Third-party
logistics (abbreviated as 3PL, or TPL) in logistics and supply
chain management is an organization's use of third-party businesses
to outsource elements of its distribution, warehousing,
and fulfillment services.
Third-party logistics providers typically specialize in integrated operations of warehousing and transportation services that can be scaled and customized to customers' needs, based on market conditions, to meet the demands and delivery service requirements for their products. Often, services exceed logistics to include value-added services related to the production or procurement of goods, such as services that integrate parts of the supply chain. A provider of such integrated services are referenced as a third-party supply chain management provider (3PSCM), or as a supply chain management service provider (SCMSP). 3PL targets particular functions within supply management, such as warehousing, transportation, or raw material provision.
The
global 3PL market reached $75 billion in 2014, and grew to $157 billion in the
US; demand growth for 3PL services in the US (7.4% YoY) outpaced the growth of
the US economy in 2014. As of 2014, 80 percent of all Fortune 500 companies
and 96 percent of Fortune 100 used some form of 3PL services.
Types
Third-party
logistics providers include freight forwarders, courier companies,
as well as other companies integrating & offering subcontracted logistics
and transportation services. Hertz and Alfredsson (2003) describe four
categories of 3PL providers:
Standard
3PL Provider: this is the most basic form of a 3PL provider. They would perform
activities such as, pick and pack, warehousing, and distribution
(business) – the most basic functions of logistics. For a majority of these
firms, the 3PL function is not their main activity.
Service
Developer: this type of 3PL provider will offer their customers advanced
value-added services such as: tracking and tracing, cross-docking,
specific packaging, or providing a unique security system. A solid IT
foundation and a focus on economies of scale and scope will enable
this type of 3PL provider to perform these types of tasks.
The
Customer Adapter: this type of 3PL provider comes in at the request of the
customer and essentially takes over complete control of the company's logistics
activities. The 3PL provider improves the logistics dramatically, but does not
develop a new service. The customer base for this type of 3PL provider is
typically quite small.
The
Customer Developer: this is the highest level that a 3PL provider can attain
with respect to its processes and activities. This occurs when the 3PL provider
integrates itself with the customer and takes over their entire logistics
function. These providers will have few customers, but will perform extensive
and detailed tasks for them.
Outsourcing
may involve a subset of an operation's logistics, leaving some products or
operating steps untouched because the in-house logistics is able to do the work
better or cheaper than an external provider. Another important point is the
customer orientation of the 3PL provider. The provider has to fit to the
structures and the requirements of the company. This fit is more important than
the pure cost savings, like a survey of 3PL providers shows clearly: The
customer orientation in form of adaptability to changing customer needs,
reliability and the flexibility of third-party logistics provider were
mentioned as much more important than pure cost savings.
Lead
logistics providers
3PL
providers without their own assets are called lead logistics providers. Lead
logistics providers have the advantage that they have specialized industry
expertise combined with low overhead costs, but lower negotiating power and
fewer resources than a third-party provider has based on a normally big company
size, a good customer base and established network systems. 3PL providers may
sacrifice efficiency by preferring their own assets in order to maximize their
own efficiency. Lead logistics providers may also be less bureaucratic with
shorter decision-making cycles due to the smaller size of the company.
Layers
First
party logistics providers (1PL) are single service providers in a specific
geographic area that specialize in certain goods or shipping methods. Examples
are: carrying companies, port operators, depot companies. The logistics
department of a producing firm can also be a first party logistics provider if
they have own transport assets and warehouses.
Second
party logistics providers (2PL) are service providers which provide their
specialized logistics services in a larger (national) geographical area than
the 1PL do. Often there are frame contracts between the 2PL and the customer,
which regulate the conditions for the transport duties that are mostly placed
short term. 2PL’s provide own and external logistics resources like trucks,
forklifts, warehouses etc. for transport, handling of cargo or warehouse
management activities. Second party logistics arose in the course of the
globalization and the uprising trend of lean management, when the companies
began to outsource their logistics activities to focus on their own core
companies. Examples are: courier, express and parcel services; ocean carriers,
freight forwarders and transshipment providers.
