Logistics and supply chain has been the centerpiece of every existing Business for decades, if not centuries. However, modern logistics and supply chain management have become highly complex processes since the adaptation of global value chains of production and the advent of technology, mainly e-commerce. As a result, Tech and automation-driven logistics and supply chain management methods such as third party logistics or 3PL and drop shipping is the most popular among the plethora of business models adopted across industries to manage their supply chain and logistics.
A simple observation into business functioning today can pretty much tell us that traditional supply chain processes and logistics are incapable of handling the sheer scale of operations and rising customer expectations. And this is where 3 party logistics or 3rd party logistics have a significant edge in their management capacity. To give you a context, an average 3pl facility or 3pl warehouses process thousands of orders in a day, a feat that traditional supply-chain can only dream about doing. The outstanding efficiency at which third-party logistics warehousing and supply chain work is the primary reason behind the success of e-commerce titans like Amazon and Flipkart. We will explore how they work later in the article. But, first, we need to answer the most basic question: what is third party logistics or to put it into the colloquial terms; What is 3pl? How does one define third party logistics? What is a 3pl warehouse? What is a 3pl logistics company? What is a third party logistics provider?
3PL or third party logistics: An overview
3pl stands for third party logistics as they are, by definition, a third party logistic service provider. This section explores the 3pl definition to explain to our readers what the proper third party logistics definition is and how it differs from other supply chain management methods for modern businesses.
How does traditional logistics and supply chain management work?
To define third party logistics or define 3pl from a supply chain and logistics management context, we first need to understand how traditional logistics and supply chain management work. To explain that, let's take an example of an apparel company whose primary business function is to sell clothing.
Traditionally the company has a manufacturing facility that produces these clothing items and sources raw material from various sources. The process is referred to as inbound logistics. Manufactured goods are then transported to their own store outlets. These stores or franchises have their inventory management system, and based on demand, the manufacturer produces and ships bulk orders to these stores. Finally, a customer visits these stores to purchase the goods, thus, completing the cycle of goods. The manufacturer has an in-house supply chain management team, fleet of vehicles, and inventory management system to produce and sell inventory. However, selling any goods at scale today requires many more channels or points of sale, i.e., through multi-store outlets like Shoppers Stop, Westside, e-commerce platforms like Amazon, Flipkart, and their website. So what can this apparel business do to expand its point of sales? They employ a 3pl logistics provider to offer end-to-end order fulfillment to their customers through various channels.
3 PL definition: What is 3 pl or third party logistics?
A third party logistics or 3pl logistics service provider manages packaging, warehousing, and transportation activity for a business, thus, serving as a vital intermediary between the company manufacturing goods and their customers. Once integrated with your Business, 3 pls providers can make scaling business seamlessly and with utmost efficiency. Thus, a company can shift the onus of managing logistics to a third party and focus on its core business, marketing, growth, and technology while significantly reducing operational costs. A third party logistics firm may be defined as the 3pl company or service provider that facilitates supply chain management services to various businesses.
Expanding on our earlier example, the apparel company, in a bid to expand their point of sales, can employ a third party logistics company to manage their supply chain. The 3pl company will provide a pickup facility from the manufacturer, manage the packaging & warehousing for goods, and provide 3pl shipping or last-mile fulfillment to the end consumer. But, again, the company's only role is to produce clothing items listed on their website.
The customer purchases their desired clothing item through the website. The rest is taken care of by third party logistics services employed by the apparel company, thus, running successful 3pl operations while helping the company become more customer-centric, offering transparency to business owners and customers.
However, when it comes to selling through e-commerce platforms like Amazon, Flipkart, the apparel company, and their franchise store, they can list their products on the platform. In contrast, the e-commerce company serves as a 3pl service provider themselves. This example pretty much answers the question, what does 3pl mean in logistics. Additionally, we will examine how e-commerce companies take over the retail segment using 3pl later in the article.
What services do third party logistics offer?
Third-party logistics service providers or companies that offer 3pl management offer a wide range of services or 3pl services to supply chain and logistics companies. Although different 3 pl providers provide various kinds of services based on their expertise, region of service, the network of transporters, etc., there are some standard 3pl supply chain solutions that almost every 3rd party logistics company offer. These 3pl services include,
- third party packaging or 3pl packaging
- third party warehousing or 3pl warehousing
- third party shipping or 3pl shipping
- Inventory management
- freight shipping
- reverse logistics
- third party fulfillment
When it comes to 3 pl logistics services, many companies offer function-specific services. These companies specialize in the specific function that companies outsource to 3pl logistics providers. These include,
- companies that provide complete third party logistics services
- companies that offer only third party fulfillment, last-mile delivery, and 3rd party shipping services
- companies that provide third party warehouse or third party warehousing services
- companies that provide third party warehousing and distribution
- companies that operate as third party shipper offering third party shipping services or a shipping logistics company (also include 3pl carrier)
- companies that act as third party packaging companies
The list of companies that offer function-specific 3pl services is endless. However, the most common are companies that operate as a third party warehouse service provider offering resources warehouse solutions as warehousing is the most resource and cost-intensive step for any business.
