Third Party Logistics

Third party logistics (abbreviated (3PL or TPL) is when a brand/company leverages a third party to handle the logistics and supply chain management – outsourcing elements of its distribution, warehousing, and fulfillment services.

Ideally, when engaging with a 3PL, a company can rest assured that their supply chain management (even the production and procurement of goods) and inventory management are handled and taken care of. This alleviates the supply chain operations bottleneck of time and resources that can stunt a scaling business’ growth.

When fine tuning your supply chain management, you need to know that there are many subsets of 3PLs, much like any other industry. There are four main buckets: Standard, Service Developer, Customer Adapter, Customer Developer. While there are a few different ‘types’, for the sake of conversation, as it relates to Ecommerce and growing product based businesses, the vast majority of needs can be met with the standard 3PL model with value add services that round out your desired customer experience.

The standard 3PL arrangement revolves around activities such as: pick and pack, warehousing, and distribution. These are the most standard logistic functions – functions that fundamentally exist with minimal synergies with the marketing, sales and other business focused operations. This lends 3PLs as a natural solution to improve efficiencies, reducing logistics errors, and cutting unnecessary costs.

As with any decision revolving around service ‘vendors’, the factors around your decision on a 3PL is no different. There are a few advantages and disadvantages to keep in mind. At the end of the day, it is going to come down to what your needs, what your budget is, and where your resources are thin.

Advantages

Low Capital Commitment

In the grand scheme of things, when you are cash strapped, or looking to hit your budget goals as you grow, more likely than not, there is not need for a client to own its own warehouse or transportation facility. Outsourcing logistics lowers the capital outlay required for a business. This savings opens up cash to put toward revenue generating activities.

This concept is particularly pertinent for clients that have large fluctuations in inventory capacities. When a client considers their own warehouse, fluctuations like this scenario can lead to the over purchasing of warehouse space and capacity, biting into profits significantly.

Cost and Time Savings

Think about what you are best at. That strength is probable at the core of what your business revolves around. Logistics isn’t much different. Logistics is what a good 3PL lives and breaths. With this core competence, extensive knowledge and logistics networks can lead to even better shipping times and cost efficiencies.

As with any other business practice, the IT and technologies revolving around the space is constantly evolving, as improved iterations seemingly come out faster and faster. You have to consider the resources, money, and time needed to keep these systems up to date and fully compliant and communicative with other evolving logistics technologies.

Focus

One of the guiding principles in business operational efficiencies is focus. Do what you are best at and let the parts that you are not best at, or aren’t worth your time, fade to the side. You’ll grow better than trying to do it all yourself. Handling logistics is no different – especially if logistics expertise is thin.

Technology is increasing the complexity of business. Now is as important as ever to devote the resources you have to activities that are going to reap you the biggest rewards.

Disadvantages

Loss of Control

Loss of control is the biggest disadvantage when choosing whether or not to use a 3PL. It is very important that you take the time to speak with how their processes work and make sure they have your best interests at heart and you aren’t ‘just another client’. Your 3PL will be shipping directly to your clients and will be interfacing directly with your suppliers. You want to make sure you trust the people acting as your operational lynchpin.

IT

Software such as EDI (Electronic Data Interchange) and Dispatch Management software (these come at a cost) needs to be in synced to ensure delays and inefficiencies within the supply chain are not had.

Reverse Logistics

While no business wants to think their customers will ever not be happy with their products, it is the nature of the beast and should be anticipated and expected. People give the wrong address, they ‘aren’t there’ when the package is delivered, they ‘ordered the wrong size’ – the list is long and exhaustive to say the least.

Just as the reliance is on a 3PL to handle the pick and pack and warehousing of the products, they also are relied upon for returns. With peak events like Black Friday or Cyber Monday, the strain on logistics can spike. Leading to delayed responses and return requests from customers.

Why Does LRM Offer A 3PL Service?