The
most significant difference between a second party logistics provider and a
third-party logistics provider is the fact that a 3PL provider is always
integrated in the customer's system. The 2PL is not integrated; in contrast to
the 3PL it is only an outsourced logistics provider with no system integration.
A 2PL works often on call (e.g. express parcel services) whereas a 3PL is
almost every time informed about the workload of the near future. As technology
progresses, the methodology for notifying a 3PL of inbound workload usually
falls on API integrations that connect, for example, an E-commerce
store with a fulfillment center. Another point that differs 2 and 3PL
is the specification and customizing of services. A 2PL normally only provides
standardized services, whereas 3PLs often provide services that are customized
and specialized to the needs of their customer. This is possible due to long
term contracts that are usual in the third-party logistics market. Cost
effectiveness of a third-party logistics provider is only given over long
periods of time with stable contract and profits. In contrast to that second
party logistic services can’t be customized, concerning to the fluctuating
market with hard competition and a price battle on a low level. And there we
have another distinguishing point between 2PL and 3PL: Durability of contracts.
3PL contracts are long term contracts, whereas 2PL contracts are of a low
durability, so that the customer is flexible in responding to market and price
changes.
With
companies operating globally, the need to increase supply chain visibility and
reduce risk, improve velocity and reduce costs – all at the same time –
requires a common technological solution. Non-asset based providers perform
functions such as consultation on packaging and transportation, freight
quoting, financial settlement, auditing, tracking, customer service and issue
resolution. However, they do not employ any truck drivers or warehouse
personnel, and they don’t own any physical freight distribution assets of their
own – no trucks, no storage trailers, no pallets, and no warehousing. A
non-assets based provider consists of a team of domain experts with accumulated
freight industry expertise and information technology assets. They fill a role
similar to freight agents or brokers, but maintain a significantly greater
degree of “hands on” involvement in the transportation of products. These
providers are 4PL and 5PL services.
A
fourth party logistics provider has no owned transport assets or warehouse
capacity. They have an allocative and integration function within a supply
chain with the aim of increasing the efficiency of it. The idea of a
fourth-party logistics provider was born in the seventies by the consulting
company Accenture. Firms are outsourcing their selection of third-party
logistics provider and the optimization process of the integration of these to
a PL as an intermediary. That reduces costs and the 4PL have to have an
overview about the whole logistics market to choose the ideal 3PL for all
operative logistic activities. For being able to provide such an ideal solution
fourth party logistics providers need a good knowledge of the logistics branch
and a good IT infrastructure. A fourth party logistics provider selects
the 3PL providers from the market which are most suitable for the logistical
issues of his customer. Unlike the allocative function of a 4PL in the supply
chain, the core competence of a 3PL provider is the operative logistics.
Fifth
party logistics providers (5PL) provide supply chain management and offer
system oriented consulting and supply chain management services to their
customers. Advancements in technology and the associated increases in supply
chain visibility and inter-company communications have given rise to a
relatively new model for third-party logistics operations – the "non-asset
based logistics provider."
On-demand
transportation
On-demand
transportation is a relatively new term coined by 3PL providers to describe
their brokerage, ad-hoc, and "flyer" service offerings. On-demand
transportation has become a mandatory capability for today's successful 3PL
providers in offering client specific solutions to supply chain needs.
These
shipments do not usually move under the "lowest rate wins" scenario
and can be very profitable to the 3PL that wins the business. The cost quoted
to customers for on-demand services are based on specific circumstances and
availability and can differ greatly from normal "published" rates.
On-demand
transportation is a niche that continues to grow and evolve within the 3PL
industry.
Specific
modes of transport that may be subject to the on-demand model include (but are
not limited to) the following:
FTL,
or Full Truck Load
LTL,
or Less-than Truckload
Hotshot
(direct, exclusive courier)
Next
Flight Out, sometimes also referred to as Best Flight Out (commercial airline
shipping)
Expedited
services: (direct, exclusive courier) Immediate delivery or
"just-in-time" (JIT)
International
Expedited
New
brokers tend to use what has become known as "smile and dial"
brokering that essentially work as telemarketing call centers. Brokers have no
obligation to successfully ship all loads (as opposed to contract logistics
providers) and almost all sales representatives are heavily (and 100%)
commissioned, and much of the workers' day is spent cold-calling sales leads.
