How to find, choose & use a 3PL warehouse in 2018
Third-party logistics (3PL) providers can massively improve your shipping times and save you countless hours and money on self-fulfillment. Ready to learn how to use it for your business? Read this guide now!
How much time do you spend fulfilling your eCommerce orders?
If you spend just an hour each day, that works out to be 7 hours a week.
That’s 28 hours a month. Almost a full working week!
Outsource your order fulfillment to a 3PL warehouse so you can spend your time on high-level, revenue-generating activities.
Not sure how? This guide will explain everything.
Note: This post is part of our 12-week Black Friday preparation checklist. Check it out if you haven't already!
What is 3PL?
The term 3PL refers to third party logistics, and a 3PL firm is a logistic provider that takes over a business’s distribution and fulfillment duties.
Image from Phasev.com
Now, 3PL warehouses weren’t always a thing.
Back in the day, there were a few big retailers who dominated the market. These guys had the capacity to fulfill all their items themselves, and they didn’t need any intermediaries.
But now that it’s so easy to set up an eCommerce store, there are a lot more small-time sellers who don’t necessarily have logistics as a core competency. These sellers tend to reply on logistics companies to sort out their fulfillment for them.
Interestingly enough, even the big boys are now turning to 3PL warehouses.
According to the 3plogistics, roughly 86% of Fortune 500 companies and 96% of Fortune 100 companies use 3PL services.
Why? Well, it’s probably because 3PL provides cost savings and a ton of other benefits.
We’ll get to that in a bit!
When should you consider 3PL warehousing?
If you ask me, it’s never too soon to consider 3PL warehousing.
Maybe you’re getting 10 orders a day right now, and you’re fulfilling those orders just fine.
But what happens when you start getting 50 orders a day? Or 100 orders a day?
Yes, you could hire a warehouse manager to take care of fulfillment for you... but, hiring someone full-time is pretty dang expensive.
It’s not just this person’s salary you’re paying, but also…
- Employment taxes
- And other miscellaneous expenses
Of course, there’s also the option of hiring a few part-timers, but think of all the time you’ve got to spend on recruiting and interviewing these people. And training them. And making sure they don’t screw up.
Remember, consumers these days are pretty unforgiving.
Say you have too many orders on hand, or you’re busy trying to train your part-timers, and you drop the ball for a bit.
As a result, 50 of your customers receive their items late.
Now, you might find one or two emails from annoyed customers trickling into your inbox. No matter - you apologize to them, offer them a promo code for their next purchase, and all’s good… right?
Nope - not quite.
And it gets worse…
91% of these customers will simply churn without saying a single word.
So the other 48 customers that didn’t reach out to you? They’re probably annoyed, too - it’s just that they can’t be bothered to tell you.
So don’t wait till you can’t keep up before making the switch.
The Bottom Line: If you’re fulfilling 10-20 orders per day and you foresee your business growing, start talking to 3PL warehouses.
Types of third party logistics providers
Now that you know exactly how important 3PL is, let’s break down the different types of 3PL providers.
In a nutshell, 3PL firms tend to specialize in one or more of the following:
- Shipping and receiving
Some bigger firms take care of all the above factors.
1. Transportation based
Need someone to ship your inventory from place to place?
Then a transportation-based firm is what you’re looking for.
You’re probably already familiar with the big names such as DHL, FedEx, UPS, and the USPS. If you’re looking specifically for same-day delivery, then you’ll have to opt for local couriers such as Postmates or UberRush.
If none of the above companies fit the bill, some of the newer transportation companies are also worth checking out. For example, there’s freight forwarder Flexport, which uses automation software to let customers track and control their cargo.
Also have a look at Freightos, an online freight marketplace which lets customers compare freight-forwarding quotes and book services online.
2. Warehouse and distribution based
When hearing the term 3PL, most people automatically think about companies that provide warehouse and distribution services. These guys handle storage, shipping, and returns - they take a lot off your plate.
As you might imagine, picking a warehouse and distribution based 3PL provider is more complex than picking a transportation-based provider.
To make sure it’s a good fit, sit down with your 3PL provider, and ask them the following questions:
What kind of warehouse network do you have?
