3PL, 4PL, and 5PL can seem quite confusing. Learn more about first-party through 5th party logistics.
The Definitive Guide to 3PLs
This definitive guide will answer all of your questions and help you to make better-informed decisions on your 3PL.
So, you want to learn more about 3PL providers? You came to the right place.
This definitive guide will answer all of your questions and help you to make a better-informed decision.
Maybe you’re looking to outsource your logistics for the first time as your brand continues to scale, or maybe you’re looking to replace your currently underperforming provider. Either way, this guide will leave you with a better understanding and insight.
The topics we will cover in this guide are:
- What is a 3PL?
- When should you start considering outsourcing your logistics to a 3PL?
- Why should you outsource your logistics?
- Key steps in choosing the right 3PL for your business
- Who are the top-rated 3PL providers and why?
- Should I choose a 3PL by geographic region?
- How do I get started today?
Ok, let's jump right into it.
What is a 3PL?
There can be a lot of confusion surrounding logistics companies even within their own industry, so before digging too deep into this guide, let's first start with the basics and a definition of what 3PL stands for along with the different types.
A third-party logistics company, commonly referred to as a 3PL, is a company that you would contract with to handle all of your transportation, warehousing, and distribution needs of your goods or products.
There are varying types of 3PL providers and they are most commonly segregated by the type of services they specialize in. Understanding the type will help you decide on which 3PL will most effectively meet the demands of your business to help you with growth.
Transportation Based 3PL
A transportation-based 3PL will handle all activities including pick, pack, warehousing and distribution of your products. Transportation-based 3PL providers will offer a full set of logistics services. Within the transportation-based 3PL category there are two subcategories.
Leveraged or Non-Asset based 3PL
- A leveraged 3PL will use the assets and facilities of another company either in full or to enhance its offerings.
- Leveraged providers can be more flexible as they are not tied to any other provider and if a problem arises, they can swap out assets as needed.
- Leveraged providers can focus on technology and service since they do not have to manage large assets.
- Examples of a non-asset-based 3PL are C.H. Robinson or Cerasis.
Non-Leveraged or Asset Based 3PL
- A non-leveraged 3PL will only use the assets and facilities of their parent company; assets such as trucks, warehouses or distribution nodes.
- These companies tend to be larger and more stable since they own all of the equipment needed to run your logistics services.
- There could be a conflict of interest if they are using their own trucks instead of bidding out freight to the cheapest provider.
- Examples of an asset-based 3PL are UPS or FedEx.
A transportation-based 3PL would be the most likely choice for a brand looking to fulfill Direct to Consumer orders. This would be called Pick and Pack and requires shipping many small parcels to thousands of customers daily.
Warehouse and Distribution-Based 3PL
A warehouse and distribution-based 3PL would specialize in storing, warehousing and transporting your products. These companies would be able to store pallets, bulk storage, or even rack storage. A lot of times these companies will further specialize in the types of products they most commonly handle whether it is Grocery, Dry Goods, Electronics ( small or large) or Apparel.
Most often this type of 3PL provider can be associated with storing large quantities of a commodity such as paper towels and then ships pallets of goods off to Walmart, Target and other big box stores.
Some common types of warehouses:
- Climate Controlled
- Frozen Goods
- FDA Registered
- Distribution Center
It is good to note that a distribution center is different in the fact that goods are not stored long term at the facility but rather just stop there on their way to another location after they are broken down into smaller shipments. Think of a Home Depot distribution center where goods come in from manufacturers and then are broken down and distributed to retail locations.
A freight forwarder or forwarder-based 3PL is a company that acts as a middleman between the initial shipper and the buyer. These companies sometimes will pick up freight from the initial shipper or more commonly the initial shipper will send the products to the freight forwarder. Then, the freight forwarder will initiate all of the shipping-related paperwork, customs, or duties and send to the end buyer.
Most times in the Direct-to-Consumer space, you will see freight forwarders work in conjunction with the brand and the initial shipper to handle all international freight parcel shipments. The freight forwarder is more specialized in this field and can often perform these duties cheaper and more efficiently than the initial 3PL companies.
Many freight forwarders also provide tools for your customers to prepay taxes and track the location of their parcels enhancing the customer experience.
Some reputable freight forwarders:
- PassPort Shipping
- Ram International
There are some other types of 3PL providers that are highly specialized and fall into the “other” category.
Examples of these types of logistics providers are:
- Freight Auditing (Shipware, Lamprey Systems)
- Cost Accounting, Control, and Consulting (OPS Design, Establish Inc)
Now that we have defined what a 3PL is and a bit about the different types of 3PL companies, let’s move on to the next topic of when should I outsource logistics?