Smile-and-dial brokerages typically require a 15% gross profit margin (the
difference between what the shipper pays the brokerage and what the brokerage
pays the carrier), and the commission compensation scheme means that the
turnover of personnel in the call centers approaches 100% per year.
For
the occasional shipper, smile-and-dial brokerages can provide a convenient way
to have goods shipped. But the lack of deep expertise due to constant turnover,
combined with the 15% pricing margins, mean that a reasonably capable traffic
professional can obtain transportation services much more economically and
reliably, while a shipper needing delivery as soon as possible, from air
freight, air charter, ground expedited, flatbed services, refrigerated, LTL or
full truckload, liftgate, van or vehicle. With JIT delivery the price will be
secondary to on-demand as soon as possible delivery.
Horizontal
alliances
Raue
& Wieland (2015) describe the example of horizontal alliances between
logistics service providers, i.e., the cooperation between two or more
logistics companies that are potentially competing.[ Logistics companies
can benefit twofold from such an alliance. On the one hand, they can
"access tangible resources which are directly exploitable". This
includes extending common transportation networks, their warehouse
infrastructure and the ability to provide more complex service packages by
combining resources. On the other hand, LSPs can "access intangible
resources, which are not directly exploitable". This includes know-how and
information and, in turn, innovation.
Advantages
Cost
and time savings
Logistics
is the core competence of third-party logistics providers. Providers may have
better related knowledge and greater expertise than the producing or selling
company, and may also have more global networks enabling greater time and cost
efficiencies.
The
equipment and the IT systems of 3PL providers are constantly updated and
adapted to match the requirements of their customers and their customer’s
suppliers. Producing or selling companies often do not have the time,
resources, or expertise to adapt their equipment and systems as quickly.
Low
capital commitment
If
most or all operative functions are outsourced to a 3PL provider, there is
usually no need for the client to own its own warehouse or transport
facilities, lowering the amount of capital required for the client's business.
This is particularly beneficial if a company's warehouse has high variations in
capacity utilization, leading to overpurchasing of warehouse capacity and
reducing profitability.
Focus
Logistics
outsourcing allows companies with limited logistics expertise to focus on their
core business. Increasing complexity in business suggests that companies
benefit from not devoting resources to areas in which they are not skilled.
Flexibility
Third-party
logistics providers can provide higher flexibility for geographic distribution
and may offer a larger variety of services than clients could provide for
themselves. Postal services and private couriers typically factor in distance
when they calculate the cost of shipping; many 3PL providers market the benefit
of what is known as zone skipping to potential clients, because it shortens the
distance between products to be shipped and customers, resulting in lower
shipping costs. This also allows businesses to more predictably manage their
resources including workforce size, and turn fixed costs into variable costs.
Disadvantages
Loss
of control
One
disadvantage is the loss of control a client has by using third-party
logistics. With outbound logistics, the 3PL provider usually assumes
communication and interactions with a firm's customer or supplier. To mitigate
this, some 3PL’s attempt to brand themselves as their clients, such as applying
clients' logos on their assets and dressing their employees like their clients'
employees.
IT
The
IT systems of the provider and the client must be interoperable. Technology
helps increase visibility for the client by way of continuous status updates
via Dispatch Management Software and Electronic Data Interchange (EDI) which
does involve a cost, but it can help avoid penalties for delays and subsequent
financial losses such as from not unloading freight in time.
Reverse
logistics
Numerous
studies have shown that selling products online, rather than in a brick and
retail environment, adds extra costs when it comes to handling returns (i.e,
reverse logistics). The reliance upon third-party logistics providers to handle
aspects of the E-commerce supply chain such as warehousing and pick-and-pack
also means these companies must be relied on to handle reverse logistics.
Artificially induced demand events such as Black Friday in
the Untied States or Singles' Day in China come with an influx of
returned products, which can slow down warehouse operations and in turn delay
the issuing of refunds or other methods for mitigating dissatisfied customers.
The additional layer of a third party to handle sensitive customer-facing
issues such as returns is thus a heavily-debated topic within the realm of
E-commerce.
courtesy:
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