3PL: What is third-party logistics and how does it work?

 Two people in a warehouse with inventory on the shelves.

Learn how 3PL can accelerate your ecommerce growth.

If you’re an ecommerce business owner with shrinking storage space, or if you recently opened an online store and don’t want to manage inventory and distribution, a third-party logistics (3PL) service could help.

Space will run out faster if you’re working out of your home than if you use a warehouse. You may even reach maximum warehouse space as your business continues to scale. Before you know it, fulfilling purchases might be tougher and more expensive as you reach your threshold, especially for heavy packages. Running shipments to UPS or FedEx multiple times per day is also costly and time-consuming.

With the help of a 3PL service, you can overcome obstacles like these and grow faster without hurting the customer experience. If you’re on the fence about using a third-party logistics company, then this guide may help. Let’s review what 3PL is and how to determine if it’s the right move.

Pro Tip
Use Fulfillment by Amazon
Try Fulfillment by Amazon (FBA) as a way to outsource the entire fulfillment process—from storing inventory through packing and shipping orders. Amazon fulfillment centers can also manage returns and provide customer service for the products you enroll in FBA. Tap into Amazon’s global fulfillment network, offer two-day shipping to Prime customers, and more.

What is 3PL?

Third-party logistics companies (or 3PL) can help ecommerce businesses scale by offering a range of services to streamline retail processes, such as inventory management, logistics, and return and exchange management. Other services include:

  • Warehouse space
  • Shipping coordination
  • Order fulfillment
  • Retail distribution

The purpose of 3PL is to simplify the scaling of your ecommerce operations. You pay a fee, and the 3PL handles stock and distribution, so you can work on your business, instead of in it.

How does a 3PL work?

Third-party logistics companies offer different services and fulfillment processes, so the process will vary, depending on which 3PL you choose.

Here’s an example of how the average 3PL service operates:

  • You send inventory to the 3PL from your storage space or directly from the manufacturer.
  • The 3PL receives and organizes each SKU in its warehouse.
  • Once a customer places an order, you either manually submit the order to the 3PL or they receive it automatically via software.
  • A worker at the 3PL picks the ordered items and places them in boxes for shipment, along with a receipt.
  • The 3PL forwards the shipments to a local shipping service provider (e.g., DHL, UPS, FedEx, USPS).

When should you use a 3PL?

Some ecommerce businesses start out using a 3PL service. Or, you might already be selling products online and considering adding a 3PL service. Here are several signs 3PL could be right for you:

  • You’re selling more items than you can store or fulfill and would like to scale to keep up with demand.
  • You want to focus on growing your business vs. overseeing the operations (e.g., inventory management, processing orders, and fulfillment).
  • Storing inventory yourself is becoming too expensive or a hassle to deal with.
  • You have the financial resources to pay for 3PL services.
  • You want to expand your reach using a 3PL’s network of locations (while reducing shipping costs).

Although 3PLs don’t always require a minimum of units sold per month, check to make sure, especially if there’s a risk sales that could increase beyond your ability to manage fulfillment. For some, the threshold may be 50 units per month, while others can manage up to 100 orders per month.

Factors to consider when choosing a 3PL provider

Working with a 3PL provider can be a big step for your ecommerce business,so it’s critical to cover all the bases before signing a contract. Here are some questions to ask to determine if a 3PL provider is the right one for you.

Are FTL and LTL freight shipping and receiving available?

Full truckload (FTL) and less than truckload (LTL) are two options for sellers to ship goods. The FTL option is for when you need to ship large orders (e.g., 12 pallets of goods). Otherwise, if you have a small shipment, LTL could be a better option because it’ll add those items to other pallets, so you’re not paying for a full truckload.

FBA Carrier Program video Thumbnail
Watch
Amazon FBA Partnered Carrier Program
Amazon Partnered Carrier Program is a discounted shipping service offered by Amazon to Amazon Sellers. In this video, learn about Amazon’s Partnered Carrier program truckload service and its benefits, and get a step-by-step overview of how to use the Amazon Partnered Carrier Program for LTL shipments (less than truckload).

