Outsourcing Fulfillment: What to Look for When Selecting a 3PL Warehouse Partner
Fulfillment is one of the most critical parts of a business for any online brand, but it is also one of the most complicated. To avoid rising shipping costs, shipping inefficiencies, and compliance issues, many brands opt to outsource their fulfillment to third-party logistics warehouses (3PLs). Here's how to identify the best 3PL warehouse to fit your ecommerce business.
From receiving inventory, warehousing, labeling, shipping, returns, and all points in between, keeping the supply chain running is critical to ensuring your revenue increases. Much of this success can be tied back to your warehouse logistics. But is your current approach the most efficient?
When brands are first establishing themselves, they tend to follow the same approach:
- Launch your business with an in-house warehouse to get off the ground
- Grow your business and generate profit
- Expand to a 3PL to scale and reduce costs
What many don’t realize is this can set them up to face some significant challenges as they continue to grow:
Most brand leaders don't realize they need to outsource fulfillment until their process is failing. Or they won't consider using a 3PL warehouse because they are so ingrained in inefficient practices that the transition becomes a daunting task. But proactively outsourcing fulfillment to 3PL in the early stages of your business helps reduce overhead costs, provides a runway to scale, and gives you back your time. - Chad Rubin, CEO, Skubana
So what happens when a company suddenly finds itself in need of a third-party logistics provider? How do you identify one that best suits your company’s growth - both today and in the future?
Let's explore when is the right time to consider a 3PL (if you don’t have one already) and how to uncover the right fulfillment provider, including the criteria to evaluate and questions to ask.
When to Consider Using a 3PL
The first step in finding the right 3PL for your company is figuring out the right time to start looking. Regardless of what you sell, or who you're selling it to, the time to engage a 3PL centers on two critical milestones:
Increasing Order Volume
When you are first establishing your company, you might find yourself filling five, ten, or even 25 orders in a month. This type of demand can be handled in-house because your order flow is slower and margins are tighter. Outsourcing your fulfillment might cost you more than your business can handle.
However, if you start to fulfill those numbers daily, they can quickly stack up to hundreds of orders each month. Now that your operation is picking up, you start to incur much higher costs from different sources, including:
- Staff payroll and employee benefits
- Safety gear
- Warehouse equipment
- Warehousing space
Most importantly, you also start to lose time. Overseeing warehouse operations requires careful consideration and attention to ensure workers are safe. Managing warehouses can easily take leaders away from business development activities, hindering a brand's growth.
Once fulfillment issues start to appear, it's a strong indicator that you need to make changes to your fulfillment practices. For many, the easiest path to addressing these challenges and scaling operations is to outsource to a 3PL warehouse.
Decreasing Inventory Space
As you expand, the need to scale places a burden on your supply chain. More inventory must be housed to keep up with orders, but there may not be space to store, pick, and pack it properly. Depending on your business and its location, space could be limited or at a premium, forcing you to stitch together your inventory management strategy.
A 3PL has more access to fulfillment resources and best practices, further reducing the strain on your business. You can bundle together storage and fulfillment, placing the responsibility of securing space, storing inventory, managing returns, and receiving inventory on the 3PL partner.
Evaluating Your 3PL Warehouse Needs
Similar to how you'd vet a new piece of software or upgraded sales platform, understanding your business requirements will help focus your 3PL search.
Requirements can boil down to multiple factors. For example, if your ecommerce operation includes direct-to-consumer, wholesale, and pop-up shops, you will need a 3PL warehouse partner who can handle the logistics for all three.
Or, if you like to ship out orders with custom packaging, inserts, and hand-written notes to create a specific unboxing experience, you will want a warehouse that can accommodate process customization.
There are several potential 3PL partners, each with their strengths and limitations. Identifying requirements helps improve the 3PL search by focusing only on the partners that could potentially meet your needs.
Here are some points to consider during your company's self-evaluation.
The business you're in matters when selecting a 3PL. Are you selling sports memorabilia like t-shirts and hats? Or are you supplying maintenance parts and supplies to property managers in a particular region? Does your product line require special storage, handling, or transportation needs, such as moving machinery or warehousing of cold goods?
