What Is 3PL? (With Definitions, Benefits, and FAQs)

By Indeed Editorial Team

Published May 22, 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Companies are constantly adopting new strategies and business methods to help them perform tasks more productively, save time, and increase their profit margin. Employing the services of 3PL companies can help these businesses optimize their processes. Understanding the concept of third-party logistics can help you make efficient business decisions that can promote growth and sustainability within an organization. In this article, we provide answers to the question, "What is 3PL?" explain the services these companies offer, discuss the benefits of using a 3PL company, and give answers to frequently asked questions on third-party logistics service providers.

What is 3PL?

Knowing the answer to "What is 3PL?" can help you understand how some contractors may improve a company's operations. 3PL is a company that provides third-party logistics services to businesses, majorly e-commerce businesses. You can also call these companies order fulfillment companies because they render relevant services necessary to outsource a business's logistics operations. There are different specializations for 3PL companies, such as cold fulfillment, which involves storing and transporting food products that require to remain frozen or cold. A business can contact order fulfillment companies to store and transport hazardous substances.

An organization can also hire 3PL companies to warehouse and transport heavy, high-value, and bulky products. With 3PL companies, businesses can outsource supply chain operations to a third party and rely on them to offer end-to-end management of specific services like inventory management, warehousing, and transportation.

Services of a 3PL provider

There are different services order fulfillment companies provide for businesses. Common services include:

Procurement

3PL providers can help businesses order and receive goods from the upstream supply chain. These service providers may manage the company's inventory and notice when the stock levels are low. They can raise orders with manufacturers and suppliers to replenish the stock. Third-party logistics companies can arrange for the goods transportation from the supplier or manufacturer to their warehouse. A 3PL company can keep these goods in a warehouse and manage its storage till their client calls for them.

Related: What Is a Logistician? (With Job Requirements and Salary)

Warehousing and storage

Storing goods until there is a need for them elsewhere is a service of a 3PL provider. They can assign a public warehouse based on their customers' demands, priorities, and capacity. It's possible for them to rent out contract warehouses to specific customers for a set duration. An order fulfillment company may also provide high-security storage for volatile or valuable goods. They can also provide warehouses for different products, like food, chemicals, or goods requiring special conditions.

Distribution and transportation

This service involves transporting goods from the provider's warehouse to end consumers or different parts of a supply chain. A 3PL provider typically uses various distribution methods, such as intermodal transport, full container load (FCL), truckload (TK), less than container load (LCL), cross-docking, drayage, brokerage, and lowboy transport. They can track the goods in transit using GPS methods. These companies pack shipments for businesses, process them, and deliver them to the desired destination.

Reverse Logistics

Reverse logistics happens when a customer return goods or items with which they have concerns. Businesses use 3PL service providers to manage the returns, sending the goods onward, and the inventory issues of the product. This can make the return process convenient for the company and the customers.

Related: What Is Warehouse Logistics and Why Should You Use It?

Inventory management

Businesses can outsource their inventory management to an order fulfillment company. This can promote growth for the business as it affords the term to expand their production. These 3PL companies can also help companies divide their inventories across their multiple centres to facilitate the distribution of goods. Businesses can reduce lead time and increase customer satisfaction and shipping speed by having the 3PL service provider ship orders from the centre closest to each customer.

Other services third-party logistics companies provide may include:

  • Freight forwarding

  • Environmentally controlled freight

  • Consolidation and deconsolidation

  • Customized packaging

Benefits of using a 3PL company

Companies outsource the logistics aspects of their business process to 3PL service providers as it offers the following benefits:

Helps save cost

Businesses can reduce order fulfillment costs by outsourcing their supply chain to a 3PL company. These service providers typically have an extensive network and connections that can help them obtain the best deals for the logistics and supply chain. They usually have a more significant influence during logistics negotiation and can help save costs by obtaining excellent arrangements for shipping. Businesses can maximize their profit margin and divert their savings from outsourcing their logistics to third-party logistics companies.

Related: How to Write a Logistic Coordinator Resume (With Sample)

Enables leveraging industry expertise and experience

Third-party logistics service providers usually have expertise and experience in strategic matters. They typically have extensive knowledge of international compliance, transport documentation, economic regulations, and importation and exportation matters. This knowledge can be helpful for businesses with goals to expand into global markets. These businesses can seek the knowledge of 3PL companies and enjoy the benefits of logistics support, which can be helpful for entry into a new region or market.

Improves customer satisfaction

Customers can enjoy benefits like increased delivery speed, reduction in lead time, and excellent services when businesses outsource their logistics services. 3PL companies can help companies simplify their delivery process, leading to increased customer satisfaction. These service providers can also handle challenging situations like returns and delays to ensure customers get maximum satisfaction. It's possible for them to give offers such as free delivery and discounts to customers. They can also reduce the cost of shipping or delivery when a customer makes bulk orders.

Aids business growth and expansion

Businesses can expand to new markets without the constraints of learning the logistical nuances of the market. This is possible when they outsource the logistics aspects of their business to a third-party logistics company. These logistics companies can help manage inventory and warehousing in the new market and save the company the cost of labour and equipment. This can accelerate business growth and development.

Related: 10 Careers in Logistics (With Salaries and Primary Duties)

Allows businesses to focus on developing their core product

Businesses can improve their core competencies and save time that may be essential to manage non-core and critical functions. They can save internal resources while enjoying the benefits of logistics expertise. These businesses can also increase their efficiency by outsourcing key elements of their order fulfillment process and creating time to focus on diverse tasks.

FAQs on 3PL companies

The following frequently asked questions and answers regarding third-party logistics companies may help you understand their role:

How do third-party logistics work?

You can contact a 3PL company when you want to send out a product. Depending on the product type, they can assist with procurement and transportation of raw materials to the company. This usually occurs during the order fulfillment process, as the company can create a batch of products to send to the company. After the 3PL company receives the package, they can store them in a warehouse and organize them.

The third-party logistics party can use the distributed inventory process to keep the products in different warehouses. When a customer orders a product, the company can forward this order to the 3PL business to start the order fulfillment process. They can pack the order with materials such as boxes and tapes or use custom packaging that matches its brand. Usually, the 3PL company ships the orders by adding shipping labels for specific carriers. These carriers deliver the orders directly to the customers.

Related: 9 Supply Chain Management Degree Jobs (With Salaries)

What is the difference between a 3PL and a 4PL company?

4PL stands for fourth-party logistics. 4PL companies are typically higher level logistics companies that carry out all the services of a 3PL company and even manage 3PL companies. They take logistics a step further than a 3PL company by managing technology, infrastructure, and resources.

They provide services like business planning, logistics strategy, consultancy, inventory planning and management, and freight sourcing management and strategies. A 4PL company can coordinate a broad supplier base across several geographies and modes through network management services and control towers.

How can a company select the right 3PL partner?

When considering a third-party logistics partner, an organization can document its requirements in the supply chain and the results it desires using this 3PL company. Then research the company it intends to use. During the research, aspects to focus on may include the company's up-scaling capability and customization options to see if they match what the organization expects. It can verify the 3PL company's credibility and legitimacy through research.

It's possible to consult other businesses and clients who use the logistics service provider for feedback on their customer experience to ensure the organization is making the right choice. It can ensure the logistics company has adequate financial stability and can integrate with the existing team and internal shareholders.

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