How does inventory management work?

When you work with a 3PL service, you’re usually responsible for managing inventory. However, some providers have analytics tools to track inventory levels to prevent stock-outs and overstocks.

For example, FBA has a dashboard for inventory management. It provides data about current stock levels and expiration dates to avoid spoilage. The system even alerts you when you have low stock levels.

With the sell-through rate data provided, you can better understand which products sell fastest, so you know which goods to reorder frequently or in higher quantities.

What services are included in the picking, packing, and shipping?

Third-party logistics providers will pick, pack, and ship goods on your behalf. Some 3PL providers might offer additional services. Learn more in this guide to inventory management and check with your 3PL solution to see if they offer the essentials you need.

For example, some 3PL providers offer custom packaging and sender labels. This can be valuable if you’re building a brand and want to use a unique design or logo you developed. It adds a personal touch to products, making your brand memorable to customers.

Does it offer kitting and assembly options?

Kitting is placing multiple SKUs into a single package. This is useful if you sell bundles, such as multiple baby outfits or accessories, grouped together in one box.

Creating bundles can increase revenue, reduce shipping costs, and expedite delivery because you ship fewer boxes per order.

Assembly is another service 3PLs offer to personalize packaging. This is common in the fashion and beauty industry where presentation especially matters. For example, you might have a special box that requires items placed in a specific order, or a basket with a bow wrapped around the top.

A 3PL with kitting and assembly can do this process for you before shipping products to customers.

Do you get access to advanced data analytics?

Some 3PLs offer data analytics to help manage inventory. While this is useful for preventing imbalanced stock levels, it doesn’t assist with future planning.

Select a third-party logistics company with advanced data to analyze other aspects of sales. For instance, Amazon Brand Analytics shows:

  • Who’s buying products (demographics in aggregate)
  • How many customers make repeat purchases
  • Which search terms customers use to find products
  • Popular items customers buy in addition to buying items you offer
  • Top three products shoppers buy instead of yours
  • Which products customers compare to your offerings

With this information, you can make informed decisions about which products to keep, drop, and increase inventory for.

Brand Analytics Demographics Lofi Ui Illustration

Does it include reverse logistics?

Reverse logistics involves accepting and restocking returns from customers. It’s a service offered by some 3PL providers for an extra fee, so check if it’s included or has a charge per return.

To prevent financial loss, some sellers deduct a restocking fee from customers’ refunds when they return an item. It’s also useful for eco-friendly brands if customers want to return containers for recycling or reuse.

Where are the warehouse locations?

If you plan to sell goods to customers across the nation or globe, then choose a 3PL service with warehouses in strategic areas.

Some providers have warehouses in a specific region or in multiple countries and continents. The more warehouse locations it has, the better it is for your sales potential.

Did you know?
Amazon has 105 fulfillment centers in the U.S.
Our network of locations enables fast fulfillment options to customers throughout the country.

How great is customer support?

Whether it’s your first or hundredth time working with a 3PL, choose one with excellent customer service. Not all third-party logistics providers are the same, which could lead to hiccups, especially when starting out.

For example, some companies require you to use your own freight forwarders, which means you’re responsible for tracking shipments and communicating with carriers.

Other providers may not provide the level of service you expect. For instance, not responding quickly to customer emails or phone calls.

When selecting a provider, consider the level of support required to ensure satisfactory order fulfillment for customers.

Does it provide distributed inventory options?

Distributed inventory allows you to store inventory at several warehouse locations. You can choose to store inventory at a single location or split it between multiple locations.

The goal is to get products as close to customer locations as possible to reduce shipping costs and improve delivery speeds.

When a customer places an order, they receive it from a fulfillment center closest to them. If you want to get shipments to customers in as few days as possible, then opt for a 3PL provider with warehouses in areas closest to customers.

