Illustration by Jennifer Tapias Derch
Scaling your ecommerce business comes with growing pains—especially with logistics. It’s not always feasible (nor cost effective) to handle a surge of orders in-house.
Third-party logistics (3PL) providers exist to take the logistics of selling online out of your hands. You’ll ship stock to their warehouses and sync your ecommerce story with their inventory. Any items ordered online get picked, packed, and shipped by your 3PL.
The market for 3PLs providers exploded following the birth and exponential growth of ecommerce. The global 3PL market is forecast to top $1.3 trillion by 2024. Some 86% of Fortune 500 companies and 96% of the Fortune 100 now use services like these.
Selecting the right ecommerce logistics partner has never been more important. Whether you’re partnering with a 3PL for the first time or considering multiple 3PL partners to diversify and mitigate risk, this guide shares how to find the right vendor.
Table of Contents
- What is a 3PL provider?
- The difference between 2PL, 3PL, and 4PL
- How does the 3PL fulfillment process work?
- When is a 3PL right for your business?
- Types of 3PLs
- Benefits of using a 3PL provider
- Disadvantages of using a 3PL provider
- How to choose a 3PL provider
- The best 3PL logistics companies
What is a 3PL provider?
A 3PL is a partner that helps with an ecommerce store’s supply chain. Instead of having owned warehouses and doing distribution in-house, you have your stock stored in a vendor’s warehouse. Items are automatically shipped from the warehouse to your customer when they’re purchased online.
3PLs receive new inventory from your manufacturers before shipping it to consumers. Alongside order fulfillment services, they can also handle retail distribution and returns.
3PL providers have become a key component in the supply chain of many brands. After the coronavirus pandemic wreaked havoc on entire supply chains for almost 1 in 5 companies, business continuity planning is now the top supply chain priority for 20% of businesses. That’s shortly followed by investments in technology and automation (16%), and diversifying their supplier base (almost 14%).
Because the process is simple and seamless with a 3PL, customers never think twice about the handoff between received orders and fulfillment. That leaves ecommerce companies the capacity to do what they do best: manufacture and sell products.
The difference between 2PL, 3PL, and 4PL
If you don’t want to give a partner control over your picking and packing, retailers can rely on shipping couriers to deliver goods. Couriers collect parcels from your warehouse and deliver them to an end customer. That’s 2PL logistics.
Ecommerce brands using the 3PL model, however, don’t have to pick and pack orders themselves. It’s a 3PL’s overall responsibility for inventory storage, fulfillment, and shipping.
Adding another layer to that process gives you a fourth-party logistics service. 4PL providers manage the fulfillment partners you’re working with. Their team negotiates the contract with a partner, resolves any issues, and communicates between your internal team and the distributor.
What is the difference between a 3PL and a broker?
A 3PL provides a variety of logistics and transportation services to brands, while freight brokers act as intermediaries between brands and drivers. Freight forwarders are different from 3PLs in that they’re specifically dedicated to matching up brands with drivers or carriers.
How does the 3PL fulfillment process work?
While the 3PL fulfillment process can vary depending on the provider and services you’ve agreed on, the typical process looks like this:
- The 3PL receives your inventory at its warehouse and organizes each SKU.
- When an order is placed on your ecommerce site, it’s either manually forwarded to the 3PL or automatically pushed (if its software integrates with your online store).
- A warehouse team member gets a picking list to collect the items that have been ordered.
- The items are packed in boxes with the receipt and order details.
- The 3PL prints the shipping label or uses one of its shipping carrier partners.
- The shipping carrier collects the package from your 3PL’s distribution center and delivers it to your customer.
- Tracking information is uploaded to the 3PL system and synced with your order management software.
When is a 3PL right for your business?
If you’ve never worked with a 3PL before, it might sound like an expensive solution to an albeit annoying workflow. After all, picking, packing, and shipping orders from your warehouse or brick-and-mortar store can be a cheaper option than hiring third-party help.
However, it’s sensible to choose a 3PL before you’re overwhelmed by order growth. Dealing with logistics in-house prevents you from being wholly focused on growing your business.
Breaking the fulfillment promises you make to customers can damage your brand, too. Customers have higher expectations than ever before. If there’s a problem in your supply chain that means delivery is longer than expected, 13% of customers will never return.
Three key questions will help you determine whether you need a 3PL.
Are you fulfilling more than 10–20 orders per day?
If that’s where you’re at, calculate the costs of partnering with a 3PL to keep your profit margins strong. Outsourcing packing, picking, and shipping can save time on manual labor, especially if you’re partnering with a 3PL that uses automation.
