This article is part of a series educating sellers about the basics of e-commerce.
Third-party logistics, more commonly referred to as 3PL, is the outsourcing of various order fulfillment processes to a third-party service provider. These processes include warehousing, managing inventory, picking and packing, fulfillment of orders and even managing returns.
In this article, we provide an overview of the different types of in-house and outsourced logistics solutions including Fulfillment by Amazon (FBA) and the types of 3PL companies. We will also share the pros, cons and processes of 3PL order fulfillment.
Types of in-house and outsourced logistics
First-party logistics (1PL)
1PL, otherwise known as in-house logistics, involves fulfilling orders using in-house solutions, where no external party is involved in the process.
Example: A t-shirt manufacturer sends their clothes to a retail store using their own delivery fleet.
Second-party logistics (2PL)
2PL involves outsourcing transportation processes to an external service provider (2PL company). These can include shipping, airline or courier companies.
Example: A t-shirt manufacturer engages a courier company to deliver their products to a retail store.
Third-party logistics (3PL)
3PL involves outsourcing various day-to-day logistics processes including packing, storage, inventory management, door-to-door delivery and reverse logistics to an external provider (otherwise known as a 3PL company). They typically own the resources needed to provide these services such as warehouses and delivery fleets.
In this model, your business will retain oversight of these 3PL companies and liaise directly with them.
Example: A t-shirt manufacturer liaises with a 3PL company to pack their clothing into boxes, store and ship them out to retail stores.
Fulfillment by Amazon
Fulfillment by Amazon (FBA) is an integrated logistics solution for Amazon sellers. We provide services such as picking, packing, storage and shipping. We also offer returns processing and customer service solutions.
As a seller, you can get access to business reports that offer insight into your sales, inventory, payments and more!
Fourth-party logistics (4PL)
4PL involves engaging a 4PL company to provide for, manage and optimize the day-to-day logistics processes like packing, storing and shipping products.
As these companies generally do not own the resources to provide these services, they will outsource these activities to their logistics partners such as delivery or warehousing companies, or even 3PL companies who own the resources needed.
4PL companies, therefore, adopt a higher level of responsibility where they manage these day-to-day operations and liaise with other service providers on behalf of your business. They are focused on optimizing the supply chain and may draw data from other service providers to provide you with a more holistic logistics solution.
Example: If a retail store is running low on t-shirts, the 4PL company will advise the t-shirt manufacturer to produce more shirts. This helps to reduce missed selling opportunities.
The company will also manage all other aspects of order fulfillment such as the shipping and storage of products.
Fifth-party logistics (5PL)
5PL involves engaging a 5PL company to plan, execute and optimize the entire supply chain from manufacturing to last-mile delivery.
These companies operate at a higher level than 4PL companies, where they lay out a comprehensive logistics plan for your business and carry it out to achieve your logistics needs.
5PL companies tend to integrate different kinds of technology such as radio-frequency identification (RFID), robotics and blockchain into various parts of the supply chain to achieve greater efficiencies for your business.
Example: A business selling t-shirts engages a 5PL company to take charge of its manufacturing and order fulfillment processes.
This company creates an elaborate logistics strategy that integrates RFID technology into the business’ warehousing management systems for better tracking of inventory and implements real-time delivery tracking for products.
Types of 3PL companies
There are various types of 3PL companies. Some may offer a full suite of logistics services while others may offer services targeted at specific processes.
Full-service 3PL companies
Full-service 3PL companies offer a full range of logistics services including packing, shipping, storage, inventory management and returns management. Their fulfillment centers are often located strategically across the globe so they can reach your customers more quickly.
3PL warehousing companies
3PL warehousing companies specialize in providing storage and distribution solutions. They are typically knowledgeable about the order fulfillment process and may have facilities globally to aid your international expansion efforts.
Additionally, these providers may offer customizations to meet the needs of your business. For example, they may allow product parts to be assembled at their warehouse on top of providing storage space.
3PL transportation companies
These companies focus mainly on moving goods to and from locations, such as from the manufacturer to the store or directly to customers. They typically have an extensive global network of shipping partners so they can deliver goods to most parts of the world.
Information-based 3PL companies
These 3PL companies specialize in offering insights and tools that may help your business optimize its operations. This includes accounting, freight auditing and inventory tracking and management solutions.
Amazon Service Provider Network
Amazon offers an extensive directory of third-party service providers including shipping and storage companies through its Service Provider Network (SPN).
Advantages of engaging a 3PL company
Access to industry expertise
As 3PL companies are typically experts in order fulfillment and logistics, working with them can allow you to leverage their industry expertise and knowledge. This may potentially help your business overcome the complexities associated with the global supply chain.
