3PL (Third-Party Logistics): Pros, Cons and Use Cases

What is 3PL?

Third-party logistics companies provide services that support some or all parts of business shipping processes, taking care of all facets of moving goods from manufacturers and distributors to the end customer. An outermost corporation performing third-party logistics (3PL) is often utilized in outsourced logistics and supply chain management for the outsourcing of the shipment and fulfillment services of an enterprise, which include:

• Transportation
• Warehousing
• Materials procurement
• Inventory management
• Customs brokerage
• Freight audit
• Payment
• Shipment tracking

Therefore, a 3PL would typically spring up in a company’s warehouse and provide transport services for the overall delivery workflow.

Third-Party Logistics (3PL) Essentials

Third-party logistics providers (3PLs) are well-positioned to manage all inbound and outbound movement in addition to warehousing on behalf of their honored clients. They have large warehouse storage to hold merchandise, are quick to pick orders, and have prompt shipping. Although the majority of 3PLs do not own delivery trucks, it is also important to note that exceptional providers like Amazon provide complete last-mile deliveries as part of their complete logistical solutions.

When you choose to use third-party logistics, you outsource your order fulfillment function, thereby relieving yourself of the intricacies of managing warehousing, staffing, and so on. Instead, what you get is access to safe storage spaces within large warehouses that distribute their services to numerous companies. Seasoned warehouse personnel handle the receipt and storage of your products, taking items from shelves and securing them for mailing. After liaising with different carriers, the 3PL guarantees timely delivery to your clients.

Maximizing speed and efficiency is one of the strongest factors to be gained from the use of a 3PL. A 3PL will be able to take care of higher order volumes as your business expands without having to hire new personnel. They also bring their network to use so that they are able to negotiate lower shipping rates and make delivery times shorter. When you outsource to a reputable 3PL, you utilize the skills and attention of professionals in the supply chain.

Some 3PLs provide customs brokerage, domestic and international transport, and compliance with trade; others offer engineering and delivery of omnichannel logistics solutions for manufacturers, retailers, and e-commerce companies.

Four Functions of 3PL Providers

1. Shipping and Receiving
   
   Shipping and receiving 3PL vendors are source-driven by the management of the shipping process from start to end. Generally, such companies highlight technology, almost always a transportation management system (TMS), or combined freight management services. These technologies are optimized to simplify efficiency as well as automate such common, yet time-consuming jobs as freight payment and accounting. Included among these 3PL providers is the management of carrier relations, freight data, and matrix reporting for real-time visibility and greater transparency throughout the shipping process. 
2. Transportation
   
   Transportation 3PL providers are engaged in shipping goods or services from one place to another. A typical example is when a 3PL provides the management of an inventory shipment between the company and the buyer. Many transportation 3PL providers usually outsource to other transportation agencies to execute their partner tasks. 
3. Warehousing
   
   Warehousing 3PL providers are perhaps the most prevalent of the third-party logistics providers. A warehouse 3PL becomes absorbed into a firm’s warehousing and transport operations and has a specialty in storing and distributing goods and/or services. Many of the warehouse 3PL providers provide flexible means of dealing with storage, distribution, and the transportation of products. 
4. Distribution
   
   Most 3PL organizations also offer hundreds of distribution and wholesale services such as outbound order fulfillment, picking and packing, custom labeling, and manufacturing. The effective allocation of many product quantities can be a hard nut to crack for a small company; through outsourcing distribution to a third-party logistics provider, its employees can focus on other core business tasks.
   

3PL vs. 4PL

A 4PL organization performs many of the services a 3PL does, but there are some critical distinctions.
First of all, a 4PL has a much wider role than a 3PL. A 4PL is described by the Council of Supply Chain Management Professionals (CSCMP) as being “often a separate entity established as a joint venture or long-term contract between a primary client and one or more partners.”

In other words, a 4PL provider is charged with the responsibility of planning, managing, and designing a whole supply chain from top to bottom (or from beginning to end), as opposed to traditional delivery, distribution, and transportation services.

Advantages of 3PL

As alluded to above, there are plenty of reasons why companies look for a 3PL for their logistics needs. From time and cost savings to delivering a better and cheaper experience to customers, outsourcing to a third-party logistics provider can be very sensible. These are some of the more common reasons why businesses are partnering with 3PLs.

