ignores % of Bonus Armor (this means armor from items / masteries/buffs/ etc)
Lethality ignores a flat amount of armor, scaling with the targets level.
%Reduction is checked before flat penetration.
This means that %reduction makes flat penetration somewhat better since it means the target has less Armor and Flat penetration is made to be effective against targets with little to no armor.
The thing is, Flat penetration is actually not that great compared to just crit or more AD in this scenario on anything but squishies.
You will be doing more overall damage with %reduction + crit than you will with Flat pen and %reduction , because the multiplier heavily outways the small flat pen numbers.
250% extra damage > 10 - 20 extra damage.
The reason it is more effective on squishies, and seems so op right now is because no one is building take atm, and thus this combination decimated league of Squishy damage dealers. But put 1 or 2 tanks and the lethality building adcs and the like start looking like jokes to everything but other squishies.
ADC Champs that have long ranged spells to hit squishies from a safe distance can get away with it more than ones that can't.
MF ult and Varus Q for example.