Why You Should Set Up a 3PL for Your E-Commerce or FBA Business
Are you thinking of selling your business? Before you dream of high payouts and double-digit multiples, you should first make sure that you’ve structured your business so that it’s eligible to sell at all.
It’s not uncommon for us to discover during the vetting and verification process that business owners are shipping inventory out of their house, garage, or warehouse. While there’s nothing inherently wrong with that business practice when you’re starting out, we can’t sell businesses if their owners fulfill their inventory that way.
Buyers prefer a hands-off approach when they acquire a business in our marketplace. Figuring out where they’ll put the merchandise, arranging for stock transfers, and creating a fulfillment process is exactly the opposite of “hands-off.”
If you’ve never considered a 3PL, you’re not alone. Although they’ve grown in popularity during the e-commerce boom, some mystery lingers about what they do and how they work. We’ll tell you everything you need to know.
What Is a 3PL?
A 3PL—short for third-party logistics—lets a company outsource the warehouse aspect of its business, which includes storage, shipping and distribution, returns, and even the supply chain.
The official definition is “a person who solely receives, holds, or otherwise transports a consumer product in the ordinary course of business but who does not take title to the product.”
In a 3PL arrangement, you supply your product to a warehouse or network of warehouses, which then ships it to the customer on your behalf. It handles all the freight, warehousing, and distribution for you. There are also industry-specific 3PLs, for example, ones that specialize in the food industry and offer cold storage capabilities to keep perishable items fresh.
A 3PL makes money by charging the following fees:
Storage – How much space your stuff takes up
Picking – Its staff’s labor in taking your items from the facility and putting them in boxes
Packaging – Boxes, tissue paper, etc. (You can provide your own or use theirs.)
Postage – Actual shipping fees
Onboarding – Account set-up, Stock Keeping Unit (SKU) uploads, training, etc.
How It Works
A 3PL company’s system typically integrates with your company or website. When an order comes in, it is shown on a dashboard that is unique to your business. The dashboard acts as a software system for your shipping, and it embraces everything related to shipping logistics, including tracking, invoices, and inventory levels.
After an order arrives, the fulfillment team picks the items from the warehouse and brings the SKUs to the packaging area. The packing team follows whatever custom instructions you specified in your procedures.
The 3PL team is also responsible for choosing a carrier, buying a shipping label, and arranging for transit. From there, your customers are notified that their orders have been fulfilled and are on their way.
Benefits of a 3PL for E-Commerce
- Expanded Capabilities – You’re an expert at running your business, but you’re probably not a shipping guru. Contracting with a 3PL allows you to be an order-fulfillment superstar as well.
- Focus – By focusing on your core competencies, you can grow and scale your business while leaving the headache of shipping and packaging logistics to someone else.
- Cost Savings – It’s usually cheaper to use a section of a warehouse and rely on their team on a part-time basis than to hire a warehouse team and run a facility outright.
- Network Leverage – Because of the volume and expertise of most 3PL providers, you can benefit from their network. This includes getting access to the best shipping rates and the most advanced software for inventory and logistics.
- Scalability and Flexibility – As your business grows, you won’t have to worry about securing more warehouse space or bringing on additional team members for order fulfillment. You can simply adjust your 3PL contract.
You can also think of a 3PL as fractional ownership of a warehouse. You get all the built-in benefits and capabilities of inventory storage, order fulfillment, and distribution without having to own or rent an entire warehouse space or employ full-time staff.
Drawbacks of a 3PL
- Potential Reputational Damage – A 3PL’s mistakes will reflect poorly on your business.
- Liability – If a 3PL messes up big time, you’re still ultimately responsible.
- Cost – The cost to fulfill a single order or unit could be higher than if you do it yourself.
- Loss of Control – The staff at a 3PL warehouse are not your employees. You have to trust and hope that they are honest, reliable, proficient, and have your best interests in mind.
- High Set-Up Fees – The onboarding and set-up process may be expensive. It usually includes software integration, SKU upload, and providing account access.
While it makes sense to work with a 3PL as your business grows, especially if you plan to sell it, not all 3PL providers are competent and trustworthy. It takes time to find a company that will be good from day one. Make sure you conduct thorough research and ask questions before signing with a company. Mistakes in this arena can be incredibly costly.
Benefits of a 3PL for an FBA
If your orders are fulfilled by Amazon (FBA), then you already have a 3PL working for you, but you’re paying more than the average for storage and transaction fees, and you’re limited in terms of custom packaging and inventory control.
The benefit of contracting with a 3PL when you sell on Amazon is that you’ll potentially have a lower cost of goods sold (COGS). However, Amazon recently reduced its fulfillment fees, making FBA an even more competitive business model.
We suspect that, unless you have a more substantial business with a steady, sizable, and loyal customer base, you’ll be better off sticking with FBA rather than seeking out a 3PL. FBA technically qualifies as a 3PL (making businesses that use it eligible for sale), and it gives smaller companies access to Amazon’s infrastructure. Once you reach a certain point, it can be more cost effective to use a 3PL over Amazon.
That said, FBA businesses with high seasonality can encounter restrictions with regard to their Amazon inventory limits. Restock limits are calculated based on past and forecasted sales, so if you’ve had a few slow months and then hit your high season, you may not be able to store as much inventory in Amazon warehouses as you need. To prevent stock shortages, it is worthwhile using a 3PL for Amazon FBA businesses that fall into this category.
If you’re on Shopify or another e-commerce platform, several apps can provide a basic 3PL service that integrates with most online stores. These businesses will likely have the necessary systems and processes in place to make great 3PL warehousing partners for Amazon FBA businesses too.
We recommend doing some research and comparing costs and capabilities, but here are three that are popular with Shopify store owners:
Are you ready to list your business on our curated marketplace? Get in touch today to speak with one of our business analysts about potentially exiting from your business.