How to Become a 3PL Company

A Comprehensive Step-by-Step Guide

The new face of shopping

eCommerce, particularly during and after the Covid pandemic, has completely changed the face of trading, with already more than a third of the world’s population shopping online across international borders, and the total global online spend is expected to exceed the breathtaking $7 trillion (£ 5.6 trillion) mark in 2025.

Consequently, driven by advancements in technology; international internet penetration; altered shopping trends; and modified customer expectations and behaviour; fulfilment centres were compelled to make significant structural changes and pivot from their traditional B2B (business to business) system to DTC (direct to customer) and B2C (business to customer) systems. Manual processes have mostly been automated and are increasingly managed by specialists using advanced WMS (warehouse management system) and SCM (supply chain management) software.

This completely transformed merchandising and order fulfilment and to meet the demands of international trade, businesses are increasingly outsourcing logistics functions to specialist third-party logistics providers (3PL).

This trend has created exciting new business opportunities for marketers looking to harness the power of e-commerce but has also conceived previously unknown challenges.

In this article, we will help you understand these challenges and opportunities if you want to start a 3PL business, grow your existing business, or become more competitive.

Principal Logistics Technologies provides sophisticated and user-friendly supply chain and 3PL solutions that deliver and exceed customer expectations. Our cutting-edge Warehouse Management Software (WMS) and Supply Chain Management Software solutions are designed to propel 3PL service providers to the top of their potential.

Contact us to find out more.

How to take advantage of a new 3PL business opportunity

Understand the 3PL business model

Before embarking on a new venture as a 3PL provider, it is necessary to understand and appreciate the logistics landscape and where a 3PL business fits into the supply- and value chain.

3PL companies are neither buyers, nor sellers, and usually don’t own transportation assets. Instead, they are facilitators who partner with service providers along the entire supply chain to efficiently coordinate and manage some, or all, aspects of logistics operations and order fulfilment by 1PL and 2PL providers.

A 3PL business model encompasses outsourced third party logistics company third-party logistics services to companies or industries, including access to advanced software and technology; up-to-the-minute data; brokering procurement, logistics services, and customs compliance; accurate inventory management; efficient warehousing and distribution; precise order fulfilment; cost-effective packing, shipping, and deliveries; real-time order tracking; and effective customer communication.

3PL services are aimed at improving efficiency, reducing delivery times, saving costs, and allowing the customer to grow their company by focusing on their core competencies, rather than logistics.

What are the main 3PL segments?

Many 3PLs offer omnichannel fulfilment solutions and services for eCommerce and brick-and-mortar businesses selling products online.

Broadly speaking, the 3PL industry can be divided into three segments. 3PL providers typically provide some, or all, of the services in these segments.

Transportation-based 3PLs

These 3PL providers specialise in moving goods between warehouse locations and delivering orders to the end customer.

This segment could be further divided into:

Dedicated contract carriage suppliers

These  3PLs provide dedicated contract shipping services and deliveries.

Transportation management logistics

These 3PLs provide non-asset-based transportation management services, broker and coordinate cost-effective shipping and delivery services, documentation, and compliance, internationally, domestically, or both.

Freight forwarders

These 3PLs act as agents to source and appoint one or more shipping carriers to transport goods from one point along the supply chain to another.

Warehouse-based 3PLs

These 3PL providers obtain or receive inventory from suppliers or manufacturers and store it on behalf of the eCommerce, wholesale, or retail business. Value-added services will include warehouse and distribution centre management and process-, fulfil-, ship, and deliver orders.

Financial and information-based 3PLs

These 3PL providers specialise in cutting-edge software and technology, freight payment, and data-driven inventory management.

What services do 3PLs provide?

Specialist third-party logistics providers (3PL) offer a variety of warehousing, supply chain, and shipping services, predominantly to eCommerce and “traditional” businesses that sell products online. These services include:

Warehousing

This includes receiving, storing, securing, protecting, storing inventory sorting, picking, and tracking inventory in a storage facility before it is sold or distributed.

Warehouse management encompasses all the processes of managing and controlling the day-to-day operations of a warehouse, including warehouse layout, shelving and storage space, inventory management, order fulfilment and fulfilment, and supply chain management or coordination.

