With the proliferation of online shopping, the e-commerce industry is growing exponentially. As a direct result, third-party logistics (3PL) fulfillment support services are a rapidly growing and critical part of the customer experience. 3PL fulfillment support services are not only important to completing the last leg of the e-commerce and B2B transactional process, but they also impact customer satisfaction, long-term customer loyalty, and the overall brand experience.
The 3PL fulfillment market has changed significantly over the last 50 years, and the scope of the support services has also changed throughout the decades. Overall direction of the industry changed forever on July 5, 1994, when Amazon was founded and began operations. In the late 20th century, online commerce launched a modern-day gold rush, and with newfound fortunes to be made, the 3PL fulfillment services market was flooded with new companies from various industries that all wanted to stake their claims.
Fast forward to 2022, and the 3PL market is now a complex and different landscape. Overall, the 3PL fulfillment services market is saturated, with over 1,000 3PLs in North America alone. Today, understanding 3PL fulfillment market options, pricing methodologies, and service level agreements (SLAs) is critically important to selecting the best 3PL partner to support your current fulfillment needs and help you scale your business.
One of the most difficult tasks in developing an outstanding 3PL partnership is selecting the best 3PL to support not only your current needs, but your future needs as you scale your business. It is critical to find a strong 3PL partner the first time around. Selecting the wrong 3PL can have a negative financial impact on your business and adversely affect the customer engagement experience and increase customer attrition rates.
Finding the ideal 3PL partner sounds easy, but with so many options, how do you best understand the market and your options? Clearly, you can use the conventional sourcing strategies of market research, leveraging your professional network, and reviewing available data from trade associations. Unfortunately, for the 3PL fulfilment services market, those methods will only yield limited benefit. Online market research will lead you straight to a relatively small number of 3PLs that do a great job with search engine optimization and brand promotion, only to provide you with mostly biased marketing rhetoric. Leveraging your network of contacts is a good way to get referral recommendations. However, unless your contacts are experts in the 3PL fulfillment market and your specific support needs (which most aren’t), that will likely fall short of the desired goal. Trade associations can be an excellent source of unbiased market knowledge, but in the 3PL fulfillment market, they are almost non-existent. The trade associations that are well positioned to focus on the issues important to the 3PL fulfillment industry primarily focus on the 3PL logistics and transportation segment of the market. If you search on Google for 3PL fulfillment trade associations, the results mostly yield the same 3PLs that you find when performing online market research for 3PL fulfillment services.
To effectively understand the 3PL fulfillment market and your options, the best source of unbiased, comprehensive market intelligence is the small number of consultants and subject matter experts (SME) who specialize in the space. Consultants and SMEs can be an invaluable resource in helping you shorten the timeline and improve the results of your 3PL fulfilment market assessment and partner selection process.
3PL Fulfillment Procurement Process & Evaluation Considerations
Once you have identified a select number of qualified 3PLs seemingly well suited to support your needs, it is important to have a formal vendor/partner selection process. This process normally starts with a formal request for proposal (RFP). The RFP should document, and clearly communicate, your support requirements, service objectives, and relationship goals. Once you communicate your requirements, request a formal services proposal from each 3PL to better understand the experience, capabilities, value proposition, and level of professionalism of each prospective partner.
There are several key considerations when evaluating prospective 3PL partners:
- Fulfillment transaction pricing and overall cost
- Geographic locations
- Culture and level of professionalism
- Experience with similar programs and distribution channel expertise
- Willingness to invest in the relationship
- Size, scalability, and infrastructure
- Available capacity and expansion plans
- Current and former client satisfaction
Let’s take a closer look at the top three considerations above and start by reviewing cost of 3PL fulfillment services.
The overall value that you receive from your 3PL has a direct correlation to the overall fulfillment cost and detailed transaction pricing for each of their services. Within the 3PL fulfillment services market, there are numerous pricing strategies, so it’s important to understand the differences at a high level.
