Here’s how Fulfillment By Amazon (FBA) used to work:
You order 2,000 units of your product from China. You enlist the help of a freight forwarder to ship your product straight from your manufacturer into Amazon’s hands. Amazon keeps all of your product in their fulfillment center, and then Amazon delivers directly to the customer when a shopper orders. You never have to touch the product. You passively earn income and end up richer at the end of a vacation than when you left!
(Some of you Shopify, Etsy, or other online sellers must be thinking: D*mn! That sounds awesome. And it is.)
Most of that Amazon FBA process is still the same.
Now, there’s a challenge thrown in: Amazon is limiting inventory storage at their fulfillment centers.
Based on your Inventory Performance Index (IPI), your maximum FBA inventory level may be as low as 200 units—even after your first order.
Today, we’re going to break down the 3PL solution to Amazon inventory woes and answer your 5 most common and important questions about third party logistics:
What is a 3PL?
When you enlist the help of a 3PL service company, you outsource your warehousing, distribution, and/or fulfillment services.
If you think that sounds like Fulfillment By Amazon, you’re not wrong.
However, FBA also gives you favor with the customer and two-day shipping with Prime. Amazon customers will often specifically look for products listed as ‘fulfilled by Amazon’ by filtering their searches with ‘Prime only’. FBA is a part of a much larger system than 3PL.
If you’re not selling Amazon FBA, a 3PL can take a lot of FBA’s place. It won’t necessarily earn you more sales, but it still makes it possible to optimize and scale your online business. Plus, for Amazon sellers who choose ‘Fulfillment by Merchant’ (FBM), 3PL makes scaling plausible.
Once you sell 30, 100—even 500 products a day or more—it will become too much for you to pack, label, and sell on your own.
Don’t let the lack of ability to ship hold your sales back! Enlist FBA and/or 3PL to help.
And if you’re thinking, “I only expect to sell ten products a day.” Instead—think big and you will go big.
What does a 3PL do and what are the advantages of using 3PL?
For most Amazon sellers, the most relevant tasks that 3PLs do for you include:
- Receiving parcels, pallets, or cartons
- Storing your units in a safe environment
- Prepping and shipping boxes or pallets to Amazon Fulfillment Centers
- Providing Fulfilled By Merchant (FBM) services
- Accepting removal orders and returns for inspection
- Freight forwarding
... and more.
What does this amount to?
First, using a 3PL can save you money.
If you’re thinking about Amazon FBM or otherwise fulfilling orders yourself, there are a ton of factors to consider: storage, shipping, inventory management software, ground transportation, and more.
Why hire three or four different services—or even hire your own employees—when you can hire one service to do it for you?
3PL services are already full of trained professionals who can understand your supply chain top to bottom and help you optimize your operations.
Second, you save time, and 3PLs give you expertise in shipping logistics.
3PLs already have experience with shipping labels, proper packaging, customs, tariffs, and regulations. You only have to provide them with information from your Amazon Seller Central account (or other marketplace facilitator), and the 3PL will take care of the rest.
Even better, you can give the sub user account access so they can go in and process all FBM orders for you (you can limit what they can and cannot access).
Your job should be to focus on building your brand experience. Not shipping.
Pro-tip: Spend your time where you make the biggest impact. Delegate additional responsibilities to experts as much as possible.
If there is a problem with shipping delays, a 3PL company already knows how to make alternate arrangements.
3PLs are also masters of efficiency. They live for this stuff. If your customers require overnight shipping, 3PLs can make it happen.
Their efficiency also makes Amazon Seller Fulfilled Prime plausible. Seller Fulfilled Prime requires FBM sellers to be able to deliver on the Prime two-day shipping promise.
Third, 3PLs make your operations flexible and scalable.
If you sell a seasonal product that fluctuates in demand, managing your Amazon Inventory Performance Index is less straightforward than if you sell a product that sells consistently year-round.
When you use a 3PL, you can easily scale your operations up when your product sells well and scale down when the dry periods come.
Additionally, when you enlist an international 3PL service, it allows you to test your products and sell in new markets without committing to investing in warehouses or staff. If you think your product can sell well in Russia, you can sell there regardless of whether Amazon sells there or not. Think beyond Amazon.
3PL companies don’t all offer the same services. Some offer less or more. In fact, when a logistics company offers an elevated level of service, it becomes known as a 4PL instead.
What is the difference between 3PL and 4PL… and 5PL?
To distinguish between 1PL, 2PL, 3PL, 4PL, and 5PL (this sounds like characters on a game board), you have to understand the degrees of separation between a seller and the supply.
First, a 1PL (first party logistics company) is when a seller or company handles their own fulfillment logistics.
An example of first-party logistics would be a farmer storing and transporting their own strawberries to a farmer’s market.
Second, a 2PL (second-party logistics company) is when a delivery company ships a product from a seller to the consumer or reseller.
The service that separates a 1PL and 2PL is delivery.
An example of second-party logistics is when an Etsy seller utilizes the USPS to ship their crochet strawberries to the buyer.
Delivery services such as USPS, UPS, and FedEx are 2PLs. 2PLs are also sometimes called “Transportation-based 3PLs”.
Third, a 3PL (third-party logistics company) is when a logistics company receives and stores a product from a seller and then fulfills orders.
The services that separate a 2PL and 3PL are packaging and warehousing.
An example of third-party logistics is when an Amazon seller utilizes a logistics company to store their inventory and fulfill FBM orders. Another example of a 3PL provider is a company that ships products from a factory in China to a warehouse in the US, packages and labels those products for Amazon FBA, then ships them into the Amazon Fulfillment Centers.
A 3PL will likely enlist the services of a 2PL such as USPS for delivery.