1. Scalability
   
   A 3PL provider can add to a firm’s space, labor, and transportation according to the exact services needed. Manufacturers, suppliers, and other producers can achieve growth in new territories much more quickly and with a much better feeling of uniqueness, with much less hassle. A 3PL is developed to help you streamline your logistics functions that you might be less savvy in and pave the way toward better business growth. 
2. Time Savings and Cost Savings
   
   A business understands that there is some measure of efficiency required for success, and that’s where a 3PL can do a lot of good. Instead of spending time and money budgeting for building and maintaining a warehouse, thinking about how to get the goods and/or services there, optimizing services, and keeping pace with new technology through their own management arrangements, a 3PL takes the costs out of the picture and frees up your key employees. 
3. Expansion
   
   It has never been easier to bring businesses to new grounds, into emerging markets and countries, than by using 3PL services. When it works with a 3PL, a business is able to benefit from new supply chains, better customer prices, and new markets that it has hitherto not been capable of. Distribution centers and warehouses from the third-party logistics providers, which tend to embed the required security and compliance procedures into their service offerings as well as having the right accreditation to support global services, make such an expansion easier than ever before.

Disadvantages of 3PL

Although the reasons why a company should adopt a 3PL are varied, there is another side to this coin; there are great rewards, but the use of third-party logistics companies can carry its own risks.

1. Loss of Control
   
   When selecting a 3PL provider, an organization is abandoning some level of control of the delivery. When a business makes the decision to form a partnership with a third-party logistics provider, they are taking a major leap of faith in a 3PL to perform to the agreed-upon SLAs for functions that can directly impact customer satisfaction. Smooth exchange of vital EDI and non-EDI information may be compromised when one of the parties uses poor-quality B2B integration software. When your B2B integration software fails to receive and ingest an EDI load tender reliably, that may lead to a poor impact on trading partner relationships. Moreover, if firms share some proprietary information with a third party (sourcing, order information, etc.), this would leave firms vulnerable if there were a data leak. 
2. Cost
   
   Although a 3PL can save a company a lot of time and money, external factors such as tariffs, overregulation, and weather exist—costs can ramp up. A 3PL company may appear to make financial sense at the outset, but you’re in the hands of this external trading partner and its own business strategy. What was at one time standard transaction costs can eventually become stratospheric as your business gulps down more services and may end up being more costly than an in-house logistics team. What’s more, it is not easy to establish cost-effective cooperation between a shipper and a 3PL, and it is not something you can do much about. 
3. Business Understanding
   
   If you are in a highly regulated business or your needs are very specific (cold storage, temperature-controlled delivery, etc.), a cookie-cutter 3PL probably won’t suit your business. In addition, 3PLs probably have hundreds or thousands of customers and may not pay your business the attention it needs. How are they to reach out for support? How quickly can they respond to your request? It is essential to select a 3PL that can really understand your business, its goals, and how efficient logistics and distribution can support the achievement of these goals.

When Should You Consider a 3PL?

The choice of whether a business should employ a 3PL involves many variables.
Does it make financial sense?
Are you internally equipped enough?
Will it streamline efficiency?

Though there isn’t a magic potion that will indicate the right time to adopt a 3PL, there’s no shortage of recurring motifs that help make an outsourcing decision.

If, however, the company is growing more energetically than anticipated (which is a wonderful thing to negotiate, by the way), soaring labor, manufacturing, facilities, and personnel costs can spiral out of control in no time flat.

Your growing pains needn’t necessarily consume some of your precious internal resources if a third-party logistics company could ease them. If you hire a 3PL, then you may be saved from logistics nightmares, not to mention time and money.

3PLs too can benefit from the latest and most contemporary technology. When a company hires a 3PL, it does not have to make the investment in technology itself to reap those technological benefits.

Those 3PLs that have in-house IT departments that design and supply their own B2B integration, WMS, TMS, and inventory management software can be a massive boon.

Many companies decide to go with a 3PL after constant inventory inaccuracies, inefficiencies, and other critical mistakes. Unreliable inventory capacity and unpredictable costs can destroy a business and its reputation, but a 3PL with credible inventory solutions can be useful in smoothing the flow of goods and optimizing resource usage and delivery.
However, so often the choice of whether to embark upon a 3PL is simply a matter of asking yourself a rather honest question: Do I really need to be managing these workflows internally?

The 3PL Consideration

Good infrastructure, transportation, concerted skills, and solutions make 3PL suppliers significant to an enterprise, irrespective of the industry, the number of companies, or their location.

The question, though, is: Does it make business sense to use a 3PL?
There are those companies that have internal skills and expertise and never need one. Some will realize that a 3PL, or even a 4PL, can significantly reduce their logistics and fulfillment issues and will serve as an ally in building up their brand and market share long term.

Interesting Reads:

What is a 3PL Warehouse, and How does it Work?

The Ultimate Guide to Logistics & Supply Chain Acronyms

Building Trust and Loyalty in the On-Demand Delivery Space