When Should I Consider Outsourcing My Logistics?
There are many considerations to make when trying to determine if you should outsource your logistics operations or keep it in-house. It can be a tough decision, but the sooner you decide, the easier it will be to scale your brand.
There is nothing more hindering to growth than waiting until there are issues with filling orders on time and then having to try to implement a solution while under a time crunch.
Let’s consider this scenario. Your brand is growing and you’re starting to see some traction. You fill about 10-20 orders per day and you are manually printing labels and aggregating orders using a tool like Shipstation. This is all working fine and everyone is happy.
You begin spending more dollars on marketing, start a robust social media campaign, your customers are talking about your brand and your sales are beginning to skyrocket. Your sales are booming and now you have doubled your daily shipments requiring you to dedicate more time to picking and packing your orders.
Your inventory is starting to overflow your garage or mother’s basement and your storage space is shrinking. You’re now spending most of your time on shipping instead of growing the company. Deliveries are starting to be delayed, you’re hearing some complaints from customers and now are having to make concessions to customers to keep them happy and regain trust.
It’s now time to start looking for a fulfillment partner.
Before we jump into selecting a 3PL provider lets first recap the top ten ways to know its time to use a 3PL.
Top Ten Ways to Know It's Time to Outsource Your Logistics
- You're spending more money on packing tape than Instagram ads.
- You have to park your car across the street since your garage is packed with “Product.”
- You're thinking of hiring Uncle Bernie to lead your shipping department (Big Mistake).
- Your mailman is on workers comp from picking up your outgoing mail.
- You're friends with your FedEx and UPS drivers on Facebook.
- Ontario, CA. Is that California or Canada?
- Customers are sending you hate mail.
- You shipped a package meant for Paris, Texas to Paris, France.
- You’ve said to customers before, “I swear UPS must have lost your package.”
- You have hundreds of “Where are my order emails?”
Ok, let's now move on to the next part of the guide, Why Should I Use a 3PL?
Why Should I Outsource my Logistics to a 3PL?
A common question I get asked about outsourcing logistics is usually, “Should I outsource my logistics or should I hire more people to handle my shipping internally?”
In this section of The Definitive Guide to 3PL’s, we are going to cover the pros and cons of outsourcing your logistics services.
So let’s get started with the top reasons to outsource your logistics.
- Cost Efficiency
- Your job is to grow your brand and a small part of that is logistics. A 3PL’s only job is logistics and because of this they are much more efficient at it, this efficiency will save you money.
- You get to focus on your brand.
- Focus on critical operations and let a professional handle logistics.
- Increase your NPS
- Your 3PL is laser-focused on delivering your packages on time, this leads to happy customers, higher net promoter scores and increased revenue.
- Reduction in liabilities
- Forget about dealing with carrier contracts, back-office staff, lost, stolen, or missing packages. Your 3PL will handle these responsibilities.
- Flexibility at Scale
- Easily scale up additional warehouses as your business begins to grow and demand increases.
- Your 3PL should be investing in new technology all the time to make their business more efficient, in turn making your business more efficient.
- 3PL’s are experts in logistics, they keep up to date with ever-changing trends so that you don’t have to.
- International Growth
- Do you have future plans for international growth? If so, a 3PL can easily navigate all of the pitfalls of a global fulfillment strategy.
You can see there are many pros associated with outsourcing your logistics. In my opinion, the biggest benefit is the ability to limit your overhead. You can eliminate worries about picking, packing or shipping your orders or having to hire and manage your in-house fulfillment team. These responsibilities can really eat into your cash flow and stifle your brand’s growth.
Now that we have covered the positive aspects of outsourcing your logistics, let’s discuss the negatives. As with any business decision, there are always pros and cons.
- Loss of Control
- Outsourcing your logistics means you do lose a little bit of control. Your 3PL might not be local. Your products might not be as accessible as before and you may have less insight into the whole process.
- Loss of Knowledge
- Giving up control also means you might have less visibility into logistics operations. You will lose valuable knowledge that your in-house team might otherwise be gathering. This could make it harder to switch back to an in-house team if you decide to later on.
- While utilizing, a 3PL will probably be cheaper. However, the costs could rise over the length of the relationship.
- Integrating your technology
- Often you already have certain technologies that you are accustomed to using, whether it’s an ERP system or shopping cart platform. These technologies may not play well with others and you may need to migrate to new tech to allow for plug and play abilities.