In this day and age, most consumers expect their items to reach them quickly (and by quickly, we mean within one or two days).
Image from S10553.com.
Bearing this in mind, you’ll need to choose a 3PL provider that has warehouses that are geographically close to your consumers.
If you’re selling to customers worldwide, then make sure your 3PL provider has presence in the countries your customers are in.
But if you’re only serving customers in the US, then I recommend using a regional provider such as Quiet Logistics instead.
Why? Well, it’s tough to negotiate with larger companies like FBA and Shipwire.
These guys are so established and have no lack of customers, so they don’t always offer the best prices.
On top of that, they’re not as flexible and accommodating as some of the smaller firms as well.
What’s your pricing model?
As a general rule of thumb, most 3PL warehouses will charge a fee that’s inversely proportional to the amount of orders you’re storing and shipping.
If you’re only shipping 10 orders per day, your per unit cost will be pretty high.
If you’re shipping 100 orders per day, your per unit cost goes down.
Simple enough, right?
Storage and shipping fees aside, 3PL warehouses might also charge extra for:
- Issuing documents to acknowledge receipt of cargo (BOL fees)
- Material and packaging
- Order kitting (putting products in special packaging)
- Customizing software / integrating software
- Breaking down master boxes
- Product disposal
All these add up quickly, so make sure you know what you’re getting into!
Is insurance provided? What does the insurance cover?
If you’re shipping big-ticket items and you want to provide your customers with extra peace of mind, you might want to consider getting your packages insured.
Image from Honducargo.com.
3PL firms generally provide three types of insurance:
- Warehouse legal liability insurance
- Business interruptions insurance, and
- Transportation insurance.
Let’s talk about what each of these covers:
Warehouse legal liability insurance
With warehouse legal liability insurance, your 3PL warehouse has to provide “reasonable care” to your goods in their possession.
Assuming your 3PL warehouse is negligent in protecting your goods, and this results in loss or damage, then the insurance provider who’s covering the policy has to cough up.
Now, here’s where things get iffy:
The term “reasonable care” is pretty subjective, and you and your 3PL warehouse may not agree on what counts as “reasonable.”
With this in mind, be sure you read through your insurance policy and understand what is defined as “reasonable.”
Business interruptions insurance
Then there’s business interruptions insurance, which covers a warehouse in the event of a business interruption (typically a natural disaster).
These types of insurance cover warehouses - not the customers who are storing their goods there. That said, you can purchase contingent business interruption insurance if you do want coverage.
How does this work?
Let’s say your 3PL warehouse gets hit by a natural disaster, and it’s temporarily inoperable. Assuming you lose profits during this period of time, you’ll be able to file a claim with your insurance provider to cover the losses that you’ve incurred.
Last but not least, there’s transportation insurance. These are pretty varied, so look through all the clauses, legal definitions and limitations, and make sure they suit your needs.
With basic transportation insurance, for example, your 3PL warehouse bears responsibility for the safe transport of your goods, and their insurance provider will pay for losses or damages incurred due to negligence.
Again, read the fine print to understand what the definition of negligence is, and make sure it aligns with your needs.
On top of that, different policies and providers calculate the amount payable in different ways.
Do you want your payment to be based on your loss of profit? Or are you okay with accepting payment based on your wholesale price?
Be sure to iron all these details out!
What happens if shipments don’t get fulfilled on time?
What happens if your shipments don’t go out in time? And if your items are damaged or lost?
Some 3PL warehouses will give you a full refund, but some will simply issue you credits.
Make sure you discuss this with your 3PL warehouse - and get them to commit to the terms you’ve agreed on in writing.
More specifically, ask for a Service Level Agreement (SLA), which is a written contract that specifies the following:
- The services that your 3PL warehouse will provide you
- Key metrics and benchmarks
- How your 3PL warehouse will compensate you assuming standards aren’t met
- Peak-Season vs. Non-Peak-Season SLAs;
What are the logistic management tools that you use?
You probably have an existing platform that you use to manage your inventory and orders. Before you commit to a 3PL warehouse, check if they’re able to integrate their management tools with your platform.
When your orders are synced up, it’s easier for you to have a bird’s eye view of what’s going on.
