What Is 3PL, and Why Might You Need It?

The best e-commerce companies seem to be good at, well, everything. They innovate cutting-edge products, lead with killer marketing strategies, and seem to have a sixth sense for discovering their perfect audience. There's no magical secret to their success, though it may look like actual magic. These companies are just smart about how they use their time—and for many e-commerce brands, that means using a 3PL, or third-party logistics provider. 

Imagine if you could free up a chunk of your day, every day. What would you do with that extra time? Probably not packaging and shipping products. (Unless you find that strangely therapeutic, in which case, we might have to have a different conversation). That's exactly where a 3PL provider comes in.

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Leveraging the Changing E-Commerce Environment

Let's back up for a second first. Why do you even need to be thinking about how to enhance your e-commerce business? Long story short, by thinking proactively about solutions that help you scale, you'll be better primed to take a larger chunk of the e-commerce pie than your competition—and it's shaping up to be a giant pie.

E-commerce sales are taking up a much larger share of the total retail market and will keep increasing for some years, according to the International Trade Administration (ITA). In 2019, before the pandemic took hold, global e-commerce sales totaled 3.354 trillion USD.

ITA data shows that once the pandemic encouraged people to shop online instead of in stores, 2020's figure grew substantially to 4.28 trillion USD. It then grew to 4.891 trillion USD in 2021, and 2022's forecast estimates 5.424 trillion USD in global e-commerce sales. The ITA expects global e-commerce sales to reach 6.388 trillion USD in 2024. From 2019 to 2021 in the USA, e-commerce sales increased by 50.5%, highlighting the opportunities in e-commerce markets. 

Chart: Retail e-commerce sales worldwide from 2014 to 2024 (in billion USD)

Increasing domestic and global e-commerce sales gives e-commerce businesses an excellent opportunity to scale their businesses for optimum results in a growing market. 3PL providers allow you to leverage this opportunity because they can take care of e-commerce fulfillment, Amazon prep, pick-and-pack, kitting, distribution, warehousing, and more.

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What is 3PL and How Does It Work?

Time is your most precious resource as a founder—but it's also an aspect of your product. Consumers are conditioned to expect their purchases to arrive not just seamlessly and safely but also quickly. You could figure out how to get your products to you, organize them, store them, pull them once an order comes in, and pack and ship them. Or you could outsource all of that to another company, like a third-party logistics (3PL) provider.

3PL stands for third-party logistics, or companies that handle the logistics of moving and storing your products for you. 3PL providers like All Points offer services such as warehousing, transportation, and distribution of products—though that's only scratching the surface of what these companies can offer e-commerce brands.

3PL companies provide a wide range of logistics services and solutions for companies looking to outsource these functions and others. Some third-party logistics suppliers offer a complete suite of integrated logistics solutions, while others specialize in specific niches or industries.

Third-party logistics providers exist in one of two main forms: large or small. Big companies have a large staff, while smaller companies have a small staff.

Large vs Small 3PLs

The main benefit of working with a small 3PL is that you’ll get a more personalized approach and form closer relationships with your 3PL team. Some smaller 3PLs have limited warehouse space and are less equipped to handle large swings in order behavior, like holiday rushes.

Large 3PLs tend to have bigger facilities, but that also comes with a larger staff. That means the trade-off for your business may be less personalization. So they may be able to handle any swing in your orders but unable to tailor your service to your unique business needs or truly know and understand your products. 

3PL vs 4PL

Third- and fourth-party logistics providers sound almost identical and, yes, they're both companies that provide logistics services for companies who don't want to or can't handle these functions internally. So, what's the difference between them? 

3PLs take care of all your logistic needs. If you're a small- to medium-sized e-commerce company, partnering with a 3PL can be a smart idea because it gives you access to a wide network of warehouses and fulfillment centers, ensuring your products reach your customers quickly and efficiently without you having to get your hands dirty. 

On the other hand, 4PLs manage logistics but also design and manage the entire supply chain process. Supply chain management combines multiple 3PLs, transport carriers, and other services into one cohesive system for large companies. 

