How to Choose a 3PL Fulfillment Provider: The Ultimate Guide

Selecting a Third-Party Logistics (3PL) provider is a critical decision that impacts your supply chain, customer experience, and long-term growth. Below is a comprehensive guide to help you evaluate and choose a 3PL partner that meets your current and future logistics needs.

1. Define Your Needs and Goals

• Clarify Objectives: Specify the logistics functions you want to outsource. Consider if you need a 3PL for a particular product line, region, or specialized service (e.g., cold storage, e-commerce fulfillment).
• Set Long-Term Goals: Choose a provider that can support your projected growth. Consider whether you may need additional services in the future, such as product returns, custom labeling, or seasonal scaling.
• Assess Service Requirements: Define whether you need full-service logistics (storage, picking, packing, and shipping) or more targeted support. Document specific requirements and priorities in your 3PL RFP (request for proposal) to communicate clearly with potential providers.

2. Choose the Right Type of 3PL

• General Purpose 3PLs: Best suited for companies with standard storage and shipping needs.
• Niche-Specific 3PLs: Specialized 3PLs cater to unique needs, such as:
  • Perishables: Cold storage and refrigerated transport for fresh or frozen goods.
  • Specialized Products: Certified handlers for regulated products like pharmaceuticals or hazardous materials.
  • E-commerce: Providers with strong last-mile delivery, returns management, and Amazon Seller Fulfilled Prime certification.
• Industry Expertise: A 3PL provider with experience in your industry is essential. Without this background, they may lack the understanding needed to handle your goods efficiently through ports and regional outlets, increasing the risk of delays or errors. Verify that the provider has strong knowledge of your industry’s shipping nuances and strategic access to necessary transport routes like ports and state borders.

3. Assess Technology Capabilities

• WMS and TMS Systems: Choose a 3PL with sophisticated Warehouse Management (WMS) and Transportation Management Systems (TMS) that enable real-time tracking, inventory management, and integrations with your e-commerce platform.
• Data Visibility and Analytics: Ensure the provider uses systems that offer clear data reporting for inventory levels, order status, and delivery metrics. These tools help you make informed decisions and respond to demand changes quickly.
• Automation and Modern Technology: Look for 3PLs implementing IoT, AI-driven route optimization, and cloud-based solutions for quicker operations and fewer errors.

4. Verify Financial and Operational Stability

• Financial Health: Research the financial history of the 3PL to ensure they’re stable and reliable for long-term needs. Check for late payments or partnerships with financially sound companies.
• Contingency Planning: Ask about the provider’s disaster preparedness for labor shortages, transportation delays, and other emergencies. A reliable 3PL should have a proven plan for mitigating issues, which is crucial for business continuity.

5. Consider Strategic Location

• Proximity to Key Markets: Choose a 3PL with warehouses close to your target markets to reduce transportation time and costs. This is especially important for time-sensitive products.
• Local Expertise: Providers familiar with local traffic patterns, seasonal demand fluctuations, and regulations can better ensure timely and accurate deliveries.

6. Review Fees and Pricing Structure

• Understand All Costs: Common 3PL fees include:
  • Onboarding: Initial setup fees, which can vary based on time and complexity.
  • Receiving: Charges for handling inbound goods, often calculated per unit, pallet, or hour.
  • Storage: Fees based on square footage, cubic space, or pallet, with added costs for climate-controlled storage.
  • Order Fulfillment: Per-order or per-item fees for picking, packing, and processing.
  • Shipping: Variable costs for shipping based on distance, delivery speed, and dimensions.
• Compare with In-House Costs: Evaluate the total costs of outsourcing compared to your current or projected in-house expenses to determine cost-effectiveness.

7. Check Reputation and Track Record

• Industry Experience: Select a 3PL with experience in your specific sector. Their familiarity with industry nuances can improve operational efficiency.
• Client References and Reviews: Ask for references from long-term clients to assess the provider’s reliability. Online reviews and lists of the best fulfillment companies can also reveal patterns in customer satisfaction.
• Response to Challenges: Investigate how the 3PL has handled logistics disruptions or crises in the past. Consistency in performance and customer service are key indicators of reliability.

8. Prioritize Communication and Transparency

• Direct Communication Channels: Choose a 3PL with responsive support and clear communication protocols. Ideally, they should provide direct access to support teams for real-time issue resolution.
• Real-Time Data Access: Opt for a 3PL with dashboards and metrics reporting that offer real-time insights on inventory status, order tracking, and shipping metrics. This transparency is essential for daily operations and long-term planning.