Be sure to confirm what the timeline and process would look like to integrate your systems, and ask how much testing is done. Decide if you want the physical inventory in the warehouse or the digital inventory in their system should be used as the inventory of record for your financial decisions. (It doesn't take much for them to be out of sync).
Finally, determine how often they sync the systems and whether they use cycle counts (less accurate but less time consuming) or a physical inventory count.
Right, that’s all I have for you when it comes to choosing a warehouse and distribution based 3PL firm. Moving on!
3. Financial and information based
We’re talking freight auditing, monitoring and tracking your inventory, cost control, and all that good stuff.
You probably don’t need these guys yet. Just keep them in mind, and circle back when your company is doing six digits per year.
In the meantime, let’s move on to discussing the pros and cons of 3PL!
Pros of 3PL
The benefits of 3PL run the gamut from improving business processes and customer service, to expanding and selling to new markets.
Image from Cerasis.com.
The above infographic sums it up nicely.
First, let’s explore the biggest advantage that’s associated with 3PL… cutting cost.
Now, I know that a lot of business owners find this counter-intuitive (especially since we’ve just gone through all those miscellaneous 3PL costs that add up).
Surely it’s cheaper to do your shipping and fulfillment yourself?
Well, that’s not the case, and I’ll tell you why.
Assuming you don’t have large freight volumes, shipping (without a 3PL warehouse!) is likely to cost you a pretty penny.
If you’re new to this eCommerce thing, negotiating space on trucks and vessels will also prove to be a challenge.
Here’s where your 3PL warehouse comes in. Seeing as this firm will probably have ties with several shipping providers, they can negotiate crate space for consolidated shipments on your behalf.
This translates into…
Volume discounts. Reduced freight fees. And possibly faster delivery.
It’s a triple win!
Sharing warehouse space
Imagine if you had a fairy godmother that could wave her wand, and make all your overheads disappear. Dream come true, huh?
Here’s the good news:
You can eliminate a huge overhead cost (warehousing!) simply by contracting a 3PL provider.
These guys operate warehouses that cater to multiple shippers, and you can reduce your costs significantly by storing your goods on their premises.
Image from MultiChannelMerchant.com.
Here’s the thing about eCommerce:
You can’t control how much product you sell on a monthly basis.
Sure, you can stick to a standard marketing budget and forecast how many units you’re likely to sell… but there tons of other factors influencing the demand for your products.
Say Competitor A runs a 40% off store-wide sale. Or Competitor B suddenly gets bought over, and now has the resources to start a price war.
I could go on, but you get the picture.
For those of you operating your warehouses, here’s what this means:
You might have zero products sitting on your shelves one month, and have your warehouse be close to capacity the next month. But regardless of how much space you’re using, your warehouse rent doesn’t change.
At the end of the day, why sink a ton of cash into paying for warehouse space that you won’t maximize throughout the year?
It’s much more cost-effective to store your goods in your 3PL provider’s warehouse, and only pay for the storage that you need.
Business process improvement
Another advantage that 3PL providers offer is business process improvement.
Let’s face it...
3PL providers are the undisputed experts when it comes to supply chain management, including anything to do with order fulfillment.
The goal of any 3PL provider is to optimize how they handle their shipment. The faster and more effective they are at this, the more business they get from eCommerce store owners such as yourself.
Yes, you could fulfill your orders in house (with some hired help).
But if you don’t have any expertise in this area, it’s basically a situation of the blind leading the blind, and you can bet you’ll make a ton of mistakes along the way.
So if your margins are good enough, you should always outsource your shipping to the pros. These guys have the experience and the technology to help you streamline your processes, and optimize your workflow.
Here’s an example:
Most 3PL providers use autopilot forklifts to move pallets across their warehouses in a more efficient manner.
Image from Toyota-Forklift.eu.
Pretty cool, huh?
A combination of software, sensors and cameras tell the forklifts when they’ve reached the load or unload destination, and these forklifts go a long way in increasing productivity.
On top of that, many 3PL providers are also implementing voice-directing picking to get the job done faster.