Distribution

This involves moving goods efficiently and smoothly from receiving and storing inventory to the point of sale, including transportation, packaging, inventory control, site and area management, and handling data.

Shipping and delivery

These are the processes of physically transporting goods such as raw materials, components, and final products along the chain of supply.

This includes air, rail, sea, and road transport, selecting the best mode of transport and delivery routes, and taking responsibility for customs, duties, and taxes. It also includes freight management, sorting, handling, packaging, and delivery.

Order fulfilment

All the supply chain and management processes involved in receiving, processing, and delivering an order are included in order fulfilment. This and fulfilment services will include inventory management, picking, packing, shipping, delivery, customer support, returns, replacement, refunds, repair management, and final disposal.

Order Inventory management

Order inventory management is a crucial part of the supply chain, ensuring at all times that the company has the right amount of products in the right place at the right time, to meet customer demands and successfully fulfil orders.

This includes maintaining accurate real-time data to forecast market trends; knowing how much and when to order; tracking and managing inventory along the entire supply chain; optimising storage; accurately picking, packing, and shipping; and automatically updating stock levels.

Customs Brokerage

Customs brokers are experts in trade, customs, compliance, and tax regulations for regulated industries and international and cross-border shipping and help importers and exporters navigate the maze of legal requirements.

They complete and submit all the paperwork to the relevant authorities, calculate and pay all fees, and manage the customs clearance processes to avoid delays, fines, or having goods seized.

Payment services

Payment of invoices, transferring funds to various supply chain partners, managing risks, complying with all regulations, and making payments in multiple currencies and different countries, can be complex and if not handled correctly, could become very expensive.

Using modern technology, 3PLs create streamlined and automated digital payment solutions that reduce potential conflict and enable companies to introduce flexible and cost-effective payment options, including payment on order, cash on delivery, banking letters of credit, and paying only for those scalable services used.

Order tracking

3PLs use sophisticated software and technology to monitor the movement of inventory throughout the supply chain, helping to ensure swift and efficient delivery of customer orders.

Tracking inventory while in a warehouse, facilitates quick order fulfilment, reduces losses, and optimises storage space.

What are the benefits of becoming a 3PL provider?

The value and opportunities of starting a 3PL business are immense, with worldwide opportunities. The exponential growth of global eCommerce and escalating practice of e-commerce businesses outsourcing logistics are constantly enlarging the field for new players.

How big is the 3PL industry? Is there room for another one?

Given the magnitude and rapid growth of international eCommerce, the market size of the 3PL industry is anticipated to grow constantly, with an estimated $1.3 trillion by next year.

It is worth noting though, that the logistics industry is becoming more and more competitive and expectations are constantly rising too. This translates to the proverbial “survival of the fittest.” In starting a new 3PL, you will have to be innovative, provide the highest levels of service and efficiency, and implement ground-breaking business improvements that add value and save costs.

You will do well to find a niche market where you can offer unique expertise or services that cannot be equalled or surpassed by competitors.

Is 3PL profitable?

3PLs base their fee on the type of service, rental space, and the volume of goods being picked, packed and shipped. Greater productivity, efficiency, momentum of fulfilment and delivery, turnover, and sustainable volumes, will increase profitability.

Based on volumes, industry trends and demands, operational efficiency, and specific business models, 3PL providers have traditionally operated within a net profit range of between 5% and 10%.

3PL will require a minimum number of orders handled on behalf of one or more clients. As a rule of thumb, it is estimated that a 3PL will need to fulfil at least 1000 orders per month to be viable.

3PLs can become profitable by aggregating and shipping orders for different clients, creating a sustainable income for themselves and helping the client save on shipping costs.

What makes a 3PL successful?

A 3PL needs to understand the client’s needs and goals, and offer unique skills, value propositions, technology, and logistics solutions that enhance the client’s business. Although the 3PL does not own any of the client’s assets, they should build a solid relationship and become a business partner that takes co-responsibility for the client’s success.

Efficient service and collaborative problem-solving will be of mutual benefit. Both parties should clearly understand what is expected, exactly how much the service will cost with no surprises and hidden costs, and how they will work together. Their software and technology solutions should integrate easily and seamlessly.