9. Evaluate Facilities and Operational Standards

• Site Tours: If possible, visit the 3PL’s warehouse to evaluate organization, cleanliness, safety standards, and process efficiency.
• Standardized Procedures: Ensure they have well-documented procedures for handling, packing, and shipping. This is especially important if you have goods requiring specialized care.
• Staff Training: Ask about their workforce training practices. A trained workforce with low turnover contributes to fewer errors and better handling of your products.

10. Assess Scalability and Flexibility

• Adaptability to Demand Fluctuations: Choose a provider that can handle spikes in orders during peak seasons and scale down during slower periods.
• Flexibility in Services: If you require value-added fulfillment services like kitting, bundling, or custom labeling, confirm that the provider can deliver these services efficiently.

11. Review Service Level Agreements (SLAs) and Contracts

• Defined Performance Metrics: SLAs should cover key performance metrics like on-time delivery rates, accuracy, and error handling. Review these guarantees closely.
• Length and Terms of Contract: Check 3PL contract terms and look for flexibility if you anticipate changes in service needs. Some 3PLs offer discounts for longer-term agreements, while others may provide month-to-month options.

12. Confirm Insurance and Compliance

• Insurance Coverage: Confirm that the provider’s warehouse insurance adequately covers your inventory type, with specific policies for high-value or sensitive goods.
• Regulatory Compliance: For regulated goods, verify the 3PL’s certifications and compliance with relevant standards, such as FDA certification for pharmaceuticals or USDA for organic foods.

13. Evaluate Metrics and Reporting Systems

• Comprehensive Metrics Tracking: A strong 3PL fulfillment partner should provide metrics on delivery speed, accuracy, returns, and inventory levels.
• Accessible Analytics: The 3PL’s metrics tools should allow you to track operations easily across mobile and desktop, making regular performance reviews and strategic planning more effective.

14. Conduct Employee and Staff Interviews

• Firsthand Insights: Employees directly involved in operations can offer valuable insights into day-to-day logistics and potential areas for improvement. Request meetings with staff to gain a clearer understanding of their procedures and perspectives.
• Assess Transparency: Honest, practical feedback from those handling your products is invaluable for understanding the provider’s strengths and any operational limitations.

15. Benchmarking for Continuous Improvement

• Set Performance Benchmarks: Establish benchmarks based on SLAs and regular performance reviews to ensure the 3PL is meeting your operational goals.
• Compare with Industry Standards: Evaluating the 3PL against industry averages and competitors can reveal areas for potential improvement and guide decisions for scaling the relationship or reassessing contracts.

16. Final Considerations for Choosing the Best 3PL

• Site Visit or Virtual Tour: A physical or virtual tour helps assess the operational standards and cleanliness of the facility.
• Thorough Cost Analysis: Confirm that the 3PL has listed all costs in the contract, including any minimums or volume discounts. Compare costs with alternative providers.
• Check Customer Service Standards: Ask how the provider handles customer issues, returns, and damaged goods. Their responsiveness impacts your reputation.
• Evaluate Facility Size and Capacity: Ensure they have adequate storage and the capability to handle your current and future volume needs.
• Assess Flexibility for Sales Channels: If you have multiple sales channels (B2B, D2C), confirm the provider can handle the specific requirements for each.
• Ask the Right Questions: Be prepared to ask detailed questions, including queries about their client base and references, retention rate of customers, communication protocols, scalability, error handling procedures, facility and service capabilities, technology, workforce quality, and cost structure.

Choosing a 3PL provider involves detailed research and a thorough understanding of your logistics needs. By systematically assessing each area—technology, location, financial stability, communication, and scalability—you can select a partner positioned to support your business’s growth and operational efficiency.

Holding Your Fulfillment Warehouse Accountable

With that in mind, is your fulfillment running smoothly? Perhaps you haven’t checked in with your fulfillment center for a while after becoming complacent to their procedures. If you’re starting to notice a few things slipping in maintaining your delivery services, it’s time to visit the warehouse and ask some serious questions.

After you address these questions head-on, it’s important to maintain a good relationship to avoid having to seek another 3PL warehouse for logistics improvement.

Are Customers Receiving Orders On Time?

