What is 3PL logistics? A guide to 3PL logistics management and quick tips to select a delivery partner

Third-party logistics providers or 3PL providers are becoming so popular and common that we often forget that there are three other types of outsourced logistics providers. Yes, there is 1PL (first-party logistics provider), 2PL (second-party logistics providers) and 4PL (fourth-party logistics providers). Each provider covers very specific logistics functions. 

Third-party logistics providers are critical for enterprises that do not have their own logistics resources or do not want to invest in their own logistics resources to execute and scale delivery operations. Highly efficient 3PL providers can optimize transportation costs, ensure high volumes of on-time in-full deliveries and improve customer service. Large manufacturers and modern businesses prefer to outsource their delivery operations to 3PL providers rather than maintain an in-house fleet so as to ensure high-levels of shipping efficiencies.

A study by Grand View Research highlighted that the world-wide third-party logistics market size was valued at USD 830.99 billion in 2019. It is expected to grow at an annual compound growth rate of 8.3% from 2020 to 2027. The rapid development of logistics infrastructure, technology advancement, a thriving e-commerce industry, the need to ensure elastics delivery operations among many others are responsible for the surging demand of 3PL providers.

According to research, 75% of shippers leverage 3PL services to optimize costs, 86% use them to improve customer service and 58% say that owing to its benefits, they will increase their use of outsourced logistics partners.

We will delve into each of these drivers in a moment. But first, let's understand what is 3PL and what role it plays in vast supply chain networks.

3PL is a service that businesses leverage to outsource their logistics and delivery functions. The service includes transporting goods, warehousing, freight forwarding, picking and packing, inventory forecasting and order fulfillment. Not every 3PL provider is equal. Businesses need to be extremely critical while selecting a 3PL provider and much of this selection process should be driven by three basic things. One, data-driven insights into a 3PL provider's historical performance. Second, the kind of freight that a shipper needs to transport. Third, understanding if the 3PL provider can deliver on the unique needs of the shipper's customer.

Different 3PLs have different capabilities. Some specialize in transporting highly volatile raw materials, some have years of experience in transporting chemicals, oil and gas, some specialize in moving cold storage containers, some are highly equipped with geographical, terrain and compliance knowledge, some are focused on delivering parcels and big-box items, the list goes on.

There are multiple reasons why third-party logistics companies or providers are critical for enterprises. In a world that’s increasingly getting virtual and digitized, logistics still remains an important physical touchpoint between a brand and a customer. For businesses that outsource delivery operations, a 3PL provider’s performance directly impacts the brand-customer relationship. In other words, it can make or break a business’ reputation.

The right 3PL provider for the right job along with highly efficient carrier management practices not only increases brand loyalty but also improves multiple other factors. It reduces logistics costs, boosts sales volumes by enabling businesses to scale deliveries during peak business seasons, ensures shippers can easily reach out to customers across the globe, drives business growth and allows enterprises to focus more time and energy on research, development and innovation and less on mundane operational processes. Having said this, without the aid of modern 3PL management tools and technologies it’s extremely difficult to fully realize these benefits.

A third-party process covers six important aspects of logistics. Inbound and outbound logistics, warehousing, FTL and LTL shipping, picking, packaging and freight forwarding and reverse logistics. Let’s quickly glance through each of these functions.

1. Inbound and outbound logistics

Inbound logistics is the process when 3PL providers collect goods and raw materials from a shipper and delivers the same inside an end customer’s plant or a production unit. An efficient 3PL provider will ensure that raw materials reach their destination on time to ensure seamless production operations so as to enable the end customer to manufacture the desired volume of end products.

Outbound logistics, as the name suggests, it involves a third-party provider’s responsibility to efficiently transport finished products and goods from the end of the production line to the end customer. This function directly impacts a manufacturer’s go-to-market timelines and customer loyalty. The end customers here can range from individual consumers or buyers to large enterprises.

2. Warehousing

Storage and warehousing impacts every aspect of logistics operations. A third-party logistics company that provide highly efficient warehousing services ensure that no orders are packed incorrectly. A single incorrectly packed order can trigger inefficiencies that end up costing thousands of dollars. Moving goods and parcels to and from warehouses are two other important 3PL logistics provider’s responsibility.

3. FTL and LTL shipping

Businesses must be smart while choosing a 3PL provider’s FTL (Full truckload) and LTL (Less than truckload) services. To put it in layman’s terms FTL refers to hiring the entire space inside a 3PL provider’s truck or semi-trailer and LTL means paying for only a specific capacity.

With the rapid growth of the e-commerce industry and the need to ensure large volumes of same-day deliveries, LTL shipping has become a popular choice among businesses, the major reason being cost efficiency and shorter delivery turnaround-time. However, even though 3PL companies tend to provide highly competitive pricing for LTL shipping, the benefits of FTL frequently outweigh the benefits of its counterpart. FTL shipping ensures that a 3PL truck will have only one destination. ETA accuracy, greater control over delivery routes and shipping costs, reduced material handing instances, risk mitigation among others are some important advantages of FTL shipping.

