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To 3PL or Not To 3PL?

Is your company ready to use a third party logistics provider (3PL)? A third party logistics provider is a warehousing and customer fulfilment operation owned and operated by a third party, i.e, not your company. Mega-companies like Amazon typically don't use 3PLs, since they have the scale to own their own warehouses. And micro-companies that keep their inventory in their garages don't use 3PLs, since the costs of using 3PLs outweigh the benefits.

So, if you're somewhere between Amazon and a mom-and-pop, how do you know if you should use a third party logistics provider or not?

Let's look at this from two perspectives. The first, from the perspective of the company that owns and manages it's own warehousing operation. And second, from the perspective of the company that owns and manages its own inventory from its garage.

The first is relatively easy to quantify. If you've got full-time inventory and warehousing personnel. And if you pay rent and insurance on a warehouse - well then, you can do some basic math. Send an RFP to at least three 3PLs to see what they would charge you for exactly what you currently do with your own team. There's no precise answer to this question, but my experience tells me that if you're managing more than 50 SKUs and transacting more than 20 customer orders per day, you're a candidate for using a 3PL.

The second perspective - the mom-and-pop managing inventory and servicing its customers from their garage should use the same rule of thumb.

If you can control your inventory with a scratch pad and if the person packing out your orders is the same person who answers your phones, manages your website and places orders with suppliers - you're probably not at the scale where a 3PL makes sense.

3PLs cost money. And optimizing cash flow is part of a supply chain pro's job. Along with comparing your current spend with what a 3PL would cost you, you'll also need to consider the value-add that 3PL's can also bring. Many 3PL's do quality inspections and assembly/kitting. All of them provide inventory control and inventory management. You'll have to figure out how good you are at that without the help of a 3PL - and if it's worth the money to have a 3PL manage it for you.

In supply chain - as in life - there are no easy answers. But using the 50 SKUs and 20 customer orders per day rule of thumb can start you on your way to understanding… To 3PL or Not To 3PL.

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