There comes a time in the life of every growing business when it can no longer handle every process in-house. And one of the first tasks up for possible outsourcing is logistics. As orders and production increase, fulfilling and shipping orders oneself quickly becomes unsustainable. Few businesses outside of the logistics industry itself have the assets, technology and processes in place to efficiently tackle the tasks involved in receiving and inspecting inventory, storing goods, picking and packing orders, transporting parcels and handling returns.
Thankfully, an ecosystem of businesses known as third-party logistics (3PL) providers is equipped to handle some or all of these processes. Businesses that understand the workings of 3PL outsourcing, the best practices for selecting providers and the challenges that can arise when working with them can prevent a lot of headaches, as they reap the benefits of more streamlined and cost-effective approaches to logistics management.
What Is 3PL (Third-Party Logistics)?
Third-party logistics, or 3PL, is the practice of outsourcing some facet of the logistics process to one or multiple external partners. A 3PL provider has the infrastructure, tools and experience to provide more streamlined, economical and scalable services than a company would be able to achieve on its own.
While the “L” in “3PL” might suggest that these companies are focused on simply moving goods around, that’s far from the case. While many 3PL providers offer transportation, there is a range of services involved in the storing or shipping of goods — such as inventory management, warehousing, fulfillment and returns management — that also fall under the banner of 3PL services today.
Key Takeaways
- Third-party logistics refers to the use of external providers to handle logistics services or management.
- There are many types of 3PL providers, with some focused on a particular aspect of logistics and others providing end-to-end services.
- Using 3PLs offers a range of business benefits, most notably lower costs, increased efficiency and broader reach.
- Loss of control and difficulty managing performance are among the challenges when outsourcing services to a 3PL provider.
- Conducting extensive due diligence before signing 3PL deals is extremely important.
3PL Explained
The 3PL model blossomed as a category of business service in the late 20th century, as companies began to explore the benefits of outsourcing their inbound and outbound logistics needs to specialist firms. The sector truly took off with the explosion of ecommerce at the turn of the millennium, in response to increasing demands for fast, low-cost delivery that, in turn, fueled engagement with 3PL providers.
In recent years, thanks to greater digitalization and advances in tracking technologies, 3PL providers have expanded their services to include nearly every aspect of the logistics value chain, from inventory management and warehouse management to picking and packing orders to last-mile delivery and reverse logistics, which handles returns, refurbishing, reuse, recycling and disposal.
Here’s what the use of 3PL might look like for a fast-growing greeting card startup. The greeting card company works with its own writers, editors, designers and illustrators to produce a portfolio of individual and boxed greeting card products. But as the company’s ecommerce sales increase and it signs some new B2B deals with retailers and distributors, handling the order fulfillment and shipping for all of its sales is no longer sustainable. In one scenario, the greeting card company may decide to start working with a 3PL to take over the whole logistics process: receiving the greeting card inventory from the company, picking and packing the orders as they come in, working with shipping carriers to pick up and deliver the orders, even taking on the task of handling the returns process. Or it might decide to contract with one or several 3PL partners to offload discrete aspects of the logistics process that it no longer wants to tackle in-house. By outsourcing to 3PL providers, the greeting card company is able to fulfill and ship orders more efficiently and cost-effectively than it could do on its own, instead focusing on what it does best: developing and marketing its product line to consumer and business customers.
Types of 3PL Providers
The ecosystem of 3PL providers is relatively broad. Although 3PL providers are all involved, in some capacity, in providing services related to getting products from sellers to customers, different types of businesses operate in this space, such as those that focus on transporting parcels, those that concentrate on end-to-end logistics and those that offer logistics management tools or services.
The most common types of 3PL providers a company might engage include the following:
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Transportation-Based 3PLs
Transportation-based 3PL providers are in the business of getting goods from point A to point B, whether that is shipping raw materials from a supplier to a factory or delivering finished goods from a warehouse or distributor to a customer’s front door. Many of these 3PLs are parcel transportation providers that will be familiar to any consumer, such as UPS, FedEx, DHL and the U.S. Postal Service. But this category might also include local courier services that may own all of the assets used to move freight — in which case, they’re referred to as nonleveraged providers — or they may use the assets of other firms to transport goods, in which they’re known as leveraged providers.
