Jul 20, 2021 14 Min READ

What are 3PLs and How Do They Work?

Chad Kleiman

Chad Kleiman is a member of the marketing team experienced in various aspects of marketing and the supply chain as he seeks to share his knowledge with the third-party logistics industry at large in an easily digestible format.

14 Min READ
What are 3PLs and How Do They Work?


Supply chain holdups, problems, and headaches? Let WMS software help manage your company’s logistics.

Juggling the various components of thriving business, especially an ecommerce company, isn’t without challenges. To achieve order fulfillment and maintain satisfied customers, the supply chain must flow seamlessly (or with as few bumps and delays as possible).

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Business owners are often not equipped with the intricate knowledge needed to ensure success. However, reaching out for help from a 3PL is often a viable solution that guarantees delivery success, customer satisfaction, and increases profitability of your bottom line. It becomes a win/win for everyone involved.

What is a 3PL?

A third-party logistics (3PL) company works with businesses to outsource operational logistics that span the gamut from warehousing, picking, packaging, inventory, order fulfillment, forwarding and delivery. Allowing a 3PL company to oversee the logistics lets you focus on your core business needs.

Outsourcing with a 3PL is not a new thing. In fact, companies have been outsourcing both inbound and outbound logistics to third parties since the early 1970s. However, the introduction and growth of online retail ecommerce in the 90s has driven 3PLs to where they are now. Using a qualified 3PL lets an ecommerce merchant achieve even more by completely automating their retail order fulfillment.

Anytime someone refers to a 3PL, they are focusing on supply chain integration which includes all warehousing operations and transportation services.

3PLs are the beating heart of the supply chain. They let B2B, ecommerce, and omnichannel businesses function with greater efficiency by effectively outsourcing all coordination and fulfillment needs to third parties.

Who Uses 3PL Services?

3PL services function as outsourced businesses that meet a company’s coordination and supply chain needs. Retailers, brands, and merchants are regularly turning to 3PLs to outsource their supply chains needs such as distribution and warehousing.

Nowadays, many kinds of businesses are regularly partnering with 3PLs. They range from small ecommerce retailers all the way to Fortune 500 businesses. Each one sells a wide range of products. 3PLs provide necessary services that help a business grow.

Small Ecommerce Businesses

A small ecommerce business might be able to manage and self-fulfill their orders initially. However, once a business starts to grow and orders increase they will start to spend an excessive amount of time packing orders and shipping in-house. So much extra work prevents a company from scaling.

A small business can hire workers, but they will eventually start to run out of room and be faced with renting a warehouse to increase their space which becomes a costly endeavor.

Small businesses get locked in a catch-22, they need to expand to grow their business, but the costs and space become extreme and gouge out their bottom dollar. They will face overspending on storage costs and employee salaries needed to fulfill orders and manage inventory. The answer to the dilemma is to outsource fulfillment to a 3PL so the business can start to focus on other necessities and will save money. A 3PL will tackle order fulfillment and provide necessary services while reducing shipping rates.

Medium Sized Companies

Companies that employ from 15 to 100 employees can benefit from a 3PL. A fast-growing company needs a 3PL for strategy fulfillment to meet its level of growth. If a company has outgrown its current warehouse location, then reaching out to a supportive 3PL helps meet the demand and scale up once the order volume increases. In some situations, they may strategically split inventory throughout several fulfillment centers to ensure that items reach customers faster and at more affordable rates to help increase a company’s profitability.

Large Fortune 500 Companies

Reports carried out in 2017 and 2020 by Armstrong and Associates found that 90% of all Fortune 500 companies use a 3PL. Of course, one must remember that there are many types and sizes of 3PL companies. A 3PL that works with small Shopify websites is not going to be the same as a 3PL that works with a Fortune 500 company. Each 3PL is designed to meet the needs of their customers such as tracking inventory across multiple channels and more. 

Large companies outsource the supply chain to effectively control costs and ensure increased efficiency. Typically, the bigger the company, the more likely it is to work with at least one 3PL company.

Companies that Use 3PLs

Whether a company is offering a solitary product or features a full catalog, hand-made items, or subscription orders, the fastest growing and most successful companies partner with 3PLs.

