Many small businesses and startups initially prefer to handle every part of fulfilling orders themselves to ensure a high-quality experience for every customer. But as a company grows, especially its ecommerce operations, staff may not have the time or resources to efficiently box up every package, stamp every envelope and ship every item. When operating at capacity, businesses are often faced with two primary options if they want to grow: Expand the workforce or outsource some of the responsibility. For businesses looking to rely on external expertise — and the potential savings that can bring — logistics service providers offer a wide range of services that can help a business meet its logistics needs, letting managers spend less time taping up boxes and more time growing the company.
What Is a Logistics Service Provider (LSP)?
Logistics service providers (LSPs), commonly referred to as third-party logistics (3PL) providers, are companies that specialize in the handling, storage and transportation of goods — also known as logistics. These goods include the raw materials used to create products, as well as the final products shipped to customers. Some companies are capable of handling their own logistics, but that can present a challenge as companies grow, especially for wide-reaching ecommerce businesses with customers expecting quick delivery times.
LSPs provide warehouse capacity wherever a company does business, offering a more affordable solution than building and maintaining multiple warehouses. LSP services can range from simple shipping solutions to complex operations that control clients’ entire supply chain, so it’s important for businesses interested in LSPs to understand their own logistics needs to effectively balance the benefits with the costs they will accrue.
- Logistics service providers help businesses manage their supply chains, including warehousing, inventory management, shipping and returns (reverse logistics).
- Logistics service providers typically range from in-house, first-party LSPs to complex fifth-party LSPs. Different levels of LSPs provide different services and maintain varying levels of control over a business’s operations.
- LSPs offer many services to help businesses grow efficiently, but they can be costly if a business is able to more affordably maintain some aspects of its logistics itself.
Logistics Service Providers Explained
Logistics as a management service has evolved from its beginnings in military science to now apply to the processes needed for any complex operation. In fact, the Merriam-Webster dictionary lists both definitions. The first is the “procurement, maintenance and transportation of military material, facilities and personnel”; the second defines logistics more broadly as “the handling of the details of an operation”.
As a business’s order volume increases, so, too, do its logistics needs. For example, if it takes one worker 10 minutes to package and ship one order, the rate that orders can be fulfilled is about six orders per hour per worker (60 minutes / 10 minutes per order). A business with a small staff — let’s say five workers — can expect a fulfillment rate of about 30 per hour (5 workers x 6 orders per worker). While it is possible to increase staff to raise orders to 36, 42, 48 per hour, it may be more cost-effective to outsource order fulfillment to a logistics service provider that can more quickly process orders, leaving staff to focus on growth tasks, such as research and development and creating new marketing strategies.
Why Businesses Use Logistics Service Providers
Businesses that no longer want to handle their own logistics can benefit from using an LSP both directly through efficiency and cost-saving measures and indirectly from the LSP’s expertise and support. Here are some common reasons why companies choose to work with LSPs.
- Scalable growth and efficiency: Companies that start out handling their own logistics often realize that doing so is unsustainable in the long run as their business grows. When staff is working at capacity and no productivity improvements can be found, efficiently expanding staff can present a challenge, especially for businesses with inconsistent sales periods or unexpectedly increasing demand. Growth may also bring unforeseen logistics costs, such as higher shipping rates, shipping insurance and packing materials that chip away at profits. Those costly aspects of logistics — both in terms of time and money — can be better controlled by an LSP that is already an expert in the field of logistics. Instead of taking a risk on a new factory or a wave of new hires, many businesses turn to LSPs to efficiently scale their operations.
- Optimized supply chain: If a business has a complex supply chain or a far-flung customer base, an LSP can help ensure that customers’ needs are met while minimizing waste and adding value at each step of the supply chain more quickly and effectively than most businesses can handle on their own. In the era of two-day or even same-day shipping, many customers will abandon their carts and look for another source if they see week-out or month-out shipping estimates. LSPs can effectively allocate inventory among warehouses spread throughout a region — be it statewide, nationally or globally — to ensure quick and cheap delivery for customers, regardless of where they reside. Returns, or reverse logistics, can be similarly streamlined through local drop-off points or return processing centers, saving on shipping and increasing customer satisfaction throughout the sales and returns process.
