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Third party logistics

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Third party logistics

A third-party logistics provider (abbreviated 3PL, or sometimes TPL) is a firm that provides service to its customers of outsourced (or "third party") logistics services for part, or all of their supply chain management functions. Third party logistics providers typically specialize in integrated operation, warehousing and transportation services that can be scaled and customized to customers' needs based on market conditions and the demands and delivery service requirements for their products and materials. Often, these services go beyond logistics and include value-added services related to the production or procurement of goods, i.e., services that integrate parts of the supply chain. Then the provider is called third-party supply chain management provider (3PSCM) or supply chain management service provider (SCMSP). Third Party Logistics System is a process which targets a particular Function in the management. It may be like warehousing, transportation, raw material provider, etc.[1]


According to the Council of Supply Chain Management Professionals, 3PL is defined as "a firm that provides multiple logistics services for use by customers. Preferably, these services are integrated, or bundled together, by the provider. Among the services 3PLs provide are transportation, warehousing, cross-docking, inventory management, packaging, and freight forwarding."

Advantages and disadvantages of 3PL

Advantages of 3PL

Cost and time savings for the client

As logistics is the core competence of third party logistics providers. They possess better know how and a greater expertise as any producing or selling company could be able. This know how together with the global networks of the often large company size enables a higher time and cost efficiency. Another point is, that the equipment and the IT systems of 3PL providers are constantly updated and adapted to new requirement of their customers, so that they are able to meet the requirements of their customer’s suppliers. And that is more than essential to a company’s survival. Producing or selling companies often do not have the time, resources or expertise to adapt their equipment and systems as quickly as necessary. So in conclusion a 3PL provider can meet the technical requirements in a faster and more cost efficient way than a company could do itself.[2]

Low capital commitment

The fact that most or all operative functions are outsourced to a 3PL provider means there is 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 has high variations in warehouse capacity utilization, because a bad capacity utilization ratio at equal fixed cost (for warehouse) will reduce a company’s profitability.[3]

Ability of client to focus on core business

The outsourcing of logistics departments permits the company to focus even more on their real core business. If logistics is one of the firms’ core businesses then outsourcing doesn’t make sense. But if logistics is no core competency but rather needed or annoying attachment it should be outsourced to a logistics provider, because the continuous increasing of business complexity makes it impossible to be an expert in every division or sector.[4] And if you are no expert in a division, there is always the opportunity to improve. Often only the core competency is really adding value to your product. So it is immense important to be best in class or one of the market leaders to generate profits, because normally the quality of the core product is the main (not the only, but the main!) reason for the consumer to buy it.

3PLs provide flexibility

Third party logistics provider can provide a much higher flexibility in geographic aspects and can offer a much larger variety of services than the clients could provide for themselves. In addition to that, the client gets flexibility in resources and workforce size and logistics fix costs turn into variable costs.[2]

Disadvantages of 3PL

Loss of control

One particular disadvantage is the loss of control a client has by working with third party logistics. Eminently in outbound logistics when the 3PL provider completely assumes the communication and interacting with a firm's customer or supplier. By having a good and continuous communication with their clients most 3PL’s counter and try to charm away such doubts. Some 3PL’s even paint the clients logos on their assets and vest their employees like the clients ones.[5]


Implementation issues and requirements of a 3PL collaboration

Due to the fact that a 3PL to client collaboration is a typical strategic alliance, problems can occur during the complex implementation phase. The implementation of the strategy is an important stepping stone towards success. If this step is not taken seriously or executed badly, this will lead to immense problems. And these problems will be even more serious in the development of a strategic alliance than in a company’s daily routine, because damaged faith in respect to the benefits and success of such an alliance is deadly and destructive for change motivation of all people involved.

Problem areas of the practical implementation of a strategic alliance

  • There isn't a convincing case or coherent blueprint for the implementation
  • There have to be a good and professional communication between the partners to manage various organizational and cultural differences
  • Managers and employees have to understand the necessity of the change that goes hand in hand with the strategic alliance. Only with acceptance there will be encouragement and a successfully alliance
  • There have to be a broad organizational compatibility check up to get synchronized structures and processes. Otherwise synchronization needs a lot of time which leads to demotivation.
  • Realistic expectations: a strategic alliance needs often half a year or more to operate in a seamless and efficient manner
  • Responsible managers have less decision making responsibilities and less expertise in project management
  • The complexity of the strategically and operative implementation is underestimated. Often there appear symptoms of fatigue and missing endurance of the management
  • If possible, the implementation of a strategic alliance should be the main duty of a few people. By an implementation by the way the quality of the alliance suffers[6]

All this points can be transferred nearly equal on third party logistics to client frame contract collaborations.

