages of 3PL
- Upfront investment
- Varied hours or workflow
There can be significant upfront costs when setting up with a 3PL provider, like integrating their software with your ecommerce store, SKU upload, and account access. Costs will normally be broken into the following categories:
- Transportation costs: Shipping products from your factory to your warehouse.
- Receiving costs: Offloading products from your transportation provider to their warehouse.
- Warehousing fees: Usually a monthly fee based on the amount of space used and charged per pallet.
- Pick-and-pack fees: Picking units from shelves or bins and packing them for shipment and discounted for higher volumes.
- Shipping costs: Delivery of product to your end customer.
- Account set-up fees: Account creation and software integration.
- Minimums: Minimum monthly spend is generally required.
Varied hours or workflow
With “fast” and “free” being the two principles dominating the shipping and fulfillment landscape, when there’s a backlog and you just want to get orders out the door, it can be tempting to head down to the warehouse and pack orders yourself. But if you’re working with a 3PL, that won’t be possible. 3PLs maintain their own hours of operation and workflow, which can have a flow-on effect to your business.
What are the types of 3PL companies?
There are several types of 3PLs:
Do you have several warehouses dotted all over the place? Selling cross-border has gotten much trickier to manage logistically. Plus, the supply chain crisis has made clear the importance of having real-time, multi-location inventory visibility.
Not only is knowing how much stock you have (and where) a key component of improving operational efficiency, so too is shipping inventory from the location closest to the customer, which cuts shipping costs. Full-service 3PLs help ecommerce brands become more efficient during and after crises.
Full logistics service providers, like the Shopify Fulfillment Network, offer end-to-end solutions that get orders to your customers easily and quickly. With a vast network of strategically located fulfillment centers nationwide, full-service 3PLs like ours make sure you have the right merchandise at the right location so orders ship faster and cheaper.
Alongside faster and cheaper shipping, full-service 3PLs offer:
- Inventory intelligence. Shopify recommends where inventory should be stored to be close to customers.
- Control over fulfillment experience. Decide how fast orders are delivered and stand out with marketing inserts. Packaging is included with the pick rate and you can supply your own branded packaging.
- Easy integration. No technical integration required. Shopify will help set up the Shopify Fulfillment app for you. Most 3PLs offer extensive integrations and ongoing maintenance.
- Same-day fulfillment. Orders received by 4 p.m. ET are shipped out the same day.
World-class fulfillment that was once reserved for only the largest companies in the world is now accessible and affordable for every high-volume brand, thanks to SFN.
Warehouses that store, ship, and handle returns are the most common type of 3PL, with many offering super-fast two-day shipping options. And, if you’re expanding globally, international warehouses can help build a global supply chain. Knowing how to refine product fulfillment workflows is a skill that comes with experience—one that retailers can lend from 3PL warehouses.
When choosing a 3PL warehouse, determine how many distribution centers you’ll have access to. You’ll need a larger network of warehouses if you promise customers expedited delivery. Shipping speed hinges on warehouses being geographically close to your customers. You’ll also need to accurately forecast inventory levels to appropriately stock warehouses in your network.
It’s also important to find out the time at which your warehouse stops fulfilling the day’s orders. If orders are placed after the warehouse cut-off time of 3 p.m., for example, they won’t go out until the next day. This impacts how you market fulfillment and the delivery dates consumers expect. (Remember: just one later-than-expected delivery and you risk losing those customers.)
Transportation-based 3PLs shuttle goods between locations. For example, they might transport inventory between your factory and warehouse. They could also transfer stock between your store and a retail buyer.
There are three main types of transportation-based 3PLs:
- Traditional parcel transportation providers such as DHL, FedEx, UPS, and the USPS
- Same-day delivery by local couriers like Postmates and UberRush
- Transportation marketplaces like Flexport, Freightos, and GrandJunction
When deciding on a 3PL parcel transportation provider, explain your origin and destination locations and the timeframes you expect for stock to move between.