Though a transportation-based 3PL’s primary focus is on the physical movement of goods, many of these companies provide a host of integrated services. They include transportation management across various modes of transport (e.g., truckload, less-than-truckload [LTL], rail, ocean, air); last-mile delivery and logistics services; transportation optimization to reduce transit times, cut shipping costs or improve shipping accuracy; and tracking and tracing capabilities. Transportation-based 3PLs may also offer ancillary services, such as warehousing and distribution, for additional fees.
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Forwarder-Based 3PLs
Freight forwarders do not actually ship items themselves. Instead, this type of 3PL provider is an independent middleman, serving between its clients and transportation-based 3PLs. A freight forwarder spends its time negotiating prices, optimizing transportation modes, planning cost-effective shipping routes and arranging for the transportation that will be provided by shipping companies. Freight forwarders are the trusted go-between, advising customers about the broad range of shipping options available to them and using their expertise and relationships to arrange the best providers, routes, prices and delivery times to meet their clients’ requirements. These types of providers are often expert at dealing with shipping-related concerns, such as customs clearance.
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Warehouse/Distribution-Based 3PLs
These providers specialize in warehousing and distribution services, such as storage and warehouse optimization, inventory management, order fulfillment, shipping and reverse logistics. A warehouse/distribution-based 3PL will receive inventory from a customer’s manufacturer or supplier and inspect and verify it before moving the inventory to storage or on to the next stage of distribution. When a customer places an order, the 3PL picks, or finds, the items in the order wherever they are being held, then packs the order for safe transport, using customer-branded packaging, if requested. In some cases, these 3PLs may also offer kitting and assembly of items received as separate pieces that require grouping to fulfill an order. This kind of 3PL will then work with shipping providers to pick up and deliver the orders to the final destination, sharing the tracking details with its customer. Many of these warehouse/distribution-based 3PLs will also handle customer returns, receiving these items back at their site and then restocking, refurbishing or disposing of the items.
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Full-Service 3PLs
While some types of 3PL provider mentioned thus far target a specific segment of the logistics process, a full-service 3PL offers end-to-end logistics management services. Customers can determine the level of support they require, whether it’s limited to inventory management and order fulfillment or involves a comprehensive outsourcing of the logistics function.
A full-service 3PL provider comes to the table with its own transportation management platform, tools and processes to undertake the full complement of logistics responsibilities, from accounting and carrier relations to claims management and logistics analytics and reporting. The best full-service 3PLs not only handle day-to-day operations but also offer recommendations on and assistance in improving or transforming the function. As is the case with any other form of business-process outsourcing, a company may choose to hand over logistics completely to a full-service 3PL to lower costs, increase efficiency and maintain its focus on other core business responsibilities.
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Financial-Based 3PLs
Some 3PLs are more like consultants than providers of actual logistics services. Financial-based 3PLs and technology-based 3PLs (which we’ll cover next) fall into this category.
Financial-based 3PLs are experts in the fiscal implications of logistics and shipping and how best to manage them. These companies serve as a finance and accounting team for the logistics process and can provide a roster of services. These may include cost accounting and controls; freight payment and auditing to look for errors, bad charges or late deliveries and collect claims payments; inventory monitoring and management; contract negotiation and optimization for more favorable rates and terms; and modal optimization to decide the best carrier and service mix, based on the client’s needs. They can also work with clients to streamline their processes and uncover additional opportunities to save costs.
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Information Technology-Based 3PLs
IT-based 3PLs – often online marketplaces or networks of transportation and logistics services – have emerged in recent years to present an alternative to more expensive 3PL providers. Some offer a platform where individuals and businesses can request quotes from customer-reviewed service providers; others harness technology to broker freight services. Still others use technology in more “disruptive” ways. For example, some ride-share companies have launched information-based 3PL businesses to connect their drivers/vehicles with freight transport businesses.