Many companies use 3PLs such as those selling the following:

  • Nutraceuticals
  • Wine and spirits
  • Bulk goods
  • Raw materials
  • Electronics
  • Pet accessories
  • Apparel
  • Cosmetics
  • General merchandise
  • And more!

Services Provided By 3PLs

Services do differ between 3PLs. Some might specialize in one niche and others in other functions. Read on to explore a number of 3PL services below:


All 3PLs focus on the cornerstone of transportation services, which they utilize to move shipments between manufacturers and warehouses to companies and buyers. Freight forwarders transport and logistic large shipments via various countries and smaller shippers such as USPS, UPS, and FedEx are often used to move smaller parcels.

Warehousing, Fulfillment, and Distribution

Many 3PL warehouses focus on services like warehousing, fulfillment, and packaging coupled with shipping and returns. Sellers turn to this type of 3PL to outsource all of their fulfillment and warehousing needs. The 3PLs that manage these, also manage transportation, shipper identification, shipping rates, and optimized shipping strategies.

Financial 3PLs

Large ecommerce companies often use financial 3PLs that offer accounting and cost control services to help control the cost of freight forwarding, tracking of inventory, and management. Typically, 3PLs that offer these services meet the needs of larger companies.

1PL, 2PL, 3PL, 4PL, and 5PL Differences

In the supply chain realm, you’ll hear terms like 1PL, 3PL, 4PL, 2PL and even 5PL bantered about. You might wonder what are the differences between all of them.


A 1PL is a business/seller combo who manages the fulfillment process from strategy to storage to fulfillment of their own items. They have their own warehouse and fulfillment center where they house their inventory and from which they ship their products to retailers and clients.


A 2PL functions as an asset-based carrier. They are often shipping lines that handle ship operation, airlines, and hauling companies with a fleet of vehicles. Usually, a 2PL is called forwarders because their business is basically only transportation focused.


A business will outsource all logistic operations to a 3PL provider. The 3PL provider controls the warehouse space, operations, and inventory within its own warehouse.


4PL refers to fourth-party logistics. With the 4PL structure, a business outsources virtually all of its logistic operations. The 4PL acts as the single point of contact between the seller and logistic providers. They make all decisions on every supply chain aspect. A 4PL will often work with a 3PL to manage logistics or other logistic services.


The term 5PL is relatively new. It refers to a company with full logistic integration through the use of many outsourced providers. A 5PL features fully integrated logistic solutions that embrace the whole supply chain from start to finish using a wide range of outsourced service providers. 5PLs are high-tech and embrace all integration of IT and computer systems to ensure visibility and control of the supply chain even if different suppliers work together.

Core Services of 3PLs

A functional 3PL can manage all operational details to free up a company to focus on other aspects of the core business or supply chain.

The core services of 3PLs include the following:


A 3PL must receive inventory to fulfill orders and ship. At a 3PL warehouse, they will store a company's inventory of products before they ship to a consumer. The 3PL coordinates the inbound shipments with the company which may or may not use freight forwarders to manage and organize bulk shipments that flow from the manufacturer to the distribution center. The entire process is part of a 3PL warehouse management process.  

The best 3PL companies have management software integrated which serves to make the process easier. The software identifies the location of the product and is then put in storage to make it easier to fulfill the order.


Once a customer places an order the next process is known as picking. A 3PL fulfillment will then process the order submitted and send it to the warehouse or fulfillment center. Once the order is received, then it is ‘picked’ out of the warehouse or storage facility for shipment to the buyer.


After picking, it's time to organize and pack the order for shipment. A 3PL company will determine the best way to pack the product so it is secure, branded, and safe. The entire process is done in a cost-effective way. When it comes to packaging, a 3PL facility must have the technology at its disposal.


Shipping is a complicated stage of the process and also expensive, but clearly, it is crucial. Everything becomes a web of intricacies with the overwhelming number of shippers, shipping options for each carrier, locations, and cutoff times. A 3PL has a strategy that focuses on shipping, costs, speeds, and ensuring the customer receives their item.


Sometimes a customer orders an item by mistake or it arrives damaged from the shipping process. In either case, the buyer requests a return. Returns are a common part of the shopping process and customer experience. A skilled 3PL company is ready to receive products, document their receipt of the times, and establish firm rules with the seller to know exactly what to do with returns.

