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What Is a 3PL and How It Helps Reduce Supply Chain Management Costs

Jun 11, 2022

10 min read

What are third-party logistics (3PLs)?

Third-party logistics (3PLs) services let you outsource your warehousing, distribution, and fulfillment operations. This way, you can farm out the task of delivering goods to the customers and focus on more important business activities like strategic planning, manufacturing, and operational processes.

Shippers hire 3PLs to reduce costs and improve efficiency. Around 90 percent of Fortune 500 companies operating in the United States use third-party logistics services (3PLs) to optimize supply chain and logistics functions.

In this article, we’ll take a look at some of the important features you should look for when choosing a 3PL service provider. We’ll also go over the common benefits of outsourcing your logistics operations to a 3PL company.

Important 3PL Services eCommerce Businesses Should Seek

Logistics operations are the core competency of 3PL providers. Additionally, most 3PLs also offer logistics management, transportation management, inventory management, supply chain management, and freight forwarding services.

In this section, we’ll discuss the primary services offered by most third-party logistics companies.

Warehousing

Smooth warehousing is essential for any business selling physical goods. One of the reasons you should hire a 3PL service provider is if you’re facing challenges running warehousing operations.

If you run a small eCommerce business, you could probably store your products in the garage. But as your business grows, you’ll need to expand your existing warehousing capabilities. This includes procurement of new warehouse space, purchasing warehousing equipment such as shelves, pallet racks, trucks, and hiring new workers.

There are also other costs associated with establishing your own warehouse (such as maintenance costs) that can leave a dent in your bottom line.

Many growing eCommerce businesses find that they could be better off outsourcing their warehousing and logistics operations to a third-party fulfillment service. You can simply utilize the 3PL’s warehouse space and processes to run and manage your warehousing operations.

Order Fulfillment

Most eCommerce businesses become overwhelmed by the increase in customer orders, and the strain it puts on their existing distribution network and in-house logistics operations. Especially, if you are trying to expand to a new market, you might realize that your logistics processes don’t match the speed of your business’ growth.

By outsourcing your order fulfillment to a third-party logistics service, you can leverage its flexible and standardized systems to meet the growing needs of your business. It will pick, pack, and ship your products and fulfill your customer orders in a timely and cost-effective manner.

A 3PL’s fulfillment process integrates directly with your eCommerce store or marketplace. It receives your products at its fulfillment center and stores them in an organized way. When a customer places an order, the 3PL warehouse staff picks the ordered items, packs them using optimized packaging, correctly labels them, and ships them to your customers.

3PLs offer more than regular warehousing and transportation services. They allow you to store your inventory at a distribution center closer to your target market, resulting in lower shipping costs as you can target lower shipping zones.

Inventory Management

A common reason why businesses manage their order fulfillment in-house is because it lets them retain control over inventory operations. However, the carrying cost of inventory is often more than the price of the storage space. This includes inventory costs in terms of leakage, insurance, and perishability, as well as overhead costs like salaries and utilities. These costs can quickly add up to drain your bottom line.

Large third-party logistics services use modern picking, packing, and shipping systems to fulfill your orders. For example, their warehouse management software automatically collects data from your online store and sends it to your warehouse, helping you track customer orders in real-time and manage warehouse operations. This enables you to monitor your inventory levels and restock them before it runs out.

By working with a 3PL partner, you can tap into their warehouse automation and industry expertise. An automated warehouse management system lets you track your orders, audit your inventory, collect payments, and make business-critical decisions in a timely manner.

Reverse Logistics

Reverse logistics involves the movement of products from the end-customer back to the seller, manufacturer, or another designated location. This process allows the customer to send a delivered item back and deals with product returns and refunds, exchanges, and disposal and recycling.

Managing returns and replacements on a daily basis is a challenge for most eCommerce businesses. They have to set up dedicated customer support to handle complaints, collect wrongly delivered items from the customer and send them the right ones.

Most 3PL service providers offer to inspect, return or replace returned items by themselves while others send them back to the warehouse to be restocked. They have powerful warehouse management systems that let you track inventory and provide visibility throughout the reverse logistics supply chain.

Benefits of Using 3PL Providers

A 3PL can help you meet your business goals by optimizing your logistics and warehousing processes. Here are some of the benefits of outsourcing your company’s order fulfillment process to a 3PL service.

1. 3PL providers offer faster transportation.

