THIRD-PARTY LOGISTICS

Guide to choosing a 3PL

How can you choose the right third-party logistics (3PL) provider for your ecommerce business? Read this guide to find out.

The third-party logistics (3PL) industry is experiencing phenomenal growth, as demand for 3PL services from businesses across numerous industries continues to rise. The size of the global 3PL market – which is estimated at US$974.6 billion in 2022 – is projected to increase to US$1.3 trillion by 2026, representing a compound annual growth rate (CAGR) of 8%, according to a recent report.

One industry in particular that is fueling the growth of the 3PL industry is ecommerce. Indeed, ecommerce businesses account for almost 53% of the total 3PL revenue, and around 60% of all shipments made by ecommerce companies are handled by 3PLs.

The question that most ecommerce companies have to grapple with is not if they should outsource their logistics operations to a 3PL, but which 3PL they should work with. This is a difficult decision: In the US alone, there are currently 24,406 3PL providers – an increase of 2.1% from last year.

With so many options to chose from, how can you choose the right 3PL for your ecommerce business? In this guide, we’ll walk you through the four steps you need to take to find a 3PL partner that meets your business needs.

Step 1: Identify and analyze the reasons why your business needs a 3PL

In order to select the right 3PL partner, you must first gain a good understanding of why your ecommerce business needs a 3PL.

Typically, there are two main reasons why companies start searching for a new 3PL partner:

Operational challenges: One common reason why many businesses look for a new 3PL is that “something is not working.” For example, you may realize that certain elements of your logistics operations (such as warehousing, order fulfillment or inventory management) are not running smoothly, leading to a drop in customer conversion rates, on-time delivery performance, inventory turnover, operating margins, or other critical key performance indicators (KPIs). If your ecommerce business is experiencing issues in these or other areas, it may be time for you to think about seeking out a 3PL or – if you are already working with a 3PL – finding a new 3PL partner.

Business changes: Another common reason why many businesses look for a new 3PL is that “something is changing.” Your company may be undergoing structural changes due to growth and expansion (into new markets or product lines, for example) or business model shifts (from brick-and-mortar retail to ecommerce or from selling on one online channel to a multi-channel approach, for instance). When these structural changes occur, you may realize that have to add capacity or new capabilities to meet your evolving business needs – and this should signal to you that it’s time to engage a 3PL or that you’ve outgrown the 3PL that you’re using.

There are many other factors that may compel your ecommerce company to look for a new 3PL. It’s imperative that, before you commence your search for a 3PL provider, you develop a clear understanding of the reasons why you need a 3PL – as this will help guide you on your journey to find the right 3PL for your business needs.

Step 2: Research different types of 3PL providers

Once you’ve obtained a solid grasp of the reasons why your ecommerce business needs a 3PL, you should begin researching and learning more about the numerous 3PL providers out there.

Broadly speaking, there are two types of 3PLs:

Traditional 3PLs: Also known as “contract logistics providers,” this type of 3PL employs a traditional, structurally-rigid, and capital-intensive approach to delivering outsourced logistics services. Although many traditional 3PLs have massive global logistics networks and provide comprehensive, customized supply chain solutions for companies across various industries, they typically require customers to enter into long-term contracts. Traditional 3PLs are suitable for large enterprises that consistently have a large volume of goods moving across their supply chains – and need a global 3PL player to help them manage their end-to-end logistics operations.

Newer, more flexible 3PLs: With the rise of ecommerce over the past decade, a new breed of 3PLs has emerged that offer more flexible, on-demand logistics services – with no long-term contract commitments. Although this new type of 3PL can provide logistics solutions for companies across any industry, they often focus on working with ecommerce companies – as demand for 3PL services from companies in that space is so strong. Many of these new 3PLs are smaller players, which cater to small- and medium-sized businesses (SMBs) in specific locations, but some, like Amazon, are major global players that have sprawling worldwide logistics networks and provide a complete suite of 3PL solutions for companies of any size – from ecommerce sellers to large-scale enterprises.

Depending on your business needs and goals, you may find that a traditional 3PL or a more flexible 3PL is a better fit for your business – or you may even discover that it would be beneficial for you to forge business relationships with both types of 3PL providers.

As you research online, you should create a list of those 3PL providers that you think your business could potentially work with.

Step 3: Evaluate various 3PL providers to determine which would be the best fit for your business

After you conduct your online research, you should begin to evaluate different 3PL providers. There are some important criteria to consider, including:

Range of services

3PLs offer an array of logistics services – from warehousing and distribution to picking, packing, and shipping orders, kitting, inventory management, and reverse logistics and returns. It’s imperative that you pinpoint which areas of your logistics operations you are looking to outsource, and identify those 3PLs that have service offerings that match and meet your needs.

Global presence

It’s critical that you carefully evaluate your prospective 3PL’s logistics network, to ensure that they have a footprint in or near locations where your customers and suppliers are based, or in those markets you are looking to expand into. By working with a 3PL that has facilities and resources in right locations for your business, you can strategically position your inventory – so that you can improve on-time delivery performance and inventory turnover, and cut costs for storage and fulfillment.