- Industry networking and experience: Many LSPs work with other logistics companies to handle tasks like shipping and custom packaging. By partnering with the right LSP, a business may also gain access to a large network of bulk discounts and customizable options for all its logistics needs. This can help minimize costs and speed up order fulfillment, creating a win-win for both companies and customers. Additionally, LSPs can use these networks to give businesses time-tested advice to plan future decisions, such as how to effectively allocate inventory or how to cost-effectively reach their customer base.
Why Businesses May Handle Logistics In-House
Not every business will benefit from using a logistics service provider. Here are two main reasons why some companies may decide to keep logistics management in-house.
- Cost: LSPs are often large companies with long or expensive contracts, especially for businesses just starting out. If a business’s staff can effectively handle the logistics responsibilities involved in day-to-day operations, especially businesses with low order volume, an LSP may end up costing more than just hiring a few more pairs of hands.
- Loss of control: Some businesses may not want to relinquish control of their product or their operations to a second or third party. For example, a business that offers personalized products may include a note to each customer or provide some other type of customized experience with specific orders. This could be a marketing strategy to capture repeat customers, increase word of mouth or help the product go viral. By giving up the hands-on approach to order fulfillment, a business may lose what makes it special and end up losing customers. It’s important for companies to analyze the impact that outsourcing can have on the final product and customer experience.
Types of Logistics Services
Logistics services look different depending on the needs of the client, but generally speaking, most services handled by an LSP fall into one of three main categories: warehousing, freight shipping and courier services. Businesses may choose to handle one or more of these categories in-house and outsource the others or let their LSP handle all three.
A business’s inventory needs to be stored somewhere during the period between manufacturing and final product delivery to customers. For companies looking to expand into new regional markets or for those with far-reaching client bases, purchasing or building and maintaining warehouses may be too expensive to effectively handle in-house. By partnering with an LSP that runs and maintains disparate warehouses, a business can store its goods closer to its customers without the large real-estate investment typically needed to maintain multiple warehouses. Instead, the business can pay only for the warehousing service, leaving the warehouse rent and upkeep to the LSP. And for clients that don’t sell enough goods in an area to justify an entire warehouse, many LSPs store multiple companies’ products in a single warehouse, known as multi-tenancy, eliminating the waste in rent and utilities that can accompany a half-empty warehouse.
For domestic companies, freight may primarily involve a fleet of trucks moving goods from one location to another — both inbound materials and outbound products. But as a company’s operations expand, freight shipping can involve tasks that may be too complex for a company without a specialized — and expensive — transport management system. These tasks may include optimizing “less-than-truckload” shipments, using multiple transportation modes — such as air, ship and truck travel, known as multimodal transportation — route planning and more. Many LSPs are equipped with the technology to handle these tasks more efficiently than a business that doesn’t specialize in transport management. Additionally, LSPs can manage the extra requirements that international shipping may need, including customs forms and tariff payments. Businesses without the infrastructure to handle their freight needs can rely on LSPs and avoid having to employ an on-site staff of experts to manage their more complex shipments.
Courier services typically provide the final delivery to customers but may also offer services for shipments with special circumstances, such as fragile products that need extra care during delivery, small items or low-volume orders. Because courier services are often the most likely to directly interact with customers, businesses must make sure these LSPs are reliable, or they run the risk of losing customers. Businesses that are unable to reliably handle their direct deliveries or lack the special equipment needed for deliveries that require features like temperature control can enlist an LSP to help meet those needs without incurring the large startup investments that come with creating a delivery fleet from the ground up. LSPs may also offer more detailed tracking, regular updates and customizable delivery times to give customers more options and businesses more confidence that their customers’ needs are being met.
Tasks of Logistics Service Providers
Logistics service providers handle more than just storage and transportation — unless they’re first- or second-party LSPs, which only handle shipping (more on that later). For LSPs third-party and above, a more comprehensive list of tasks they manage may include:
When raw materials or supplies are brought in, the logistics service provider will make sure the shipment matches the initial purchase order and allocate the materials to their appropriate destinations. For companies with multiple production facilities, this may involve cross-checking current levels to make sure that no factory is left waiting while another has more supplies than it needs. More complex LSPs may also handle the ordering process in addition to incoming logistics.
Inventory management is the entire process of managing inventories from raw materials to finished products. An LSP can help businesses identify and respond to trends to ensure there’s always enough stock to fulfill customer orders, and it can provide proper warning of a shortage.
For finished goods, warehousing is more than just storage. Proper cataloging is crucial to ensure that goods can be picked and shipped quickly. Without proper labeling, orders can be left unfulfilled, leading to dissatisfied customers. For LSPs that use multi-tenant warehouses, accurate organization and cataloging ensure that different clients’ goods are kept separate and accounted for.
