Should you work with a third-party logistics (3PL) company?

3PL Companies can be a boon, under the right circumstances

Third-party logistics companies, known as 3PLs, are companies that process, hold, count, and ship your inventory for you. Have you ever worked with one? For some businesses – they can be an incredibly boon. For others, a more hands-on approach might be necessary. 

Below, we’ll walk you through a few things to keep in mind if you’re considering a 3PL company.

First, do a cost comparison

Depending on the size of your small business, the cost structure of working with a 3PL may or may not make sense. When making a decision, take into consideration the following realities to ensure you get everything you need and nothing you dont.

You have an existing warehouse operation

If you already have a functional warehouse, you will have to do a full comparison of costs to ensure it is worth switching over. This can be done by figuring out your warehouse costs that would not exist with a 3PL like rent, utilities, insurance, equipment, hardware, warehouse labor, supplies, and tech support.

No existing warehouse operation?

If you do not have a warehouse, you should still calculate what you think it would cost you to set up an operation. It all depends on your product size, quantity, shipment volume, and seasonality.

How to Calculate 3PL Costs

It is unlikely that the 3PL will give you their pricing structure in a simple way. They will give you a chart with a monthly storage cost per pallet, a per pallet in & out fee, a cost per case pack for processing, an hourly fee for inventory counts, and a monthly fee to use their software program.

To make sense of these metrics, you will need to build out a model using their costs and your assumptions about your inventory.

Start by asking yourself some questions:

How many pallets of product will you store? How often will you need shipments sent? Will the shipments be in a case pack (individual box) or a whole pallet? Will there be items that need to be reboxed or priced with a sticker? How many incoming shipping containers will you have in a year?

Try to figure out these answers and put them into a spreadsheet.

Determine the cost for each based on the fee structure provided to get to a more accurate estimate of your total cost.

Finally, compare this estimate to the total cost of warehouse operations. This will tell you if it makes sense cost-wise. 

There are other factors to consider as well when you’re thinking about using 3PL…

Proven effectiveness, at the cost of flexibility 

The nice thing about a 3PL is that they have a system in place that is proven. They have done this before. But because of this, they cannot react quickly. When you have your own warehouse, you have more control over exact times and dates. You can physically see that something gets done. But with a 3PL, you are on their time.

If you plan ahead, this should not be an issue. Just know that it will be a change if you are used to more flexibility.

You might encounter some implementation challenges

Some 3PLs require customers to use their software program to enter orders and shipment requests. They may require EDI (electronic data interchange), which takes some time and money to set up.

Occasionally they can use your existing system, but there is a learning curve for them to consider.

Big Savings on Shipping Costs

Often 3PLs have great negotiated rates with USPS, UPS, and FedEx because they ship so frequently. You will see savings on your shipping bill if you are able to utilize their shipping accounts for your outgoing packages.

Communication is Key

This might seem like an obvious suggestion, but make sure you try and meet with the 3PL in person. Visit their facility and tour their warehouse (don’t forget to ask questions!). 

If you do decide to go the 3PL route, make certain you have a great line of communication set up. Have weekly calls with each other to make sure they know your anticipated volume to prevent any surprises when you can least afford them!

Margins not looking good?

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