A whopping 90% of Fortune 500 companies in the U.S. rely on at least one third-party logistics (3PL) provider to help with their logistics needs. This statistic, from an Amstrong & Associates Inc. report shared in Supply Chain Dive, reinforces the value that 3PLs play in all business sectors.
The rising trend in using 3PL management has been impressive—the figure was almost half that in 2001, at 46%. And trends are anticipated to continue the meteoric rise. Two years ago, the global 3PL market was valued at $1,023 billion, and it’s expected to almost double to $1,994 billion by 2030, per a Market Research Future report. Yes, those are global figures, but the U.S. is a big part of that.
Certainly, ecommerce plays a significant role. Statista showed that in 2021, global retail ecommerce sales were $5.2 trillion and are forecasted to grow to around $8.1 trillion by 2026. Someone has to handle and ship all those packages, and it won’t be every seller. While many people think of supply chain 3PLs only as an ecommerce service, the Fortune 500 company example clearly shows that isn’t the case. Many companies using 3PLs do so for business-to-business (B2B) logistics.
To a 3PL management company, it may not matter if they’re working with B2B orders or business-to-consumer orders (B2C). Though some services may differ, much of the logistics process can be the same. So, it’s essential to understand what a 3PL can offer, as the term is now used broadly, and people may not all be thinking of the same capabilities and services when using it. In reality, 3PLs offer various services and benefits; clients can choose their desired level.
What is a 3PL?
A 3PL is a company used for outsourced logistics needs, in part or full. The key function of a third-party logistics provider (3PL) is to help companies:
- Receive products
- Store them in their warehouse
- Fulfill orders
- Transport them to customers
- Track shipments and inventory
- Handle customs brokerage
- Tackle customer service inquiries
This is a small list of what a 3PL or third party logistics provider might offer, but the extent of services depends on a company’s needs and budget. A 3PL in supply chain management generally has a more robust infrastructure to manage and handle any necessary service in that supply chain process, and it can usually do so for less money and with greater expertise than the company outsourcing to it.
3PLs as a reliable partner
Many companies realize that working with 3PLs is pivotal to ensuring accurate and timely 3PL fulfillment & agreement optimization, providing better warehouse solutions, managing inventory, and determining the best shipping options. Outsourcing and partnering with a 3PL can give companies time to do what they do best while relying on 3PLs for what they do best. Shippers (ecommerce or B2B) can save time and money while providing better customer service.
A 3PL in supply chain management should be viewed as something other than an intermediary but rather as a reliable partner. That’s because the 3PL’s success is tied to the shipper’s. The logistics company can provide helpful benefits such as volume carrier discounts, and it should be able to scale with you, but it also works hand-in-hand with clients to determine what’s most important to them.
One client might prefer to send packages with different service levels to arrive faster, though shipping costs more. Based on their business model, another might want everything sent at the lowest price. A 3PL should internalize how a shipper’s kitting must be completed so subscription service customers can precisely get what the company envisions. Securing this will only happen through a partnership model.
The roles and benefits of 3PL providers
3PL management can offer various benefits and options based on the provider and the company’s needs. While some choices have already been shared, here is a more comprehensive listing of them:
- Volume carrier discounts
- Freight discounts
- Bulk packaging discounts
- 3PL management scaling with the company as it grows
- Warehousing, scalable by need and location
- Technology: warehouse management systems (WMS), inventory management systems (IMS), transportation management systems (TMS)
- Shipping package optimization
- Customs brokerage services
- Freight forwarding
- International shipping
This list is partial. In addition, shippers in a 3PL partnership can access the 3PL’s expertise in various areas. That might include a greater understanding and access to international shipping, which can expand a company’s market opportunities. Businesses can lower logistics costs by not renting out their warehouses and hiring labor to staff the warehouse for picking, packing, and shipping.
A 3PL in supply chain management has multiple clients, and they can spread their work, warehousing, technology, and other infrastructure costs across all clients. Some shippers save money on technology by using the 3PL’s tech, like inventory management systems, to optimize their ordering process and track their current inventory and product flow more accurately. All of these areas can improve a company’s supply chain management.
To better understand what 3PLs provide and how to evaluate them, it’s helpful to know about the four key types of 3PLs. They are standard providers, service developers, customer adapters, and developers. Let’s dive into each to understand what they are and who can benefit from them.
#1 Standard 3PL providers
A standard 3PL provider offers baseline services, including produce receiving, storage, stock rotation, and transportation of the goods. Additional options include return services and reverse logistics. These 3PL services are the backbone of a smooth supply chain management system.
Without offering as many bells and whistles as other supply chain 3PL types, this is the lowest-cost option. The standard option suits ecommerce retailers and B2B companies that don’t need those bells and whistles but just want the essentials.
