Freight forwarders vs third-party logistics: What's best for your eCommerce business?
You’ve built your business, and you’re ready to start getting products to customers. Now you must ask yourself a question. How do I get those products from providers into the hands of an end customer?
For new businesses, particularly eCommerce businesses, this is a trickier question than it first seems. Cost-effective, efficient transportation of goods is key to your business’s bottom line.
To determine what’s best for your business, we’ll walk you through three primary options for service providers: freight forwarders, third-party logistics (3PL) and a hybrid model.
Each option provides logistics services, but they also play distinct roles in order fulfilment. The logistics industry has many twists and turns, so you should consider your pricing, market and supply chain needs.
What are freight forwarders?
Freight forwarding companies, aka freight forwarders, are a full-service route for getting products to customers. They’re primarily involved in the transportation of goods. They don’t move goods themselves, but they arrange international logistics needs.
Freight forwarding companies make sure your goods get from point A to point B — that is, to an end customer. They work between your business and a shipping company.
They often use several modes of transportation to do so and offer short-term warehousing along the way. Additionally, they may provide other full-service options (e.g. completing paperwork, partnering with shippers) to expedite transportation services.
In short, they’re a middleman among points in the supply chain. Your business pays expert freight forwarders to handle logistics management so that you can focus on your operations.
The largest freight forwarders are Kuehne + Nagel and DHL Supply Chain & Global Forwarding. If you run an eCommerce business, you may have spotted these freight forwarding companies while planning your order management process.
Pros and benefits
Freight forwarders handle practically the entire shipping process for you, such as outsourcing labour, arranging warehousing and completing other logistics services. They also have the know-how to connect global transportation services via land, air and water. Plus, they’re specialists at navigating international shipping regulations and finding the best pricing for providers and shippers.
If your business processes global orders, freight forwarders take the hassle out of dealing with providers, shipping lines and complicated regulatory paperwork. They’re experts at arranging these moving parts.
Cons and challenges
First, businesses may become too dependent on freight forwarders. This can lead to not having in-house knowledge of logistics operations — and in-house knowledge is crucial to your long-term growth.
Next, some freight forwarding companies can charge unreasonably high prices for their services. And if you don’t have that basic in-housesupply chain knowledge, you won’t realise when or where a freight forwarding company’s price-gouging you.
Your business enlists a freight forwarding company. When a customer places an order, you relay the applicable information to the company.
The company then coordinates international shippers, carriers, outsourcing, warehousing, packaging, international paperwork and other supply chain needs. It ideally sends real-time tracking information to your business and/or the end customer.
Finally, your product reaches the customer’s hands. If you’re interested in a deeper breakdown, Mach 1’s article detailing the freight forwarding process is useful.
What are third-party logistics (3PL)?
A third-party logistics company (i.e. 3PL company) works more closely with your business than freight forwarders. You’ll also see them called third-party logistics providers (i.e. 3PL providers).
You might consider freight forwarders as overall experts, but 3PL services include individual steps along the supply chain. Your business typically forms a long-term relationship with a 3PL company.
A 3PL company takes care of your business’s entire supply chain needs. It may do so by outsourcing 3PL services to other companies that specialise in an area (e.g. warehousing, order fulfilment, shippers).
Overall, a 3PL company’s primary role is shipping. However, it frequently handles or outsources warehousing and other core competencies along the supply chain. For instance, a 3PL company might enlist a freight forwarding company if international regulations are complex for a product.
You might imagine freight forwarding companies as single-chef dishes from a restaurant, while 3PL providers are potluck or buffet platters. Both involve food items, but how you choose them differs: two main points (you and one chef) or multiple points (you and various chefs).
Pros and benefits
The use of 3PL providers is widespread, from enterprises to SMBs. They’re so popular because their party logistics services allow for a tailored approach to order fulfilment.
For instance, if you run an eCommerce business, having a 3PL partner allows you to streamline operations. And if your business is growing or you plan to expand internationally, working with a 3PL company is imperative. That company will become a core part of your business because you no longer have to coordinate order management.
Overall, 3PL providers benefit your business by keeping your products flowing smoothly from one party to the next — and at the best-possible rates. A high-quality 3PL company negotiates pricing for the steps along the supply chain. In turn, your operations are more cost-effective, and you have less hassle.
And because 3PL providers are plentiful, you can find one that’ll settle on a reasonable monthly fee for its services.
Cons and challenges
One of the benefits of 3PL providers is also one of its challenges! As we noted, you have no shortage of companies to choose from. That means doing your due diligence and ensuring your 3PL partner is reputable and capable of all core competencies.
You must also be wary of pricing. A 3PL company whose rates seem too good to be true probably doesn’t have the know-how to truly streamline the shipping process. And that means you have fewer satisfied customers.
Localised delivery services example
Let’s say you run an eCommerce business. In an ideal situation, you evaluate 3PL providers, then select a knowledgeable, reputable 3PL company. You keep communication lines open and ongoing — after all, they’re your 3PL partner.
