Shoppers in 2023 demand quality, speed, and convenience — but keeping up with all three as sales grow is a challenge for any small business.
Many companies have limited space, budget, and personnel, while shifting consumer demand means businesses have to frequently update their product lines.
To focus more on marketing, product development, and customer service, some entrepreneurs are outsourcing their logistics to simplify their operations.
What is logistics outsourcing?
Logistics outsourcing is when a business hires a third-party logistics (3PL) provider to manage and coordinate the transportation, storage, and distribution of goods on its behalf. It’s a great way for small businesses to manage fast growth, without additional employees or warehouses.
For example, a small business that sells products online may outsource its order fulfillment process to a logistics company. The ecommerce company receives orders from customers and passes the details to the best 3PL fulfillment company for order preparation and shipment.
The 3PL then picks the item from its warehouse, packages it for shipping, and ships it to customers via a provider like UPS or FedEx. This allows the business to focus on other aspects of its operations while still ensuring orders are fulfilled quickly and efficiently.
Different types of 3PL services
3PL providers offer varying levels of services — from comprehensive logistics solutions to specialized one-off services. Here are some of the common logistics services you can outsource to:
- Freight forwarding: Coordinates the transportation of goods from one location to another. This includes arranging delivery, bargaining shipping costs, and managing paperwork related to customs clearance.
- Warehousing: Stores and manages inventory for a business. This can be beneficial for small businesses that don’t have the space or resources to manage their own warehouses.
- Last-mile delivery: Delivers goods from a distribution center, supermarket, or warehouse to customers’ doorsteps. UPS, FedEx, and Instacart are examples of last-mile delivery companies.
- Supply chain management: Manages the flow of goods and services from suppliers to customers. It involves coordinating activities such as procurement, production, inventory management, transportation, warehousing, and customer service.
- Inventory management: Tracks and manages inventory levels to maximize efficiency and profitability. It involves maintaining stock levels, ordering new inventory when needed, and ensuring goods are available when ordered.
- Value-add services: May include product customization, packaging and labeling, kitting and assembly, returns processing, and other value-added activities.
For example, an ecommerce business may outsource customizing products (e.g., monogramming), packaging them in attractive boxes or bags, or handling returns and exchanges.
How much does logistics outsourcing cost?
The cost for outsourcing logistics depends on how much you ship and which services you need. For instance, the more products you ship, the more you’ll pay.
If you’re using 3PL for other solutions, such as inventory management and value-add services, it will be a part of your monthly bill. Third-party logistics companies have several models they use: variable pricing, fixed monthly fees, and per project (e.g., adding special packaging for the holidays).
Here’s an overview of the fees you’ll pay for outsourcing logistics services:
- Warehouse and storage fees (charged per bin, pallet, or shelf)
- Pick and packing fees
- Shipping fees based on size, weight, and quantity
- Setup and account management fees
- Kitting fees (charged per kit)
Advantages of outsourcing logistics
Dealing with upticks in customer demand doesn’t have to be on the shoulders of small-business owners. By outsourcing logistics, you can reduce some of the burden.
Cost savings
Paying for 3PL services can save you money. You forgo hiring an in-house fulfillment team and purchasing software and systems, expensive warehouse space, or a fleet of delivery vehicles.
A 2021 State of Logistics Outsourcing Report shows 68% of 3PL users agree it decreases overall logistics costs.
3PLs can also reduce freight costs by up to 25%, according to the above report. The savings come from consolidating your shipments with other companies to make it a truckload size, as shippers charge higher when you have smaller shipments. You’re also splitting the freight cost with other companies.
Additionally, logistics service providers can often negotiate better deals from carriers and other suppliers on your behalf.
Improved customer service
Customers desire a fast and convenient buying experience. Outsourcing logistics to a 3PL means you get access to a large network of carriers and delivery options.
In the 2021 State of Logistics Outsourcing Report, 71% of 3PL users said it helped to improve customer service.
One way it does this is via advanced tracking technologies. Your 3PL can provide you with a real-time tracking number so you can track your orders and provide your customers with updates.
Increased efficiency
Outsourcing logistics allows you to offload the day-to-day tasks associated with shipping, such as finding carriers and negotiating shipping rates.
You can then use that time to focus on other areas, such as hiring, finding investors, researching new products, or expanding to other regions.
Scalability
With the assistance of a 3PL, small businesses can scale their operations without worrying about infrastructure costs and labor.
There’s also less risk on your part, since you don’t have to invest capital or take out large business loans to ramp up your operations with bigger teams and warehouses.
Plus, it allows small businesses to ship goods to customers wherever they are in the world. Going global is faster, cheaper, and easier when you work with a 3PL.
Access to expertise
Experienced 3PL services can provide you with insights into supply chain processes, helping you make better decisions about inventory levels and transportation routes. Kevin Wang of LED mirror manufacturer Inyouth says that 3PLs help them stay on top of rapidly changing market trends and technologies needed to stay competitive.
3PLs live and breathe logistics — so you can benefit from their expertise without building a team yourself.
Risks of outsourcing logistics
Do the risks of working with a 3PL outweigh the advantages? Here’s a look at some of the cons:
- Tarnished reputation: Choosing the wrong 3PL provider can place your business in the line of fire when things go wrong with customers. So make sure to research the company’s history and satisfaction rate to reduce the risk.
- Software incompatibility issues: Your software must talk to the 3PL’s systems to streamline the sending and receiving of customer orders and data. If it doesn’t, you’ll need to update your software or find another 3PL that’s compatible.
- Data security: You’re entrusting sensitive customer data to a third-party provider. If the 3PL doesn’t have adequate security measures (e.g., high-grade encryption) in place, it could lead to a data breach that exposes customer information.
Reasons to outsource logistics
As a small-business owner, you can outsource your logistics services to reduce costs, improve customer service, and increase efficiency. It can also offer the flexibility to scale operations as needed.
But is it right for your small business?
Here are some situations when it may make sense to outsource your logistics:
- Expanding too fast: You run an ecommerce company out of a small rental storage unit. But now you’re seeing steadily increasing orders each month, and it’s too much to handle. So you search for 3PL services to manage warehousing and shipping to focus on growth.
- Need specialized services: You have a product that requires special care to put together. But now that you’re expanding, you can’t afford to hire a team. So instead, you look for a 3PL that offers assembly services.
- Need last-mile delivery: You want to stand out in your city by providing an expedited same-day delivery option to locals. But you don’t have the vehicles or people to pull this off, so you hire a 3PL provider.
- Inventory management: You want to focus less on counting product levels and more on growing your business. So use a 3PL to manage your inventory and prevent items from going out of stock.
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