Likewise, estimate the growth potential—opportunities you’re not currently able to pursue—by outsourcing fulfillment to a 3PL.
Are you running out of inventory storage space?
Retailers often forget to include storage costs in their fulfillment expense calculations. (This is surprising considering that 21% of a company’s logistical costs are spent on inventory carrying.)
When deciding whether a 3PL is right for your retail business, compare your current storage expenses with estimates from 3PLs. Sometimes, bundling storage costs with outsourced fulfillment gives you better value for your money.
Can your existing infrastructure handle a surge in demand?
How much would a sustained spike in order volume (outside of one-off flash sales or marketing promotions) cost your business? If you need to hire rapidly to increase in-house capacity or invest in automation yourself, it might be more cost effective to outsource fulfillment to a 3PL.
Types of 3PLs
Do you have several warehouses dotted all over the place? Selling cross-border has gotten much trickier to manage logistically. Plus, the COVID-19 crisis has made clear the importance of having real-time, multi-location inventory visibility.
Not only is knowing how much stock you have (and where) a key component of improving operational efficiency, so too is shipping inventory from the location closest to the customer, which cuts shipping costs. Full-service 3PLs help ecommerce brands become more efficient during and after crises.
Full logistics service providers, like the Shopify Fulfillment Network, offer an end-to-end solution that gets orders to your customers easily and quickly. With a vast network of strategically located fulfillment centers nationwide, full-service 3PLs like ours make sure you have the right merchandise at the right location so orders ship faster and cheaper.
Alongside faster and cheaper shipping, full-service 3PLs like the Shopify Fulfillment Network offer:
- Inventory intelligence. Shopify recommends where inventory should be stored in order to be close to customers.
- Control over fulfillment experience. Decide how fast orders are delivered and stand out with marketing inserts. Packaging is included with the pick rate and you can supply your own branded packaging.
- Easy integration. No technical integration required. Shopify will help set up the Shopify Fulfillment app for you. Most 3PLs offer extensive integrations and ongoing maintenance.
- Same-day fulfillment. Orders received by 4 pm ET are shipped out the same day.
World-class fulfillment that was once reserved for only the largest and richest companies in the world. With full-service 3PLs like the Shopify Fulfillment Network, it’s now accessible and affordable for every high-volume brand.
Warehouses that store, ship, and handle returns are the most common type of 3PL. Innovative warehouses can help you offer Amazon Prime–like shipping in two days. And, if you’re expanding globally, international warehouses can help build a global supply chain.
Knowing how to refine product fulfillment workflows is a skill that comes with experience; one that retailers can lend from 3PL warehouses.
When choosing a 3PL warehouse, determine how many distribution centers you’ll have access to. You’ll need a larger network of warehouses if you promise customers expedited delivery. Shipping speed hinges on warehouses being geographically close to your customers. You’ll also need to accurately forecast inventory levels to appropriately stock warehouses in your network.
It’s also important to find out the time at which your warehouse stops fulfilling the day’s orders. If orders are placed after the warehouse cut-off time of 3 pm, for example, they won’t go out until the next day. This impacts how you market fulfillment and the delivery dates consumers expect. (Remember: just one later-than-expected delivery and you risk losing 13% of those customers.)
Transportation-based 3PLs shuttle goods between locations. For example, they might transport inventory between your factory and warehouse. They could also transfer stock between your store and a retail buyer.
There are three main types of transportation-based 3PL:
- Traditional parcel transportation providers such as DHL, FedEx, UPS, and the USPS.
- Same-day delivery by local couriers like Postmates and UberRush.
- Transportation marketplaces like Flexport, Freightos, and GrandJunction .
When deciding on a 3PL parcel transportation provider, explain your origin and destination locations and the timeframes you expect for stock to move between.
Ask about the shipping methods they use, the service levels, and any pricing/discount information they’ll give once your inventory increases. If you transport freight globally, some include brokerage fees; others include import/export taxes and duties in their costs.
Financial- and information-based 3PLs
The coronavirus pandemic caused many retailers to focus on unit economics. It’s a model that requires visibility into key warehouse processes like pick-to-pack to better understand and calculate the costs associated with each unit or item sold.
As we exit out of pandemic-related lockdowns, retailers must have the financial information associated with fulfillment at their fingertips. It’s the only way to make rapid and accurate decisions during crises and thereafter.
