Understanding Third-Party Logistics (3PL)

As modern businesses expand beyond borders and consumers grow accustomed to rapid order fulfillment, third-party logistics becomes essential in streamlining supply chains. Third-party logistics help implement cost-saving measures and free up company resources to focus on other aspects of their operation.

This guide addresses what 3PL entails, its benefits and how to choose the right 3PL partner for your company. 

What Is Third-Party Logistics? 

Put simply, 3PL refers to outsourcing most or all of a company's distribution and fulfillment services to another company for management. Third-party logistics companies are independent providers that offer specific logistic services. 

While 3PL logistics exploded with the rise of the internet and e-commerce, it dates back to the 1980s. The Motor Carrier Act of 1980 deregulated the trucking industry, increasing the number of trucking carriers from around 20,000 in 1980 to over 1.2 million today.

Part of this growth emerged when warehousing companies expanded to include transportation. The mainstreaming of information technology, the internet and emerging technologies, such as AI, also played a critical role in the increasing prevalence of 3PL.

Today, 3PL offers a cost-effective solution for manufacturers, providing flexibility and access to cutting-edge technological tools that help companies thrive. They often oversee various stages of the supply chain and manage inventory to reduce inefficiencies. Some may provide last-mile delivery services, while others handle packaging and kitting.

1PL to 5PL: Understanding the Differences

Logistics can be described in several ways, such as 1PL to 5PL, depending on how it's handled and whether it's outsourced. While they all refer to the same general processes of transportation and supply chain management, how those occur varies based on the level.

First-Party Logistics (1PL)

When a company handles logistics internally, from storing its goods to transporting them to a customer, it engages in first-party logistics. These companies remain self-sufficient in logistics because nothing is outsourced. For that reason, 1PL is typically limited to smaller production companies that focus on local distribution.

Second-Party Logistics (2PL)

Second-party logistics refers to outsourcing one part of a supply chain. A 2PL operator may manage the storage and transportation of goods during one part of the process. Usually, 2PL carriers or providers operate within the company's country.

Third-Party Logistics (3PL)

Companies utilizing 3PL outsource most or all of the logistics process to an external operator. This may include organizing transportation and storage, filling orders, managing inventory and handling return logistics. Essentially, 3PL providers act as intermediaries between companies and their customers.

Fourth-Party Logistics (4PL)

Fourth-party logistics providers handle general supply chain management. They may oversee the consulting, planning, management and warehousing components, although they typically outsource the physical transportation of goods to 3PL companies.

Essentially, 4PL providers operate nonphysical logistics to optimize a company's supply chain. A 4PL provider is more of a strategic partner than a service provider.

Fifth-Party Logistics (5PL)

Fifth-party logistics is a relatively new concept in the logistics industry. Typically, a 5PL is an operator that provides a combination of 3PL and 4PL services to manage an entire network of supply chains. 

Services Offered by 3PL Providers

Third-party logistics providers offer an array of services, allowing companies to outsource various aspects of their supply chain. The most common services they provide include:

• Warehousing, storage and distribution services: 3PL providers often store items in warehouses, where they typically manage inventory and may also engage in distribution services.
• Transportation management: Items may need to be moved to warehouses for further distribution or storage until an item is sold. Third-party logistics providers can handle this process, as well as shipping and delivering products to buyers or retailers.
• Inventory management: Third-party logistics providers keep track of inventory for their clients, identifying when stock runs low and ordering items from suppliers and manufacturers as needed.
• Value-added services: Many 3PL providers offer additional services to help businesses run their supply chain, such as kitting, packaging and shipping orders.

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Benefits of Using a 3PL

A 3LP provider offers significant benefits to companies looking to optimize their supply chain and logistics, including:

• Cost savings: A 3PL can reduce operational costs due to simple economies of scale. Because they assist numerous other companies, they can often negotiate beneficial contracts for transportation and offer services at a lower price. 
• Scalability and flexibility: Third-party logistics providers are well-equipped to handle the ebb and flow of the market. Using a 3PL can help your company avoid seasonal bottlenecks due to labor shortages or increased demand.
• Focus on core competencies: Increased savings in resources and time created by outsourcing logistics allow a company to focus on other aspects of the business.
• Access to technology and expertise: Technological advancements in logistics have dramatically boosted the ease of inventory management, transportation and other aspects. Investing in these can be cost-prohibitive for smaller companies. By outsourcing to a 3PL provider, companies often gain these benefits without paying for the technology upfront. Additionally, 3PLs have extensive experience from perfecting their strategies, benefiting their clients. 

How to Choose the Right 3PL Partner

Before signing a contract with a 3PL partner, you need to evaluate whether they're right for the job. Most importantly, you must assess your needs. This can look vastly different for a small local business compared to international e-commerce. 

From there, start evaluating potential 3PL providers based on factors such as:

• Capability: Does the provider offer the services you need? For example, a company may offer revolving subscription boxes or require kitting. A company in a large country, such as the US, may opt for a provider with several locations to reduce shipping time.
• Reliability: Opt for a 3PL provider with significant experience and a good reputation. High-quality logistics and supply chain management often come from years of honing processes, and more established providers can better fill this niche.
• Customization: 3PL  providers can offer any number of services. The best 3PLs collaborate with you to create customized solutions that easily integrate into your supply chain. By customizing the logistics strategy for your specific company, you may gain better results.
• Responsiveness: This extends beyond how quickly a 3PL provider gets back to you. It also involves evaluating how they respond when issues arise.
• Technology: One of the biggest benefits of partnering with a 3PL provider is gaining access to technology. Ensure the company you choose utilizes modern technology that best suits your needs. For example, you might need an integrated order management system or an IT team available to assist customers.

Challenges and Considerations in 3PL Partnerships

Outsourcing logistics means relinquishing some company control to a third party. This can come with some challenges and considerations, including:

• End-to-end visibility: End-to-end visibility can suffer as logistics are outsourced due to goods being passed from company to company while they're processed. Some 3PL providers manage this through integrative software that provides real-time data and analysis.
• Poor communication or collaboration: Bringing more people into the supply chain increases the risk of miscommunications that can lead to errors or inefficiencies. Third-party logistics providers ensure effective communication channels are in place so all parties remain on the same page.
• Data security risks: Having multiple parties involved in the supply chain increases data security risks. Third-party logistics providers must have up-to-date security measures to protect sensitive data, such as customer or financial information.

Future Trends in the 3PL Industry

As global e-commerce sales increase, so does the 3PL industry. As it grows, emerging technologies, such as AI, IoT and blockchain integration, are expected to follow. AI and IoT integration already allow for real-time tracking of products through the supply chain. 

A growing focus on green logistics and sustainability also dictates future trends. From reverse logistics emphasizing recovery, repair and recycling of products when possible to electric vehicle fleets, companies are adopting eco-friendly solutions. These practices can reduce costs and boost customer loyalty, especially when minimizing packaging to fit more products in transportation or storage. 

**A link to the Green Logistics subpage can be inserted here.

Choose Atlas International as Your 3PL Partner

Third-party logistics can be a real game-changer for businesses, offering services and speed that may not be attainable for companies that operate supply chains in-house. By providing access to cutting-edge technologies and extensive experience, a 3PL partner revolutionizes and streamlines companies' supply chains.

Atlas International has stepped into the 3PL scene, offering extensive project, supply chain, warehouse and transportation management solutions for companies to outsource their logistics. As a full-service logistics provider with access to over 1,000 warehouses in North America, we're ready to help your business thrive. Reach out for a free consultation or assessment by requesting a quote online, calling 800-446-2079 or emailing supplychain@atlaslogistics.com. 

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