3PLs Fitting into the Supply Chain

As a crucial part of the supply chain, a 3PL manages all picking, packing, shipping, and handling of items. A 3PL owns none of the inventory in the warehousing process. They serve as a go-between or intermediary that acts between the client and consumer. The goal of any 3PL provider is to ensure that the logistics of the client’s business runs smoothly and efficiently so they can fulfill the needs of their consumers.

Many brands struggle with shipping, transportation, and distribution. However, an experienced 3PL service provider increases efficiency for any business. Yes, there are some companies who would opt to work in-house, but most businesses leverage the services of 3PLs to effectively outsource during the high season. A 3PL partners with a company to streamline everything and reduce wait times for shipping.

What is WMS?

An effective warehouse management system (WMS) is a highly effective software solution to track inventory and manage the entire operational process of a warehouse. The software focuses on managing, shipping, and tracking all of the needs of the warehouse. Warehouse management software helps everything run smoothly, distinguishes sections, and manages all processes.

WMS software provides the following:

  • Real-time visibility to track all inventory statuses and levels.
  • Live integrations coupled with reports about shopping carts to avoid the possibility of backorders and stock shortages.
  • Recording and tracking inventory supplies, locations, lots, serial numbers, and expiration dates.
  • WMS identifies and then recognizes the myriad items and products.
  • Provides visibility to the entire warehousing process.
  • Offers ease of access to the inventory sent along the logistics pipeline.
  • All aspects of receiving packing, packing, and shipping are tracked.
  • Assignment and complete tracking of items from products to the various storage locations using automation and software.
  • Control of supply chain logistics to ensure timely delivery of products.
  • WMS scales to guide flexible periods during the peak and low seasons. 

Why Partner with a 3PL?

3PL warehouses provide ongoing support and service to their customers — they are not a one-and-done service, but instead an entire system that streamlines operations. Everything runs efficiently to ensure that the brand and merchant better services consumers. 3PLs provide an assortment of market knowledge and industry practices to smooth workflows and reduce supply chain inefficiencies.

Reduced Supply Chain Inefficiencies

3PLs use WMS software to create a specialized view of the supply chain to increase speed, efficiency, and accuracy. The enhanced capabilities track inventory, improve shipping, and automate the transfer of information.

Leveraging the 3PL software creates an automated approach for the fulfillment process. It identifies the warehousing processes so they can be honed or altered to become even faster and more efficient. Everything that a 3PL does is to achieve more proficient, efficient operations and service for the customer.

Improved Market Knowledge

Warehouse real estate is a premium and commands high dollar value. With shipping increasing from coast to coast, the costs continue to grow. Consumers have started to expect more, and most are now demanding perfection.

When a company works with a 3PL warehouse, they can expand and solidify their brand. Warehouse locations with access for direct shipping are in high demand. 3PLs actually leverage their existing carrier relationships. Pay for service models provide overhead costs and fees linked to growth.

Industry Expertise

With industry expertise and a firm knowledge of logistics and supply chain ins and outs, 3PLs couple warehousing services with efficiency and optimization. With reduced costs, time savings, negotiations, and packing, 3PLs rely on verticals such as cold storage, electronics, hazmat, nutraceuticals, apparel, and more. They bring decades of experience to fulfill every need.

How 3PL Can Benefit a Business

There are many ways that a 3PL can benefit a business. Often, they can meet the needs of businesses across a multitude of spheres.  

Cost Savings

The number one reason why a seller decides to outsource their fulfillment needs is to save money. The majority of 3PLs collaborate with numerous sellers so they can use their buying power to obtain better prices with logistics vendors on items such as shipping services and materials. The overhead is spread out so 3PLs offer better rates than if a seller opts to manage things.

Here are several ways that a 3PL helps save money:

Lowers Capital Investment Costs

A seller might think it makes sense to operate their own private warehouse and tackle fulfillment orders with their staff, but the process is actually awfully expensive. As the business grows, so do costs of operation such as labor, rent, security, and packing materials. It’s more cost-efficient to let a 3PL handle things.

Shipping Expenses

The sheer size and reach of a 3PL business significantly lower the cost of shipping. As a seller handling your own fulfillment, you cannot beat the prices obtained by a 3PL.

