What Is a 3PL: Third Party Logistics

Author: Bryan Van Suchtelen
December 11, 2023

Shipping, inventory management, returns, warehousing—there are a lot of moving parts to keep track of in the logistics game. This has made it rare to find wholly in-housed supply chain management today, even in small local businesses. 

The majority of businesses now contract outside shipping companies and other service providers to get their products from the point of manufacturing to the end user. In fact, among domestic Fortune 500 companies, 90% utilized third party logistics providers in 2017, nearly double the percentage that did so in 2001. 

With that in mind, is outsourcing the storage and transport of your goods through third party logistics, or 3PL, a good fit for your business?

Introduction to Third Party Logistics (3PL)

Logistics is the portion of supply chain management that encompasses the entirety of creating and moving a saleable product from origin to final destination. 

For instance, let’s look at a rocking chair. The starting point is the raw material—oak—being sourced, ordered, turned from tree to lumber, aged and stored, and eventually delivered to one or more stops where it’ll be cut, shaped, and built into a finished chair. The chairs are then created and stored in a warehouse space before being shipped either to furniture retailers or individual consumers’ homes. 

Throughout the whole process, a successful business needs to know how much to order, make, and store to optimally meet customer demand without: 

  1. The lost sales of making too few chairs
  2. The storage and damage cost of making too many chairs

Having a bird’s eye view and making the right decisions about the total flow of resources, goods, and services is called logistics management. 

So what is 3PL logistics, exactly? Logistics starts with one and two before you jump to three: 

  1. First Party Logistics (1PL) is when a business brings products directly to their customers.
  2. Second Party Logistics (2PL) includes a separate shipper who delivers to customers.
  3. Third Party Logistics (3PL) includes a separate business that warehouses goods between product creation and client delivery, and may provide additional services. 

Continuing our rocking chair example, using 3PL would mean that the manufacturer hires a fulfillment center to store their chairs and manage the process of shipping them out as orders come in. 

FYI, there’s also a fourth link in the chain: Fourth Party Logistics (4PL) companies oversee, manage, and may even select a 3PL service provider on behalf of a business. 

Transform Shipping Data Into Savings

Key Services Provided by 3PLs

A 3PL provider isn’t the same as renting an empty warehouse—it’s adding a layer to your business that handles a set portion of your supply chain operations. Services 3PLs often provide include: 

  • Procurement – Managing the ordering and intake of goods from point of manufacture in response to orders or business goals.
  • Storage – Safely storing and keeping track of all goods in their care, including monitoring how long the goods have been there, keeping them damage-free, and ensuring they can be retrieved.
  • Picking – Physical retrieval of an ordered product from the storage location by human or robotic hands. 
  • Packaging – Wrapping, boxing, and addressing each shipment as directed by the business in either generic or branded materials. 
  • Transport – A 3PL may either directly handle shipping functions or use their own freight contracts and bill costs back to their clients.
  • Route optimization – Cost, time, and error reduction through best practices and efficient fleet management software.
  • Freight forwarding – Managing the import and export of goods.
  • Reverse logistics – Managing returned goods and product disposals.

Underlying all of these functions is inventory management. A solid 3PL should be able to partner with you in providing analytics, real-time data, and proactive guidance to maximize customer satisfaction and reduce costs and order loss.

Types of 3PLs

Among 3PLs, there are differences of service range and type. In addition to the traditional 3PLs that warehouse and distribute physical goods, some specialize in specific areas of focus such as: 

  • Financial optimization of freight costs, inventory management, audits, and accounting
  • Forwarding between your business’s warehouse and carriers for delivery
  • Transport between factories, warehouses, and customers
  • Data analytics for B2B

Advantages of Partnering with a 3PL

Outsourcing to a 3PL has the potential for savings of both time and money, although that depends on the current state of your logistics and locating the right 3PL for your business. When partnering with a 3PL, look for: 

  • Efficiency and customer experience improvement – Cutting through red tape, optimizing shipping methods, and finding ways to get the job done more quickly are all top of mind for successful 3PLs. Your customers should benefit from more transparent and immediate shipping updates and a higher rate of undamaged, on-time deliveries.
  • Shipping cost reduction – Economy of scale may equal lower shipping costs when your goods ship through a 3PL instead of handling your own freight contracts. 
  • Expert guidance – The right 3PL can help you identify innovation and test improvements. Outsourcing can be a way to up your logistical performance by partnering with specialists in the field.
  • Labor cost reduction – Hiring staff to handle inventory and shipping functions costs more than the calculation of their hourly wages. Benefits, unemployment taxes, and the additional staff to recruit, hire, and on-board workers all add up. A 3PL can help you avoid hiring challenges, high turnover, temporary agency costs, and staffing gaps as well.
  • Management time – From HR services to direct management, overseeing internal inventory management and shipping teams as well as freight contracts and logistics software requires significant time. Outsourcing can allow you to downsize high-paid staff or redirect them to benefit sales and other business operations. 

