20 March 2023
These days, in the midst of the flourishing world of e-commerce, shipping plays an even more integral part in a business’s success or failure than ever before. Unfortunately, many e-commerce businesses or retailers underestimate how vital a role shipping plays until it is too late. As a result, an all too common story is that a company finds rapid success and blows up, but cannot meet demand due to undersupply of products and an inability to distribute that product on a wide scale.
Oddly enough, spectacular growth can be the death knell for a company that does not have a firm grasp on its shipping, fulfillment, and logistics and is unprepared for large-scale demand. Breakdowns in any of these areas can cripple a company, let alone in all three. Because of this, many companies that experience an uptick in growth or notice that they need assistance turn to third-party logistics companies, also known as 3PLs. According to a 2013 report by Armstrong and Associates, 86% of Fortune 500 companies utilize 3PLs for logistics and supply chain management, with companies such as GM, Walmart, and Procter and Gamble each engaging more than 50 different 3PLs to operate smoothly.
So, if you require assistance with your fulfillment, shipping, or logistics, 3PLs are a smart investment. Below, we will discuss what 3PLs are, what services they offer, and why you might want to consider utilizing their aid.
What is a 3PL
Third-party logistics companies also referred to as 3PLs, are utilized to improve logistics and supply chain management. In most cases, most if not all of a business distribution and fulfillment services are handed over to a 3PL. The Bill, HR4040, was passed in 2008 and defined third-party logistics as, “A person who solely receives, holds, or otherwise transports a consumer product in the ordinary course of business but who does not take title to the product.”
In the 60’s freight contracts occurred between two parties, the carrier (freight companies) and the shipper (wholesalers, manufacturers, retailers). By the late 60’s, more and more businesses decided to enter the market and compete as sellers, many of whom did not have the logistics or capital already in place to deal with fulfillment and shipping. As a result, intermodal marketing companies rose to prominence, acting as intermediaries between shippers and carriers, oftentimes taking the shipment from the shipper and transporting them to the carrier, thus becoming the third party in the arrangement. Over time, third-party logistics evolved along with the industry, adding further service and specialization to shippers such as packaging, freight forwarding, warehousing, palletizing, transportation, cross-docking, logistical oversight, and management of inventory.
The Three Main Types of 3PLs
3PLs generally handle some form of shipping and receiving, transportation, distribution, and warehousing. While the smaller ones may focus or specialize in one of these services the larger 3PLs generally incorporate all four models into their business practices. That said, there are three distinct types of 3PLs that concentrate on certain areas of the business and have carved out roles therein. They are:
1) Warehouse/Distribution Based
The most common type of 3PL, especially for growing companies. These types handle all of the shipment, storage and returns of freight. Warehouses come in a variety of shapes, capabilities, and sizes, with some specializing in holding certain types of goods. When choosing a warehouse based 3PL consider the following:
- Pricing Model – is their pricing predictable, transparent and flexible to shift with your company as it grows or shrinks? Do they have fees for accessorials and are they willing to negotiate some of those away?
- Delivery time frame – The quicker a customer expects an order to arrive, the more warehouses you will require in your network. Geographical proximity to the customer is essential, especially for two-day or same day deliverers. Further, you will need enough inventory to fill the warehouses and the logistical support to get the goods to those spots.
- Do you desire to use their carrier or your own? If you have a pre-existing relationship with a carrier and have already haggled over shipping rates, your warehouse must be willing to allow those. In many cases, however, warehouses will be able to land better rates than businesses since they ship in bulk and thus get more substantial discounts.
- Do they offer insurance? Some companies may want their goods to be insured for the duration of their life, from storage to shipping, to delivery. If shipments do not get fulfilled on time, do you get credit or a refund for it? If an item breaks or is damaged, will they recompense you?
2) Transportation Based
Transport 3PLs focus on shipping and transporting your goods whether that transport is occurring from your factory to your warehouse, the warehouse to the carrier, or warehouse to the customer. These are your FedEx, UPS, DHL, and USPS of the world, your traditional parcel services. Picking a parcel transporter often depends on a variety of factors including:
- Pricing – what is their pricing model? Do they have tiers of service?
- Fees – do they have a ton of accessorial fees, gate service, same day delivery, residential delivery, palletizing, etc.?
- Discounts – do they offer discounts for bundling shipments or shipping on less popular days?
- Service areas and lanes – Do they cover areas you regularly ship to? If not, they have to transfer to partner shippers that do, which can end up costing you more.
- Shipping methods – How do they ship their goods? Are they reliable? Safe? How do they track them?
- Location of origin and destination – Certain transport 3PLs are better suited for certain areas or have a more extensive distribution network. Are you shipping locally, transnationally, internationally? All of these companies have their areas of expertise.
- Time requirements – How fast do you need your goods delivered? How often will you require pick-up and delivery? Do you do much of your shipping during the holidays?
