How to Understand and Improve Your Third-Party Fulfillment Partnership

By Shipware June 6, 2020 eCommerce

Leveraging a strong ecommerce third party fulfillment (3PF) partnership for order fulfillment, inventory management, pick & pack, shipping and returns management can unlock enormous opportunities for your business and help you improve your supply chain. A capable and trusted fulfillment partner will provide the infrastructure and technology to quickly scale with your operation and help you cost-effectively capitalize on the current market opportunity. 

That begs several questions: If you do rely on a 3PF, are you sure you are getting maximum mileage out of the marriage? Are you satisfied that you’re getting the greatest value from your 3PF? Do you feel like you are achieving an effective balance between service and pricing? Do you worry about the 3PF Services Agreement protecting your best interests? Perhaps most important, can you benchmark your partner’s pricing and performance against other best-in-class providers? Read on to understand more about the importance of your 3PF partnership and how to choose a great eCommerce third party fulfillment partner.

First Off, Your eCommerce Business is Overpaying

According to Shipware’s research, 8 out of 10 merchants are overpaying for 3PF services and/or receiving subpar fulfillment service. There are multiple reasons for that: Contract pricing is inherently confusing. Getting best-in-class terms that meet your needs and objectives can be difficult or can’t be done without logistics consulting. Every provider packages their fulfillment pricing differently; some offer a bundled pricing option; others use detailed line-item pricing, where you get nickeled and dimed for every task; and many offer reduced fees for some services only to make significant margins on small parcel and LTL freight.

The 3PF contract language itself can be very complicated. Many contracts aren’t transparent and are written to protect the 3PF.  Most fail to incorporate the “service level agreements” (SLA) that benchmark the provider’s performance against Key Performance Indicators (KPI). Many contracts are written to shield providers from accountability and offer no financial relief for service failures. These tactics are designed to stack the deck in the 3PF’s favor.

How to Get the Best 3PF Pricing

Understandably, many merchants (retail and/or eCommerce) “don’t know what they don’t know” when it comes to 3PF pricing benchmarks and contract best practices. That’s where Shipware can add significant value. We have spent decades reviewing and optimizing all types of eCommerce shipping, fulfillment, and logistics contracts, starting with the parcel delivery space. We know exactly what to look for. When it comes to 3PF,  we understand best-in-class pricing, have significant benchmarking data, and know SLA best practices. We help establish reporting mechanisms so providers know what’s expected of them, and our merchant clients know the key issues to focus on. And we put enforcement teeth into the contractual language to hold providers accountable.

We level the playing field for our shipper clients by identifying more efficient ways to store and distribute goods. Since we launched in 1994, we have saved our clients, in aggregate, hundreds of millions of dollars in freight costs. To break it down, the typical Shipware assignment has resulted in per-client savings of about 20.2%, on average, over what they were paying before.

Sometimes, we will recommend a new provider. In many cases, however, our clients never switch their providers. Many are satisfied with the general direction of the relationship and don’t want to change suppliers. They just want actionable ways to save money and improve fulfillment service. Shipware gives it to them.

The 3PF relationship has never been more important than it is today. The COVID-19 pandemic has accelerated a secular shift from brick-and-mortar to e-commerce transactions that’s already been in place for years. Due to retail store closures and shelter-in-place mandates, more orders are being fulfilled through the e-commerce channel than ever before. The need to position distribution networks closer to the residential customer will profoundly change how product supply chains are structured. This puts a premium on strong 3PF relationships.

It may also be an excellent time for merchants to leverage their e-commerce volumes to strike better pricing and deal terms with their providers. Many 3PF’s have strong ties to merchants tilted towards brick-and-mortar distribution. During the pandemic, that business has virtually ground to a halt. As a result, these providers are pivoting quickly to e-commerce and could be quite willing to offer e-merchants aggressive pricing in return for increased volume.

Understanding the 3PF Market

The 3PF provider segment is very fragmented, which makes it difficult for merchants to get their arms around the best partners for their specific needs. The fulfillment universe ranges from smaller niche-type players to mid-size providers to large firms like Radial and Rakuten that have been around for decades. The one exception to the fragmentation rule applies to bigger merchants with global footprints; only a select few providers have the scale and resources to cost-effectively support multi-site global distribution strategies. For most U.S. merchants with a typical North American geographic exposure, the list of providers to choose from is quite extensive. That presents a challenge for merchants just to sort through.