#2 3PL service developers
A developer would offer the same essential services as a standard 3PL provider. But it would provide some additional perks as well. That might include technology and IT infrastructure, such as shipment tracking and compliance management.
It also offers other logistics services like cross-docking, which allows packages and freight to be unloaded from one truck onto another without having to be stored or have additional processing at the initial warehouse.
Doing so can be a money-saver and a time-saver when goods go to multiple warehouses or locations.
A service developer might offer other features like customized packaging. A service developer 3PL can be helpful for B2B and B2C shippers with more comprehensive shipping needs and transparency requirements. These clients may want freight consolidation strategies to streamline their operations and to prioritize timely delivery.
#3 3PL customer adapters
A 3PL customer adapter is responsible for almost all clients’ logistics efforts. That can include the end-to-end shipping process, carrier contract negotiation, and rate maintenance. The services provided by the previous 3PL types would be included here, along with additional technology access, like TMS, to give shipping visibility and customization options if wanted. Customer adapters might also offer freight forwarder solutions, acting as intermediaries and orchestrating freight transportation and logistics needs. A customer adapter 3PL client might require expert management of complex freight and transportation logistics, wanting to be hands-off.
#4 3PL customer developers
The biggest businesses generally use customer developer 3PLs. This category is less popular overall since it is such a comprehensive service. A customer developer, 3PL becomes the client’s outsourced logistics department. Outsourcing is naturally the most expensive option since it requires more labor costs, responsibility, and effort. It is ideal for large online retailers and shippers with complex systems, as it can require integrating other software systems.
Determining the Right 3PL Type for Your Business
After reading through the four types of 3PLs, it can be confusing to determine which is best for your business. Here are six steps you can take to help you do that.
#1 Assess your needs
Consider your logistics needs, how complex they are, and the scope of your shipping. Ask yourself questions like Would cross-docking save you money? How much visibility do you need in the shipping process? Do you want customized packaging? Do you want a hands-on approach to your logistics, or do you want to hand over the keys to the operation?
Think through what would help your company better serve its customers and help you focus on your growth. That can help you determine if basic services or comprehensive management is required.
#2 Evaluate your resources
Small companies have fewer resources than large ones. That is one way to consider what you can afford and how extensive you want the services to be. It’s also okay to start with one level of service and add more as needed.
Ask prospective 3PL companies how they can scale their services as you grow and just scale the current offerings. Consider also what your internal human resources and capabilities are. If you have no expertise in logistics and don’t want to build up that department, it may pay to look for a more comprehensive option.
#3 Cost vs. benefit analysis
Weigh the benefits of enhanced services against the associated costs. “Nice to have” is not the same as “need to have,” especially if the money can better be allocated elsewhere. After analyzing these factors, your choice should align with your budget and goals.
#4 What’s your long-term strategy?
While not all companies can know what will happen several years down the line, especially if it’s a startup or early-stage enterprise, think about your potential business growth and expansion plans. If you can select a 3PL management type that can scale with you and meet your potential future needs, that saves a lot of hassle later, and the 3PL management can help you move to those following stages more efficiently and cost-effectively.
#5 Technology and customization
Find out what technology and customization options the 3PL offers, and evaluate what you have now. It can be less expensive to piggyback on a 3PL’s technology, saving you money and keeping one source of truth. If you have technology, you want to retain, find out if and how the 3PL can integrate it into their offerings so you both get the benefits. Technology allows you to ensure visibility, while customization can help you align with your business preferences.
#6 Industry expertise
Consider a prospective 3PL’s industry expertise and whether they know your industry and can provide seasoned advice. Given that it should be a partnership, you’ll want a 3PL that adds value and can help your business grow. The 3PL should be familiar and experienced with your business sector.
Final steps
Understanding the nuances of different supply chain 3PL types and aligning them with business requirements empowers companies to optimize their logistics operations effectively. By evaluating service needs, resources, costs, growth strategies, technology, and industry expertise, businesses can confidently select the most suitable 3PL partner.
After a holistic understanding of these 3PL management types and their unique benefits, your company is better positioned to make informed decisions aligned with your specific operational goals. Shipware’s experts can offer additional insights into choosing the right 3PL for your needs and exploring suitable 3PL solutions. Contact Shipware today.
Sources:
- Supply Chain Dive. Fortune 500 companies are using 3PLs more, study finds. https://www.supplychaindive.com/news/third-party-logistics-3pl-increase-large-companies-2017/443710/
- Market Research Future. Fortune 500 companies are using 3PLs more, study finds. https://www.marketresearchfuture.com/reports/third-party-logistics-3pl-market-9996
- Statista. Retail e-commerce sales worldwide from 2014 to 2026. https://www.statista.com/statistics/379046/worldwide-retail-e-commerce-sales/
This post was developed by SIB’s team of logistics experts from our Shipware division.