Some 3PL providers specialize in specific industries and have services that cater to the common warehousing needs in these markets. If your products require specific warehouse conditions or handling, you will want this factored into your search. Your 3PL warehouse should have the capacity to properly manage and care for your products to keep them in quality condition.
Does your business have an aggressive growth plan? Or does your company plan to expand to different sales channels? Regardless of the path you take, you want a 3PL with the flexibility to handle your growth.
Choose a 3PL that's too narrow, and you risk running into service and fulfillment issues. Pick a 3PL that's too broad, and you might find yourself spending more on services you don't need.
Outline the plans you have in the next couple of years, including:
- What channels and marketplaces you want to expand to
- How many SKUs you plan to have in your portfolio (or how many the 3PL is expected to house)
- New product categories you plan to establish
- Forecasted monthly order volume.
The warehouses should also be equipped to meet the various shipping requirements of each channel you will sell on – wholesale fulfillment, FBA, ecommerce channels each have different order flows and shipping volumes. You will want a partner that can deliver on each.
Make sure the 3PL selected is aligned with your plans and can accommodate your company roadmap for years to come.
Your Brand Image
The last part of self-evaluation stems from your reputation. When you employ a 3PL, your brand remains the forward-facing image customers see, not the 3PL. A big part of your due diligence should include researching the reputation of the providers you're examining.
Talk to others in your industry. Reach out to references. Note who else uses the 3PLs you're considering. Remember that the 3PL warehouse you use effectively becomes an extension of your brand. You want it to be a good one.
Key Elements to Consider with 3PL Providers
When exploring 3PLs, it's helpful to understand the different features and levels of service they provide - and the inquiries you'll want to make into each area. Complicating your selection process, however, is the broad definition often given to third-party logistics.
To keep it simple, let's focus on the central tenets of 3PL: warehousing, transportation, distribution, and shipping/receiving. A fifth principle focuses on technology - not just a 3PLs current capabilities but their willingness and success in adopting and integrating with new solutions.
When comparing full-service 3PL providers, you'll want to focus on these eight aspects:
While a 3PL warehouse removes the burden of you having to source storage for your inventory, you do need to understand the 3PLs storage policies and their warehouse network.
Ask whether the provider offers shared storage (where they hold and fulfill orders for several clients in the same area) to reduce costs or if your products can be held exclusively in one area. Also, you'll want to determine if they own their warehouses or utilize a brokered asset approach where they outsource the storage and logistics to another company.
Request information about the security procedures put in place within storage areas. How is inventory being monitored and tracked as it moves from location to location? If something happens to your inventory, you want to have confidence that the 3PL can trackback to see what happened to your products.
Another concern with discerning a provider's network stems from their total number of warehouses and their locations. A broader reach with facilities in or near large population centers equates to more effective fulfillment. Too few warehouses mean slower, less reliable delivery schedules.
Take into account where your customers live, as well. Changes to zone shipping have made it increasingly expensive to ship domestically, so it is important to establish a warehouse footprint that keeps priority states within lower-priced shipping zones.
Let's go back to our maintenance parts supplier example. If the majority of your property management clients are in gulf coast states like Louisiana, Mississippi, Alabama, or Florida - distribution centers in Dallas or Atlanta are ideal. If a 3PL only manages space in Chicago or Denver, it may not be the best service for fulfilling your customer's needs.
Also, the technology a 3PL utilizes to automate fulfillment has a significant impact on your ability to meet customer demand for fast shipping. Proper routing means orders route through facilities that will best fulfill an order in the shortest amount of time. However, if a 3PL doesn’t have this capability internally, you can pair it with an inventory management software to handle the routing for you (more on that below).
It’s also important to have diversification in your supply chain, including in your fulfillment centers. The biggest reason why TKEES is implementing a multi-warehouse framework is to provide a higher level of speed and service to our customers. While same day shipping is the standard set by Amazon, we want to get to a point where we’re able to fulfill orders within one or two hours after an order is placed. That level of service would be unparalleled, and in certain metro areas, it is possible to do this with little operational risk.” - Daniel Abramov, CDO, TKEES
Find more insights in our latest report - Here & Now: A Guide for the Modern D2C Brand.
Inventory management is two-fold - the freight coming in and the products going out. You want your 3PL to be adept at both sides of the equation. Verify that they offer systems that track the inventory as it enters the warehouse and then integrates with your online sales platform or inventory management software to maintain an accurate account of your stock.