Types of Logistics Providers
3PL service providers are the most common type of logistics provider that is used. However, there are several other types of logistics service providers that are used by businesses. Let's have a brief look at each one of them individually.
What is 1PL or first-party logistics?
1PL is the most basic logistics method and probably one of the oldest ones. In this method, a company that manufactures goods is responsible for delivering the goods directly to the end consumer. The manufacturer employs a fleet of their own to manage transportation. For example, a small poultry company whose operations are restricted to a small geographical region produces eggs and delivers directly to the customers residing in the same town or nearby areas. However, 1PL is employed by small-scale businesses, and the scope of scaling up a business is very costly and limited. Therefore, the supply chain operations for 1PL are usually not outsourced but managed in-house.
What is 2PL or second-party logistics?
2PL has more scope of scaling up when compared to 1PL services. In this method, a company manufactures goods and outsources the transportation and delivery to a company that offers transportation services as a courier. The company that manufactures goods is responsible for warehousing and packaging of goods. The only process that is outsourced is the delivery of goods to the end consumer. Therefore, the scope of scaling up operations is possible but limited for companies employing 2PL service providers. 2PL service providers like couriers manage transportation and delivery for the company. However, the company has limited control over transparency and the delivery process and is usually at the mercy of courier services.
What is 3PL or third-party logistics?
3PL service providers are by far the most commonly used service providers, particularly in e-commerce. For example, e-commerce companies act as third party logistics providers for companies that sell their goods via their platform. The company that manufactures goods is only responsible for manufacturing the goods and thus, can focus on marketing, growth, and improving their product quality for better sales. The third-party logistics company manages the picking, packaging, warehousing, and transportation of goods on behalf of the company. In addition, they offer several other services like inventory management and reverse logistics, which is crucial if the company wants to scale up its operation or provide better customer service to their consumer. It is also the most cost-effective method of logistics and supply chain management available today. The most crucial USP of 3PL or third-party logistics is the tech-driven approach taken by the service providers, which results in a much better customer service experience and offers transparency in the process to both businesses and customers. The nexus of technology and automation has made it possible for features like same-day delivery across the country, which is a massive hit among e-commerce customers.
What is 4PL or fourth party logistics?
Fourth party logistics, popularly called 4PL, is outsourcing the entire process of logistics operations to a single service provider that manages all aspects of the supply chain on behalf of the company. The difference between a 3PL and 4PL is that in 4PL logistics, the company outsources goods manufacturing to a service provider and picking, packaging, warehousing, transport, and fulfillment. As a result, 4PL is suited for medium to large-scale operations and maintains a single point of contact for all operations.
What is 5PL or fifth-party logistics?
A fifth party logistics or 5PL is nothing but a much larger service provider that manages multiple 4PL and 3PL operations. In simple terms, 5PL service providers are large-scale service providers that have numerous clients across countries. The scale of their operations is humongous, and their network of transporters and carriers is often the largest.
3PL business and 3PL process
3pl outsourcing is generally associated with e-commerce companies or companies selling through e-commerce platforms. However, as we have already understood, the role of a third party logistics company is to handle both inbound logistics and outbound logistics for businesses essentially. In other words, a third party company managing supply chain operations on behalf of a company. In the case of inbound logistics, they process resources based on demand. 3pl providers, in general, own or lease many warehouses in the region they operate in and partner with companies that offer warehousing services to services across more expansive geography.
How does 3pl logistics work?
As discussed above, 3rd party logistics companies work as an intermediary between manufacturing companies and their customers. In short, it is how a company can outsource its fulfillment to a third party. Let's look at several processes that are involved in a 3pl business model.
3pl transportation & logistics meaning & process
This section talks about shipping company definition and logistics company definition and how it integrates various processes with a 3pl system.
Most 3rd party logistics companies don't own a fleet of vehicles for their transport operation. Instead, they partner with transporters or carriers to manage their transport. As a result, 3pl providers have an extensive network of transporters which is very beneficial to serve a large set of customers across regions. The 3pl service provider is responsible for the transportation of goods.
Companies that employ 3pl service providers are only responsible for manufacturing the goods. Goods are then picked up and transported from the company's manufacturing facilities and shipped to warehouses owned by the 3pl provider shipped via network carriers of the 3pl provider.
3pl warehouse meaning & process
This section talks about warehouse logistics definition and how it works.
