What is 3PL(third-party logistics)?

What is 3PL (third-party logistics)? – Third-party logistics is the delivery of a company’s materials or product distribution to another company in whole or in part.

By another definition, third-party logistics is the outsourcing of logistics activities traditionally carried out in an organization. These activities, carried out as a third party, can cover all activities in processes, as well as specific activities that are often selected.

First of all, to explain why it is called the 3rd party –

o 1st party : Manufacturer, shipper, wholesaler etc. is the manufacturer of goods and/or services.

o 2nd party : It is the business that is the direct customer of the first party or its supplier by flow.

o 3rd party 😀 the company that manages the flow of goods and services between these two parties.

The Supply Chain Management Professional Committee defines third-party logistics as outsourcing all or most of a company’s logistics operations to a professional company.

The term third-party logistics was first used in the early 1970s to introduce the United Transportation Marketing Corporation (IMC) into contracts of carriage. Until then, there were only two parties to the contract of carriage: the shipper and the carrier. When united transport marketing companies enter the market as intermediaries, receive the shipper’s goods and provide them to the real carrier (rail carrier) behind them, they become third parties to the contract, i.e. third-party logistics companies.

Today, this definition is greatly expanded, with every company providing some kind of logistics service calling itself a third-party logistics company. At best, service providers integrate and bundle these services. Services include transportation, warehousing, cross-distribution, inventory management, packaging and freight forwarding.

A law passed in 2008 declared that the legal definition of third-party logistics refers to a person who receives, holds or transports a product in the normal course of business, but does not own the product. Third-party logistics providers are: freight forwarders, courier companies, and other enterprises that provide subcontracted logistics and transportation services.

About the market size of 3PL

The market size of 3PL is expanding year by year and is expected to continue to grow.

However, there is no denying that challenges remain, such as staff shortages and rising shipping costs. In addition, due to the impact of COVID-19, sales in E-Commerce excluding some products such as clothing are increasing, and it can be said that it is important for 3PL operators to further strengthen their response to EC.

Importance of 3PL

Delivering products in good condition to the customers without delay is one of the most important tasks for a company. However, in order to achieve complete logistics in-house, there is a huge cost of transportation and storage. Considering not only the cost of machinery and equipment, but also the cost of human resources and systems that are utilized in the delivery business, it is not easy to work on the development of logistics operations alone.

Therefore, the effective means is the introduction of “3PL”.

It helps to keep the quality of delivery to a high level while reducing the cost of logistics operations, and by outsourcing, we can use the free time and resources for normal business. In order to achieve both in-house growth and efficient logistics, it is very effective to make the most of 3PL.

Purpose of 3PL

When it comes to everything from product manufacturing to logistics in-house, the cost and burden on staff will increase. It is no surprise that the introduction of 3PL is essential to focus the economic resources and personnel on core operations. In addition, the purpose of introducing 3PL includes “improving the quality of service”. Since various know-how is required to deliver products to customers quickly without mistakes, it can be said that it is better to leave it to a 3PL supplier who is a logistics professional rather than responding in-house. As a result, one can expect to see an increase in overall profits.

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Benefits of 3PL deployment

a. Reduced costs

When operating logistics in-house, fixed costs such as labour costs, transportation costs, warehouse costs, etc. are always charged every month regardless of the amount of cargo.

However, by introducing 3PL, this fixed cost can be switched to variable costs, reducing costs for months with low cargo volumes.

b. Productivity improvement

There are three main approaches to productivity improvement.

(1) Increase sales without changing costs

Even if the cost of consignment to 3PL is the same as if we covered logistics in-house, if the logistics efficiency increases by consignment, it will be possible to deliver more products, resulting in higher sales.

(2) Reduce costs without changing sales

Even if the sales of the products do not change, if we outsource to 3PL and logistics costs go down, the profit of the entire company will increase.

(3) Increase sales and reduce costs

The most ideal is productivity improvement from two perspectives: outsourcing to 3PL lowers logistics costs and increases sales by improving work efficiency.