Advantages of Using 3PLs
Many growing businesses turn to 3PL providers when they can no longer keep up with managing their own order fulfillment and shipping. But that’s not the only reason companies take advantage of 3PL services. Indeed, there is a host of benefits to be gained by outsourcing logistics-related processes. Some of the most common advantages include:
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Cost and time efficiency: This is one of the most obvious benefits of using a 3PL service. Outsourcing order-fulfillment and logistics tasks saves businesses the time, effort and cost of doing all the work themselves. Whether it’s packing boxes, arranging pickup by a parcel service, standing in line to ship them off or dealing with the returns process, companies can sidestep a significant amount of effort and expense by contracting with 3PL partners to handle some or all of the process.
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Reduced capital investment: By working with 3PL providers, companies avoid having to invest in the infrastructure required to perform all of the steps involved in good logistics management. Instead of investing precious capital on packaging, warehouse spaces, logistics operations, labor and related technology tools and platforms, businesses can farm out the work to companies that make ongoing investments in these assets and resources.
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Enhanced focus on core business: Contracting out work to 3PL partners frees up businesses to focus on what they do best. Rather than spending their time on packing orders or figuring out the best way to ship goods to customers, they can, for example, concentrate on value-added tasks, like product development, long-term planning and marketing.
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Access to industry expertise: Let’s face it: Businesses that handle all of their logistics needs in-house are less likely to do as good a job as a company that specializes in these tasks — and whose competitive stance relies on continually improving its capabilities. Most 3PL providers are up to date on the latest technology, hire trained and skilled professionals and have made investments in the assets necessary to manage these tasks most effectively. What’s more, 3PLs understand the particular challenges and nuances of this work in a way that another kind of business never could. As a result, they elevate their customers’ end-to-end logistics performances. Indeed, 89% of companies surveyed for the NTT Data/Penske Logistics 2024 Third-Party Logistics Study said that their 3PLs had contributed to improved service.
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Increased flexibility: Because those in the 3PL niche already have the infrastructure and resources in place, companies can use their services as they require, which gives them the flexibility to respond to shifts in demand, disruptions in the logistics network and any other issue that may arise.
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Optimized geographic distribution: Working with 3PLs can open up opportunities for businesses to increase their profitability, improve the customer’s experience and expand their market reach. Working with 3PLs that have broader networks of warehouses, distribution centers and overall geographic coverage creates opportunities for a company to sell to new markets, offer faster shipping and decrease its logistics costs. For example, a company that performs its own logistics can rack up overhead with its cross-country or cross-border orders. However, by working with nationwide or global 3PLs, it may be able to store its products in warehouses closer to its customers, reducing transit times and costs.
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Scalable cost structure: Handling order fulfillment and logistics in-house runs the risk of becoming more and more expensive. Increased sales can force the company to invest in more warehouse space, equipment, technology, labor and other related costs to keep up. By working with 3PLs, however, a company can eliminate those constant overhead increases, paying for only the services it needs. The business may even be able to take advantage of volume discounts from its 3PLs to generate cost savings as its business grows.
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Broad network: 3PL providers have access to a wider web of suppliers and distribution channels than any business could have on its own. The 3PLs can make use of these established relationships and extensive networks, as needed, to provide better options than a business would be able to access on its own.
Challenges and Considerations in 3PL
There are clear and significant advantages to using 3PL services for many businesses, but contracting with 3PLs also courts risk. Awareness of common challenges that coincide with 3PL usage and understanding how to address them is essential. Some of the most common concerns include:
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Loss of control: As with any type of outsourcing, the shift from doing something in-house to farming it out to another company involves a loss of direct control over the process. That said, a business never outsources responsibility for the outcomes. Thus, when working with 3PLs, a business must be able to evolve from managing tasks to managing results. It’s essential for the business to put in place appropriate oversight and governance to ensure that quality and service levels are met. Regular communication and performance reviews with 3PL providers are highly recommended.
