What is a 3PL? (Third Party Logistics)
In supply-chain management, a 3PL, or third party logistics company, is an outsourced business that will assist brands in their distribution of product to customers. 3PLs are excellent solutions for brands looking to scale their business.
What is a 3PL used for?
When Sunski was experiencing high-growth, they found themselves taking on time-consuming tasks rather than focusing on the position they were hired for. As a result, the Sunski team decided to outsource fulfillment to a 3PL. Outsourcing the fulfillment and distribution process helped them increase accuracy, reach more customers, and increase profitability.
Like many brands that scale quickly while maintaining a lean team, Sunski concluded that working with a 3PL was necessary to keep up with customer demand. Onboarding and implementing several 3PL logistics in key geographical territories only took a few weeks, and as a result, they were able to distribute products to customers faster and continue expanding their business.
Assessing your business: when to invest in a 3PL
Using a 3PL to outsource shipping and fulfillment in order to keep up with fulfillment demands is key. It’s impossible for your brand to scale without ensuring that the unique components of your fulfillment is met.
Besides product development, experimentation, sales, financials–the list goes on–brands need to keep track of how product is fulfilled and shipped to customers using product reporting. Brands who are fulfilling and shipping product themselves often find themselves with excess aging inventory due to being out of touch with the customer’s wants and needs.
Below are questions to consider when searching for the ways in which 3PLs can help you save:
Can bundling help me increase sales?
When your brand encounters aging inventory–an excess amount of inventory that isn’t selling–there are a few routes to take in order to free up that warehouse. One is to discount the item, and hope that it will begin to move out of the warehouse.
A preferred, and extremely effective alternative to markdowns, is to bundle best-selling products with slow-selling products. There are a few ways brands bundle products to surprise and delight customers:
- Bundling as a promotional effort helps to make the customer feel like they’re getting a deal. In this instance, your brand is upselling the customer by providing an optional added item to their order while reducing the overall price.
- Bundling through a loyalty program helps retain customers. Perhaps, with each order, you throw in an additional item, free of charge. You can keep this a mystery so that they’re surprised, but you can change the additional item if necessary.
- Bundling to raise AOV (average order value) can push customers into buying two items instead of one, at a slightly lower cost.
3PLs with Stitch make it easier to bundle items, since items will each retain their individual SKU on the backend. This makes it simple to pick, pack, and ship items accurately, while the customer on the frontend only sees this as an overall SKU.
Can order-splitting and order holding improve customer experience?
Order-splitting provides your brand with the ability to split items in an order into two or more different shipments. This is especially helpful for brands when they experiment with pre-orders or encounter backorders. Optimizing fulfillment so that the available item ships immediately will make the customer happy. Once the pre-ordered or backordered item becomes available, it will signal the 3PL to ship that as well.
Providing the best customer experience is first and foremost the goal, but implementing order-splitting can be difficult in the absence of a 3PL.
Additionally, order holding can be a powerful tool. If your brand puts a hold on a customer’s order for a designated period of time, it will stall the order from being sent to the 3PL. That way, your customer can change any incorrect information that was accidentally sent in their order. This includes changing payment information, sizes, colors, products, and shipment information.
The customer will not only be relieved that they will be getting the product they meant to order however they ordered it, but you also will be saving on shipping costs by not immediately having that item fulfilled and shipped by the 3PL, without any leeway room for changes.
Would geographical routing benefit my customers?
Order-routing powers a brand to ship items from the nearest warehouse directly to the customer. It reduces shipping cost, and improves customer experience since it gets the product to the customer faster. If a customer orders multiple items and one of those isn’t readily available in the closest warehouse, it will automatically route from the next nearest warehouse.
Evaluating the best 3PL for your brand
For busy, growing brands, leveraging a 3PL is the difference in being a fulfillment brand and a lifestyle brand. 3PLs are the catalyst to your success, and if you’re not ensuring that your inventory is being taken care of efficiently, you’re not growing your brand appropriately.
“It starts with your pain points,” says Rafael Zakinov, President of Ruby Has Fulfillment. Essentially, you want to start out with understanding why you want a 3PL and how they will help your business. If you have inventory- or fulfillment-related pain points, then a 3PL might be a solution.
Here are best practices when looking for a 3PL partner:
1. Look for a 3PL that decreases shipping costs
Some brands look for certain third party shipping and fulfillment systems to simply reduce shipping cost, but other brands also want additional value-adds such as return management or unique packaging. Often, 3PLs receive a discount on shipping and shipping supplies because their volume is so large. These costs can decrease further if the 3PL specializes in certain industries.
For example, a 3PL that specializes in packaging heavier items will receive a vastly larger discount when shipping heavier items. If your brand is selling heavy products, it’s wise to choose a 3PL that matches those needs.
If your brand needs additional services like return management or special packaging, look for a 3PL that is willing to accommodate this. The easiest way to find a 3PL that works for you is through referrals and asking brands similar to yours which 3PLs they use.
If you can find 3PLs that specialize in your niche, start there: “there are many 3PLs that are specific to a particular industry or type of business,” says Carpentieri. “If you’re selling heavier products, then you’d need a 3PL that has multiple locations, because ideally, you’d be working with one 3PL rather than many.”
2. Warehouse spread
Looking for a spread of warehouses that span across the country or globally so you can decrease shipping cost and increase shipping and processing speeds? It is beneficial to find a 3PL that has multiple locations in areas of high traffic for your brand. With multiple warehouses, a purchased product will ship from the nearest warehouse to the consumer. This will save you money on shipping cost, and also make the customer happier, since it will arrive at their doorstep more quickly.