Maybe you’ve solved the inventory problems, but what about the method of getting your products to customers? Are customers starting to receive those items later than intended? If so, it’s time to look into what’s happeHolding Your Fulfillment Warehouse Accountable

With that in mind, is your fulfillment running smoothly? Perhaps you haven’t checked in with your fulfillment center for a while after becoming complacent to their procedures. If you’re starting to notice a few things slipping in maintaining your delivery services, it’s time to visit the warehouse and ask some serious questions.

After you address these questions head-on, it’s important to maintain a good relationship to avoid having to seek another 3PL warehouse for logistics improvement.

Are Orders Shipping Out Accurately?

Statistics show that 39% of all retail companies face problems with accuracy in delivering products to their customers. This falls squarely on the fulfillment center you work with, and you may notice too many errors lately.

After several order errors, it can quickly start to erode trust with the customers you’ve worked hard to acquire. While you’ve already invested a huge percentage of your budget into labor expenses, this extra cost is essential to make sure the fulfillment center gets things right.

It’s time to do an audit of the warehouse you work with if you see too many inaccuracies in orders lately. More than several in a week’s time should become a red flag.

Is Cart Inventory Matching Your On-Hand Inventory?

Not being able to fulfill an order becomes even more of a frustration for your customers. The job of your fulfillment center is to make sure they relay what your inventory is so your cart inventory matches your on-hand inventory. Having to suddenly tell a customer your product is out-of-stock after they’ve placed an order is true retail anathema.

Do You Receive Products from Suppliers in a Timely Manner?

Getting your products sent to the warehouse from suppliers and manufacturers is another problem that might start to lag. Call your suppliers and find out what’s possibly occurring to slow down deliveries. Having constant low inventory immediately sends a message to consumers you’re not keeping your operations running optimally.

Are Returns Being Processed Quickly and Timely?

You always need a good return policy if you’re dealing in e-commerce. Your fulfillment center should deal in reverse logistics to make sure all returns go smoothly. The only way to make this happen is to assure the warehouse has the best technology to track information on inventory levels and to liquidate items.

Making sure fulfillment communicates this information to you helps you save money and time having unsaleable products stack up in the warehouse.

Take a Second Look at Your Contractual Agreement

The contract that you originally signed with your 3PL provider may no longer suit your needs. As your business changes and grows, so must the contract that you have with your 3PL partner. You may also find that the fulfillment center isn’t meeting all of the initial expectations of the agreement – so it’s important to review a few times per year to be certain.

How to Evaluate Your Current 3PL Warehouse

Your contract defines the terms of your relationship with your 3PL provider and lays out each party’s responsibilities. As you learn more about the logistics solutions your business needs and as you gain more experience in the 3PL industry, you’ll be able to negotiate more favorable contract terms over time.

When you do review your contract’s terms, keep in mind that contracts aren’t in place for the good times, they’re in place to protect both party’s interests no matter what happens in the future.

All too often contracts get renewed without making significant enough changes to meet the needs of the businesses who are signing them.

Hold Regular Meetings to Go Over Expectations, Issues, and KPIs

One of the most important things you can do to manage your relationship with your 3PL provider is to meet with them regularly. During these meetings you should be reviewing their metrics, evaluating their performance and discussing improvement strategies where needed. We recommend holding these meetings every month or every quarter.

By having pre-scheduled meetings with your 3PL provider, you’re able to stay on top of their numbers and performance before there’s an emergency.

When you hold your 3PL provider accountable in the short term, they’ll take your business more seriously and will be less likely to make mistakes when handling your goods.

Now, if you don’t know what metrics to talk about in your meetings or how to evaluate the 3PL’s performance, then read on.

Frequently Manage Key Metrics That Matter

Data and analytics reports are a standard in the modern 3PL age we live in today. This is a fantastic benefit for your business because you’re able to see the numbers and judge your 3PL’s performance based on facts, not feelings.

Reading metrics is essential for any company to get a 360-degree view of what’s happening. Don’t ignore the analytics in your fulfillment center since it can tell you so much. Especially look at their 3PL KPI’s (Key Performance Indicators) where you’ll see some clarity on what the warehouse is doing and what their performance outlook is. Accountability and performance are important aspects of any business relationship, but when it comes to your 3PL partner, they’re especially important.

