Third-Party Logistics, commonly known as 3PL or TPL, is a term used in logistics and supply chain management and refers to the outsourcing of a company’s distribution and fulfillment elements. “3PL” was a term first used in the early 1970s in order to identify intermodal marketing companies in transportation contracts. Contracts for transportation at that point only had two parties – the shipper and the carrier. Services that third-party logistics providers deliver today are bundled together and include transportation, warehousing, cross-docking, inventory management, packaging and freight forwarding. These are freight forwarders; courier companies; and other companies integrating and offering subcontracted logistics and transportation services.
In 2008, the Consumer Product Safety Improvement Act legislation passed, declaring that the legal definition of a 3PL is “A person who solely receives, holds, or otherwise transports a consumer product in the ordinary course of business but who does not take title to the product.”
Types of Third-Party Logistics
Hertz and Alfredsson (2003) describes and groups 3PL providers into the following categories:
- Standard Provider: The most basic and standard form of 3PL. This company will provide services such as to pack and pick, warehousing management as well as business distribution. These are seen as the basic forms of logistics.
- Service Developer: This type of 3PL service provider will provide advanced value added and unique services such as tracing and tracking, specific packaging as well as unique security systems. A solid IT foundation and a focus on economies of scale, as well as scope, will enable this type of 3PL provider to perform these types of tasks.
- The Customer Adapter: This type of suppliers will come in at the request of a client or company and they will essentially take over complete control of your logistics activities. The 3PL provider improves the logistics drastically but does not develop a new service. The customer base for this type of 3PL provider is typically quite small.
- The Customer Developer: This would be the highest level that a 3PL provider can attain with respect to its processes and activities. This occurs when the 3PL provider integrates itself with the customer and takes over their entire logistics function. These providers will have few customers but will perform extensive and detailed tasks for them.
Third-party logistics belongs to a class of other PL providers that consists of the below:
- First-Party Logistics – A firm or an individual that needs to have cargo, freight, goods, produce or merchandise transported from one place to another. This certain provider stands for both the cargo and for the cargo receiver. Any party having goods moved from their place of origin to their new place is considered to be first-party logistics provider.
- Second-Party Logistics (2PL) – A provider then is an asset-based carrier that actually owns the means of transportation. Typical 2PLs would often be shipping lines which own, lease or charter their ships. Airlines too that own, lease or charter their planes along with companies that do the same fall under this category.
- Fourth-Party Logistics (4PL) – With 4PL logistics, the organization is often a separate entity established as a joint venture or long-term contract between the primary client and one or more partners. Secondly, a 4PL organization presents itself as a single interface between the client and multiple logistics service providers. Providers under this element also manage all aspects of the client’s supply chain.
Third Party Logistics (3PL) service providers have become so integrated into supply chain processes that it has become mandatory to use 3PL providers. A lot of companies opt to outsource now because a company that focuses solely on optimizing supply chain processes will be better enabled to get your products from point A to B in the most cost and time efficient manner.
The Benefits of Using a 3PL Provider
Qualified third-party logistics providers offer the focus and core competencies needed to run a state-of-the-art reverse logistics program and that is one of the main reasons why companies outsource. They gain the software, leadership and experience that is able to start and maintain a reverse logistics process that delivers bottom-line results. Outsourcing reverse logistics to an experienced 3PL means that there is an efficient process up and running in months compared to the years it might take when using in-house capabilities.
Major capital is required to create a network with multiple distribution centres. This outlay, together with the high risks involved, can be avoided through the use of 3PL service providers meaning expansion can be done quickly and efficiently.
With 3PLs involved, retailers and manufacturers are awarded the flexibility that enables them to implement an efficient returns process quickly without impacting capital budgets. Most providers have existing facilities that can be controlled or can be opened in locations that minimize transportation costs. These third-party logistics providers provide all the infrastructure needed, and build all facility, software and equipment costs into their price.
3PLs provide liability protection—for example, capping worker compensation at a standard monthly cost, regardless of the accident rate in the facility. They also build into their contracts a shrinkage allowance over the inventory they process. Most 3PL reverse logistics contracts include some form of price-per-piece cap. All these factors make budgeting and planning easy for those who outsource.
