Using a 3PL isn’t for everyone. But escalating labor costs, requirements for a new facility, starting a new business or channel and avoiding capital costs are reasons we see companies comparing internal fulfillment to 3PL.
Based on that, here are six major ways businesses have traditionally saved money and reduced capital using 3PLs in their supply chain.
Help Reduce or Stabilize Cost Per Order
A 3PL can provide a lower cost per order when compared to internally managed operations. This isn’t always true, but often is for SMBs that don’t have a four-season business.
Large-volume 3PLs can often cost-justify implementation of WMS, voice picking, automated picking solutions, automated sortation and conveyance systems.
3PL can also reduce costs and improve order fulfillment time. This can mean lower shipping costs from volume discounts by carriers. Determine whether these cost savings are possible for your operation.
Lowers Capital Investment
The right 3PL partner can help you reduce or avoid capital outlays for new or upgraded warehouse facilities, WMS and automated fulfillment solutions.
They can also help with longer-term projects which often distract management from servicing the customer and controlling costs. This include adding fulfillment centers, upping product storage capacity and increasing order throughput.
Change Fixed to Variable Costs
In our experience, more than 60% of internal fulfillment costs are related to labor. There is a fixed investment in facilities, material handling and conveyance, and IT systems irrespective of the transactions processed. When you’re using 3PL services, this is not the case. You can expect to see the cost of transaction processing rise and fall with volumes processed.
Reduce Time to Customer and Shipping Costs
Large retailers like Amazon, Walmart, Target and Wayfair have such significant reach from a distribution perspective that they can easily deliver in two days or less utilizing a variety of shipping methods, including same-day delivery. SMBs can benefit from 3PLs by being in strategic geographic locations that allow for reaching 70% to 80% of the U.S. population via two-day ground. Customer purchase decisions are influenced by the delivery time and shipping cost.
Provides Scalability for Growth and Peak Volume
A 3PL can help you efficiently handle peak holiday season volumes, and expand the distribution capabilities needed to meet your strategic plan. As your business grows, a 3PL can scale up to increase staff and product storage capacity. This eliminates the time consuming and costly activities involved in recruiting and training seasonal and new employees.
Allows Focused Management Time
3PL use allows you to concentrate management time on core competencies, such as marketing, merchandising and ecommerce analysis. One of our clients has used a 3PL for 25+ years for this very reason. Entering a new channel such as ecommerce, FBA or big-box retail replenishment could distract from other responsibilities.
Using a 3PL Profitably
Here are 7 examples of cost-effective 3PL use in the supply chain:
Ecommerce order fulfillment channel specialization: Brick-and-mortar retailers sometimes contract with a 3PL to ship direct orders, rather than bringing small-order pick/pack/ship into their retail DCs.
An SMB can often benefit from a 3PL because it will lower their cost per order in off-peak times. For startups, it can be less expensive to implement 3PL fulfillment vs. internal.
International order fulfillment: Many multichannel companies use a 3PL partner to ship orders worldwide. Larger 3PLs have international document preparation and shipping systems that are continually updated for global rate changes, tariffs, customs and exclusions.
Implementation of big box, FBA and marketplace compliance: Many ecommerce companies sell through marketplaces and major retailers. They all have stringent vendor compliance policies and IT requirements. 3PLs often have these IT capabilities, savings you time and money to hire expertise and implement systems internally.
Increase in sales and support: We find that 3PLs are becoming more involved with sales support. This includes multichannel platforms and supporting unique brand and marketing strategies such as direct response TV, subscription programs and club plans. These are high-volume transactions for a short duration.
Expand the distribution network: Many larger 3PLs have anywhere from a handful of locations to hundreds of sites across the U.S. While multi-location requires more inventory, it also greatly shortens time to customer and increases sales.
We have two clients – a food gift company and an industrial supply company – that have implemented multiple 3PL DC strategies. Each has a central internal fulfillment center which receives product and replenishes four 3PL DCs. This multi-DC strategy allows them to reach 92%-95% of their customers with one-two-day ground, saving time and money. Quick delivery builds sales, too.
Reverse logistics: Several large 3PLs specialize in reverse logistics and returns processing for ecommerce and retail, especially in high-return categories such as apparel, shoes and electronics. In addition to return processing and credit/refunds, reverse logistics offers a wide range of services such as testing, refurbishment, repackaging and bagging for resale.
Inbound ocean freight and distribution to DCs and stores: Many of our clients use 3PLs to receive and process bulk purchase order receipts, broken down by DC or stores.
In summary, perform an objective, comprehensive evaluation of the pros and cons, including a fully loaded cost comparison, to see if a 3PL is the right solution for your business.
Brian Barry is President of F. Curtis Barry & Company