The team at LRM has overseen numerous digital transformations for companies both big and small across many different fields. This has included building out entire digital operations as it relates to CRM pipelines and contacts to linking all digital efforts to robust performance based marketing campaigns. That said, we’ve managed over $100M in advertising spend, both for internal operations and on behalf of clients.

Many of our clients were well funded start ups looking to scale or mid market Ecommerce companies looking for that hockey stick growth. We noticed that nothing can inhibit growth like logistical capacity issues. This inspired us to start offering being a 3PL as a service. With as many uncertainties that exist in the digital business world now, we wanted to eliminate as many variables for our clients as possible.

Working with LRM as a 3PL

LRM offers 3PL as a service, including:

3PL Pricing Models

As a seller of products, it is essential that you have a good grasp on your total cost per order at different magnitudes of scale (ie, price per unit, size of shipments, etc). Below is a breakdown of fulfillment costs that help show the line items that add up to that amount.

Fulfillment Service	Pricing Model #1	Example #1	Pricing Model #2	Example #2
Inventory storage cost	By the cubic foot	$0.30 per cu ft / mo	By the pallet	$20 per pallet / mo
Pick and pack cost	By the order	$2.00 per order	By the unit	$1.00 per unit
Receiving cost	By the shipment	$200 per shipment	By the unit	$0.05 per unit
Kitting cost	By the kit	$0.50 per kit	By the hour	$50 per hour
Customer support cost	Flat rate	$100 per month	By the hour	$50 per hour

The grid above gives you a guiding light as it relates to what you can expect in terms of cost. Of course, each 3PL that you evaluate will have different fees covered or not. They’ll use the ones they cover as the unique selling proposition and minimize the ones they keep in. Ultimately, you need a model and pricing structure that fits the kind of logistical operations you’ll be doing.

An example fee would be ‘long term storage fees’. These are somewhat self explanatory fees, but ultimately, they are fees imposed on inventory that has sat idle in the 3PLs warehouse. Here, you might be sold into the agreement with lower cu ft./mo storage, but be hit with this fee (which can be extremely costly). You just want to be careful and be aware of agreements like this.

Another example would be a lower pick and pack fee, but there are minimums that need to be hit each month. If you don’t hit those minimums, that seemingly lower fee can turn extremely expensive on a cost per unit basis.

You want to pick a pricing model that is going to keep your costs low and provide you with the most predictable cost structure so you can be more confident in your cost projections.

How Do You Calculate Cost Per Order?

FULFILLMENT COST CALCULATOR	PROJECT ASSUMPTIONS
Number of pallets on hand each month	5
Number of orders per month	500
Number of units per order	1.5
Number of units received each month	750
FULFILLMENT SERVICE QUOTE	FULFILLMENT SERVICE FEE
Storage fee per pallet	$20.00
Pick/pack fee per order	$1.50
Pick/pack fee per unit	$0.50
Receiving fee per unit	$0.05
MONTHLY SERVICE	TOTAL MONTHLY FEE
Total storage fee	$100
Total pick/pack fee	$1,125
Total receiving fee	$37.50
Total monthly fee	$1,262.50
TOTAL FEE PER ORDER	$2.53

Okay, so that is a lot of information above. Here is how the calculations above break down.

TOTAL STORAGE FEE = number of pallets x storage fee per pallet

TOTAL PICK/PACK FEE = (number of orders per month x pick/pack fee per order) + (number of units per month x pick/pack fee per unit)

TOTAL RECEIVING FEE = Number of units received each month x receiving fee per unit

TOTAL MONTHLY FEE = total storage fee + total pick/pack fee + total receiving fee

TOTAL FEE PER ORDER = total monthly fee / number of orders per month

What Does This All Mean?

This example can be used for illustrative purposes. It does not include things like long term storage fees and fees like that. It is to say, take a look at what the numbers are and make sure you are able to get a good grasp on what you are going to be paying, in what situations you are paying and how much.

Fees can be a defining contention point for clients and 3PLs. This can be avoided by knowing what you are getting into and making sure your 3PL is trustworthy. A trustworthy, reliable 3PL is worth their weight in gold.