Third-party logistics, often shortened to 3PL, has become an integral part of supply chain management for businesses across industries. As global trade continues expanding in volume and complexity, more companies find it advantageous to outsource some or all of their distribution, fulfillment, and logistics requirements to specialists in these areas.
This comprehensive guide will examine the 3PL definition, what 3PL entails, the services 3PL providers offer, the benefits of using 3PL, and how to select the right partner for your business.
What is 3PL? Definition and Meaning
A third-party logistics provider is a company that handles outsourced procurement, fulfillment, and distribution services for other companies. The client company contracts these responsibilities to the 3PL provider, allowing it to focus resources on core competencies instead of supply chain logistics.
So, what does 3pl mean in short? In essence, 3PL fills gaps in operational capacity during times of high demand. It enables flexibility in adapting to changes in market conditions. Established 3PL providers have vast transportation networks and infrastructure that most individual businesses find challenging and expensive to replicate.
Hiring 3PL services or logistics software development company offers access to advanced supply chain technology and experienced logistics expertise. The term “3PL” comes from the provider being a “third party” outside companies A and B. Company A outsources logistics that ultimately deliver goods to Company B’s customers.
Key Characteristics of Third-Party Logistics
Third-party logistics as a concept has been around for decades, but it has only achieved widespread adoption in recent years. Some key characteristics of modern 3PL include:
- Asset-Based or Non-Asset Based: Asset-based providers invest heavily in transportation assets, warehouses, cross-docks, and technology. Non-asset based players instead focus on services and coordinate logistics using networks and partners. Most 3PL companies offer a mix.
- Integrated Services: Contracting multiple standalone services leads to higher costs and coordination issues. Top providers instead deliver integrated, end-to-end solutions.
- Advanced Technology: Cutting-edge tools for optimization, visibility, tracking, metrics, and more enable modern 3PL companies to provide high reliability and efficiency.
- Accountability: Customers hold 3PL providers accountable to strict service level agreements (SLAs) and key performance indicators (KPIs) tailored to their operations.
- Flexibility: Demand fluctuation, new product launches, omnichannel models, and other realities create constantly changing requirements that 3PLs must adapt to.
- Specialization: While many 3PL companies offer a full menu of logistics services, some niche players focus deeply on certain capabilities or industries to stand apart from the competition.
Why Do Companies Use Third-Party Logistics? Benefits Explained
The rapid growth of ecommerce, globalized supply chains, and omnichannel distribution have made 3PL meaning more complex than ever. Businesses today need maximum flexibility and efficiency to meet accelerating customer demands. However, achieving this internally requires considerable investments in infrastructure, technology, and skilled talent.
As a result, outsourcing to a trusted third-party logistics partner has become invaluable for shippers. It empowers them to adapt quickly, optimize costs, and focus on what they do best.
Gaining Focus
Using 3PL services enables brands to allocate more time, capital and attention to growing core areas like production, marketing, and product development. By leveraging outside specialists, shippers avoid the burdens of managing logistics in-house. Instead, leadership can concentrate on strengthening competitive advantages that move the business forward.
Accessing Capacity
Expanding warehousing space, adding new shipping routes, and hiring qualified personnel all require major financial commitments. Shippers find it drains critical funding needed for strategic initiatives. However, partnering with a third party logistics provider grants access to modern logistics networks and infrastructure without the associated capital investments. This capacity can readily scale up or down based on changing requirements. Additionally, many 3PL providers leverage advanced technologies, including AI development, to optimize supply chain management, improve predictive analytics, and enhance overall operational efficiency: https://www.eliftech.com/ai-development/.
Improving Efficiency
Mature 3PLs have invested heavily in technologies, facilities, and process improvements focused on optimization. Combined with economies of scale, centralized control, and experienced staff, they achieve faster cycle times, higher productivity, and less waste compared to most in-house operations. Shippers experience the bottom-line benefits without the multi-year journey to reach that operational efficiency level alone.
Enabling Flexibility
Volatile consumer demand, seasonal peaks, new product launches, promotions, and omnichannel distribution all make adaptability imperative. Shippers often struggle to reconfigure internal assets, staffing and systems rapidly enough to respond. Leading 3PL providers offer extensive options and built-in scalability to adjust to needs. The best supply chain partners help shippers prepare contingency plans for agility when the unexpected happens.
Reducing Risks
When unforeseen circumstances like natural disasters, supplier delays or compliance violations disrupt logistics operations, it can severely impact customer service, revenue and brand reputation. Maintaining complete in-house functional continuity requires comprehensive contingency planning and insurance policies that carry expensive premiums. However, by outsourcing these functions, 3PLs assume much of the risk liability. Their broad infrastructure and experience managing disruptions also provide more stability.
Controlling Costs
Studies show outsourcing transportation and warehousing to 3PLs leads to an average 12-15 percent reduction in total supply chain costs. Providers can consolidate volumes to secure reduced freight pricing. Optimized routing and carrier selection also lower fuel and mileage expenses. Shared public warehouse space offers cost-efficiency. And avoiding large fixed investments in assets, technology and personnel enables shippers to convert many capital expenditures into more predictable operating costs.
Supporting Growth
As order volumes multiply and shippers expand into new domestic and international markets, distribution needs to scale up to match demand. But accurately forecasting and internally building enough capacity requires guesswork. 3PL services offer flexible frameworks and established infrastructure that businesses can leverage to pursue growth without taking on the risks of over or underinvestment. Partners proactively advise clients based on market indicators as well.
