While exploring your options for fulfillment support, you’ve undoubtedly come across the acronym 3PL. Shorthand for ‘Third Party Logistics’, this type of business is contracted to manage the storage, control and shipping out of orders placed with online retail partners.
A 3PL is one of four levels of logistics outsourcing. Others include 1PL, 2PL, and 4PL. While there is some debate about exact definitions within the industry, it is safe to say that higher levels involve more outsourced fulfillment tasks. Let’s explore each and what such services mean for your business.
1PL
Also known as First Party Logistics, this is the level of outsourcing where very little is outsourced at all. Such a business would receive raw or partially refined materials and manufacture their final product in-house. They would then store, brand, package and ship products from their workspace directly to their customers. Often, delivery is local and the 1PL has their own fleet of transport trucks.
An example is a farmer that sells carrots to a local grocery store. The farmer tends the carrots, harvests them, stores them hygienically, drives the bundles to town, and delivers them to the store where the carrots are ready to be purchased. The farmer may need to source seeds, soil amendments, and bundling twine from their supply chain to make the final product, but the rest of their fulfillment activities are completed in-house.
This model is highly functional in local markets, however, connecting with customers outside of the range of a retail storefront requires the help of outside delivery companies.
2PL
Also known as Second Party Logistics. Here a business will outsource the delivery segment of their supply chain to a carrier or courier. Organizations like USPS, UPS, FedEx, DHL, Reddaway, Yellow Freight, and Old Dominion are all examples of 2PL services available for hire. Working with 2PLs is a critical part of online retail order fulfillment, as they are the link in the supply chain that moves product from origin to destination.
2PLs pick up products from an agreed upon location, or collect them from a dropoff facility, and then coordinate the movement of those products through use of dispatchers and delivery vehicles.
Let’s consider our carrot farmer again. This year there was an exceptionally bountiful carrot harvest, and there are more carrots to sell than local customers able to buy them. The farmer’s family works together to pickle the carrots and seal them in glass jars, and agrees to sell the jars to their favorite restaurant two towns over. The farmer then partners with a carrier service operating in their region able to transport glass safely. The carrier agrees to pick up the pickled carrots on a pallet at the farm, and deliver the pallet to the restaurant. The farmer pays the carrier for this service, and the restaurant pays the agreed price directly to the farmer.
Depending on your ability to get your products to a dropoff location, the amount of product you move, the weight of the product and other factors - you may be able to negotiate special discounted rates with various 2PLs.
3PL
Also known as Third Party Logistics. At this level, a business will outsource inventory tracking, product storage, and customer order fulfillment to a specialized warehouse. This warehouse has tools, technology and highly trained staff that work to minimize the time and money needed to move product into, and out of, stock.
Each 3PL typically has a special market segment that they service. The 3PL may focus on serving customers who engage in business to business (B2B) sales, wholesale sales or eCommerce, or they may focus on specific product types like foodstuffs, heavy goods, or hazardous goods.
The 3PL will receive the products to be managed from the business directly, or from the vendors that the business buys from. Receiving includes tasks like physically accepting, counting, moving and storing product, maintaining electronic records and counts, and reporting to the business when changes to inventory are made. The 3PL will assign SKUs to each item being sold.
Next, the product is moved to a picking and packing bay and placed in bins, which are labeled and tracked for easy retrieval. As orders come in, the product is pulled from the storage bay to complete the full order and then packed at the packing station. From there, the shippable box is placed in another bin for pickup by a 2PL carrier or stored for later delivery directly to the 2PL.
The 3PL may also offer additional services like light assembly and kitting. Light assembly involves gathering different parts of one product, and putting those different parts in the final box being shipped out. For example - your product, your brand sticker and your box all come to the 3PL from different vendors. The 3PL combines those into the final package. Kitting involves taking products that can be sold separately or in combination, and combining them if the customer orders them as a set.
Two major 3PL examples are Fulfilled By Amazon (FBA) and Walmart Fulfillment Services (WFS). These conglomerates have an almost entirely automated receiving process, so businesses that use their fulfillment services must meet strict packaging guidelines.
Each 3PL will arrange each product's method of shipping using one of their preferred 2PLs. With a high volume of orders moving out of their warehouses, they are often able to get better rates on shipping that a single business could. They may or may not shop around for the lowest rate on shipping each product, however, as they may need to guarantee a set number of packages through one 2PL to keep their discounted rates. This is a key point to consider when selecting a 3PL, as the cost of shipping is paid by the business.
Return logistics is a typical service of a 3PL, as it is considered a cost of doing business. The customer is given a return label from the 3PL, and the package is received in the manner defined by the business. The business decides what happens to the returned item, which may be repackaged and resold, returned to the business, or destroyed. Handling of returns is paid for by the customer and this service is negotiated in the original contract.
Let’s consider our farmer again. Their pickled carrots were a hit, and businesses across the country are asking to place orders. The farmer adds pickled green beans and pickled bell peppers to their offerings and contracts with a 3PL. The farmer grows the produce, prepares it, brands the glass jars, and pays to ship the final product to the 3PL. The 3PL receives the inventory, stores it, processes all orders, packages them (safely to prevent breakage) and ships out the orders. The farmer pays the 3PL a storage fee, a handling fee and reimburses the cost of shipping. Should a glass jar break in transit, an investigation into the packaging process is done to determine if the 3PL packed them inadequately or the carrier did not handle it correctly and adjustments are made.
A 3PL can drastically reduce the per-unit cost of inventory management, product handling and shipping. However, there are challenges to this type of outsourcing service. Communication can be difficult to maintain, and the 3PL may be far from the business or may not offer site visits. This leaves some business owners feeling as though they’ve ‘lost control’ of their product. It can also be hard to make contract changes as business needs change, forcing a business to stay ‘stuck’ with an operations procedure that doesn't quite fit. The staff of the 3PL may not take the level of care you expect, nor package the product in a way your customers respond best to. Your product needs are also competing with the other businesses that the 3PL services, and in times of high demand, your orders may get sidelined.
Because they are the main connection between a business and a customer, it is critical to be discerning when selecting a 3PL. We recommend reading the contract completely, negotiating strongly, and being skeptical of the lowest bidder. The right 3PL will be able to handle products exactly how the business would handle it, communicate well, and have enough staffing to meet the demand of all their business customers.
4PL
Also known as Fourth-Party Logistics, here the entire supply chain is outsourced. A 4PL will find and manage suppliers, provide manufacturing, manage inventory and storage, pick, pack and ship, and maintain customer relationships.
Going back to our farmer, let’s say the family is ready to get out of the business of pickled produce but they want to keep selling their branded product. They hire a 4PL to take over. The 4PL then sources the produce from another farm, moves it to a pickler, and then moves it to a 3PL service that does light assembly to make their final product. The 3PL coordinates a 2PL to ship it directly to the customer. Once the 2PL, 3PL and 4PL are paid, the farmer collects their profits.
The 4PL works to lower costs along the supply chain while meeting the brand expectations established by the businesses existing customer base. They leverage their industry knowledge and skill set to manage relationships and ensure effective communication. They are a single point of contact for a complex and constantly changing network of moving parts.
A 4PL should be able to effectively communicate with a business, set reasonable expectations, and deliver on their commitments. Their role is to provide peace of mind and connectivity throughout the process from product creation to customer service. These are highly individualized contracts that require extensive negotiation, and an attorney may be needed to ensure all parties are aware of their expectations and deliverables.