What is Third Party Logistics? (3PL)
Third party logistics (3PL) is a method of order fulfillment that involves sending inventory to an external company to prepare and ship orders for you.
3PL services can include a variety of areas in supply chain management, including inventory storage, handling, packing, postage and customer service.
Using third party fulfillment still requires you to purchase inventory and ensure accurate quantities to avoid stockouts. Fulfillment by Amazon (FBA) is a popular service that allows sellers to store and distribute products from an Amazon facility.
Advantages of third party logistics
- Avoid long-term leases. Third party logistics companies often offer flexible pricing adjusted to your needs as you grow.
- Flexibility. You can delegate your work to a logistics company who can be responsible for running a warehouse and managing staff.
- Lower shipping costs. A 3PL company is likely to have access to much better shipping rates than you are alone.
- Focus on growth. By letting someone else take care of logistics you can focus more on growing the business.
- Higher profit margins. Purchasing inventory in bulk means you can potentially have higher profit margins than simple dropshipping.
Disadvantages of third party logistics
- Quality can be compromised. Your company is not in full control of a business function with one of the biggest impacts on customers.
- Distance. If you’re far away from the 3PL warehouse then solving any quality problems with your product can prove challenging.
- Cost. If you’re a smaller retailer, the overall cost of using a third party logistics provider for convenience can be far higher than if you were to use self-fulfillment.
- Communication. Adding a third party between you and customers can create complications when communicating.
Who is third party fulfillment best for?
Growing startups beginning to get enough orders to outgrow shipping from a small office could benefit from using a 3PL.
Small to medium sized businesses with a current revenue of around $1m-$10m and where distribution is not a core competency could also benefit.
If your retail business is at a stage of investing in a warehouse, machinery and staff, using a logistics provider to ship customer orders can save a substantial amount of money.
Who should avoid third party fulfillment?
3PL companies are less suited towards businesses with a limited cash flow or a low volume of orders. It’s also likely to be too expensive if you have highly customised, one-of-a-kind pieces that require separate SKUs in designated areas of a warehouse.
Brands may also want to avoid third party fulfillment in order to maintain complete control of their messaging, reputation and unique packaging.
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