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What is 3PL?
In a supply chain, logistics can be described as the links between each stage that help bring together all of the materials, resources, inventory, equipment, and manpower needed to operate your business. In the case of small and even medium-sized businesses, an organization usually chooses to build out their [logistics management] processes in house because of its simplicity.
As the business grows, however, the responsibilities that come with managing these processes can become tricky to deal with alongside other core operations such as people management, marketing activities, customer experience, and more.
For context, ‘more orders’ on its own sounds like a great thing. But in terms of logistics, all of the additional order management and fulfillment processes have to be squeezed into a time frame that is less forgiving because of the new order volumes. This means:
- Businesses that work with physical inventory may start having to manage larger quantities or multiple varieties of goods.
- If they’re also storing this inventory, then they’ll need to make sure they have enough room in their warehouse, and consider renting or purchasing more space if they don’t.
- These additional resources must be transported from one stage to another, which typically involves planning and optimizing the most efficient and time saving routes.
- So with more resources added to the picture, reaching that same level of optimal transportation could require more labor, trips, equipment, vehicles, and so on.
Essentially, receiving more orders means a bigger list of things that an organization needs to take care of quickly and efficiently. It’s around this time when some business owners turn to third-party logistics (3PL) providers for help. In this guide, you’ll read about what 3PL providers offer, their types, as well as how you can benefit from using them for your small to medium-sized business.
What is 3PL?
3PL providers are external companies that manage a business’ logistics services for a fee. The idea of a 3PL provider has been around for a while, and the first actual 3PL companies were developed back in the 1970s and 1980s.
3PLs services are meant to specifically benefit small and medium-sized businesses because these companies usually don’t prefer to invest as much in logistics as enterprise-level companies. The services include:
Transportation
Order management and fulfillment (picking, packing, shipping)
Freight forwarding
Finances
General information management
Although they offer a variety of services, 3PLs don’t usually require their customers to make use of all of them. Instead, you can just outsource the services that you need help with to your 3PL partner, and they’ll take care of it for you. This flexibility gives you more time to focus on the parts of your business that need your attention most, which is one of the reasons that 3PL providers very popular recently.
More organizations are having to divert a lot of manpower into creating robust strategies that cater to the new generation of management trends in order to keep up with competition. This means more automation for routine processes, but also more outsourcing. As a result, the global 3PL market has grown considerably over the decades, reaching $889.01 billion in 2020 with an expected CAGR growth of 8.5% by 2028.
What are the types of 3PL providers?
There are 4 common types of 3PL providers:
Standard
Standard 3PL providers are very straightforward and offer commonly used logistics services only, like storage, shipping, and distribution. Since these service packages are not as specialized, they generally cost less as well.
Service development
Service development 3PL providers offer the same services as standard 3PLs, as well as additional services like IT support, information management, security features, cross docking, and inventory and order tracking. Because of these extra features, these 3PL providers can give businesses and their customers a better sense of security over their transactions.
Customer adapters
Customer adapting 3PL providers take over all of a business’s logistics processes, managing these processes just as the business would have; they do not implement their own ideas or solutions. They take care of a customer’s end-to-end logistics operations, so they cost more than the previous two types. But these 3PL providers ensure efficient work to your exact specifications, so many businesses find the cost worth it.
Customer developers
Customer developing 3PL providers are similar to customer adapters in the sense that they take care of their client’s logistics entirely. But they’re a step ahead because they implement their own logistics processes, solutions, and changes if they find them necessary. In this way, they establish more control over the logistics operations and can fix any problems that arise faster. This makes their services costly, but the guaranteed results and new perspectives they offer make them appealing in today’s competitive business landscape.
Why should you consider using a 3PL?
As we mentioned earlier, the most common reason to outsource your logistics is the fact that you will save the time that you would have spent managing it all. This way, you can spend that time on other important parts of your business, instead.
In addition to this, here are three more reasons why you should consider using a 3PL to manage your business’s logistics.
Considerably cut back on expenses
Hiring a 3PL will cost you a good amount of money. This makes it seem like a pricey investment at first, but this can be an expense that saves you in the long run.
The most prominent benefit of using a 3PL with respect to cost savings is the fact that you don’t have to invest in your own order and warehouse management resources. Storage space, equipment, employees, packaging and shipping materials—your 3PL provider will take care of it all. As an added benefit, you can have the flexibility to make upgrades, expand, experiment, and grow without having to worry too much about capital.
3PL firms also have strong partnerships with vendors and dealers, so they can leverage this for volume discounts and better prices. Not to mention that they will likely have more expertise in the logistics domain in general and can offer valuable insights on how to negotiate with different vendors.
All of this combined with the time you will save your team means that a 3PL provider is often a great choice for those looking to expand their business on a budget.