Definitions and Basics of 3PL

First things first, let's get familiar with some key terms. A third-party logistics company is a service that allows e-commerce businesses to outsource operational logistics from warehousing, to fulfillment services like pick-and-pack and delivery, and everything in between. You could think of them as the invisible elves doing all the heavy lifting in Santa’s workshop, but instead of toys, they're handling your business inventory. 

Imagine a well-oiled machine humming along in the background while you focus on the fun stuff like marketing and product development. That's your 3PL provider. 

• Inbound Logistics: This is essentially the receiving part of the process. It's where your products are shipped from your suppliers to the 3PL's warehouse. For you, that means no more worrying about where to stash all those boxes.
• Warehousing: This is where your products are stored until they're sold. Your 3PL provider will have a dedicated space for your inventory, so you can forget about tripping over stock in your office.
• Outbound Logistics: This is the distribution side, where products are packed and shipped to your customers. It's like having your own personal post office.
• Order Fulfillment: As orders roll in, your 3PL provider processes them, picks the products from the warehouse, packages them up, and ships them off. It's a beautiful ballet of efficiency.

Now, where does the 3PL provider fit into the supply chain? They're like a vital cog in the machine, bridging the gap between you, the supplier, and the customer. Without them, you'd be the one juggling all the logistics.

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Why Should You Consider Using a Third-Party Logistics Provider?

Picture this: your business is booming, orders are pouring in like a waterfall, and the world is your oyster. It sounds great—but who's handling all the logistics? It's easy to see how a drive to improve business KPIs can quickly lead to a logistical nightmare. Having a 3PL provider to handle your third-party logistics can save you from this chaos, but also has benefits that go well beyond that.

Lean Staff

With a 3PL provider, you can keep your team lean and mean, saving on overheads and avoiding the logistical nightmares of managing a large team. You can also stay lean through ups and downs in the economy, avoiding hiring—and needing to lay off—new team members.

Having another company to do your third-party logistics also means you will never waste time or resources recruiting, interviewing, or onboarding staff to manage your warehouse space.

Lowers Your Overhead

A third-party logistics company also saves you from a major overhead cost: having your own warehouse. Even when commercial real estate (CRE) is struggling, renting or buying a warehouse large enough to store all your inventory—potentially leaving room as a safety net for increased demand—is not cheap. You'll skip the cost of the space, equipment, and staff if you turn to third-party logistics companies to handle that for you.

Focus 

Running an e-commerce business is like juggling flaming swords while riding a unicycle...on a tightrope. It requires intense focus. With a third-party logistics provider, you can stop worrying about the nitty-gritty of storage, packaging, and transportation, and focus on what you do best—growing your business. 

Flexibility 

Ever tried to change direction quickly with a bloated team? It's like trying to turn a cruise ship on a dime. But with another company handling your third-party logistics, you can scale your logistics needs up or down depending on the season or demand, giving your e-commerce business the agility it needs.

Efficiency 

Thanks to economies of scale, 3PL providers can often perform logistics tasks more efficiently than you ever could. That's because you're recruiting a team of professionals who specialize in exactly what you need: they manage inventory and optimize the fulfillment process with a precision that all but guarantees customer satisfaction. And the experience on these teams is exactly why they can manage and optimize these processes like others cannot.

Expertise 

Unless you have a secret degree in logistics, chances are, a team of logistics experts will handle the intricate details of shipping and handling better than you. Let's face it, you wouldn't ask your butcher to bake your wedding cake. This outsourced service lets you focus on everything about your e-commerce store to the point of purchase and hands the rest to a team whose core competencies are everything that comes after. 

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Types of Services Offered by 3PL Providers

A third-party logistics provider is like a Swiss Army knife for your business: It puts many tools at your disposal, but you don't need to use them all at once. The beauty of 3PL is that it's not a one-size-fits-all deal. Depending on your business needs, you can choose from a smorgasbord of services, and rest assured that others are available if and when your business grows to need them. 

