When To Use a 3PL

Ultimately, deciding whether and when to use a 3PL is a business specific decision that hinges on the two following questions:

1.) Do the profit margins provide sufficient room for partnering with a 3PL at your current scale?

2.) If yes, do the projected gains from outsourcing fulfillment outweigh the costs?

Having established that essential premise, let’s review the primary factors that inform these key questions, and this decision.

The ability, not just to manage fulfillment, but the capacity to develop and learn how to manage it in the first place, can easily feel like the most important, if not the sole criteria for deciding to use a 3PL – especially when time feels scarce and other business needs are pressing. In your case, it just might be the deciding factor. This can be a trap for the unwary, however, as deciding whether (and when) to partner with a 3PL involves other essential business considerations that may require in house fulfillment – at least in the short term.

While not a direct 3PL consideration, having a sound understanding of all facets of one’s business is an essential component of establishing the foundation of any business. Although warehousing and logistics is not a complex subject, understanding their basic ecosystem and functionality – especially as applied to one’s own products, sales channels, and customer base – puts a business in the best place to a.) select a 3PL that fits, and b.) to develop a positive, long term partnership with whatever 3PL they eventually select. This is best done by developing one’s own fulfillment operations early, regardless of whether one intends to move to a 3PL at some point.

The alternative is to work with a 3PL that is open and direct, and that clearly communicates an understanding of all things related to your product fulfillment – from the tech to the handling, shipping, and billing. You need to trust that your 3PL is a committed partner with your best interests in mind. 3PLs like Mission Fulfillment Plus are cultured to do just that, beginning with understanding each client’s unique business model and requirements.

The standard benchmark for many 3PL companies is 100 orders a month. This is primarily because most 3PLs are unwilling to work with a start up company – and if they do agree to work with a start up, they often apply fees and other minimums that erode, if not altogether consume, a young company’s profit margins. Of course, greater margins do present more room to absorb that kind of an early hit, but it still may not be the best use of cash.

Start-ups often begin in one’s personal residence, sometimes even in the smallest of apartments, and those that move to a commercial space often prefer to avoid the cost of renting warehouse space in addition to office space. Large products, high supplier MOQs (Minimum Order Quantities) and growing order volumes can all push the limits of that existing space.

For companies with relatively low order volumes, and for companies who just want to postpone the move to a 3PL, storage units can provide an affordable replenishment storage model whereby quantities for immediate shipment are regularly replenished to the office from storage.

As order volumes increase, running out of space may also simply mean that it’s time to partner with a 3PL.

The location of a company relative to the location of the majority of that company’s customers may be a significant factor. Tools like the USPS zone chart, or this really cool interactive map from Pirate Ship, can provide a good indication of the significance of that factor.

Many foreign companies selling in the US face high costs simply due to the time and cost of shipping each individual order into the US, making a jump straight to a 3PL seem like a necessity. Where possible, however, establishing a strong foundation of sales in their own country first can make it easier to find a willing fulfillment partner in the US while also providing the necessary cash flow to fuel a US launch based solely on that 3PL partnership.

US based companies that are located a significant distance from their customer base may also benefit from partnering with a 3PL that is closer to that customer base. Companies located on either coast that have sales scattered across the country might want to consider utilizing a Midwest based 3PL.

A Word of Warning

Young companies should beware of the allure of large 3PLs with multiple locations. While spreading inventory across the country may seem like a good idea at first blush, the costs are likely to outweigh the benefits.

One strategically located fulfillment center can typically compete effectively on cost and shipping times on the whole. Furthermore, splitting inventory among multiple locations increases the cost of the initial inventory delivery to fulfillment, increases the complexity and cost of inventory management, and almost always results in carrying increased inventory quantities, which in turn lengthens overall inventory turns. For small brands that are just beginning to build scale, the typical result is decreased cash flow, decreased flexibility and lower net profits.

While often great for larger companies, this type of strategy could hinder, or even crush a small to mid size company.

Pro Tip

A great counter to siren song of multiple fulfillment center locations is not only a strategically located fulfillment center, as mentioned above, but just as (if not more) important is a 3PL partner who ships your orders daily.

Coupled with effective tracking communication, fast order processing gives customers the assurance that their order is en route, and that assurance of a met expectation in progress is significant. How important is this action coupled with communication? Without it, more than 60% of customers will consider looking for another retailer. Furthermore, 91% of customers actively track their orders, 39% track them daily, and 19% of customers track their orders multiple times a day!

