What Is Third-Party Logistics (3PL)?
Third-party logistics (3PL) refers to the contractual delegation of logistics operations to a specialised service provider. These companies assume responsibility for various aspects of a business’s supply chain, encompassing warehousing and inventory management functions to order fulfilment and shipment execution.
In essence, a 3PL provider is contracted to manage the movement of the products from origin (point A) to destination (point B), with the potential for additional services further along the supply chain. This strategic partnership can offer significant advantages for businesses, particularly those experiencing growth or engaged in electronic commerce. By outsourcing logistics operations, businesses can reallocate internal resources towards core competencies, such as product development or marketing initiatives.
How Does Third-Party Logistics (3PL) Work?
The following is a breakdown of how a typical third-party logistics (3PL) company works:
Infrastructure and Technology
- Warehouses: 3PLs own or lease strategically located warehouses with efficient layouts for receiving, storing, picking, and packing products. They may have specialised areas for temperature-controlled items, hazardous materials, or oversized goods.
- Warehouse Management System (WMS): This software is the backbone of the operation, tracking inventory levels, product locations within the warehouse, and order fulfilment processes.
- Transportation Management System (TMS): If the 3PL manages transportation, they’ll utilise a TMS to choose carriers, negotiate rates, schedule shipments, and track deliveries.
Human Resources
- Warehouse Staff: This team is responsible for receiving, storing, picking, packaging, and shipping products. They operate forklifts, scan barcodes, and ensure efficient order fulfilment.
- Inventory Management Specialists: These specialists analyse inventory data, implement strategies to optimise stock levels, and forecast demand to prevent stockouts.
- Customer Service Representatives: They handle communication with client businesses, answer questions about inventory, and address any fulfilment issues.
- Information Technology (IT) Staff: The IT team maintains the WMS, TMS, and other software systems to ensure smooth operation and data security.
Operations
- Standardised Processes: 3PLs develop and implement standardised processes for receiving inventory, order picking, packaging, and shipping to ensure consistency and accuracy across all client accounts.
- Technology Integration: The WMS and TMS integrate with client systems to receive orders electronically and update inventory levels automatically.
- Performance Monitoring: 3PLs track key metrics like order fulfilment accuracy, picking times, and shipping costs to identify areas for improvement and ensure they meet Service Level Agreements (SLAs) with their clients.
- Value-Added Services: Some 3PLs offer additional services beyond core fulfilment, such as kitting (assembling multiple products), returns processing, labelling, and light assembly.
What Are The Advantages & Disadvantages Of Third-Party Logistics (3PL)?
While there are some obvious benefits of third-party logistics over in-house logistics, there are always some drawbacks to consider:
Advantages Of Third-Party Logistics (3PL)
- Cost Savings: 3PLs can offer economies of scale, leveraging their buying power to negotiate better rates with warehouses, transportation companies, and technology providers. This can translate to significant cost savings for businesses compared to managing logistics in-house.
- Expertise & Specialisation: 3PLs have the expertise and experience to handle complex logistics operations efficiently. They stay up-to-date on industry best practices and invest in the latest technologies, providing knowledge and efficiency that some businesses may find difficult to achieve independently.
- Flexibility & Scalability: 3PLs can easily scale their operations up or down to meet the fluctuating needs of a business. This is particularly beneficial for businesses experiencing growth or seasonal variations in demand.
- Focus On Core Competencies: By outsourcing logistics, businesses can free up internal resources to focus on core competencies, such as product development, marketing, and sales.
- Enhanced Service Levels: 3PLs can help businesses achieve faster delivery times, improved order accuracy, and better inventory management, ultimately leading to a more positive customer experience.
Disadvantages of Third-Party Logistics (3PL)
- Loss of Control: Outsourcing logistics can lead to some loss of control over the supply chain. Businesses rely on the 3PL to meet their performance standards.
- Dependence on External Partners: Businesses become reliant on the 3PL’s performance and infrastructure. If there are issues with the 3PL, it can directly impact the business’s ability to deliver to its customers.
- Hidden Costs: While 3PLs can offer cost savings, it’s crucial to carefully review contracts to avoid hidden fees or surcharges.
- Limited Customisation: Some 3PLs offer standardised services, which may not be ideal for businesses requiring highly customised logistics solutions.
- Potential for Communication Issues: Clear communication between the business and the 3PL is essential. Any breakdowns can lead to inefficiencies and errors.
What Are Some Prominent Indian Third-Party Logistics (3PL) Startups?
Some of the biggest third-party logistics (3PL) startups in India include the likes of unicorns such as Shiprocket, Xpressbees, the listed unicorn Delhivery, and other major startups like Pickrr (owned by Shiprocket), Shadowfax, LetsTransport, and Flipkart-owned Ekart Logistics.
To provide some perspective, data from IMARC Group indicates that the Indian logistics market achieved an impressive valuation of $259.5 Bn in 2022. Projections for the future are equally promising, with expectations of reaching $432.4 Bn by 2028, showcasing a robust CAGR of 8.8% between 2023 and 2028.
