What Is 3PL? A Guide to Third-Party Logistics
As your business grows, it becomes harder to stay on top of shipping, logistics, and other critical activities. That's why many firms partner with third-party logistics (3PL) providers for several services, from warehousing and distribution to inventory management and order fulfillment. In this guide, we’ll explain what 3PL is and how it can help your company increase efficiency and reduce costs.
What is a 3PL company?
Here's 3PL’s meaning in simple terms: A 3PL provider is an outside company that helps companies manage their supply chain activities, including shipping coordination, fulfillment, inventory management, returns, exchanges, and distribution to retailers.
Now that you know the basic 3PL meaning, let’s explore the menu of services available. Here are six of the most common offerings:
- Warehousing and distribution
Warehousing involves storing items until you're ready to use them in production or ship them to retailers, distributors, and end users. Distribution may include packing, choosing an appropriate product mix, and providing goods to consumers.
2. Inventory management
Inventory management activities maintain optimal inventory levels for your business. They include ordering items from manufacturers, storing those items in a warehouse, and determining when to move them to the point of sale.
3. Order fulfillment
Order fulfillment begins when a customer places an order. A 3PL company can process the order for you and ensure it's delivered on schedule. Order fulfillment also includes customer returns and exchanges. An electronic data interchange (EDI) system streamlines this process, with EDI transactions automating many of the steps.
4. Transportation and freight management
Transportation refers to the movement of physical goods. Freight management is a valuable service provided by a 3PL company or a freight forwarder that includes route planning, finding a freight carrier, and optimizing the transportation process.
5. Value-added services
Some 3PL companies offer additional services to help e-commerce companies simplify their operations. Third-party logistics providers often handle returns or offer kitting — the practice of packing complementary items in a kit. For example, an auto supply company may package front brakes, rotors, and calipers together so customers can buy all three things simultaneously instead of making separate orders.
6. Picking and packing
Picking and packing get warehoused items ready for shipment. A picker is responsible for retrieving the correct products from warehouse shelves. For example, if a customer orders an XL shirt in arctic blue, the picker must find the right brand, style, size, and color. Packing involves verifying the items, choosing an appropriate container, and checking the packaging for damage.
3PL vs. 4PL
While 3PL focuses on order fulfillment, 4PL focuses on fulfillment, technology, transportation, and every other aspect of the supply chain. In other words, a 4PL partner will work with you to overcome all your supply chain challenges.
5 elements of the third-party logistics process
Different 3PL providers vary in their operations, but they all share certain elements:
- Planning and forecasting: A 3PL provider must forecast demand and use its predictions to make critical decisions to operate efficiently. Logistics professionals use these forecasts to inform ordering, pricing, and inventory management.
- Order management: 3PL services must keep close track of every order. Therefore, they need some way to capture orders, follow them, and ensure they're fulfilled. 3PL EDI integration allows them to automate these activities.
- Inventory control: Good inventory control makes it easier to meet customer demand without incurring additional carrying costs. It includes all the systems and processes ensuring you have adequate stock on hand.
- Logistics: A 3PL company manages the flow of goods on your behalf, increasing efficiency. Logistics is the process of managing the acquisition, storage, and transportation of company resources.
- Transportation management: Optimized transportation processes ensure goods are delivered on time. With effective transportation management, you can increase efficiency and reduce transportation-related costs.
3PL services versus dropshipping
Although 3PL and dropshipping have some similarities, there's one big difference: 3PL providers own and manage inventory on behalf of a business, handling warehousing, order fulfillment, and distribution. With drop-shipping, the manufacturer ships orders directly to customers, bypassing the need for inventory management or ownership.
Benefits of 3PL
Once you understand the 3PL, the benefits of a third-party logistics partner become apparent. These are five of the top benefits of 3PL:
- Cost savings: By outsourcing logistics and supply chain management to a 3PL provider, businesses save money on infrastructure, labor, transportation, and inventory management.
- Scalability and flexibility: 3PL providers offer scalable solutions that adapt to the changing needs of businesses.
- Expertise: You gain access to expert guidance and support from a 3PL partner. They will assist you in selecting the best packaging, shipping methods, inventory management strategies, and logistics solutions for your company's needs.
- Expansion opportunities: Expanding into new markets is an excellent way to grow your business, but establishing overseas infrastructure is expensive. You can partner with a 3PL company to test a new market before committing to it.
- Faster fulfillment: If you partner with a 3PL provider, they can ship products from multiple warehouses, reducing the time it takes for customers to receive their goods.
Every logistics solution comes with challenges. 3PL presents some potential disadvantages, including the following:
- Lack of control: Outsourcing logistics to a third-party provider means relinquishing a degree of control over your processes and operations.
- Communication and coordination: Effective communication and coordination between a business and its 3PL provider are essential. Challenges may arise due to misaligned expectations, inadequate information flow, or issues with integrating systems and technologies.
- Cost considerations: Although outsourcing logistics can save money on infrastructure and personnel, 3PL services have their own associated costs, such as warehousing and transportation.
- Minimums: Many 3PL firms expect you to spend a minimum monthly amount. This may present budgetary challenges during slow periods.
- Labor shortages: On-time delivery rates have declined since the beginning of the COVID-19 pandemic, partly due to a mismatch between labor supply and demand in the logistics industry. If your 3PL provider is inadequately staffed, they may be unable to follow through on all their promises.
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