Another point to be examined separately is the fitting accuracy of the IT systems of the provider and the client. A good fitting of the different information technologies is essential for an effective and smooth work flow. So it’s problematic that there is a great gap between the expectations and the needs of the 3PL clients and the IT resources the 3PLs provide.

Important issues to think about, before contracting with a 3PL provider

First you have to know about your own logistics costs. Because only if you know exactly your own costs you can compare it to the costs of a logistics provider. Often it is useful to know the direct costs of each product and service, because sometime it makes sense to outsource only some parts of the logistics and leave some products or operating steps untouched because the in-house logistics is able to do better or cheaper than an external provider.[5] 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.[7]

Closely entangled together with the point of customer orientation is the point of a 3PL’s specialization. The special requirements of the own company should be flow into the decision which 3PL is the right one to choose. Experts often suggest firms to choose 3Pl providers with roots in the same area of logistics as the department that shall be outsourced.

Furthermore it is worth to discuss if the company wants an asset-owning or a non-asset-owning 3PL Provider. 3PL provider without own assets are called lead logistics providers. Lead logistics provider have the advantage that they have specialized industry expertise combined with low overhead costs, but lower negotiation power and less resources than a third party provider has, based on a normally big company size, a good customer base and established network systems. But 3Pl providers tend to shed clients efficiency consciously by preferring their own assets in order to maximize their own efficiency. In addition to that third party logistics provider often are bureaucratic and have long decision making cycles caused by the size of the company.[8][9]

Implementation issues

If a company gets the result that it wants to implement a third party logistics provider into their processes, it has to work on the following implementation issues. These are points a company that is purchasing the third party logistics services, has to fulfill.

The startup phase of such a strategic alliance is the most difficult and most critical phase. For implementation considerations there has to be planned a time frame of between six months and a year! Otherwise you risk quality and reliability losses.[9] The client company has to clearly identify their needs and expectations to the 3PL exactly to avoid misunderstandings and disaffections due to miscommunications. Performance measure have to be set. Concrete guidelines are necessary.

Necessary guidelines:

  • Aims and methods for target achievement have to be set
  • Milestones for important actions of the alliance project have to be set
  • Actions for encouragement of strengths on the one hand and methods for compensation of weaknesses have to be planned
  • Concept for the integration of alliance partners have to be developed
  • Critical parts of the contract have to be discussed and a for both sides responsible agreement have to be found
  • A time frame of the contract has to be given

Both parties, provider and client, must concentrate on the aim of a good collaboration concept with mutual beneficial. Otherwise if there is no win-win situation one party suffers and reduce its efforts.[8] Just as important as the good communication between client and provider is the communication within the workforce and employees and not only within the managers’ level. In the best case the communication is informative, motivating and anticipatory. The integration of employees should have highest priority! To avoid incertitude of employees, customers and business partners’ changes in respect to structures and reliabilities have to be communicated internal and external as early as possible.[10] Good communication is essential within such a project, employees want to know why a company is outsourcing and what the expectations of this step are.[8] Upcoming fear in respect to employee reduction have to be faced within the different departments in an early stage, if there is none, because fear of losing one’s livelihood is paralyzing the working morale. The employees should be motivated and mobilized to an active cooperation by understanding the change as a chance.[11]

Motivation and aims of 3PL collaborations

The first point reported about now, is instantly the most stimulating and propulsive reason for shippers and companies to commit their selves into strategic alliance collaborations with third party logistics providers.

Often companies, equal what size they have, aren’t able to improve their market position, as fast as the hard concurrency and competition in the national and international business requires, alone. Or if they are able this fast adaption to the market requirements would cause immense and disproportional costs.[12] So the companies try to get their logistics more efficient and costs economic by working together with third party logistics provider that have the size, the experience and the know-how to make the clients supply chain more cost efficient, more flexible and more profitable ( see also the advantages of 3PL in chapter 7.1). The 2014 annual Third Party Logistics Study (subtitle: The State of Logistics Outsourcing) of Capgemini investigated, that third party logistics clients have an average logistics cost reduction of 11%, an average inventory cost reduction of 6%, and an average fixed logistics cos reduction of even 23% by outsourcing their logistics to 3PL providers. Another important point for shipper is, that their fill rates and their order accuracy increase what is really important within the hard competition to satisfy, in special the challenging, but also the general customer.[13]

Types of 3PL providers

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:[14]

  • 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.[15]

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
  • Hotshot (direct, exclusive courier)
  • Next Flight Out, sometimes also referred to as Best Flight Out (commercial airline shipping)
  • International Expedited

On-demand transportation is a term to reflect what have become known as "smile and dial" brokerages 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.