Some of the most used services of third-party logistics providers are:

• Transportation: This is the heart of 3PL services. From pick-up to drop-off, third-party logistics providers ensure your goods arrive safely and on time. This is especially beneficial to the manufacturing industry, where timely delivery is key to maintaining production schedules.
• Warehousing: Need a place to store your goods? Third-party logistics providers have got you covered with secure, managed storage facilities. This is a boon for retail businesses that need to manage large inventories but don't want the costs and work associated with owning or renting their own warehouse space.
• Distribution: Third-party logistics providers can manage the distribution of your goods, ensuring they reach the right place at the right time. This is perfect for e-commerce businesses that ship products to a wide array of locations.
• Return or Reverse Logistics: Logistics management isn't all about getting your products to your customers. Sometimes, it's about making it easy for customers to get your product back to you. A third-party logistics company handles this for you, so even if you lose the sale to a return, you can win the next with stellar customer service.
• Value-added services: These can range from packaging and labeling to the assembly of products. For example, a furniture business might need assistance with assembly before shipping.

And that's just scratching the surface. Here's a more detailed look at some of the services: 

Supply Chain Management

Imagine a conductor guiding an orchestra through a symphony—that's what a 3PL does for your inventory management and logistics services. They'll run all of your e-commerce fulfillment out of their third-party logistics warehouse and use their industry expertise to ensure every step of the shipping process is running smoothly. 3PLs, however, don't optimize your supply chain. That's where other logistics service providers may be necessary, such as:

• 4PLs: Fourth-party logistics providers (also called lead logistics providers or LLPs) handle all supply chain management, optimizations, and logistics for companies that need it.
• 5PLs: Fifth-party logistics providers go a step beyond 4PLs/lead logistics providers. These companies handle multiple supply chains for their clients.

If your supply chain works well, and you mostly need help with supply chain operations—not optimizations—a 3PL is probably the best fit for your business.

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Factors to Consider When Choosing a 3PL Provider

Choosing a 3PL provider is like choosing a dance partner. You want someone who can keep up with your pace, who won't step on your toes, and who knows all the right moves. It's a relationship, and like all relationships, it needs to be a good fit. 

First and foremost, consider the services the 3PL provider offers. Is it a one-trick pony, or can it handle all the steps of your order fulfillment process? Some providers offer just warehousing, while others offer a complete package that includes pick-and-pack, kitting, shipping, and returns. 

• Warehousing: Can they store your products and handle inventory management?
• Pick-and-Pack: Can they pick the product from inventory and pack it for shipping?
• Kitting: Are they able to pack complementary SKUs together to optimize shipping?
• Shipping: Do they have relationships with carriers to get you the best shipping rates?
• Returns: Can they handle returns effectively and efficiently?

Additionally, consider their location and scalability. Are they close to your customers? Can they scale up or down to meet your changing needs? 

The next thing to consider is their technology. Do they have a modern, user-friendly platform that can integrate with your e-commerce system? Can you track your inventory and orders in real-time? These are all critical questions to ask. 

You may also want to consider the size of the third-party logistics provider. As we outlined above, a larger team may be able to handle a surge in purchases around the holidays. A smaller team, however, can offer you more personalized service—often with a dedicated team member who knows your SKUs as well as you do.

Finally, don't forget about cost (we'll discuss this more in a second). Third-party logistics providers can offer cost savings by bundling services together, but make sure you understand all the fees involved. 

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Costs Associated with Using a Third-Party Logistics Provider

So you're ready to never have to print another shipping label in-house. Trusting your inventory management and fulfillment services to a 3PL provider can be a smart move, but it isn't free. There are costs associated, and you must understand these before making your decision. Here are some of the main costs to consider:

Inventory Storage 

The first and most obvious cost is inventory storage. Your goods need a home until they're shipped to your customers. Depending on the size, quantity, and nature of your products, storage costs can vary. 

Pick and Pack Fees 

This is the cost of picking the product from its warehouse shelf, packing it safely, and getting it ready for shipping.

Kitting

3PL providers may have separate pricing for kitting—packaging together multiple items stored in their third-party logistics warehouses. In some cases, this can offer cost savings compared to having a 3PL provider that will do order fulfillment through pick-and-pack but not kitting.

Shipping Costs 

Moving along the steps of order fulfillment, next comes shipping costs. Shipping costs usually depend on the weight, size, and destination of the package, which is why picking a third-party logistics service with a fulfillment center in a central location or multiple fulfillment centers can be helpful. Most 3PL providers will break down destinations into shipping zones so you can easily understand the transportation costs of shipping to each of them.

