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What Is Third-Party Logistics?

Jan 24

Outsourced logistics services are provided by a 3PL (third-party logistics) provider, and include anything that includes administration of one or more aspects of procurement and fulfillment. In the commercial world, 3PL refers to any service contract that involves the storage or shipment of goods. A 3PL service may be a single provider, such as transportation or warehouse storage, or a systemwide bundle of services that can handle supply chain management.


What is the process of using third-party logistics?

Here's an example of how a third-party logistics agreement works: A book publisher engages authors, editors, and graphic designers to create books, but it may not want to manage customer ordering or shipping. Instead, the book publisher processes online orders via a fulfillment center and engages a trucking company to transport its freight. Both the fulfillment center and the carrier serve as third-party logistics (third-party logistics) providers. Book orders may be fulfilled and sent by a single 3PL supplier as well.

By partnering with a third-party logistics provider, the book publisher may employ supply and distribution services just when they're required, allowing it to better manage costs while concentrating on its core expertise of publishing books.


The expansion of third-party logistics companies (third-party logistics companies)

3PLs have existed for hundreds, if not thousands, of years in some form or another. The 3PL acronym dates back to the 1940s, according to the Council of Supply Chain Management Professionals. In a glossary, the council noted, "The term 3PL was initially used to describe intermodal marketing organizations... in transportation contracts in the early 1970s." "Until then, transportation contracts had only included two parties: the shipper and the carrier."

The Motor Carrier Act of 1980 deregulated the transportation business, resulting in lower trucking rates and more competition, all of which influenced 3PL notions.

In the 1990s, the phrase 3PL became increasingly popular among consultants and at conferences, most likely as a result of changing technologies, such as the internet's emergence.

The Consumer Product Safety Improvement Act of 2008 later defined 3PL as "a person that receives, retains, or otherwise moves a consumer product in the usual course of business but does not assume ownership to the product."

According to a widely recognized 2017 research from supply chain consultant Armstrong & Associates, 90% of domestic Fortune 500 businesses use third-party logistics providers, up from 46% in 2001.

Desire for 3PL services has increased as online sales have increased, as has customer demand for quicker delivery and cheaper pricing. Tracking technology, such as radio frequency identification (RFID) and the global positioning system (GPS), has also aided the growth of 3PLs. Meanwhile, IoT technology has enhanced truckers and other carriers' tracking measures.


3PL's advantages

The key advantage of hiring a 3PL service to manage logistics including packaging, storage, fulfillment, and distribution is the cost savings — for example, not having to maintain a warehouse or employees to supervise supply chain activities.

A 3PL solution is expected to provide superior results in areas like shipping while also making scaling operations simpler. If, as in the previous example, a publishing business has to send more copies of a popular title, a fulfillment center will be able to satisfy that demand more quickly than if the publisher had to transport more copies of the book itself.


3PL vs. 4PL is a battle between two teams

When talking about 3PL, the term 4PL (fourth-party logistics) is often used. In a nutshell, a 3PL provider becomes a 4PL provider when it outsources any of its contractual services. In the case of a book publisher, if the fulfillment center outsources its shrink-wrapping and freight weighing, it is considered a 4PL supplier.

Some observers consider 3PLs to be managers of a specific outsourced service, while 4PLs are in charge of services throughout the whole supply chain.

A 4PL service may also be thought of as a supplier that operates as a single point of contact for a client organization in the supply chain, selecting and managing numerous 3PL operations. Lead logistics providers, or 4PL, is another name for 4PL (LLP).


Freight forwarding vs. third-party logistics (third-party logistics)

Although freight forwarding and third-party logistics (third-party logistics) may seem to be comparable, there are significant variations.

Freight forwarders don't actually convey goods; instead, they operate as a middleman between a customer and shipping companies. The freight forwarder focuses on pricing, determining the best forms of transportation, establishing cost-effective shipping routes, and other logistical challenges. 3PL providers, as opposed to forwarders, handle a wider variety of services.

A 3PL provider also assumes responsibility for the products or services being sent, while a freight forwarder, as a middleman, is unlikely to do so.