What You Need to Know About 3rd Party Logistics & Fulfillment Centers – Mochi
What You Need to Know About 3rd Party Logistics & Fulfillment Centers
Aralie Hoskins

Aralie Hoskins

What You Need to Know About 3rd Party Logistics & Fulfillment Centers

eCommerce Fulfillment

It’s 12:34 am and you’re lying in bed browsing Amazon for a Christmas present for your mom and it’s harder than you expected. What do you get the woman who has it all?

You hit “buy now” and the Amazon engine gurgles and churns into action. Estimated delivery time? Two days, guaranteed delivery by 9 pm, with automatic updates every step of the way. 

You get your mom’s newest MacGuffin, inspect it and decide to return it. You print a shipping label, drop it off at the nearest UPS store, and you have your money back by the end of the next business day. 

If you’re reading this thinking, I just described the world’s most mundane shopping ‘spree’, you’re right. Here’s the thing, the fact that what I just described appears so mundane is why many eCommerce businesses sputter to a halt as quickly as they start. 

The truth is, it takes billions and billions of dollars to set up a supply chain yet 93% of online shoppers believe 5 days is an acceptable timeframe for delivering a product purchased online.

So how do you shorten shipping times to the ‘acceptable’ 5 days and stay competitive? How can you take care of packaging, delivery, cash on delivery, inventory management and returns?

Luckily, there’s a market solution for that. eCommerce as a business model has exploded in the last 15 years and that means so have 3rd-Party Logistic providers.

What is 3rd-Party Logistics?

Simply put, a third-party logistics provider (abbreviated as 3PL or TPL) is an outsourced option for eCommerce businesses to manage their distribution, warehousing, and fulfillment services.

What is 3rd-Party Logistics?

3PL providers take care of everything that happens between the ‘checkout’ button and your product hitting your customer’s front step.

They help entrepreneurs stay competitive in a world ruled by Fortune 100 companies without the billions in investments they would otherwise have to shell out. 

A 3PL provider helps eCommerce businesses run fast and efficient. In fact, 86% of Fortune 500 companies use 3PL providers and 96% of Fortune 100 companies use them as well.

Four Types of 3PL Services

Before we discuss why you should fall in line with the 86% and 96% of Fortune 500 and 100 companies using a 3PL, let’s go over what types of 3PL providers are out there and why you may want to use one type over another.

Generally speaking, there are four types of 3PL providers:

  1.     Standard 3PL
  2.     Service Developer
  3.     The Customer Adapter
  4.     The Customer Developer

1. Standard 3PL

This is the most basic form of a 3PL. A Standard 3PL takes care of warehousing and distribution activities such as picking and packing. Imagine a bunch of people walking through row after row of shelving stocked with products, looking at purchase order and ‘picking’ the item off the shelf and ‘packing’ it for shipping.

Check out this list of top standard 3PL providers.

2. Service Developer

This type of 3PL provider will offer its customers advanced value-added services such as tracking and tracing, cross-docking, specific packaging, or providing a unique security system.

Service developers don’t offer comprehensive, tailored transportation or management solutions. They are more focused on a tech-centric, customer logistic support solution.

3. Customer Adapter

Remember the Ronco Rotisserie Oven infomercial? No? here’s a hint: ‘SET IT AND FORGET IT!’ A customer adapter is essentially the ‘set it and forget it’ version of 3PL. 

Customer 3PLs take over your existing logistics and run them for you. They don’t add or create new supply chain procedures, merely take the task off your plate and onto theirs. This is a solution that costs significantly more because of the heavy personnel involved in the logistic function.

4. Customer Developer

If a customer adapter is like a temp you hire to do the office tasks nobody wants to do, then the Customer Developer is the temp you loved so much you decided to hire them full time and make them logistics manager (basically the Ryan Howard of logistics).

Customer Developers take complete control of the company’s logistic functions and integrate themselves into the company and exhibit complete control over the logistics function and develop new logistics solutions or might change the process if needed.

Check out this article for more on the four types of 3PL Service Providers.

If the idea of working with one of the four types of 3PL, particularly the Customer Developer, seems out of reach, for now, don’t fret. Think of it like this: as your business grows, you’ll work yourself from Standard 3PL to a Customer Developer.

You’ll get there… one order at a time.

