Richard E. Crandall, PhD, CFPIM, CIRM, CSCP | September/October 2013 | 23 | 5
Taking a close look at third-party logistics providers
Many of the products you see in the stores aren’t moved there by the retailer or even the manufacturer. More and more, a third party performs this logistics function. As the UPS slogan goes, “We love logistics,” and this makes it possible for consumers to get the products they want when and where they want them.
Global competition and outsourcing are the primary reasons why a number of companies use third-party logistics (3PL) providers. These 3PL companies have specialized knowledge and capabilities to move product smoothly along the global supply chain. Outsourcing logistics management tasks to a third party is not new. Cost reduction was the primary reason for outsourcing logistics initially; however, more companies are finding other benefits, such as improved customer service and access to new markets (C.H. Robinson Worldwide 2013).
Third-party logistics providers can perform a variety of services. The most common include inventory management; order acceptance and processing; pick-and-pack operations; order fulfillment; assembly, packaging, and other value-added activities; credit card verification; invoicing, credit, and collection; pre-sort capabilities; and returns handling (Ackerman 2000).
Evolution of 3PL
The rise of 3PL can be marked by three phases:
- The first wave dates back to the 1980s, when organizations with strong positions in transportation and warehousing began to provide these services to retailers and manufacturers.
- The second wave began in the early 1990s, as parcel and express companies such as DHL, TNT, and UPS added 3PL services to capitalize on their express networks and experience in countries throughout the world.
- A third wave beginning in the late 1990s brought in companies with extensive knowledge in information technology, consultancy, and financial services. These businesses included Accenture, GE Capital Services, and IBM (Berglund 1999).
As the 3PL market grew, many organizations spun off their logistics businesses as separate entities in order to provide growth opportunities and reduce possible conflicts with customers of their primary businesses (Berglund 1999).
Table 1 contains data from Armstrong & Associates (2013), a 3PL industry consultancy, demonstrating the size of the global 3PL market. In Europe and North America, logistics costs average 8.9 percent of the gross domestic product (GDP), while the percentage of logistics costs to GDP runs higher in the rest of the world. The use of 3PLs also is larger in Europe and North America and lower elsewhere.
Hertz and Alfredsson (2003) developed a two-by-two matrix to classify the different types of 3PL providers. (See Figure 1.) The upper-left, lower-left, and lower-right quadrants show the basic businesses where 3PL activities started. The upper-right quadrant shows four types of 3PL providers.
This quadrant is broken down further in Figure 2 as the following:
- The service developer offers advanced value-added services such as forming specific packaging, cross-docking, track and trace, and special security systems.
- The standard 3PL provider supplies typical 3PL services including warehousing, distribution, and pick and pack.
- The customer adapter is a 3PL firm that takes over a customer’s existing activities and improves handling efficiency.
- The customer developer is the most advanced form and involves high integration with the customer, often taking over its whole logistics operations. This is similar to what is now known as fourth-party logistics (4PL).
These classifications represent a hierarchy of services, beginning with the standard 3PL provider and progressing to the customer developer. However, not all 3PL companies aspire to the highest level; the progression may be one of greater outsourcing of logistics services by the buying company. As a company increases its outsourcing to a 3PL or a 4PL provider, the two entities must build stronger relationships and have a greater level of trust. Similarly, as a 3PL company increases its portfolio of services, it tends to serve fewer customers.
The benefits of using 3PL providers can include the following.
Reduction of total cost. Using 3PL providers should reduce the logistics costs along a supply chain. This may come from improved route planning, lower negotiated transportation rates, optimized selection of transportation modes, and more.
Shortening of time from origin to destination. Lead time to replenish inventory is important, and a 3PL provider should be able to help in this area through close coordination of goods movement, especially when changing from one mode to another; more accurate paperwork, which is important in customs and other transfer points; and tighter scheduling of routes to reduce transit delays.
More consistent processing with less time variability. A 3PL company with a global perspective should provide a holistic view of the total supply chain so that each movement of goods can be planned to minimize interruptions and delays. Reducing variability in elapsed time enables inventory managers to avoid stockouts and excess inventory.
Better concentration on core functions. Logistics management in extended supply chains is a complex process. Reducing or eliminating the time spent on day-to-day logistics activities enables professionals to concentrate on primary business functions.
Increased supply chain flexibility. When there are new developments in the marketplace, a business may need to find a new supplier or move goods to a new location. A 3PL provider can provide this flexibility better than a company with other concerns.
Market development. 3PL providers can aid in the demand side, as well, suggesting new market opportunities and assisting with marketing in new territories. These businesses understand how to work in many different parts of the world, and sharing this information with the customer is a win-win for both parties.
Access to specialized knowledge. Likewise, a 3PL provider accumulates information about activities along the supply chain beyond logistics functions and shares some of this knowledge with its closest relationships. Potential growth areas include new products, new processes, trends in business climates in foreign countries, trends in transportation modes, and more.
The following are just some of the potential obstacles to successful 3PL implementations.
