What is third party logistics (3PL)

Third party logistics (3PL) is the outsourcing of some or all of your supply chain and logistics operations to another company. With a 3PL provider taking care of behind-the-scenes tasks, you can focus on business development, sales and marketing.

The need for 3PL

As the modern supply chain becomes increasingly complex, more companies are turning to 3PLs to ensure that goods arrive at the retail store or the customer's door on time and at least possible cost.

A health food company that imports supplements from Europe is growing its business in Australia. Currently, it sells 80% of its products at five health expos each year. It also has an online store, which handles the remaining 20% of sales. The owner of the company can't justify running a warehouse and organising shipping for the stock that accounts for the online sales –even though she plans to grow this side of the business in coming years.

This is where 3PL proves itself.

It's ideal for companies that don't want to invest in their own logistics solutions – be it holding stock in a warehouse, building out the IT infrastructure to manage stock control, or staffing the solution. Using 3PL, the health food company can offer a premium delivery solution to customers, without the massive outlay.

Indeed, with the rapid pace of change in logistics – think EDI and RFID and other fancy acronyms – it doesn't make sense for smaller businesses to try and keep up. The ongoing investment in IT to ensure compatibility across the supply chain, or in storage facilities to cope with seasonal variations indemand, can destroy a business before it has really had the chance to take flight.

The shape of 3PL

3PL is not an 'all or nothing' service. Rather, you can engage a 3PL to help with just one or a few aspects of your supply chain. The most common tasks outsourced to 3PLs are transactional, operational and repetitive, and include:

  • Domestic transport – 80%
  • International transport – 70%
  • Warehousing – 67%
  • Customs brokerage – 53%
  • Freight forwarding – 51%

Break the above list down further, and 3PL tasks can involve:

  • Container receipt and de-stuffing – This is where a shipping container full of goods arrives at the warehouse and is unpacked. Your 3PL will assess the quality of the received goods, note any damages, and produce appropriate documentation.
  • Cross-docking – This niche service by passes the warehouse stage and send products straight from the manufacturer to the retailer or customer. Your 3PL will develop a transport solution that minimises the time goods spend in transit – and ultimately saves your business money.
  • Retail scan packing – 3PLs don't just pick and pack for B2B supply chains. They can do B2C, too. So, they can get products from the DC to retailers, offices, or homes – whatever your business needs.
  • Inventory management – Using sophisticated logistics software and technology, your 3PL can advise on how much stock to hold, or provide timely notifications when you're running low.
  • Order management and processing – Fulfilment is a key task in 3PL. Getting goods to the customer's door or dock on time is crucial for customer service, and 3PLs will enable this. Using technologies that interface with your own shopping cart, many of the processes are automated – and all become completely traceable.
  • Reporting – 3PL warehouse management systems (WMS) give you full visibility into stock levels, including what stock is moving off the shelf, how long things are stored for, and much more. This visibility is very reassuring for product managers who want to see where their products are at all times.
  • Freight and distribution – Tying transport in with the services above increases the overall value you get from 3PL. By bundling freight in with other services, it achieves greater economies of scale and removes the burden of managing these tasks from you.

The benefits of 3PL

To calculate the cost-benefit of using 3PL, you need to work out whether it makes more sense to manage the above services in-house, or outsource them. Do you have the staff numbers to physically unpack containers, add barcodes if needed, and place the goods on your warehouse shelves? Indeed, can you afford the rent on a warehouse in the first place?

There's a reason why 67% of shippers are outsourcing some or all of their logistics services1. It simply makes good business sense.

Cost savings

3PLs have buying power. They can negotiate much better freight prices, and their warehousing costs are generally lower. These savings are passed on to you. Given that today's consumers expect flat rates (the lower the better) for shipping, it's important for online retailers to offer the best shipping prices they can.

Performance gains

Shippers who use 3PLs report that they experience improvements in order fill rate and order accuracy.1 This is a win-win for the retail and the customer. Time savings equate to cost savings at the retailer's end; while increased accuracy equates to happy customers, and happy customers are generally repeat customers.

Low capital commitment

Compare the cost of maintaining a warehouse space in a capital city with that of using a 3PL, and it's likely the 3PL will come out on top. Don't forget to factor in costs like electricity, IT systems and people power.

Focus on growing your business

Logistics and supply chain management take significant effort. Either you hire in-house experts to manage it for you, or you outsource. Do the latter, and you can focus on growing your business. Plus, with 3PL, when you grow your business into new markets, they have the expertise and resources to get you there.

Manage seasonal variations

3PL is ideal for seasonal variations. For example, in the peak selling period before Christmas, you can quickly ramp up your investment in 3PL; and then scale it right back after all the presents have been delivered.