Leveraging Your 3PL Provider for Better Shipping

Now that you have some idea of the different types of 3PL providers and how they function, let’s discuss how you can leverage 3PL providers to provide a five-star shipping service.

Leveraging Your 3PL Provider for Better Shipping​

Reasons to work with a 3rd Party Logistic provider include:

  1.     Cost and Time Savings
  2.     Low Capital Commitment
  3.     Focus
  4.     Flexibility

1. Cost and Time Savings

Logistics is the core competency of third-party logistics providers. Meaning that you are paying them in good faith, hoping that they won’t make the mistakes you would likely make.

The equipment and the IT systems of 3PL providers are constantly updated and adapted to match the requirements of their customers and their customer’s suppliers. 

75% of eCommerce business owners say the use of a 3PL has reduced shipping costs. Less time managing logistics means that you can spend more time working on the lifeblood of your business: marketing, brand, customer service, and new products.

2. Lower Capital Commitments

This one is pretty easy to explain. If your 3PL owns the warehouse, pays for the inventory management software, transportation costs, and employee fees you don’t have to.

This means less capital investment on your end. Over purchasing inventory and having to think about warehouse capacity are a thing of the past.

3. Enhanced Focus

A jack of all trades is often a master of none. When you have a 3PL with working knowledge of logistics and inventory management, it creates an environment that can grow and scale at a faster pace than normal.

Having a trustworthy 3PL partner means you can expend energy where you want to and allows you to do more of what you love and what your business needs.

4. Added Flexibility

3PL providers mean you are no longer bound to your geographic location, pricing, distribution channels, and so on. USPS, UPS, FedEx, and DHL all typically factor in the distance when they calculate the cost of shipping.

Many 3PL providers market the benefit of zone skipping to potential clients (you) because it shortens the distance between products to be shipped and customers, resulting in lower shipping costs.

Zone Skipping is a logistics technique whereby a shipper consolidates many individual packages or orders. These individual packages are held and aggregated until the quantity reaches a full truckload. In other words, the 3PL cuts costs and passes on those savings to you by making one BIG trip instead of many small trips.

Challenges of working with a 3PL provider

Before diving into this section, a caveat – As with many things in eCommerce, timing the purchase of a new tool or service tends to be as important as the service itself. 

Challenges of working with a 3PL provider​

Deciding when and which type of 3PL to use is no different. Preferably, you should wait until packing and shipping boxes yourself becomes too much of a burden before resorting to a 3PL provider.

A good rule of thumb is the twenty-order rule, which goes like this: when you’re making at least twenty sales a day, it would be beneficial to your business to hire a 3PL provider so you can focus on marketing, customer service and product development.

Challenges of Working with a 3PL provider include:

  1. Loss of Control
  2. Transparency
  3. Antiquated or Inefficient Reporting Systems
  4. Reverse Logistics

1. Loss of control

If you integrate a 3PL provider into your supply chain, the 3PL provider usually assumes communication and interactions with your customer or supplier. 

To mitigate this, some 3PL providers attempt to brand themselves as their clients, such as applying clients’ logos on their assets and dressing their employees like their clients’ employees to varying degrees of success.

2. Transparency

Everyone wants full transparency into where their delivery is at all times. These days, the location of a package is as interconnected as your social network. In fact, as customer expectations have increased, their willingness to pay for fast shipping has decreased with just about 64% of consumers unwilling to pay anything extra for less than two-day shipping.

The honest truth is that it’s hard to get all the information you need at a moment’s notice. Which leads to our next point.

3. Antiquated or Inefficient Reporting Systems

One reason that 3PL providers are able to help is that they can plug into your systems and amplify your reach. Unfortunately, when it comes to data, real-time plugging into a 3PL provider’s data system borders on impossible. 

What does this all mean? To put it simply, your 3PL can see when an order needs to go out and then fulfills it for you. Great! But what if they get the order wrong, can you look into the 3PL provider’s systems and track down, correct, and send a new order to your customer?

Sometimes your 3PL provider is able to see your order information from the eCommerce platform you use (e.g., Shopify), but there is no bi-directional data flow for you to see orders to help with your customer service.

If a customer complains of a wrong order, it would be hard to retrieve the information needed to correct it.

