E-commerce Fulfillment: A new standard for SPEED

When COVID hit and e-commerce took off, many shippers realized they needed to expand their direct-to-consumer delivery.

Traditional business-to-business (B2B) industries such as manufacturing, brick-and-mortar like retail, and small- to medium-sized businesses struggled to engage with customers and meet their demands in the online mode. This pushed both shippers and third-party logistics (3PLs) providers to invest significantly in e-commerce capabilities.

That push to more sophisticated systems, such as digital front-end order management, inventory visibility, and last-mile delivery continues today. In fact, e-commerce is now one of the strongest growth drivers for 3PLs in all segments of this vital sector of supply chain services.

U.S. 3PL e-commerce revenue reached $27.2 billion in 2023 and is projected to reach $31.5 billion in 2025, reports leading market analyst firm Armstrong & Armstrong (A&A). The firm projects an estimated compound annual growth rate (CAGR) of 16% is anticipated from 2017 to 2025.

“Continuing this trend, 3PLs are now going beyond the basics, with advanced services like returns management, ‘white glove’ delivery, and better ways to get products from the warehouse to the customer’s door, including efficient inventory management and cross-border, dynamic fulfilment capabilities,” says Sarah Banks, global lead of freight and logistics at Accenture.

In fact, 91% of 3PL companies acknowledge that shipper customers are now asking for end-to-end logistics services managed by a single provider, research by Accenture finds. It notes that strong, sustained demand for e-commerce fulfillment is driving growth in industries like consumer goods, retail, industrial, and pharma.

Key opportunities, activities

E-commerce presents a variety of opportunities for 3PLs, including omni-channel business.

A&A indicates that major U.S. e-commerce logistics cost drivers include the continued expansion of e-commerce retail (domestic and cross-border); logistics network development; increasingly complex last-mile delivery; a shift to business-to-commerce (B2C) in the parcel segment; a tight labor market; and the increasing importance of reverse logistics.

Logistics companies say they have already developed select capabilities to bolster their end-to-end service portfolios

“E-commerce can result in higher margins for 3PLs, and its volatile volumes play well for non-asset-based companies,” says Evan Armstrong, president of A&A.

London-based Transport Intelligence’s (Ti) 2024 State of Logistics Survey shows that, for those 3PLs that deal with e-commerce volumes, e-commerce accounts for between 41% to 50% of total contract logistics volumes. Subsequently, many 3PLs are continuing to look at expanding their capabilities to capture more e-commerce market share.

“Inorganic growth is a popular way of doing this,” says Nia Hudson, research and team lead at Ti. Consequently, the industry is seeing its share of mergers and acquisitions (M&A).

3PL Logistics congurations compared

Among the established 3PLs that are continuing to evolve their capabilities through M&A activity are Ceva Logistics, GXO, and Ryder. Since 2023, GXO has bought two companies to boost its e-commerce services: PFSWeb to reach more clients in North America in the consumer goods sector; and Wincanton to increase its presence in the UK. Ryder completed its acquisition of Cardinal Logistics in early February.

Digital logistics companies like Flexport are also expanding by acquiring Shopify Logistics and Deliverr, giving them access to more warehouse space for small- and medium-sized enterprises.

Additional services, value

The analysts we interviewed agreed that as the 3PL industry evolves, so too will its ability to offer inventory visibility and management.

“With multiple online shopping options, shippers—who are also product companies—need to provide up-to-date information on stock levels and quick delivery times,” says Banks. “This is crucial for companies with omnichannel capability where inventory changes frequently and orders can be fulfilled in different ways.”

In addition, sophisticated 3PLs are offering inventory management capabilities since needs are increasing for such proficiencies that eliminate excess stock and lower shipping costs.

To meet these needs, Banks advises shippers to partner with 3PL providers who offer automated inventory tracking and technology integration capabilities that feed into their systems real-time and generate custom reporting. “This helps efficiently manage orders and inventory, meet service expectations, and keep costs down,” she says.

The evolution in e-commerce fulfillment also has resulted 3PLs having the ability to handle a variety of value-added capabilities, such as customized branding and labeling, repairs and refurbishments, as well as reverse logistics.

