Third Party Logistics (3PL): Everything You Need to Know About the One Thing that Can Devour Your Success

Third Party Logistics (3PL): Everything You Need to Know About the One Thing that Can Devour Your Success

This is a special guest post by Nathan Resnick, CEO of Sourcify, and Maia Benson, Shopify Global GM of Shipping & Fulfillment

Overwhelmed doesn’t come close.

Nightmare … that’s the word Mike Brown — founder of the multimillion dollar Death Wish Coffee and EY’s recent recipient for 2017’s Entrepreneur of the Year — used to describe the aftermath of their appearance on Good Morning America four years ago:

“After thirty days of basking in the glow, everything fell apart. We’d been number one on Amazon; then they shut down our account completely. Our second biggest outlet, eBay, even dropped a lifetime ban on our company.”

“It was a nightmare.”

Mike Brown, Founder Death Wish Coffee

Meteoric growth is supposed to be a dream. So, what had happened?

Turns out, it was the same thing that’d happened to Mika Casey from MMA Warehouse right before he crashed his car into the side of a house and the same thing that almost killed RIPT Apparel before they had a chance to get off the ground.

Ironically, it’s also the same thing that most growing merchants overlook …

Fulfillment and logistics

A spark from a viral campaign floods you with orders. A media appearance sends droves of visitors to your site. A new product takes fire and — if you can’t keep up with demand — negative reviews, broken trust, and resentful customers follow immediately.

Effective fulfillment is one part of a business that you can’t live without. But before you decide to try and tackle fulfillment yourself, here’s everything you need to know about the history, types, advantages, disadvantages, and — of course — selecting a third party logistics (3PL) partner.

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What is a Third Party Logistics Partner (3PL)?

Before the early 1970s, transportation contracts had only featured two parties, the shipper — think big retailers, manufacturers or wholesalers — and the shipping carriers. As more “sellers” came to market, who didn’t have logistics as their core competency, third party intermediaries, known as third party logistics providers, rose to prominence.

3PL services are almost always integrated or packaged together by the provider. Legislation passed in 2008 declares that the legal definition of a 3PL is:

“A person who solely receives, holds, or otherwise transports a consumer product in the ordinary course of business but who does not take title to the product.”

Although they do not hold ownership of the inventory, they are legally bound and responsible for performing the requested fulfillment activities of your ecommerce company.

Over the last decade, with the democratization of the internet empowering more retail both on and offline, the market for third party logistic providers has exploded. An estimated 86% of Fortune 500 companies and 96% of the current Fortune 100 use 3PL services.

A good ecommerce-focused 3PL will streamline everything fulfillment and logistics based for your business.

They are your outsourced arm when it comes to receiving new inventory from your manufacturers and shipping it out to the end consumer. Some also handle retail distribution and returns. Ultimately, they make sure your orders get delivered to your consumer buyer with the out-of-box experience you desire.

When Should You Call a 3PL?

Most merchants call a third party logistics partner too late after the time they’re spending fulfilling orders has gotten in the way of their ability to focus on growing their business. Not to mention upsetting customers.

Hindsight is always 20/20 but here are a few metrics to pay attention to that will ensure you get in front of your fulfillment needs:

Are you fulfilling more than 10-20 orders per day?

That’s the volume at which you should start to consider a third party fulfillment partner. As long as you have enough margin in your products to support a slight premium to your current shipping expense, an innovative 3PL can add value to your business by taking this work off your plate.

Are you running out of storage for your inventory or is your storage expense high?

Many merchants don’t consider storage as a part of their fulfillment expense. If you are spending money on renting a storage facility, a garage, or seeing increases in your fees, get a quote for a third party logistics provider and compare. You might be surprised to learn your storage fee could be used better supporting your fulfillment expenses.

Is your business growing or about to spike? Do you run flash sales?

If you know you are entering a period when your order volume will spike (e.g., seasonality, running a big marketing promotion, etc.), call a 3PL at least four months in advance.

Types of Third Party Logistic Providers

When we examine potential third party logistics partners at Sourcify, we make sure they can cover the following activities:

  • Transportation or freight management
  • Warehousing
  • Distribution management
  • Shipping and receiving

Most third party logistic relationships are long term, as they add value by becoming your company’s fulfillment partner that creates a seamless shipping experience for your end customer.

These service providers usually focus on certain aspects of the logistics or supply chain process, yet the bigger firms may handle all of it while integrating seamlessly.

1. Transportation Based

This type of 3PL specializes in the actual transport between one location and another — e.g., shipping. For example, they could handle the inventory shipment between your factory and your warehouse or between you and your consumer or buyer.

Transportation is a must for any ecommerce company. Without a transportation provider, you will have no way of getting your products from your factory to your warehouse or from a warehouse to a consumer.