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Quality and performance monitoring: Depending on 3PLs for critical logistics functions introduces vulnerabilities that, as mentioned above, a customer has no direct control over. Mistakes or performance issues on the part of the 3PL, such as delivery delays, service disruptions, quality issues or cybersecurity incidents, can have a serious impact on everything from the customer’s experience to compliance to profitability. Visibility and transparency are crucial. Establishing and monitoring key performance indicators for each 3PL provider, as well as the entire logistics value chain, will help ensure all stays on track and that issues are identified and addressed promptly.
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Integration issues: Ideally, a 3PL and its customers can easily share real-time data to ensure smooth operations, easy tracking and tracing, and high levels of service. However, it’s not uncommon to run into integration issues. When the client and the 3PL use different data formats, structures or protocols, errors and data duplication that inhibit operational efficiency and transparency can occur. Thus, it’s important for 3PL customers to be sure that they and their partners use either a standardized data format or a common cloud platform to transmit data back and forth.
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Hidden costs and service limitations: Ideally, using a 3PL provider helps a business establish time and cost savings. However, it’s not unusual for customers to be caught off-guard by pricing structures they don’t understand or to encounter additional fees for services they thought were included in their contracts. This is why it’s imperative to fully understand a 3PL contract, including its pricing and service provisions, to avoid getting locked into an agreement that results in unexpected or escalating costs. In addition, 3PL customers should be clear about what is within the scope of the agreement in terms of roles and responsibilities to ensure that the agreement delivers anticipated benefits and outcomes. This level of due diligence goes a long way toward setting up the relationship for success, because it ensures that everyone is operating from the same understanding.
Choosing the Right 3PL Partner
Using 3PL services can save time and money, preserve capital, improve logistics performance and free up a business to focus on more strategic tasks. To achieve those benefits, though, it’s critical to pick the right providers, because these logistics processes have a direct impact on customer experience, customer satisfaction and business growth.
There is certainly no shortage of 3PL help available today, but that array of options can be a blessing or a curse. Companies new to the 3PL ecosystem, especially, may be overwhelmed by the breadth of the marketplace and unsure about where to begin. To help clarify, following are 12 best practices for finding and selecting 3PL providers.
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Assess your business needs. As with any sourcing decision, it’s important to first understand what problem you’re trying to solve before diving into potential solutions. Begin by clearly outlining your company’s logistic requirements and business objectives. Those overarching needs can cascade down into the specific services you want to assess, like transportation, warehousing, order fulfillment or financial management.
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Research potential 3PL providers. With consensus on the business objectives you’re pursuing and the services you’d like to outsource, it’s time to assess the options. At this stage, it’s important to home in on providers that can meet those needs. A food and beverage manufacturer, for example, will need 3PLs with temperature-controlled freight options.
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Evaluate technological capabilities. A 3PL may be performing physical tasks on behalf of your company, but its technology stack is as important as its other assets, if not more so. Specifically, make sure you understand how well the 3PL’s technology and data will integrate with your systems and data. This is also a good time to assess the provider’s warehouse management systems and transportation management systems, if applicable, and the tools it uses for tracking, visibility and communication, both behind the scenes and on its vehicles or parcels.
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Check for industry expertise and experience. Seeking 3PL providers with experience in your industry is a smart move. Ascertain potential partners’ expertise in managing the kinds of logistics challenges, products and norms common in their sectors and ask for references from other customers in their industries.
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Analyze geographic coverage and network. As mentioned earlier, a 3PL’s reach will come into play as companies look for opportunities to cut costs, increase efficiency, offer faster order fulfillment and, possibly, access new customers and markets. It’s important to know where the providers’ warehouses and fulfillment centers are located and what their logistics networks look like; these can be determining factors in logistics speed and cost, as well as the 3PL’s ability to adapt to disruptions. Before signing any contracts, ensure that the 3PL partner’s network aligns with your needs and goals.
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Verify financial stability and reliability. Researching the financial health of service providers is an important step in any buying decision — to ensure that the partner is going to remain in business for the foreseeable future, of course. After all, a financially sound 3PL is more likely to continue to invest in technology, infrastructure and service improvements. The company’s audited financial statements, paired with the auditor’s opinion letter of the company (and, if applicable, a parent company), will provide a good picture of financial stability and reliability as represented in key financial ratios. Commercial credit ratings can also prove insightful.