4. Picking, packaging and freight forwarding

A core responsibility of a 3PL provider happens to be picking, packing and shipping a customer's order. Once a customer places an order, an alert is triggered in about the same in a warehouse or a fulfillment warehouse to be more precise. The 3PL providers reach the facility finds the product, packs it nicely in an appropriate box, labels it and then ensures that it's moved inside the right carrier for freight forwarding. In most cases, a third-party logistics provider will ensure that the order is safely delivered to the end customer on time.

5. Reverse logistics

From a business perspective, returns management or reverse logistics is like the dark side of the moon or in this case the e-commerce boom. It’s complex, customer sensitive and cost heavy. Just like ensuring efficient delivery of a product to the end customer, a third-party logistics provider will receive a returned item from a, in most cases angry, customer and commence with the journey of sending it back to the warehouse.

As e-commerce keeps growing across the globe, the need to scale delivery operations and boost profitability reaches alarming levels. Especially with the onset of the COVID-19 pandemic, online purchasing has crept into households that were till now reluctant to leverage online sales channels.

According to a Digital Commerce 360 study, U.S. consumers spent $861.12 billion in online purchases in 2020, which's up by 44% from $598.02 billion in 2019. Online spending represented as much as 21% of total sales in 2020. In 2019 the number was close to 16%. The jump in numbers clearly highlights the pressure e-commerce and online retailers are experiencing with regards to ensuring seamless delivery operations. Hence making the role of 3PL logistics providers critical than ever.

Outsourcing e-commerce logistics and delivery operations is quickly becoming a highly lucrative and viable option for brands, and why not? Managing in-house logistics resources can get extremely cumbersome. The amount of time, money and energy one needs to invest in ensuring spotless deliveries is massive. If these investments are channeled towards understanding customer behavior, engineering cutting-edge product designs and crafting robust online sales channels, brands can efficiently ensure business sustenance and competitive advantage.

Managing internal logistics resources comes with significant costs too. For instance, investing in creating large delivery fleets to match delivery demands can pan out to be costly. Then comes costs associated with hiring and managing delivery executives, vehicle maintenance, vehicle wear and tear, buying parking facilities and more. This does not mean that outsourcing delivery operations to third-party logistics providers is always an economical option, but when it comes to scaling deliveries this option is definitely cost-effective.

Not all 3PL providers are equal. Consider these factors before selecting a logistics partner.

Increasing delivery demands is accompanied by the need to scale delivery operations and that too fast. Be it grocery delivery providers, big box, e-commerce or retail, online purchasing volumes have reached never before seen volumes. In the U.S., e-commerce sales are expected to cross $740 billion by 2023. A 3PL company should ensure you with the guarantee that they can help you grasp this massive sales opportunity.

Traditional 3PL providers or logistics partners who have been working with a particular brand for a long time tend to take your businesses for granted. That’s not going to help you battle cut-throat competition. Adherence to service level agreements (SLAs) is critical for delivery success, performance benchmarking and profitability. With advanced 3PL logistics management tools, it’s extremely easy to ensure that SLAs are being followed religiously. Discrepancies will not get unnoticed. Hence, savvy brands today make it clear that non-compliance with SLAs will result in service termination. Also, the e-commerce market happens to be extremely dynamic, your 3PL provider should also be flexible when it comes to adjusting SLAs with evolving customer and business expectations.

On-time in-full (OTIF) delivery is key not only for logistics but for the supply chain network. In e-commerce and retail, it directly impacts customer experience and SLA adherence. Realizing this, modern enterprises are rapidly becoming highly sensitive to OTIF delivery volumes. In fact, Walmart ruled that all their suppliers should comply with OTIF shipment rules 98% of the time.

Without gaining end-to-end visibility of delivery operations, it’s impossible for e-commerce businesses to have a tight grasp on 3PL performance. For instance, delivery stakeholders should be able to know anytime where a shipment is? How is the shipment handled? When will it be delivered? What’s the ETA? Advanced 3PL management solutions empower businesses to achieve 100% visibility of ground-level 3PL operations. Therefore, a 3PL provider that’s willing to be absolutely transparent about its delivery operations may become your 3PL of choice.

Customer experience is now a competitive differentiator, and savvy businesses leave no stones unturned to connect with consumers. Logistics is a great way to connect with customers and get quick feedback. White label delivery services allow businesses to provide branded delivery experience by eliminating 3PL involvement in the eyes of a customer. It’s a great way to boost brand loyalty.

To boost control and visibility of your 3PL provider’s activities it’s important that the latter is willing to integrate their existing IT infrastructure with yours. Ensuring this integration is not a big IT project. It does not demand ripping and replacing a 3PL company’s systems. Today's plug and play 3PL management solutions allow brands to ensure seamless interoperability between disparate logistics systems like 3PL tools, warehouse management systems, order management systems, GPS devices and more.