Getting the best from your 3PL

From the October 2023 print edition

What is a 3PL? That can depend on who you talk to.

Recently, I had a call from a company looking for customs training for their staff and when I asked what their main activity was, they said: we’re a 3PL.

But in talking to them, I realized they’re a load broker or freight broker, not really a 3PL.
International freight forwarders now often call themselves logistics services providers: it sounds better and more in tune with our times. Some say they offer full supply chain management services, which is not always the case, as this would include procurement.

The term 3PL, short for third-party logistics, was coined in the 1970s when companies started to outsource the warehousing and distribution of their products to focus on their core activities. The key then was to concentrate on what you know and do best, and subcontract other functions to someone else. If this does not make companies more profitable in the long run, as outsourcing can be more expensive, it still makes them look better for the financial world and for shareholders, as it reduces upfront and financing costs.

So 3PLs are independent contractors running facilities to store, sometimes sort, pack, repack, and so on, then ship out their customers’ goods. As that function became more common, it also became more sophisticated, thanks to equipment and software enabling 3PLs to offer integrated and value-added services.

This is similar to how many companies converted their truck fleets from employee-operated to subcontractor-operated, forcing drivers to become independent contractors and shifting fleet management headaches onto them. Today, 3PLs extend beyond logistics and provide value-added services to meet customers’ needs, adding some supply chain management functions to their service offering.

International freight forwarders and courier companies often provide 3PL services as well. We can distinguish two categories of 3PLs: the basic ones that perform receiving, storage, sorting, pick and pack and shipping, and more advanced ones that offer value-added services like packaging, tracking and tracing, and information management. The second category is more common today, as managing the information has become almost more important than managing the products. This explains the growing importance of 3PLs and how they have evolved from a “sidekick” to a core function.

Whether they operate multi-customer, public facilities or are dedicated to one customer, another factor is flexibility. 3PLs can usually adapt their offerings and their way of working to customers’ needs.

By nature, they have to adapt to customer requirements. The highest level for a 3PL is to integrate fully with the customer and to manage their entire logistics function.
In these cases, the key to success is the fit between customer and service provider, with adaptability, flexibility and reliability as important, if not more, than cost savings.

In e-commerce, the term 3PL takes a slightly different twist, with the focus on order fulfilment. The classic model for e-commerce merchants, particularly SMEs, is to outsource this function to a 3PL.

Order fulfilment is the method by which a company processes a sales order to the customer’s specifications and includes receiving stock; sorting and storing it; order processing; retrieving; pick and pack; production of documentation and shipping out. 3PLs also handle reverse logistics, the function of handling returns, disposing of them or repacking/refurbishing them for resale. This has become more important with the growth of e-commerce: the return rate for brick-and-mortar retailers is around 10 per cent, or as high as 20 per cent for online shoppers.

What challenges do 3PLs face today? They are asset-based, so operating costs, facilities and financing are key, as well as labour shortages. Keeping up with technology, automation, managing data and adapting to customer expectations are challenging. One element is that 3PLs must constantly expand their offerings. Three things drive this: customer retention, spreading risks, and keeping competition at bay. To strengthen customer relationships, we need to provide as wide a service offering as possible, develop strong partnerships and integration, to become an indispensable partner. Offering a wide service range spreads risks, as increased activity in one area can offset a slowdown in another.

Staying ahead of the competition is tough, especially as big players get more active and offer fully integrated services. These days, it’s like everybody wants to become a 3PL, to diversify, strengthen their position and develop tighter customer relationships.

A good example is Maersk. They used to only offer traditional ocean carrier services, as well as some limited air cargo services, using their own fleet. Maersk today does not just offer traditional ocean and air freight but also freight forwarding, logistics services, warehousing and distribution, customs brokerage, and even cargo insurance. Ironically, the reason traders need cargo insurance is ocean carriers have low limits of liability. If something goes wrong, you never get fully compensated for your goods. The maximum you will get from Maersk or any other ocean carrier, is between US$500 and US$900 per container, depending on the applicable convention. Maersk offering cargo insurance is like making up for its own shortcomings. What they could do instead
is cancel their limits of liability and take full responsibility for the cargo they carry.

3PLs are key players for the success of many companies. They must be fast movers, adaptable, proactive and use new technology to meet customers’ expectations, stay competitive and profitable. Businesses will continue to focus on driving down operational and labour costs by outsourcing their logistics function to 3PLs. Adapting to new technologies is essential, yet in the end, people matter more than technology.