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Review the statement of work, service level agreements (SLAs) and clauses. It’s never a good idea to sign a boilerplate contract for 3PL services. Due diligence should include a thorough review of all contract terms, paying special attention to the statement of work and the required standards of performance for the provider (called service-level agreements, or SLAs). Typically, 3PL SLAs include order-fulfillment cutoff times, shipping times, error rates and inventory shrinkage allowances. Also review other key contractual clauses, including termination clauses, warranty/guarantees and limitations of liability. Involving your internal legal team or external counsel in contract negotiations is essential to arrive at a mutually acceptable agreement. Some questions to consider include how either party might terminate the agreement and what you can do to help maintain service. Verify that all terms meet your objectives and requirements.
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Understand pricing and cost structure. Of course, saving money is top of mind when outsourcing 3PL tasks and processes. In fact, 89% of companies surveyed for the previously mentioned 2024 Third-Party Logistics Study said cost savings was the top priority during contract negotiations with 3PL providers — far outpacing any other consideration, including process improvement commitments (56%) and capacity commitments (48%). Thus, it’s important to shop around to guarantee the best use of your logistics budget. That said, 3PL pricing and cost structures can be complex and, in many cases, contain additional fees for certain services or specific conditions. For example, additional fees could apply to cover customized analytics and reporting.
Typically, 3PL contracts are multiyear agreements and, while prices are usually guaranteed for the first year, there will likely be annual cost escalations, which will be addressed in the contract. Some common categories of expenses include:
- Implementation activities, charged hourly or at a fixed rate
- Activities charged back on an hourly or project basis, such as kitting or cycle counting
- Processing charges for activities, such as picking and packing
- Advances for costs paid by a 3PL on your behalf, such as postage, packing supplies and import fees, which may or may not get marked up by the provider
To avoid surprises, it’s a good idea to review the contract with the assistance of legal counsel, and those with logistics expertise, to understand contract inclusions, how the contract is priced and anything that can prompt additional charges. It’s also a good idea to review how frequently the 3PL sends invoices and the time frame for payments.
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Examine flexibility and scalability. The procurement process can be time-consuming and costly, so it’s advisable to select a 3PL partner that will be able to scale services to meet your growing needs. Confirm that any partners can respond to fluctuations in demand and seasonal surges; the contract itself should be written in such a way that it can adapt to changing business needs. Additionally, make sure to assess potential 3PL providers’ disaster recovery, business continuity and cybersecurity response plans to understand how they will react to unforeseen events or disruption to normal operations.
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Prioritize communication and customer service. Technological capabilities, geographic coverage and networks, pricing structures and terms, and financial stability are all important. But when it comes to the day-in, day-out relationship with a 3PL, clear and consistent communication and a strong customer service mindset are also key. Indeed, poor customer service was the top reason given for a failed 3PL partnership, cited by 60% of respondents in Inbound Logistics’ 2023 3PL market research report. Therefore, be sure to dig into the providers’ approach to collaboration and make sure they have effective channels for communication, real-time data sharing and problem resolution.
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Request references and case studies. One of the best ways to ascertain a 3PL’s customer-service posture (and any of the other key attributes mentioned above) is to ask its current and previous customers. Talking to references, particularly those of a similar size, in the same industry or on a similar growth trajectory, will illuminate the benefits and challenges of working with a particular vendor. Case studies can also be helpful in understanding the provider’s capabilities and may even highlight opportunities for improvement not considered before.
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Visit facilities. Site visits to 3PL providers’ warehouses, distribution centers and other facilities are a great way to assess their infrastructure, technology, human resources and overall operations firsthand. Some points to look out for or ask about during the visit include the suitability of the location to your business needs, the types of equipment being used, the operating procedures and systems in place, the organization’s culture, the security measures in place, compatibility with existing business requirements and what the on-boarding process will look like.
Give Your Logistics Operations Transparency With NetSuite
Quickly, accurately and cost-effectively managing inventory and order fulfillment will be critical for any business, and partnering with 3PL providers can help. But these relationships work best when they become an embedded part of the business. Investing in a cloud-based enterprise platform with robust inventory management and integration capabilities ensures that a business can track its inventory and orders, whether they’re found in the business’s own warehouses, at a 3PL distribution center or on a freight shipper’s truck heading toward its customers.