Reverse Logistics

Since reverse logistics essentially reverse the entire process of order fulfillment, its costs are associated with the same services: shipping, unpacking, and storing returned items from customer orders.

Account Management Fees 

Lastly, there's the account management fee. This is like a cover charge for the time and effort the 3PL provider puts into overseeing your account and ensuring everything runs smoothly. It's like paying for their watchful eye on your supply chain. 

Finally, here's all this information in an easy-to-read table: 

Common Challenges of Using a 3PL Provider and How to Overcome Them

There's no denying the advantages of outsourcing fulfillment for successful e-commerce businesses. But while we could talk up the value of 3PL services all day, it's worth knowing the hurdles so you can plan for them.

Challenge #1: Communication 

A common challenge with large 3PL providers is communication. You could feel like you're playing hide and seek with information about your own inventory. And since you might be far from the storage space being used for inventory warehousing, you're ultimately reliant on communication since you can't just swing by for a check in.

Establish a clear communication plan from the get-go. Regular updates, scheduled meetings, and a dedicated point of contact can keep those pesky dark corners at bay. You may choose to go with a small 3PL provider to avoid this issue altogether. All Points, for example, keeps things small but nimble so each client has the inventory management they want with a dedicated contact that knows your inventory as well, if not better, than they do. 

Challenge #2: Hidden Costs 

Another curve ball that might come your way is unexpected costs. You thought you were signing up for a straight-forward package deal, but then you're slammed with additional fees and charges.

Make sure you read the fine print and ask for a detailed breakdown of all costs before you sign on the dotted line. You don't want any surprises that'll make your wallet weep. Many providers, like All Points, make a point of cost clarity, so it may be worth seeking out a provider that's upfront with all of this information so you don't need to parse through clauses or hunt down additional cost information.

A Quick Note...

Logistics companies will have thought about these challenges, too, and will likely address them as soon as you start discussing using them to help your e-commerce store with inventory and shipping logistics. Just because they exist doesn't mean you have to experience them as you focus on the growth of your online store. Know these challenges exist, find a 3PL provider who feels like a partner, and establish a plan to avoid these together.

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Choosing the Right 3PL Partner for Your Business

There are several key factors you need to contemplate to ensure that you're pairing up with a 3PL provider that matches your business needs and goals. You know, kind of like finding your business's soulmate. Some factors you may want to consider are:

• Services Offered: Not all providers are created equal, and the 3PL services they offer can vary wildly. Some might specialize in transportation, while others may be whizzes at warehousing. Ideally, you want a 3PL that offers a full suite of services—kind of like a one-stop shop for all your logistical needs. You may also want to consider specific services that matter more to your e-commerce business, like reverse logistics to make sure customer expectations are met if they want to return a product.
• Experience: How long has the company been in business? Do they have experience handling products similar to yours? Past performance is often a good indicator of future results. Remember, you're not just looking for any partner; you're searching for the right partner.
• Technology: We're living in a digitized world, and if your 3PL isn't technologically savvy, they may be left in the dust. Look for a 3PL that uses modern, efficient systems. You want a partner that can track and report on your inventory in real-time with a warehouse management system, not one that still uses pen and paper.
• Scalability: Your business isn't static, and your 3PL shouldn't be either. Whether you're scaling up or scaling down, you need a flexible partner who can adapt to your business's needs. Can they handle your holiday rush or a sudden surge in demand? If not, they might not be the one for you. But if your sales are more stable, you may be able to choose a smaller provider that's great at shipping orders consistently but doesn't have the infrastructure for a surge in demand.
• Reputation: Word of mouth still holds a lot of weight in the business world. What are other companies saying about them? Are they reliable, professional, and efficient? A little bit of research can save you a lot of trouble down the line.

Choosing a 3PL is like choosing a partner—it's not a decision to be taken lightly. Take the time to do your research, ask the right questions, and ensure they align with your business's needs and goals. Your future self will thank you.

All Points may be a great partner for you if you're looking for a smaller 3PL provider that's able to be deeply ingrained in your products and comes with plenty of industry expertise. We've worked with small, independent non-profits and Fortune 500 companies, and offer personalization services like kitting that may be essential for your e-commerce business.

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How to build and maintain a strong 3PL relationship

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