3PL companies tend to service multiple businesses at once. This can allow them to enjoy economies of scale, where they negotiate lower prices for packing materials and even shipping, based on the number and frequency of orders.
As such, they may pass on their cost savings to your business, allowing you to reinvest these savings into growing your company.
Access to partner resources
Engaging a 3PL company can give you access to their established global network of shipping partners and resources such as labor and technological capabilities. This can allow you to achieve greater cost and operational efficiencies in your order fulfillment process.
Offer world-class customer service through Amazon
As part of our FBA program, our professional team offers a range of customer service solutions. We will help you manage all customer inquiries, returns and refunds so you can focus on growing your business!
As your business grows, you are likely to require more storage space, equipment and labor. Hiring more staff can be time-consuming and investing in new warehouses and equipment can be costly.
Working with a 3PL company can give you access to these resources quickly and easily without having to commit to capital investments. This is particularly helpful for industries that experience seasonal demand as such businesses can adapt to the changes in demand efficiently and effectively.
As the warehouse storage capacity of each 3PL company may differ, it is important to find one with sufficient assets so that you can scale according to your needs, especially if you are planning to adopt an omnichannel approach.
Scale your business with FBA
With FBA, you pay for the storage space you need and the orders fulfilled by us so you can scale your business more easily and cost-effectively. All shipping costs are included in the fulfillment fees and will be calculated based on your product dimensions and shipping weight.
Opportunity for cross-border commerce
International expansion is one of the ways to grow your business. However, it can be costly to start on your own.
Engaging a 3PL company with a vast global network of shipping partners can reduce the costs and complexity of global expansion. It may also expedite shipping and improve overall customer satisfaction.
Reach new geographical markets with Amazon
Expanding your business internationally can be possible with the help of Amazon as we have a total of 20 stores across the globe. Read about how to register for global selling here.
Disadvantages of engaging a 3PL company
Lack of control
By outsourcing the order fulfillment process to a 3PL company, you may have less control over your operations.
When issues such as wrong orders or delays in shipment occur due to an oversight by the 3PL company, customers are more likely to look to your business for solutions. This is because your business serves as the direct point of contact, rather than the 3PL company.
When that happens, it can be challenging to rectify these issues as you lack direct control over your inventory.
Steep upfront costs
Engaging a 3PL company may require significant upfront costs with regards to aspects such as account set-up and systems integrations. For example, there may be labor and time costs associated with the uploading of stock-keeping unit (SKU) codes into their systems.
3PL order fulfillment process
As you are outsourcing your order fulfillment operations to a third party, learn how these providers generally deliver goods to your customer.
Step 1: Receive products
After your goods are manufactured, they will be transported to the warehouse, where they are received by the 3PL company.
Packing your inventory for Amazon Fulfillment Centers
Once your inventory arrives at the warehouse or fulfillment center, the 3PL company will proceed to store them. They may be stored based on their SKU, where each SKU has its own designated storage location.
At this stage, items that enter the warehouse are typically registered in the provider’s tracking system
Store your inventory safely at Amazon using FBA
At Amazon, we take care to store your inventory safely and in accordance with the product type. This is especially so for items such as food or fragile products, which may have specific storage requirements.
Step 3: Picking ordered items
When the 3PL company receives an order from the customer, they will proceed to collect the items from the warehouse.
Some companies may require manual uploading of orders while others use systems that are integrated with your e-commerce platform. The latter will automatically sync your orders and this can allow for greater operating efficiency.
Step 4: Packing orders
After all the items have been picked, the 3PL company will proceed to pack the order. These are some common packing materials that may be used:
Depending on the company, these packing materials may be charged separately.
If you wish to develop strong branding, you may wish to engage a 3PL company that allows for custom packaging such as printing your company’s brand colors or logo on carton boxes.
Step 5: Shipping orders
Once the order is packed, it is time to ship your goods. Some 3PL companies may already have their preferred shipping partners while others may choose to compare prices and delivery speeds to find one that best suits your needs.
After the package is shipped, your customer is likely to receive the tracking details for their order.
Step 6: Managing returns
This is the final step of the order fulfillment process and occurs when customers return their purchases due to reasons such as a change of mind, failure to meet expectations or product defects or damages.
When products are shipped back to the 3PL company’s warehouse, the provider will process the return and determine if the product should be placed back on the shelf or disposed of. This decision is often dependent on your business’ preferences and the 3PL company’s return policies.
When engaging a 3PL company, it is crucial to check if this return processing (or reverse logistics) service is offered. This can save you the trouble of managing returns in-house.
