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Third-party logistics (abbreviated 3PL, or sometimes TPL) in logistics and supply chain management is a company's use of third-party businesses to outsource elements of the company's distribution and fulfillment services.
Third-party logistics providers typically specialize in integrated operation, warehousing and transportation services which can be scaled and customized to customers' needs based on market conditions, such as the demands and delivery service requirements for their products and materials. Often, these services go beyond logistics and include value-added services related to the production or procurement of goods, i.e., services that integrate parts of the supply chain. When this integration occurs, the provider is then called a third-party supply chain management provider (3PSCM) or supply chain management service provider (SCMSP). 3PL targets particular functions within supply management, such as warehousing, transportation, or raw material provision.
The global 3PL market reached $750 billion in 2014, and grew to $157 billion in the US; demand growth for 3PL services in the US (7.4% YoY) outpaced the growth of the US economy in 2014., As of 2014, 80 percent of all Fortune 500 companies and 96 of the Fortune 100 used some form of 3PL services.
The global third-party logistics market is predicted to grow at around 5 percent CAGR during 2016 to 2024 (forecast period). Its companies operate for the shipping industry to supervise logistic undertakings (forecasting, warehousing, & conveyance management software). The market will attain a size of about USD 1, 054 billion by 2024.
Third-party logistics providers include freight forwarders, courier companies, as well as other companies integrating & offering subcontracted logistics and transportation services. Hertz and Alfredsson (2003) describe four categories of 3PL providers:
- Standard 3PL Provider: this is the most basic form of a 3PL provider. They would perform activities such as, pick and pack, warehousing, and distribution (business) – the most basic functions of logistics. For a majority of these firms, the 3PL function is not their main activity.
- Service Developer: this type of 3PL provider will offer their customers advanced value-added services such as: tracking and tracing, cross-docking, specific packaging, or providing a unique security system. A solid IT foundation and a focus on economies of scale and scope will enable this type of 3PL provider to perform these types of tasks.
- The Customer Adapter: this type of 3PL provider comes in at the request of the customer and essentially takes over complete control of the company's logistics activities. The 3PL provider improves the logistics dramatically, but does not develop a new service. The customer base for this type of 3PL provider is typically quite small.
- The Customer Developer: this is the highest level that a 3PL provider can attain with respect to its processes and activities. This occurs when the 3PL provider integrates itself with the customer and takes over their entire logistics function. These providers will have few customers, but will perform extensive and detailed tasks for them.
Outsourcing may involve a subset of an operation's logistics, leaving some products or operating steps untouched because the in-house logistics is able to do the work better or cheaper than an external provider. Another important point is the customer orientation of the 3PL provider. The provider has to fit to the structures and the requirements of the company. This fit is more important than the pure cost savings, like a survey of 3PL providers shows clearly: The customer orientation in form of adaptability to changing customer needs, reliability and the flexibility of third-party logistics provider were mentioned as much more important than pure cost savings.
Lead logistics providers
3PL providers without their own assets are called lead logistics providers. Lead logistics providers have the advantage that they have specialized industry expertise combined with low overhead costs, but lower negotiating power and fewer resources than a third-party provider has based on a normally big company size, a good customer base and established network systems. 3PL providers may sacrifice efficiency by preferring their own assets in order to maximize their own efficiency. Lead logistics providers may also be less bureaucratic with shorter decision-making cycles due to the smaller size of the company.
First party logistics providers (1PL) are single service providers in a specific geographic area that specialize in certain goods or shipping methods. Examples are: carrying companies, port operators, depot companies. The logistics department of a producing firm can also be a first party logistics provider if they have own transport assets and warehouses.
Second party logistics providers (2PL) are service providers which provide their specialized logistics services in a larger (national) geographical area than the 1PL do. Often there are frame contracts between the 2PL and the customer, which regulate the conditions for the transport duties that are mostly placed short term. 2PL’s provide own and external logistics resources like trucks, forklifts, warehouses etc. for transport, handling of cargo or warehouse management activities. Second party logistics arose in the course of the globalization and the uprising trend of lean management, when the companies began to outsource their logistics activities to focus on their own core companies. Examples are: courier, express and parcel services; ocean carriers, freight forwarders and transshipment providers.
The most significant difference between a second party logistics provider and a third-party logistics provider is the fact that a 3PL provider is always integrated in the customer's system. The 2PL is not integrated, in contrast to the 3PL he is only an outsourced logistics provider with no system integration. A 2PL works often on call (e.g. express parcel services) whereas a 3PL is almost every time informed about the workload of the near future. Another point that differs 2 and 3PL is the specification and customizing of services. A 2PL normally only provides standardized services, whereas 3PLs often provide services that are customized and specialized to the needs of their customer. This is possible due to long term contracts that are usual in the third-party logistics market. Cost effectiveness of a third-party logistics provider is only given over long periods of time with stable contract and profits. In contrast to that second party logistic services can’t be customized, concerning to the fluctuating market with hard competition and a price battle on a low level. And there we have another distinguishing point between 2PL and 3PL: Durability of contracts. 3PL contracts are long term contracts, whereas 2PL contracts are of a low durability, so that the customer is flexible in responding to market and price changes.