Now that we have covered the pros and cons hopefully you will have a better idea of the next steps in your decision to outsource your logistics or not. Only you know your business and how it operates, it's a big decision and hopefully The Complete Guide to 3PL’s will leave you more informed to make that big decision.
Okay so next up, Steps to Choosing the Right 3PL for my Business
Steps to Choosing the Right 3PL for Your Business
So, you made it this far and now you have decided that hiring a 3PL provider and outsourcing your logistics is the next step needed to help grow and expand your brand. Congratulations!
A quick google search of the top 3PL providers will return hundreds of results. You’re thinking, “Where do I begin? How do I know which company is right for my business?” Each business is different and you cannot take a one size fits all approach here.
Most 3PL providers will require service contacts of at least 2 years, so you need to spend some time performing your due diligence making sure your company and the 3PL are aligned on your long-term goals.
I usually start with the basics and look for a company with a solid financial record, great online reviews from their customers, a functioning website and a positive reputation in the industry.
- Stability and length of time in business
- Reputation and customer reviews
- Are they active within their industry and community?
- Flexible hours
- How many fulfillment centers do they operate?
- Safety record, which is available to the public here.
After a quick review, you usually can get a good feel for companies that you do not have a high level of trust with and can eliminate immediately.
Moving on, it’s time to dig a bit deeper. The next biggest factor is the geographic location of the warehouse. The 3PL you select should be within 2 business days for ground shipping to the majority of your customers.
- Where are they located? Do they have a warehouse in close proximity to your customers?
- Do they have more than one fulfillment center?
- Is international expansion in your plans? You should then select a provider with that capability.
With a simple online search, you have narrowed your list down to reputable companies with geographic locations close to your customers. Now, let’s get our hands dirty and dive a bit deeper.
Capabilities/Volume of Orders
When contacting 3PL providers and asking what daily order volumes they can handle, most will say they can handle just about any volume of orders. I have not seen this to be true in practice. When speaking with a 3PL, a better question to ask would be what is their sweet spot for daily order volume?
Some other providers might have daily minimums, just something to consider.
- What daily order volume are they the most adept at handling consistently?
- Do they have a daily minimum order volume?
- Can they handle Direct-to-Consumer, Direct-to-Retail, Crowdfunding campaigns? What’s their specialty?
- Do they support bundling, kitting, or light assembly?
- Do they support Next day order?
- Do they support gift cards?
This sounds like a complicated college course that you dropped a few times. In reality, it simply means that everyone is a bit better at performing certain activities than others. This is also true in the 3PL world. While most 3PL’s can handle most products effectively, there are a few that are really good at a specific niche.
Some questions that might be pertinent to your business:
- Do they specialize in certain verticals? (i.e. Apparel, Cosmetics, Electronics)
- Can they store batteries or aerosols?
- Are they FDA registered?
- Do they have climate-controlled storage?
Technology is so important when it comes to selecting a 3PL provider. First and foremost, you need a 3PL that is flexible, growing and constantly improving its tech stack.
You will first need to summarize the technology that you are using, decide how important the tech you are using is to you, and will you migrate if forced.
Start building a list of platforms or integrations you’re currently using.
Here is a quick guide you can use:
- What are you using as your Shopping Cart? (ie. Shopify)
- What are all the Marketplaces where you sell your products? (ie. Amazon, eBay)
- What ERP do you use? (ie. NetSuite)
- What do you use as an Inventory Management System? (ie. ChannelApe)
- What do you use as an Order/Fulfillment Management System? (ie. ChannelApe)
- What do you use for accounting? (ie. Quickbooks, Xero)
These are just some of the middleware that can live between your inventory and orders and will need to play well with your warehouse provider.
When you’re building out your tech stack list, make sure to notate how these pieces connect. They could connect via FTP, API or EDI.
So, here are some questions to ask the 3PL regarding their technical capabilities:
- What shopping carts do they integrate with?
- What marketplaces do they support?
- Do they play well with Amazon Seller Fulfilled Prime (SFP)?
- How do they accept orders, via API, FTP or EDI?
- What middleware do they integrate with?
- Are you constantly upgrading their tech capabilities?
- What is on their roadmap for future development?
Hopefully, now after reviewing your targeted 3PL’s, you have the list down to two or three companies that you think you will want to work with.
This next step should always be the last. Yes, you guessed it, cost. While cost is very important when selecting a 3PL, you should not make this your leading metric by which to select a provider.
At the end of the day, you are placing one of the most important pieces of your company’s continued growth into someone else’s hands. Saving a few pennies here and there and cutting corners will not be worth your customer’s satisfaction.
I put together a list of some common fees associated with outsourced logistics.