Inventory management is particularly crucial at heavy traffic times - holidays, weekends, or industry-specific choke points. You want the 3PL equipped to handle your specific demands for maintaining proper inventory levels, so you know exactly when you need to reorder inventory to avoid stockouts.
Fulfillment all comes down to an employee picking the product that was ordered and packing it for shipment. You may have even employed specific people for this job when you were handling fulfillment in-house.
However, it points to the larger question of 3PL staffing. Does the 3PL employ staff? Contract with other third-parties? Do the employees receive background checks? Are employees adequately trained to perform the tasks the 3PL is promising to handle? What training or certifications do employees take?
There's no need to concern yourself with the day to day specifics of the 3PL employee roster. But the 3PL should be transparent about the qualifications for their staff so you can determine if the employees handling your products will be an asset or liability for your company.
Shipping is arguably the cornerstone of the supply chain process. Several items fall under the shipping umbrella, and each can have a profound impact on your bottom line.
- Freight Forwarding: This is the process after an order is "picked and packaged." The 3PL will forward all packages ready to be shipped to a carrier to fulfill the delivery.
When looking at the capabilities of different 3PLs, examine which shipping carriers they use and the price and reliability of those carriers. The carrier's pricing might be attractive, but it may not be the most reliable service. A great 3PL will weigh the importance of both for the best possible combination.
In some instances, your ecommerce business might be able to broker better shipping rates than the 3PL you decide to use. If this is the case, inquire if the 3PL is willing to use your preferred carrier. If not, consider a different service.
- Tracking: When a 3PL takes on shipping duties, they will also handle the tracking aspect of those orders. Again, you'll want to scrutinize the provider's automation so that their tracking information is sent quickly to either your customers or to your inventory management system. If there are issues with these updates, you will also want to understand the bandwidth they have to address them.
- Expedited Shipping: Similar to tracking, review the 3PL expedited shipping parameters. This is a notable advantage in using a 3PL in part because they can often offer more options at lower costs. Again, make sure the 3PL can resolve issues that may arise from the greater demands consumers place on faster shipping.
More formally called reverse logistics, returns are a big deal. Your 3PL search should examine the provider's ability to address them. Define your preferences for handling returns so both parties understand what to do with inventory, how to factor costs, and what shipping services to use for return shipments.
Most importantly, ensure the 3PL can integrate with your platforms and provide consumers with the necessary return labels so you can track what's coming back and why.
We've already touched on the importance of 3PL technology in a few instances - inventory management, shipping, and returns. The technological requirements, though, should not stop there.
Ecommerce is constantly evolving. So too are consumer demands. Five years ago, most customers were satisfied with a five- to seven-day delivery. Today, a company like Amazon can reach nearly three-fourths of the U.S. population within a day. Much of that is due to prioritizing automation and embracing new technologies.
From software to equipment, a great 3PL provider does the same - seeking out new and innovative ways to serve their client's fulfillment needs.
3PL pricing can vary greatly. Pricing might be a la carte or bundled together based on the 3PL services or your needs. When completing your due diligence, look for pricing structures that are clear and transparent.
Recognize that while you might be charged fees for freight, storage, packing, or labeling, those costs could increase as your business grows. While you might have to pay initial setup fees, you could also be on the hook for more as your brand scales upward.
Be mindful of added costs. The handling of a 40' pallet might be considerably higher than that of a 20' pallet. Unique services such as kitting may run extra unless built into your agreement. Overtime charges might be factored in during the holidays, on weekends, or other high volume times.
Additionally, be wary of markups. For example, a 3PL might have shipping rates through a carrier of $10 but charges you $15. Your rates might be cheaper, in which case you'll want to address the discrepancy. If not, you'll want to negotiate the prices or partner with a 3PL that can be more competitive.
While they may not be "hidden" within the framework of a contract, partnering with a 3PL without fully vetting their price structure could cost you.
Advantages of 3PL
If you remain on the fence about whether the time is right to work with a 3PL, we compiled a list of the main benefits in taking that next step with your business:
Economies of Scale
As your ecommerce grows, it can place a significant burden on your infrastructure. 3PLs are built to carry this burden for you. Using a 3PL allows you to scale storage, shipping, and staffing, and get access to the more favorable rates.
