The Complete Guide to 3PL (Third-Party Logistics)

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The Complete Guide to 3PL

3PL – third-party logistics – in logistics and supply chain management are present as an organization’s use of third-party businesses to outsource those services. That would include distribution, warehousing, and order fulfillment, as 3PL is a service that allows you to outsource operational logistics from warehousing to delivery, allowing you to focus on other aspects of your business.

3PL companies provide any number of services having to do with the logistics of the supply chain. This includes transportation, warehousing, picking and packing, inventory forecasting, order fulfillment, packaging, and freight forwarding.

The market for 3PL providers experienced significant growth with the rise of e-commerce. Many Fortune 500 (86%) and Fortune 100 (96%) companies use the services of 3PLs.

Types of 3PL Providers

Types of 3PL providers specialize in different crucial capabilities:

  1. End-to-end solution (full service)
  2. Warehousing (network of warehouses, whether they be international or local)
  3. Transportation (by land, water, or air)
  4. Distribution
  5. Shipping

Additionally, it is quite important to note that the size and specialization of the company matter quite a bit. For instance, some 3PLs lack the full-service capability, specializing in one or two areas. At the same time, larger 3PL firms can offer end-to-end execution and integrate seamlessly into the existing system.

End-to-end Solutions Based 3PLs

The COVID-19 crisis has put operational efficiency in greater focus and knowing how much stock you have and where it is a crucial component of improving operational efficiency. Additionally, so is shipping inventory from the location closest to the customer, which cuts shipping costs. Full-service 3PLs help e-commerce brands become more efficient during and after crises such as this one.

Full-service providers offer brands an end-to-end solution that is tailored to get orders to your customers quickly and easily. Full-service 3PLs usually have a vast network of strategically located fulfillment centers, where some are in the country, and some are international. That ensures your merchandise is always at the right location, so orders ship faster and cheaper.

Full-service 3PLs offer:

  • Inventory intelligence
  • Branding the fulfillment experience
  • Easy integration
  • Same-day fulfillment

Warehouse- and Distribution-based 3PLs

As COVID-19 had a significant impact on order volume, warehouse- and distribution-based 3PLs have been valuable assets to many companies by offering unimpeded product fulfillment and implementing best practices in their workflow. It is worth noting that they are the most common type of 3PLs, and they store items, ship them to the designated locations, and handle returns. Moreover, some innovative warehouses can help you offer two-day shipping and, if you are thinking of expanding globally, 3PLs with international warehouses can help build a global supply chain.

Transportation-based 3PLs

The global pandemic spotlighted how crucial it is to automate delivery notifications and have a single place from which you can track orders worldwide in real-time.

That is where the transportation-based 3PLs come in. They transport goods between locations – for instance, between the factory and warehouse, or your business and your retail buyer.

Financial- and Information-based 3PLs

The changes caused by the current pandemic caused many companies to focus on the sum total of all economic activities, requiring visibility into key warehouse processes like pick-to-pack. In order to make swift yet informed decisions in times like these, the financial information related to fulfillment must be at your fingertips.

That is where financial- and information-based 3PL companies come in. They provide industry-specific insight and can optimize complex global supply chains. They also offer internal controls related to freight auditing, cost accounting, and inventory management.

Distribution and Warehousing

Partnering with a 3PL distribution or warehousing service provides significant benefits for retail businesses. Working closely with a reliable 3PL and having your supply chain adequately managed helps you gain a competitive advantage. This is all due to the shipping processes being swifter and more accurate. Moreover, using a 3PL distribution or warehousing services can help you save money on expenses like renting or owning a building, hiring labor, and purchasing equipment, as the 3PLs often offset those costs for their customers.

Furthermore, high-quality 3PL services are crucial as they allow experienced professionals to handle the complex processes, allowing you and your business to focus on growth in the time otherwise spent on managing distribution and warehousing processes. This will help you stay ahead within your industry as, when you have expert assistance on your side to simplify the supply chain processes, you will be able to save money, have more flexibility, and optimize your business as a whole.

How Warehousing Helps Streamline Distribution

The reason why warehousing and distribution are put into the same category in this text is the fact that an essential component of the distribution process is warehousing.

Goods distributed by businesses have to make stops at warehouses along their way. That is why proper warehousing practices are essential to exercise an efficient supply chain process. High-quality distribution services often include processing, quality control, and many other services that align perfectly with warehousing – all to make sure that the shipments reach their destination quickly and safely.

