3PL (third-party logistics) providers deliver outsourced distribution and fulfillment activities to companies that want to supplement or lack the resources to handle these functions in-house. Companies also outsource to 3PLs to benefit from the expertise 3PLs have built into their distribution and fulfillment infrastructure. 3PLs aren’t used exclusively by major enterprises; in fact, smaller companies often find it more financially sustainable to outsource activities such as warehousing and distribution to 3PLs compared to building and maintaining in-house business units dedicated to these functions.
Definition of 3PL
Companies that outsource all or part of their distribution and fulfillment activities typically outsource these functions to 3PLs. Often, 3PLs don’t have ownership in the inventory. Instead, they handle various business functions on behalf of other companies on a fee-for-service or contractual basis. 3PLs can handle everything from receiving new inventory from manufacturers to shipping products to end consumers and everything in between. Some 3PLs even handle retail distribution and returns. The specific services offered by 3PLs may differ from company to company, and 3PL clients typically outsource a customized set of services based on their unique needs. For example, a company may already have an on-site warehouse but outsources order fulfillment and distribution services to a 3PL rather than expanding its in-house capabilities.
3PL use is prevalent (and growing). A report by Armstrong & Associates found that 86% of Fortune 500 companies and 96% of Fortune 100 companies utilized 3PLs in 2013. In 2017, Armstrong & Associates found that 90% of domestic Fortune 500 companies use 3PL providers, compared to just 46% in 2001.
Types of 3PLs
3PLs offer a variety of services, but not all 3PLs offer the same services and functions and some 3PLs specialize in one or two areas. Most 3PLs focus on one of these functional areas:
- Transportation: 3PLs focused on transportation handle inventory shipments between manufacturers and your warehouse or your between your company and your buyers.
- Warehousing and Distribution: The most common type of 3PL that companies use, handling functions such as storage, fulfillment, pick and pack, shipping and returns.
- Financial and Information: Typically used by larger companies, these 3PLs optimize your company’s logistics network by providing services ranging from accounting and cost control to freight auditing, inventory tracking and management and similar functions.
Some larger 3PLs offer services in all of the above functional areas for their clients.
How 3PLs work
Companies that produce or manufacture products, such as books, sports gear or other goods, but don’t want to handle order fulfillment and shipment in-house often outsource these tasks to 3PLs. A fulfillment center that processes orders and a trucking company that handles logistics on behalf of clients are both considered 3PLs, but a single 3PL provider may also handle multiple processes, such as packaging, warehousing, fulfillment and distribution.
3PLs sometimes outsource services they offer to other companies, acting as a 4PL provider. The distinction is that true 3PLs provide services directly to clients, while 4PLs may offer some services directly but outsource other services to other 3PL providers. In some cases, a 4PL acts as a manager, outsourcing all needed services to one or more 3PLs on behalf of clients without actually providing any services directly (aside from management). 4PLs may outsource any of the activities offered by 3PLs, including:
- Transportation and logistics, such as trucking services to deliver goods to retailers or end consumers.
- Warehousing and distribution, such as storage, packaging and order fulfillment services.
- Financial and information services, such as accounting services or inventory management.
Benefits and disadvantages of 3PLs
One of the main advantages of using 3PL services is that 3PLs are typically experts in their area. A company that focuses exclusively on handling warehousing and distribution functions on behalf of multiple clients is more experienced and knowledgeable on best practices and current strategies compared to, for instance, a book company that has never managed order fulfillment or distribution processes. For companies that lack expertise in these areas, outsourcing to a 3PL can be far more effective than setting up an in-house team and starting from scratch.
3PLs are also useful for meeting global fulfillment needs. Some 3PLs have a broader footprint, with physical locations and distribution centers around the world. Using a 3PL with a global presence means maintaining inventory closer to your buyers, plus you can tap into the 3PL’s expertise in handling customs functions and complying with international regulations.
Outsourcing to a 3PL also means lower overhead costs compared to in-house order fulfillment, as there’s no need for your company to invest in warehouse facilities and distribution centers, trucking resources and other assets. Due to a 3PL’s expertise, you’ll benefit from better performance (and thus happier customers). Plus, it’s easier to scale your operations when using a 3PL compared to scaling the same functions in-house, because you don’t need to invest in a larger warehouse facility or hire additional staff to manage these processes. Instead, your 3PL provider dedicates more resources to meet your needs.
That’s not to say that there aren’t some disadvantages to using 3PLs. You’ll have less direct control over (and access to) your inventory, and while you’ll have less overhead costs, 3PL services can be costly, particularly for companies with small order quantities. Ultimately, you’re still responsible for satisfying your customers, and when issues arise related to shipping or other services provided by your 3PL, your customers will come to you with complaints — even though you weren’t directly involved in the shipping process (which your customers, of course, may not realize). Finally, if you deal with perishable, flammable or other hazardous goods, it may be difficult to find a 3PL who can accommodate your needs. If you do, it may cost more compared to typical 3PL services.
Building and managing a successful 3PL relationship
Choosing the right 3PL provider is the key to building a successful 3PL relationship. As mentioned, 3PLs offer different services and capabilities, so carefully evaluate your options to find a provider that best meets your company’s needs. For instance, ensure that your 3PL has the right warehouse automation technology to meet your company’s needs and goals. Ask for past performance data and regularly monitor data to measure the company’s performance against your KPIs and business objectives.
Choose a 3PL that’s flexible enough to meet your company’s changing needs and scale seamlessly along with your business as it grows. You need a 3PL that can keep up with your warehousing demands, so evaluate innovative 3PLs that stay on top of the latest technology advancements to determine the best fit — both now and in the future.