When orders are received, it is the LSP’s responsibility to manage and fulfill them. Often, orders are placed and managed through a business’s own enterprise resource planning (ERP) system, which should be integrated with the LSP, allowing for both the client company and the LSP to effectively track orders. Without proper integration, orders can be left unfulfilled, or in-transit orders may be mistakenly labeled “not yet sent” and reshipped.
Many companies prefer to bill their customers themselves and pass the orders along to an LSP, but some LSPs offer direct customer invoicing. These invoices should be matched with original order numbers and prices to ensure accuracy before orders are shipped. Payment receipts should be saved and tracked to keep accurate records for the future.
Logistics service providers also regularly bill their clients based on the terms of their contract — often monthly or yearly. LSPs typically have several clients at one time and may bill flat rates or vary charges by the services provided. LSPs offering more complex services will generally have higher costs.
Picking and packing:
After an order is placed, the items must be picked and processed. The LSP will handle item picking and label generation, often using internal track-and-trace systems with “license plate numbers” (LPNs) to ensure that every item and package are kept together as entire orders are completed. These tracking systems also keep inventory counts current and accurate.
Logistics service providers will either have their own fleet of vehicles for shipping or outsource this service to another company. When an order is placed through the client company, customer information is forwarded to the LSP with the order details to initiate the delivery. Businesses that have specific delivery requirements, such as time-sensitive arrivals or temperature-controlled environments, often use LSPs as a more affordable shipping option. This is especially true if these types of deliveries account for only a small fraction of a business’s sales, which doesn’t justify the large investment needed to purchase a specialized fleet of its own.
Payment and finance management:
LSPs manage the day-to-day costs of shipping and warehousing goods, including labor and packing materials, with client companies outsourcing the payment management responsibilities from an internal accounts payable team to the LSP. Through detailed analysis of logistics key performance indicators (KPIs), such as shipping cost per unit, shipping cost per mile/km traveled or shipping cost per lb/kg of package, LSPs are able to identify trends and optimize their shipping methods and logistics operations to minimize waste and reduce costs for themselves and their clients. Businesses can also receive bulk discounts through their LSPs that they would not qualify for on their own, freeing up capital for other financial needs, like growth or managerial investments.
Many LSPs process customer payments for their clients as well. Businesses relying on LSPs to collect payments from customers must make sure accounts are properly integrated so that payments end up where they belong – with the client’s accounts receivable team. And for businesses extending credit terms to customers, it is important to ensure that payments are properly linked to purchase orders and shipping confirmations to match what goods were sent. Not every LSP takes over responsibility for payment collection, so in-house accounts receivable staff must fully understand what they are responsible for and what is being outsourced to the LSP. Otherwise, customers may get their goods without ever receiving an invoice, resulting in losses for the company.
Returns, also known as reverse logistics, can present a challenge for a company operating with small margins. Many LSPs handle customer returns and also raw materials returns to suppliers. Because LSPs typically have more locations and a wider reach than their clients, customer returns through an LSP can be cheaper and more convenient for both customers and suppliers at either end of the returns process. Easier return policies can give customers more confidence when shopping and lead to more repeat customers, even when orders need to be returned.
Some products will inevitably need to be disposed of due to damage, malfunction or outdated and discontinued product lines. Businesses often end up with storage units and warehouse shelves filled with goods that will never be sold, so many turn to logistics service providers to handle the disposal of unwanted inventory, freeing up space and reducing carrying costs.
Types of Logistics Service Providers
Third-party logistics service providers (3PLs) are the most common structure for LSPs, but there are several others that businesses can choose from, commonly ranging from first party to fifth party. With the growing popularity of environmental and social accountability and advances in artificial intelligence (AI) and machine learning, some innovators have begun to imagine sixth- through tenth-party LSPs; however, many elements of those higher-level LSPs are theoretical and have not been widely accepted or implemented.
|Types of Logistics Services Providers (LSPs)|
|1PL||First-party LSP||Business that handles all its own logistics in-house.|
|2PL||Second-party LSP||Provides only shipping and transportation.|
|3PL||Third-party LSP||Provides inbound and outbound transportation and warehousing.|
|4PL||Fourth-party LSP||Manages and oversees supply chain and contracts with other companies to provide logistics services.|
|5PL||Fifth-party LSP||Contracts with and overseas multiple 3PLs to create a large supply network.|
First-Party Logistics Service Provider (1PL)
First-party logistics service providers (1PLs) are companies that handle all their logistics in-house. They have their own fleet of delivery vehicles and don’t outsource any steps in their logistics workflow, retaining complete control. 1PL is also called self-logistics.