3PL forms a network of relationships with shipping carriers so they know the best ones to use for various locations, can navigate the sales channels and know the varying prices depending on the time of year. They ship thousands of products using multiple companies every day so they can negotiate huge bulk discount rates with the largest shipping carriers. Yes, you might save only a small amount per package but as your business grows the savings add up and impact your bottom line.

Seasonal Flexibility

Typically, sellers experience spikes in sales throughout multiple times of the year. Sales often increase during the holiday rush or due to special promotions. When the sales spike, you’ll need to shop for extra packages and at the end of the season your shipping needs will come down. A 3PL has the ability to scale up and down as needed so your company will not take a hard hit over the additional margin of costs.

Greater Level of Experience

As the owner of a thriving business, you probably have a handle on operations, but fulfillment and logistics might not be your specialty. As your business grows, you’ll want a true logistics expert at the helm who can provide you with the biggest value

Warehouse Safety

Running a warehouse is not easy. You’ll have to comply with health and safety regulations and standards which include certifications, training, and periodic equipment checks. In addition, the operation of a warehouse takes time and extra staff. Outsourcing to a 3PL specialist helps you maintain workflow and save money.

Greater Customer Satisfaction

Tackling shipping, fulfillment, and logistics might cause you to spread yourself thin which results in errors. Customer satisfaction takes a nosedive which can impact how you grow your customer base. A 3PL eliminates simple mistakes such as incorrect orders, late deliveries, and incorrect labeling. Reducing errors always provides greater customer satisfaction so you can more effectively grow your business and generate more customers.

Needed Equipment

Any business experiences unforeseen costs but with an order fulfillment operation, the expenses can become steep because equipment regularly breaks down or requires maintenance to continue performing.

The equipment needed to operate a warehouse includes forklifts, conveyor belts, barcode scanners, and pallets. The upfront cost of purchasing them is often steep, and so is the ongoing maintenance and repair. A 3PL has all the needed equipment so you don’t have to worry about buying your own. Plus, they repair and maintain all of their mechanical devices which saves you money.

IT Capabilities and WMS Software

Many people are surprised to realize that the amount of software a logistics company requires is staggering. Everything from 3PL billing software, shopping cart integrations, and third-party fulfillment software needs to work with a WMS to track orders and inventory. The software used ensures that everything runs smoothly and efficiently.

However, when you partner with a 3PL, you don’t have to worry about the WMS software to determine what works best. The logistics company will already have the best WMS for 3PL warehouses in place.

If you partner with a 3PL, you never have to worry about the upfront cost of IT components or training employees to run the software. Everything is included with the 3PL you are working with.

Going Paperless

Another way working with a 3PL warehouse can benefit your business is by reducing manual errors. Automation reduces the amount of manual work that can lead to human mistakes, which can become costly down the line. Working with a 3PL that offers paperless warehouse management means you can save money on these expensive hiccups.

Opportunity Cost

If you are spending an excessive amount of time with order fulfillment then your core business responsibilities might start to suffer. If you delegate fulfillment to a 3PL then you are freeing up capital that you can then reinvest in your business. Not to mention, you gain more time and energy to focus on your business.

Opportunity cost matters if you are a startup. You’ll want to focus on operational duties so your business continues to grow. Often your long-term success hinges on the situation.

Location Matters

If you handle your business’s self-fulfillment then you are probably only shipping to an individual location, so the task remains doable on your end. However, your customers' location and number of distribution centers all matter because they can add to the amount of time it takes for your product's delivery and the cost. 3PLs work with multiple fulfillment centers that are all strategically located which gives them a far greater reach. All of these components drive the cost of your shipping down.

What Kinds of Online Stores Should Use a 3PL?

All ecommerce stores should be using 3PL. It doesn't matter what their ecommerce platform, product category, or industry is because all can benefit from using outsourcing fulfillment.

Let’s examine the signs that your business is ready to take the leap to partner with a 3PL:

Shipping Has Increased to Over 100 Orders Per Month

There is no magic number that indicates when exactly your volume has reached a point where it's better to outsource to a shipper. However, typically if you are shipping over 100 orders per month, then you have had to enlist the help of friends, family, or additional labor to pack boxes quickly and meet the demand.

Order fulfillment quickly becomes a problem because you are swamped, and it is a low dollar activity that is incapable of generating a sizable amount of money so it could be holding back our company’s growth. Not to mention, if you have hired additional laborers to conduct the process then you are probably in over your head and actually bleeding money in an effort to pack items, print labels, transport the items to a post office, and more.

