A: 3PL (third-party logistics) is a shipper’s use of third-party businesses for the outsourcing of logistics, distribution or fulfillment services. This often includes warehousing and transportation services that can be scaled to fit the needs of a given customer.
A: There are numerous cost and efficiency benefits that should incentivize shippers to use 3PL. Here’s a list we will break down further in the post below:
Let’s dive in!
The Third Party Logistics (3PL) industry has been on the rise for years and is projected to grow by about $500 Billion over the course of the next 7 years.
If you’re wondering why, look no further than the needs of shippers transitioning from dedicated fleets, who are ill-equipped when it comes to managing their transportation and warehousing needs.
Third party logistics providers produce staggering cost savings and increased efficiency for shippers across the board.
As we mentioned above, a 3PL is a company that shippers outsource to for transportation and warehousing services.
While it’s possible for shippers to outsource all facets of their logistics operations to a 3PL, it doesn’t need to be that way:
3PLs can also take over certain parts of shipping operations to aid shippers in areas outside their core competency.
3PLs are also useful because of their flexible capacity, and their ability to scale based on the needs of a particular customer. For example, if a customer typically uses twice as much outsourced warehouse space in the winter as it does in the Summer, a 3PL can adjust to the client’s fluctuating needs.
If a shipper chooses to use a 3PL as a comprehensive fleet outsourcing and warehousing solution, the 3PL will provide a variety of services that span multiple areas of the customer’s supply chain. The best 3PLs are able to leverage their technology, expertise and relationships to provide supply chain efficiencies and cut costs for their customers.
4PL (fourth party logistics) providers are companies used to oversee and integrate every element of a shipper’s supply chain.
4PLs often require complete control over this process, overseeing all 3PL providers and ensuring that everything is going smoothly. Using a 4PL provides a shipper with a supply chain integrator that adds a consultative layer to the pursuit of greater efficiency and cost savings.
If a shipper needs additional oversight, or employs multiple 3PLs to perform different functions of their logistics operations, they can benefit from the comprehensive management offered by a 4PL.
Let’s say a Wisconsin-based cheese producer works with a few regional grocery chains across the Midwest.
The cheese producer finally closes its first major national chain, and the influx of orders is so large that an inordinate share of the company’s resources are being devoted to order fulfillment or processing and delivering orders to end customers.
Now let’s say another major national grocery chain decides to start carrying the product.
Well there’s an issue:
Production has slowed down because of the massive effort going toward fulfillment, and there’s not enough product to satisfy both new and existing accounts.
The flexibility just isn’t there.
This is the perfect situation for a 3PL, which could offer the flexibility necessary to fulfill all orders while allowing the business to focus on its own core competency: making cheese.
Prior to its emergence on a national scale, our Wisconsin cheese company has realized that in order to effectively oversee its supply chain and its overall logistics operations, it needs to invest in new logistics technology.
However, this financial investment would be considerable, and the successful learning and operation of the technology would rely on hiring more people to the operations team.
This would be a great time to bring in a 3PL that is already equipped with the appropriate technology and can immediately address the issue.
Because our cheese company is just getting off the ground regionally, the grocery chains carrying the product are only purchasing small quantities.
This means that the company may only fill up one tenth of a refrigerated truck with orders that need to go to 6 grocery stores in 3 different cities in Iowa.
Sending one truck from a private fleet would be incredibly inefficient.
A 3PL’s LTL consolidation capabilities would allow our cheese company’s product to be consolidated with other shipments going to similar locations, significantly reducing costs.
Let’s fast forward a few years when our Wisconsin cheese company has gained significant market share and is now in high-demand internationally.
Instead of embarking on the international shipping journey blindly, our company should rely on the expertise of a 3PL, which will be well equipped to manage all trade compliance requirements, tariffs and customs regulations.
There are many massive benefits inherent in outsourcing to a third party logistics provider.
Many of these benefits are centered around a 3PL’s ability to provide shippers with cost savings and greater levels of efficiency throughout the logistics process.
Because third party logistics providers specialize in transportation, warehousing and logistics, many are equipped with vast distribution networks which allow them to provide even better service to their clients.
A shipper with a private fleet that needs to get one single item from point A to point B has no choice but to use one of its vehicles to get the item to its final destination. This can be cripplingly inefficient from a cost and labor standpoint.
3PLs are able to leverage relationships to generate volume discounts and consolidate freight through methods like cross-docking to lower overall costs and improve delivery on-time percentage.
In fact, in the US, 3PL providers control about 25% of the less-than-truckload (LTL) market.
The most obvious reason for the cost savings behind hiring a 3PL provider lies in the fact that shippers don’t have to create and manage their own fleets, warehouses or tracking technology.