Second-Party Logistics Service Provider (2PL)
Second-party logistics service providers (2PLs) offer intermediary transportation options. 2PLs have their own fleet of vehicles and offer customer delivery or freight options but don’t handle warehousing or other services. Businesses that use 2PLs, or traditional transportation providers, package their goods themselves and either drop them off or arrange a pickup location for the 2PL to deliver the goods to their next destination.
Third-Party Logistics Service Provider (3PL)
Third-party logistics service providers (3PLs) control both inbound and outbound transportation and warehousing. 3PLs typically lease warehouse space to clients and handle shipment preparation — like labeling and packaging — as well as transportation. They may own their own fleet of vehicles or outsource the actual delivery to a 2PL. Once goods are shipped, 3PLs may handle tasks such as tracking, delivery status and customs. Many insiders use the term logistics service provider to refer exclusively to third-party LSPs.
Fourth-Party Logistics Service Provider (4PL) or Lead Logistics Provider (LLP)
Fourth-party logistics service providers (4PLs) take further control of a client’s supply chain than 3PLs. Not only do 4PLs control inbound and outbound transportation and warehousing, but they also oversee the rest of a business’s supply chain, taking a hands-on approach with suppliers, retailers and other relevant parties to the business’s operations. 4PLs, also called supply-chain overseers, don’t own any physical assets themselves for moving goods. Instead, they play a consulting and managerial role by contracting with 2PLs and 3PLs for shipping and warehousing.
Fifth-Party Logistics Service Provider (5PL)
Fifth-party logistics service providers (5PLs), also known as logistics aggregators, combine, contract and oversee multiple 3PLs to create a large supply network. These networks may grow large enough to create market leverage and lead to further discounts for client companies. 5PLs often provide businesses a full framework for how to best plan and execute their supply-chain operations. 5PLs require significant trust and communication from their clients as 5PLs take over more responsibilities and control of a business’s operations than the other types of LSPs.
Self-Shipping vs. Logistics Service Providers
Some smaller businesses, especially those that offer personalized or one-of-a-kind products and experiences, may prefer to handle all their shipping needs themselves, using a self-shipping model. If a small business isn’t looking to scale larger or give up any control to another party, a logistics service provider may not be a good fit. However, every hour spent packaging and shipping is an hour that can’t be used to create more products, find areas for improvement or focus on growth.
Businesses looking to expand into new regional markets often turn to LSPs for a more affordable way to keep shipping quick and cheap — or even free — for customers, something that more and more customers every year value when shopping. According to a June 2022 X Delivery and Santa Clara University Retail Management Institute survey of almost 2,500 adults who regularly shop online, 90% said that delivery should take fewer than five business days. For businesses looking to build a far-reaching ecommerce customer base, partnering with an LSP can help meet customer shipping expectations without the high overhead of building, stocking and staffing decentralized distribution centers.
Benefits of Logistics Service Providers
Logistics service providers offer services that cater to a business’s needs, from 2PLs taking over deliveries through 5PLs managing the entire supply chain. Some common benefits that LSPs provide include:
- Access to industry-leading processes and technology. LSPs are highly skilled in running a wide network of shipping processes and generally operate more advanced shipping technology than many small businesses have in-house, including transportation management planning systems, transportation management scheduling systems and warehouse/distribution center management systems. By partnering with an LSP, businesses can take advantage of this technology to bring their customers a more reliable experience without needing to build state-of-the-art infrastructure from the ground up. LSPs can also offer clients the benefits of advanced technologies, such as Internet of Things (IoT) devices, which provide real-time information on the location and status of goods, as well as data analytics that provide valuable insight into clients’ operations.
- More shipping options. Logistics service providers are able to offer flexibility in how and when they ship goods because of their robust fleets of delivery vehicles, often including planes, ships and trucks. Using these multimodal shipping options, LSPs give their clients a range of options to minimize cost, maximize speed or meet other company-specific needs.