- Inbound Transportation Costs
- This will consist of fees associated with sending your products to the fulfillment center including unpacking and receiving your goods.
- Warehouse Fees
- This is the cost of storing your goods until they are picked and packed for shipment. This fee is generally inexpensive and charged per pallet.
- Pick and Pack fees
- These are fees billed per order. This is the cost for someone to pick the order, put it in a box, and label. There could be additional fees here if the package requires gift cards, gift wrap or inserts. Prices will get cheaper as you ship more items.
- Shipping Costs
- This is the actual cost associated with mailing out your order. 3PL’s typically get much cheaper rates since they are doing a very large volume of orders. Whether or not they turn around and give you a discount on rates is debatable.
- Setup Costs
- These are usually one time fees associated with setting your account for the first time. These include readying warehouse space, administrative fees, and training.
- Minimum Fees
- As I mentioned previously, some 3PL providers have month minimums. If you think your order volume will be very low, you can search for a provider without minimum monthly charges.
You should be in really great shape to make a decision on partnering with a 3PL provider. Typically at this point, you should have your choice narrowed down to two highly qualified companies.
Next step, I would advise to always meet face to face with the 3PL and do an inspection of their facilities. Most 3PL companies are easily accessible to major highways and larger cities. Jump on a plane or plan a road trip, it will be worth your time.
I know you’re telling yourself that this seems like a lot of work. There has to be an easier way. Where do I start?
Well, my motto is “Work Smarter, Not Harder.” In the next section, I have a surprise for you, so continue on to Who are the best 3PL’s?
Who are the best 3PL’s?
Well, hopefully now you are a 3PL ninja knowing everything there is to know about 3PL’s. You also learned how outsourcing your logistics can scale your brand to unheard-of levels. You booking your flight to perform your site visit and are getting your products ready to ship into a warehouse.
Okay, but I am not naive. I know you're busy. Maybe you didn’t have time to read my guide from end to end. You have a fast-growing direct-to-consumer brand, you are wearing many hats and putting out fires daily at your startup.
You just want to know who the best 3PL’s are, give it to me. I want the list!
Okay, okay, but before I do, let me preface it with this. This is not just some list gleaned off the net. This is not a copied list from somebody else. This is not from some logistics whitepaper hidden deep in a backlink somewhere. This is a list built and curated by speaking with the actual companies to learn more about their services.
These are some of the top 3PL providers right now and this list will continue to grow. So check back often.
From Charlie@Fulfillrite, to Marian@DirectShotDistributing, to Brady@RedStag and Tyler@Geodis, each was interviewed to learn more about their company's capabilities, capacities, specialized niches, and future goals.
So without further ado, The ChannelApe 3PL Fulfillment Network.
How Can I Find a 3PL by Geography
Earlier in this guide, I mentioned that you should select a 3PL provider that has a warehouse that can supply a majority of your customers within two days via ground shipping.
There are two main reasons why this is so important
- Happy Customers
- Gone are the days of taking a week to fill an order. Amazon set the bar that now has customers expecting their deliveries in a few days or less.
- 40 percent of customers will never shop with a retailer again after a negative delivery experience.
- Cost Savings
- Ground shipping is cheap, Next Day Air is not.
- Fulfillment cost is directly related to time in transit.
For example, a parcel shipping from Southern California to New York may be in transit for 5 business days. But, if you factor in weekends or holidays, this could expand to ten days. You can see how this could lead to a negative fulfillment experience.
For this reason, you will find most 3PL’s have fulfillment centers located close to major metropolitan areas where there are high concentrations of people.
Now that you understand how important geography is to your order fulfillment, how do you search for 3PL providers with a specific region or country?
You can use this searchable fulfillment network directory to filter by region or company headquarters. This should be a great starting point.
How do I get started with my 3PL?
Now comes the fun part. You used The Definitive Guide to 3PL’s and the 3PL Fulfillment Directory to select your logistics provider. Your products are shipped into the warehouse, they have been inventoried, and are now ready to be picked and packed.
You are ready to flip the switch over and have your 3PL start shipping orders from your website to your customers with lightning speed.
There is only one piece left to connect. You are looking for a unified platform to give you complete visibility into all of your orders and fulfillment plus give you that extra horsepower needed to fill orders using your complex business rules.
You’re now searching for tools that offer features like:
- Unified fulfillment visibility
- Automated shipping updates
- Customized fulfillment hold period ( hold before sending to 3PL to allow changes)
- PreOrder/BackOrder management
- Distributed line item routing
- The ability to scale up additional warehouses on demand
- Fulfillment Analytics to measure your logistics KPI’s
- Custom order routing