What is 3PL Fulfillment | Process & Cost Explained

At some point during your dropshipping business expansion, you’ll consider outsourcing fulfillment to a fulfillment service like a 3PL. But many new entrepreneurs do not fully understand the process and how it will affect their bottom line.

That’s why we decided to create this guide on 3PL fulfillment to clear some common doubts that businesses have, and to help provide a clear overview on how these services work.

What is 3PL Fulfillment?

3PL stands for Third Party Logistics. Third party logistics (3PL) providers deliver parcels to customers on behalf of a retailer or brand, providing services such as warehousing, inventory storage, order picking, packing and shipping.

That of course depends on the type of 3PL service you choose. Not all offer the same services, that’s why it is important to know what you are looking for before making a decision.

But often, in business verbiage, the terms 3PL and fulfillment service are used interchangeably which only adds to the confusion rather than clearing it.

3PL Fulfillment Process Overview

Let’s take a closer look at all the steps that make up the entire fulfillment workflow.

1. Receiving inventory

Technically, this step happens even before the fulfillment process begins, because there will be no order fulfillment if your inventory is not in the right location, will there? Receiving inventory is a critical part of the fulfillment process because the warehouse manager needs to receive the goods before they can pick orders.

Most 3PLs offer receiving services that include verifying inventory, counting, inspecting, verifying product condition, kitting and palletizing.

Some may also offer order consolidation with multiple suppliers to improve efficiency without the need of having multiple receiving locations. Once the inventory is received, it is logged into the company’s inventory management software, before it is sent for storage in precise locations for easier picking.

2. Picking orders

When you generate sales, the eCommerce software automatically sends the order details to the warehouse. This is synced with the warehouse management software, which then identifies the location of each product and directs the picker to that location.

When the warehouse manager is ready to pick orders, they use a picking list generated by the eCommerce platform to source items. Today’s picking software uses advanced machine learning technology to reduce pick errors and improve productivity.

3. Packaging products for shipping

Once the warehouse has picked the items, it is time to package them for shipment. Depending on the 3PL’s capabilities, they may offer a range of packing services that include standard item packaging, crating for large/heavy items, custom box building, and branded packaging.

Packing will determine the shipping cost as well as damages during delivery. If you are scaling to a branded dropshipping business to help build your brand image, look for a 3PL that offers branded packaging.

4. Shipping

For most 3PL services, shipping is the final leg of the fulfillment process unless they also handle kitting and returns. The 3PL will print the shipping label and will dispatch it to the logistics center.

Most 3PL will partner with one or several shipping carriers to provide discounted rates. Depending on the price, you may choose to use your own carrier account instead.

Once the 3PL receives the shipment notification from the carrier, they notify you of the tracking number.

Related Post: What is a Fulfillment Center?

5. Kitting and returns

Kitting is the process of assembling multiple items into a kit that consists of multiple products. For example, you can combine your product with accessories before shipping to the customer.

However, when it comes to returns, kitting is the process of inspecting the return item for defects before dispatching it to the warehouse for storage. This may be an integral part of the fulfillment process, especially if you sell a product with a high return rate.

Returns management is another useful service that can minimize bad customer reviews. However, this service is only available if the 3PL also handles product returns and may be chargeable. Many 3PLs also charge for disposing off the product. So ensure that you are aware of the prices before you sign up.

How much does 3PL Fulfillment Cost?

There are no standard 3PL fulfillment costs and the price for fulfillment will depend largely on the type of services, the expertise and efficiency of the fulfillment service, and their brand positioning in the market presently.

That said, here’s an overview of the many charges that you will generally find on your invoice.

A single fulfillment cost

Some 3PLs will levy an all-inclusive, single fulfillment cost for each order. This is a good option if you’re looking for an affordable service without the need to divide fulfillment charges into smaller components.

It’s easier to keep track of, there are no hidden charges to be wary of, and you can easily calculate your expenses, as well as profitability. In addition to the fulfillment cost, some 3PLs will charge extra for storage. But that’s to be expected because inventory storage is generally separate from fulfillment.

Separate charges for each part of the workflow

Some 3PLs break down the fulfillment cost into separate charges for each part of the supply chain process. The different charges include, but may not be limited to –

Setup – A one-time charge for onboarding with the 3PLs cloud-based software platform. This will introduce you to their software and give you a dedicated account manager (generally), who will guide you on how to use it.

Receiving – Charged by the hour when your inventory is received, verified, unloaded and kitted for storage.

Storage – You will be charged according to the cubic foot or pallet space that your inventory occupies for storage. This will also depend on the time of the year and the total time that the inventory is stored in the warehouse. Peak season storage is charged more than other times of the year.

Picking – Charged by the hour or by each pick when the inventory is ready for pick and pack. Some 3PLs have a flat rate for the first pick in an order. Every other item in the order is charged extra.

Packing – Charged by the packaging material type when the inventory is packed into customer-ready parcels. Some items require specialized packaging and those are charged extra.

Labeling – A charge for affixing the shipping label on the customer-ready parcels.

Shipping – Charged according to the 3PLs policies. Some charge as per shipping zones, which are areas based on their geographical proximity to the warehouse where the inventory is stocked. Some charge as per the weight of the package, and some will use a combination of shipping zones and the weight.

Kitting & Returns – A charge for when the inventory has to be kitted for storage, or disposal when it’s received at the warehouse after a customer returns it. A charge is also levied if you want to dispose it off or add it again to the inventory for restocking.

Hidden Charges – Some 3PLs may try to slip in hidden charges, such as charges for manual errors, storage and administrative fees. Others will overcharge for any item that requires extra packaging and labelling. What’s worse is that these charges may not be evident when you sign up with them. Many businesses are shocked to see ad-hoc charges on their invoice. So, ensure that you read the fine print and ask about any charges that may not be included in their pricing schedules.

When to Outsource 3PL Fulfillment?

As important it is to pick the right fulfillment service, fulfillment doesn’t need to be outsourced always. You need to know when you should be looking at a 3PL service provider rather than managing your product inventory and fulfillment yourself.

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Here are some rules to follow when choosing a fulfillment company.

1. You are generating steady sales

Most eCommerce businesses will come to a point where they are able to generate a steady volume of sales. This can be as low as 10-20 sales a day. Or as high as 1000 a day. Regardless of the number, if the sales are consistent, it’s time to bring efficiency, speed and quality into the workflow.

That generally comes with a 3PL fulfillment service. This will allow you to focus on your core competencies and scale, without struggling with the complex fulfillment process.

2. You want to offer expedited shipping

3PLs are able to offer 2-day and even overnight shipping in key markets such as the United States, Europe & Australia. This is because of their network of warehouses, that they use to fulfill the orders, and their experience in streamlining the process.

If you want to leverage the potential that fast shipping brings to the eCommerce market, you should look at a 3PL service provider who can offer you fast shipping.

Related Post: Ecommerce Fulfillment Guide

3. You want to focus on generating sales

Let’s face it. Fulfillment is complex. There’s no reason for you to be focusing on it, when there are people who do the job for a living. They have the infrastructure, the equipment, and the process to get it done. Focus on your core competencies, which are bringing online buyers to your store, converting them into customers. Especially since you are generating a steady number of sales.

Leave fulfillment to the experts.

To wrap it up

We hope that this article has given you a good overview of what 3PL fulfillment entails.

It’s complex and there’s a lot to keep track of. In most situations, it makes sense to scale up and leave the fulfillment process to the experts.