The modern warehouse offers much more than basic storage. It’s home base for sophisticated eCommerce operations, high-velocity retail distribution, vendor managed inventory, and a variety of other services. While you can build and staff your own warehouse and perform these services yourself, more and more companies see the value in handing warehousing operations off to a third-party logistics (3PL) provider.
In this article, we’ll examine all that 3PL warehousing entails, while helping you find a 3PL partner that’s right for your business.
There are three basic types of warehousing available to you.
No matter which warehousing model your company uses, the cornerstone of your warehousing and distribution operations will be the facility’s warehouse management system (WMS) – a robust software application that supports nearly every warehouse function. Common WMS capabilities include:
If you were to invest in your own WMS system, you can spend well into 6-figure territory. When you partner with a 3PL for warehousing, however, you can simply plug your systems into that provider’s WMS – while footing the bill for only the services you use. Some 3PLs do not charge customers for WMS usage and instead only bill for related services (e.g., pick and pack).
As data becomes increasingly valuable and cyber threats more prevalent, ensuring the security of your supply chain data is paramount. Data security and compliance measures, such as cybersecurity protocols and data encryption are critical considerations when choosing a 3PL partner. Ensure that your 3PL provider has robust security measures in place to protect sensitive information and is compliant with relevant data protection regulations.
Many 3PLs will be able perform both B2B and B2C/eCommerce distribution. However, efficient pick and pack warehousing for B2C fulfillment requires a very different approach to product storage, picking, packing and transportation. You’ll want to work with an experienced partner.
As stated above, your 3PL’s WMS will integrate with your chosen eCommerce platform. As orders come into the WMS, the system will share order details and item locations with associates, prepare shipping labels, and schedule shipment with the 3PL’s chosen carrier. Products can then be picked and packed, labels affixed, and final QA will be performed prior to shipping.
As with B2C distribution, orders from retailers and other B2B customers will feed into the 3PL’s WMS. The system will then create UCC-128 labels and additional labels specific to your customer. From there, the 3PL will coordinate the outbound shipment – either with its internal transportation arm or with an external provider.
As consumer behavior shifts towards omnichannel shopping, where customers expect seamless integration between online and offline experiences, 3PLs are evolving to meet these demands. Omnichannel fulfillment capabilities allow 3PLs to manage inventory and orders across multiple sales channels—be it physical stores, eCommerce platforms, or marketplaces—ensuring that customers receive their orders quickly and accurately, regardless of the purchase channel. This flexibility is crucial for businesses looking to enhance their customer experience.
In addition to storage, inventory management, order management, and distribution, the 3PL warehouse can be home to a variety of additional services known as “value-added services.” Such services can include:
Product rework. Let’s say you have an imported shipment of a product that needs to be repackaged or reconfigured (e.g., a part or instruction manual needs to be replaced with a new one). You can ship it back to its origin for these services – taking substantial hits to your wallet and product turn time in the process. Or, you can save time and money by working with a 3PL that can perform these services quickly and cost-effectively without your product ever leaving the warehouse.
Vendor-managed inventory (VMI). With the VMI model, manufacturing suppliers work with 3PLs to store goods that the manufacturer will eventually require. Once the materials are needed, the 3PL performs just in time (JIT) delivery to the manufacturer. This benefits the manufacturer, who only pays for – and takes physical ownership of – materials when they are needed. Its production space, therefore, isn’t cluttered by boxes of inventory and it doesn’t have to pay upfront for high volumes of materials that won’t be needed right away.
Cross docking. With cross docking, goods are delivered to a 3PL loading dock for temporary storage or direct transfer to another truck. The time and costs of long-term warehousing are skipped, while distribution can continue with minimal interruption.
Kitting. Typically, with a manufacturing service, kitting services involve the assembly of components into a ‘kit’ that can be delivered directly to the manufacturing line. Examples range from custom trays that contain nuts, bolts and screws to be used in production to the assembly of one part of a larger product.
Foreign trade zone (FTZ). Located in or near U.S. ports, some warehouses legally act as foreign trade zones that are under U.S. Customs and Border Protection (CBP) supervision, though considered outside of CBP territory. Merchandise may enter the U.S. via an FTZ without a formal customs entry, without payment of customs duties or excise taxes, and without a thorough examination. Duties and taxes are not paid until the product enters the U.S. marketplace for consumption.
With shared warehousing, the costs are typically very palatable as, again, you’re only paying for the space and services you use.
Ultimately, of course, warehousing costs are largely individual. Just about every 3PL will have a standard rate for the square footage you require, but square footage is only part of the story. You will need to provide your 3PL with greater detail about your products so that they can determine the services and type of space needed in order to provide you with an accurate quote.
The following are examples of storage and handling information your 3PL will need from you to determine precise costs.
