Many companies are still not comfortable with the idea of outsourcing their logistics operations as they are still unsure of what exactly does a Third-Party Logistics (3PL) mean and what value do they provide. In all fairness, the 3PL companies don’t make it any easier either. There are so many 3PL providers with so much breadth and variety of service, that a new client is often confused on how to categorize and compare these various players. Let us try and understand what is a 3PL player and what kinds of 3PL players are there in the market.
Who is a Third-Party Logistics Provider? There is no one definition of third party logistics or 3PL as it is more colloquially called, that is applicable all around. Let’s take a quick look to understand the evolution of 3PL, so that one can understand from the context. Earlier, in around 70’s there were only trucking companies. The shipper provided and loaded the final packaged material to the transporter, who then transported to the destination. Then came the IMCs. These Intermodal Marketing Companies, plugged between the shipper and the carrier. They accepted the package from the shipper and managed all the retail transportation engagement. Going forward these companies started offering other value added services such as warehouse storage, Packaging, financial needs and other services. The key to understand there is that these companies only provide services to the shipper and value for shipping company in terms of handling their logistics requirement, at any point, in their supply chain. Today the council of supply chain management professionals defines 3PL as outsourcing all or much of a company’s logistics operations to a specialized company. A Federal legislation passed in 2008 legally defines a 3PL as “a person who solely receives, holds, or otherwise transports a consumer product in the ordinary course of business but who does not take title to the product.” Thus, we can assume that any company that provides a logistics service in any supply chain, can be called a 3PL company. A transporter, a warehouse space provider, a special storage provider, a packaging service provider, a booking, tracking, auditing based or financial based service provider, or information service provider for these services, or provider of any combination of these services can be termed as a third-party logistics service provider or 3PL provider.
Now that we understand what is a 3PL provider is, let’s look at various kinds of 3PL providers.
Transportation based: Here the primary service offered is transportation. Trucking in various segments, from wholesale to retail to individual deliveries. They own the physical transportation machines, specialized transportation vehicles (cold storage trucks) and networks and system specialized for fleet utilization and route optimization. Their aim is to optimize the transportation cost (as opposed to other kinds of costs in logistics). They usually club various shipments based on transportation cost optimization. While these companies may offer other services such as warehouse, they are typically in association with a partner who provides those services.
Warehouse Based: These companies own the storage space at the distribution points. They specialize in warehouse operations. They make significant investments in warehouse space, warehouse technologies (cranes, lifts), automation to quickly move the products inside warehouse, specialized warehouse needs such as cold storage and hazardous chemicals etc. They have their operations specialized for optimum use of space and their systems optimized for movement of inventory such as FIFO, maintaining minimum and maximum levels of inventory, close monitoring of expiry sensitive inventory such as food products. Apart from inside warehouse operation, they also specialize in locations of warehouse, at critical nodal points such as important ports, or close to big markets. Large players usually operate multiple warehouses spread geographically at important points, having these warehouses interconnected with dedicated transportation. The warehouse based providers usually tie-up with Transporters to provide the last mile delivery to the customer. They will usually have tie ups with various transporters to cater to different needs of the customers.
Freight Forwarder: These companies do not own any physical asset. They tie up with various other logistics service providers, manage the relationships and operation between them, for their clients and give their clients an end to end logistics service. To elaborate a little more Freight forwarders, specialize in arranging the storage and shipping of merchandize on behalf of the shippers. They usually provide a full range of service such as inward transportation tracking, documentation preparation, warehousing, cargo space booking, freight charges negotiations, insurance and claiming insurance claims. Freight forwarders are especially useful if you are planning to operate in international markets. i.e. Your business involves import and export of material or finished products.
Financial based Logistics services provider: These companies specialize in the financial aspects of the logistics. They provide freight payment and audit service along with accounting, control and tool for monitoring and management of inventory. They also provide small financial solutions for logistics (getting the LOC for freight loading or unloading)
While many companies provide these individual services, quite a few also provide various combinations or all of these services. It is up to the client to decide, which one is best suitable for his business requirements. Clients also need to keep in mind the that players not only differ in the kind of service, but level of partnership the 3PL firms provide. This depends on the nature of engagement that exists between the business and it’s 3PL provider.
- These relationships are on per transaction basis. This is kind of Postal service. You pay for each transaction and that’s it.
- These relationships are based on long term contracts. The rates are negotiated for bulk volumes and systems are integrated for easy flow of information between the two entities.
- These are more like partnerships. The 3PL will make investments in their business and you will be committed to them. Both, the client and the 3PL grow together.
Businesses outsourcing for the first time, may and usually do start from the transactional model. As they gain experience and the volumes of shipments grows, they move to more mature models of engagement, forging partnerships with their suppliers.
Outsourcing to a 3PL player may seem confusing at the beginning. There are a lot of players with different value propositions and you will need to invest time to choose the one that is right for you. However, once you have the right partner, you do not have to worry about logistics and focus all your energies into your core business practices that result in growth of your business.