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What is Third-Party Logistics (3PL)?

Published 02 Dec 2020

What is Third-Party Logistics (3PL)?

What is Third-Party Logistics (3PL)?


Many people ask what 3PL is and what the different between other PL types in logistics is. The “PL” concept can be very confusing. This article is going to explain the concept and the different forms of “PL” to help you understand 3PL in detail.


Types of PL


1PL (First-Party Logistics): An enterprise that sends goods or products from one location to another is a 1PL. For example, a local farm that transports oranges directly to a grocery store for sale is a 1PL.


2PL (Second-Party Logistics): An enterprise that owns assets such as vehicles or planes to transport products from one location to another is a 2PL. The local farm that produces oranges might hire a 2PL to transport their oranges from the farm to the grocery store.


3PL (Third-Party Logistics): 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. Services often extend beyond logistics to include value-added services related to the production or procurement of goods, such as services that integrate parts of the supply chain. In the farm-to-grocery store example, a 3PL may be responsible for packing the oranges in cartons in addition to moving the oranges from the farm to the grocery store.


4PL (Fourth-Party Logistics): In a 4PL model, an enterprise outsources management of logistics activities as well as the execution across the supply chain. The 4PL provider typically offers more strategic insight and management over the enterprise's supply chain. A manufacturer will use a 4PL to essentially outsource its entire logistics operations. In this case, the 4PL may manage the communication with the farmer to produce more oranges as the grocery store's inventory decreases.


5PL (Fifth-Party Logistics): A 5PL provider supplies innovative logistics solutions and develops an optimum supply chain network. This can include automation, robotics and blockchain.



What is the Third-Party Logistics Provider?


In the logistics spectrum from 1PL to 5PL the most discussed and common model is the Third-Party Logistics model.


The term "third-party logistics provider" or “3PL” has been around since the 1970s. It simply means that a third party is involved in a company's logistics operations, in addition to the shipper/receiver and the carrier. The third party becomes a manager between the other two parties. Any company that offers some form of logistics services for hire is known as a 3PL.


Most 3PLs offer a variety of supply chain services including: transportation, warehousing, cross-docking, inventory management, packaging and freight forwarding.



Advantages of 3PL


Cost and time saving: Logistics is the core competence of third-party logistics providers. They 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.


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 warehouse or transport facilities, lowering the amount of capital required for the client's business.


Focus: Logistics outsourcing allows companies with limited logistics expertise to focus on their core business.


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.



Disadvantages of 3PL


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.


IT: The IT systems of the provider and the client must be interoperable.


Reverse logistics: Especially in e-commerce people prefer to return items they bought. This is called reverse logistics. Reverse logistics can be very difficult in terms of warehousing and pick-and-pack.

These advantages and disadvantages can help you to decide if you need a Third-Party Logistics provider and what you need to consider.