Challenges and Considerations in 3PL Selection

Companies of all sizes work with 3PLs. So long as the math works to make it more profitable than handling the order fulfillment process directly, it can benefit your business. When you’re starting to shop and compare them, look at: 

  • Location – Do they have facilities near your manufacturing location(s) and near your consumers? How will distance affect access, delivery time, and cost? 
  • Cost – Look at the fine print on charges and discuss savings opportunities, such as how you group or pre-package your goods for warehouse intake. Do storage charges change based on length of storage time, volume vs. weight, stackability? Do they offer destruction or other aged good services, and for how much? 
  • Customization – If packaging is critical to your brand, particularly with luxury goods, make sure to test and confirm that a 3PL can deliver products to your exact specifications.
  • Scope – Ask about the current client size they serve in terms of number of SKUs to ensure your inventory won’t get lost in the crowd. 
  • Scalability – If you’re coming in as their biggest client ever, that may pose a problem in the future. Find out if they can adjust around company growth, switch in product focus, or major seasonal shifts. 
  • Tracking – Ask to view sample reports, dashboard interfaces, and walk through how they track inventory. You’ll want to understand how to access real-time data on your goods and shipments, and know that they’re monitoring goods from receiving through to customer delivery.
  • Special features – Do your products need cold storage or other types of climate control? Does your industry have unique logistical needs? What services does the 3PL offer that could benefit your current or future product range? 

The Cost Implications and Financial Benefits of 3PLs

When you dive into shopping for a 3PL, you need an apples to apples (or rocking chairs to rocking chairs) understanding of how costs compare. 

If you’ve been hanging out in the 1PL or 2PL zones, gather full-year data on the your logistics functions that a 3PL would replace, including: 

  • Storing and monitoring your goods
  • Labor and materials cost of picking and packing shipments
  • Shipping, either via direct fleet cost or 2PL shipping contracts and fees
  • Receipt and distribution or destruction of returned goods

Don’t forget to account for time. While a 3PL optimizes performance based on specializing in these logistics functions, they should also provide tools and analytics to reduce the time you’ve been spending on handling them in-house. 

Is a 3PL Right for Your Business?

Understanding what services they offer and how to compare your logistics time and costs in other scenarios is important in deciding whether a 3PL model is the right fit for your business. 

Before you make that leap, are you sure your current shipping arrangements are optimal? You can save time, money, and headaches with a Lojistic account.

Lojistic’s easy-to-use platform helps you land lower rates with shipping carriers, performs shipping invoice audits, and even pursues refunds owed to you. It provides shipping reports that show where you’re overspending, helps you avoid late fees, and automates manual processes. 

Join our network of delighted users and transform your shipping game with actionable insights and tools from Lojistic. You can check out a demo or schedule a convenient time for us to contact you.

Sources: 

Business News Daily. 3PL Logistics Guide. https://www.businessnewsdaily.com/15954-3pl-logistics-guide.html

TechTarget. 3PL (third-party logistics). https://www.techtarget.com/searcherp/definition/3PL-third-party-logistics
QuickBooks Blog. What is 3PL (Third-Party Logistics) and are they right for your business? https://quickbooks.intuit.com/r/midsize-business/what-is-3pl/

Author

Bryan Van Suchtelen

Bryan Van Suchtelen

Corporate Director of Parcel Rate Services

With more than 34 years of parcel experience, Bryan Van Suchtelen is the Corporate Director of Parcel Rate Services at Lojistic, one of the nation’s top logistics and transportation cost management companies.

Prior to joining Lojistic in 2015, Bryan enjoyed a 26-year career with UPS where his roles included Pricing, Field Sales and Director-level Sales Management of some of UPS’s largest customers.

At Lojistic, Bryan leverages his wealth of experience/expertise to identify and execute supply chain cost management solutions for parcel shippers of all sizes. Bryan has helped his customers reduce their shipping spend by tens of millions of dollars.
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