Gaining Knowledge
The best 3rd party logistics engagements are strategic partnerships that drive mutual success through information sharing. Advanced 3PLs provide valuable supply chain insights, cost benchmarking data, and logistics metrics to enhance clients’ understanding of market dynamics and planning abilities. Their breadth of experience also brings innovative ideas and best practices that shippers can apply to achieve even greater efficiency and resiliency.
Third-Party Logistics Services Explained
3PL providers offer a wide range of outsourced supply chain services that enable businesses to optimize their operations. These include comprehensive transportation management, versatile warehousing, and value-added services.
Transportation Management
Transportation spend often represents the largest portion of overall logistics costs. Savvy shippers engage 3PL partners to manage freight execution and movement across their supply chain. This allows them to benefit from the advanced carrier agreements, system integrations, and shipping expertise 3PLs provide. Core transportation services include thorough freight audit and payment services, robust shipment visibility and tracking, multi-modal carrier selection, and complete management of rates, routes, and costs across transportation modes. With the rise of nearshoring and inventory rebalancing, shippers require flexibility in adapting networks and flows to market changes. Leading 3PLs use optimized models, real-time visibility tools, automated milestone alerts, and other technologies to deliver this.
Warehousing Services
In addition to transportation, warehouse capabilities make up a sizable share of overall logistics expenses. Businesses partner with 3PLs to externalize real estate management, inventory handling, labor resources, and equipment costs associated with storage and fulfillment. 3PL warehouses provide secure, scalable capacity that can expand and adapt based on product volumes and customer demand shifts. Temperature-controlled environments ensure product integrity, while value-added services like kitting and reverse logistics simplify shippers’ processes. Rather than taking on the considerable capital expenses of leasing, staffing and managing their warehouses, smart companies take advantage of 3PL warehousing density, flexibility, and service breadth to fulfill orders accurately and efficiently.
Value-Added Services
Leading 3PLs provide an array of value-added services that drive productivity and performance across the supply chain: order management, omnichannel distribution, sustainability options, detailed reporting and analytics, and more. For example, outsourced direct-to-consumer fulfillment enables brands to meet rising consumer expectations for fast, customized delivery. 3PLs handle repacking, personalized messaging, branded packaging, and last-mile delivery – allowing shippers to focus on their core business. Detailed logistics analytics and dashboards also provide real-time visibility into orders, inventory, and logistics costs so businesses can make data-driven decisions.
The Third-Party Logistics Process Step-By-Step
While each client has unique requirements, below are the standard steps in most 3PL engagements:
- Assess Needs – The 3PL thoroughly evaluates operational volumes, constraints, pain points, and goals. This may require an in-person tour.
- Design Solution – Leveraging expertise and data, the 3PL architect designs a comprehensive logistics solution customized to the client’s needs.
- Contract Terms – The client and 3PL formalize scope details, processes, metrics, responsibilities and costs within a contract.
- Implement Technology – APIs, EDI and other tools integrate systems to enable seamless order and data flows between parties.
- Launch Services – The solution goes live on an agreed schedule, with teams collaborating daily to guide activities.
- Review & Improve – Both sides continuously review volumes, performance metrics, challenges and opportunities to drive ongoing optimization.
How to Select Your 3PL Partner
The advantages of outsourcing logistics are clear. However, choosing the right 3rd party logistics provider is key to achieving them. Here is a step-by-step process for vetting and selecting your ideal 3PL partner:
- Define Requirements – Detail must-have services, operations data, volumes, compliance needs and multi-year objectives.
- Seek Recommendations – Consult industry colleagues and associations to compile a list of vetted providers known for specialties and customer service.
- Research Capabilities – Visit company websites and materials to gauge services, assets, technology, security standards, sustainability and other differentiators.
- Issue RFP – Create a comprehensive Request for Proposal defining your needs and distributed to a shortlist of leading candidates to return thorough responses.
- Evaluate Fit – Compare RFP responses against requirements to identify providers most aligned operationally and culturally with your goals.
- Conduct Interviews – Further assess company expertise, communication styles and vision by discussing capabilities, metrics and scenarios.
- Tour Facilities – Visit shortlisted 3PL locations in-person to inspect security, condition, layout and workflow relevant to your operations.
- Request Pricing – Ask remaining candidates to provide a complete outsourced solution price breakdown aligned with all defined service levels.
- Perform Due Diligence – Verify certifications, audit financials, run credit checks, and contact references to confirm third party logistics provider credibility.
- Make Final Decision & Transition – Select best-fit 3PL partner and develop a detailed project plan for safely ramping up new logistics operations.
Conclusion
We have just explored what does 3pl stand for, the critical role 3rd party logistics plays in modern supply chain operations and how businesses can benefit from outsourcing to 3PL partners.
As competition accelerates across industries, companies must pursue every opportunity to gain efficiency, insight, flexibility and a competitive edge while controlling expenses. The world-class transportation, warehousing, distribution and fulfillment capabilities that 3PLs provide enable this focus.
However, thorough diligence is required to select the right partner to meet unique operational requirements beyond a standard template. Taking the time to strategically evaluate priorities, vet capabilities, and align them with culture maximizes the long-term value that 3PL engagement delivers.
The future seems bright for both shippers and logistics providers as more enterprise leaders recognize why and how to leverage specialized third-party logistics in their success formula.