When a customer places an order, the full-service company knows in real time via cutting-edge software. After checking inventory management, the 3PL company locates, packages, ships and delivers the order promptly to the end customer. It either self-fulfils or outsources these tasks along the supply chain per what’s most cost-effective for your business.
What does a hybrid model look like?
As the name suggests, a hybrid order fulfilment model involves multiple parties. Your business wouldn’t rely solely on freight forwarders or 3PL providers. You might integrate dropshipping and/or in-houseorder fulfilment in your logistics operations.
Why implement a hybrid model?
The business sphere and order fulfilment demands fluctuate, so a hybrid fulfilment model is a definite option for flexibility.
Perhaps one aspect of 3PL services sees a pricing spike, or international laws hinder freight forwarders’ operations. Any number of factors could change — which is why you might use a hybrid model. Essentially, businesses might implement a hybrid model to keep pace with a rapidly changing market and maintain cost-effective order management.
If your business is expanding, a hybrid model certainly may benefit you in the long run. After all, the more order fulfilment options you have, the more wiggle room you have. Ultimately, you want to keep customers satisfied with your product — and how (and when) they receive it.
First, let’s define dropshipping, which removes supply chain needs from marketing and sales. A customer makes a purchase, and then a supplier receives the order. The supplier then packages and ships the product.
In-house order fulfilment is equally simple. Your business fulfils the order from purchase to shipping via a carrier.
Integrating 3PL services is fairly intuitive. You might reserve in-house order fulfilment for local orders and use 3PL services for international orders. Meanwhile, you might use dropshipping for regional orders — when shipping times are reasonable and your supplier is consistent.
Pros and benefits
As we noted, flexibility in multiple aspects of business — from pricing shifts to shipping windows to market changes — is invaluable.
For instance, if you run a quickly growing eCommerce business and ship internationally, then the hybrid model can save you time and hassle. If one manufacturing route or supply chain link fails, you can pick up with a reasonable alternative.
In other words, you’re not boxed in — and customers stay happy.
Cons and challenges
Yet again, a benefit here can also present a challenge. That same flexibility lends an air of uncertainty to using a hybrid model.
In a changing market, predicting revenue by using 3PL services versus in-house order fulfilment and/or dropshipping may be frustrating. In fact, it might be nearly impossible. Plus, using two or more order fulfilment methods can quickly grow complicated for your books!
More importantly, there’s always the chance of customer dissatisfaction. For instance, customers in one region might have a great buying experience via 3PL services, but those in another might be terribly disappointed with dropshipping delivery times.
How to figure out what’s best for your business
Now to the nut of the matter: What’s best for your business? So many factors come into play — personal, professional and global — that finding the answer is tricky.
But whatever you decide, it’s never set in stone! Being adaptable is always smart, even if you choose to use only one order management method. Regardless, we recommend taking concrete steps before deciding among a freight forwarding company, a 3PL company and a hybrid model.
First evaluate your market, then create a feasible strategy.
Evaluate your market
Always evaluate your target market — and markets you want to target in the future. As we touched on earlier, different service providers may suit different markets best.
Then, take a close look at your customer demographics. Where are they from, and what types of products do they buy? It also doesn’t hurt to examine the taxes, levies and service charges they regularly pay.
You might find one cost-effective order fulfilment method that fits your largest market segment’s average spending.
Create a strategy
Next, take a steady look at your business. Do you sell internationally? Do you plan to expand — or expand internationally?
Knowing where you are and where you’re headed will inform your logistics management approach. We’ve outlined five key strategy steps below.
Understand where demand is
Know what’s most popular — not only your most broadly sold products but also your higher-end items. Then, determine which customers tend to purchase which products.
As an aside, this step doesn’t just help you choose your order fulfilment method — it helps you adjust all manner of other approaches, from marketing to hiring.
Market, market, market! Get the word out, and inform regular customers of any changes you’ll make concerning order fulfilment. Unexpected changes can lead to customer complaints.
Localise inventory management
When you localise inventory management, you’ll save both costs and time. With a bit of planning and those customer demographics, you can pinpoint what products need to be where. And of course, you’ll better know which logistics services work best.
Use freight forwarders for outliers
From a bird’s-eye view, freight forwarding companies are intermediaries. They may handle the intricacies of international regulations, but 3PL providers can outsource freight forwarders.
That being said, save freight forwarders for any worthwhile outliers — that is, rare but valuable scenarios.
Boost your bottom line with Airwallex
Airwallex is designed to help eCommerce businesses scale globally.
With our financial infrastructure in place, you can collect customer payments in multiple currencies, and payout to supplies around the globe, all whilst avoiding unnecessary FX fees.
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For example, an eCommerce business based in the UK can collect payment from customers in USD, hold the funds in their account, then use them to pay global suppliers, all without paying fees. Sign up for a free Airwallex account to get started.
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