Which types of businesses will benefit from 3PL services? (Who are your potential clients?)

3PL services can potentially benefit all types of businesses and industries, with emphasis on the following:

•   eCommerce and online sales by traditional retailers.
•   Manufacturers and fabricators.
•   Importers and exporters.
•   International and cross-border retailers and wholesalers.
•   Small businesses that cannot afford their own logistics infrastructure.
•   Companies that are rapidly expanding their trade volumes or product lines.
•   Complex or highly regulated industries and businesses.
•   Warehouses, fulfilment centres, and distribution centres.
•   Seasonal or cyclical businesses.
•   Subscription services.

Steps in setting up your 3PL business

Market analysis and identifying a niche market segment

•   As in any new business venture, careful planning, understanding and evaluating the market trends and business opportunities, are crucial in starting and building a 3PL with its unique challenges.
•   Thorough market research and analysis will help you identify which specific skills, expertise, value proposition, and operational capacity are required to give you a competitive edge in the 3PL segment you wish to serve.
•   If you have exceptional or uncommon expertise, identify a niche market where you will have an advantage over competitors.
•   Research and evaluate companies and industries where your expertise can add value, allowing them to focus on their core competencies.
•   Seek 1PL and 2PL service providers, such as warehouses or transport companies, with whom you can partner to add value to your clients.
•   Assess the local and global demand for your 3PL services and research your competitors.
•   Thoroughly research software and technology solutions in which to invest.
•   Identify resources and organisations that can support your goals, such as experts in the field, industry interest groups and regulators, suppliers, international organisations, and development partners.

Business plan

Develop a comprehensive business plan that will clarify your goals and opportunities and possibly help obtain financing. Your detailed business plan should include:

•   Decide on the type of 3PL specialisation; business entity, legal structure, compliance and registration requirements; and business model.
•   Clearly outline your mission, business goals and objectives, target market, and service offerings.
•   Clarify your specific expertise and unique value proposition.
•   Identify your challenges, strengths, and weaknesses and compare them to those of competitors and market demands.
•   Determine which resources are required, the cost of infrastructure and equipment, overhead expenses, pricing structures, breakeven figures and financial projections for best and worst-case scenarios.
•   Determine sources of startup funding and contingency funds.
•   Develop a marketing strategy, including the target market, the central message of the marketing plan, marketing channels and media, specific marketing actions, time scales, and marketing budget.

Operational setup

Setting up a 3PL requires significant capital investment for the various functions you aim to provide. This will include all, or some, of the following either on lease or direct purchase:

•   Secure suitable warehouse space or business facilities, considering size; security, strategic location; accessibility; transportation hubs, road, rail, air, and sea freight networks; and room for expansion.
•   Obtain the appropriate infrastructure, equipment, and vehicles.
•   Partner with 1PL, 2PL, other transportation services providers, and possibly other 3PL logistics companies to enhance your capacity.

Technological advantage

•   Research, select, and implement the best warehouse management systems (WMS) and transportation management systems (TMS) for inventory tracking, order fulfilment, and route optimisation. 

• Invest in modern warehouse management software to efficiently manage 3PL eCommerce fulfilment operations and enhance customer experience.
• Ensure your technology seamlessly integrates with the sales channels such as e-commerce platforms and marketplaces.
• The best software solutions will provide extensive data analytics to boost effective decision-making, enhance operational efficiency, control inventory levels, avoid inefficiencies, and curtail shipping and operating costs.

Build a solid team

•   Select talented partners and recruit capable staff that will work together as a team to achieve your organisational goals and ensure they are trained and their skills continuously developed.
•   Develop solid relationships with other supply chain partners.
•   Engage with skilful logistics and software professionals to advise and guide you in achieving the highest levels of success and getting it right the first time.

Develop your services

•   Carefully identify your core services and focus on those. A broad menu of services might sound alluring but can easily detract from the essential elements of your business. Value-added services must be carefully weighed to distinguish your service offering from competitors.  
•   Core services include accurate inventory management, optimised warehouse space, efficient and error-free order fulfilment, timely and cost-effective delivery, and competently managing shipping operations.

