3PLs are vitally important companies within the supply chain management function. They can make or break a distribution strategy, and are becoming more and more important to manufacturers and product-based businesses. But because of the complexity of their functionality, many struggle to understand the true 3PL definition or 3PL provider meaning.
A third-party logistics company, or 3PL, provides supply chain logistics as an outsourced service for different types of businesses. 3PLs handle the transportation and warehousing and distribution for businesses that choose not to have an internal team managing these components of their logistics. As with any type of outsourcing to a specialized team, 3PLs can give their customers a higher level of service with their connections, knowledge, and expertise.
What Does a 3PL do?
Businesses that are considering utilizing a 3PL (or third party logistics providers) need to ask: what are the specific types of services a 3PL can handle for you? 3PLs work with you to give you the services uniquely needed to fit your business. They’re equipped to manage your transportation and warehousing segments of the supply chain.
3PL Transportation Logistics Services
A 3PL can either be asset-based or non-asset based, meaning it owns its own trucks or it utilizes outside carriers, respectively. When it comes to transporting shipments, 3PLs manage both inbound and outbound freight for the shipper. Inbound shipments could come from a domestic manufacturer or from overseas (freight forwarders), arriving in containers or via air freight. Outbound shipments take the product from the warehouse to the customer via full truckload (TL) or less-than-truckload (LTL) shipments.
When 3PLs are non-asset based and, therefore, use outside transportation carriers, it’s important to note that there is a high likelihood that the 3PL is marking up freight. Not that this is a bad thing, but it’s important to know so that you can negotiate the best rates with the 3PL and minimize the amount of markup. Alternatively, when a 3PL is asset-based, they will have the greatest control over rates, and can provide the most aggressive shipping options.
3PL Warehousing Logistics Services
3rd party logistics services manage warehousing for shippers—providing the warehouse space to store their goods at any point in the supply chain, which might include storing materials or finished products. 3PL Warehousing services also involve inventory management, order fulfillment, picking and packing, and distribution. These are the segments of the supply chain that occur between a shipment’s delivery and its next pickup, to and from its temporary storage location before it is transported to the customer. To summarize, the following are the services provided:
Warehouse and Inventory Management: 3PLs receive product and manage the storage levels of products, typically using a WMS (warehouse management system). Customers can view stock levels, receive notices when low levels are hit, etc.
Order Fulfillment: Order fulfillment is the process by which warehouse staff pick orders and prepare them for shipment. The process involves physically picking the orders, quality checking them for accuracy to avoid mis-shipments and packaging them for shipping.
Shipping: 3PLs provide full-scale shipping services, whether it be using their own, asset-based options (couriers, delivery vans and trucks, etc.) or by using the freight services of other companies, both on a parcel basis (USPS, FedEx, UPS, DHL, etc.) or greater than parcel basis (LTL, FL, etc.). Shipping provided by 3PLs includes both domestic shipping options as well as international shipping to customers abroad. 3PLs also provide a wealth of tracking options for ensuring that delivery is confirmed by recipients.
Reverse Logistics: Full-service 3PLs also complete the entire cycle of the fulfillment process by providing returns services, also known as reverse logistics. Reverse logistics provides a mechanism for customers to return product. The 3PL inspects the returns, disposes of damaged product, and returns the salvageable product back to inventory for resale.
Oftentimes, 3PLs specialize in certain areas. This is a good thing for their customer base, as the 3PL becomes highly competent in a particular area, which brings expertise and further potential cost savings through near flawless execution. Common areas of differentiation include:
- Product based (apparel, food, pharmaceutical, etc.)
- Sized based (small volume versus high volume of orders and shipments, etc.)
- Location based (single location, multiple locations, multiple countries, etc.)
- Service based (B2C, B2B, subscription fulfillment, cross docking, etc.)
3PL Versus 4PL
Especially for managing the overall cost of 3PL operations, it’s important to understand which services are fully managed by 3PLs themselves versus the functions that are outsourced to others. Oftentimes, 4PL providers come into play. 4PL, or fourth party logistics providers, are companies that simply manage the entire process. They are hired to orchestrate all the moving parts. For examples, some large companies hire 4PLs to manage highly sophisticated operations including the initial procurement of products, as well as the 3PL functions.
