3PL (third-party logistics)

What is 3PL (third-party logistics)?

A 3PL (third-party logistics) provider offers outsourced logistics services, which encompass anything that involves management of one or more facets of procurement and fulfillment activities. In business, 3PL has a broad meaning that applies to any service contract that involves storing or shipping items.

A 3PL service may be a single provider, such as transportation or warehouse storage, or it can be a systemwide bundle of services capable of handling supply chain management.

How third-party logistics work

Here is an example of how 3PL arrangements operate: A book publisher hires writers, editors and graphic designers to produce publications, but it may not want to handle the consumer ordering process or transportation of book shipments.

Instead, the book publisher uses a fulfillment center to process its online orders and hires a trucking carrier to haul its freight. The fulfillment center and carrier both act as 3PL providers. It's possible for a single 3PL provider to fulfill and ship book orders, too.

By contracting with a 3PL provider, the book company can use supply and distribution services only when needed, thus controlling costs more effectively while focusing on its core competency of producing books.

The growth of 3PLs

Aspects of 3PLs probably date back hundreds, if not thousands, of years. The Council of Supply Chain Management Professionals traces the actual 3PL abbreviation to four decades ago. "The term 3PL was first used in the early 1970s to identify intermodal marketing companies ... in transportation contracts," the council wrote in a glossary. "Up to that point, contracts for transportation had featured only two parties, the shipper and the carrier."

The Motor Carrier Act of 1980 deregulated the trucking industry, which reduced trucking rates and increased the amount of competition, all of which fed into 3PL concepts.

The term 3PL got bandied about more by consultants and during conferences in the 1990s, likely tied to evolving technology, including the rise of the internet.

Later, the Consumer Product Safety Improvement Act of 2008 legally defined 3PL: "The term third-party logistics provider means a person who solely receives, holds or otherwise transports a consumer product in the ordinary course of business but who does not take title to the product."

According to a frequently cited 2017 report from Armstrong & Associates, a supply chain consultancy, 90% of domestic Fortune 500 companies rely on 3PL providers to handle logistics, compared to the 46% Armstrong reported in 2001.

The growth in online sales and increasing consumer demand for faster delivery and lower prices have spiked demand for 3PL services. 3PLs have also bloomed thanks to tracking technology, such as radio frequency identification (RFID) and global positioning system (GPS), both of which offer extended supply chain visibility. Meanwhile, internet of things (IoT) technology has improved tracking metrics for trucking and other carriers.

The benefits of 3PL

The primary benefit of using a 3PL service to handle logistics, such as packaging, warehousing, fulfillment and distribution, is cost savings -- for example, not having to maintain a warehouse or the staff to monitor supply chain operations.

A 3PL service likely offers better performance on efforts such as shipping while also enjoying an easier ability to scale its operations. If the publishing company in the example above suddenly needs to ship more copies of a popular title, a fulfillment center will have an easier time meeting that demand than if the publisher itself had to ship additional copies of the book.

3PL vs. 4PL

The term 4PL (fourth-party logistics) often pops up in discussions about 3PL. In brief, when 3PL providers outsource any of their own contracted services, they become a 4PL provider. In the example of a book publisher, if the fulfillment center subcontracts out its shrink-wrapping and freight weighing to other companies, then the center acts as a 4PL provider.

Some observers view 3PLs providers as managers of a particular outsourced service, while 4PL providers oversee services across an entire supply chain.

Another way to look at a 4PL service is as a provider that acts as a client company's single point of contact in the supply chain; the 4PL provider selects and manages various 3PL activities. 4PL is also known as lead logistics providers (LLP).

3PL vs. freight forwarding

Freight forwarding and 3PL might come across as similar, but there are noticeable differences.

Freight forwarders do not actually ship materials, and instead function as a liaison between a client company and shipping firms. The freight forwarder negotiates prices, determines the best modes of transportation, establishes economical shipping routes and works on other logistics concerns. As noted earlier, 3PL providers handle a broader range of services compared to forwarders.

Also, a 3PL provider takes responsibility for the goods or services being shipped, while a freight forwarder likely will not, given it is just an intermediary.