Third-party logistics firms need to rethink the fundamentals in 2025

Originally published on Morning Brew’s Retail Brew Newsletter: https://www.retailbrew.com/stories/c/3pl-2025-fundamentals

By Vidhi Choudhary

DECEMBER 10, 2024

The fulfillment sector has grown in lockstep with e-commerce because the growth in e-commerce has made logistics sexy. There has also been a heady rush into the industry because of what Amazon has done in the space.

“We’re moving really rapidly to the economy of now,” Erik Volkerink, CEO and co-founder of Trackonomy, told Retail Brew. “It really puts all the dimensions of a supply chain on steroids, from a speed and efficiency standpoint; [everything] needs to happen super fast.”

Over the last three years, fulfillment companies like ShipBob and Flexport have dealt with a lot of transformation in the supply chain. With the height of the Covid-19 pandemic in the past, these companies found other challenges to deal with in 2024, like the rising cost of doing business and a drastic increase in parcel volumes to be shipped. Experts told Retail Brew that for e-commerce deliveries, third-party logistics providers (3PLs), need to rethink the fundamentals, keeping shipments at the center of their universe.

Enter 3PLs

3PLs handle fulfillment operations for the bulk of the brands that sell online across marketplaces like Amazon. Fulfillment operations in the world of e-commerce brands that earn average revenue anywhere between $10 million to $1 billion are dominated by 3PLs. Smaller brands selling online tend to do fulfillment in-house initially, but once they cross $100,000 in sales, they tend to opt for 3PLs, anecdotally.

“I’d say for a brand that does up to about a billion dollars in sales, it is very common to have all, or at least a significant share, of their fulfillment outsourced to a 3PL,” Matthew Hertz, founder and CEO of Third Person, an AI-powered platform for e-commerce brands or retailers to discover and connect with fulfillment partners, told Retail Brew.

The relationship between an e-commerce brand and its 3PL is “like a marriage,” Hertz said.

Why it matters

Increasingly, it’s becoming important to pick the correct fulfillment model to set up for business success because of the significance of this decision. With on-time deliveries being “the North Star metric for companies to gauge success,” as Retail Brew previously reported, finding a 3PL that will speed up fulfillment is almost a non-negotiable.

“It’s a huge financial decision for brands; about 20% of their revenue goes to this one,” Hertz said.

Meanwhile, Volkerink said the need to deliver packages as fast as possible impacts every aspect of the supply chain, from the distribution centers and how they stay organized to shipping rates. All of these decisions depend on the fulfillment partner a brand chooses. 

“I always encourage the brands to actually visit the warehouses. What's important is to actually understand the team, who's on the floor, who will be doing the work.”

—Matthew Hertz, founder and CEO of Third Person

Still, Volkerink said logistics and supply chain is a “fun problem” to have.

These 3PLs are also crucial as they act as the only point of contact between the brand and the customer, Hertz added. “It’s the only touchpoint between the brand and the customer—the only physical touchpoint,” he said.

And while it’s really important to find the right partner, Hertz said, far too often, e-commerce brands are discovering their fulfillment provider through—asking a friend, or just Googling, “best warehouse in Chicago to ship hot sauce,” for example.

Finding the right one

Hertz said finding the right fulfillment partner is typically a longish process: “I’d say two to four months. It could be two weeks, it could be a few days, if they’re in a bind.” 

Hertz recommends that retailers and brands demo the technology systems used at the 3PL they wish to work with before signing on the dotted line. “I always encourage the brands to actually visit the warehouses,” he said. “What’s important is to actually understand the team, who’s on the floor, who will be doing the work.”

In a sea of 3PLs, Hertz said the companies that stand out are those that offer advice to clients more broadly. 

“One thing that has been really interesting is that, some of the 3PLs that have had most success with these modern e-commerce, high-growth emerging brands are those who really take more of a consultative approach,” Hertz said.

In other words, 3PLs that help clients with everything from planning, inventory, and managing freight partners, to shipping carriers, are more successful than the rest. 

“They have a lot of native technology in-house, whether it’s the warehouse management system they use, or companies like Two Boxes…on the return side, that acts like a full-service partner,” Hertz added.

Hertz said even the larger brands that do say, $100 million in revenue are all struggling with issues with shipping carriers, missed deliveries, 3PLs who are slow with shipping: “The problems really impact everyone.”

However, not everybody can afford to be Amazon, in which case Volkerink recommends vertical visualization of the entire supply chain. “Without the glue of full end-to-end visibility, it’s all kind of meaningless,” Volkerink explained.

Hybrid works best

“The best supply chains are always hybrid,” Volkerink said, because then brands have some amount of control over the supply chain through this approach. 

“The pieces where you outsource, you need it; just because you don’t own it, doesn’t mean you cannot intervene,” Volkernik said.

And technology comes in handy here. “There’s new technologies out there, where, if somebody puts something in the wrong container, buzzers go off and you can directly course-correct,” Volkerink added.

Looking to the future 

There will always be consolidation in the fulfillment space, Hertz said. Some 3PLs may even go out of business. “Think of the hotel model. You know, in the hotel industry, which is very similar, it’s fragmented—lots of options, lots of big players, a lot of small players. Hotels are always going out of business,” Hertz said.

However, given the influx of new technology, and new AI systems, he said, the fulfillment businesses are attracting younger people, resulting in a more collaborative approach to partnerships. 

“It’s been really enlightening and really exciting, I should say, to see how 3PLs—which have traditionally been a boring, boomer-type business—is increasingly being run by a lot of younger folks…millennials,” he said. “And, now, there’s a lot more partnership, and some [3PLs] are really leading the charge in facilitating a broader set of integrations, offering a lot of value-added services that they never used to, such as different returns management.”

Meanwhile, Volkerink said, it’s time to rethink fundamentals of the supply chain: “What that means is a real-time supply chain is needed right now.” 

Traditionally, things like warehouse management systems and enterprise resource planning systems have been isolated from supply chain optimization systems and fleet management systems. 

“Overlay that with dynamic pricing, and you get a very complex puzzle,” Volkerink said. “These traditional silos in the next three years really need to be broken down, where people start looking at the shipment itself as the center of the universe.”