But the cost savings of working with a 3PL don’t stop there.
Here are a the major sources of cost savings:
Third party logistics providers operate warehouses that cater to multiple shippers.
Outsourcing warehousing cuts supply chain costs considerably, but it’s also beneficial because it supports changes in the amount of goods in need of storage.
Let’s say a company operating its own warehouse has fluctuating seasonal sales, needing to store much more merchandise during particular seasons than others.
The extra warehouse space on slow seasons can incur a massive and unnecessary cost.
3PL providers solve this problem with flexible, shared warehouses, designed to fulfill the scaling needs of multiple clients.
Outsourcing logistics allows shippers to avoid the costs associated with purchasing and implementing advanced delivery and tracking technology.
Third party logistics providers have professional experience and insights that promote increased efficiency and cost savings throughout the warehousing and delivery process.
By taking advantage of vast resource networks, consolidating LTL shipments and implementing processes like cross-docking, 3PLs are able to create savings for shippers.
On average, 3PLs should be able to handle a capacity for up to 30 times the order volume of a particular shipper.
This makes 3PLs extremely flexible, as they are able to adapt to high and low order volumes without suffering from decreases in efficiency.
3PLs typically have more resources to allocate to technology that measures their delivery and warehouse performance.
They also possess the industry experience to draw valuable insights from the reports the technology helps them generate—and can use these insights to help shippers grow and improve their companies.
By using performance monitoring and analytics to build a knowledge base on factors like inventory levels, product popularity and shipping speeds, 3PL providers can ensure that their clients are getting the most out of their fulfillment strategy.
By hiring third party logistics providers, shippers are able to alleviate the risks that go hand in hand with fluctuations in order volume or a need for warehouse space.
They also reduce employee or security-related risk factors.
Outsourcing to a third party logistics provider—instead of having to hire drivers and insure the vehicles of a dedicated fleet—produces obvious cost benefits while decreasing a shipper’s liability.
As experts in the supply chain and logistics industry, 3PL providers are required to be knowledgeable about certain aspects of compliance and regulation that shippers may not be accustomed to (or may not have the time to deal with).
Outsourcing to a 3PL provider makes it far more likely that facets of logistics such as international shipping, taxes, customs and documentation will be handled correctly, saving shippers the headache of learning how to be compliant in an area far outside their core competence.
83% of 3PL users agree that the use of 3PLs has improved service to their customers.
The benefits of working with a 3PL provider create a ripple effect that ultimately improves the experience of the end user.
When a shipper chooses to outsource to a 3PL, there’s no longer a need to manage a facet of the business that lies outside of the company’s core competency.
In addition, the vast industry networks, experience and flexibility of 3PLs drive efficiency, getting products to consumers quickly.
Third Party Logistics providers can solve most of the problems experienced by shippers with self-managed fleets. They help shippers cut costs, save time, and improve customer service as well as general business processes. Third Party Logistics providers have more experience, established relationships, and better software.
3PL Market size was over $750 billion in 2016 and is predicted to grow at an estimated CAGR of 4.6% from 2017 to 2024.
This is the most simple one but it is vital. There are various types of 3PLs, ranging from all-in-one solutions to companies that just focus on one or two facets of logistics operations, such as fleet outsourcing or warehousing.
Make sure you identify your needs and find the right provider.
As we saw in the Wisconsin cheese company example above, it’s tough to know how your business needs will evolve, but you should have a general vision of what the future may hold based on your business goals.
If you want to expand regionally, maybe regional fleet outsourcing is something to pursue. The earlier you begin building relationships with 3PLs that could help you down the road, the more prepared you will be when the time comes.
Different 3PLs have different specialties, just like manufacturers. For example, if you manufacture food products that are in need of cold storage and refrigerated transportation, look into refrigerated fleet outsourcing with a company that specializes in refrigerated transportation and warehousing.
While 3PLs often offer increased capacity and flexibility than what you would get from a private or dedicated fleet, some are better equipped than other to handle fluctuating demand.
It’s also important to ask a 3PL about their maximum capacity, to make sure you don’t outgrow them.
Asking these questions will help you identify the right 3PL for your needs. Once you understand your company’s needs, you will be better equipped to evaluate different 3PLs.
Consumer expectations for expedited or same-day delivery are becoming more widespread, and many shippers need to adapt to rising standards in the world of logistics.
It’s far from a guarantee that all shippers with dedicated fleets will be able to fulfill the needs of consumers in our increasingly “on demand” economy.
Even without more complex consumer demands, outsourcing to a 3PL provider creates inherent benefits for shippers across the industry spectrum.
3PL companies offer a proven solution for increasing overall efficiency and customer satisfaction while cutting logistics costs.