Lack of management skills. Managing an outsourced activity usually is more difficult than managing a local activity and requires knowledgeable and dependable managers, even if the 3PL provider is fully qualified to do the job. There are always questions relating to company policy and how to handle difficult or incompetent suppliers.
Lack of full service providers. It can be tricky to find a 3PL provider that can perform the full range of services needed, and outsourcing logistics activities on a piecemeal basis is not a desirable approach.
Perceived loss of control. Outsourcing carries with it the potential for the outsourced function to lose managerial control. While minor supply chain disruptions can be serious, major disruptions can lead to severe loss of market position and business failure.
Difficulty in coordinating participants. Most companies have multiple supply chains that handle several products and markets, requiring numerous suppliers in different countries. Managing all of these suppliers is even more difficult when conducted through a third party. Qualified people are needed to handle these challenging and time-consuming relationships.
Need for comprehensive financial analysis. As with outsourcing manufacturing and other services, the decision to use a 3PL provider requires careful analysis. This can be difficult, thanks to some less-tangible considerations including supplier relationships, transportation suppliers, foreign governments, and the effects of improved or deteriorating delivery times, to name a few.
Finding and using appropriate performance measures. Selecting and evaluating a 3PL provider requires a series of appropriate performance measures. Cooper et al. (2012) illustrate a model that covers incoming order administration, transportation to a regional distribution center, inventory management, transportation to customer distribution center, and delivery. In all, they outline 28 different metrics that can be adapted to each company’s needs.
“If you want a quick answer to the question, ‘What's new with 3PLs?’ 4PLs would be as concise as you could get,” writes Tom Andel (2013) at MHL News. While these businesses have been around a while, they are receiving renewed attention.
The difference between 3PL and 4PL is not yet clear. Perhaps the 4PL provider is a non-asset company so it is not influenced to recommend its own company’s services. Some choose simply to replace the term “4PL” with “lead logistics provider” (Burnson 2011). As another example of this uncertainty, it was reported that Transportation Insight was the first 4PL provider to become a member of the International Warehouse Logistics Association—however, the company’s own website describes itself as a “full-service 3PL” (Transportation Insight 2013).
Another term that is coming into greater use is “horizontal collaboration.” This is when a 3PL or 4PL provider manages portions of two or more companies’ supply chains to share resources such as warehouse space or manufacturing capacity. A comprehensive study of UK grocery supply chains found that suppliers were more receptive to a collaborative arrangement than retailers. Suppliers felt they could gain cost savings, but retailers were concerned about a loss of competitive advantage (Hingley et al. 2011).
It appears 4PL providers have the potential to help strengthen supply chain relationships, but supply chain participants may not want to give up this control. It raises an interesting question: Should a third party manage the entire supply chain, including retailing and manufacturing operations, as well as logistics? Share your thoughts by sending an email to email@example.com.
Ackerman, K. 2000. “How to choose a third-party logistics provider.” Material Handling Management 55 (3): 95.
Andel, Tom. 2013. “The competency you keep when outsourcing logistics.” MHL News. http://mhlnews.com/labor-management/competency-you-keep-when-outsourcing-logistics, accessed May 30, 2013.
Armstrong & Associates. 2013. “A&A’s Top 50 Global Third-Party Logistics Provider (3PL) List.” http://www.3plogistics.com/Top_50_Global_3Pls.htm, accessed May 30, 2013.
Berglund, Magnus, Peter van Laarhoven., Graham Sharman, and Sten Wandel. 1999. “Third-party logistics: Is there a future?” International Journal of Logistics Management 10 (1): 59–70.
Burnson, P. 2011. “Demystifying the 4PL.” Logistics Management 50 (4): 40–44.
C. H. Robinson Worldwide. 2013. “Collaborative Outsourcing: Preparing for a Successful Logistics Outsource.” http://www.chrobinson.com/en/us/Resources/White-Papers/?d=139.
Cooper, Orrin, Pandu Tadikamalla, and Jennifer Shang. 2012. “Selection of a third-party logistics provider: Capturing the interaction and influence of performance metrics with the analytical network process.” Journal of Multicriteria Decision Analysis 19 (3–4): 115.
Gephart, Fred. 2012. “Reshoring to Boost the Bottom Line.” Target 28 (3) 12–14.
Hertz, Susanne, and Monica Alfredsson. 2003. “Strategic development of third-party logistics providers.” Industrial Marketing Management 32 (2): 139–149.
Hingley, Martin, Adam Lindgreen, David B. Grant, and Charles Kane. 2011. “Using fourth-party logistics management to improve horizontal collaboration among grocery retailers.” Supply Chain Management 16 (5): 316–327.
Morton, R. 2007. “Keeping the supply chain in focus.” Logistics Today 48 (7): 12.
Tompkins, Jim. 1996. “Integrated Logistics: Journey to the Ultimate Customer.” Material Handling Engineering March 1996: xx.
Transportation Insight. 2013. http://www.transportationinsight.com, accessed June 14, 2013.
Richard E. Crandall, PhD, CFPIM, CIRM, CSCP, is a professor at Appalachian State University in Boone, North Carolina. He may be contacted at firstname.lastname@example.org.