Understanding third-party logistics isn’t hard. At its core, third-party logistics is essentially hiring someone else to manage your shipping. Small companies without their own delivery trucks will often turn to a third-party logistics company for all their delivery needs, large or small. They act as an intermediary that will schedule pickups, track shipments, and deal with any issues that arise in transit.
Third-party logistics is not a new concept, and the digital age is making it an appealing option to more and more companies. Lower costs, traceability, and peace of mind knowing someone else is managing it are just a few of the benefits. Having a 3PL manage your supply chain frees you to grow your business and innovate new products and strategies.
There are different categories of 3PL companies, and they vary in their scope and what they do for their customers. To create a better understanding of third-party logistics, we will explain what it is and how it works.
In the logistics world, five parties coexist and might be worth attending, depending on the size of your company and shipment.
First-party logistics is a firm or an individual that has its own cargo and can transport it from one point to another. They are the consigner of different goods and organize the transportation to their respective destinations. It consists of two parties that benefit from the transaction. The manufacturer ships directly to the entity buying the merchandise. There are no other middlemen involved in the whole process.
Second-party logistics deals in massive quantities moving thousands of miles by land, sea, or air. This is typically air freight, rail cars, or ocean liners moving hundreds of thousands of pounds of commodities, cars, fossil fuels, and the like. International transportation to ports of entry is the name of the 2PL game.
Third-party logistics is a supply chain that primarily concerns the transportation and delivery of different products. A 3PL can arrange transportation for goods around the world and manage the lane. A 3PL company will also include various types of additional services as well. That could include warehousing, terminal operations, customs brokerage, supply chain management, and more. It can also include logistics IT software products and analysis services, for tracking the delivery status of different products. These 3rd party logistics can deliver all the above-mentioned services and manage various obstacles that come the way.
At this level, the 3PL company provides basic logistics. They will be responsible for securing shipping for your goods as well as tracking them. This kind of 3PL will have relationships with trucking companies of all kinds to meet the needs of the customer. They contract with nationwide carriers, package delivery services, and local next-day quick ship carriers for emergency deliveries. Their strength is in their versatility and network of carriers. Larger 3PLs operate their own warehouses and distribution centers to house customer goods and manage all their supply chain needs. This involves the storing and transporting of products, as well as some distribution under the company’s requests.
Service developers have a technology background and provide value-added services including tracking, security, or cross-docking capabilities. These services are based on economies of scale, meaning the companies have cost advantages with larger shipments. In addition to the basic logistics services offered at the standard level, the service developer 3PL offers support in IT, security, and tracking. This means they can further ensure the delivery of the customers' goods on time and in a safe, secure way.
The customer adaptor caters to smaller companies. Essentially, the 3PL takes over complete control of the client’s logistics. New services aren’t added, but the net result is that service quality is greatly improved. The 3PL doesn’t alter the existing processes already in place, they just assume control. Once operational knowledge is gained, changes are then made with customer approval. This is an opportunity for the customer to trim their overhead and pass the responsibility to another, kind of like hiring temporary workers.
Customer developer providers have few clients because they provide all the clients’ services. Essentially the third-party company takes over logistics while integrating into the client company itself. Company A will hire the 3PL to come into their building and assume control of all the logistics, warehousing, and supply chain operations. At this level, the customer developer 3PL will not only inherit the logistics operation of their partner company, but they will also adapt their systems. That means that the 3PL becomes the entire logistics department, as opposed to simply offering services.
The biggest advantage of hiring a 3PL provider is cost savings and a massive reduction in overhead. Businesses benefit greatly from cost and time savings with third-party logistics providers. Smaller companies that are just getting started don’t have the capital or need for a fleet of trucks, massive warehouses, forklifts, racking, and the staff to manage the operation. Larger companies that need to control costs can eliminate those costs by bringing in a 3PL company.
The logistics company has better networks and operational knowledge to keep things running efficiently with low overhead costs. With more contacts to utilize, the small business also must invest less, despite paying for the service of the logistics company. For example, a small business no longer needs to consider fleet management or warehousing costs. It also means the business focuses on its core service and not the small tasks that involve getting its product to the customer. Companies simply can’t waste an entire day tracking a lost package.
A third-party logistics provider can find this service faster and more efficiently. There may be increased flexibility and opportunities for new customers. Once contracting with a logistics provider, the small business will be able to ship internationally, track items, or ship more fragile or complex pieces.
We hope that our guide helped you better understand the mechanics of third-party logistics.
Whether you're a company looking to improve one facet of your supply chain, your entire supply chain, or simply looking for a transportation and logistics consultation, we can help.
