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Keeping your 3PL in check

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November 15, 2020

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Kalvin Mizzi

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A 3PL (Third Party Logistics) service is a 3rd party warehouse that stores, ships, and receives goods on your behalf.

If you use a 3PL in an e-commerce environment, you’ve probably faced challenges in auditing the inventory levels of the 3PL.

There are two needs for 3PL inventory levels that are needed:

  1. Operational needs
  2. Accounting needs

Operational Needs

Operationally, the stock level at your 3PL is whatever they tell you it is. You have to make decisions of whether or not you can fulfill an order or if you have multiple warehouses, which warehouse you should fulfill a given order from.

For such operations, you simply trust whatever inventory level your 3PL gives you. There is no audit trail.

Usually your 3PL will share the inventory levels with you via API, FTP, a web portal that you log into, or a combination of these. Ideally there is API/FTP capabilities so that the software you use to manage your sales channel listings can sync the 3PL inventory with the sales channels inventory levels in order to avoid overselling.

Accounting Needs

Aside from needing stock levels for the purpose of fulfillment, you need to keep your 3PL in check by making sure there are no unexpected inventory losses.

For direct warehouses that you own, you keep an audit trail of inventory events to have a live inventory level.

Periodically, a physical count is performed and discrepancies from the audit trail computed levels and physical levels are investigated. You then make the decision whether to simply accept any discrepancies as a cost of doing business, or to look at the audit trail for any items in discrepancy to investigate further. Possible reasons for inventory discrepancy could be:

  • Inventory stolen
  • Inventory misplaced/mislabeled
  • Wrong items shipped to customers
  • Miscount during receiving purchase order from supplier
  • Returns received but not yet processed

With a 3PL, the process is similar, but depending on the capabilities of the 3PL, they may not be able to share a full audit trail of inventory events.

The results is that figuring out what could have caused the discrepancy is more challenging and the maximum allowable discrepancy that you will just write off as a cost of doing business may be higher than direct warehouses you own.

With a 3PL, you have an additional challenge of syncing between two systems that may have different timings.

For example, if your 3PL emails you about a return received, you may reply to them with instructions to return the goods to stock, then on that date, record the inventory as received. However, the 3PL may not process the inventory event until the next day, the next week, or maybe they forgot all together. This is where it is helpful to have two sets of books, your own audit trail of inventory events, and the 3PL audit trail. When a discrepancy occurs, you can compare line by line until the discrepancy is found.

Another example of a timing issue is when you send an order to your 3PL to be shipped on the last day of the month. In your books, if you treat this action as completed and deduct the inventory, but your 3PL doesn’t actually ship the item until the following day, there may be a discrepancy in inventory levels for the month. The best solution for this would be to not deduct inventory until a shipping confirmation is received from the 3PL. This is a tricky problem when managing the two needs (Operational and Accounting). Operationally you want to deduct the inventory to avoid overselling. For Accounting, you don’t want to deduct the inventory yet so that the books are in sync. This problem is a good example of why two inventory levels are needed if you work with a 3PL.

Another useful capability is to be able to look up an inventory snapshot of a given SKU on a given date on both systems. This way, you can narrow down the problem date when the inventory levels differed.

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Kalvin Mizzi

Online Seller, Finance Geek, Developer

Kalvin Mizzi has over 20 years experience in the E-commerce industry.  He holds an Economics degree from University of Toronto, where he graduated with Honors, and is a self-taught programmer and entrepreneur.

Kalvin started his career in the real estate development industry, raising equity/debt, financial modeling, and sales/brokerage.

He is passionate about systems and helping other E-commerce sellers.

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