In terms of bottom line dollars, hundreds of millions, if not billions, of dollars in ecommerce revenue have been estimated to hinge upon retailers’ ability to meet promised delivery dates (not upon retailers’ ability to keep up with Amazon Prime – which is often its own mirage – but to simply provide and deliver within an accurate delivery time frame). Fast order processing is a foundation step in accomplishing just that.

The weight and dimensions of the average package shipped might be a significant factor in determining whether to utilize a 3PL. The primary break points are whether your packages are:

Over or under 12 ounces; or

More or less than 1 cubic foot

By using using USPS Ground Advantage Commercial rates, you can ship Packages that weigh 12 ounces or less at competitive rates across the country, regardless of your location. Once that 12 ounce barrier is breached, however, even USPS Ground Advantage rates begin to increase quickly.

Packages that exceed 1 cubic foot trigger a dimensional weight calculation where the greater of the result of that calculation or the actual weight is used to determine freight charges.

Regardless of whether the actual weight of your packages exceeds 12 ounces or the dimensional weight exceeds 1 cubic foot, a 3PL can often save significant money on shipping charges, even at lower volumes, especially if your 3PL is closer to your customers or more centrally located. As package weights increase, the price difference across shipping zones increases dramatically.

Of course, this depends heavily upon the specific shipping platform that you utilize. Options abound, and your miles will vary depending upon your specific situation and needs. ShipStation, EasyPost, Shippo, Pirate Ship, and sales channel specific shipping platforms, along with more complete OMS/WMS solutions like Soapbox and ShipEdge are all potential considerations.

International sales present a potential opportunity to increase sales. International shipping also presents its own challenges and increased costs. This is another area where a 3PL is likely to have rates and operational efficiencies that make this more cost effective.

Not every 3PL is a good fit for every client. A good 3PL targets and refines its policies and processes to fit its preferred client base. This certainly should inform, not just the decision to seek a 3PL, but also the decision to work with any one specific 3PL. It may also require adapting to work effectively with one’s chosen 3PL. If you are interested in 3PL, but unsure whether Mission Fulfillment Plus is a good fit for your brand, give us some detail here for a no pressure discussion!

Another Word of Warning

Young companies with limited experience should also be wary of large 3PLs like ShipBob, Amazon, WalMart, and others that promise expansive logistical capabilities. Their muscle and low advertised entrance costs might look impressive at first glance, but it’s the smaller companies who choose to work with those big chains that often get squeezed by things like poor customer support, complex fee structures and increased inventory management costs.

The types of specific needs that require consideration may include:

– Specific storage requirements (temperature/high value/high risk)

– Specific packing/shipping requirements (temperature/high value/high risk)

– Complex kitting requirements

– Co-packing

– Lot/Serial/Expiration Dated Goods

– Custom Packaging

– Inserts, Markings, Labeling

– Case Picking/B2B

– A high SKU count

While fulfillment centers exist that can perform these services and more, requirements like these tend to introduce a level of complexity that should be specifically vetted as part of the decision to self fulfill or to use any specific 3PL. A good 3PL will seek to clearly understand your needs and explicitly state whether and to what extent they can meet those needs. A good 3PL will also help you determine the best path for fulfilling those needs, even if that means guiding you away from their services.

Implementing fulfillment operations at scale requires developing a distinct operations model that is essentially a separate business. This involves a number of independent factors, such as:

Warehouse Space: Warehouse space is expensive, often requires long term commitments, and may not be obtainable in connection with, or even in close proximity to, current office space. New companies without credit history may need to provide personal guarantees or an enhanced security deposit. Furthermore, obtaining the right amount of space is a likely issue, as opposed to working with a 3PL that only charges for the space you use, as you use it.

Software: Implementing a WMS (Warehouse Management System) is a necessity, along with other potential software requirements, such as an OMS (Order Management System) and other applications to manage the warehouse team. This may also invoke or accelerate a larger question of software integration, or even fully functioning ERP systems (Enterprise Resource Planning), which present their own questions of costs and benefits.

Equipment: Racking, shelving, forklift, pallet jack, pick carts, bins, pack tables, bar code scanners, computers, label printers, etc.

Supplies: Packaging, tape, labels, office supplies, etc.

Management: In addition to all of the above, implementing a fulfillment operation will require developing processes along with hiring, training and managing a workforce that is dedicated to executing those fulfillment operations daily.

As this article illustrates, whether to use a 3PL can be a difficult decision that involves a number of factors. We’ve distilled the above factors into five basic questions to help clarify whether using a 3PL makes sense for you. Take the quiz, and we’ll tell you if we think partnering with a 3PL is a good fit for you right now.

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