With companies operating globally, the need to increase supply chain visibility and reduce risk, improve velocity and reduce costs – all at the same time – requires a common technological solution. Non-asset based providers perform functions such as consultation on packaging and transportation, freight quoting, financial settlement, auditing, tracking, customer service and issue resolution. However, they do not employ any truck drivers or warehouse personnel, and they don’t own any physical freight distribution assets of their own – no trucks, no storage trailers, no pallets, and no warehousing. A non-assets based provider consists of a team of domain experts with accumulated freight industry expertise and information technology assets. They fill a role similar to freight agents or brokers, but maintain a significantly greater degree of “hands on” involvement in the transportation of products. These providers are 4PL and 5PL services.
A fourth party logistics provider has no own transport assets or warehouse capacity. They have an allocative and integration function within a supply chain with the aim of increasing the efficiency of it. The idea of a fourth-party logistics provider was born in the seventies by the consulting company Accenture. Firms are outsourcing their selection of third-party logistics provider and the optimization process of the integration of these to a PL as an intermediary. That reduces costs and the 4PL have to have an overview about the whole logistics market to choose the ideal 3PL for all operative logistic activities. For being able to provide such an ideal solution fourth party logistics providers need a good knowledge of the logistics branch and a good IT infrastructure. A fourth party logistics provider selects the 3PL providers from the market which are most suitable for the logistical issues of his customer. Unlike the allocative function of a 4PL in the supply chain, the core competence of a 3PL provider is the operative logistics.
Fifth party logistics providers (5PL) provide supply chain management and offer system oriented consulting and supply chain management services to their customers. Advancements in technology and the associated increases in supply chain visibility and inter-company communications have given rise to a relatively new model for third-party logistics operations – the “non-asset based logistics provider.”
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On-demand transportation is a relatively new term coined by 3PL providers to describe their brokerage, ad-hoc, and "flyer" service offerings. On-demand transportation has become a mandatory capability for today's successful 3PL providers in offering client specific solutions to supply chain needs.
These shipments do not usually move under the "lowest rate wins" scenario and can be very profitable to the 3PL that wins the business. The cost quoted to customers for on-demand services are based on specific circumstances and availability and can differ greatly from normal "published" rates.
On-demand transportation is a niche that continues to grow and evolve within the 3PL industry.
Specific modes of transport that may be subject to the on-demand model include (but are not limited to) the following:
- FTL, or Full Truck Load
- LTL, or Less-than Truck Load
- Hotshot (direct, exclusive courier)
- Next Flight Out, sometimes also referred to as Best Flight Out (commercial airline shipping)
- International Expedited
On-demand transportation is a term to reflect what have become known as "smile and dial" brokerages that essentially work as telemarketing call centers. Brokers have no obligation to successfully ship all loads (as opposed to contract logistics providers) and almost all sales representatives are heavily (and 100%) commissioned, and much of the workers' day is spent cold-calling sales leads. Smile-and-dial brokerages typically require a 15% gross profit margin (the difference between what the shipper pays the brokerage and what the brokerage pays the carrier), and the commission compensation scheme means that the turnover of personnel in the call centers approaches 100% per year.
For the occasional shipper, smile-and-dial brokerages can provide a convenient way to have goods shipped. But the lack of deep expertise due to constant turnover, combined with the 15% pricing margins, mean that a reasonably capable traffic professional can obtain transportation services much more economically and reliably.
Raue & Wieland (2015) describe the example of horizontal alliances between logistics service providers, i.e., the cooperation between two or more logistics companies that are potentially competing. Logistics companies can benefit twofold from such an alliance. On the one hand, they can "access tangible resources which are directly exploitable". This includes extending common transportation networks, their warehouse infrastructure and the ability to provide more complex service packages by combining resources. On the other hand, LSPs can "access intangible resources, which are not directly exploitable". This includes know-how and information and, in turn, innovativeness.
Cost and time savings
Logistics is the core competence of third-party logistics providers. Providers may have better related knowledge and greater expertise than the producing or selling company, and may also have more global networks enabling greater time and cost efficiencies.
The equipment and the IT systems of 3PL providers are constantly updated and adapted to match the requirements of their customers and their customer’s suppliers. Producing or selling companies often do not have the time, resources, or expertise to adapt their equipment and systems as quickly.
Low capital commitment
If most or all operative functions are outsourced to a 3PL provider, there is usually no need for the client to own its own warehouse or transport facilities, lowering the amount of capital required for the client's business. This is particularly beneficial if a company's warehouse has high variations in capacity utilization, leading to overpurchasing of warehouse capacity and reducing profitability.
Logistics outsourcing allows companies with limited logistics expertise to focus on their core business. Increasing complexity in business suggests that companies benefit from not devoting resources to areas in which they are not skilled.
Third-party logistics providers can provide higher flexibility for geographic distribution and may offer a larger variety of services than clients could provide for themselves. This also allows businesses to more predictably manage their resources including workforce size, and turn fixed costs into variable costs.
Loss of control
One disadvantage is the loss of control a client has by using third-party logistics. With outbound logistics, the 3PL provider usually assumes communication and interactions with a firm's customer or supplier. To mitigate this, some 3PL’s attempt to brand themselves as their clients, such as applying clients' logos on their assets and dressing their employees like their clients' employees.
The IT systems of the provider and the client must be interoperable. Technology helps increase visibility for the client by way of continuous status updates via Dispatch Management Software and Electronic Data Interchange (EDI) which does involve a cost, but it can help avoid penalties for delays and subsequent financial losses such as from not unloading freight in time.
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- Simchi-Levi and Kaminsky, Designing and Managing the Supply Chain: Concepts,Strategies and Case Studies, third edition, McGraw-Hill International Edition, page 250