Before you sign on the dotted line for warehousing and distribution services, you should make sure you clearly understand where your 3PL's responsibilities end in terms of liability – and where yours begin.
In the logistics industry, most 3PL warehousing providers are fully responsible for their buildings, equipment, and people. This is standard practice in line with guidelines set by the International Warehouse Logistics Association (IWLA). So, if a hurricane peels back part of the roof, it’s the 3PL’s responsibility to fix it and relocate products as repair occurs. The same goes for a broken forklift or an injured associate – it is the 3PL provider’s responsibility to take care of these things in order to perform services as it is contracted to do.
The 3PL provider is also responsible for rectifying any errors that it makes. Examples include:
When it comes to products, however, the 3PL is not responsible for damage due to “acts of God” (e.g., that hurricane mentioned earlier) and will typically have limited liability coverage for all other types of product damage, the exact parameters of which will be clearly defined in your contract. In most cases, the 3PL is financially liable for product damage or disrepair up to a certain (limited) amount. The bulk of the liability will be owned by the customer and its insurance coverage.
In most 3PL relationships, the 3PL customer is responsible for its own products. Yes, the customer is placing its products in the care of the 3PL provider, and the provider must do all that is reasonable to protect those products, but the products are ultimately the responsibility of their owner.
If damage occurs, the 3PL provider’s insurance will typically cover a portion of the cost (limited liability) and the customer’s insurance will cover most of the replacement cost. To have product replacement insurance apply to goods being warehoused by a 3PL, the customer simply needs to take out a rider listing the 3PL facility as a storage facility. In some cases, the 3PL may add the products to its own insurance and bill the customer accordingly.
When it comes to creating a contract with your 3PL, it is important to remember two things:
With all this warehousing knowledge now at your disposal, it’s time to find your 3PL provider. Your vetting process should start with the basics:
From there, you should look for characteristics that separate one 3PL from the rest of the pack. Two areas that should be of interest are continuous improvement and KPI management.
For most companies, it is important that their 3PL partner has a documented continuous improvement program (CIP) in place. Such a program seeks to improve operations, prevent non-conformities and ensure that errors, should they occur, are never repeated. Here are 7 questions you can ask prospective providers to see if they have such a program.
When you contract with a 3PL for warehousing and distribution, you’re entrusting key components of your supply chain to an expert that can perform these services at a high level. Key performance indicators (KPIs) are the metrics that help you to understand just how well your 3PL is performing.
Your 3PL should be have KPI measurements for its other customers and be perfectly willing to establish KPIs for your operation.
According to Armstrong and Associates, the following metrics are most commonly assessed in 3PL warehousing (the percentages in parentheses denote the common target range across the 3PL industry).
These are just the KPIs that are most common across the warehousing and logistics space. The KPIs you establish with your 3PL can and should be based on the metrics most important to your business.
Importantly, these KPIs should be established with your 3PL at the outset of the relationship. Each metric must also have a target or goal which denotes success (e.g., 99.5% on-time shipments). If/when your 3PL provider falls short of the mark with any given metric, you’ll want to have confidence in its ability to identify the root cause and to establish corrective measures to improve performance.
The past few years have highlighted the importance of supply chain resilience. Risk management strategies in 3PL warehousing have become more sophisticated, with many providers offering business continuity plans, disaster recovery options, and supply chain risk assessments. These strategies are designed to mitigate the impact of unexpected disruptions, whether they be natural disasters, geopolitical events, or pandemics. When selecting a 3PL partner, it’s important to assess their ability to maintain operations under adverse conditions.
If recruiting, hiring and retaining warehouse associates is part of your company’s core skill set, then continuing to operate your own warehouse may make sense. If, however, you find that you struggle to adequately staff your warehousing operations and that your customers’ experiences are suffering as a result, then handing your warehousing operation over to a 3PL may work to your benefit.
3PLs have resources that are solely committed to the recruitment, hiring, training and retention of employees. Additional advantages include the following:
With increasing environmental awareness, many companies are prioritizing sustainability in their supply chains. Modern 3PLs are adopting green practices to reduce their carbon footprint, such as energy-efficient lighting, solar power, and environmentally friendly packaging. Additionally, some 3PLs are implementing circular economy practices, like recycling and reusing materials, to minimize waste. When choosing a 3PL partner, it’s worth considering their commitment to sustainability and how it aligns with your company’s environmental goals.
If you’re feeling overwhelmed or would just like to have an exploratory chat with a real-life 3PL provider, there are many to choose from all across the country. Kanban Logistics is an Eastern North Carolina 3PL provider that offers warehousing and other logistics services in the mid-Atlantic. We’re always happy to talk warehousing, so feel free to contact us anytime.