Overwhelmed doesn’t come close.
Nightmare … that’s the word Mike Brown — founder of the multimillion-dollar Death Wish Coffee and EY’s 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.”
Meteoric growth is supposed to be a dream. So, what had happened?
Fulfillment, shipping, and logistics breakdowns.
For high-grown ecommerce, that trifecta can be crippling. To save you from the same fate, here’s everything you need to know about the history, types, advantages, disadvantages, and — of course — the selection of a third-party logistics partner.
Don’t have time to read the full article?
No problem … with the help of Orderbot and Stitch Labs — two of the leading 3PL providers — we’ve put together a checklist of 20 questions every business should ask when selecting a 3PL.
This is a platform-agnostic guide to help you avoid the missteps, vet possible solutions, and prepare for growth.
What is a 3PL?
A 3PL — short for third-party logistics (sometimes called a TPL) — is used in logistics and supply-chain management to outsource part or all of a business’ distribution and fulfillment services.
Before the early 1970s, transportation contracts only featured two parties, the shipper — think big retailers, manufacturers, or wholesalers — and the shipping carrier. As more “sellers” came to market, who didn’t have logistics as their core competency, intermediaries, known as third-party logistics providers, rose to prominence.
Legislation passed in 2008 defines them as:
“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 logistics providers has exploded.
An estimated 86% of Fortune 500 companies and 96% of the Fortune 100 use these services.
Solid providers act as your outsourced arm when it comes to receiving new inventory from your manufacturers and shipping it 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 Enlist a 3PL?
Most merchants call too late … well after fulfilling orders has gotten in the way of their ability to focus on growing their business. Not to mention upsetting customers.
Hindsight is 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 partner 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 a facility or seeing increases in your fees, get a quote from a third party logistics provider and compare. You might be surprised to learn your storage costs could be used better supporting fulfillment.
Is your business growing or about to spike?
If you know you are entering a period when order volume will spike (e.g., seasonality, running a flash sale, or are on the cusp of a big marketing promotion, etc.), reach out at least four months in advance.
Types of Third-Party Logistics Providers
When we examine potential third-party logistics partners at Sourcify, we make sure they can cover the following activities:
- Shipping and receiving
3PLs usually focus on one aspect of the logistics or supply chain process, yet the bigger firms may handle all of it while integrating seamlessly.
1. Transportation Based
This type specializes in the actual transport between locations — e.g., shipping. For example, they could handle the inventory shipment between your factory and your warehouse or between you and your buyer.
Deciding on a parcel transportation provider all depends on:
- Origin location
- Destination location
- Shipping methods
- Service levels
- Pricing and discounts
For global freight, costs are centered on the transportation fee to import your product. They may also help handle export taxes and duties.
Traditional parcel transportation includes DHL, FedEx, UPS, and governmental bodies like the USPS. Same-day delivery is normally handled by local couriers like Postmates and UberRush. Additionally, new marketplaces for transportation exist like Flexport, Freightos, and GrandJunction.
2. Warehouse and Distribution Based
As you grow, this is the most common type of 3PL, as they handle storage, shipment, and returns. Warehouses come in many shapes and sizes, and the market is active with innovation thanks to Amazon firmly establishing a two day, same day and next day delivery expectations. Thanks to international warehouses, even global customers feel the same.
Further on we’ll walk through a comprehensive approach to picking the right provider. However, if you’re considering a warehouse solution, here are the key criteria to evaluate:
What delivery timeframe do your consumers want? The faster 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 a network.
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 carrier? 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 them. Sometimes warehouses will be able to negotiate better rates than individual businesses as they aggregate their volume for better discounts.
Do you want your packages fully insured both during delivery and return as well as while in storage? 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.
When outsourcing logistics, it’s vital to ensure you and your provider can sync with your existing inventory management system (IMS), order management system (OMS), order processing software, and/or warehouse management solution (WMS).
When an order comes in, the software(s) should automatically know what product needs to be shipped, where to ship it, and how to update inventory levels. However, the buck stops with you … especially in your customer’s eyes.
Providers like Shipwire, Rakutan, and Fulfilment by Amazon (FBA) 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 (Nathan) 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 logistics 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.
These types of 3PLs help optimize 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.
The leading advantage is that a 3PL will save you time automating fulfillment. 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 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.
2. Manage Internationalization
One of the bottlenecks of growing internationally is dealing with global fulfillment. Few people in the world want to take care of documentation, customs, duties, and other issues that may occur when dealing with overseas sales.
Outsourcing 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 provider allows you to minimize costs when scaling your fulfillment process.
Though there are plenty of advantages, 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 turn to? You. Your provider is not customer facing and won’t be interacting directly with your end customers. If delays occur, your customers will look to you for a resolution.
2. Steep set-up fees
Almost all third-party logistics companies will have upfront costs. This will usually cover the integration of their software to your ecommerce store, SKU upload, and account access. These costs can make setup a large investment in the short term.
3. Out of your hands
There are third-party logistics 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 Provider
Choosing the right partner can make or break your company’s logistics, customer service, and repeat purchases.
In addition, 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.
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.
Want to save this checkilist 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 they’re willing to share documentation regarding?
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 exceed.”
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 partner will charge for offloading 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 for a provider to pick a product from storage and pack it. The more units you ship each month, the cheaper this fee should be.
Shipping costs: The actual shipping cost to deliver a product to your end customer. 3PLs often have better shipping rates because they ship at scale.
Account set-up fees: The price you pay to create an account and integrate software.
Minimums: Most 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:
By comparison, FBA recently rolled out their own pricing approach:
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.
Still want more on 3PL?
Recently 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.