It is all costing you in time and labor which you could be using to acquire more customers, launch marketing campaigns or develop new products. At this point, it is high time you partner with a 3PL.

Running Out of Space

As your order volume increases, your need for keeping inventory grows. If you are fulfilling orders yourself, then you have to keep products on hand and you are probably having a challenging time with adequate storage space. A 3PL warehouse will hold your products in their outsourcing inventory warehouse and then fulfill all orders effortlessly don’t have to worry about storage or fulfillment. You’ll never have to fear running out of space for all of your items.

Offering Two-Day Shipping

Amazon is the king of two-day shipping. However, if you are self-fulfilling orders, then providing your customers with two-day shipping takes a huge toll on your profitability. This is especially true if you are providing two-day expedited air shipping. Working with a qualified 3PL makes two-day shipping not only feasible but affordable.

How to Choose the Best 3PL Company?

At this point, you have decided that partnering with a 3PL company is in your company’s best interest and will help significantly with your bottom line. Your company will save time, money, free up resources, and experience growth. However, choosing a 3PL company is not always easy. There are a variety of companies out there so you might wonder which one is the best 3PL company to meet your needs.

You’ll want to find a 3PL that you can trust to handle your inventory and maintain customer satisfaction. Here are a few questions to ask any 3PL before making the decision on which one is best for your company:

How is your 3PL company different from your competitors?

This is a basic question, but you’ll want to pay close attention to the answers. Honestly, not all 3PLs are created equal.

What technology and 3PL software do you rely on?

You want to pick an innovative tech-enabled 3PL that provides streamlined, integrated shipping and fulfillment solutions. They should also be running software to help with automation including order and inventory management so they can track orders and manage returns effortlessly.

Where are your fulfillment centers located?

You not only want to know where the headquarters of the 3PL you are thinking of working with is located but also their fulfillment centers. The location will give you an idea of who can offer the fastest delivery coupled with affordability. Location of warehouses helps your shipping strategy and ensures the ease of two-day shipping.

Understanding 3PL Pricing

There are a variety of 3PL pricing models, and they will depend on your business’s needs. However, below we will explore the most common 3PL costs.




Fulfillment services, tech setup

Inventory Receiving

Incoming inventory acceptance and storage such as per unit, flat rates, per hour, or per pallet

Inventory Storage

Storage space - warehousing, per SKU, fixed fee, fixed fee per shelf, fixed fee per pallet/pallet used, bin fee

Pick and Pack

Pay for each item included in every order


Packing materials, boxes, air-fill for items


Kitting and assembly


Shipping from fulfillment center



Why is 3PL important?

As a business owner, the task of packaging and shipping your products is time-consuming, difficult, and costly. In order to compete in the ecommerce space, businesses expect timely service (specifically to compete against Amazon). Customers are demanding free shipping in two days or less. A 3PL company has the ability to meet those needs while saving a business owner money. By specializing in supply chain management, a 3PL warehouse can help streamline the entire shipping process so it becomes more cost-effective and has far better logistic efficiency.

What is the difference between a freight forwarding company and a 3PL?

Freight forwarders manage the coordination of multiple carrier methods such as rail, ship, highway, and air from destination to destination. They negotiate freight charges and the preparation of shipping documents but never actually manage the freight itself. The freight forwarder acts as a liaison between companies and carriers. A 3PL manages the supply chain from start to finish which includes picking, packing, warehouse storage, and shipping.

When should you use 3PL?

If your ecommerce store is rapidly growing, then working with a 3PL company is a terrific way to scale your business while leveraging the expertise of a 3PL who will oversee the shipping logistics and warehousing.

How do you determine a 3PL performance?

After you choose a 3PL partner, you’ll want to measure their function by looking at their key performance indicators (KPI) such as returns due to shipping damage, shipping errors, quality of service, accuracy, timely delivery, possible bottlenecks, and the maximum efficiency achieved.

Extensiv, a Fit for All 3PL Needs

A skilled 3PL serves as an intermediary between your brand and your customers. Without doubt, the 3PL is the heart of the supply chain and integrates all logistic activities and warehousing needs. Please contact Extensiv to learn how we can truly optimize your 3PL warehouse.


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