NetSuite’s inventory management software provides that single, real-time view of inventory across all locations: warehouses, retail stores, pop-up shops, drop shippers, 3PLs or any other places goods are held. Having real-time accuracy and visibility from point of sale to delivery creates opportunities to augment automation, consolidate financial and operational management and improve customer service.
In short, 3PL services have never been more popular, as retailers, manufacturers, distributors and others seek to streamline order fulfillment, meet customer demands for low-cost and fast delivery and focus their efforts on revenue-generating activities. For businesses that understand how to select the right 3PL partners, manage any associated challenges and invest in the right software for inventory management, outsourcing logistics can deliver many benefits, including improvements in cost and efficiency, better service, greater geographic reach and increased flexibility.
Award Winning
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3PL (Third-Party Logistics) FAQs
What’s the difference between 3PL services and drop shipping?
Third-party logistics (3PL) services and drop shipping are two types of services a business can obtain from an external provider to manage some aspect of its order fulfillment processes. But they differ in a few respects:
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3PL includes a broad range of services within the logistics value chain, including inventory and warehouse management, picking and packing orders, freight transportation, last-mile delivery and returns management. The 3PL provider handles various aspects of the order fulfillment process for its customers, but it never has ownership of the products being shipped.
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Drop shipping is when a retailer or ecommerce company has a contract with the manufacturer or supplier of the products it sells whereby, when the retailer or ecommerce company makes a sale of a product, the supplier or manufacturer then ships the product directly to the purchaser. In this kind of arrangement, the retailer or ecommerce company does not own (or even touch) the inventory — that’s all taken care of by the manufacturer or supplier. The retailer or ecommerce company will not usually have any control over packaging and branding of the shipment or the speed of delivery.
What is an example of a 3PL?
A 3PL (or third-party logistics provider) specializes in logistics related to order fulfillment to help its customers streamline or improve any or all of their associated processes. There are a number of different types of 3PLs today, including those specializing in a particular aspect of overall 3PL management (like financial management), those that focus on transportation and those with expertise in warehousing management and optimization. Many of the largest 3PLs are capable of handling end-to-end logistics operations and management. Some examples include FedEx Supply Chain, UPS Supply Chain Solutions, DHL Supply Chain and Amazon Fulfillment Services.
What is the difference between 3PL and 4PL?
The difference between 3PL (third-party logistics) and 4PL (fourth-party logistics) is essentially an additional degree of separation between provider and client. 3PLs are companies that provide some aspect of logistics and order fulfillment services to other businesses, like freight transportation management or inventory warehousing and distribution, whereas 4PLs are companies that help businesses select and manage their various 3PL providers and activities. These companies are also sometimes referred to as lead logistics providers. In some cases, a 4PL can also provide 3PL services.
Is Amazon a 3PL?
Yes. Amazon built a name for itself by disrupting ecommerce with its increasingly vast, end-to-end logistics infrastructure and network, capable of providing ever quicker delivery times to consumers. In 2016, it began offering 3PL services to other companies with its Fulfillment by Amazon service. Today, it’s one of the largest 3PLs in the world, offering everything from inventory management to picking and packing orders to transportation and last-mile delivery services.
What does 3PL and 4PL mean?
“3PL” is short for third-party logistics, a term that refers to an array of services a company may outsource to an external provider in the realm of order fulfillment. “4PL,” which stands for fourth-party logistics, describes companies that manage or oversee the use of 3PL providers for a company. Sometimes this is referred to as “double brokering.”
Is FedEx considered a 3PL?
Yes. While we’re all familiar with FedEx as a shipper for consumers, the company also operates a major third-party logistics (3PL) provider called FedEx Supply Chain, which serves a number of industries, including technology, electronics, retail, ecommerce, consumer projects, industrial goods and healthcare. Its 3PL services include warehousing, fulfillment, distribution, transportation and reverse logistics; its network spans more than 200 countries.