An essential part of this is a Warehouse Management System (WMS). WMS is software intended for companies that deal with production, inventory, and employees with different skill sets and duties. This software solution offers visibility into the entire inventory of a business and helps manage supply chain fulfillment operations – from the distribution center to the store.

The functionality of a WMS can be divided into three main categories:

  1. Inventory management
  2. Work execution
  3. Analysis and reporting

Nowadays, a myriad of WMS solutions can be custom-fitted to streamline any business’s warehouse and distribution operations (regardless of the industry or sector they operate in).

Benefits of Outsourcing Distribution and Warehousing

Developing the right strategy alongside a 3PL provider gives the business access to an entirely new range of expertise concerning supply chain and logistics. Whether your business is a startup company with a goal to establish a presence in the market, or a large company with a goal of seizing opportunities in new areas, or something else entirely, partnerships with 3PLs provide options that allow businesses to scale efficiently.

Flexibility

Utilizing a 3PL distribution provider allows you to set up and scale the distribution model according to changes in business demands. That leads to more accessible access to new markets that, in turn, allow you to service unique and diverse customer bases.

Here are some examples of flexibility that can be gained from outsourcing:

  • Flexibility in the transportation network: A well-managed distribution network led by experts in the field allows for more straightforward adaptation to changes and trends in transportation.
  • Flexibility in the supply chain: An outsourced 3PL partner will know how to synchronize inventory across all levels of the supply chain. Leveraging the expertise of a 3PL can reduce inventory carrying cost by utilizing the following methods, maintaining appropriate levels of stock, and positioning the product optimally to serve customers, regardless of their location.

Added Supply Chain Value

An experienced 3PL partner can provide a variety of added supply chain value, such as:

  • Creating kits, new packaging, and similar – These are some of the specialized services 3PL providers can use to support different parts of your business. For example, a 3PL provider can implement those value-adding services like packaging and kitting at the final point in the supply chain, which results in a drastic reduction of inventory and transportation costs.
  • Reverse logistics, returns processing, quality inspection – These processes are quite common in, for instance, e-commerce. Seeing how between 30-40% of online orders end up being returned, it is crucial to take care of these processes in an efficient way. Managing the logistics of an order return, as well as its eventual return to inventory, is a crucial part of any supply chain.
  • Cross-Docking, Order Consolidation – These practices are crucial for retailers servicing stores or larger distribution centers in their network. Cross-docking is a process in which a 3PL provider can receive and forward a product quickly to the next point of distribution, or, for example, fulfill a retail channel order; and by doing that, ensuring that it does not end up in storage needlessly. Consolidation is a similar tactic a 3PL provider can use for cost and labor reduction. It consists of ensuring multiple small shipments can be combined into a larger load, resulting in lower shipping costs.

Access To Relevant Industry Expertise

Strategic advantages realized by outsourcing are leveraging a 3PL provider for their operational process expertise and know-how. This can reduce costs, drive up efficiency and allow you to focus on your core business, as you can count on the 3PL partner to:

  • Understand the requirements of partners in the supply chain and know the ins & outs of product flows for a given industry;
  • Understand how to optimize processes within the warehouses to serve business-to-business and business-to-customer distribution channels effectively; and
  • Continuously improve and adapt processes to ensure efficiency, productivity, and cost improvement are always on the highest level.

Innovative and Impactful Solutions

Technological solutions such as the WMS (Warehouse Management System), TMS (Transportation Management System), RFID (Radio Frequency Identification), and EDI (Electronic Data Interchange) are capable of adding value to the supply chain in the form of visibility & connectivity, increased efficiency and streamlining the ongoing processes. Information transmission requirements set by large distributors often provide barriers to small or less sophisticated companies, but that no longer needs to be off-limits, as a 3PL partner could aid with that.

Namely, the capabilities of WMS and TMS are significant, as they allow for not only real-time access to detailed inventory information but also the forecast of upcoming trends in the market. Having a 3PL with strong technological capabilities as a partner allows you to utilize their systems and expertise to improve your own logistical processes. Moreover, integrating supply chain information into your own business systems can provide insights on a larger scale – for instance, how your business is ultimately serving your customer.

Significant Cost Savings

They can be realized in many ways, and the most common of them involve:

  • Process: For instance – improved productivity, increased efficiency, and optimization of shipping & transportation.
  • People: For instance – improved quality of labor and safety.

As already mentioned, an experienced 3PL partner can give you the ability to forecast the exact cost of each of your products and to account for that in the sales process.

