Managing Inventory Between Your Distribution Business and 3PL

  • 3PL distribution

Many wholesale and distribution businesses operate without physically touching any inventory, and, instead of managing warehouse space, they pay a 3rd party logistics company (3PL) to handle the receipt, pick, pack and shipping of product on their behalf. In this situation, product from the manufacturer and other vendors ships directly to the 3PL where orders are then fulfilled on behalf of the wholesale distributor – without the end customer ever knowing. This is a great tactic for small businesses who do not wish to incur the costs associated with managing and staffing warehouse space, and for businesses that sell across the country and can benefit from multiple locations strategically placed. Before you decide on a 3PL partner (or multiple), you will need to consider your options for inventory management software. Even if you are not physically managing inventory, it is still important to find a system that can work together with your 3PL partners. Below we explore some of your options.

Option 1: Inventory Management Software and Manual Processes

As a wholesale distribution business, irrespective of whether you physically manage inventory, you still need proper software in place to manage inventory purchasing and replenishment as well as sales orders, invoicing, accounting, financials, customer service, and more. When it comes to inventory management, you need to ensure that your 3PL partners have enough inventory on hand to fulfil customer orders and therefore you will need to track inventory levels, sales orders and purchase orders, and keep track of pricing, costs, sales history and margins. Some of this information you will then need to share with your 3PLs and vice versa. Therefore, one option is to find inventory management software to use in conjunction with your accounting system and manual processes. With basic inventory management software, you can track information in the system and then manually email and share data with your 3PL partners. When your 3PL partners ship an order, they would email you back the appropriate information for you to then update in your system manually. Because of the manual work required with this type of approach, it is best suited for smaller wholesale distributors with a limited number of transactions and SKUs. And remember, if your inventory management system is separate from your accounting system, you will end up doing even more manual data entry to keep all systems up-to-date. Let’s look at an example.

Example:

A customer wants to purchase product from you and so you’ve gone ahead and created a new sales order. Now, instead of sending a pick slip to your warehouse, you will email the appropriate 3PL a copy of the pick slip and potentially the packing slip too. This would alert the 3PL that you’ve created a new sales order and that their team now has to pick, pack and ship the order on your behalf.

  • Once the 3PL has shipped the order, they would email you back shipping confirmation details which you will have to manually enter into your inventory system
  • Then, once the customer receives the order/the 3PL has delivered the product, the 3PL will send you proof of receipt and confirmation that the order was shipped and delivered
    • Once you have proof of delivery information, you will then update your inventory system and your accounting system to then invoice the customer 

Option 2: ERP Software and Automated Processes

Option 2 involves using an all-in-one inventory management and accounting ERP system that can integrate with the systems used by your 3PL partners. Just like you need software to manage your operations, so do the 3PL companies of the world. Finding an ERP system that can integrate with other software provides more opportunities for automation – therefore, eliminating manual processes and the risk of human error.

Typically done through EDI, integration allows your system to connect directly to the system of each of your 3PL partners. This means that instead of manually sending and receiving information and then manually updating your software, the systems can directly exchange information with one another, and then automatically update data and status’. Let’s look at the same example used above.

Example:

A customer wants to purchase product from you and so you’ve gone ahead and created a new sales order. Now, instead of sending a pick slip to your warehouse, through EDI, your system would automatically communicate and send the appropriate 3PL an EDI file. This would alert the 3PL that you’ve created a new sales order and that their team now has to pick, pack and ship the order on your behalf.

  • Once the 3PL has shipped the order, they would electronically send you back shipping confirmation details which would automatically update your ERP and potentially trigger the changing of a status such as marking the sales order as shipped
  • Then, once the customer receives the order/the 3PL has delivered the product, the 3PL will automatically send you proof of receipt and confirmation that the order was shipped and delivered
    • This information would be received directly into your system, once again automatically populating fields of data and/or updating a status
    • You can also have the system set up so that updating a status will trigger a workflow to then invoice the customer

As you can see, integrating your ERP system with the software used by your 3PL partners is a much more efficient way of doing business. And, when you compare the costs and time associated with both options, you may be surprised to find that there is a clear case for electronically exchanging data – especially if you have a lot of transactions and a high order volume.

Learn More: Inventory Management Techniques