With voice-directing picking, employees receive their orders through the wireless headsets that they wear. Because they get verbal prompts that tell them where to obtain their products, they needn’t stop to consult a computer.
Once they’ve gotten their item(s), all employees need to do is read the product code out loud. This is then recorded in the system, and the order is marked “complete.”
The bottom line?
Third party logistics providers are lean, mean, order-fulfilling machines. They’re the best candidate to help you get the job done!
Improving customer service
We’ve already talked about how 3PL providers help you fulfill orders more quickly and effectively - and this obviously makes your customers happy.
Image from ClickSoftware.com.
Aside from that, most 3PL companies also provide real-time tracking functions for your customers who want to check on their orders. That’s another win.
Cons of 3PL
We’ve spoken at length about how 3PL providers benefit eCommerce sellers, but as with anything else, there are several downsides to consider as well.
Here are a few to keep in mind...
Lack of control
When you start using a 3PL provider, you’re essentially giving up control of your operations, and putting all the power in your provider’s hands.
And guess what happens if they make a mistake?
The customer isn’t going to blame them - they’ll blame you.
You’ll be the one who has to deal with angry emails in your inbox, and one-star reviews on your Facebook page.
To protect the reputation of your company, and reduce the chances of potential mishaps, always go with a trusted and established 3PL provider.
Most 3PL providers’ systems and operations are digitized, which means you’ll be able to monitor your inventory levels, deliveries, and incoming shipments even if you aren’t located nearby your provider.
So everything’s fine and dandy… unless you run into quality issues with your products.
If this happens, you’ll probably need to physically inspect your products, so that you can liaise with your manufacturer about replacements.
Obviously, if you’re not working with a local 3PL provider, this presents a problem.
Ideally, you should make sure that you have a reliable manufacturer before you start outsourcing your fulfillment.
If you’re working with a manufacturer for the first time, and you’re not 100% confident about their product quality, then keep fulfillment in-house for now.
How to choose a logistics company
Onto the final piece of the puzzle - how to choose a logistics company!
Step one: Shortlist candidates
Run through your various options (either the ones we’ve shared, or ones you’ve found on Google), then shortlist your top candidates based on these factors:
- Expertise/reputation of the company
- Distribution network
- Capacity and scalability
Step two: Discuss requirements
Next, speak to your top candidates and tell them more about your needs. Ask them if they can integrate their systems with the platforms you’re currently using, and bring up any special requests that you might have (custom packing slips, gift messages, etc.).
Make sure you feel good about talking to them on the phone. If not, it probably won’t be a good fit.
Pro Tip: It's important to make sure your 3PL provider can handle peak and non-peak deliveries. Specifically, make sure:
- They have extra staff during the fall/holiday (peak) season to minimize delays. (This may vary depending on YOUR predictions - more on that in a second.)
- They provide the same service for express deliveries regardless of peak or non-peak season.
- You provide accurate product ordering and inbound shipment forecasts. This last point is the most important, because it's the best way to ensure speedy delivery of your goods.
Note also that Ground SLAs are usually where it fluctuates the most. If you commit to your customer 5-7 business day arrival, there's usually a buffer built in year round. Most of the year you blow that out of the water. They pick/pack/ship same or next business day and it delivers in 3-5 business days.
BUT in peak you may need to utilize the buffer to pick/pack/ship in 2-3 business days and arrive in 3-5 business days to meet the customer shipping SLA.
Step three: Choose the best fit
Ask the 3PL providers to run you through a demo of their system, and determine whether it’s user-friendly and if it meets your needs.
Finally, hone in on the best fit, and ask them for a contract as well as a Service Level Agreement. Oh, and make sure it fits your budget!
Congrats - you’ve successfully chosen your 3PL warehouse!
A final word on choosing a 3PL warehouse
Look, I’ve worked with a lot of new entrepreneurs and eCommerce store owners, and here’s what most of these guys do:
They wait till they’re struggling before they start talking to 3PL companies.
But you’re smart. You know that liaising with 3PL providers and finding the right fit takes time; it doesn’t just happen overnight.
Want to make sure you’re one step ahead, and you won’t run into problems with fulfilling orders?
Strike while the iron is hot, and start looking at third party logistics firms today.
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