4. Reverse Logistics

When your product moves through the supply chain network, the objective is for the product to reach your customer. Any process or management after the sale of the product involves reverse logistics.

When a product is defective, your customer will return it. You would then have to organize the shipping of the defective product, testing, dismantling, repairing, recycling or disposing of the product.

The product would travel in reverse order through the supply chain network in order for you to obtain it and retain any use from it. The logistics for such matters is reverse logistics.

The reliance upon third-party logistics providers to handle aspects of the eCommerce supply chain such as warehousing and pick-and-pack also means these companies must be relied on to handle reverse logistics.

The additional layer of a third party to handle sensitive customer-facing issues such as returns is thus a heavily debated topic within the realm of eCommerce.

Managing Relationships with 3PL Providers

A relationship with your 3PL provider is like any other relationship in your life: it requires constant effort to keep it healthy and functional.

Managing Relationships with 3PL Providers​

With that in mind, here are a few tips for making sure your relationship with your 3PL provider flourishes past the honeymoon stage and turns into a long-lasting business partnership.

  1. Establish Clear Expectations
  2. Appoint a Single Point of Contact
  3. Define an Escalation Procedure
  4. Schedule Formal Review Intervals
  5. Keep the 3PL Provider in the Information Loop

1. Establish Clear Expectations

A 3PL relationship is a partnership. As with any partnership, defining what is acceptable early and having frequent opportunities to measure and review those objectives is paramount.

Establishing clear expectations from the beginning is the best way to ensure a good relationship with your 3PL provider. Have clear and concise terms that will help you maintain your customer relations.

Also, remember to have attainable expectations. Don’t expect them to do a 180-degree pivot of their business plan to fit your needs. Attainable goals give your 3PL the motivation to provide you with excellent customer service, which in turn gives your customers great customer service as well.

Define key performance indicators or KPI’s – at the outset and review them regularly. Spell out the expectations clearly, particularly in how issues are resolved. Being as cut and dry with your expectations and procedures means you can both measure and recognize successes and failures early and frequently.

2. Appoint a Single Point of Contact

At first, you’ll be doing most of the communication with your 3PL provider but, when the time comes, appoint someone senior enough in your company to deal with supply chain issues and challenges. Expect the 3PL firm to do the same.

73% of eCommerce shippers say they talk to their 3PL on a daily basis. Checking in and seeing if they need anything from you or vice versa will cultivate a lasting relationship and make you a priority to them.

Once you’ve appointed your main point of contact on both ends of the transaction, use them. Empower them to make decisions, enabling the appointees to quickly reach necessary resolutions.

3. Define an Escalation Procedure

Thinking about and documenting escalation procedures is not only smart, but it will also enable your 3PL provider to serve you better.

From the outset, chart the escalation path that issues will take. This will ensure that problems will not get sidetracked or buried.

Keep a log of issues and outcomes to chart overall resolution trends.

4. Schedule Formal Review Intervals

Along with talking to your 3PL providers every day, it’s good practice to have scheduled formal interviews. Resetting performance standards is a way to have a healthy relationship.

If your standards are too high, you can let them know that your expectations were a bit off. If you expect more, now is the time to formally say it.

Everyone knows that what gets measured, gets improved upon. So, once you have established data tracking and flows for yourself and your 3PL provider, review them and schedule a time to review them with your 3PL provider. This is a useful exercise that provides a forum for both parties to compare notes on the original KPIs and reset performance standards.

5. Keep the 3PL Provider in the Information Loop

Remember that your 3PL provider is a crucial part of the success of your business. As such, you need to be in constant communication with them.

They are your primary supply partner and need to be made aware of any changes or developments in your organization and/or policies.

For example, providing good information on product introductions, year-end activities and impending recalls will give the 3PL company a heads-up in time to meet those needs.

Over to you

You’ve made it this far. Take a deep breath and pat yourself on the back. I know this is a lot of information and it can seem a little overwhelming. So yes, now IS a good time for a glass of wine and a brainstorming session.

A strong relationship with a 3PL provider can be the difference between steady and exponential growth. Any time you spend right now deciding yes or no on moving forward with a 3PL provider is time well spent.

As with everything, there are pros and cons to be considered. But get it right, and you will have added one of the most powerful assets to your growing e-commerce business strategy.

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