• Beneficial value-added services include reverse logistics, kitting, packaging, personalised shipping labels, and customised fulfilment services for high-value clients.

Innovative marketing and client acquisition

•   Understand your customers’ needs and aspirations. An effective marketing message tells clients what they need to hear, not what you want to tell them.
•   Create a strong brand identity, highlighting your unique value proposition and building trust and loyalty.
•   Identify prospects and create a comprehensive register of their needs and requirements. Reach out to those potential clients with a personalised approach. Filter out bad leads and spend time and resources to attract your ideal clients.
•   Leverage industry resources by subscribing to online publications, journals, and newsletters.
•   Enhance your brand and optimise a user-friendly website with useful information and SEO articles. Use AI to automate worthwhile responses to any visitors to your site.
•   Adopt a targeted and personalised marketing approach within your niche and present customised logistics solutions.
•   Optimise social media to create awareness of your business, interact with your target audience, and create “ambassadors” for your business.
•   Targeted advertising helps you stand out from competitors and increases awareness of your brand and services. Monitoring and analysing competitor advertising can help eliminate misleading advertising and stimulate creative marketing ideas. Effective advertising also helps build the morale and loyalty of your employees and customers.
•   Networking can introduce you to potential clients, partners, and investors and build rapport.  Attend industry events, participate in online forums, and get involved in community and social activities. 
•   Continuously evaluate and improve operational efficiency and effectiveness.

Important considerations that will set you apart from competitors

•   Focus on your unique value proposition, whether specialised industry skills and knowledge, technology expertise, local contacts and network, cost-savings, or other differentiating qualities.
•   Expertise in compliance, regulations, customs and duties, environmental standards, and safety procedures in transporting specialised goods, will help you fulfil a distinctive service package. Study all relevant legislation, regulations, and procedures and become an expert if you do not already have those skills.
•   Design your business model to be scalable to accommodate various client affiliations, and accommodate future growth and expansion for your clients and own business.
•   Competitive pricing, tiered, and flexible pricing models that meet specific needs and reward clients for volume and loyalty.
•   Constructive customer support and management services to help grow their businesses.

What is an acceptable margin of error in 3PL service delivery?

Errors cost money and lead to loss of credibility, business and clients. In an ideal world, a 3PL will not make any errors but in the real world, they will happen and the more complex the order, the greater the chances of an error slipping in. The question is, what is an acceptable error rate and how should errors be handled?

A formally accepted margin of error does not exist but it seems most people agree that less than 1% would be satisfactory, rising to 3% with very complex orders.

To better understand this, we need to understand the nature of errors that occur most, which will include inventory and fulfilment inaccuracies, delays in processing and delivering orders, failed or wrong deliveries, lost or misplaced inventory, inaccurate product descriptions, and unnecessary costs.

This begs the question: who should pay for the errors? As an example, if an order of £ 100 costs £ 10 to deliver and the order fulfilment process costs £ 2, totalling £ 112, is lost, rejected, or returned, to whom is the loss ascribed? The answer is not simple because administration costs and damage to the vendor’s credibility often outweigh the loss.

A better question is probably, how can errors be minimised and how should they be handled to limit loss of clients and sales? Again, there is no simple answer but the following factors will mitigate long-term damage:

•   Reliable software solutions and automation will minimise errors and maximise efficiency.
•   A clear understanding between the supply chain partners of expectations and the accountability of each will go a long way towards budgeting for financial losses.
•   Effective and empathetic communication with clients to retain their trust. Some 3PL providers have a default policy to compensate the client employing some form of reward.

How does 3PL differ from a 4PL business model?

In simple terms, fourth-party logistics (4PL)are the lead third-party logistics companies and providers that coordinate the activities of all supply chain partners (1 PL, 2PL, and 3PL) to ensure the right product is delivered at the right time to the right client, within the budget.

Some providers, such as Amazon, act as 3PL and 4PL by owning and managing the entire supply chain, including warehousing, inventory management, a fulfilment centre, shipping, and delivery.

For expert advice, contact Principal Logistics Technologies online, at +44 (0)161 888 2580 in Manchester,  +44 (0)121 368 0057 in Birmingham, or +353 (0)1 683 3333 in Dublin. 

You can also send us an email to info@principalsystems.com