Ask about the shipping methods they use, the service levels, and any pricing/discount information they’ll give once your inventory increases. If you transport freight globally, some include brokerage fees; others include import/export taxes and duties in their costs.
Financial- and information-based 3PLs
Many retailers, due to the pandemic, are now focused on unit economics. It’s a model that requires visibility into key warehouse processes like pick-to-pack to better understand and calculate the costs associated with each unit or item sold.
Retailers need to have the financial information associated with fulfillment at their fingertips. It’s the only way to make rapid and accurate decisions during crises and thereafter.
After you’ve scaled revenue to eight or nine figures, you might want to consider a financial- or information-based 3PL company. Consulting firms—like Chicago Consulting and St. Onge—provide industry-specific insight and can take the headache out of complex global supply-chain management. They also give internal controls on tasks like freight auditing, cost accounting, and inventory management to ensure consistency.
What are the services a 3PL provides?
Here are the most important services to look for when engaging the services of a 3PL.
Warehouse and inventory management
A 3PL should provide inventory warehousing, as well as inventory management solutions and software to manage it.
Based on where most of your customers reside, it’s helpful to know where a 3PL’s warehouses are located. This can keep your merchandise within shipping zones, allowing you to provide same-day or two-day shipping.
A good 3PL will also relocate your inventory based on where orders are coming from. It will ship goods closer to your buyers to ensure they’re always available in the closest warehouse possible.
Order management and fulfillment
A 3PL should have a robust order management system (OMS) to track stock levels across warehouses and to get the products into your customers’ hands, fast. This will be integrated with your own software, so that you’re able to maintain management of your shipping and fulfillment.
3PLs either work with established carriers or have their own fleet for shipping and fulfilling orders.
Most are adept at fulfilling shipping promises (such as two-day shipping), which has been proven to drive conversions at checkout.
A 3PL will send order confirmation to customers, as well as confirmation of shipping and delivery.
Reverse logistics and returns
It’s not enough to simply ship orders out. A full-service 3PL will also manage your return and exchange processes, as well as the customer service that goes along with that.
Finally, if you’re scaling internationally, choose a 3PL with locations in multiple countries, which can help to reduce cross-border shipping and tax complexities.
How to choose a 3PL provider
Selecting a third-party logistics service is likely one of the biggest decisions you’ll make as you scale your ecommerce business. You’re putting trust in the provider you select to take care of your brand and deliver the customer experience you envision.
The right partner can make or break your company’s logistics, customer service, and repeat purchase rate. Trusting someone with sales, inventory, and other sensitive information is a significant risk.
Choosing the right partner is a balance between quantitative data and relationship building.
What to look for in a 3PL
We asked a merchant success lead at Shopify Fulfillment Network, what they would recommend when it comes to choosing a 3PL. Their top piece of advice? Don’t choose a 3PL based on where you are today, but rather where your business is going to be one or three years from now.
“Changing fulfillment providers can be strategically difficult and disruptive to your business, even when executed via the smoothest transition plan,” they said.
“It's best to pick a long-term partner and to anchor yourself to the one to three things that elevated that partner amongst the rest. Commerce and fulfillment will evolve over time and by selecting a partner for the long term and establishing trust, you can benefit from their insight and suggestions into how to evolve your business along with the industry’s changing landscape.”
Likewise, choose a 3PL that is also looking for a long-term partnership, such as one that’s able to advise you on how to maximize sales, reduce costs and optimize your supply chain.
How to get the best out of a 3PL provider
Evaluate their logistics operations
The advantage of using a 3PL is you can lean into a partner’s existing setup to store, pack, pick, and ship orders. Evaluate how efficient that process is and whether they’re equipped to handle a rise in inventory as your own business scales.
Ask the following questions:
- How many warehouses do you operate?
- Do you have locations in my high-volume areas?