Fulfillment relationships come in all shapes and sizes. Perhaps the most well-known these days is Amazon.com.’s “Fulfillment by Amazon” (FBA) program, which provides a bundled marketing, fulfillment, and delivery solution. But FBA is not for everyone. An e-commerce merchant must sell its wares on Amazon’s site, abide by Amazon’s often-demanding terms and conditions, and then have Amazon take a decent chunk of the product’s selling price as its profit.  Not to mention that Amazon stopped processing orders for many of their “non-essential” customers during the pandemic.

What to Look For in a 3PF Partner

There are five key criteria for selecting a successful 3rd party fulfillment partner:

1. People

Some 3PFs have highly trained professional teams. But many do not. That will spell the difference between a great partnership and a subpar one. In addition, the partner you choose must have support staff with the expertise to meet your specific support needs. That is important because there are many different types of fulfillment support.

2. Technology

It can make your eCommerce business run smoothly, or it can add needless friction. The ideal partner has strong tools and an expert staff capable of helping you adapt to changing technologies that can support expansion into new channels and markets.

3. Commitment to quality. 

You spend untold hours creating, marketing, and selling your products. Service failures reflect badly on your brand. It’s important that your partner has an unwavering commitment to quality and has the internal controls in place to back it up.

4. Infrastructure. 

Amazon has conditioned consumers to deliveries in two days or less. It may not be mandatory to hit a two-day delivery window. However, you still must remain market-competitive and maintain customer satisfaction. Your partner must have the fulfillment footprint that meets your needs today and is scalable for future growth.

5. Cost

It’s important to have competitive pricing from your third party fulfillment company, but fulfillment cost shouldn’t be the top consideration. Low pricing means nothing if the other qualities of order fulfillment don’t come through.

How Shipware Helps You Find the Best

Our five-step contract optimization process begins with a complimentary, no-obligation assessment of a prospective customer’s 3PF contract. That is followed by a comprehensive strategy with suggested pricing metrics. We then engage in direct negotiations with the incumbent fulfillment provider or evaluate market options via a Shipware-developed RFP. We also help our partners clearly evaluate options, perform due diligence, establish SLA’s, and negotiate pricing and contract terms.  

Peak Design: Case Study

When Peak Design, a leader in carry gear such as camera straps, travel bags and tripods, came to us, it was experiencing 55% year-on-year growth for the past three years. It operated through six global distribution centers supporting its direct-to-consumer and traditional retail business. However, Peak Design’s 3PF costs were rising, and it was grappling with inventory management, turn time, and order accuracy issues that were impacting the customer experience. Moreover, Peak Design had no SLA’s in their contract to govern the partner’s performance.

After a thorough analysis, we renegotiated the current pricing programs with the incumbent and developed contractual SLAs that could be followed and enforced. We beefed up Peak Design’s access to 3PF resources such as reporting, technology, and infrastructure. We recommended that two of the DC locations be repositioned to reduce costs and enable better service, especially in the B2B retail channel. The result: more than $300,000 in cost savings, improved workflow efficiencies, reduced order turn times, the enshrinement of robust SLA language, and a superior end-customer experience.

“We were very pleased with the end result of the negotiations. I had an opportunity to share the initiative results with the Peak Design Leadership Team and it was a smashing success,” said Mike Winchell, Finance Director at Peak Design. 

Key to Success: 3PF Performance

To say we are living through a dynamic time would be a massive understatement. eCommerce is accelerating in ways that we could have hardly imagined even a year ago. Opportunities will abound for e-merchants that can master marketing, customer experience, supply chain, and ecommerce fulfillment. Their success will depend, in large part, on the performance of their third-party fulfillment partners.

Let us help you find the best ecommerce fulfillment providers or improve your current partnership. With years of expertise consulting as a shipping and logistics company, we know how to negotiate for the best rates and service. Reach out to us today so you can get the most from your fulfillment partner.

Shipware

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