Amazon has fulfillment centers in locations across America, Europe, the UK, Canada, Italy, France, and other countries to meet growing customer demand.

Female customer service rep

How in-depth is the returns process?

When a customer returns a product, will the 3PL provider fulfill the request? Some third-party logistics companies offer complete return services like:

  • Checking for packaging and item damage
  • Restocking returns in like-new condition with no damage
  • Creating new SKUs for slightly damaged or used products to sell at a discount
  • Discarding food or damaged products and calculating the loss

Provide the 3PL with clear instructions on how to handle returns. For example, you may require certain goods to be tossed if opened, such as undergarments or food items.

What are their hours of operation?

Are you choosing a 3PL outside of your locale? Either way, check the hours of operation of a 3PL and opt for a provider that’s open during reasonable hours on your end in case you need to speak with customer support.

This will be tougher to achieve if using an overseas 3PL,so consider using a 3PL provider with offices in your time zone, but warehouses in national or international locations.

Your fulfillment options in Amazon stores

You have two options for fulfilling ecommerce orders using Amazon stores: multi-channel fulfillment (MFC) and Fulfillment by Amazon (FBA).

Multi-channel fulfillment

Amazon’s Multi-Channel Fulfillment (MCF) program is a suitable solution if you sell through your own ecommerce website or other channels. For example, if you sell through social media, then you can pay a single fee for picking, packing, and fulfillment services through Amazon MCF.

You can also sign up for Buy with Prime to offer free two-day shipping to customers. You get discounted shipping rates and real-time monitoring of customer shipments.

Fulfillment by Amazon

Amazon FBA offers a complete done-for-you service to ecommerce sellers. When you use Amazon FBA, you get the following benefits:

  • Have packages received, stored, and shipped for you.
  • Get returns management, including collecting and restocking (or disposing of them) on your behalf.
  • Save money by avoiding website and hosting services, paying pickers and packers, and high shipping fees.
  • Access an analytics dashboard to get a window into inventory.
  • Insights to understand when stock levels are too low (or high), which products sell the best, and trending keywords shoppers use to find products.
  • Customers can contact our customer support via phone or email, day or night.
  • Connect with 300+ million daily shoppers.

These advantages can help you make decisions on which products to stock, how much inventory to buy and when, and how to market products in Amazon stores to attract traffic.

Did you know?
Fulfillment by Amazon can save you money
Shipping with FBA costs 30% less per unit than standard shipping options offered by major US carriers and 70% less per unit than their premium options comparable to FBA.

There’s no extra charge for Amazon Prime free two-day shipping and free shipping options for eligible products. You’re only charged for storage space and orders fulfilled, giving you more control over your expenses. You can also choose optional services for additional costs.

Grow your ecommerce business faster with 3PL

With third-party logistics, you get the services needed to scale without hurting the customer experience. So consider using Amazon’s Service Provider Network to find high-quality service providers for everything from bookkeeping and advertising to account management and international shipping.

If you’d like to learn more about fulfillment, then check out this ecommerce fulfillment guide.

Amazon is an engine of growth for us. We’ve had triple-digit growth, which is remarkable.
Karen Tay
Co-founder of Fair Havens

How to sell on Amazon from anywhere in the world: Global Seller Success Story

FAQ: 3PL

Q:

What’s a third-party logistics company?


A:
A third-party logistics (3PL) provider is an independent business that provides services to ecommerce sellers. 3PLs are often referred to as “outsourced logistics providers” or “logistics service providers,” and they can be found at every stage of the supply chain. They offer solutions like warehouse management, transportation, inventory control, order fulfillment, customer service, and data analysis.
Q:

Is Amazon a 3PL?


A:
If you would like to outsource shipping or other parts of the fulfillment process through Amazon, you have two options: Fulfillment by Amazon (FBA) and multi-channel fulfillment (MCF).

