Editor's Note: This post was originally published in February 2018 and has been updated for accuracy and comprehensiveness.
A business nightmare....
That’s how Mike Brown, founder of Death Wish Coffee, describes the disastrous aftermath of his company’s appearance on Good Morning America in 2013,
“After thirty days of basking in the glow, everything fell apart,” Brown says. “We’d been number one on Amazon before they shut down our account completely. Our second biggest outlet, eBay, even dropped a lifetime ban on our company. It was a nightmare.”
The culprit? Meteoric growth.
Overwhelmed by the rapid spike in sales, Death Wish looked like an apt description of the company’s future as it flubbed logistics, shipping, and fulfillment for 10,000 orders.
High-growth brands routinely commit errors in these three mission-critical areas that cripple growth. It’s why many partner with a third-party logistics (3PL) provider. Here, we outline everything you need to select the right 3PL and avoid nightmare scenarios like Brown experienced.
Don’t have time to read the full article?
We partnered with Orderbot and Stitch Labs—two leading 3PLs— to create a checklist of 20 questions every business should ask before selecting a 3PL.
What is a 3PL?
You take the orders. Your third-party logistics provider (3PL) fulfills them. It’s that simple and if it’s seamless, customers never think twice about the handoff between received orders and its fulfillment. A 3PL is a link in the supply chain brands use to outsource part or all of a business’ distribution and fulfillment services.
The market for 3PLs providers exploded following the birth and exponential growth of ecommerce. Most Fortune 500 (86%) companies and 96% of the Fortune 100 use services like these.
3PLs receive new inventory from your manufacturers before shipping it to consumers. They can also handle retail distribution and returns. Ultimately, they deliver your orders with an out-of-box experience.
When Should You Enlist a 3PL?
Don’t wait until you’re overwhelmed by order growth. Breaking the fulfillment promises you make to customers can damage your brand. It also prevents you from being wholly focused on growing your business.
Three key questions will help you determine whether you need a 3PL:
Are you fulfilling more than 10-20 orders per day?
If so, calculate the costs of partnering with a 3PL to keep your profit margins strong. Likewise, estimate the growth potential—opportunities you’re not currently able to pursue–by outsourcing fulfillment.
Are you running out of costly inventory storage space?
Brands often forget to include storage costs in their fulfillment expense calculations. Compare your current expenses with estimates from 3PLs. Determine if bundling storage costs with outsourced fulfillment is a better value.
Is your business a coiled spring?
If you’re expecting a sustained spike in order volume—not just one-off flash sales or marketing promotions—estimate the costs and headcount necessary to meet demand yourself. Compare with the costs of outsourcing fulfillment.
Types of Third-Party Logistics Providers
Investigate four crucial capabilities when comparing 3PLs:
- Shipping and receiving
Size and specialization matter. Some 3PLs lack the native full-service capability and specialize in one or two areas. Larger established firms offer end-to-end execution and integrate seamlessly.
1. Warehouse- and distribution-based 3PLs
This is the most common type of 3PL—they store, ship, and handle returns. Innovative warehouses can help you offer Amazon Prime-like shipping in two days. If you’re expanding globally, international warehouses can help build a global supply chain.
When considering a warehouse solution, evaluate the following criteria:
You’ll require 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.
Demand a transparent pricing model—and understand how that model changes as you grow. Identify what’s included and what costs extra—ask about returns management or fees with each service. Or how extra services like “kitting” (bundling several products in special packaging) impact pricing.
Shipping carrier rates:
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.
Determine 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.
Daily cutoff time for fulfilling orders:
Identify the time at which your warehouse stops fulfilling the day’s orders. If orders are placed after the warehouse cut off time, they won’t go out until the next day. This impacts how you market fulfillment and the delivery dates consumers expect.
Delivery service levels:
Sweat the contract details before you commit. 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.
Ensure 3PLs integrate with your existing inventory management system (IMS), order management system (OMS), order processing software, and/or warehouse management solution (WMS). Synchronizing systems ensures orders are automatically picked, packed, and shipped while simultaneously updating inventory levels.
2. Transportation-based 3PLs
Specialize in the transportation between locations. For example, they might transport inventory between your factory and warehouse or you and your retail buyer. Consider the following when weighing a parcel transportation provider:
1. Origin location
2. Destination location
4. Shipping methods
5. Service levels
6. Pricing and discounts
Remember to consider import/export taxes and duties if you transport freight globally.
Traditional parcel transportation providers include DHL, FedEx, UPS, and the USPS. Same-day delivery is normally handled by local couriers like Postmates and UberRush. Transportation marketplaces like Flexport, Freightos, and GrandJunction connect buyers and sellers.
