The Benefits of Using a 3PL for Retail Inventory Management

July 6, 2023

The Benefits of Using a 3PL for Retail Inventory Management


Port Jersey Logistics

Inventory management is a complex aspect of logistics for retailers. Poor inventory management can bring consequences of lost sales, increased costs, reduced profit margins, and even damage to the brand's reputation. To avoid these consequences, retailers must have a strategic approach to demand forecasting, stockouts and overstocking, multi-channel operations, product variability, shelf-life and perishability, inventory accuracy and tracking, seasonal and promotional demands, and more.

Given the intricacies involved in each of these, many companies opt to work with third-party logistics providers (3PLs) to handle their inventory management needs. 3PLs offer specialized expertise, scalability, flexibility, cost-effective solutions, and operational efficiency that can help retailers overcome their biggest hurdles and optimize their inventory management.

The Challenges of Retail Inventory Management

Within the many facets of inventory management, many challenges for retailers are simply the byproduct of retail operations within a dynamic market. These are compounded when the retailer doesn't have the right tools and solutions to handle them. Inventory visibility, supply chain complexity, and returns and reverse logistics are three common areas that can cause challenges for retailers.

Inventory Visibility

Inventory visibility is a necessity for retailers today. It involves having accurate and real-time information about the availability and location of products across the entire supply chain, including within the warehouse. Retailers cannot afford discrepancies between physical inventory and inventory data, which can arise from manual processes, human errors, delays in data synchronization, and other technical limitations.

Inefficient tracking systems and outdated technologies can hinder inventory visibility. Traditional methods like periodic manual counts or barcodes may not provide real-time data and are prone to errors. Retailers without automated tracking solutions have more difficulty locating specific items within a store or warehouse. To stay competitive and ensure operational efficiency, retailers must prioritize their inventory visibility, assessing the tracking systems and technologies they use.

Supply Chain Complexity

The more complex a supply chain, the more complex it makes inventory management. Starting with demand, any variability makes it difficult for retailers to accurately predict and plan their inventory levels, leading to the risk of stockouts or excess inventory, while unpredictable lead times can affect the timing of product reordering. For example, any supplier issue concerning quality, production schedules, or disruptions in the supplier's supply chain can result in delays in receiving inventory. This further complicates inventory management for retailers, especially when they count on multiple suppliers to be reliable.

If there are a large number of SKUs, it's especially important to have the systems in place for accurate forecasting, efficient tracking systems, and increased coordination between suppliers, warehouses, and retail outlets to ensure smooth inventory management operations. With more retailers using multiple sales channels, including brick-and-mortar stores, e-commerce platforms, and third-party marketplaces, each channel may also have distinct inventory requirements and fulfillment processes, adding complexity to inventory management efforts.

Returns and Reverse Logistics

Returns and reverse logistics add another layer for retailers to manage. To ensure customer satisfaction, returns must be handled quickly and efficiently. However, returns can easily lead to inventory discrepancies if not carefully managed. When products are returned, they may not be in the same condition as when they were initially sold, which complicates the process. Depending on the return policy, retailers may need to classify returned products as new, refurbished, damaged, or unsellable. Proper categorization and tracking are essential to manage inventory with varying conditions and determine the value and potential resale opportunities.

Reverse logistics can also increase inventory holding costs as returned products need to be stored, inspected, and processed, occupying valuable warehouse space. This, and any additional costs from refurbishing or disposing of returned items, impacts profitability. Retailers must carefully manage these costs and find the appropriate balance between optimal inventory levels and mitigating the financial impact of returns.