After you’ve scaled revenue to eight or nine figures, you might want to consider a financial- or information-based 3PL company. Consulting firms—like Chicago Consulting and St. Onge—provide industry-specific insight and can take the headache out of complex global supply-chain management. They also give internal controls on tasks like freight auditing, cost accounting, and inventory management to ensure consistency.
Benefits of using a 3PL provider
Work with the pros
As an ecommerce business owner, your specialty probably doesn’t lie within logistics. It’s your job to get products in front of target customers, refine products, and deliver positive experiences that convince people to return.
Getting inventory to a customer is a key piece of the puzzle, but it doesn’t always fall into an ecommerce site owner’s wheelhouse.
The good news: shipment and fulfillment optimization are standard 3PL specialties. You can build your team but because you’re not focused full-time on fulfillment. You can invest more time into a bigger picture strategy to grow the business. In turn, you’ll likely achieve better results across various aspects of the business, including logistics, using a 3PL.
A good provider is worth its weight in gold. Reduction of errors and timely deliveries equal happy customers, and happy customers order more. An extra 25 cents per order is cheap if your customers’ expectations are met or, even better, exceeded.”
—Steve Izen, Co-Founder at Orderbot Software Inc.
There’s a lot of behind-the-scenes work that goes into scaling an ecommerce business. Expanding internationally requires a global fulfillment network. Processing international orders requires documentation and accounting for customs and duties.
Outsourcing these responsibilities can make cross-border selling easier. It can also expedite delivery times, improve customer satisfaction, and reduce shipping costs—three huge wins bound to have positive impacts on your bottom line.
If you’re investing in your own warehouses and distribution centers, the costs aren’t set to decrease any time soon. There’s a shortfall of 140 million square footage of warehouse space expected by 2024 bound to bump up the price of storage facilities.
Leasing warehouse space and hiring a fulfillment team increases your overhead. Maintaining fulfillment assets is costly.
However, working with a 3PL can return cost savings. They have stronger holds over their storage premises and higher order values from their retail partners give them grounds to keep their warehouse space. That means your capital can be directed toward return-generating endeavors.
Save time on labor
COVID-19 required employees to work from home, including those who worked in 3PL warehouses and fulfillment centers. As a result, warehouse automation has been thrust into the spotlight as a key differentiator for 3PL services.
McKinsey estimates that companies in the warehousing and transportation industry, including logistics management services, have the third-highest automation potential of any sector.
Robotic machinery to pick and pack orders, for example, means human staff don’t need to be on-hand to fulfill orders. The machinery works 24/7 so retailers can benefit from later order cut-offs for immediate shipping. Ocado Retail even overhauled its entire warehouse to be completely automated.
Relying on a 3PL means you get the benefits of warehouse automation technology without investing cash into developing your own. You’ll spend time growing your business, not on paper-based omnichannel retail fulfillment services or moving packages.
Disadvantages of using a 3PL provider
While most 3PL providers will be held accountable for mistakes, your partner won’t interact directly with your customers. They’ll pick the item from the warehouse, pack it, and ship it to a person’s address. The end customer won’t know who the middleman is.
Any bumps in the road may lead to customer complaints. When products are late, who will your customers turn to? You—regardless of whether it’s your fault.
When a shipment doesn’t get delivered on time, the customer expects the ecommerce company to make it right. This generally involves customer service collaborating with the 3PL to determine what happened and how it can be remedied in the future.”
“These downsides can be mitigated by contacting references of other brands that have product stored in the 3PL, and selecting a 3PL that has EDI capabilities so that warehouse processes can be automated and discrepancies can be caught well in advance of a customer satisfaction issue.” —Steve Norris, VP of Pre-Sales Engineering for Supply Chain Collaboration at TrueCommerce
Steep set-up fees
All luxuries come at a cost—including a partnership with a 3PL. There are significant upfront costs when setting up with a 3PL provider, like integrating their software with your ecommerce store, SKU upload, and account access.
Costs will normally be broken into the following categories:
- Transportation costs: shipping products from your factory to your warehouse.
- Receiving costs: offloading products from your transportation provider to their warehouse.
- Warehousing fees: usually a monthly fee based on the amount of space used and charged per pallet.
- Pick-and-pack fees: picking units from shelves or bins and packing them for shipment and discounted for higher volumes.
- Shipping costs: delivery of product to your end customer.
- Account set-up fees: account creation and software integration.
- Minimums: minimum monthly spend is generally required.
Stock is out of your hands
Inventory stored in 3PL warehouses won’t be immediately accessible. Granted, the provider should sync their warehouse inventory with your order management system. But should you encounter quality control issues, it’ll be harder to retrieve and rectify that stock.