Easily manage peaks and market changes
With a 3PL, you can avoid the hassle and expenses involved with the usual uncertainties that come with logistics management.
For example, say your business works with a large quantity of inventory, and you need a big warehouse to store your items. You invest in one that is within your budget and can almost perfectly fit your items and equipment. But then say there’s a surge in demand, and you’re required to produce more stock that you’ll have to store in your warehouse for the time being. You may not have room. Logically, your next step would be to rent out some more space just for the peak times, but then have no use for it during slow periods. This entire situation can be avoided with a 3PL since they can cover your storage needs and other logistics requirements entirely.
Gain more options for international expansion
There are 3PL providers all over the world, which means if you had plans of expanding your business internationally, you now have more options to move towards that goal. Also, you wouldn’t have to necessarily invest in additional manpower or assets overseas since the providers will take care of it for you. For instance, say you work with a 3PL provider in your own country, and happen to learn that they also have branches abroad. You could continue working with them as per usual while also developing your international customer base.
How will I know if I need a 3PL?
Here are some signs that you could look for in your business to know if you could benefit from using a 3PL:
The number of incoming orders is starting to get overwhelming.
As your business grows, you will probably start to accept more customer orders. And while this is great news on its own, it also means that you may find yourself spending more time than you should be on fulfilling those orders. The increase of orders and fulfillment processes can be manageable at first. You may be spending a little extra time on them, but you may also feel like you’ve got it covered. But once this phase has passed, you’ll notice it’s becoming increasingly difficult and time-consuming for you to keep up with your orders using your existing staff, methods, and resources.
If you’re currently facing this kind of situation, then you should seriously start considering a 3PL to help you with your order fulfillment. It can save you some valuable time and also boost your efficiency since working with multiple orders at a time could get a little chaotic and result in errors that damage your customer experience.
You’re running out of storage space.
If your business deals with physical inventory, then you most likely have a dedicated space to store your items. But just like ‘more orders’ means ‘more fulfillment processes,’ more orders also means more inventory. You’ll begin ordering a higher quantity of shipments and possibly new SKUs and varieties as well. All of this means an increasing quantity of stock, to be stored in a fixed space; not much balance here.
When this happens, you will have to consider how to store more inventory. Your first go-to options may be to either buy more space if you see this growth continuing in the long term, or rent a space if you’re not ready to make such a big investment. While these are both good ideas, you also have a third option: working with a 3PL to take care of your storage needs.
Before you decide, weigh your pros and cons between using a 3PL or finding your own space. Some important factors that you should pay special attention to here are fees, the amount of space provided, whether the space will be able to accommodate your unique inventory requirements (if any), like refrigeration, high ceilings to store tall items, and more.
You want to improve your order lead time.
The ecommerce industry has set a trend with their same-day and two-day deliveries, and that’s resulted in most customers expecting quicker shipping quotes, regardless of who they’re buying from. So in order to keep up with this trend, many businesses have begun to speed up their order lead time, which is the average time it takes them to fulfill their customers’ orders after they receive it.
If you are also looking to cut down your order lead times, then you’ll first have to evaluate your logistics processes and see if you can afford to speed things up while maintaining your efficiency and accuracy; you don’t want to risk complicating your processes and causing errors all for a faster pace. If it looks like you may have some difficulty doing this on your own, then it could be time to consider a 3PL.
You’ve been receiving more customer complaints than usual.
As a business expands in size and volume, the number of tasks that they need to complete begins to pile up, making it easier to miss certain important details in their processes. These small errors can eventually accumulate and end up reflecting in their sales orders, which could result in an unhappy customer. But this doesn’t necessarily have to be the case for you.
Getting help early and outsourcing your storage, inventory management, order fulfillment, transport, distribution, or whichever logistics process you need a hand with can help you avoid letting the finer details slip in your business. At the end of the day, this helps you maintain a great customer experience, and it also puts less pressure on your teams.
You’re moving your business online.
When comparing an ecommerce operation with a brick and mortar store, one of the first differences that stands out is how running an ecommerce business means that you don’t need a physical store presence. But another important factor to consider is how different your ecommerce logistics are when compared to your brick and mortar store’s logistics: ecommerce moves faster, experiences ever-changing demand fluctuations, requires higher volumes of order fulfillment, receive more returns, and very seriously prioritizes accuracy.
When you consider all these conditions, plus other specifics directly related to your business, outsourcing your logistics when you move to ecommerce is a smart, easy, reliable, and (eventually) cost-effective option.
3PL providers, or third-party logistics providers, are companies that can manage whatever logistics requirements and operations you need taken care of. Over time, they’ve grown to become very reliable partners for many organizations because they can help you save time and money, manage market changes, and even expand internationally. If logistics is an area in your business that you’re currently struggling with, then a 3PL is a great way to find some assistance.