With the push of online sales, the global third-party logistics (3PL) market is expected to be valued at $1.1 trillion over the next six years. As the warehousing industry continues to feverishly expand, transitioning to a 3PL is becoming more enticing to private warehouses–and we can see why! As a private warehouse, you’ve already got a leg up on anyone starting from scratch. That being said, there’s still a lot you need to do to transition your private warehouse to a 3PL warehouse. Start the same way you would with any business: research the 3PL market, identify opportunities or niches where you can stand out, and find customers.
What is a Private Warehouse?
A private warehouse is owned and operated by a single business or manufacturer for the storage of goods or materials. In private warehousing, the individual business is in control of all the logistics: storage, flow of inventory, orders, processes, and even schedules. Unlimited control also means the private warehouse must cover all costs – design, operations, and maintenance. Though there’s more control in a private warehouse, the high costs keep most businesses from having their own warehouse.
What is a 3PL?
A third-party logistics warehouse, or 3PL for short, is an outsourced business that takes care of a company’s supply chain and logistics operations. Simply put, brands use 3PLs for the outsourcing and distribution needs of their inventory and fulfillment. 3PL warehouses manage stocking, holding, and shipping of the inventory of multiple businesses or other businesses in addition to their own inventory.
Why Transition to a 3PL?
With warehouse vacancy rates at a near all-time low of 3.8% in 2021, now is a perfect time for a private warehouse to transition to a 3PL warehouse. Compared to a private warehouse, 3PLs are affordable and flexible. A 3PL can choose what services they offer to their customers to ensure they are setting themselves up for success and profit. Transitioning to a 3PL can potentially cover the costs you experience as a private warehouse while also providing opportunities to drive a profit. Once you take on customers, start to rent space, and manage their inventory and shipping, you become a 3PL!
Before You Decide to Transition a 3PL
There are a few things to consider before you transition from a private warehouse to a 3PL.
Is there demand in your area?
Before transitioning from a private warehouse to a 3PL warehouse, you must consider if there is demand in your area for 3PL services and if there are competitors. If there are lots of 3PLs in your area, it could mean that demand is high and likely profitable. If there are no other 3PLs, demand might be below. Conducting an extensive market survey will help you determine if the lack of 3PLs is due to demand issues or if now is a good time for you to transition your warehouse from private to public.
Do you have the proper warehouse space?
Warehouse space is arguably one of the most critical parts of a successful 3PL. You will need enough space to store your customers’ inventory and your own, but you also need enough space for the proper pick and pack paths. Use the Extensiv Pick and Pack Process checklist to learn the best practices to increase accuracy.
Do you have the right warehouse staff?
Warehouse labor is crucial for your 3PL. It is important that you have enough people to do the job, and do it right, which can make or break your customer’s satisfaction.
Do you have the right infrastructure?
Layout and equipment set your warehouse up for success. Warehouses should place similar processes or subsequent inventory processes closer to each other and use “pick to bin” workflows for bulk inventory. Storage System- Pallet racks, shelving, specialty racks. Material Handling- Forklifts, pallet jacks, hand trucks are all the necessary equipment for a warehouse.
Things You Need to Transition to a 3PL
When you become a 3PL warehouse, you will need to consider the competition. It’s important to make sure your 3PL stands out from the rest. Besides offering basic fulfillment services, you need to ask yourself, “what can I do to make sure I’m not just another 3PL?” Find out how you can carve out a niche for your 3PL. If your competitors limit themselves to just warehousing and storage, consider adding supplementary services to your 3PL.
There are a few value-added services you can offer to differentiate your 3PL from the rest:
- Kitting and assembly
- Order Customization
- Pick and pack services
- Price marking and ticketing
The Right Technology
Most private warehouses use an inventory management system (IMS) to track their own product inventory, while 3PLs use a warehouse management system (WMS) that allows them to keep track of all their customers’ inventory. Investing in a solid WMS will make or break your 3PL. You must make sure that your WMS can integrate with multiple customer shopping carts, manage multiple billing scripts, maintain schedules, inventory management, shipping and receiving, picking/packing, and more. The software used by a 3PL is far more complex than your current private warehouse’s IMS because you’re no longer just tracking your own inventory but the inventory for several other companies. An investment in your technology can be used as leverage when finding new clients.
In 2021, users of 3PL services reported that 40% of their total logistics expenditures were related to outsourcing. Much of this growth can be directly correlated to the rise of the ecommerce industry. It’s clear that the 3PL industry is in a growth stage. Now is a great time to get involved, but to survive you need to make a profit with strategic pricing.
When determining your pricing, it’s best to take a holistic approach at first. After you complete in-depth market analysis and activity-based cost exercise, you need to calculate how much income you expect to make during your first year as a 3PL. You need customers to make a profit, but since you will be a new 3PL, discounts may be necessary to bring in new clientele in your first year. Next, compare your predicted income to your startup costs – rent, equipment, supplies, staff and labor, training, technology, bills, etc. The 3PL pricing process should create a model that is a blend of warehouse costs and revenue to minimize the total cost of the operation.
When your 3PL is first starting out, you will need to build your clientele. Attending tradeshows and conferences related to your industry is a great way to start meeting potential customers. We also recommend joining the International Warehouse Logistics Association for different resources and opportunities.
For your 3PL to be successful and stand out amongst your competition, you must become a partner that your customers have a strong loyalty to by offering services they need to meet core deliverables and service level agreements (SLAs). You need to be committed to your customers’ satisfaction and success to help manage inventory and operate efficiently.
Here are five ways your 3PL warehouse can help gain new customers and create loyal partnerships:
- Become your customer’s fulfillment best practices experts
- Seamlessly connect with your customers’ existing systems
- Become the most trusted data partner
- Become your customers’ brand image champions
- Help your customers grow their business
You can read more about becoming a 3PL that your customers love here.
The Right Equipment & Warehouse Layout
Though you may have some basic equipment as a private warehouse, a 3PL warehouse requires, even more, to properly store and transport your customers’ products. Good storage and inventory infrastructure are vital for your employees to quickly locate products and prepare them for shipping. Adding proper signage and labels in your warehouse’s stack racks will help your employees safely navigate the warehouse.
Your warehouse’s aisles, shelves, and containers should list the name of the contents and the customer’s name to minimize retrieval times. Optimizing your pick path is essential. Without a well-designed floorplan, unnecessary steps result in slower fulfillment, loss of potential revenue, and increased labor costs. Your warehouse layout should flow smoothly like a waterfall - pickers should move in a zig-zag formation to eliminate extra steps and end at a pack station. Additionally, from an ecommerce perspective, there should be a designated pick area for high-volume turning SKUs that you replenish from a storage location. This way, pickers stay within a smaller confined area and create efficiency.
Transitioning to a 3PL warehouse from private warehousing can be challenging, but when done right, it can be incredibly lucrative. Ensuring your success comes down to your willingness and ability to serve your customers. Value-added services, modern technology, competitive pricing, and efficient warehouse layout, and good equipment are essential to meeting the needs of your customers. If you can achieve this, your warehouse is on a path to being a successful 3PL.