When we talk about 3PLs, we most often mean “Standard 3PL Providers”, “Service Developer 3PLs”, or “Full-service 3PLs”. Some 3PLs perform freight forwarding as well.
Fourth, a 4PL (fourth-party logistics company) is when a logistics company manages 3PL companies for the seller.
Yes, a logistics company manages other logistics companies for you.
The service that separates a 3PL and 4PL is logistics on behalf of the seller. By “logistics” we mean detailed operations for moving the product.
A fourth party logistics company takes over the supply chain operations directly after production. It is another level of convenience for the seller and another degree of separation between the seller and the supply line. This often involves freight forwarding.
The 4PL acts as a manager of the 3PL services. They find the 3PL company for you and make sure everything happens the way you need it, without you ever having to talk directly to the 3PL. This saves you time from having to go into extraneous detail with the 3PL provider and just have one contact—your 4PL provider—to handle it all for you. This is especially beneficial to companies with huge logistical needs.
The line between 3PL and 4PL often blurs. 4PLs are sometimes called “Customer Adapter 3PLs” or “Lead Logistics Providers” (LLPs).
The easiest way to distinguish between a 3PL and 4PL is that a 4PL does not actually own transportation vehicles or warehouses. The 3PLs do.
Fifth, a 5PL (fifth-party logistics company) manages the supply chain from raw materials to production to storage and delivery.
The service that separates a 4PL and 5PL is production management.
In this case, a company would not only oversee storage, delivery, and logistics, but also manage suppliers as well—like if you sell a ceramic mug, the 5PL would start their oversight with the ceramic production (before the manufacturer makes the mug with the ceramic).
Trading companies coordinate raw material suppliers and goods production. But a 5PL starts at the beginning and takes it all the way to the customer or reseller.
5PLs do the job of a 4PL provider plus production management. It’s almost like a trading/sourcing company and a 4PL provider merged into a new service.
5PLs are sometimes called “Customer Developer 3PLs”.
Finally, does your company need a 3PL, 4PL, or 5PL?
For most ecommerce sellers, a standard 3PL service is all that is needed. What should ultimately affect your decision is which service will make you the most profitable.
What are the cons of using a 3PL provider?
When you enlist 3PL services, you have less direct control over the delivery process. Perhaps you’d prefer to use United States Postal Service or UPS tracking instead. For low-volume and handicraft sellers (under 10 sales per day), sometimes using a 2PL is the best option.
For 4PLs and 5PLs, the degree of separation is even greater.
3PLs will not directly interact with your customers or handle customer service like Amazon FBA will. So that responsibility is still yours.
Amazon sellers: we always suggest you utilize Fulfillment by Amazon when it makes sense for your bottom line. You also do not have to choose between exclusively using FBA or a 3PL provider.
Sometimes 3PLs come with a large upfront investment and/or a monthly minimum spend. However, 3PLs can more than pay for themselves in the long run. We here at Just One Dime always suggest long-term thinking and encourage you to believe that you can and will scale your online business.
What should you look for in a 3PL facility?
1. The 3PL should have warehouses where you need to operate.
If the 3PL isn’t in a location close to where you want to sell, your costs will go up greatly. For example, if your customer base is in the USA, then hire the services of a USA-based 3PL. If you are doing arbitrage or wholesale, your profits will be significantly higher if you are using a 3PL in a no-sales tax state like Oregon. Every time you ship a product to their warehouse, there is no due sales tax.
Also ask yourself: does the 3PL have enough warehouses in the places where you sell the most? When you have massive sales volume, having 3PL locations close to customers will save you from higher costs and decrease shipping wait times for your buyers.
2. Ensure your 3PL has high quality warehouses.
A high quality warehouse must be:
- Temperature regulated
- Have 24-hour security
- Fully staffed
- Have regular drop-off and picks with UPS, FedEx, and the USPS
- Able to receive cartons, pallets, and individual parcels
3. Your 3PL needs to be able to handle your business volume.
Some 3PLs will only be cost-effective for high volume businesses. Others will be more flexible. Pick one that suits your needs and double check that they are fully equipped to deliver 50 units per day if you sell 50 units per day.
4. Your 3PL provides references for exceptional past performance reports.
Most good 3PLs will be willing to share a two-year track record of financial statements with you.
You should be able to examine the 3PL’s ratio of on-time versus delayed deliveries, how well they communicate with clients, and whether they have long-standing relationships with sellers or if they lose every client within a year or so.
5. Your 3PL uses compatible software.
Make sure that your 3PL can integrate with whatever inventory management system you use. And if you don’t use any yet, choose a 3PL that is on the cutting edge of technology rather than one that still uses Windows XP.
6. Your 3PL should be able to process returns.
This is one of the largest headaches for people who use 3PLs. But if your 3PL can handle seamless returns, then that’s one less thing to worry about. If you need to do a removal order on one of your Amazon products, you need a place to ship it to within the same country where you are selling it.
Shopify sellers: make sure the 3PL integrates directly with your Shopify store through an API or approved application.
7. Amazon sellers: you will have a better experience if your 3PL is run by experienced Amazon sellers.
Make sure your 3PL’s services include FBA prep and ship ability and can also fulfill orders FBM.
You may also want to consider 3PLs that have long operating hours including weekends and holidays.
Does Just One Dime know of any good 3PLs?
As a matter of fact, we do! Former Just One Dime student and current Amazon expert coach Eric Abbey runs AP Prep Services.
AP Prep Services:
- You ship your boxes, pallets, or cartons directly to their state-of-the-art warehouse
- They receive your units, catalog them, and store your product with 24 hour security
- When you are ready, they prepare your pallets and ship them to Amazon fulfillment centers
- To get started, click on this link
Other, more well-known 3PLs and 4PLs include:
Is there anything we can help you with concerning 3PLs? Let us know in the comments section!