Third party logistics (3PL): how it helps your business

Published Tuesday 12 May 2026

Table of contents

• What is third-party logistics (3PL)?
• How does 3PL work?
• Services offered by 3PL providers
• Who uses third-party logistics?
• Types of 3PL providers
• Benefits of outsourcing inventory management
• FAQs on third-party logistics

Key takeaways

• Run a pilot program with one product line for three to six months before fully committing to a 3PL provider, so you can evaluate costs, delivery performance, and customer satisfaction with minimal risk.
• Outsource warehousing, order fulfilment, shipping, and staff management to a 3PL provider, but keep demand forecasting in-house where your market knowledge gives you a real advantage.
• Partner with a 3PL provider to benefit from their bulk buying power, as they negotiate better shipping rates and warehouse costs across all their clients and can pass those savings on to you.
• Weigh the total cost of outsourcing against the potential loss of direct control over quality, customer service, and data sharing before choosing a 3PL provider.

What is third-party logistics (3PL)?

Third-party logistics (3PL) is when you outsource warehousing, order fulfilment, and shipping to an external provider. Instead of managing these tasks yourself, a 3PL company handles storage, packing, and delivery on your behalf.

This frees you to focus on product development, sales, and growing your business rather than the complexities of getting products to customers.

How does 3PL work?

The 3PL process connects your sales channels to customer delivery through a streamlined workflow managed by your provider.

Here's how it typically works:

1. You send inventory: ship your products to the 3PL provider's warehouse
2. They store and manage stock: the provider tracks inventory levels and alerts you when restocking is needed
3. Orders flow automatically: when customers buy from your website or marketplace, orders sync to the 3PL system
4. They pick, pack, and ship: warehouse staff fulfil orders and hand them to carriers
5. Customers receive delivery: tracking information updates automatically so you and your customers can monitor progress

The entire process runs without you handling physical products. Your role shifts to managing the relationship, monitoring performance, and focusing on sales.

Services offered by 3PL providers

3PL providers typically handle five core services that cover the full order-to-delivery process. The specific offerings vary by provider, but most include:

• Warehousing: Storing your inventory in a secure facility
• Inventory management: Tracking stock levels to prevent overstocking or stockouts
• Order fulfilment: Picking and packing products as orders come in
• Shipping and distribution: Coordinating with carriers to deliver orders to customers
• Returns management: Handling customer returns and processing refunds or exchanges

Most logistics tasks can be outsourced, though some work better when kept in-house.

Here are the tasks that work well when outsourced to a 3PL provider:

• Warehousing: Storing and rotating stock or raw materials
• Order fulfilment: Picking, packing, and shipping products
• Distribution: Managing delivery logistics and tracking
• Staff management: Training and supervising warehouse personnel

Some tasks are better managed internally:

• Demand forecasting: Predicting sales based on your market knowledge gives you a competitive edge

Who uses third-party logistics?

Businesses of all sizes use 3PL services, but they're especially valuable for small and growing companies that lack in-house logistics capacity.

Many different types of businesses benefit from 3PL services. Common users include:

• Ecommerce stores: Scaling order volume without building warehouse infrastructure
• Retailers: Expanding into new markets without local distribution centres
• Manufacturers: Focusing on production while outsourcing delivery logistics

If managing inventory and shipping in-house is slowing your growth, a 3PL can provide the expertise and infrastructure you need.

Types of 3PL providers

3PL providers range from basic warehouse services to fully integrated logistics partners. Understanding the different types helps you choose the right fit for your business stage and needs.

Each type of provider offers different levels of service and integration. Choose based on your current logistics requirements and future growth plans.

Standard 3PL providers

Standard providers handle core logistics tasks like warehousing and transportation. They're a good starting point for businesses new to outsourcing.

Standard providers typically offer the following services:

• Basic storage and inventory management
• Picking, packing, and shipping
• Standard carrier relationships

Best for: Businesses with straightforward logistics needs and predictable order volumes.

Service developers

Service developers add technology and value-added services on top of basic logistics. They provide more visibility and control over your supply chain.

Service developers typically offer the following:

• Inventory tracking systems and real-time reporting
• Integration with ecommerce platforms and accounting software
• Cross-docking and kitting services

Best for: Growing businesses that need better data and system connections.

