What is 3PL (Third Party Logistics)?
You’d never think that success could be your biggest downfall, unless you’ve run headlong into the 10-foot wall that is a logistical meltdown. 3PL is an entire industry that cropped up in the 70s to keep those operational nightmares as being just that: scary stories told around the campfire rather than being the reality of your business operations.
These companies take on the operational activities of their clients. This can encompass everything from distribution to fulfilment, or even the full supply chain. Since there is more and more emphasis on providing a top-notch customer experience, they have really stepped up their game by providing personalised services for their clients.
What is the difference between a 3PL & an Inventory Management System (IMS)?
It’s very easy to get an IMS and a 3PL mixed up, so it’s wise to know the distinction between the two. 3PLs actually hold a third party responsible for carrying out tasks on behalf of your Shopify store. With an Inventory Management System, the key word is management: it is a system that manages orders, stock inventory, volume forecasting and a heap of other inventory and operational decisions.
The key takeaway is that an IMS and 3PL are not interchangeable, however, an IMS is a part of the 3PL ecosystem. This should be taken into consideration if you’re thinking of setting up a 3PL, as you need to make sure that it ties in with your IMS. In other words, your IMS should plug into your 3PL.
What are the different types of 3PL?
Transportation 3PL can occur anywhere along the production/delivery line. You may want to outsource shipment from your buyers to your warehouse or the order delivery out to your customers. It’s essential to have a list of your shipping requirements prepared when finding your 3PL, e.g. next day delivery or your primary customer region.
Warehouse and distribution based
Here, we are dealing with the shipment aspect (as with transportation based 3PL), but you’ve also got the added steps of storage and returns. When a business outgrows its startup space, this is usually their go-to option. Space and backlogs no longer limit you and are less likely to happen. Again, think geographically and try to source a warehouse close to your customers. However, there’s a lot more than that to juggle, including delivery labels, inventory insurance, shipping rates, pricing models and so forth. This is where an IMS comes in handy.
Financial and information based
Most Shopify stores won’t reach a level where they will need to consider this option, but it’s essentially when all logistical operations are outsourced. Everything from cost accounting to booking, tracking and monitoring inventory. It's a considerable portion of the business’ operations, so it’s no surprise that it’s the most costly option.
In-house fulfilment vs outsourcing
We’re under no illusion here at Elkfox that outsourcing is a great option for many stores. The question is: where do you stop once you’ve started outsourcing? Everything can be done outside the business, from marketing to shipping. Here’s a good way of thinking about it: if outsourcing a part of your logistics helps your company to grow without sacrificing your unique selling point (USP), then it’s worth considering. We’ll discuss the pros and cons of outsourcing a little later on.
At what point should you consider outsourcing operations to a 3PL?
I’m not going to give you an ‘it depends’ answer here. These are the key variables that will dictate whether or not your store will receive a healthy ROI from working with a 3PL:
Your business is growing
It might be time to hand over the logistics to a company that already has the resources. If you’re experiencing a decisive growth spurt in your business, the best option is to outsource before investing in warehouse equipment. Make a decision as early as possible to prevent unneeded costs.
Decreasing profit margins
If you’re finding a worrying pattern of reducing profit margins and increased cost, it’s worth looking at your operational overheads. Outsourcing warehouse activities could very well mean reduced business expenses, and who doesn’t want that?
Your business is overstretched
A company clogged up by operational activities risks losing its USP. Outsourcing will allow your store to refocus its resources and creativity on product development, core values, UX and marketing.
Storage space is becoming scarce
When space is inhibiting your operations, causing delays and stress, this is a telling sign that a 3PL could be for you. However, if you are managing all the other variables, this may very well just be a sign to upsize to a roomier warehouse.
You may be paying exorbitant rates for shipping, especially if you’re a smaller store. A 3PL will have a higher volume of shipment which gives them more bargaining power when dealing with the likes of FedEx, DHL, UPS etc.
What the pros and cons of outsourcing your operations to a 3PL?
It saves time
No more picking, packing, shipment logistics, although you will have to deal with queries from your 3PL.
Scaling your business becomes easier
Especially when it comes to opening your store’s overseas potential. You don’t have to increase labour and storage costs but instead, you invest in an industry professional.
Access to better shipping rates
3PLs have the shipment volume and the knowledge to get you optimal deals in product delivery.
Simplify international logistics
There’s a lot of documentation, customs and expertise involved that you won’t have to deal with if you have a professional 3PL on board.
3PLs have the latest software for inventory forecasting, transportation management and customer order fulfilment.
No more inventory audits
Hooray! I have yet to hear of a Shopify store that enjoys manual stocktaking...
The majority of the downsides either come from selecting the wrong 3PL, lack of communication, or signing an SLA (service level agreement) that doesn’t fit your requirements. However, there are a few drawbacks to consider:
Loss of control over the fulfilment process
this is inevitable. You’ve got to keep an eye on quality control, which does take up time.
Larger upfront investment
There are significant set-up costs involved. If your company doesn’t have a large enough storage requirement or sales volume to justify outsourcing, it may become a costly business error.
If something goes wrong, it's your business that looks bad
If mistakes are made along the way, it’s still your business that looks bad, not theirs. There’s no other way of looking at it: you are adding a middleman and vendors are bound to make mistakes here and there.
Loss of market knowledge
Handing over your logistics to a 3PL means your in-house logistical team risks losing relevant market knowledge. Should your relationship with your 3PL ever cease, your team could lack the institutional knowledge to bring shipping back in-house.
What do you need to consider when outsourcing order fulfilment?
Ideally, their warehouse location minimises both time and costs to you and your customers in this balancing act. Their warehouse should also be on a road that large trucks can access.
Rates and fees
Rates and fees are going to be high on your agenda in deciding whether to outsource. Here are the fees and rates that account for the bulk of outsourcing costs:
- Shipping rates
- Warehousing fees
- Picking & packing fees
3PLs come in all different shapes and sizes, so find one that can cater to your storage needs.
You want your 3PL to enhance your customer’s experience - this means getting products to them on time.
Take note of how responsive they are to your queries and, if you can, speak to them in person and visit the warehouse.
Still need help choosing the right 3PL for your business? Contact us and we can help you select the perfect 3PL for your Shopify store. We're digital commerce experts with years of experience working on the Shopify platform.