Third-party logistics (3PL) is a mainstay of eCommerce fulfillment, offering warehousing, professional pick and pack, packaging prep, and handoff to shipping couriers. These providers are essentially “logistics as a service,” with some specializing in single points of the process (e.g., warehousing), and others providing a full-service solution, complete with distribution and courier handoff.
In most cases, they present a cheaper alternative that’s less resource-intensive and lower risk than setting up similar shipping capabilities in-house. They also give eCommerce brands access to professional fulfillment at a much earlier stage in the business life cycle. As a result, 3PLs are growing rapidly, with over 21,000 such businesses in the U.S. Further, these providers handle an estimated 60% of all global retail shipments.
In this article, we’ll look at how those services are able to save your organization money, explaining where specifically they can cut costs across logistics.
1. Fewer shipping expenses
The core of 3PL companies is shipping and fulfillment. They often operate through a mix of their own shipping fleets and major shipping carriers like UPS, USPS, and FedEx.
3PLs can negotiate significantly lower rates with carriers because they represent their entire clientele, which can encompass hundreds of thousands or even millions of product shipments per year. Those economies of scale carry over to other aspects of shipping as well:
- 3PLs can afford their own fleets for last-mile delivery to reduce the total cost of courier delivery.
- Optimized routes minimize expenses along the journey by distributing inventory regionally, which reduces the final cost to ship.
2. Reduced warehousing costs
Warehousing eats up a significant portion of budget for many businesses. With a 3PL though, you share storage costs with their other customers, since you’re renting a small portion of a larger warehouse alongside tens or even hundreds of other businesses.
With 3PLs like MyFBAPrep boasting over 85 million square feet of warehousing space, eCommerce brands enjoy economies of scale for storage as well. Instead of investing in building or buying infrastructure, you pay for what you need, and the cost per square foot is significantly lower because the service operates in bulk.
Storage availability also enables you to scale during seasonal and peak periods with ease: You can increase warehousing volume for the holidays to meet demand without having to find extra space to hold your products.
3. Inventory management
Other foundational offerings are inventory management, warehousing, and distribution. 3PLs invest in these services to develop top-notch inventory management systems, with real-time tracking and synchronization with your existing software and systems. This means you can track stock levels live so you can update inventory on every platform where you sell.
Your 3PL should also offer advice on inventory optimization. For example, they may recommend strategies for ordering and stocking, increasing inventory turnover, and reducing total costs.
4. Cost savings on labor
Hiring staff for product handling, pick and pack, inventory and warehouse management, and other logistical tasks is time-consuming and expensive. You have to screen candidates and train new staff, and during peak sales periods like the holidays, those responsibilities multiply.
For smaller eCommerce stores, that can be extremely expensive, because you might not have the volume to employ full-time staff for part of the year, then suddenly need a team of more than 10 at key points. With only one or two people on staff, your warehouse could experience outages during turnover or if someone calls in sick.
Switching to a 3PL gives you access to a professional, full-time workforce that distributes work across multiple businesses — you can scale labor as needed, with your 3PL handling the hiring, training, and supervising. A larger team also means less disruption when employees take sick days or you scale up for seasonal peaks, so you pay less for better service.
Savings can also be considerable if you compare the annual wage of in-house employees versus what you pay for the same service from your 3PL.
5. Technological savings
Logistical processes also require advanced software, which 3PLs and 4PLs possess. They boast the latest systems for picking, warehouse management, transportation management, etc. Their robust software enables your business to enjoy real-time tracking, better warehousing insights, automated pick, and more.
In addition, by shifting much of that software to a third party, you cut technology costs like IT staffing and hosting to create and maintain that same software environment internally. While you’ll still need in-house IMS and CRM, you’ll have fewer tools to set up and maintain, which lessens your investment in IT.
6. Risk management
With professional and trained staff, advanced technology for reliable, real-time tracking, analytics to highlight and mitigate potential problems, and the ability to provide more comprehensive insurance, 3PLs can greatly reduce logistical risks.
Providers often incorporate regulatory compliance into service offerings as well, in the form of a compliance officer who stays up to date on rules so you don’t have to onboard someone to handle it internally. You save on compliance and risk management while slashing potential expenses that could result from neglecting risk management.
7. Minimal capital investment
Outsourcing logistics to a 3PL lets you focus on core business aspects and frees capital for stock replenishment, expansion, and other activities to strengthen your brand. You also benefit from increased logistical flexibility and scalability, without having to make a personal investment, which saves you on expenses like:
- Researching and buying software, storage capacity, machinery for warehousing, etc.
- Maintenance costs (e.g., cleaning warehouses, repairing buildings, hiring and recruitment expenses)
A 3PL switches all of those services to a “pay as you go” model (much like software as a service). You pay for what you use as a portion of the total costs of the provider, which is often cheaper than if you took on the same services yourself. In turn, you regain that capital to redirect toward your core business.
8. Less demand for customer service
Thanks to their professional services, robust software, real-time tracking, automated pick-and-pack systems, and reliable logistics, 3PLs slash the occurrence of errors, breakage, and late deliveries. They also bring other perks like packaging optimization and last-mile-delivery, which minimize damage during transit. As a result, you save money through fewer customer complaints, returns, and replacement product costs.
9. Cheaper expansion into new markets
Expanding into a new geographic region requires significant research, setup, and effort to place inventory for timely delivery to customers. With a 3PL, you instantly access warehousing and last-mile fulfillment in those areas. Additionally, they may also have existing contracts with carriers, so all you’ll have to do is move inventory to their warehouses.
Many also offer advanced capabilities for international shipping. For example, if more of your customers ship globally, you would benefit from consolidated shipments to cut expenses. You’ll also see fewer costs and delays associated with customs processing since the 3PL is well versed in the necessary requirements.
10. Prep and packaging services
Finally, 3PLs offer pick, pack, and prep services that save you considerably versus handling them on your own, thanks to:
- Economies of scale to reduce the cost of packaging per unit
- Machinery for pick and pack
- Access to a range of packaging materials to better fit products in packages
- Cost-effective bundling and kitting capabilities
- Uniquely branded packaging for memorable presentation
- Options to add inserts, discounts, etc., to packaging
- Expert prep to meet guidelines for FBA and other 2P solutions
Conclusion
A 3PL can help your eCommerce business save money at every stage of logistics. They bring professional services like warehousing, pick and pack, and delivery for less money than if you handled everything yourself. At the same time, you enjoy greater quality, compliance, inventory management, and software — all of which cut expenses while improving the customer experience.
About the Author
Tom Wicky, Co-Founder & CEO, MyFBAPrep
