Advantages and disadvantages of 3PL (Third Party Logistics)
3PL - 3rd party logistics
As businesses have continued to expand their presence overseas in an effort to find faster international growth, their supply chains have also grown increasingly complex. Handling large and complex supply chains is often quite costly and burdensome for businesses. Developing and managing large and international supply chain networks, on the one hand, requires a large capital investment, on the other, it also needs strong physical infrastructure. The evolution of e-commerce and fast growth in its popularity has also led to the evolution of supply chain networks supported by modern technologies including AI, blockchain, and digital technology. The evolution of heavily digitized supply chain networks was also followed by the rise of Third Party logistics or 3PLs (also referred sometimes to as TPL).
What is 3PL?
3PL or Third Party Logistics refers to the use of third-party logistics providers by companies for handling and managing part or all of their supply chain and distribution operations. These third-party logistics providers specialize in the provision of logistics and warehousing services. The leading 3PL firms like Fedex have extensive international networks that several large companies worldwide utilize to support their supply chain operations. The services offered by the 3PL firms can be scaled and customized to suit the needs of the customers and changing market situation as well as other factors like product type. The growth in demand for 3PL providers was mainly fuelled by the growth in the need for supply chain flexibility. Ecommerce providers mainly need a lot of support from 3PL firms and some of the retail companies that also offer e-commerce services have acquired and integrated supply chain solutions providers into their business to grow the competitiveness of their supply chains.
The Council of Supply chain Management Professionals has defined 3PL providers as:
A firm that 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 they provide are transportation, warehousing, cross-docking, inventory management, packaging, and freight forwarding.
Types of 3PL Providers:
In their research Hertz and Alfredsson (2003) identified four categories of 3PL providers.
Standard 3PL Provider:
Standard 3PL providers are the most basic type of 3PL providers. They are generally involved in the performance of the most basic logistics activities like pick and pack, warehousing, and distribution activities. Most of the Standard 3Pl providers are not logistics firms in general or logistics is not their core business activity.
The service developers are the more advanced type of 3PL providers that offer more specialized services compared to the standard 3PL providers. These providers offer their customers more advanced value-added services including track and trace, cross-docking, and in many cases, they also offer unique security systems for secure transportation of packages. However, to offer these services a 3Pl provider must have a solid IT foundation. The service developers have solid and well designed IT platforms. Apart from that, service developers acquire economies of scale and scope which enable the provision of the above-mentioned services.
The Customer Adapter:
The Customer Adapters come into play at the request of the customer. Apart from taking full control of the logistics activities of the company, these 3PL providers also make dramatic improvements to logistics. However, they only make improvements to the existing services and do not develop any new ones. Typically, the customer base of the Customer Adapters is quite limited.
The Customer Developer:
Hertz and Alfredsson have described the customer developers as the highest level of 3PL providers. This is the top-most level that 3PL providers can achieve with regard to their operations. The customer developers get fully integrated with the customer and take over their entire logistics function and related responsibilities. While the number of customers that avail of their services may be limited, such 3PL providers perform extensive and detailed logistics-related tasks for their customers.
Advantages and Disadvantages of Third-Party Logistics Providers (3PL):
A large number of companies have outsourced their logistics function fully or partially to 3PL providers due to the benefits they offer. While on the one hand, business expansion and other growth-related challenges may make it difficult for businesses to maintain their own logistics, the need to outsource logistics also arises because companies need to focus on their core businesses. For a large and international company, managing its global business empire might not be simple and as a result, many such companies outsource various functions to such service providers. For international e-commerce providers like Amazon, it also becomes difficult to fully rely on its own distribution and supply chain network because of the sheer volume of orders placed on the e-commerce site daily. However, cost savings is not the main advantage that most businesses try to gain through third-party logistics providers. In a highly complex, ambiguous, and competitive environment, companies need to be highly flexible. It is the flexibility and adaptability that 3PLs offer which draws businesses worldwide towards them.
Higher Operational Efficiency:
The first major advantage that businesses can gain by using services offered by the 3PL providers is increased operational efficiency. The industry environment throughout the world has grown highly complex and competitive and companies need to focus on their core businesses. In such an environment, operating an integrated and extensive supply chain and distribution network may not remain a simple task for large companies. In the e-commerce, automobile, and FMCG industries, the need for outsourcing the logistics function has grown driven by market changes. Outsourcing the logistics function to the 3PL providers eases a lot of the operational burden on the company’s shoulders and allows it to focus on its core businesses. Companies outsourcing their logistics function to third parties have enough time and resources to dedicate to their core business areas which means higher profitability and faster growth. Moreover, increased complexity of supply chains and distribution networks also requires specialized services which is not possible for every business to develop. 3PL providers have specialized tools and IT platforms that make it easier to perform various tasks in the supply chain and distribution network including pick and pack, as well as tracking and security of packages.
Reduced Operating Expenses:
Large and international companies cannot have dedicated logistics teams worldwide. In the US, Walmart is the only major retailer that has its own fleet of trucks for inbound and outbound logistics. However, having a dedicated fleet globally, in all the markets where the company operates will add to its operating expenses significantly. Despite its own fleet of trucks, Walmart depends on various 3PL providers due to its expansive size of business.
A large number of other businesses too including retail and automobile businesses use the services of 3Pl providers to control their operating expenses. BMW has partnered with DHL for its supply chain operations. DHL supports BMW’s operations throughout its supply chain and distribution network from pre-production to the final delivery. Many more such companies around the world avail of 3PL services in order to reduce their operating expenses. For a company to own the entire logistics functions and develop special technologies would prove highly costly. On the other hand, 3PL providers that have achieved economies of scale can easily offer such technologies and services at much lower costs than the company would have to spend if it wanted to own the entire logistics infrastructure.