How to choose a third-party logistics provider
Selecting a third-party logistics service is likely one of the biggest decisions you’ll make as you scale your ecommerce business. You’re putting trust in the provider you select to take care of your brand and deliver the customer experience you envision.
The right partner can make or break your company’s logistics, customer service, and repeat purchase rate. Trusting someone with sales, inventory, and other sensitive information is a significant risk.
Choosing the right partner is a balance between quantitative data and relationship building. Here’s how to do it.
1. Evaluate their own logistics operations
The advantage of using a 3PL is you can lean into a partner’s existing setup to store, pack, pick, and ship orders. Evaluate how efficient that process is and whether they’re equipped to handle a rise in inventory as your own business scales.
Ask the following questions:
- How many warehouses do they operate?
- Do their locations correlate to your high-volume areas?
- Have they worked with companies in your industry? What vertical do they specialize in?
- How many orders do they ship each month (in the following categories: B2C, B2B, domestic, and international)?
- What is their maximum capacity?
- Has their capacity grown over time? Does its growth match your own history and projections?
- Do they handle reverse logistics?
- How do they execute next-day orders?
- How do they handle unexpected spikes in order volume?
“Select a 3PL that has experience shipping similar products and at a similar volume as your ecommerce company. Storing and shipping flat-packed items like apparel is significantly different from shipping appliances. Shipping 50 orders a day is significantly different from shipping 50,000 orders a day.” —Steve Norris, VP of Pre-Sales Engineering for Supply Chain Collaboration at TrueCommerce
2. Ask about the costs
There are steep set-up fees when partnering with a new 3PL, but as time goes on, you’ll likely save money on fewer overheads and labor costs. Calculate the potential savings by asking for a list of costs—and what that quote includes—before deciding on a partner.
- What are their hours of operations (including weekends and holidays)?
- How many shipments from your factory do you receive on a quarterly basis?
- Do they provide custom packing slips and gift messages or gift cards?
You might have better shipping rates than the warehouse you’re evaluating. If so, ensure your warehouse partner will accept them. Conversely, larger warehouse networks can often use their heft to negotiate deeper discounts than lone businesses.
Look out for the quoted price and understand that it often won't include value add-ons like marketing inserts, gift wrapping, and special packaging. If you feel like you’re getting too good a deal, you probably haven’t asked all the right questions.”
—Charles Michael, Manager of Strategic Partnerships at Stitch Labs
3. Set reporting and communication expectations
When working with a new 3PL, it’s crucial that things switch over seamlessly. Monitor your customer support channels and social media for shipping-related complaints from customers. Also inquire about whether your 3PL options offer some form of reporting to help you keep track of things like timeliness of deliveries, order and delivery accuracy, and shipping-related damages.
Set expectations for that communication. How do they communicate about the following:
- New orders
- Shipping notices
- Inventory counts
- Incoming purchase orders
- Receiving stock
- Adjustment notifications
4. Determine delivery service levels
Sweat the contract details before you commit to working with a new 3PL provider. Asking the following questions upfront prevents you from entering into a contract with an untrustworthy logistics provider:
- How do they compensate for delays?
- Do they have an enforceable non-disclosure agreement?
- Do they have strong customer references?
- Do they have at least a two-year track record of financial stability and are they willing to share financial statements with you?
Decide whether you prefer a refund or credit if shipments aren’t fulfilled on time. Be sure you know whether you’ll be credited for broken or lost items—understand the service-level guarantees offered to gauge your liabilities.
Also, think about whether you want packages fully insured while in storage and during delivery and return. Be precise when negotiating. For instance, you may only want to insure items up to $100 or beyond. Understand if what you’re getting is insurance or simply a carrier-included liability.
5. Check for integrations
Got your shortlist of 3PL providers? The final measure is to confirm that the 3PL integrates with your existing inventory management system, order management system, order processing software, and/or warehouse management solution.
Synchronizing systems ensures orders are automatically picked, packed, and shipped while simultaneously updating inventory levels.
- How easy is their standalone platform to use?
- Do they integrate directly with your Shopify store through an API or an approved app?
- Do they have a standalone platform you can integrate with through an EDI or via FTP file transfers?
Some 3PLs integrate with Shopify directly to make changes on your behalf—like marking orders as fulfilled, processing refunds, or tracking stock. Your order management system becomes the single source of truth, regardless of whether you’re posting orders from your own warehouses or using a 3PL.