Layers to Logistics Services

First party logistics provider/ 1PL

First party logistics provider are single service providers which are usually specialized on certain goods, branches and shipping methods. They do the functional transport and logistics services in a straitened region.[16] They do the core activities of logistics, namely transport, storing and handling of cargo, which were done by the most producing companies by themselves till the late seventies if we look back into history.[17] Examples are: Carrying companies, port operators, depot companies.[16] The logistics department of a producing firm can also be seen as a first party logistics provider if they have own transport assets and warehouses.(Pick and deliver it)

Second party logistics provider/ 2PL

Second party logistics provider 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.[16] Second party logistics arouse 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.[17]

Third party logistics provider/ 3PL

See Definition above.

Fourth party logistics provider/ 4PL

A fourth party logistics provider has no own 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.

Non-asset based logistics providers

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.” 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.[18] 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.

To be useful, providers must show their customers a benefit in financial and operational terms by leveraging exceptional expertise and ability in the areas of operations, negotiations, and customer service in a way that complements its customers' preexisting physical assets.

Fifth party logistics provider/ 5PL

Fifth party logistics providers are engaged with supply chain management and offer system oriented consulting and supply chain management services to their customers.[17]

Differentiation of 2PL and 3PL

The most significant difference between a second party logistics provider and a third party logistics provider is the fact that a 3Pl is always integrated in the customs system. The 2 Pl is not integrated, in contrast to the 3Pl he 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. Another point that differs 2 and 3PL is the specification and customizing of services. A 2Pl normally only provides standardized services. 3Pl’s against it often provide services that are customized and specialized on the needs of their customer. This is possible by the long term contracts that are usual in the third party logistics market. So the if there are customized logistics services are needed the contracts in the 3PL segment have to be long term, because customizing always costs money. A cost effectiveness for the third party logistics provider is only given over longer periods of time with a stable contract and stable 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. 3 PL 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.

Differentiation of 3PL and 4PL

The one great point of determination between a third- and a fourth party logistics provider is the point of own assets. In contrast to a 3Pl a 4Pl has no own transportation or warehouse assets! A fourth party logistics provider selects the 3 Pl 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.

Lead logistics provider as a cut surface between 3PL and 4PL

As a cut surface between 3Pl and 4 Pl there are existing so called lead logistics providers (abbreviation: LLP) which have the typical 4Pl attributes but hold own operative assets.

Lead logistics providers are a combination out of 3PL and 4PL logistics providers and are sometimes called 3,5PL provider. Because LLPs have the needed know-how for controlling and managing complex supply chains and additionally hold transport and warehouse assets, LLPs are able to provide comprehensive supply chain management services.

See also


  1. ^ "Outsourcing Transport and Warehousing: Pricing, Honesty and Contentious Issues" Published in Australian Freight Logistics Magazine. Retrieved 2014-3-25.
  2. ^ a b Simchi-Levi and Kaminsky, Designing and Managing the Supply Chain: Concepts,Strategies and Case Studies, third edition, McGraw-Hill International Edition, page 251.
  3. ^ Third Party Logistics
  4. ^ Simchi-Levi and Kaminsky, Designing and Managing the Supply Chain: Concepts,Strategies and Case Studies, third edition, McGraw-Hill International Edition, page 250
  5. ^ a b Simchi-Levi and Kaminsky, Designing and Managing the Supply Chain: Concepts,Strategies and Case Studies, third edition, McGraw-Hill International Edition, page 252
  6. ^ all problem areas compare: Arno Heck, Strategische Allianzen Erfolg durch professionelle Umsetzung (Berlin/Heidelberg: Springer Verlag, 1999), pages: 29-36.
  7. ^ Leahy, S.; P. Murphy; and R. Poist.,Determinants of Successful Logistics Relationships: A third Party Provider Perspective, Transport Journal Nr. 35, 1995, Pages:5-13
  8. ^ a b c Simchi-Levi and Kaminsky, Designing and Managing the Supply Chain: Concepts,Strategies and Case Studies, third edition, McGraw-Hill International Edition, page 253
  9. ^ a b Arno Heck, Strategische Allianzen, Springer Verlag pp. 47+48
  10. ^ Arno Heck, Strategische Allianzen (Springer Verlag), pp. 43.
  11. ^ Arno Heck, Strategische Allianzen (Springer Verlag), p.61.
  12. ^ Arno Heck, Strategische Allianzen (Springer Verlag), p.7.
  13. ^ Capgemini 2014 Third Party Logistics Study
  14. ^ Hertz, Susanne; Monica Alfredsson (February 2003). "Strategic development of third party logistics providers". Industrial Marketing Management (Elsevier Science) 32 (2): pp. 139–149.  
  15. ^ Martin Murray, "Selecting a Third Party Logistics (3PL) Provider",
  16. ^ a b c H.Brumme, N. Schröter,I. Schröter, Supply Chain Management und Logistik, Verlag W. Kohlhammer, Stuttgart 2010, Seite 15
  17. ^ a b c Logistikdienstleister
  18. ^ Supply Chain Visibility is ranked top priority. Again.
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