Unless your company is in the logistics business, logistics is a usually a means to an end, not the focus. The end is ensuring your clients get the products they order, in a cost-effective manner and at the service levels specified. Your company may have the labor and expertise to oversee the warehousing, assembling, order fulfillment, transportation, and reverse logistics to do that well. Or it may be a better business option to outsource some or all of this to a third-party logistics provider, otherwise known as a 3PL provider.
A good logistics provider can do this—and more—while also identifying and filling any gaps in the process that you may not have coverage for.
What are 3PLs and why are they used; why is their use growing so rapidly?
In general, 3PLs improve the quality and types of services that shippers need and provide for customers. They allow a company to outsource some or all of its logistics efforts necessary to get products to the customer (and sometimes back again if reverse logistics are needed). As ecommerce sales continue to grow, companies must be more efficient and cost-effective in their logistics operations, to improve customer service while lowering shipping costs and working with tight timeframes.
A 3PL relationship should be a partnership to maximize the results. It should not be transactional. Working with them to ensure success means that all parties come out ahead. A good third-party logistics company can provide a small business with a comprehensive solution, sometimes even a one-stop solution, to cover the entire supply chain management process for getting your products to the customer. The provider can be and should be proactive in sharing solutions for what your current process lacks, and offering solutions for that. A 3PL service can handle the complex situations that arise, helping your company to be agile and responsive. The 3PL can create value for your operations, your finances and your customer satisfaction.
How do third party logistics work?
Third-party logistics services are usually incorporated into supply chain solutions, such as warehouse space and transportation. It can be a one-stop shop, providing all the supply chain management services to get the inventory to the customer, or to handle individual elements of the logistics services, with your company handling the rest.
In addition to the warehousing, a 3PL logistics provider can cover inventory management and be a fulfillment center. They can do freight forwarding and manage transportation while integrating technology into the process. In terms of transportation, the third-party logistics companies can engage carriers for shipments, work with multiple customers to consolidate less-than-truckload (LTL) freight to save costs and time, and handle the payment and insurance documents. With proper use of technology, you will get visibility into your shipping.
Why use third party logistics? A good provider can also help with global shipping and as a freight forwarder. By outsourcing logistics with global needs, the third-party logistics companies can handle the compliance needs and customs information too.
What are the advantages and disadvantages of third-party logistics?
There are advantages and disadvantages of third-party logistics use. Why use third-party logistics? Let start with the benefits.
Advantages of third-party logistics
- Focus on core business strengths: By outsourcing logistics management, a small company, mid-size company or large company can focus on what it does best and not divert energy into logistics functions and additional paperwork.
- Save on capital, labor and technology expenses: Outsourced logistics means that the shipper doesn’t need to buy warehouses or hire warehouse workers. The service expenses can be built into the budget as ongoing needs, and the real estate and staffing aspects are handled by the 3PL. The shipper can minimize its overhead and infrastructure. The shipper can also access the provider’s technology like transportation management software or warehouse management software to give visibility into its operations, without having to pay for the software.
- Relationship efficiencies: A third-party service provider has extensive networks of contacts for transportation and warehousing, which can benefit the shipper with potential volume discounts if the 3PL uses it for multiple clients.
- Expanding the market: A company can more easily expand to other markets while using a logistics service provider that has experience and networks in different markets. Companies can use this resource to scale up and expand more quickly. The shipper can also have more flexible operations that can expand and contract easily.
- Expertise: A third-party service provider has the expertise needed in the logistics they handle. That means they can take care of domestic and international compliance regulations, ensuring that the shipper is going to have more efficient and smooth operations.
Disadvantages of third-party logistics
- Loss of control: By outsourcing the logistics process, the shipper does hand over some control to the provider, for quality assurance, timing and customer satisfaction. The shipper and third-party logistics company need to negotiate service level agreements, and must stay in close contact to ensure they are being met. If the 3PL cannot provide the quality needed, the business hiring them can experience problems.
