3PLs can contribute to improved customer service, increase bottom line
The supply chain environment is continually evolving, so logistics roles must be flexible. To stay at optimal performance, companies must continually analyze and fine-tune their logistics operations. More and more, these businesses are outsourcing some portion of their logistics to an outside transportation service company, or third-party logistics provider (3PL).
Logistics management plays a significant role in the success of any company’s operations and has a direct impact on the bottom line. More importantly, logistics processes play a big part in customer satisfaction.
Companies consider a number of factors in deciding to contract their logistics to a third-party provider. Among them: Would it be more effective to have a third-party logistics company manage some or all aspects of your logistics functions? What financial and service considerations must you take into account before making this decision?
According to a survey of CEOs by global management company A.T. Kearney, the reasons for outsourcing transportation services include to: avoid capital expenditures, cut costs, increase flexibility, focus on core business, improve service, company’s lack of scale, acquire talent and avoid labor problems.
What is a third-party logistics provider?
A third-party logistics provider is a firm that provides multiple logistics services for use by its customers. 3PLs are external suppliers that perform all or part of a company’s logistics functions. 3PL providers include freight suppliers (warehouse/distribution-based), courier firms (transportation-based), and transport services (forwarder-based), as well as 3PL consultants who provide financial- and information-based services. Preferably, these services are integrated or “bundled” together by the provider.
These firms facilitate the movement of parts and materials from suppliers to manufacturers and finished products from manufacturers to distributors and retailers. Among the services they provide are transportation, warehousing, cross-docking, inventory management, packaging and freight forwarding.
What are the types of 3PLs?
There are three types of third-party logistics providers:
- Asset Based - 3PL companies that use their own trucks, warehouses and personnel to operate the client’s business.
- Management Based - 3PL companies that provide the managerial and technological functions to operate the logistics business but do so using assets of other companies (brokered logistics) and do not necessarily own any assets. In a management-based agreement, the 3PL will oversee the management, routing and scheduling of the delivery service but broker the transportation service to an outside company.
- Integrated Providers - 3PL companies that can be either asset based or management based that supplement their services with whatever is needed by their clients. An example of an integrated provider would be a logistics company who utilizes their own drivers/warehouse and vehicles to service the immediate geographic region and broker the delivery service to transportation companies serving markets outside their area.
Considering a 3PL Provider
More than 80% of Fortune 500 companies outsource some aspect of their logistics, and The 2017 21st-annual Third-Party Logistics Study found that 58% of shippers said they are increasing their use of outsourced logistics services.
An important step in considering the advantages and disadvantages of outsourcing your transportation needs is taking a full assessment of current costs your business is accruing with logistics managed inhouse. The assessment should include vehicle expenses, maintenance, payroll/hiring, insurance, management and money paid to employees when there is downtime. This will help you evaluate the terms of a potential 3PL contract and any cost savings or service enhancements with your outsourced 3PL solution.
If hiring a 3PL seems to make sense for your company, download our Guide Sheet: Top 10 Questions When Evaluating Third Party Logistics Providers to help you better evaluate which provider will be the best partner for your business.