What is Third-Party Logistics (3PL)?

Third party logistics, or 3PL as it is commonly referred to, is the outsourcing of the fulfillment of orders to an external party. A 3PL service provider will handle the receiving of products, the fulfillment and shipping of orders with those products, and any returns of those orders on your behalf. 

Why is it called third-party? 

It is referred to as third party because the 3PL service provider becomes the third party in a transaction, meaning you have your customer who buys from you, you as a creator who designs and sells a product, and finally, that third party which is the 3PL who fulfills that order on your behalf to your customer. 

How does a 3PL work?

There are some basic services that a 3PL service provider will do: receiving, storing, picking, packing, and shipping. Other services are depending on the specific 3PL provider, like returns, custom packaging, labeling, kitting, etc. Let’s go into the basic ones:

1. Receiving - The first stage in a 3PL process is the receiving of inventory of your products. Here, the 3PL will count the products that arrived at the 3PL facility, scan the products using barcode/SKU, and categorize them for storage. 
2. Storing - Once the 3PL has received the inventory and taken stock of the number of items and the breakdown of those items, the 3PL will store those accordingly in a way that will make it easier to find the products when it is time to fulfill an order. 
3. Picking - When you receive an order, the 3PL will be notified that they have an order that needs fulfillment. A worker will find the stored item or items that are needed for that specific order. They will pick many items of different orders at the same time to make the process as efficient as possible. 
4. Packing - After items are picked, they are handed over to a packing area where they will be scanned, grouped if they are in the same order, and properly packed for shipping. Here, they will also print the shipping label needed and then move the packaged order into bins categorized based on shipping carrier or shipping service. 
5. Shipping - Now that the order has been packaged, it is handed over to the shipping carrier to get the order to your customer.
6. Returns - Not all 3PL service providers accept returns. The return flow is commonly referred to as reverse logistics. There are some similarities between normal order fulfillment and returns; however, returns have some complexities, which is why not all 3PL providers will accept them. This includes things like doing product inspection, re-packaging the product for resale, re-stocking into storage as returned, discarding products not suited for resale, etc. 

How do 3PL make money?

Third-party logistic providers have a fairly complex pricing structure, which will vary from provider to provider. The most common is charging a fee for each step of the fulfillment process:

• Receiving fee - a charge per unit received at the 3PL facility
• Storage fee - for any products kept in inventory with the 3PL facility, usually calculated based on the last day of the month. Think of it as a fee for the space your products take up in a 3PL warehouse. 
• Pick and packing fees - 3PL will charge for the fulfillment of orders. Typically, they have a fee for the first product of an order and then a lower fee for any additional items in the same order. An order with multiple items will have a higher total fee but a lower average fee per item. 
• Other fees - these are fees for special projects that a 3PL provider might do for you, return fees, customer service, etc. 

Why use a 3PL - benefits of third-party logistics

Having a 3PL provider offers several advantages to companies by outsourcing order fulfillment logistics. The main benefits are:

• Expertise - You can rely on the expert knowledge of logistics professionals whose primary focus day in and day out is finding the best solution to optimize your order fulfillment and increase the speed at which your customers receive their products and orders. 
• Lower costs - Depending on the volume and the fluctuation of orders, outsourcing the complexity of order fulfillment to a 3PL service provider provides a lower-cost solution than having it in-house. With a 3PL, you only incur costs as you use their services versus having the fixed costs of staffing, warehouse space, and equipment when running order fulfillment in-house.
• Scalability - 3PLs give you scalable resources to meet your needs as your business scales and can quickly adapt to seasonal fluctuations in your business. This helps keep your focus where it matters: with your product and business. 

Limitations of using a 3PL

Outsourcing your order fulfillment to external companies like 3PL providers comes with some risks since you are handing over specific responsibilities to a third party. By using a 3PL, there is a lack of direct control, which means quality control and customer service require extra coordination to ensure the 3PL is reducing the chances of errors and mistakes. With proper planning and communication, a 3PL collaboration can succeed and be highly beneficial to your business.

Related Topics / Questions

• Fourthwall fulfillment service guide
• Sending products to Fourthwall's fulfillment center - Best Practices

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