Deciding on a parcel transportation provider all depends on:

  1. The origin location of the shipment
  2. The destination location of the shipment (how far it has to travel and whether it is across a country border)
  3. The time in which it needs to be delivered (same day, next day, two days or five days)
  4. The shipping method you are going to use and where your products will end up
  5. The pricing discounts you can negotiate and services levels you can get guaranteed

For freight shipments, costs of this type of 3PL are centered on the transportation fee to import your product. They may also help handle import taxes involved with your shipment.

Traditional 3PLs for parcel transportation include FedEx, UPS and the USPS. UPS and FedEx and DHL are leading freight providers. And the growing same-day delivery need is be fulfilled by local couriers and companies like Postmates and UberRush. Additionally, new marketplaces for transportation exist like Flexport, Freightos, and GrandJunction.

2. Warehouse and Distribution Based

This is the most common type of 3PL, as they will handle the storage of your inventory, shipment to your end customers, and returns. Warehouse 3PLs come in many shapes and sizes, and the market is active with disruptors and innovation thanks to Amazon firmly establishing a two day, same day and next day delivery expectations.

Further on we’ll walk through a comprehensive approach to picking the right 3PL. However, if you’re considering a warehouse solution, here are the key criteria to evaluate:

Warehouse network:

What type of delivery time frame do your consumers want? The quicker they expect their orders, the more warehouse locations you will need in the network. A warehouse has to be geographically located close to the end consumer in order for it to be delivered faster than two days. You’ll also need enough inventory to distribute among the warehouses in network.

Pricing:

Do you have a pricing model from your warehouse provider that gives you transparency and predictability? Do you have a pricing model that changes as you grow? Identify all fees upfront and ask about returns management and any extra services you might require like “kitting” (putting several products in special packaging) or destruction.

Shipping carrier rates:

Do you want to use your own pre-negotiated carrier rates? If you have negotiated shipping rates that are better than a warehouse could get, it is important to know if the warehouse partner will accept your shipping rates. Sometimes warehouses will be able to negotiate better rates than individual businesses as they aggregate their volume for better discounts.

Insurance:

Do you want your packages fully insured both during delivery and return as well as while sitting in the warehouse? Again, get specific with the number. Up to $100 or beyond? Is it insurance or simply the carrier-included liability?

Daily cutoff time for fulfilling orders:

What time does your warehouse stop fulfilling that day's orders? If orders are placed after the warehouse cut off time, then they won’t go out until the next day thus impacting the delivery date the consumer expects.

Delivery service levels:

Do you want a refund or credit if shipments don’t get fulfilled on time? Does your warehouse credit you for every broken or lost item? Ask for the service-level guarantees your warehouse partner offers so you can understand how much liability you might have for your goods.

    Warehouses will be in charge of keep track of your inventory, so it’s vital to ensure your they have a strong inventory management tool that integrates directly with your store. When an order comes in, the 3PL’s software will automatically know what product needs to be shipped, where to ship it, and will update inventory levels. However, the buck stops with you … especially in your customer’s eyes.

    There are major companies integrated with Shopify like Shipwire, Rakutan and FBA that handle warehousing and distribution on a major scale. You can also find a regional provider like Quiet Logistics or local provider like Fulex, a fulfillment company I worked with in San Diego when running my ecommerce store.

    3. Financial and Information Based

    Most ecommerce companies won’t work with financial or information based third party logistic companies until they hit the eight or nine figure mark in revenue. With that said, they are important to mention, as they provide valuable insight towards the overall industry and current trends.

    The services they provide include optimizing your entire logistics network, owned and via third parties, freight auditing, cost accounting and control, and tools for monitoring, booking, tracking, tracing, and managing inventory. Leading consultancies include Chicago Consulting and St Onge. Apps like ShipperHQ can also add valuable insights.

    Advantages of 3PLs

    The biggest advantage of working with a 3PL is that it will save you time while automating your fulfillment process. Instead of having to worry and hire staff to handle the shipment of your products, you’ll have a partner whose sole focus is ensuring your products end up in your customer’s hands.

    1. Work With the Pros

    A third party logistics (3PL) company’s main focus is to optimize how a company handles shipments. They are the experts when it comes to fulfillment, warehousing, and shipping. Though you could set up your own team, it usually isn’t worth it as you will rarely become as effective as a 3PL.

    2. Manage International Business Easily

    One of the bottlenecks of growing internationally is dealing with international logistics. Few people in the world want to take care of documentation, customs, duties, and other issues that may occur when dealing with overseas sales. Hiring a 3PL offsets that responsibility as your logistics partner can not only make selling in country easier (merchant of record, etc) but also expedite time to delivery and lower your shipping costs. Again, the closer your inventory is to the end customer, the lower the cost to ship it to them.