3. Financial- and information-based 3PLs
After you’ve scaled revenue to eight or nine figures, you might want to consider a financial or information based third-party logistics company. These firms provide industry-specific insight and can optimize complex global supply chains. They also provide internal controls related to freight auditing, cost accounting, and inventory management. Leading consultancies include Chicago Consulting and St Onge. Apps like ShipperHQ can also add valuable insights.
Advantages of 3PLs
3PLs will automate fulfillment for you, so you can focus on the rest. Spend time growing your business, not on moving packages.
1. Work with the pros
Shipment and fulfillment optimization are standard 3PL specialties. You can build your own team but because you’re not focused full-time on fulfillment, you’ll likely achieve substandard results versus 3PLs.
2. Manage internationalization
Expanding internationally requires a global fulfillment network. Processing international orders requires documentation and accounting for customs and duties. Outsourcing these responsibilities can make cross-border selling easier. It can also expedite delivery times, improve customer satisfaction, and reduce shipping costs.
3. Limit Overhead
Leasing warehouse space and hiring a fulfillment team increases your overhead. Maintaining fulfillment assets is costly. Working with a 3PL can minimize costs so capital can be directed toward return generating endeavors.
Disadvantages of 3PLs
The biggest risks are losing control over your inventory and trusting a third-party with your bran
1. Hidden responsibility
Your 3PL won’t interact directly with your customers. When products are late, who will your customers turn to? You. (Regardless of whether it’s your fault.)
2. Steep set-up fees
Significant upfront costs include integrating a 3PL’s software with your ecommerce store, SKU upload, and account access.
3. Out of your hands
Inventory stored in 3PL warehouses won’t be immediately accessible should you encounter quality control issues.
How to Choose Your Provider
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.
Want to save this checklist for later?
1. Do they have an enforceable non-disclosure agree (NDA)?
2. Do they have at least a two-year track record of financial stability are willing to share financial statements with you?
3. What are their hours of operations (including weekends and holidays)?
4. How many shipments from your factory do you receive on a quarterly basis?
5. How many orders do you ship each month (in the following categories: B2C, B2B, domestic, and international)?
6. What is your maximum capacity?
7. Has their capacity grown over time? Does its growth match your own history and projections?
8. How many warehouses do they operate?
9. Do their locations correlate to your high-volume areas?
10. Do they have strong customer references?
Charles Michael, Manager of Strategic Partnerships at Stitch Labs
“Many of our customers have trouble finding credible reviews. One way to circumvent this problem is learning who a provider’s customers are and reading those companies’ reviews that pertain to shipping and fulfillment.”
“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. If you feel like you're getting too good a deal, you probably haven't asked all the right questions.”
“Picking the right partner can be thorny. That’s why we wrote a blog post with more advice on finding and leveraging them here.”
11. Have they worked with companies in your industry? What vertical do they specialize in?
12. How do they compensate for delays?
13. Do they provide custom packing slips and gift messages or gift cards?
14. How do they execute next day orders?
15. How do they handle unexpected spikes in order volume?
16. Do they integrate directly with your Shopify store through an API or approved app?
17. Do they have a standalone platform you can integrate with through an EDI or via FTP file transfers?
18. What communications types are available for orders, shipping notices, returns, inventory counts, incoming purchase orders, receiving, and adjustment notifications?
19. How easy is their standalone platform to use?
Steve Izen, Co-Founder at Orderbot Software Inc.
“The big mistake everyone makes is to ask about price first. Price is one of the last things you ask. A good provider is worth its weight in gold. Reduction of errors and timely deliveries equal happy customers, and happy customers order more.”
“An extra 25 cents per order is cheap if your customers’ expectations are met, or even better exceeded.”
20. What costs are included in their quote?
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.
For example, here’s a recent quote from a San Diego based 3PL Sourcify received:
By comparison, FBA recently rolled out their own pricing approach:
The right 3PL can change your business. Even better, it can turn fulfillment nightmares into dreams come true as it did for Death Wish Coffee. “The magical moment was when I finally got my hands off the packing tape,” Brown says. “Hands off and hands-free, you’ll save time, save money, and earn the one thing that matters most—delighted customers.”
Want more on 3PL?
Craig Morris—VP of Strategy and Domestic Product Management at DHL eCommerce—joined Maia Benson—Global Commercial Head of Shipping & Fulfillment at Shopify for a live event.
Discover how to ...
- Select the right third-party solution
- Manage inventory and multiple locations
- Optimize shipping to give your company a competitive advantage
About the Authors
He has brought dozens of products to life and continues to foster long-term relationships with overseas and domestic manufacturers after living in China.
Maia Benson is the Shopify Global Commercial Head of Shipping & Fulfillment.
A passionate entrepreneur, she has spent over decade building products and experiences for and with other entrepreneurs and businesses to help them grow — because when they grow, we all grow. With her husband and young sons, Maia is also hacking teleportation, so orders can just get delivered.