Managing returns and refunds with Amazon
If you are a seller under the FBA, we will assist you with the processing of returns and refunds! Learn more about our policy and process here.
Fulfillment by Amazon (3PL) vs in-house order fulfillment (1PL)
If you are planning to sell on Amazon, learn about the differences between our FBA program and in-house order fulfillment below!
Fulfillment by Amazon
FBA allows you to tap into our established logistics network to fulfill your customers’ orders. We will handle all aspects of the day-to-day operations such as packing, storing and shipping your goods. We will also provide customer service and return processing services so you can focus your efforts on growing the business.
Benefits of FBA
● Free* shipping for customers If your products are eligible under FBA, Amazon Prime members can enjoy free* one-day delivery while other Amazon.sg shoppers can enjoy free shipping on their orders.
This may be helpful in encouraging sales as 38% of shoppers cited free and discounted shipping as one of their key purchase considerations.
*Terms and conditions apply
● Strong customer service support Our customer service representatives are available around the clock to assist your customers with any inquiries. They will also handle requests for returns or refunds, which means you can spend more time on other aspects of your business.
● Inventory management tools Being a part of our FBA program gives you access to inventory management tools that can help you to better track, monitor and manage your inventory. You can also create listings and remove items from fulfillment centers with the help of these tools.
● International expansion With our team handling your order fulfillment processes such as shipping and warehousing, you can better focus on growing your business. You may even be able to expand internationally with fewer concerns about the process, cost and reliability of shipping partners.
In-house order fulfillment
In-house order fulfillment, otherwise known as 1PL, involves handling all aspects of the order fulfillment process without the involvement of a third party. This includes inventory management, warehousing, shipping, returns processing and managing customer inquiries.
Merchant Fulfilled Network (MFN)
At Amazon, you can choose to fulfill orders on your own with merchant fulfilled shipping. You will have control over packaging, shipping, returns and customer service.
● Greater control over processes In-house order fulfillment may give your business greater control over the various processes. For example, you can implement better quality control measures or optimize your processes to meet your needs.
● Stronger branding While certain 3PL companies allow for packaging customizations, in-house order fulfillment may allow your business to build a stronger brand in the minds of consumers as you can better curate the delivery experience. For example, you may have your own fleet of delivery drivers wearing uniforms with your brand on them.
● Lower costs This fulfillment method may allow you to save on the costs associated with engaging a 3PL company such as the fees for receiving products and managing inventory. However, you may incur greater costs from other areas such as shipping or warehousing.
Amazon answers FAQs about SKUs
What is the difference between 3PL and 4PL?
● Functions 3PL companies are focused on the relevant day-to-day operations of the order fulfillment process. This includes storing, picking and packing, shipping and managing product returns.
On the other hand, 4PL companies are focused on managing and optimizing the entire supply chain to generate greater operating efficiencies.
● Communication In the 3PL model, your business will work directly with a 3PL company. This facilitates communication and allows for faster resolution of issues.
In the 4PL model, the 4PL company serves as the intermediary between your business and their logistics partners such as 3PL companies. As such, you are likely to have less control over the order fulfillment process than in a 3PL model.
What is the difference between 3PL and dropshipping?
● Inventory For 3PL, the inventory stored and shipped is owned and manufactured by your business, whereas the products offered by a dropshipper are not owned or manufactured by them.
● Order fulfillment In 3PL, the order is shipped to the customer from the fulfillment center while in dropshipping, the order is shipped directly to the customer from the manufacturer.
What is the difference between a 3PL company and a broker?
A 3PL company offers various logistics services such as inventory storage, shipping and packing. They also own assets like warehouses, warehouse management software and picking equipment.
On the other hand, a broker serves as the middleman between your business and shipping partners such as freight forwarders or transportation companies, and they do not own these supply chain assets.
When do e-commerce stores need to engage a 3PL company?
There are various factors to consider when deciding whether to engage a 3PL company. Here are some common situations that may indicate a need to outsource your order fulfillment processes:
● When your costs are rising If your business is growing rapidly, you may encounter rising costs associated with labor, shipping and storage. Outsourcing the necessary processes to a 3PL company may help you lower these costs and avoid long-term investments in equipment and storage facilities.
● When you wish to expand your business If you have limited storage space, this may limit your ability to grow the business. Since investing in more storage space can be costly, it may be more cost-effective to engage a 3PL company who can allow you to scale according to your business needs.
● When you are encountering issues with order fulfillment If you are encountering issues such as inaccurate inventory count, inefficient processes and inaccurate orders, this may signal a need to outsource your order fulfillment process to a 3PL company. This may allow you to better streamline your processes, reduce inaccuracies and improve customer satisfaction.