For example, when you engage Amazon Multi-Channel Fulfillment (MCF) as your 3PL, you get access to Amazon’s world-class logistics network – which stretches across 27 countries and has over 2,000 facilities (including more than 200 fulfillment centers) as well as 120,000 trucks, vans, and planes, and 1,275,000 associates and partners – and you can leverage this network to fuel the grow of your ecommerce business around the globe and across various sales channels.

Pricing models

One of the primary benefits of partnering with a 3PL is that you can reduce your logistics costs. This is only possible, though, if you choose a 3PL with a pricing structure that works for your ecommerce business. It’s imperative that you study your prospective 3PLs’ rate cards to gain an understanding of their pricing structure and estimate how much your logistics costs would be if you partnered with them. Remember to look out for hidden fees and surcharges (as these can really add up and negatively impact your bottom line over the long haul) as well as long-term contracts (which often stipulate volume, throughput, and other requirements). At the end of the day, you want to choose the 3PL that can offer you the highest quality services at the lowest cost – as this will benefit your bottom line.

Relevant experience

3PLs serve different types of companies around the world and across various industries. Make sure that the 3PLs you are evaluating have relevant experience working with companies that are similar to yours in terms of size, industry, and location. You may want to ask the 3PLs you are considering to provide case studies and, if possible, to speak with their current or past customers.

Carrier relationships

Most 3PLs rely on carriers to handle their transportation and shipping services, but a handful of 3PLs – including MCF – are carriers themselves. If the 3PLs you are evaluating don’t have their own carrier network and fleet, you should find out which carriers they work with, how much those carriers charge for their services, and how much capacity those carriers can offer that 3PL’s customers. If your 3PL is a carrier themselves (like MCF), that can be a huge advantage for you as a customer – as you can have a direct relationship with the carrier and oftentimes get a better rate or more flexible capacity limits.

Technology

Many 3PLs utilize cutting-edge technologies – such as warehouse robotics and demand forecasting systems – to automate and optimize logistics operations. By partnering with a 3PL that invests in and utilizes best-of-breed technologies, you can transform your end-to-end supply chain. For example, if you engage MCF as your 3PL, you will benefit from Amazon’s commitment to continuous innovation – since 2019, Amazon has invested more than $30 billion on logistics, tools, services, and people.

Also, on the technology front, you should check to make sure that:

The systems that your 3PL uses can be easily and effectively integrated with your order management, enterprise resource planning (ERP), and other systems. Some 3PLs – like MCF – offer free-to-use integrator apps and other integrations that can swiftly and seamlessly connect the back-end systems that you and your 3PL use.

Your 3PL will safeguard the security of your data and other IT assets. Some 3PLs – like MCF – have achieved ISO 27001 certification, demonstrating a commitment to upholding industry-leading IT security best practices.

By taking the time to evaluate the 3PLs you are considering based on the criteria above and other factors, you should be able to narrow down your list to a handful of prospective providers.

You will probably want to start reaching out to the 3PLs on your short list to arrange a meeting (in person or virtual) to find out more about the services they offer (and take a tour of their facilities, if possible), tell them about your company’s challenges and goals, and determine if they would be a good fit for your ecommerce business.

Step 4: Decide which 3PLs you want to engage

After completing the evaluation process, you need to confer with stakeholders across your ecommerce company and decide on which 3PL provider you would like to work with.

This is a high-stakes decision – which will have an enduring impact on the performance of your business in key areas such as on-time delivery, customer satisfaction and retention, and profit margins – so it’s vital that you choose carefully and wisely.

Here are a few pieces of advice that can help guide you in your decision-making process:

Think long-term when choosing a 3PL. You should select a 3PL provider that can not only help you conquer the logistics challenges that you face today, but also will be able to help your business scale in the future.

You can choose more than one 3PL. Many ecommerce businesses partner with multiple 3PLs, although some do opt to work with only one 3PL provider.

Given the supply chain challenges and volatility we have seen over the past few years, having a flexible 3PL partner is paramount. Choose a 3PL partner that you think will be able to consistently provide flexible, first-class logistics services – no matter how supply and demand conditions change.

Although price is an important factor, you should really think about which 3PL provider is going to drive the most value for your customers. As the legendary investor Warren Buffett said, “Price is what you pay. Value is what you get” – and these words of wisdom hold true when it comes to 3PLs. Choose the 3PL that you believe can really help you delight your customers (and thereby drive business growth).

Find out how Amazon Multi-Channel Fulfillment can support your business growth.

Guide to third-party logistics (3PL)

This guide will give you everything you need to know about third-party logistics (3PL) – so that you can decide if your business would like to partner with a 3PL provider.

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In this infographic, we'll walk you through how Amazon Multi-Channel Fulfillment can help you with your end-to-end logistics operations.