While you may have the resources to acquire warehouse space in your company's back yard, you are probably limited in the resources to expand beyond that footprint. A 3PL with a strong warehouse network puts your inventory closer to more customers in more regions than that single warehouse space.
Narrow Your Focus
You will never stop worrying about all aspects of your business. However, partnering with a great 3PL puts fulfillment and warehousing in the hands of experts whose sole responsibility is to deal with day-to-day fulfillment activities. You won’t have to get into the weeds of incoming freight, warehousing, shipping, and returns so you can focus time managing other aspects of your business.
Partnering with a 3PL provider connects you with their business volume. You no longer have to foot the bill of your supply chain alone. Warehouse space, packaging, shipping, and labor - all of those costs are spread out over other clients on the 3PLs. The distributed costs provide an enhanced fulfillment service at a fraction of the cost of an in-house solution.
Many 3PLs also give you the luxury of customization - branding, packing, and shipping - at more competitive prices than going it alone.
Employing a 3PL frees up your team to take advantage of new opportunities. You can focus your internal resources on other activities to foster business development, including marketing, product innovation, strategic sales campaigns, and data collection.
Choosing the Right 3PL
So far, we've:
- Determined the critical indicators for moving to 3PL.
- Evaluated your company's 3PL needs as the starting point for your search.
- Reviewed the 3PL services offered and the key points to consider for each area.
- Expanded on why the advantages a 3PL present and how that helps your company grow.
Upon narrowing your 3PL provider list to a handful of top candidates, you'll want to interview each contender.
Below is a list of questions you'll want to pose to each 3PL. While straightforward, the answers will help discern small differences between each service, allowing you to identify the best fit for your business.
- Ask about a non-disclosure agreement (NDA), as you'll want to protect your intellectual property and any discussions or projects that relate to your business.
- We mentioned it a couple of times, but it's worth noting again - is the 3PL in tune with new technology and continually working to improve their fulfillment capabilities.
- What software platforms and automation do they use?
- Are they compatible with your company's tools?
- What multichannel tools, apps, and software can they integrate with?
- Is the 3PL financially stable?
- Go back as far as possible to determine an established commitment to good stewardship. You do not want to be left holding the bag if a 3PL can no longer fulfill its financial responsibilities.
- Understand their communication methods.
- How will they communicate with your firm?
- Are they set up for a single point of contact?
- Do you get a dedicated account rep? Or will you work with multiple individuals based on the area of fulfillment?
- What is their current footprint, and what are their plans for expansion?
- Remember that you are looking at 3PLs to help your business scale and grow. Make sure they have procedures in place to do the same.
- If you're considering a 3PL that does not already have a presence in your industry, inquire if they have worked with companies of similar size or sales and fulfillment volume.
- Ask for a full outlay of pricing and costs upfront, and don't hesitate to walk away if the 3PL is less than forthcoming or slow to provide the information.
- When you're at this stage, it's time to sweat the small stuff. You don't want to be caught off guard later.
- What are their hours of operation, including weekends and holidays?
- Which carries do they have relationships with?
- How deep is their customization - can they integrate branded packaging, or custom packing slips or gift order messaging?
- What is their process for addressing delays, lost packages, or sudden increases in order volume?
- Do they offer delivery guarantees or compensation for meeting performance and service thresholds?
- What about insurance or international shipping?
Don't just take their word for it.
Reach out to current and former clients of every 3PL you're considering and ask them for the pros and cons of working a specific provider. Don't be afraid to ask the 3PL for references. Do they have a lot of satisfied clients or a larger number of disgruntled ones?
If possible, single out firms that may have run into issues and ask how the 3PL warehouse resolved them.
In addition to these critical questions, add anything that pertains to your specific segment or industry. Often those direct inquiries will help identify the ideal 3PL.
Outsourcing fulfillment to a 3PL partner in the early stages of your business helps reduce, provides the flexibility to scale, and gives you back your time. However, when selecting a 3PL partner, you want to make sure you choose one who is equipped to support your business goals, shipping requirements, and growth plans. Carefully vet your partner, and you’ll give your brand the proper structure to expand quickly.