Greater Customer Satisfaction
Using an effective 3PL results in faster, more efficient service making for happy, returning customers who are likely to recommend your services. Demand has enabled 3PL operators the opportunity and advantage of building lasting relationships with important customers, suppliers and retailers they want to work with.
This position also now requires that warehouses and fulfillment centres step up in terms of quality service in order to meet increased demand. The only way 3PLs can succeed in this new environment is if they become equipped to deal with the industry’s biggest challenge today which is the escalation of customer and prospect expectations.
Tips for Finding the Right 3PL Partner for your Company
Companies are starting to frequently outsource in order to gain access to numerous pre-qualified carriers, industry expertise and advanced logistics technology that’s able to offer supply chain visibility and provide operational efficiency. Working hand in hand with third-party logistics providers brings immense difference and value to the supply chain, making it important to ensure that the process to finding one is handled properly. Here are strategies that can assist you in finding the right partner.
Communicate Objectives & Important KPIs
As mentioned above, the quality of service offered is very crucial so make certain to let all potential service providers know what your goals are along with key performance indicators important to your company. An excellent third-party logistics provider will make it their responsibility to reach that benchmark and strive to continuously improve in order to ensure that they are making a valuable difference on your firm. Typical KPIs include EDI compliance, on-time delivery, tender acceptance or rejection percentages and on-time pickup.
Establish Strategic Partnerships
Pricing is obviously one factor that influences how shippers choose to award logistics service contracts. However, most shippers prefer looking at the quality of service offered over pricing. Look for ways 3PLs can be a consultant to your business and how they can provide value-added operations. The right partner is always seeking for strategic ways and opportunities to save your company overall costs. One way to tell if your 3PL is effective is when you are able to integrate your business’ ERP and supply chain systems with their TMS or other technology platforms and having supply chain visibility as a result.
Consolidate Shipments To Increase Volume
When looking for a 3PL partner, seek for one that will help you attain opportunities which will allow you to consolidate your shipments. Through merging, volume and efficiency increases – therefore decreasing overall costs. It also assists in avoiding loading dock congestions and results in few accessorial charges.
Third Party Logistics Software (3PL) is used by 3PL logistics providers to organize, control, monitor and optimize their clients’ logistics operations. Logistics software providers also offer software solutions that enable companies to track the progress and have visibility over the operations, progress and service level agreements.
3PL software comprises warehouse, transport, shipping, distribution and transport management and enables visibility, automation, increased accuracy and control in your supply chain. The logistics software solution should be tailored to your unique requirements and should enable an optimized supply chain, catering to your business needs and ensuring a competitive advantage.
The questions to ask for 3PL success are:
– What does the solution comprise; to which supply chain segments will it cater?
– How will this solution ensure competitiveness for my business?
– How will this 3PL solution cater to expansion in my business?
– What will the implementation and licensing fees be?
– What kind of support will be offered after software implementation?
– How is constant communication and visibility between a company and the 3PL solution provider ensured?
– Does your company ensure constant evolvement of its software solutions to meet global developments and requirements?
Now that you’re informed and have insight into our full 3PL guide, it’s time to streamline your 3PL management and ensure logistics improvement. Dovetail’s HighJump One 3PL Warehouse Management System (WMS) ensures optimal coordination & management of supply chain management functions. It can also greatly improve performance in the warehouse and transport management industries. Contact Us for more!
Hertz, S. Alfredsson, M. 2003. “Strategic development of third-party logistics providers”. Industrial Marketing Management. Elsevier Science. 32 (2): 139–149.
Bernard, D. Rouse, M. 2018. SearchERP: What is 3PL (third-party logistics)? – Definition from WhatIs.com. [ONLINE] Available at: https://searcherp.techtarget.com/definition/3PL-third-party-logistics . [Accessed 25 September 2018].
Enterprise Ecommerce Blog – Enterprise Business Marketing, News, Tips & More. 2018. 3PL (Third Party Logistics): Everything You Need to Know. [ONLINE] Available at: https://www.shopify.com/enterprise/third-party-logistics-3pl . [Accessed 25 September 2018].