What Is 3PL? Third-Party Logistics Explained

Logistics is the movement and storage of goods and materials from one place to another. While many businesses handle this in-house, there are third-party logistics companies that can take the burden off of the business. 3PL involves a third party with expertise in storing and transporting goods and materials, handling the heavy lifting for the company.

In this process, the business will order or make the products and send them to the 3PL fulfillment centers where they are stored, awaiting sale. As items are sold, the 3PL center packs and ships the item and will handle any returns. This is different than a retail store where the store will order and store products in the building and hand them over to customers after a sale.

While 3PL is a type of fulfillment company, it is different from a dropshipping company. In dropshipping, the order is only processed after a customer makes a purchase. With 3PL, the company maintains inventory to sell.

The term 3PL is sometimes mistaken for a freight broker, who acts as a middleman between a shipper and a carrier and focuses on handling large freight items. Additionally, there is a concept called 4PL, where a company outsources its entire supply chain management and logistics to an external provider, which may include the manufacturing of goods.

3PL is important in today’s market, where the internet plays an essential role in the selling of goods. Many e-commerce companies don’t want to manage the storage and fulfillment of orders. They rely on a fulfillment center to do this.

3PL makes it possible for small e-commerce companies to offer products to more people as they can better manage inventory with the 3PL model. Without the fulfillment center, companies would be forced to get the staff and space to handle inventory and ship it.

Additionally, 3PL providers often have advanced technology and expertise that small businesses might not be able to afford on their own. This includes real-time inventory tracking, efficient order processing and optimized shipping solutions. By outsourcing these logistics functions, companies can focus on their core business activities, such as marketing, product development and customer service, making them more efficient and competitive in the market.

3PL providers can also scale operations up or down based on demand fluctuations, providing flexibility and cost savings that are crucial for businesses navigating the dynamic e-commerce landscape.

There are many components of a 3PL fulfillment center. Let’s take a closer look.

Warehousing

The 3PL fulfillment center’s first role is to store the products that the company will sell. The 3PL provider may have several clients, for which it stores inventory and manages the shipping. The warehouse is divided by company, and inventory is managed and reported to the company.

Inventory Management

Inventory management is the next major process of 3PL fulfillment centers. As the 3PL fulfillment center tracks the inventory and reports it back to the company, the company then has the information needed to place new orders for goods and products based on the need. Many 3PL fulfillment centers can provide real-time inventory management so that companies are always aware of what is in stock and what is running low.

Picking and Packing

When a product is purchased, it must be processed and shipped. This is where picking and packing comes into play. The 3PL fulfillment center takes the order, pulls the product off the shelves and boxes it so that it is ready for shipment. This is the “handling” part of shipping and handling.

Shipping and Receiving

Once an item is boxed and ready for shipping, the next step is to ship the product. This includes affixing a mailing label to the item and setting it out for the shipping carrier to collect it.

Kitting

Sometimes, an order will need to have several stock items assembled together to make a kit. In this case, the 3PL fulfillment center will collect the necessary items for the kit and place them in a box together during the picking and packing process.

Reverse Logistics

Reverse logistics is the process of handling returns. Many 3PL fulfillment centers take on this job. The items are received back at the fulfillment center and restocked in inventory. In this process, the company handles the refund to the customer.

Here are some of the key benefits of using the 3PL fulfillment center model.

Lower Cost of Goods Sold

Because companies can hold higher inventory levels with the warehouses offered by 3PL fulfillment centers, they can order more items. By ordering more items, they are able to get a better wholesale price. This helps to reduce the cost of goods sold and improves the bottom line of the retailer.

Greater Flexibility in Product Sourcing

When retailers use a 3PL fulfillment center, they have more flexibility in where products come from. They can obtain products from multiple suppliers and have products from different suppliers boxed and mailed together for a better customer experience.

Better Control Over Logistics Operations

The fulfillment center takes care of logistics. That’s their job. With better attention to detail, the 3PL fulfillment center improves service to customers while the company has all the information needed about logistics.

Faster Order Fulfillment

Some 3PL fulfillment centers ship and pack orders faster than others. This means that a retailer can choose a fulfillment center to meet the demands of their order status and improve the customer experience.

Easier Returns Processing

Just as the 3PL fulfillment center handles picking, packing and shipping, it also handles returns. It becomes a convenient place for returns because it can quickly restock the item and place it back into inventory to be sold at another time.

There are challenges that 3PL fulfillment models face.

Rising Fuel Costs

Delivery and shipment rely on fuel costs to get items to their endpoint. As fuel costs rise, so does the cost of shipment. This directly affects the profitability of the 3PL fulfillment center and its retailers.

Recruiting New Talent

Many 3PLs find it challenging to attract and retain top talent. The transportation industry is currently experiencing a shortage of drivers, which can directly affect those using a 3PL model. Not having the right talent means that productivity and efficiency are lost, which leads to thinner profit margins.

Lack of Collaboration

The 3PL fulfillment center is often left as an island on its own to fulfill products. A lack of communication and collaboration between the 3PL and the retailer can directly affect the supply chain’s smooth operation. It can be challenging for retailers to know exactly how the 3PL is operating on their behalf.

Government Regulations

As more rules and regulations are implemented, 3PL fulfillment centers are burdened with complying. This is not just a human resources nightmare in some cases but can directly affect the company’s bottom line.

Environmental Concerns

Society has more concerns about the environment and the impact that transportation has on it. To emission reduction, more 3PL fulfillment centers must make adaptations to how deliveries occur.

Client Requirements

Each client that the 3PL fulfillment center has may have different requirements for the fulfillment center. This can lead to confusion and nonstandard fulfillment practices, creating problems in delivery.

Absence of Reliable Reporting Mechanisms

It can be hard to track all shipments leaving a 3PL fulfillment center. Getting the correct information to provide monthly reports is essential to successfully partnering with retailers.

The 3PL fulfillment center is an integral component of many businesses in today’s e-commerce marketplace. It is important to find a 3PL partner that fulfills orders in a way that matches your company vision and helps provide your customers with a good experience.