Higher flexibility in supply chain and distribution:
Today’s complex nature of business and hyper-competitive industry environment requires businesses to focus on developing competitive strengths and adapt fast to the ever-changing industry environment. Global companies have expansive supply chain and distribution networks but there is a lot of complexity involved in the management of the networks. The use of services offered by 3PL providers allows the companies to operate more flexibly and respond faster to the changing customer demands and preferences.
The industry environment whether in retail or in automobile and other industries is constantly evolving. However, businesses cannot always respond so fast to these environmental changes. It is why most of them outsource the logistics function fully or partially in order to save time and costs. However, it also grows their adaptability since 3PL providers can offer improved and specialized services that are essential for dealing with a higher degree of complexity and ambiguity that characterizes today’s industry environment. While the 3PL providers bring higher variety in terms of the services they offer, they also provide higher flexibility in terms of geographical distribution. Throughout the world, 3PL providers can offer cheaper and better routes for distribution than the companies can themselves manage. It reduces the operating costs of the companies and also helps them manage their variable costs more efficiently.
Low Capital Commitment:
In many cases, what companies do in order to avoid higher costs related to supply and distribution, they just use 3PL services providers. In this way, they do not have to invest in purchasing warehouse space or establishing a large transportation network. This lowers the amount of capital needed for doing business. This arrangement proves to be particularly beneficial in the cases where there are very high variations in the capacity utilization of a company’s warehouses. In such situations, if the company wants to own all the warehousing space it needs, the result will be sharper growth in expenses due to over-purchasing of warehousing capacity and lower profitability. Therefore, to avoid heavy capital expenditure companies outsource warehousing operations fully or partially to third-party logistics providers.
Just like there are many advantages of using 3rd party logistics providers, there are a few shortcomings of this arrangement as well. Companies using 3rd party service providers will need to sacrifice a little of their control, and apart from that they also need to achieve a higher degree of synchronization between their own technologies and operations and that of the 3PL providers. These disadvantages are dealt with in detail in the section below:
One main disadvantage of using 3PL providers is that the company stands to lose some of the control that it exercised over its supply chain and distribution networks. As the third-party logistics provider assumes these responsibilities, it communicates and interacts with the firm’s customers and suppliers which gives rise to additional risks. While some 3PLs use cobranding to mitigate these risks, usually it is insufficient to mitigate the risks completely. As a part of this arrangement, companies have to necessarily sacrifice some of their control over their supply chains and distribution networks.
Information Technology Related Complexities:
There are several IT-related complications also involved in the use of 3PL services for supply chain and distribution operations. As supply chains have evolved the use of Information Technology for managing supply chain operations has also increased. However, increased use of IT has also brought some complexities since it is inherently a complex area. First of all, to achieve a higher degree of synchronization between the operations of the company and the 3PL provider, their IT services must be interoperable. If the level of interoperability between the IT systems of the two is low, the level of benefits to be derived from this arrangement will also be lower. However, with time the 3PL service providers have updated the technologies they used for managing client interactions and deliveries a lot.
For example, UPS which is a leading provider of supply chain solutions and third-party logistics services uses several technologies that provide its customers with higher visibility. Through the help of shipping, visibility, and billing technologies, the UPS customers can create electronic bills of lading, monitor shipment progress, and reconcile shipping charges. UPS uses several such user-friendly technologies like UPS WorldShip, Quantum View, and UPS Billing Center.
Complexities related to reverse logistics:
There are several complexities related to reverse logistics when a company uses 3PLs to manage supply chain and logistics. Reverse logistics refers to the set of activities that follow post-sales and related to recapturing value to end the life cycle of a product. It generally involves the return of the product to the manufacturer or the distributor or forwarding it for servicing, refurbishment or for recycling and disposal.
However, there are some problems with 3PLs handling reverse logistics for a company. Moreover, for the e-commerce companies, the costs of handling returns are higher than the brick and mortar stores. During certain periods the level of goods being returned can be higher than normal and that can lead to delay in processing returns, apart from slowing down warehouse operations. In turn, it can lead to higher customer dissatisfaction. In the realm of e-commerce, outsourcing sensitive customer-facing issues like returns to 3PLs can be problematic. However, some companies have developed specifically designed solutions to overcome this problem.
For example, to help its customers with product returns, UPS has established a robust portfolio of return services. The returns services offered by UPS cover 145 countries and include a large range of cost-effective label options and a broad network of consumer drop points, as well as a selection of returns technologies for convenient and friction-free consumer experience.
One of the main factors driving the growth of 3PLs is the growth of the e-commerce industry. Ecommerce companies like Amazon and Flipkart are among the leading customers of 3PLs. The leading 3PLs and supply chain solutions providers have also focused a lot on technological innovation to find faster growth and offer better service. They have adopted several specialized tools and technologies that significantly ease the supply chain, distribution, and logistics-related burden of their customers. However, for e-commerce and physical retail companies, there are also several advantages of 3PLs which far outweigh their cons. Apart from controlling their operating expenses, these companies are also able to save time and make their supply chains much more agile and flexible. All these things have become important to surviving in a highly competitive industry environment. So, the 3PLs are helping a large number of companies around the world strengthen their competitive advantage and serve their customers more flexibly and satisfactorily.