Ottemo Blog

When to use a 3PL

by Mark Swanson

What is a 3PL?

3PL is an acronym for a Third Party Logistics provider and refers to contract or outsourced businesses who provide various logistics and operations services.

These services include warehouse receiving, storage of your products and components, manufacturing and assembly of those components into other components as well as finished goods, fulfillment of orders to customers (B2B and B2C) and returns from those customers. In some cases, a 3PL may even act as your purchasing and customer service departments.

3PL Advantages and Benefits

  • LaborScalability and Flexibility

3PLs typically work with several clients within a campus. Labor can be increased or decrease rapidly and shared among the customers. 3PLs have great relationships with temporary employment agencies and can get labor quickly, often the same day.

  • Space

The client-sharing nature of 3PLs also allow for flexible space usage. Once filled up, it is up to the 3PL to source more space.

  • Operational Cost

All real estate and operating costs are borne by the 3PL. They will certainly bake in a cost factor for each client, but typically their reduced labor costs, shared space and core competency in logistics can bring your cost inline and sometimes below what it would cost to do it yourself.

  • Freight

3PLs ship a very large number of orders each day and can get the best discounts from parcel carriers (UPS, FedEx and DHL) and trucking companies. If you ship fewer than 100 orders per day, expect to cut your shipping costs by 30%+ thru a 3PL.

*Focus

This is for you, the client. You can focus on product development, sales and marketing (revenue-generating work) and not have to worry about operations.

3PL Disadvantages and Cautions

  • Change Management

You lose instant access to process changes. Changing an assembly or shipping run mid-stream may cause a delay of hours to days while floor personnel are informed and SOPs are re-written to accommodate the new request. Additional charges, known as AdHoc fees, may be levied since the change request is viewed as "out of scope".

  • Speed

The same benefit of shared resources to provide additional labor and lower costs can also work against you as the work for you is put in line with the others. A much larger client may get more attention and their needs may trump yours.

  • AdHoc Fees

Mentioned above, this is the single biggest surprise you get when you look at the 3PL invoice at the end of each month. AdHoc fees are all of the charges for labor, space, management and materials used that were not part of the scoped processes and requirements.

A carefully crafted statement of work (SOW) can avoid this. A poorly negotiated contract can cost you double or more each month.

*Contract Term

Most 3PLs ask for 3-4 year contracts. Many can be negotiated down to 2 years

  • Implementation Costs

Depending upon the complexity of the work, integration of systems and equipment needed to handle your products, a one-time upfront charge may be required. This can be as high as $25,000 but may be negotiated lower and sometimes waived.

When to use a 3PL?

The answer can be a simple math equation based on cost or it can be a bit more involved. Here are some considerations:

  • Do you need or want 100% control of how your product is handled?

  • Do you want to focus on your core competencies and leave the operations to a contractor?

  • Can you commit to a 2-4 year contract?

  • Do you expect fast growth that would be difficult for you to keep up with on your own?

If you decide that a 3PL might be appropriate, create a statement of work including timing and volume data for all of your SKUs and components, estimated frequency of receipts from vendors, number of outgoing orders, etc. Then contact 3-5 3PLs to get their feedback on what they can do for you along with a ballpark of costs from each.

A knowledgeable advocate or consultant can assist with the entire process from strategy thru negotiations and implementation.

Topics: fulfillment, warehouse, 3PL, ecommerce, digital commerce, operations

Mark Swanson

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