Logistics & ops
/ 9 min read
Jul 14, 2023
Third-party logistics (3PL) services can be instrumental in managing inventory, fulfilling orders, and handling returns, allowing e-commerce business owners to focus on other parts of their business.
3PL services aren't just for enterprise-level companies. Your business may be a great candidate for third-party logistics if you’re experiencing any of the following:
More than 100 orders per month
Surge increase in demand
Fluctuating order volumes
Uptick in returns
Frequent mistakes in order fulfillment
Rising shipping and warehousing costs
Lack of warehouse space
Plans for international expansion
Today, businesses across all sectors use 3PL companies for logistics and supply chain functions. If you choose one that fits well with your e-commerce or Shopify business, 3PL can lay the foundation you need in order to grow and scale your business.
Other benefits of a well-chosen 3PL provider include:
Reduced shipping costs per order
Broader shipping reach (globally and domestically)
Faster processing and shipping times
Improved customer experience and loyalty
The experience to navigate busy holiday periods, regulatory changes, and natural disaster disruption
However, identifying the right 3PL provider can take a lot of research, several rounds of discussions, and pricing negotiations.
We interviewed three experts in fulfillment, logistics, and supply chain management with over 42 years of logistics experience between them — from working at Amazon to serving with the US Air Force — to build a comprehensive checklist on how to find, choose, and negotiate a 3PL agreement.
“There are examples where we have chosen the wrong partner. If you find yourself in an arrangement that isn’t ideal, it’s important to recognize a mis-match early and before you fully integrate your inventory into their facility.”
“Doing up-front diligence in reviewing a potential 3PL company will save you time and money, ensuring you’re selecting the right service provider for your brand,” David continues.
“There are a ton of providers in the market and each has different capabilities, rates, shipping options, and varying discounts with carriers.”
OpenStore’s nine-step playbook will walk you through all of the considerations to make when deciding and implementing 3PL solutions for your e-commerce business.
"When choosing a 3PL offering, you’ll want to consider factors that will impact the success of your business and the relationship you’ll have with your customers," says OpenStore’s fulfillment lead Shaun Neal, highlighting customer satisfaction.
Customers often abandon e-commerce brands due to long estimates for shipping times, delays in delivery, or high shipping costs. The role of a 3PL company is critical when it comes to providing a variety of shipping options (and assessing whether free shipping is the best strategy for your store).
A crucial factor to consider for customer experience is how a 3PL provider handles returns. Shaun Neal advises that you find out if the provider can:
Accommodate your standard operating procedure for returns (SOP) in order to reduce customer frustration and minimize chargebacks.
Manage return inventory via refurbishment, disposal, or restocking.
Process returns fast enough for timely refunds or exchanges.
Remember to protect your margins as much as possible when considering a 3PL service’s reverse logistics capabilities (but more on this later).
The location of a 3PL’s warehouses is one of Shaun’s top considerations. This factor can greatly influence delivery times and shipping costs relative to your key markets: domestic or abroad.
For instance, if your e-commerce store sells to customers outside of the US, say all over Europe, it might be worth considering a 3PL provider with warehouses in both the European Union and the United Kingdom, which can help streamline cross-border shipping and minimize tax complexities — given the UK’s departure from the EU single market (also known as Brexit).
Also besure to understand the 3PL company’s shipping procedures, delivery options, delivery times, packaging options, cost (more on this later), and their policies for handling delays.
As your business grows and evolves, your chosen 3PL contractor should be able to accommodate increases in order volume, handle new product launches, and mitigate any supply chain disruptions. Recounting his experience with 3PL services when managing multiple Shopify stores, Shaun Neal shares key questions to ask:
Can the 3PL provider scale as your e-commerce store grows?
Will they be able to adapt to changing order volumes?
Can they handle varying product types?
How do they accommodate subscription services?
Do they support product kitting? (Kitting is when individual, related products are packaged together as part of a single SKU.)
Is there flexibility for storage space, contract terms (more on this later), and pricing structures?
Shaun recalls how one 3PL provider could not support brands that sold temperature-controlled food and cosmetics products, and another that wouldn’t accommodate high-value items.
Different 3PL providers will have varying storage capabilities for handling an expanding product line or a growing order volume. Align your expectations and pre-negotiate if you foresee needing something like that for your business in the short-term.
“As a general rule, having higher shipped volumes puts you in a stronger position to negotiate and secure cost discounts too,” says Shaun.
The stack of your potential 3PL provider should align with your e-commerce platform and the existing apps, tools, and plugins that you use, or they should offer viable alternatives (but consider the cost and benefits to your business of changing).
The key question is: do they automate parts of their solution? And what kind of control or visibility do you want to have over it?
Integration with e-commerce platform:
Do they have a pre-built integration or an application programming interface (API) that seamlessly connects with your store?
Do they offer an electronic data interchange (EDI) for order management?
What warehouse management system (WMS) do they use?
Does the integration allow for real-time inventory updates, order syncing, and tracking information?
Cost of integrations: not all 3PL providers offer these services included in the base fee, especially EDI.