If you can choose the ideal 3PL supplier to walk with your company, you can expect a significant productivity improvement.

If we can establish partnerships with 3PL operators who can clarify the purpose of implementation and share that purpose, “increase sales and reduce costs” is not a dream.

c. Quality improvement

Smooth delivery with unique know-how cultivated in the professional field can reduce time and increase certainty with less error delivery.

In addition, there are companies that are responsible for inventory management as well as logistics.

In order to properly manage inventory in-house, it is necessary to have experienced personnel, but if you leave it to a specialized supplier, it will also lead to a lower incidence of defective inventory.

3PL suppliers will be able to throw a stone into “logistics that is too close to the seller’s position”, which many shippers tend to fall into, and will be indispensable for proper logistics construction.

As a result, logistics quality is maintained in a high state, which will result in the satisfaction of sellers and end users.

d. Elimination of labour risks

A company is made up of people’s growth. Recruitment, education and organization (team building) are major challenges for many companies.

Related laws and regulations related to employment are frequently revised, and the cost per person continues to rise due to the rise in minimum hourly wages and the revision of social insurance premiums.

In addition, many of the top reasons for leaving the company are “relationships in the field”, and the need and emergency to take measures to address this issue as a company are also increasing.

The introduction of 3PL eliminates these labour risks and allows economic resources to be invested in other issues.

e. Expansion of sales channels

By outsourcing logistics to 3PL companies, it will be easier to challenge the expansion of new sales channels that could not be tackled when providing logistics in-house.

For example, e-commerce sites have a wide variety of destinations and delivery methods, so there are aspects that are too complicated to handle with your own logistics.

However, if you leave all logistics to a 3PL supplier with specialized know-how, you can accurately deliver complicated deliveries without delay.

Disadvantages

First: enterprises cannot directly control the logistics function, cannot guarantee the timeliness and accuracy of supply, cannot guarantee the quality of customer service.

Second: 3PLs are often designed to be tailored to different customers and do not have a wide range of applicability. As a result, 3PL does not have economies of scale, and while 3PL reduces distribution costs for its customers, the resulting management costs increase, so the final cost savings for shippers are very limited.

Third: traditionally, companies have been able to meet the growing needs of their customers by optimizing inventory and utilizing regional service agents and 3PL companies. But now, customers need to include e-procurement, order processing power, virtual inventory management and so on. Businesses are finding that 3PL providers lack the comprehensive skills, integration technologies, strategies, and global expansion capabilities they need today.

Fourth: Contract-related complexity – In the logistics industry, problems have been pointed out by both operators and shippers regarding contracts related to 3PL.

Shipper companies have said that they feel uncertainty in terms of cost because standard prices are not set for billing item names, units, and pricing.

In addition, there are many cases where the burden of labor and cost on the part of the business operator increases depending on the regulations, definition, and scope of the business.

If you do not have detailed rules in the contract and any problems occur, it may lead to major trouble.

It would be good if money exchanges were settled, but if notoriety spread, it could affect both sides’ sales activities.

It’s important to have details at the contract stage, such as business rules and definitions, scope, billing items, and fees.

Be careful when creating contracts to avoid damage that would otherwise have been avoided.

Fifth: Do not accumulate in-house know-how – Outsourcing logistics to 3PL operators is not in-house department management, but rather management of other companies (security-related, physically distant, etc.), so it becomes difficult to go to the outsourcing business area, and it is not uncommon for shipper companies to perform only KPI management.

This will make it difficult to check the actual situation of the site and the state of operation.

Even if a problem related to commercial flow occurs, it is unclear what the problem is at the logistics site and what the point of improvement is, so need to ask 3PL operators to submit an improvement report and explain it, making it difficult to accumulate know-how to solve problems in-house and develop human resources who are familiar with it.

Therefore, it is necessary to go to the site regularly and include a contract that enables it.

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