Role of a Third Party Logistics Company

Before delving into the role that third party logistics companies play in the supply chain it’s imperative to understand what is a 3PL? The Council of Supply Chain Management Professionals, or better known as CSCMP is looked at as a major resource in the logistics and supply chain community. According to the glossary of the CSCMP, the official definition given for “3PL logistics” is the following:

Third-Party Logistics Provider: A firm which provides multiple logistics services for use by customers. Preferably, these services are integrated, or "bundled" together by the provider. These firms facilitate the movement of parts and materials from suppliers to manufacturers, and finished products from manufacturers to distributors and retailers. Among the services which they provide are transportation, warehousing, cross- docking, inventory management, packaging, and freight forwarding.

When people hear “3rd party logistics'' they might have a difficult time understanding what it accomplishes and if it can help their businesses. In today’s fast paced environment of commerce it’s vital that businesses have a full scope of everything when it comes to logistics and supply chain management. Not having a clear visual on what it costs to fulfill and ship an order will determine how much profit the business will earn. Shipping and logistics do not just include delivering the product to the customer. It involves getting the products to the warehouse so they are readily available to pick up and ship. Freight containers often need to make use of intermodal transport until they are received at the dock or a warehouse. Understanding all the elements of the supply chain are critical for the success of any business.

3PL Meaning For Dummies

Supply chain is complex but it’s not difficult at all to understand what third party logistics companies do. Third party logistics companies assist businesses in their supply chain. To get a better understanding as to what 3rd party logistics is it's important to understand the different layers of a supply chain. Prior to going into what a 3PL is we should first get clarity on what a 1PL and 2PL are.

1 PL - One party logistics is the most basic type of commerce between two parties. Here is an example of 1PL: Tim goes to the ice cream store to get his favorite ice cream, cookies and cream topped with chocolate sprinkles. He gives the money to the server and receives the product that he ordered, cookies and cream ice cream topped with chocolate sprinkles. From a supply chain point of view, this is 1 PL or known as one party logistics.

2 PL - Two party logistics is very common when someone orders a product online and the seller needs to make use of a name brand shipping provider like USPS, UPS, and FedEx. It goes from the seller, to the shipping company, to the customer. This would be 2PL or two party logistics.

3 PL - Third party logistics companies use the same supply chain elements as 1 PL and 2 PL but add on the warehouse element that turns it into a 3 PL. The seller will make use of a warehousing company to stock their products and fulfill orders. One of the more famous 3PL companies is none other than Amazon. As a matter of fact they are the largest 3pl company in the world with 185 global fulfillment centers.

How Do Third Party Logistics Providers Help Small Businesses?

A 3PL is a company to which you outsource your warehousing and fulfilment. Third party logistics companies are experts when it comes to understanding shipping and the logistics of your business. They have a complete view of what it will cost to ship a container both domestically and internationally. More importantly, 3PLs will give you an accurate date of delivery for your business to be profitable and run efficiently.

Besides for 3PL logistics companies running your shipping and fulfilment they can provide substantial savings to your bottom line by your company making use of their many services. For example, when fulfilling a shipment there are many elements besides warehousing the physical items that are part of fulfilment. This includes labor of getting the shipment ready and whatever resources are needed to deliver the shipment link material and transport. Keep in mind that there are many expensive pieces of equipment that are needed in operating a functioning warehouse like forklifts, pallet jacks, and lift gates. Avoiding these added costs during distribution might determine if a company will break even. Third party logistics take over this part of the business in a more cost effective way while you run the business in regards to receiving orders and basic operations.

What If I Am Just Looking For Basic Warehousing?

Interestingly enough, business owners will be searching for 3rd party logistics companies when all they really need is basic warehousing for their freight. Many people tend to use third party logistics as a catch-all for all types of warehousing even though they don't need all of the other services it provides like repackaging, fulfilment, and shipping. That’s why it’s important to understand what you need prior to reaching out to a 3PL provider. Very often local logistics companies that handle your freight will often provide warehousing as an added service at a very reasonable rate.

2008 Legal Definition of 3PL

In July of 2008, congress passed a bill, HR 4040 which was signed into law by President George W. Bush. Part of the bill included the legal definition of a third party logistics company to be a handler of goods and not a manufacturer of goods. This means that the sole responsibility of any recalls by the Consumer Product Safety Commission (CPSC) rests with the product owner and not the third-party warehouse.

When there is a product defect one may speculate to hold the 3PL responsible as they are the ones that distributed the product to the customer. However, HR 4040 makes it clear that the onus is on the owner of the products and 3PL’s are just there as a service provider to get the product to the end user. Think of what would happen if someone ships some contraband via the USPS. The one who is responsible is the one who shipped the item not the shipper.

Manufacturers anticipate that there will be recalls with their products and will often incorporate it into the annual budget. Just recently one of the trending brands, Peloton had to recall its Peloton Tread+ and Peloton Tread treadmills due to receiving 72 reports of people and pets being pulled under the treadmill. Unfortunately, there was one death reported and the company had decided to pull 175,000 of these products off the market. This ended Peloton’s stock market winning streak as PTON stock began to dip at the start of the 2021 calendar year. In such a case, Peloton takes on the sole responsibility of any legal issues associated with the product recall, not the third party logistics companies that deliver the product to the consumer.

The Dot-Com Bubble In The United States & 3PL Logistics

In the late 1990’s when commerce began going online it was essential for these companies to have a reliable logistics provider that could be trusted and at the same time cost effective. This paved the way for third party fulfillment companies to establish themselves as an important layer in the supply chain. Ecommerce companies would be able to purchase goods and ship them straight to the 3PL who would then pick and ship orders to the customer. This helps keep costs down by not having to host a warehouse, workers, and all the expensive equipment for its operation.

With the growth of the online sector major retailers like Amazon & Walmart had begun to take on the roles of third party logistics services which forced the smaller retailers to join the online marketplace these companies hosted. Many of the smaller retailers were able to absorb their logistics fees and still be successful while others were not so fortunate and had to close up shop. It’s a big debate if Amazon should be split due to the monopoly it has in the online community. For now it seems like the U.S. government is looking away but who knows what future administrations may do these behemoth companies that are taking over the economy.

Final Words

Third party logistics companies play a very important role in assisting businesses of all sizes in getting a product to consumers. Very often people will search for a 3PL when all they are looking for is someone to warehouse their freight as it moves along through the supply chain. Understanding what a 3rd party logistics company does will help navigate you to the service you're looking for. In today's competitive online environment it’s vital that sellers have a bird’s eye view of what it will cost them to warehouse, fulfill, and ship. This will often determine the price you will charge the consumer in order for you to be profitable. Once you establish what your profit margins are you can then determine if a 3PL is right for your business.