Third party logistics: What is 3PL and how can it help your business?

Published Wednesday 5 November 2025

Table of contents

• What is third-party logistics (3PL)?
• Services offered by 3PL providers
• What could you outsource?
• Who can help?
• Who uses third-party logistics?
• Dropshipping
• Using the economies of scale
• The benefits of outsourcing inventory management
• The disadvantages of outsourcing inventory management
• Getting started with inventory outsourcing
• FAQs on third-party logistics

Key takeaways

• Start with a pilot program by testing 3PL services with one product line for 3-6 months to evaluate costs, delivery performance, and customer satisfaction before scaling your outsourcing strategy.

• Keep demand forecasting in-house while outsourcing warehousing, order fulfillment, shipping, and staff management, as your business knowledge provides a competitive advantage in predicting market demand.

• Leverage economies of scale by partnering with 3PL providers who can negotiate better shipping rates and warehouse costs through their collective buying power, passing savings on to your business.

• Evaluate the total cost of outsourcing against potential loss of direct control over quality, customer service, and data sharing to ensure the benefits outweigh the risks for your specific business needs.

What is third-party logistics (3PL)?

Third-party logistics (3PL) refers to outsourcing your business's logistics and supply chain management. A third-party logistics provider handles tasks such as warehousing, order fulfilment, and shipping for you. This lets you focus on other parts of your business, such as product development and sales, instead of managing the complexities of getting products to your customers.

Services offered by 3PL providers

A 3PL provider can manage several key parts of your supply chain. While services vary, most providers offer a core set of solutions to help your business run smoothly. Common services 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

What could you outsource?

You can outsource most inventory management tasks, but you should keep demand forecasting in-house as it relies on your business knowledge. Here’s what you can delegate to external providers:

Can be outsourced:

• Warehousing: Storage and rotation of stock or raw materials
• Order fulfillment: Picking, packing, and shipping products
• Distribution: Managing delivery logistics and tracking
• Staff management: Training and managing warehouse personnel

Best kept in-house:

• Demand forecasting: Predicting which products will sell based on your market knowledge

Good point-of-sale (POS) software and analysis of your accounts and receipts can help. Learn more about retail POS software and inventory management systems. Your expertise in this area helps give your business an edge.

You can outsource the other four steps. Many businesses choose to outsource some or all of these inventory management tasks.

Who can help?

Fulfillment outsourcing means hiring a company to handle storage, packaging, and shipping after you manufacture your products. This approach works particularly well for small, non-perishable items.

How fulfillment outsourcing works:

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

Key benefits:

• Eliminates warehouse costs: No need for your own storage space
• Reduces operational complexity: External specialists manage logistics
• Improves focus: Concentrate on manufacturing and business development

If you want to outsource more of your inventory management, you can do so, especially if you run a retail business.

Who uses third-party logistics?

Businesses of all sizes use 3PL services, but they are especially helpful for small and growing businesses. If you're finding it difficult to manage inventory and shipping in-house, a 3PL can provide the expertise and infrastructure you need.

Ecommerce stores, retailers, and manufacturers often turn to 3PLs when they want to scale operations, enter new markets, or simply improve efficiency without investing in their own warehouses and logistics teams.

Dropshipping

Dropshipping is when a supplier handles your entire inventory process from storage to customer delivery. You never physically handle the products you sell.

How dropshipping works:

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

Dropshipping became popular with the rise of auction sites such as eBay. Today, many market sectors use this model. Usually, the retailer receives a sales commission from the dropshipping company instead of paying for the service.

Some dropship companies customise packaging materials, adding your compliment slips and return addresses. This helps your customers feel like their purchases come directly from you.

Using the economies of scale

Outsourcing inventory management can give your business more buying power. By joining with other businesses, you can negotiate better rates and access larger warehouses.

Inventory management outsourcing companies buy or rent large warehouses and negotiate shipping discounts. Some even operate their own courier services.

By acting for many businesses, these companies gain strong buying power and can pass savings on to you, even after their fees.

Consider the pros and cons before you decide to outsource inventory management.

Benefits of outsourcing inventory management

Outsourcing inventory management offers significant cost and operational benefits:

Cost savings

• Reduced overhead: Eliminate warehouse rent, utilities, and insurance costs
• Lower staffing costs: No need for warehouse staff, equipment operators, or inventory managers
• Less capital tied up: Reduce money locked in unsold stock

Operational advantages

• Faster fulfillment: Professional logistics companies often deliver quicker than in-house operations
• Advanced technology: Access to sophisticated inventory management and integration tools
• Reduced waste: Minimize spoilage, damage, and obsolete stock

Business growth benefits

• Instant scalability: Handle increased sales without warehouse expansion
• Predictable costs: Inventory expenses scale with sales volume
• Focus on core business: Spend time on product development and marketing instead of logistics

Disadvantages of outsourcing inventory management

Consider these risks before outsourcing your inventory management:

Control and quality risks

• Loss of direct oversight: You can't immediately fix problems that occur in external warehouses
• Customer service challenges: Delays or errors reflect on your brand, not the logistics provider
• Quality control: Less direct supervision of packaging and shipping standards

Business and competitive risks

• Data sharing: Logistics partners access your sales data and customer information
• Margin pressure: Suppliers may favour retailers offering higher commissions (especially in dropshipping)
• Dependency: Heavy reliance on external partners for core business operations

Financial considerations

• Service costs: Outsourcing fees must be less than your internal operational savings
• Contract terms: Long-term commitments may limit flexibility as your business evolves

Getting started with inventory outsourcing

Start with a pilot program to test inventory outsourcing:

Phase 1: Test with one product line

• Choose a single product: Select your most predictable or highest-volume item
• Find integrated partners: Select providers that connect with your accounting software
• Set clear metrics: Track costs, delivery times, and customer satisfaction

Phase 2: Evaluate results after 3-6 months

• Cost analysis: Compare total outsourcing costs against previous internal expenses
• Performance review: Assess delivery speed, accuracy, and customer feedback
• Integration success: Ensure smooth data flow between systems and your accounts

Phase 3: Scale or adjust based on data

Use accounting software like Xero to track financial performance and make informed decisions about expanding your outsourcing strategy. The clearer your financial picture, the better you can evaluate whether outsourcing delivers the cost savings and operational benefits your business needs.

Start a free Xero trial to get better visibility into your inventory costs and outsourcing return on investment.

FAQs on third-party logistics

Here are answers to common questions about third-party logistics.

What is meant by third-party logistics?

Third-party logistics (3PL) means hiring an external company to manage elements of your distribution, warehousing, and fulfilment services. Instead of handling these tasks yourself, you outsource them to a specialised provider.

What is an example of 3PL?

An example of 3PL is an ecommerce business hiring a company to store its products, pack orders as they come in through its website, and ship them directly to customers. The business owner never has to handle the physical inventory.

What are the three types of 3PL?

While there are many ways to categorise 3PLs, they are often grouped by their level of integration. Common types include standard 3PL providers who offer basic logistics like warehousing and shipping, service developers who add IT and tracking services, and customer adapters who take over and manage a company's entire logistics function.

How much does third-party logistics cost?

The cost of 3PL services varies widely based on your needs. Pricing is typically based on the services you use, such as the amount of warehouse space required, the number of orders fulfilled, and shipping fees. It's best to get quotes from a few providers to understand the potential costs for your business.

How do I know if my business needs 3PL?

Consider a 3PL if you're spending too much time on packing and shipping, running out of storage space, or want to expand your sales reach without a large upfront investment. If logistics are holding back your growth, it might be time to explore outsourcing.