- Have you worked with companies in our industry? What vertical do you specialize in?
- How many orders do you ship each month (in the following categories: B2C, B2B, domestic, and international)?
- What is your maximum capacity?
- Has your capacity grown over time?
- Do you handle reverse logistics?
- How do you execute next-day orders?
- How do you handle unexpected spikes in order volume?
Learn more: What Is Logistics Management?
Ask about the costs
There are steep set-up fees when partnering with a new 3PL, but as time goes on, you’ll likely
save money on fewer overheads and labor costs. Calculate the potential savings by asking for a list of costs—and what that quote includes—before deciding on a partner.
- What are your hours of operations (including weekends and holidays)?
- How many shipments from your factory do you receive on a quarterly basis?
- Do you provide custom packing slips and gift messages or gift cards?
“Look out for the quoted price and understand that it often won’t include value add-ons like marketing inserts, gift wrapping, and special packaging,” says Charles Michael, manager of strategic partnerships at Stitch Labs. “If you feel like you’re getting too good a deal, you probably haven’t asked all the right questions.”
You might have better shipping rates than the warehouse you’re evaluating. If so, ensure your warehouse partner will accept them. Conversely, larger warehouse networks can often use their heft to negotiate deeper discounts than lone businesses.
Set reporting and communication expectations
When working with a new 3PL, it’s crucial things switch over seamlessly. Monitor your customer support channels and social media for shipping-related complaints from customers. Also inquire about whether your 3PL options offer some form of reporting to help you keep track of things like timeliness of deliveries, order and delivery accuracy, and shipping-related damages.
Set expectations for that communication. How do they communicate about the following:
- New orders
- Shipping notices
- Inventory counts
- Incoming purchase orders
- Receiving stock
- Adjustment notifications
Determine delivery service levels
Sweat the contract details before you commit to working with a new 3PL provider. Asking the following questions upfront prevents you from entering a contract with an untrustworthy logistics provider:
- How do they compensate for delays?
- Do they have an enforceable non-disclosure agreement?
- Do they have strong customer references?
- Do they have at least a two-year track record of financial stability, and are they willing to share financial statements with you?
Decide whether you prefer a refund or credit if shipments aren’t fulfilled on time. Be sure you know whether you’ll be credited for broken or lost items—understand the service-level guarantees offered to gauge your liabilities.
Also, think about whether you want packages fully insured while in storage and during delivery and return. Be precise when negotiating. For instance, you may only want to insure items up to $100 or beyond. Understand if what you’re getting is insurance or simply a carrier-included liability.
Check for integrations
Got your shortlist of 3PL providers? The final measure is to confirm the 3PL integrates with your existing inventory management system, order management system, order processing software, and/or warehouse management solution.
Synchronizing systems ensure orders are automatically fulfilled and shipped while simultaneously updating inventory levels.
- How easy is your standalone platform to use?
- Do you integrate directly with your Shopify store through an API or an approved app?
- Do you have a standalone platform you can integrate with through an EDI or via FTP file transfers?
Some 3PLs integrate with Shopify directly to make changes on your behalf—like marking orders as fulfilled, processing refunds, or tracking stock. Your order management system becomes the single source of truth, regardless of whether you’re posting orders from your own warehouses or using a 3PL.
Looking for more advice on how to find the right 3PL partner? Download The Third-Party Logistics Checklist, which includes 45 key questions to ask prospective partners, along with advice from experts in the field.
Top third-party logistics providers in key locations
- C.H. Robinson
- XPO Logistics
- US Xpress
- Ceva Logistics
- DHL International
- Kuehne + Nagel
- DB Schenker
- A.P. Moller-Maersk
- Bollore Logistics
- C.H. Robinson Worldwide
- FedEx Corporation
- Kintetsu World Express
- Nippon Express
- Penske Logistics
- SCI Group
- DB Schenker
- eStore Logistics
- Toll Group
The Shopify Fulfillment Network
The Shopify Fulfillment Network can pick, pack and ship orders for you, so you can spend more time managing your business. Shopify will deliver 98% of your orders on time, in three days or less. Merchants also get the Shop Promise badge on their checkout page, which shows customers exactly when they’ll get their package.
