Is 3PL worth it? The pros and cons of third-party logistics

To have stumbled upon this article it’s sensible to assume that you’re considering outsourcing eCommerce fulfilment. You probably have a fair understanding of what 3PL is, but might not be aware of the intricacies of entrusting another business with the management of your delicate business operations. In this article we will cover what warehousing and order fulfilment involves, the benefits, drawbacks, how to find the right provider or whether to just do it yourself.

Ecommerce fulfilment is the process an online retailer or brand takes which involves entrusting a specialist with the orchestration of the goods intake, storage, picking, packing and distribution of finished goods to consumers. With extraordinary triple-digit growth in market size predicted, 3PL is an increasingly popular strategic imperative because it allows businesses to effectively club together into a buying group, and achieve greater economies of scale. Rather than having a single contract with a courier, 3PLs act as a shipping aggregator, with preferential rates and later collection times, thanks to their buying power and influence.

In-house fulfilment warehousing

While many retailers choose to process their orders in-house, this involves developing and maintaining the following:

- An eCommerce fulfilment warehouse

- Staffing, e.g. picking and packing warehouse operatives

- Barcode scanning technology

- A warehouse management system

- Energy and utilities costs

- Insurance

- Forklift trucks

- Pallet racking

- Packaging technology (and materials such as pallet wrap)

Order processing is therefore highly capital and labour-intensive. Retail decision-makers must also consider the opportunity cost of investing in, or borrowing large sums of money to develop warehousing infrastructure, to then potentially realise later down the line that they can’t match the efficiency of a dedicated direct-to-consumer fulfilment centre.

The hidden benefits of third-party logistics

Working with an eCommerce 3PL might also grant you access to complementary services, such as outsourced customer services (contact centre support such as product and delivery-related query management), customs clearance, bespoke packaging, product customisation, order reworking, or in the case of Zendbox, a UK fulfilment centre, inventory analysis technology that helps retailers order just the right amount of stock, at just the right time, thanks to AI-powered analysis of stock levels, stock replenishment dates, and seasonal demand fluctuations.

3PLs aren’t suitable for all online retailers as they require minimum daily order volumes of between 10 and 300 shipments. SME-focused 3PLs can assist retailers shipping 10-30 parcels per day, whereas mid-market and enterprise fulfilment services require hundreds, or even thousands of orders. There are many other variables, such as product value, dimensions, weight, and destination; fulfilment houses might be able to add more value to clients that ship a lot of overseas orders.

How much does a 3PL cost?

3PL pricing involves many variables, such as storage, picking and packing costs, shipping fees, integration and ongoing software charges. When performing order fulfilment in-house, retailers will have fixed overheads, whereas beyond agreed contract minimum spend, merchants working with a 3PL typically only pay for what they actually use.

Fulfilling orders in-house can still be an excellent operational setup for small and growing businesses, as it helps merchants retain greater control, and there is always the opportunity to rent their spare warehouse space out to other retailers, to help cover overheads; this is known as the ‘micro-fulfilment’ trend. However, if management of an insourced fulfilment warehouse isn’t delegated down the hierarchy chain, operations can become a drain on leaders’ focus that could be better spent on other growth drivers such as sales, marketing, strategy, new product development and competitor analysis.

How to effectively measure eCommerce logistics performance

You might be wondering at this point how retailers who decide 3PL is right for them can ensure outsourcing fulfilment was worthwhile. The best way to measure this is with Key Performance Indicators Objectives and Key Results; KPIs are numbers that track the operational performance of the 3PL, based on past results and/or future goals. Actions are prompted when numbers are off track, and KPIs are measured on an ongoing basis. KPIs based on metrics such as order processing speed, item in or out of stock rates, customer satisfaction and on-time delivery performance. OKRs, on the other hand, are mission-based, aspirational and directional, but still involve action-oriented goals and measures. An example OKR could be ‘to achieve the best customer satisfaction score in our industry’, or ‘to halve order-processing speed’, or ‘to increase picking accuracy from 99.7% to 99.9%’.

In the case of Complete Strength, a Shopify-powered multichannel workouts supplement retailer, they learned outsourcing fulfilment with Zendbox helped them increase conversion rates, and find new markets.

The majority of their customers prefer to shop late in the evening, such as after a gym workout when they realise they are low on protein powder. Before working with their current 3PL, their old fulfilment provider had a mid-afternoon order cut-off, which meant missed sales opportunities from night owl consumers who wanted their order the next day. Founder Rob Whitfield added: “Now we’ve got a later cut-off time with Zendbox, we get less abandoned carts. We have also noticed customers are shopping with us simply because of the later cut-off time.” Without effective measurement of KPIs and OKRs in place, this retailer wouldn’t have known if they had achieved better performance, but thanks to Zendportal, they do.

So, is 3PL worth it?

When weighing up the advantages and disadvantages of outsourced eCommerce fulfilment, it’s important to consider that when working with a 3PL, one will have less control over their product distribution, having to commit to minimum daily order amounts, and minimum contract terms. Whether working with a domestic or overseas fulfilment centre, or a combination of both, one will have to cope with being at a distance from one's stock. For companies who have stable, consistent order volumes, that are able to predict demand and revenue, third-party logistics can become a competitive advantage and growth driver. Utilising an overseas fulfilment centre can give merchants the chance to gauge demand abroad, without committing to their own international operations. Retailers can mitigate risk in other ways too, such as diversifying their shipping options, so that if one carrier is hit with adverse weather conditions, or staff are on strike, there will be other delivery methods available. On a final note, it's important to consider that the majority of negative customer reviews are related to the post-checkout customer experience; getting warehousing and fulfilment right can not only impact conversion and profitability, it can also influence your reputation.