Customer adapters

Customer adapters take over your entire logistics function. They become an extension of your business and manage operations end-to-end.

Customer adapters typically offer the following:

• Complete supply chain management
• Dedicated account teams and custom solutions
• Strategic logistics planning

Best for: Established businesses ready to fully outsource logistics operations.

Dropshipping

Dropshipping is a 3PL model where the supplier handles your entire inventory process. You never physically touch the products you sell.

Here's how the dropshipping model works:

• You handle: Marketing, sales, and customer service
• Supplier handles: Inventory storage, order fulfilment, packaging, and shipping
• Customer receives: Products directly from the supplier, often with your branding

Many dropship providers customise packaging with your compliment slips and return addresses, so customers feel like purchases come directly from you. Instead of paying service fees, retailers typically receive a sales commission from the dropshipping company.

Fulfilment outsourcing

Fulfilment outsourcing is when you hire a company to store, pack, and ship products after you manufacture them. This model suits small, non-perishable items particularly well.

Here's how fulfilment outsourcing typically works:

• You handle: Product creation and production decisions
• They handle: Storage, order processing, packaging, shipping, and tracking

Businesses choose fulfilment outsourcing for several reasons:

• Lower overhead: No need to rent or maintain your own warehouse
• Simpler operations: External specialists manage day-to-day logistics
• Better focus: More time for manufacturing and business development

Benefits of outsourcing inventory management

Outsourcing inventory management delivers measurable cost and operational benefits for growing businesses.

Different benefits matter depending on your business size and growth stage. The following sections outline the key advantages.

Cost savings

3PL partnerships reduce fixed costs and free up working capital. Here are the key cost benefits:

• Eliminate overhead: Remove warehouse rent, utilities, and insurance expenses
• Cut staffing costs: Avoid hiring warehouse staff, equipment operators, and inventory managers
• Free up capital: Reduce money locked in unsold stock

Economies of scale work in your favour when you outsource. 3PL providers buy or rent large warehouses and negotiate bulk shipping discounts across all their clients. Some operate their own courier services. Because they act for many businesses, they gain strong buying power and can pass savings on to you, even after their fees.

Operational advantages

3PL providers bring expertise and systems that improve day-to-day performance. Key operational advantages include:

• Faster delivery times: Professional fulfilment centres process orders quickly and ship from locations closer to your customers
• Better inventory accuracy: Real-time tracking systems reduce errors and prevent stockouts
• Scalability: Easily handle peak seasons and sales growth without hiring temporary staff or expanding warehouse space
• Technology integration: Connect your sales channels, accounting software, and shipping systems through provider platforms

Take control of your business growth

By ousourcing inventory, you'll be able to use the time saved to pursue new opportunities. Scale your business with confidence with clear financial insights.

With Xero, you get real-time data to track outsourcing costs, monitor cash flow, and make smart decisions about your inventory. Get one month free.

FAQs on third-party logistics

Here are answers to common questions about outsourcing logistics to 3PL providers.

How much does 3PL cost?

3PL pricing varies based on storage volume, order frequency, and service level. Most providers charge for receiving inventory, monthly storage (per pallet or cubic metre), pick and pack per order, and shipping. Expect to pay setup fees initially, then ongoing costs that scale with your sales volume.

How do I choose the right 3PL provider?

Start by assessing your specific needs: order volume, product types, delivery speed requirements, and integration with your existing systems. Request quotes from three to five providers, ask for client references, and run a pilot program with a limited product range before committing fully.

Can I use multiple 3PL providers?

Yes, many businesses split inventory across multiple providers to serve different geographic regions or product categories. This approach reduces shipping distances and costs but increases management complexity. Ensure your systems can handle multiple provider integrations.

What happens if my 3PL provider makes a mistake?

Most 3PL contracts specify service level agreements (SLAs) that outline error rates and remedies. Common issues include incorrect shipments, damaged goods, or delays. Review contracts carefully to understand liability limits, insurance coverage, and how mistakes are resolved or compensated.

How long does it take to switch to a 3PL provider?

Implementation typically takes four to eight weeks. This includes selecting a provider, setting up systems integration, transferring inventory, testing order flows, and training your team. Plan the transition during a slower sales period to minimise disruption.