There are indeed several benefits of switching to a 3pl business model for managing supply chain and logistics. For example, companies can avoid investment in warehouses to store their inventory which is a fixed expense and costly one, by switching to third party warehouse services. In addition, scaling businesses have an increasing demand for storage as well. In the 3pl Business, model companies do not have to own warehouses. Instead, they rent space in a much larger 3rd party warehouse owned by 3rd party logistics providers. An added benefit of renting shelf space in warehouses (also called warehouse 3pl or logistics 3pl) is that the management of warehouses is done by employees who work for the 3pl provider. Thus, companies can save the cost of employing hundreds of warehouse workers to run warehouse operations. Once shipped to the warehouse, the goods are stored there until a purchase is made.
3pl storage and packaging meaning and process
From all the 3pl services offered by third party logistics providers, 3pl storage & packaging is one of the most crucial ones. It is the process of securely packaging and storing goods received from the company that employed the 3pl provider in warehouses stocked inventory. If we consider that the point of sale (POS) where the customer purchases goods sold by the company is their website, the particular product is shipped via network carriers of the 3pl provider to the nearest warehouse or fulfillment center. Here, the warehouse employees are responsible for picking the ordered product from the inventory, packaging it securely, and preparing it for fulfillment or last-mile delivery.
3pl carrier delivery meaning and process
The final step in 3pl logistics is last-mile delivery, which involves picking goods by the carrier part of the 3pl provider's network for delivery to the end customer. Once the order is securely packaged and ready to be shipped, the carrier picks it up and transports it to the nearest warehouse or fulfillment center. The shipment usually follows a pre-defined route as the carriers responsible for delivering the goods to the end-customer deal with thousands of orders in a day.
Once the order is received in the nearest storage or warehouse, also popularly called the final delivery station, the delivery person finishes the last-mile delivery by delivering it to the end customer, thus, completing the entire process from ordering to delivery to the end consumer.
An add-on step or an additional service offered by 3pl providers is called reverse logistics. In simple terms, processing returns. If the customer is not satisfied with their order purchased from the company, they usually return for the same order. Once the company receives the return request, the carrier is instructed to conduct due diligence (verifying the product condition, tags, etc.) and collect the order. The entire process of fulfillment is followed but in reverse and ends at the faulty product reaching the manufacturer.
Benefits of third party logistics
The benefits of third-party logistics are enormous, especially for companies looking to scale operations based on demands. It is also beneficial for a business who want flexibility when it comes to their supply chain management. Companies that would like to have the option to scale up or down their operations based on demand can significantly benefit from the flexibility that a 3PL service provider offers. Let's briefly look at some of the key benefits of employing a 3PL service provider for your Business.
3PL offers businesses benefits like scalable warehousing and avoid high fixed costs for Business
The most crucial benefit offered by the 3PL service provider is the ability to scale up or down its operation based on demand. Businesses and manufacturers are susceptible to wavering demand, especially for companies that make goods that are sold in specific seasons. Thus, it does not make sense to make investments in warehouses that are costly. Therefore, 3PL service providers offer companies the flexibility to choose the scale of services like transportation, warehousing, etc., as per their requirements.
3PL offers benefits like excellent customer service and transparency in the supply chain process
3PL service providers use technology and automation to their benefit to make logistics and supply chain operations as efficient and cost-effective as possible. Technologies like fleet management, vehicle tracking, etc., allow them to offer better customer service and more transparency in the process. In addition, they offer customer support service to the end customers and handle it efficiently, thus, reducing the burden of employing large customer service departments for companies.
3PL offer benefits like expert-backed solutions and large-scale networks
3PL providers are their industry's experts with years of experience in supply-chain management. As a result, they offer businesses reliable delivery time, better communication and tracking, minimum chances of poor packing and damaging, and an overall improved customer experience to improve customer satisfaction and overall brand reliability. In addition, an extensive network of carriers and warehouses help them offer services over a vast geographical region benefitting businesses with a country-wide and international presence.
3PL make it possible for companies to offer shorter delivery times and a same-day delivery feature
One of the most popular features of Amazon is the option for same-day delivery, which has revolutionized supply chain management as well as pumped up consumer expectations. Various surveys have found that companies that offer shorter delivery times and features like same-day delivery, etc., are favored by consumers. 3PL, with its highly efficient supply chain management, makes it possible for companies and e-commerce platforms to offer such exciting features resulting in better sales.
It is a no-brainer that third-party logistics has revolutionized supply chain management for good. Some of the most remarkable feats in logistics and supply chain management, like fleet management, vehicle tracking system, in-plant logistics, transport management system, etc., are why 3PL as a supply chain management system exists. Thus, businesses that still rely on traditional supply chain management need to evaluate their options if they want to compete with new-age companies equipped with such highly efficient logistics solutions.
If you would like to read more on how Amazon leveraged the 3PL system to become the largest e-commerce platform, read The Ultimate Guide to the 3PL provider for Logistics and Supply-Chain (fleetx.io). If you already know how third-party logistics works and would like to find out how to choose the right 3PL provider for your Business, refer to the article, How to Choose the right 3PL provider for your Business (fleetx.io).