With Shopify Fulfillment Network, you get:
- Faster delivery: Shopify distributes your products to fulfillment centers across the US. When customers place an order, Shopify will pick, pack, and ship the order.
- Simple pricing: Get zero upfront costs and predictable pricing that covers inventory management and delivery, so you can scale up and earn more.
- Smooth returns: Provide customers reliable, easy returns. Your fulfillment team will inspect and restock products, and give customers updates.
- Maximize growth. Merchants using the Shopify Fulfillment Network see up to a 50% increase in orders after just one month.
Unlike other 3PLs—which often have complex pricing plans—SFN’s pricing is all inclusive. There’s just one fee for all your storage, fulfillment and returns, and you don’t pay for any storage on fees for items sold within six months.
For merchants like The Dad Hoodie, relying on SFN for shipping and fulfillment has made a big difference to its bottom line.
“Knowing that we have a premium partner that gets orders out of the warehouse quickly and at a cost we could not achieve elsewhere [means] we’re able to focus on growing our business,” says Taylor Llewellyn, founder of The Dad Hoodie. Since enlisting the services of SFN, The Dad Hoodie’s average shipping cost has been reduced by 40%.
“As a business owner, fulfillment is only something you think about when it isn’t working well, and luckily, I never have to think about it," says Taylor.
The Shopify Fulfillment Network can help high-volume businesses fulfill quickly and affordably.
Shopify’s third-party logistics (3PL) partners
Shopify has some of the best 3PL partners in the logistics industry with seamless integration into your Shopify store. These include:
Partnering with a 3PL can change your business for the better
Whether you’re partnering with a 3PL for the first time or decreasing the reliance you already have on one, the process is tough. Ecommerce brands can’t control the destiny of each of their business partners. But you can control the due diligence you conduct before selecting a 3PL.
Be thorough in your appraisal of potential partners. The right third-party logistics companies can change your business for the better—not just by taking the headache out of storing and delivering orders, but in the speedy delivery times you promise to customers.
The Shopify Fulfillment Network can help high-volume businesses fulfill quickly and affordably.
Learn more about the Shopify Shipping and Fulfillment solution.
Illustration by Jennifer Tapias Derch
What is a 3PL relationship?
A 3PL relationship is a relationship between a brand and a separate company that fulfills (prepares and delivers) customer orders on their behalf. Some 3PL relationships are embedded, meaning the 3PL partners with the brand and their supply chain more closely to avoid failures.
What industries use 3PL the most?
DHL is the leading third party logistics provider in the world, and the top industries they serve include retail, technology, auto, manufacturing, energy, healthcare, chemicals, and the public sector.
What is the difference between a 3PL and a broker?
A 3PL provides a variety of transportation and logistics services to brands, while freight brokers act as an intermediary between brands and drivers. Freight brokers are different from 3PLs in that they’re specifically dedicated to matching up brands with drivers or carriers.
How do you manage a 3PL?
To manage a 3PL provider, start by setting clear expectations. Then, establish a single point of contact who has experience with your supply chain and has the authority to make decisions. Next, set up recurring reviews where you can evaluate whether your 3PL is meeting expectations.
How can I monitor my 3PL performance?
Most 3PLs provide some form of reporting to help you keep track of things like timeliness of deliveries, order and delivery accuracy, and shipping-related damages. You can also monitor your customer support channels and social media for shipping-related complaints from customers.
What is the reason for using 3PL services?
Brands use 3PL services when they can no longer handle storing, preparing, and delivering orders on their own. If you’re finding that your business has grown to the point that you no longer have the bandwidth to handle fulfillment, it may be time to hire a 3PL.