A well-integrated 3PL warehousing and distribution strategy allows you to fully utilize an expert in supply chain management. A 3PL provider should be able to create a roadmap of how to most effectively build and maintain the supply chain. The provider should be able to provide flexible solutions that fit your strategy technology that allows you to scale efficiently, and process development to drive efficiency and cost reduction, and have the fiscal sense to help you maximize the invested finances.

Order Fulfillment

If you are new to outsourcing shipping, what goes on in a fulfillment center may seem like a mystery. However, it does not need to be. Therefore, here are the most common operational activities that take place in a fulfillment center:

Receiving

Before the 3PL of your choice can start fulfilling orders, it must go through a warehousing operation of receiving the inventory. That refers to the acquisition of the incoming inventory and its subsequent storage.

Each 3PL has its processes for receiving and storing inventory to aid them with the organization so that the orders can be fulfilled quickly and efficiently. Once the inventory is received, it is stored in fulfillment centers.

Picking

This is the first step of the fulfillment process. Some 3PLs require you to upload orders to their system manually; however, there are 3PLs that can integrate with your already existing system and automatically forward customers’ orders to your fulfillment provider.

The moment an order is sent to the 3PL, it is assigned to a warehouse picking team or a picker. Then, in order to collect the ordered products from their respective locations, they receive the list of required items along with their quantities and storage locations at the facility.

Packing

After the picking step, it is time to pack the orders. It is worth noting that some 3PLs charge for packing materials, while others include them as part of their fulfillment services.

Shipping

After that comes the shipping. It is good to know that most 3PLs handle the purchase and printing of shipping labels on your behalf. Additionally, some 3PLs have partner carriers, while others compare shipping costs from various carriers according to the situation.

Who Has Use of 3PL?

Partnering with an experienced 3PL for proper handling is often cheaper and more effective for retailers who are shipping outside of the country, as tax, tariff, and import laws would be handled by the 3PL provider. Moreover, establishing a separate international shipping department requires the education and potential certification of staff — an investment company may want to avoid — especially when a high product volume is involved.

Additional value that 3PLs bring is that many larger-scale logistics providers have numerous warehouses or fulfillment centers scattered throughout the country, meaning they only draw from their stock from the location closest to the customer. In cases of international shipments, they are able to source directly from a place in the country where the purchase was made, which is cutting down both the time and cost of shipping.

Now – why should you rely on a 3PL provider? It is simple – outsourcing supply chain operations to a 3PL company allows your business to preserve the financial assets instead of investing them into an in-house warehouse and distribution system, allowing you to focus on growth.

Moreover, for smaller businesses, 3PL is the most efficient option as it cuts down the associated costs of warehousing, distribution, labor, and infrastructure expenses.

As for larger companies – it does make sense to outsource the supply chain in order to control costs and increase the efficiency in their supply chain. That is why the larger the company, the more likely it will have a relationship with at least one 3PL company. For example, 90% of Fortune 500 companies operating within the U.S. sought assistance from one or more 3PLs, which is quite an increase from the 46% initially found in 2001, according to supply chain consultancy Armstrong and Associates.

3PL outsourcing is essential for shippers, as it allows for better cost control and efficiency improvements within the supply chain. Moreover, 3PLs are especially effective at handling e-commerce needs within the business-to-consumer market, as they can provide quality fulfillment by country.

When Should You Choose to Use a 3PL?

First things first – do not wait until you are overwhelmed by order growth, as it can damage your brand. Moreover, it can also prevent you from being as focused on growing your business as you should. Therefore, ask yourself those three key questions:

1. Are you fulfilling more than 10-20 orders per day? In order to save time and money, it might be beneficial to partner with a 3PL. Moreover, it would be beneficial if you estimated the growth potential outsourcing fulfillment could bring to you.

2. Are you running out of inventory storage space? Brands often forget to include storage costs in their fulfillment expense calculations. Compare your current expenses with estimates from 3PLs. Determine if bundling storage costs with outsourced fulfillment is a better value.

3. Can your infrastructure handle the demand? If you’re expecting a sustained spike in order volume – not just one-off flash sales or marketing promotions – estimate the costs and headcount necessary to meet demand yourself and compare that with the costs of outsourcing fulfillment.

In case you need logistics services, RedBird Logistics is here to help. The services they provide as a 3PL are numerous, and you can see them here. Moreover, you can always consult with them for the best solution for your business!

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