Third party logistics also known as 3PL or TPL is when a company uses a third party business to outsource parts of the company's fulfillment & distribution services, rather than secure their own industrial space for rent.
Third party logistics service providers commonly specialize integrated operations, transportation, and warehousing services that can be customized and scaled to a customers needs. For example when the delivery service requirements & demands for materials and products increase for an Ecommerce business. These 3PL services often go beyond logistics and may include value added services that relate to the procurement and production of goods. For example services integrated in portions of the supply chain. When integration occurs at this level the provider is now called a third party supply chain management provider (aka 3PSCM).
Who Uses 3PL Services?
3PL services are used by over 80% of all Fortune 500 companies and over 95% of all Fortune 100 companies. Globally the third party logistics market is over $750 billion. In the U.S. the 3PL market is around $150 billion and growing at about 7% per year.
Types of Third Party Logistics Companie
Third party logistics companies can be any company offering and integrating subcontracted logistics & transportation services as well as freight forwarders and courier companies.
- Standard 3PL – They offer the most basic logistics functions such as warehousing, pick & pack, and distribution
- Service developer – Offer value add services in addition to basic services such as cross docking, tracking & tracing, packaging, security
- Customer adapter – Basically takes over a company's logistic activities however does not create a new service. Customer base is typically small.
- Customer developer – Highest level of 3PL services. The logistics provider integrates with customer and takes over entire logistic activities.
Should You Hire a 3rd Party Logistics Provider?
There are certain logistics that you can probably do better and cheaper than an external 3PL however it's beneficial to do a cost vs time analysis to determine what is right for your business. If you have the time, money, personnel, expertise, etc to lease warehouse space then take care of your own logistics. However if your core business is retail or ecommerce and you don't want the hassle of renting warehouse space, committing to long term lease contracts, hiring and managing people, or having the additional overhead then consider evaluating a third party logistics company.
The nice thing about outsourcing is that if your company ever needs to expand or contract you don't have to worry about finding more warehouse space. You can simply tell your logistics company that you need more or less space. In most cases when leasing warehouse space you will have to sign a 3 to 5 year lease. 3PL contracts are typically much shorter than that so you have a lot more flexibility and not have to lock in long term commitments.