Here’s what you should look for when you’re evaluating your 3PL provider’s capabilities:

1. Order error and success rates: Your 3PL provider’s business is making sure that your goods are handled properly and that your orders are completed without error. Of course, no 3PL provider will have a 100% success rate every time. Errors do happen and should be expected as a cost of doing business. However, your 3PL provider should be able to explain where their errors stemmed from and what they’re doing to prevent them from happening in the future.
2. On time shipping percentage: When your customers are given a delivery date, that date should be met. Even if your 3PL’s order success rate is high, if there are a large percentage of orders that aren’t arriving on time, that’s a problem that needs to be addressed. Every order that gets delayed impacts your business’s reputation and your bottom line.
3. Inventory count accuracy: Your 3PL provider not only handles the transportation and storage of your goods, but in most cases they’re managing your inventories to ensure that you’re not over or under producing goods. That’s a big responsibility and if they’re not managing your inventories well, it could cost you your business. Likewise, if they’re doing a great job with your inventory management, then you can be confident when it’s time to renew your contract.

Keep Communication at the Top of Mind

Beyond the metrics and the numbers, your 3PL provider should be providing quality customer service to you and your team throughout the relationship.

In addition to the regular meetings you’ll be holding with your provider, your requests for information, phone calls and emails should be responded to promptly and professionally.

Logistics is about organization and execution. If your 3PL provider isn’t able to respond quickly with the data and answers you need, then their priorities and organizational skills could be called into question.

Warning Signs You’re with the Wrong Fulfillment Provider

Even if you find one you think you can work with, the warehouse could have problems in the future. Sometimes it’s impossible to know whether a fulfillment warehouse is going to have issues until the time actually comes. They still usually show warning signs, which you can scope out in part during vetting. Then again, if you’ve already signed a warehouse contract in 2016, it pays to keep an eye on some red flags in the coming year. Conducting annual assessments with your warehouse usually helps find some of the most egregious issues.

Here’s some warning signs you’re with the wrong third-party fulfillment company so you can take heed and move on before becoming a bigger problem.

Lack of Communication

While this is a common issue, it’s something to still take seriously. Maybe you haven’t made an effort yourself to keep in contact with your warehouse for a while. Or, maybe you have, yet the fulfillment company hasn’t bothered to return your calls, emails, or texts.

If not, it’s an immediate sign they don’t take communicating with you seriously. When this happens, it’s a surefire sign your partnership isn’t going well. You can’t work with a warehouse and not have a good working relationship. They’re basically your other business half, and communicating every day is essential.

With this relationship, you need transparency, and any tendency to cover up things is an immediate sign to look elsewhere.

Improper Billing Procedures

Any lack of organization in the warehouse could lead to improper billing that creates constant confusion between you and customers. Much of this has to do with technology weaknesses and using paper-based systems. Digitizing documents is important now to prevent discrepancies.

All it takes is a mistake in charging too much on shipping, or not properly addressing your own bills, to create major downtime finding errors. Because you’re already busy keeping your business afloat, you don’t want to waste hours or days locating where a mistake occurred. Your warehouse might not cooperate either, making things worse.

3PL Partnership Frequently Asked Questions

What is a 3PL Partnership?

A 3PL (Third-Party Logistics) partnership involves a business working with an external provider to manage supply chain tasks such as warehousing, order fulfillment, transportation, and inventory management. This arrangement helps businesses handle logistics needs more efficiently.

When Should I Consider a 3PL Partnership?

A 3PL partnership is beneficial if your business is growing, expanding into new markets, or lacks in-house logistics expertise. By outsourcing logistics, you can focus on other business activities while receiving professional support for complex operations.

What Are the Advantages of a 3PL Partnership?

3PL partnerships offer cost reduction (outsourcing logistics reduces the need for additional warehousing space and personnel), access to technology (many 3PLs provide tools for tracking and reporting), and expertise (3PLs bring experience in logistics management, handling tasks like warehousing and shipping efficiently).

What Are the Drawbacks of a 3PL Partnership?

Possible disadvantages include loss of oversight (working with a third party can reduce direct control over inventory and distribution); upfront costs (initial expenses may be significant for smaller businesses), and communication and integration needs (partnering with a 3PL requires compatible systems and effective communication, which can sometimes be challenging).

Are There Alternatives to a 3PL Partnership?

Depending on your logistics requirements, alternatives include in-house logistics (managing warehousing, fulfillment, and distribution internally), shipping software solutions (using software to sync orders, manage shipping, and track deliveries), and using smaller fulfillment companies (some regional fulfillment providers offer more personalized services suited to smaller or niche businesses).

How Do I Determine If a 3PL Partner is Right for Me?

Evaluate your logistics needs, growth plans, and internal resources. A 3PL partnership can be useful for businesses prioritizing efficiency and professional logistics management, but it’s essential to ensure your goals align with those of the 3PL provider.

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