The various 3PL transaction pricing strategies aren’t difficult to understand, but what is significantly more challenging is estimating and comparing the total cost per order and annual support costs between the various pricing methodologies. As stated above, the 3PL market expanded rapidly when a host of companies, from vastly different industries and market segments, entered the fulfillment services space. These new market players brought with them their own set of pricing models and industry-specific best practices. Unfortunately, there are no formal industry standards regarding 3PL fulfillment pricing guidelines and, as a result, there are numerous pricing strategies and hybrid models that have emerged over the years.
It's very beneficial to estimate your all-in cost per order for warehousing, pick & pack, account management, and transportation costs to compare options. Most 3PLs include their account management costs in their per-order fees, but some 3PLs charge separate fees for those services. Estimated transportation costs can be a little more challenging but can be simplified by getting rate tables by carrier, weight, zone, and service. Once you understand the estimated cost per order, it is relatively easy to compute your overall estimated annual fulfillment support costs based on anticipated order volumes, inventory storge requirements, and other support requirements.
Having your fulfillment centers in the appropriate locations is critically important to an effective and efficient solution that delivers maximum customer value. When developing your location strategy, key considerations include manufacturing locations, customer concentration, time-in-transit goals, and order volume. Manufacturing locations will drive the supply chain process and impact fulfillment center location options but are only part of the decision-making criteria. Customer concentration and desired delivery time-in-transit goals are also important considerations. Order volume will also impact your optimal fulfillment center location strategy.
Your optimal fulfillment location strategy may lead to leveraging multiple distribution locations. One common US strategy is to leverage east coast and west coast fulfillment operations to reduce freight costs and deliver time-in-transit efficiencies. It’s very important to determine your desired fulfillment center locations prior to selecting 3PLs for consideration.
3PL technology is also an important consideration when selecting a partner. Many 3PLs leverage inhouse systems and proprietary technology to support their business and clients. Some proprietary fulfillment order management systems (OMS) and warehouse management systems (WMS) are very robust but some have challenges. There are also many third-party OMS/WMS systems available. Third-party OMS/WMS systems tend to be comprehensive but can be more difficult to modify for client specific customization requirements.
It's also critical to select a 3PL partner that has experience and existing integrations with your current e-commerce shopping cart platform. If integration with your ERP system is required, it’s a good practice to validate that they have preexisting integrations or can efficiently and effectively manage that process in a timely fashion. Although many 3PLs work with most major shopping carts, many have limited expertise and integrations with some common ERP systems. If system integrations work well, that will help your fulfillment process run smoothly and efficiently. If not, it can be a major challenge and negatively impact support costs and the customer experience.
Getting to know and evaluating each 3PL is a collaborative process that requires significant effort, due diligence, and attention to detail. It’s important to rate and rank each 3PL based on the above key considerations and any other unique support requirements in order to narrow the process to a few finalists for further evaluation.
After you select a 3PL, it’s time to negotiate and execute the master services agreement (MSA) and statement of work (SOW). For the most part, standard 3PL MSAs are one-sided agreements, developed specifically to protect the 3PL’s best interests. Standard 3PL SOWs are typically much more bilateral and document the agreed upon client fulfillment support requirements and specific operational workflows to achieve the desired results. In practice, many merchants do a decent job of incorporating their required terms and conditions into the MSAs; however, overall, most agreements do an inadequate job of protecting both parties’ best interests and clearly defining support requirements. It is vital to structure your 3PL contracts to clearly define the support requirements, memorialize the agreed upon terms and conditions, document SLAs, and provide the foundation for future optimization opportunities.
3PL fulfillment procurement and ongoing relationship optimization should be a very structured, systematic, and ongoing process. A formalized procurement process and focus on continuous improvements will yield significant results. It requires a clear understanding of support requirements, growth projections, and strategic alignment with your 3PL. It also requires proactive communication, attention to detail, and reviewing results regularly.
An effective 3PL fulfillment partnership will deliver significant value for your company and your customers by increasing customer engagement, enhancing brand value, and driving shareholder equity.
Steve Givens is Managing Director, 3PL Fulfillment Optimization, Shipware, LLC.
This article originally appeared in the September/October, 2022 issue of PARCEL.