The best third-party logistics companies
Shopify Fulfillment Network
The Shopify Fulfillment Network (SFN) is a great option if you’re looking for a 3PL for your Shopify store. It’s a network of global warehouses where ecommerce orders are stored, packed, and shipped from.
The SFN will recommend distribution centers that are close to your customers so you can regionalize your inventory. As soon as an order is placed through your ecommerce site, it’ll ping the warehouse that’s closest to your end customer. The product gets picked, packed, and shipped—all without your hands-on involvement.
All distribution centers have their own Chuck, a collaborative robot that picks and packs orders. It reduces human error and improves speed and accuracy when fulfilling orders.
ShipBob is another 3PL that integrates with your Shopify store. Alongside the storage and shipping of your inventory (and everything in between), it gives real-time inventory tracking. Get notifications whenever stock is running low so you can replenish immediately.
ShipBob has a network of fulfillment centers that means qualifying customers can be guaranteed two-day shipping. Delivery times reduce to same-day shipping if orders are set to be shipped to a location near its US fulfillment centers.
Red Stag Fulfillment
Red Stag Fulfillment is another 3PL provider that can fulfill your Shopify orders. What’s different about this fulfillment network, though, is that it gives guarantees.
Should it go over promised delivery times, mis-pick or inaccurately pack an order, Red Stag will cover the cost to rectify it and pay you $50 compensation for the hassle. It also promises to reimburse the wholesale cost of stock that is damaged or goes missing at one of its distribution centers.
Rakuten Super Logistics
Rakuten’s 3PL offering also gives Shopify retailers a way to store, pack, and ship orders without intense involvement. It has locations across the US—including Las Vegas, Chicago, and Miami—to regionalize stock. Its partnerships with shipping carriers also mean Rakuten guarantees two-day delivery for retailers delivering stock to US customers.
Alongside integrations with Shopify, Rakuten has its own SmartFill dashboard. Inside it, you’ll see your Shopify inventory levels and real-time stock updates for each warehouse. Ship more inventory to it when those levels are running low.
Fulfyld is a good option if you’re partnering with a 3PL for the first time or don’t want to risk relying on one provider for your entire logistics operations.
It integrates with Shopify so when an order is made on your site, Fulfyld’s warehouse gets notified of a new unfilled order. It picks the stock from the warehouse and ships it on the same day (depending on your agreed order cut-off time).
Fulfyld offers reverse logistics, too. Customers who want to return their item can ship it to one of its warehouses. Your inventory management system in Shopify will automatically get updated with accurate stock levels.
Partnering with a 3PL can change your business for the better
Whether you’re partnering with a 3PL for the first time or decreasing the reliance you already have on one, the process is tough. Ecommerce brands can’t control the destiny of each of their business partners. But what you can control is the due diligence you conduct before selecting a 3PL.
Be ultra-thorough in your appraisal of potential partners. The right third-party logistics companies can change your business for the better—not just by taking the headache out of storing and delivering orders, but in the speedy delivery times you can promise to customers.
Common Questions About 3PL
What is a 3pl relationship?
A 3PL relationship is a relationship between a brand and a separate company that fulfills (prepares and delivers) customer orders on their behalf. Some 3PL relationships are embedded, meaning the 3PL partners with the brand and their supply chain more closely to avoid failures.
What industries use 3pl the most?
DHL is the leading 3PL provider in the world, and the top industries they serve include retail, technology, auto, manufacturing, energy, healthcare, chemicals, and the public sector. Additionally, 90% of Fortune 500 companies operating within the U.S. seek assistance from 3PLs annually.
What is the difference between a 3pl and a broker?
A 3PL provides a variety of logistics and transportation services to brands, while freight brokers act as an intermediary between brands and drivers. Freight brokers are different from 3PLs in that they’re specifically dedicated to matching up brands with drivers or carriers.
How do you manage a 3pl?
To manage a 3PL provider, start by setting clear expectations. Then, establish a single point of contact who has experience with your supply chain and has the authority to make decisions. Next, set up recurring reviews where you can evaluate whether your 3PL is meeting expectations.
How can I monitor my 3pl performance?
Most 3PLs provide some form of reporting to help you keep track of things like timeliness of deliveries, order and delivery accuracy, and shipping-related damages. You can also monitor your customer support channels and social media for shipping-related complaints from customers.
What is a reason for using 3pl services?
Brands use 3PL services when they can no longer handle storing, preparing, and delivering orders on their own. If you’re finding that your business has grown to the point that you no longer have the bandwidth to handle fulfillment, it may be time to hire a 3PL.