Same-day or next day delivery is a key factor in customer satisfaction. According to an Emarketer study, 61 percent of customers are willing to pay more for the same-day delivery.

You can achieve this by storing portions of your inventory in warehouses closer to your target market. A third-party logistics company enables you to achieve this through its established distribution network, helping you offer expedited delivery to your customers.

And when you fulfill orders from warehouses closer to your customers’ geographical location, you can target a lower shipping zone. This translates into time and cost savings for your business, and better customer experience.

In addition to this, 3PLs have an extensive transport network, including roadways, railways, and freight cargo that enables them to transport goods faster and at a much lower cost. As a seller, you can utilize their auditing and tracking systems to gain visibility into your supply chain and monitor stock levels and order delivery in real-time.

2. 3PL providers use skilled laborers.

The rise in customer orders can overwhelm almost any eCommerce businesses’ warehouse staff. For example, they may find it difficult to complete orders in a timely manner when the demand is high. Things can become even more frustrating if your profitability is dependent on peak season sales.

Moreover, your growth plans can put pressure on your existing staff capacities, leading to work overload and increasing shipping mistakes. As a result, your managers will be spending more time solving problems and less time supervising operations.

When you outsource your warehouse operations to a third-party fulfillment provider, you no longer have to worry about hiring and training new labor to meet your growing needs. You can utilize their resources and expertise to take the additional workload off your team members.

3PL companies are better equipped to hire appropriately skilled warehouse workers. You can simply utilize their expertise in inventory management and shipping to take the additional burden off your team members. This allows your team to focus on core business activities like planning, manufacturing, and operational processes.

3. 3PL providers save costs on unused resources, time, and money.

One of the signs that tell you to hire a 3PL provider is the gradual increase in costs for running warehousing operations. This is especially true when you are expanding to new markets or offering new products.

When you are looking to target a new market, you’ll have to expand your existing distribution network and supply chain. Similarly, if you are offering new products, you’ll need to focus on procuring storage space and warehousing equipment.

In contrast, when you enlist a 3PL provider’s services, you only pay charges for the additional storage space and transportation services you use. This is particularly useful for products with seasonal demand that cause shortage of space in peak periods and excess of space when the demand is low.

3PLs can scale a business’ storage space, transportation, and staff, enabling you to smoothly upgrade your current capacity. Moreover, they have the expertise and tools to correctly forecast the variability in the market, enabling you to optimally utilize its storage space and tap into its distribution network.

4. 3PL warehouses provide transitional storing of goods at a lower cost.

Most 3PL providers offer a variety of logistics services such as cross docking that give the seller a competitive edge. It involves skipping the long-term storage of inventory at the warehouse.

Cross-docking is a logistics practice in which goods are unloaded from an inbound truck and loaded onto an outbound truck with little or no storage in-between at the 3PL warehouse. This results in reduced costs in terms of storage space, additional transportation, and inventory handling.

Plus, cross-docking also minimizes the risk of damage during storage while speeding up the delivery process.

5. 3PL providers assist manufacturers with logistics intelligence tools.

According to a Gartner study, 50 percent of global businesses are looking to invest in real-time supply chain, artificial intelligence, and advanced analytics solutions by 2023.

Modern technologies such as logistics intelligence tools enable manufacturers to better manage warehouse, transportation, and freight operations. This means they can compare the different costs, mode of transport, taxes, and insurances offered by multiple carriers to identify the most cost-effective options.

3PL service providers collect data throughout the entire supply chain. Sifted is an AI-powered logistics automation tool that can leverage this data to extract patterns to help you decrease your fulfillment costs.

Similarly, logistics automation tools allow managers to access large amounts of data and adjust stock levels, identify carrier errors, and monitor freight traffic in real-time. This enables them to identify business opportunities and make better-informed decisions.

Sifted Logistics Intelligence could strengthen your logistics in partnership with a third-party logistics provider

Deciding to handle your logistics operations internally, or outsourcing it to a 3PL service provider requires thorough research and assessment on your part. By analyzing the challenges and opportunities they bring to your eCommerce business, you’ll be in a better position to choose the option that best fits your needs.

Sifted Logistics Intelligence gives you complete visibility into your shipping data in one place. It simplifies logistics management and helps you optimize costs using AI-powered demand forecasting.

Ready to streamline your logistics operations?  Get a free demo from Sifted!

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