However, there are more recent entrants into the 4PL space that are worth mentioning. Some of these companies are software based (e.g. on demand warehousing), where they act as matchmaking services but force the clients to use their software platform. Regardless of the pitch, the ultimate conclusion is that it forces users to pay higher rates, as the software platform takes a cut of the deal. In some cases, this may be helpful or necessary. However, in most cases, it is a needless and wasted spend and going directly with the 3PL saves a significant amount of money over the life of the deal.
Pros of Hiring a 3PL
Benefits of Working with 3PLs
There are many pros and cons to working with third party logistics. How you decide whether to work with a 3PL comes down to the advantages the 3PL can provide, as they benefit your business. In general, businesses can expect the following benefits: the simplicity of a done-for-you service, reduced costs (especially storage and freight costs), stronger negotiating power through the 3PL for transportation and warehousing, and access to the 3PL’s resources and network.
Essentially, businesses are benefiting from the expertise of their 3PL. They don’t need to spend the time and money to try to manage logistics on their own. The 3PL already has the knowledge and resources to deliver this service effectively and efficiently.
Cons of Hiring a 3PL
How to Decide Whether to Use a 3PL
Any business decision is not without potential drawbacks, however small they might be. There are a few cons to using a 3PL, but for many businesses, these don’t outweigh the advantages. In unique circumstances, the shipper might need to handle their logistics in-house.
First, due to the nature of outsourcing, a business using a 3PL would be farther removed from the logistics processes at any given point. The business would need to give up some degree of control, and for some, this means weighing the risks for when operations don’t go according to plan and having processes to handle any problems that arise.
Shippers will also find that getting set up with a 3PL requires an initial investment. While the setup fee is relatively small and the overall savings will more than make up for it, it can deter some businesses from giving third-party logistics a try.
Growth of 3PLs in the U.S.
Businesses have a huge number of 3PL companies to choose from for working with. In the United States, the number of third-party logistics companies grew by 4.2% in 2022, reaching over 14,000 in total. This growth in 3PLs is corresponding to the large growth in e-commerce since 2020. Revenue from e-commerce was $644.4 billion in 2020, and it’s expected to reach a staggering $1.33 trillion by 2025.
Where Businesses are Searching for 3PLs in the U.S.
Location is always an important factor in supply chain and logistics, from where products are manufactured, where they’re transported to, and where they’re stored, and the location of your warehouse or fulfillment center matters to your logistics. Choosing which state your warehouse is in or which 3PL to hire is a strategic decision, and each state in the U.S. has several 3PL options.
What to Look for in a 3PL?
There are extremely detailed listings of the most important things to look for in a 3PL, including a piece that we wrote here. But suffice it to say, some of the most important things to keep in mind are listed below. Furthermore, some companies decide to codify the search in a formal 3PL RFP (request for proposal) or RFQ (request for quote).
- Technology and integrations needed
- Ability to handle current and ongoing volumes
- Financial stability
- Industry expertise
- Cost competitiveness
- Reputation and Experience
- Communication capabilities
- Accuracy rates
- Cultural fit
- Service capabilities
- Desired location(s)
3PLs typically charge a fee for all the services they perform for clients. These 3PL costs include:
- Inbound freight
- Order fulfillment or pick and pack
- Outbound shipping
3PL costs differ from company to company.
3PLs are a vital part of the logistics industry. They can literally make or break a company, offering significant savings over in-house operations, entrance into new markets, expertise previously unachieved, etc. But don’t fall prey to the marketing ploy that is so prevalent in our world today – there is no such thing a single or “top 10 3PL”. There is a wealth of high performers, and there are far too many poor performers. However, there is no way to quantify who is the best, as there are far too many companies and far too many dynamics to consider.
Performing an exhaustive search, coupled with a strong due diligence process will eventually lead to the right 3PL companies selection.