Inventory Management KPIs

To manage these challenges, it is important to have relevant key performance indicators that help lead to better inventory management. Retailers should consider the following KPIs:

  • Days on Hand measures the average number of days inventory is held before being sold. This helps retailers determine how efficiently they are managing their inventory and how quickly they can convert it into sales.
  • Inventory Turnover measures how quickly inventory is sold or used over a specific period. It is calculated by dividing the cost of goods sold (COGS) by the average inventory value. A higher inventory turnover ratio generally indicates efficient inventory management. 
  • Stock-to-Sales Ratio is used to gauge the balance between inventory levels and sales. It compares the value of the available inventory to the average daily sales. 
  • Stock-Out Rate shows the frequency or percentage of time when a company runs out of stock for a particular item. This helps identify issues within demand forecasting, replenishment processes, or supplier reliability. 
  • Fill Rate measures the percentage of customer orders that are filled completely from available stock. This indicates the company's ability to meet customer demand and reflects the efficiency of inventory management and order fulfillment processes. 
  • Carrying Cost of Inventory is the cost associated with holding and managing inventory over a specified period, including expenses like warehousing, storage, insurance, depreciation, and obsolescence. 
  • Lead Time is the time between placing an order and receiving it. Tracking lead time helps identify potential delays, improve order fulfillment processes, and maintain optimal inventory levels. 
  • Backorder Rate measures the percentage of customer orders that cannot be fulfilled immediately due to stock unavailability. It helps assess inventory forecasting accuracy and highlights potential issues with supply chain management. 
  • Inventory Shrinkage reflects the loss or reduction of inventory due to theft, damage, or miscounts. It is expressed as a percentage of the total inventory value. Retailers aim to minimize inventory shrinkage as it can have a negative impact on profitability.

What is 3PL Inventory Management?

3PL inventory management involves outsourcing inventory-related tasks to a specialized provider, including the storage, tracking, and handling of inventory. The 3PL provides support and solutions to help retailers navigate whatever challenges they may face. They offer expertise, infrastructure, and technology to optimize inventory management processes, improve supply chain efficiency, and reduce business costs. Retailers are freed up to focus on their core competencies while benefiting from the specialized capabilities and resources of their 3PL provider.

The Key Benefits of 3PL Inventory Management for Retailers

Retailers are not always equipped to handle inventory management in the same way as a 3PL. They might struggle with the ability to scale, increase their cost-effectiveness, or improve their operational efficiency.

Scalability and Flexibility

While retailers deal with fluctuations in supply and demand, a 3PL provides scalability and flexibility, allowing businesses to efficiently accommodate changes. With the 3PL supplying space, labor, and transportation based on current needs, retailers have access to the resources to scale up or down or adjust to seasonal demands and peak periods. This flexibility ensures that companies have a plan in place to meet customer demands without overspending on resources during slower sales periods.


From warehousing to labor, capital costs, depreciation, insurance, taxes, and packaging, inventory carry costs can add up quickly. By leveraging the services of a 3PL with on-demand warehouse capacity, businesses can consolidate cost savings related to storage without incurring additional expenses such as rent and utilities. This reduction in inventory carrying costs, which typically account for 20% to 30% of total inventory value, can have a substantial positive impact on a company's bottom line.

Improved Operational Efficiency

By entrusting inventory processes like order fulfillment and replenishment to a specialized logistics partner, companies can optimize these operations and achieve greater efficiency. The right 3PL will use advanced technologies and data analytics to streamline inventory management processes for accuracy, speed, and visibility throughout the supply chain. This improved efficiency reduces errors and delays and frees up internal resources, allowing businesses to focus on growth.

Keep Inventory in Check with Reliability and Efficiency from Port Jersey Logistics

With its many moving pieces and uncertainties to plan for, retail inventory management is no easy task. Recognizing the challenges involved, many retailers turn to 3PLs like Port Jersey Logistics to streamline their operations. 3PLs not only take the pressure of inventory management off retailers but also bring added benefits of increased efficiency and cost-effectiveness. With our resources and expertise, Port Jersey Logistics offers the flexibility to adapt to evolving market needs and provides retailers with a competitive edge, whether through 3PL inventory management or any other logistics service like value-add services, brokerage transportation, and more. To learn more about how Port Jersey Logistics provides efficient inventory management, reach out to us today.

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