    3. Limit Overhead

    One of the hardest parts of setting up your own warehouse lies in the overhead needed to lease space and hire a fulfillment team. Maintaining all this is costly and will eat into your cash flow. Working with a 3PL allows you to minimize costs when scaling your fulfillment process.

    Disadvantages of 3PLs

    Though there are plenty of advantages to working with a 3PL, there are also some drawbacks to consider. These drawbacks center around the fact that your inventory is now controlled by a third party.

    1. Hidden responsibility

    When a customer’s products are late, who will they be asking? You. Your 3PL is not customer facing and won’t be interacting directly with your end customers. If delays occur, your customers won’t be looking at your 3PL for a resolution.

    2. Steep set-up fees

    Almost all third party logistic companies will have upfront costs. This will usually cover the integration of their software to your ecommerce store, SKU upload, and account access. This set-up fee can make a 3PL seem like a large investment in the short term.

    3. Out of your hands

    There are third party logistic companies around the world, and you may not end up working with one locally. This means your products won’t always be immediately accessible. If you run into quality control issues with your factory, this could be an issue. Your main goal should be to keep products in a warehouse location that cuts shipping costs and delivery times.

    These considerations are why it’s so vital to have a clear game plan when you move into …

    How to Choose Your 3PL Partner

    Choosing the right 3PL partner will make or break your company’s logistics. A 3PL is part of your operations and without a smooth integration, your business will go down faster than the Titanic. Imagine the nightmare that would occur if you had to handle every order manually or worse, had to address the thousands of customer complaints that could stem from a delay.

    Trusting someone with data regarding your sales, inventory, costs, and other sensitive information is risky. That’s why choosing the right partner is a balance between quantitative data and the actual relationship you have with the people at this 3PL.

    We worked with the teams at Orderbot and Stitch Labs to formulate the following questions every merchant should ask both themselves as well as a prospective partner:

    Basics

    1. Do you have an enforceable non-disclosure agree (NDA)?

    2. Does the 3PL have at least a two-year track record of financial stability they’re willing to share with you?

    3. What are their hours of operations (including weekends and holidays)?

      Volume

      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 each 3PL’s maximum capacity?

        Performance

        7. Has this 3PL grown its capacity over time? Does its growth match your 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?

        “Many of our customers have trouble finding credible reviews when searching for 3PLs. One way to circumvent this problem is learning who a 3PL’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 3PLs here.”

        Charles Michael, Manager of
        Strategic Partnerships at Stitch Labs

        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?

          Technology

          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?

            Costs

            “The big mistake everyone makes is to ask about price first. Price is one of the last things you ask. A good 3PL 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 exceed.”

            Steve Izen, Co-Founder at Orderbot Software Inc.

            20. What are the costs in their quote?

              Costs will normally be broken into the following categories:

              Transportation costs: The standard shipment cost of sending your products from your factory to your warehouse.

              Receiving costs: What your warehouse 3PL partner will charge you for offloading your products from your transportation provider and into their warehouse.

              Warehousing fees: Usually a monthly fee based on the amount of space used. Often charged per pallet.

              Pick-and-pack fees: The price you pay for the 3PL to pick a product from storage and pack it. The more units you ship each month, the cheaper this fee is.

              Shipping costs: The actual shipping cost to deliver that product from your 3PL to your end customer. 3PLs often have better shipping rates because they ship at scale.

              Account set-up fees: The price you pay to setup your account with your 3PL and integrate their software.

              Minimums: Most 3PLs will set a minimum monthly spend that you must have with them in case your business has a slow month.

              As an example, here is a recent quote from a San Diego based third party logistics company Sourcify received:

              Image via Nathan Resnick

              By comparison, FBA recently rolled out their own pricing approach found here:

              Image via Amazon

              Your Next Step into 3PL Freedom

              Before creating a partnership, you’re going to have to speak with each potential partner. You won’t be able to tell if they’re a good fit just from looking at their website.

              The worst case scenario is you waste time and resources to integrate with the wrong third party logistics partner. Not only will your business be swamped with unfulfilled orders, you’ll also take a major hit from angry customers waiting for their delayed products.

              This happens more often than most suspect, as a company is eager to solve their logistics problems and a 3PL is excited to take on a new customer.

              However, when you get out in front of the looming challenges of logistics and fulfillment, conduct due diligence, and find the right partner … nightmares turn back into dreams.

              “The magical moment,” Mike Brown explained when asked about order fulfillment, “was when I finally got my hands off the packing tape.” Hands off and hands-free, you’ll save time, save money, and earn the one thing that matters most: delighted customers.

              About the Authors

              Nathan Resnick is a serial entrepreneur who is the CEO of Sourcify, a platform that makes manufacturing easy.

              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 GM 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.

               

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