Future-proof technology: if your business is built on innovation and staying ahead of competitors with the resulting cost-savings, Michael Brod, OpenStore’s fulfillment specialist, suggests looking into the provider's use of robotics, artificial intelligence or machine learning, predictive analytics, and data-driven decision-making tools.
Reporting: review the kind of analysis and reports the 3PL services provide.
Are you likely to need additional reports or features in the future? Will these come with extra costs?
OpenStore’s experts strongly believe — as employees of a technology company that’s innovating with in-house software that integrates e-commerce 3PL services via APIs — that the right technology can lead to more efficient operations and save you time and money. For example, they can enable better cross-selling and increase average order value (AOV).
What systems does the 3PL contractor use? And how scalable are they?
How well do they integrate with your shopping carts?
As a baseline, a good 3PL partner can “manage inventory, fulfill your orders, handle returns, and manage and receive your inbound purchase orders,” says Shaun.
But remember to consider flexibility. “Ensuring they have robust and flexible systems in place is crucial for your growth,” David Reifschneider adds.
Shaun also advises assessing the 3PL provider’s ability to handle your products in terms of size, fragility, and perishability.
Can they handle your expected order volume?
Are they prepared for peak season demands?
Do they offer services such as pick and pack, kitting, or bundling?
Paying attention to cost in your 3PL checklist is crucial. “3PL agreements can be expensive, especially if you weigh them against the costs of doing your own fulfillment,” says Michael Brod.
Types of pricing arrangements: there are different arrangements on the market. Plans often include inbounding costs, storage costs, outbounding costs, customs and duties, custom packaging, and returns logistics. But the final package will depend on your requirements.
Are there monthly order minimums or maximums?
Are there changes in fees during peak or holiday periods?
Are there any costs for standard packaging materials?
David, OpenStore’s head of supply chain, gives an example on pricing for reverse logistics:
“The 3PL service will handle the returns in any manner you’d like, and in most cases they will offer services to either recycle, reuse, resell or donate. You should agree on how you will be billed for processing returns in your agreement.. Transactional pricing is usually a better arrangement for a store owner than hourly rates.”
As a side note, choosing the right 3PL provider for your business can also help you reduce your customer support costs significantly. For example, when transitioning from dropshipping to 3PL, you can expect to see reduced transit time and thus less of a burden on your customer service.
Negotiation: take it from David’s decades of experience in the industry.
“If your shipping involves large packages or increased weight, you’ll want to hone in on how they can help with your parcel shipping expense, one of the most significant cost drivers in your DTC business.
There are also times when it may make sense to use a smaller, more customizable partner who can perform one-off value-add or kitting services should you need it.
Everything is negotiable so encourage your potential partner to lead with their most cost-efficient proposal. The market competition drives the rates and cost structure, so shop around and ask industry colleagues and experts about their experience with different providers and choose the one that best fits your brand.”
The following is not legal advice, but a checklist to help you understand 3PL agreements and contracts.
Pay attention to the following in a 3PL provider’s service level agreements (SLAs), and statements of work (SOW):
Contractual obligations around price increases, order limits, and how billing works. How are billable activities tracked and invoiced?
Implementation plan: does the agreement detail the onboarding process with distribution centers? Does it specify timelines for when the first inbound product is to be received and when the first customer order can be shipped?
Damage liability: who bears responsibility for damages, and what are the insurance requirements?
Contract duration & renewal conditions: most contracts last a few years and have renewal terms.
Partnership terms: does the 3PL service define themselves as independent contractors (often the more flexible option for you), or as partners? Can they advertise that they work with you?
Customer service arrangement: will you have a dedicated account manager? Can this change? What are their operating hours?
Inventory management clauses: be aware of provisions for inventory shrinkage.
Termination terms: ensure that the language protects you. Can you cancel the agreement based on error rates, service levels, and dissatisfaction with account management?
Non-disclosure agreement (NDA): does it include a mutual NDA to protect your intellectual property?
Dispute resolution process: know how billing disputes will be handled and how you’ll be able to audit and review invoices.
David advises that: “3PL providers will push for long term contracts and will use language in their agreements with auto-renewal clauses on the term. You may want to find a reputable attorney who can review any contracts with you and protect you and your brand should you need an exit or renegotiated terms.”
Outside of the SLA and terms and conditions, look for reviews about your chosen 3PL provider and assess their customer satisfaction and financial stability. Reach out to businesses they mention in case studies or on their website to understand their reputation in the industry.
OpenStore's e-commerce management service gives Shopify store owners an option to step away from the day-to-day of their business for a year.
By handling your store's logistics, marketing, and operations for 12 months, OpenStore pays founders a consistent stream of passive income, while growing their business under the OpenStore Drive program.
For those considering selling their Shopify stores, OpenStore integrates the brand with a chosen, technology-focused 3PL provider to ensure growth post-acquisition.
Turn your Shopify store into passive income
OpenStore will first analyze your store’s performance, and calculate your monthly payments for a full year. Get started — for free, no-strings-attached:
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