Register as an Amazon seller to enroll products in FBA. Then, you can send inventory to Amazon warehouses to store and ship directly to customers. Amazon FBA can also provide return and refund services on your behalf. You can have the manufacturer send shipments to Amazon warehouses, or you can receive shipments and handle the product preparation yourself before sending items to Amazon for distribution. Learn more about FBA.

MCF provides low-cost, reliable fulfillment for any of your sales channels, whether you use another selling website, social media, or other ecommerce solutions. This option comes along with tools for streamlining inventory, up-to-the-minute order tracking, and more. Learn about MCF.
Q:

What’s the main purpose of third-party logistics?


A:
Third-party logistics allow companies to outsource their supply chain management. A 3PL is responsible for managing and coordinating transportation, warehousing, inventory control, order fulfillment, customer service, and other functions involved in moving goods from one point to another.

Using a 3PL can reduce or eliminate expenses for managing fulfillment tasks and purchasing or leasing storage space. It’s a popular solution for ecommerce store owners who want to reduce their workload to focus on growth.
Q:

What are the different types of third-party logistics?


A:
3PLs can be classified into three categories:
  1. Transportation-based 3PLs: Offers logistics services to get you products from Point A to Point B (and even Point C, in the case of returns). The 3PL picks up products, transports to a warehouse, and then to the customer. Examples include shipping carriers, bike couriers, and freight companies.
  2. 3PL warehouse management: Provides storage and distribution services, such as storing goods, rotating stocks, managing inventory, and restocking returns.
  3. Full-service 3PLs: Delivers end-to-end logistics management, including inventory management, distribution, analytics technology, and customer service.
Q:

What is a 4PL?


A:
Fourth-party logistics, or 4PL, is a service ecommerce sellers use to manage all aspects of the supply chain. In some scenarios, the 4PL will hire a 3PL and oversee activities to ensure everything runs smoothly. The 4PL becomes your single point of contact in the supply chain.
Q:

How do you manage a 3PL?


A:
Here are a few tips for 3PL management:
  • Be clear about your expectations (e.g., when to restock or throw away an item, how to bundle goods)
  • Set realistic goals and expectations
  • Determine your point of contact at the 3PL
  • Maintain open lines of communication
  • Use software to track inventory and sales
Q:

What’s the difference between 3PL and a freight forwarder?


A:
A 3PL is a company that provides services such as warehousing, transportation, inventory management, and returns processing.

A freight forwarder doesn’t provide any of these services but instead acts as an agent to find one or more shipping carriers to transport goods from Point A to Point B.

Freight shipping is the process of transporting goods from one location to another using freight trains, airplanes, ships, or freight trucks. For example, freight shippers might pick up cargo from a manufacturer in China and transport it by sea to the docks in America, where a logistics company can pick it up for transport to your warehouse.

Freight receiving is the process of accepting freight shipments, which consists of removing them from the trucks, organizing the goods, and stocking them on warehouse shelves for future picking and packing.
Q:

What’s the difference between a 3PL and a freight broker?


A:
A freight broker is a liaison between companies needing goods transported from a manufacturer to a warehouse. The freight broker finds reputable companies, negotiates rates, and arranges freight shipments on your behalf.

A 3PL manages the logistics, as well as other services, such as warehouse and inventory management, and product returns.
Q:

How do you measure 3PL performance?


A:
To measure the performance of your 3PL provider, ask the following questions:
  • Are customers receiving their shipments on time?
  • How many complaints about shipping and packaging do you receive monthly?
  • Are orders shipped to customers accurate?
  • How long does it take to fulfill customer orders?
  • Are inventory level reports accurate?
  • Are returns processed in a timely fashion?
  • Are costs for services still affordable?

Daisy Quaker
Daisy Quaker
Daisy Quaker is a Sr. Marketing Manager at Amazon who’s driven by helping entrepreneurs and brands discover opportunities to reach more customers through Amazon stores. She also enjoys the outdoors, art museums, and good food.