- Faster and cheaper returns process. LSPs offer return-by-mail or drop-off locations in many areas, giving customers a convenient and quick way to process returns. This reverse-logistics process saves customers and businesses time and money by avoiding long-distance shipping to one central return location, which can be plagued by shipping delays or bottlenecks. When an LSP handles returns, it also frees up a business’s staff to focus on making new sales, not refunding old ones.
- Scalability. Business growth can create logistics problems for companies as orders pile up beyond what current staff can handle. Logistics service providers have the infrastructure needed to increase operations and meet customer demand as it grows, helping businesses avoid the stress and expense of quickly hiring and training an expanding work force to meet rising demand.
- Expertise. Logistics service providers offer more than just logistics management. They also provide their customers with a large network of diverse experts. For example, businesses looking to expand into a new region or effectively navigate market volatility can get time-tested advice and insight from their LSP.
LSPs vs. Freight Forwarders
A freight forwarder arranges transportation for a company’s goods and plans shipments, often using multiple transportation methods and vehicles, much like a logistics service provider. However, the difference is that LSPs offer wider-reaching services than freight forwarders and tend to have longer working relationships with their clients. A freight forwarder typically acts as a liaison between a company and the transportation company, whereas an LSP traditionally handles additional services, including warehousing and returns. For businesses that primarily handle their logistics in-house with only a few complex shipments at a time, a freight forwarder may be a more affordable option to arrange shipments that require extra care. For ongoing logistic needs, an LSP may be the more efficient choice.
Give Your Logistics Operations Transparency With NetSuite
A business that has outgrown handling its own logistics in-house has also likely outgrown managing its financial operations using spreadsheets and other manual methods. NetSuite ERP is an all-in-one, cloud-based business management solution that gives visibility into a business’s data and performance. Using intuitive dashboards, data for tasks such as order processing, inventory management and supply chain management is available in real-time and can be integrated with a logistics service provider’s system to make sure all orders and inventory are updated and processed effectively. An LSP can help a business handle the physical movement of goods while NetSuite ERP can handle the flow of information throughout a company’s organization, both working together to free up staff to focus on growth and development.
Not every business needs — or wants — to outsource its logistics, but many companies benefit from the scalability that logistics service providers offer, especially businesses looking to expand their reach or improve the efficiency of their ecommerce operations. LSPs can provide a more affordable way to offer quick and reliable delivery times to customers and more convenient return policies. Beyond deliveries, LSPs also offer warehousing, order processing, expertise and even full supply chain management services that can be customized to fit their clients’ needs. If a business’s staff is spending more time packing up boxes than growing the company, it may be time to consider outsourcing some responsibilities to a logistics service provider.
Logistics Service Prover FAQs
How do I choose a logistics service provider?
Businesses interested in contracting with a logistics service provider should first assess what services they are looking to outsource to make sure they don’t end up paying for services they don’t need. For example, if a business only needs transportation, a second-party LSP (2PL) may be the most efficient option. Once a business’s needs are clear, it can start looking into LSPs that provide the appropriate services.
Is logistics the same as transportation?
No, transportation is just one aspect of services that fall under the umbrella term of logistics. Logistics also includes warehousing, order fulfillment, returns and more.
What are the elements of logistics?
The five elements of logistics are storage and warehousing, packaging, inventory, transportation and information management. All of these elements work together to provide a streamlined workflow to efficiently move goods from the manufacturer into the hands of customers.
What are the services provided by logistics service providers?
The services offered by logistics service providers include incoming-goods logistics, warehousing, order acceptance, invoicing, picking, shipping, payment and finance management, returns and disposal. Not every LSP offers all of these services, and their contracts are often tailored to clients’ needs.
What are the three types of logistics?
The three types of logistics are warehousing services, freight shipping and courier services. Warehousing stores a business’s goods; freight shipping transports them in bulk; and courier services provide direct delivery to customers.
How do I become a logistics service provider?
Logistics service providers can start small and offer delivery options or act as a liaison between a business and a shipping company. Because not every LSP owns a fleet of vehicles and may outsource the actual transportation or warehousing of goods, an entrepreneur with a logistics network or expertise can start offering services to businesses with logistics needs.
What is the difference between an LSP and a 3PL?
A 3PL, or third-party logistics service provider, is one type of LSP. 3PLs are the most common type of LSP and control both inbound and outbound transportation and warehousing. 3PLs typically lease warehouse space to clients and handle shipment preparation — like labeling and packaging — and transportation. Many insiders use the term logistics service provider to exclusively mean 3PLs, rather than the other categories.