“Many 3PLs have such capabilities already and can handle the increasing volume of e-commerce returns and provide an array of services to retailers,” Armstrong says, adding that this is especially important to shippers, since costs associated with e-commerce reverse logistics are growing more than 20% annually, according to his firm’s research.

“Industry estimates for the value of e-commerce returns range from 12% to 33% of e-commerce revenue,” says Armstrong. “That’s drastically higher than the 9% rate for brick-and-mortar purchases.”

Reverse logistics and the processing of returns is particularly a key differentiator and growth area for 3PLs. Service providers have been broadly investing in improving reverse logistics capabilities that make it easier for customers to return goods. “These capabilities reduce losses, help spot quality issues, and promote sustainability by reusing, reselling, or recycling products,” says Banks.

While items can usually be shipped back to a retailer’s warehouse or returned to a store, Armstrong notes that retailer distribution and fulfillment centers are already crowded with a ballooning number of e-commerce stock keeping units (SKUs). “But by using a 3PL, consumers gain visibility and hassle-free returns,” he says. “This can be both a revenue- and profit-generating strategy for 3PLs.”

Warehousing, delivery configuration

As the 3PL industry matures, so will its continued investment in warehousing. “Companies continue to invest in choosing the best locations and building new facilities to ensure they reach local and regional markets,” says Banks. “This investment helps meet the growing demand for direct-to-consumer fulfillment driven by e-commerce.”

Banks notes that while Warehouse-as-a-Service appeals to companies that are entering certain markets or meeting specific service delivery requirements with lower risks, product companies and their 3PLs must have deep competencies in network optimization, location analysis, and facility structures.

“This ensures that both cost, and service level, are balanced to make the most out of existing market opportunities,” adds Banks. “Facilities that meet market needs, whether for same-day or next-day delivery and are well-connected to last-mile delivery, will be preferred. The ones that can offer best service at the lowest cost will come out on top.”

Having a major impact on site location and warehouse footprint needs is the increase in SKUs sold by e-commerce retailers.

“Today, requirements call for multi-client warehousing and flexible space options, since shippers want to deploy e-commerce fulfillment parcel shipping out of warehouses as close to the customer as possible to increase service levels,” says Armstrong.

Thus, 3PLs are increasingly searching for desirable locations around major population centers in each region of the U.S. But real estate in these markets is tight and costly, and the final transportation leg for an e-commerce order, known as the “last-mile,” is extremely costly.

“Transportation costs for a shipment from a distribution center or fulfillment center to a customer’s doorstep can account for 30% to 40% of the total cost of transportation,” says Armstrong. “Managing logistics costs and developing ample delivery density are the two significant challenges in this space.”

Meanwhile, some companies have experienced a shift in the mix of B2B and B2C packages they transport. Armstrong points to UPS and FedEx as examples.

“The direct result is a lower delivery density per stop,” says Armstrong. “A B2B delivery typically consists of three packages, compared to just one for a typical B2C delivery. This has placed pressure on profitability, which parcel carriers address by increasing prices, improving efficiencies, expanding networks, and investing in sortation capacity. However, last-mile pressures continue to mount with e-commerce customer delivery demands.”

Another Amazon effect

New fulfillment products also continue to be introduced. Amazon offers an example of a market leader in fulfillment through its Fulfillment by Amazon (FBA) capabilities. Amazon FBA is a program where shippers outsource order fulfillment to Amazon and customers receive free, two-day shipping through Prime.

By enrolling in FBA, shippers can send their products into Amazon’s global network of fulfillment centers, and Amazon will pick, pack, and ship orders, as well as handle customer service and returns. FBA is part of a fully automated set of services it calls Supply Chain by Amazon. Amazon announced its Supply Chain by
Amazon in 2023.

According to Banks, the intention is to strengthen its global fulfillment by offering better cross-border transportation, inventory management and replenishment, and direct delivery to consumers, even from non-Amazon channels. “Amazon’s continued investment in these capabilities shows confidence in the overall demand for fulfilment services,” she adds. More so, it demonstrates just how sophisticated 3PL services have become.