- Security: A 3PL logistics company needs to provide the proper assurance and proof of secure operations and systems. They will be handling sensitive client information and a data breach could put the hiring company out of business.
- Cost: The shipper will save on capital and labor expenses by using a 3PL service, but using a 3PL is not inexpensive. Transaction costs can rise based on market conditions, and the shipper may not have control over the costs. The more services used, the more expensive it will be. At some point, a company may decide it is more cost-effective to handle the logistics services in-house.
- Specialized knowledge: If your company has specific needs, whether that is temperature-controlled delivery or regulated needs like for pharmaceutical tracking, you need to be sure the 3PL can handle those specialized needs.
- The right relationship: The 3PL will need a lot of vetting before you sign the contract, to ensure that it can meet your needs, that it offers responsive customer support, that it has the time and staffing to give you the service you need, and that it has the network and relationships to deliver on its promises. That requires work up front on your part.
Do you need a 3PL?
A company’s leaders need to weigh the advantages and disadvantages of a 3PL and look at its own corporate goals and capabilities to determine if a 3PL is the right move. Your company should consider if it makes financial sense and if you have the internal resources to do the job better yourself. You need to see if engaging a third-party logistics provider will actually streamline efficiency and improve customer service. There’s no magic formula to determine whether it’s the right choice for you.
If your company is scaling up or expanding rapidly, it can make sense to use a 3PL. Labor, warehousing costs, lack of expertise in various markets and fewer carrier relationships means your company might spend more time trying to make logistics work versus spending your time on the manufacturing and marketing efforts. Customers may be better served by focusing on them and their needs, rather than on complex logistics operations. You may not have the internal human resources now to handle it all, and hiring and training people takes time, especially with low unemployment rates.
Companies without a solid technology infrastructure can also benefit from a 3PL relationship. Vetting technology providers and getting systems up and running is a major expense and effort. Plugging into a 3PL’s technology network can save time and money compared to creating that network yourself.
If your company doesn’t have a good inventory management process, bringing in a 3PL to handle inventory and warehousing can save time and money overall. It can smooth out the inventory forecasting as well, ensuring better efficiency and key performance indicators (KPIs) for inventory management.
How to find 3PL
Finding the right 3PL for your needs is a process. It can be confusing and difficult to know how to weigh the factors or even know what factors are important. You’ll want to define your requirements, understand what results you expect and what your top priorities are. You’ll need to determine which logistics responsibilities you want to maintain in your company and which will be outsourced.
For each 3PL you consider, you’ll want to find out the services they offer, how they charge, whether they can customize operations based on your needs, if they specialize in your operations or have focus in specific solutions. Pricing can vary based on the company, and that can make it difficult to compare apples to apples. And if a great 3PL can’t handle your needs for all parts of the country, you may need to consider multiple companies, which increases the complexity. Of course you’ll want to check references also.
If this seems overwhelming and a lot to handle, consider using a consultant to help you through the process. Finding the right partner for your needs should be done the first time so you can almost guarantee success.
Shipware helps customers find the right 3PL for them. First, Shipware assesses the company’s current contract or their 3PL wish list. We look at shipping data and logistics needs, current spending weighed against Shipware’s proprietary benchmarked data. Shipware experts evaluate the market with a request for proposal (RFP) to find the 3PLs that best meet the company’s needs and pricing. After analyzing the responses and talking with the 3PL providers, Shipware recommends the best solution or solutions. Once the company agrees, Shipware will negotiate with the 3PL, a process that includes determining service level agreements (SLAs) and embedding those in the contracts. The 3PL will then be held accountable for these agreements.
Shipware can negotiate new agreements or perform 3PL contract optimization with existing contracts, to ensure the company is getting the best prices and service from its 3PL provider, and holding it accountable for what it promises. Shipware’s experts in this space have proven their value to customers. To learn more about how Shipware can help you with your 3PL contracts, contact us.