3) Financial and Information-Based
The vast majority of small to medium-sized businesses do not require financial or informational 3PLs. Generally, such cost-saving insights are not valuable until a company is making tens of millions, if not hundreds of millions in revenue. For those companies, however, 3PLs focus on optimizing the logistics networks via, monitoring tools, booking, tracing, tracking, freight auditing, cost accounting, cost control and inventory management. Such third-party logistics companies make it their goal to avoid wasted time, increase efficiency, and save the company money on shipments.
Benefits of 3PLs
- Saving time and money – Using a 3PL lowers your risk and need for capital infusion and investment since you do not need to spend your company’s money on transportation, technology, or storage space. On top of this, 3PLs take tasks out of your hands that might take up valuable time or labor resources. By letting them operate in their realm of expertise, they allow you to optimize your business by focusing on what you are good at.
- Allow you to scale – As you likely know, e-commerce companies regularly experience financial ebbs and flows. Some months are busier than others or times of the year, and so they must ramp up their services. 3PLs let companies scale according to their requirements. So, if they need to grow or shrink according to demand, they can do so with heavy capital investment or loss. Further, this decrease of capital cost can give you tax advantages, whereas capital costs can and do depreciate over time. Since 3PLs deal with a variety of customers, with a diversity of needs, they learn to be flexible, which makes them ideal for dealing with volume fluctuations as you see with holiday shipping peaks.
- Streamlined operations and optimization – 3PLs are dedicated to increasing productivity and efficiency, which helps improve your business. Their ability to measure key performance indicators gives you a strong playbook to work with and helps you find areas of weakness in your company. Doing so will streamline your supply chain and make everyone’s lives easier. Further, many 3PLs handle a handful of clients from the same facility, which allows them to consolidate freight shipments and land lower LTL rates.
- Testing – With the help of 3PLs, companies can test a new market or product before actually diving in. This allows them to gain an important understanding of the market and its potential without having to invest fully. On top of that, there is a constant stream of new technologies and advancements being presented every year. 3PLs let their clients test drive such systems or techs before employing them in their own practice. This type of flexibility enables businesses to search for ways to improve efficiency without spending a ton of money doing so by trial and error.
- Leverage expertise – 3PLs focus on optimizing shipments. As a result, they are experts on shipping, fulfillment, and warehousing. While you could create your own network that does all of these things, that would require a ton of investment. 3PLs are up-to-date on the best practices, as well as developments in tech, logistics, and manufacturing. They employ the most current inventory and supply chain software. By leveraging their experience and expertise, you gain an edge on how you run your business.
- Proximity to customers – As mentioned above, the quicker a customer demands a good, the more warehouses required in order to increase proximity to customers. With the help of 3PLs and their vast networks, your goods are stored closer to your customers, they help improve fulfillment efficiency, and allow customers to receive their products sooner.
- A vast network – 3PLs efficiency hinges on creating and developing relationships with all businesses that play a part of the freight industry. Such associations allow them to develop methods that increase speed and decrease a company’s overhead.
- No labor hassel – You do not need to manage a large workforce that handles shipping, fulfillment and other such services. As a result, you do not need to deal with all the responsibilities that are attached to a labor force such as, unions, wages, insurance, firing, and hiring.
- Deal with returns – Returns are a regular part of life, especially in the world of retail. 3PLs not only concentrate on dealing with returns logistics, but they are fantastic at helping you find third-party wholesalers or secondary markets for damaged goods, thus allowing you to mitigate losses.
- Enhance your companies security – 3PLs have accrued the know-how to manage supply chain security. Whether that is staying up to date with new security regulations or employing the optimal practices for increasing security, 3PLs allow you not to have to worry about such matters.
- Improve your company’s quality – As a 3PL helps you optimize your company, you can presume that will have a ripple effect throughout the entire company with higher customer satisfaction, lower inventory levels, less waste, better rates and improved order accuracy.
- It’s better for the environment – As a fact of life, we depend on trucks, trains, ships, and planes, to move our product from point A to point B, but there are ways to reduce that impact. For those of you that care deeply about the impact your company leaves on the environment, 3PLs optimization, whether that is in the consolidation of routes, emission-reducing technology, or improve distribution networks, lead to less waste and a cleaner and healthier environment.
Third-party logistics have quickly become a vital aspect of the freight community, often times serving as the oil that allows the entire machine to operate seamlessly and smoothly. Employing the services of a 3PL, whether that is for shipping, warehousing, or financial and logistical analysis, can be a tremendous benefit to your company. They allow you to limit your overhead so you do not need to eat into your cash flow and they will enable you to shrink or grow at a rapid rate according to what the market and customer demands dictate. If you think a 3PL service would be of benefit to you, be sure to do your research and spend time accessing where your company’s weaknesses lie and what services a 3PL could provide that could bridge that gap.