Besides the secondary 3PL serving a different region, it also allows your team to experiment with new processes and leverage tactics for continued growth. If your brand is looking to add a secondary 3PL for warehouse spread, consider the following:
- Look for a 3PL in a different region to increase your brand’s reach
- Choose a 3PL that offers something different than your original 3PL–perhaps unique packaging or a unique workflow you’re looking to experiment with
Remember, adding a 3PL can be timely and prone to error. It’s important to have a software or management system in place to manage the integration and keep your brand running while these changes occur.
3. Processing time
Now more than ever, customers expect their orders to be processed and shipped within a day or two. Looking for a 3PL that has 24-hour or same-day processing can help create this valuable customer experience, and drive repeat sales.
Once you know what you want to accomplish and how a 3PL fits into that, you can start identifying options to look into further.
“Amazon doesn’t enable two-day free shipping by paying more for freight or postage. They enable two-day shipping by having multiple warehouses throughout the country.” – Rafael Zakinov, president, Ruby Has Fulfillment
When considering which 3PL to invest in, there are a few more questions you’ll want to ask:
- How do you receive new inventory?
- What types of automation do you have implemented?
- Do you have a security system?
- What other clients do you work with?
- What special requests have you been able to execute with other clients?
- Is the warehouse clean and well-organized?
- How do you handle peak volumes?
- What’s your capacity per facility?
- Is your location optimized for seller-fulfilled Prime?
- What’s your turnaround/SLA time?
- Do you handle quality control and/or stain removal for returns?
What a 3PL can do for your brand
1. How does a 3PL me save time?
Implementing a 3rd party logistics company reduces time spent on managing orders, and reduces overall error. Having a 3PL provider is like having an additional department dedicated to fulfilling product for your customers. 3PLs aid brands with quality control, compliance regulations, and inventory security. Inventory management software helps regulate and keep accurate the information that goes through to fulfillment, so if there are any discrepancies they can be properly reconciled.
Additionally, inventory management software that connects to your 3PL will also regulate complex order workflows like pre-orders, order-routing, and order-splitting.
2. Can a 3PL customize for my brand?
Brands often worry that outsourcing packaging will have a negative effect on the brand’s image. In fact, third party logistics are often willing to go above and beyond to accommodate brands’ specifications on customizing and personalizing packaging. Some 3PLs also brand inserts, shipping labels, and confirmation emails to maintain their clients’ need to stay authentic.
If your brand has weight-sensitive products, 3PLs are able to package your product accordingly. As an example, if there are multiple products in an order, the 3PL can pack the heaviest product on the bottom with specific directions. Similarly, they are able to package your items horizontally large to small for an aesthetic appeal.
3PLs that have a good relationship with your brand are often willing to go above and beyond in keeping your brand authentic.
3. Can a 3PL help me save money?
- Shipping cost: 3PLs receive reduced shipping costs by providers since they are constantly shipping product.
- Packaging cost: Separate from the return-on-investment of a brand’s employee’s time spent on fulfilling and shipping the item themselves, the cost of outsourcing packaging and shipping reduces cost as well.
- Manual error: Investing in a third party logistics company also reduces manual errors which saves money as well since the risk of upsetting or losing a customer is too great.
Here is a breakdown of what some costs are with and without an outsourced 3PL:
Using very conservative cost estimates, let’s assume the 3PL charges the following:
Order Processing: $3.00/order
Warehouse: $15.00/pallet storage/month
Receiving: $15.00 pallet
Account Management: $2,500/month
Also, assume you are:
Shipping 100 orders/day or 2,500 orders/month (2,500 x $3.00): $7,500/month
Warehousing 35 pallets/month (35x $15.00): $525/month
Receiving 15 pallets/month (15 x $15.00): $225/month
Total Monthly Outsourcing Cost:
($7,500 + $525 + $225 + $2,500): $10,750/month
Since you do 2500 orders/month, on a per order basis this is:
Now let’s estimate what your in-house per order cost might be:
Direct Labor: 2 full-time clerks ($4,500/month w/benefits: 2 x $4,500): $9,000
Indirect Labor: 50% of manager ($7,000/month w/benefits: 50% x $7,000): $3,500
Warehouse Space: 100 pallets (5,000SqFt @ $1.00/SqFt/month: 5,000 x $1.00): $5,000
Cost of Capital: equipment, racks, etc (3/4%/month x $50,000 investment): $375
Misc Costs (IT, Expendable supplies, etc): $300
Total monthly in-house cost:
($9,000 + $3,500 + $5,000 + $375 + $300): $18,175/month
Or on a per order basis
Unfortunately, choosing the wrong 3PL for your brand happens.
Sometimes, 3PLs that don’t have risk protection and don’t process orders or track inventory properly can wreak havoc on the operations team of a brand. This is due to the fact that 3PLs charge for inventory storage, and having a 3PL claim that a product is out-of-stock when it isn’t means the brand has to manually reconcile that item, also making it unavailable for sale.
If your brand is experiencing poor service and mishandled inventory, it’s time to look for a different 3PL that can properly meet your brand’s demands and needs. While this can be a daunting task, finding the right partner can make or break the success of your brand.
How an inventory management system can help
Stitch Labs inventory control and management system is constantly syncing with your 3PL to ensure the 3PL is held accountable. This means that we will always have an accurate count of your stock, and make sure that we are communicating with your 3PL if there are any discrepancies, saving you time on the phone with the 3PL and with the customer in reconciling orders.
We’re able to ensure accurate stock updates, track the availability of product at your 3PL(s), and make sure that any transferred inventory has the appropriate costs associated with it. Stitch acts as a centralized hub which stores crucial information, providing your brand with the stability, accuracy, and safety it needs to not only scale efficiently, but thrive.