3rd Party Logistics

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A supply chain practice where one or more logistic functions of a firm are outsourced. Explanation of 3rd Party Logistics (3PL). ('80)

Contributed by: Eric Goh See Khai

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Third Party Logictics

What is 3rd Party Logistics (3PL)? Description

3rd Party Logistics (3PL) is the supply chain practice where one or more logistics functions of a firm are outsourced to a 3PL provider. Typical outsourced logistics functions are: inbound freight, customs and freight consolidation, public warehousing, contract warehousing, order fulfillment, distribution, and management of outbound freight to the client's customers.

On top of this, also Value Added Services can be provided, such as: repackaging, assembling and return logistics. The 3PL Provider manages and executes these particular logistics functions using its own assets and resources, on behalf of the client company.
 

The thoughts behind this are to keep the firm competitive by keeping it lean without owning much assets, allowing it to focus on niche areas and to reduce operational costs. Third Party Logistics is also referred to as Contract Logistics.


3PL is evolving from predominately transactional-based to more strategic in nature. At the same time 3PL is gradually evolving into 4PL. A Fourth Party Logistics provider is a supply chain services provider that searches the best logistical solutions for its client, typically without using own assets and resources. Relatively new is the term 5PL or even 7PL, indicating Total Supply Chain Management Outsourcing.


Origin of 3rd Party Logistics (3PL). History

In the 80s, there was increased globalization and an increased use of IT. These trends resulted in increased demands on firms and possibilities for companies to operate more competitive and lean. Some successful 3PL companies emerged, such as DHL/Exel, Kuehne + Nagel, Schenker , UPS, Panalpina, C.H. Robinson, TNT Logistics, Schneider, and NYK Logistics.


Usage of 3rd Party Logistics (3PL). Applications

  • Firms with a wide and/or complex distribution network. Example: IBM.
  • Firms that do not focus on logistics as one of their core competencies. Example: Chevron Corp or British Petroleum.
  • In strategic discussions on Core Competence.
  • In the case of the creation of a new product group.
  • When a company is integrating activities of a takeover. Compare Acquisition Integration Approaches

Steps in 3rd Party Logistics (3PL). Process

The application of 3PL is normally done in a number of phases:

  1. Awareness. Investigate possibilities, inform employees, SWOT Analysis.
  2. Market Research. Investigate market trends, in particular service demands. See: SERVQUAL, Customer Satisfaction Model, and Quality Function Deployment.
  3. Strategy. Develop and compare logistics concepts.
  4. Make or Buy. Build own competence or outsource. Outsource completely or partly.
  5. Business Plan. Costs, benefits. Phasing. Timing. Risks. Communication and motivation.
  6. Selection. Selecting partner based on market coverage, competency, integrity, vision, etc.
  7. Agreement. Agreeing on mutual expectations using a set of performance metrics.
  8. Evaluation and Renewal. Sustain partnership via mutual financial costs and benefits, joined planning, multi-level contacts, open information exchange.

Strengths of 3rd Party Logistics (3PL). Benefits

3PL allows a firm to gain competitive advantage via:

  • Allowing firms to focus on developing their Core Competences.
  • Cost competitiveness.
  • Freeing up resources (money).
  • Benefit from the logistics know-how and international distribution networks of specialized 3PL Logistics providers, allowing for superior customer service levels.

Limitations of 3rd Party Logistics (3PL). Disadvantages and Risks

To implement 3PL successfully, one may need to bear in mind some possible pitfalls:

  • Loss of control over the logistics function (especially for critical parts).
  • More distance from clients. Loss of human touch.
  • Discontinuity of services of 3PL provider.
  • Differences of opinion or perception of the service level of the third party provider.

Assumptions of 3rd Party Logistics (3PL). Conditions

It can be inferred that the firm engaging this practice is likely:

  1. A firm that does not focus on logistics as one of its core competencies.
  2. At least a mid-sized corporation such that the logistics cost is substantial enough to justify the engagement of the outsourcing services.

Book: Edward A Silver - Inventory Management and Production Planning and Scheduling  -

Book: David Simchi-Levi - Designing and Managing the Supply Chain  -




3rd Party Logistics Forum (16 topics) Help
  Looking for Reliable 3PL Vendor in India  - I recently signed on a new 3PL vendor in India to provide us with gift suggestions and services. When the orders were placed, I asked several times for ETA's and tracking information and he bailed out on us and basically disappeared.
I am lookin...
     
  Multinationals Should Consider Utilizing an Arm of Their Group to Serve Their Logistics Functions  - Many FMCGs and manufacturing MNCs seek to outsource their logistics functions to third party logistics providers. However, in my view, all multinationals should consider utilizing an arm of their group to serve their logistics functions. With the imm...      
  New Trends in Transport and Logistics  - What are the new developments in the transport and logistics industry with special emphasis on the following: growth of 3PLs, 4PLs, increased bulk carriage, increased use of unit loads, air freight and documentation. Thanks....      
  3PLs Market in Saudi Arabia  - Due to economic expansion in Saudi, please share your thoughts on the 3PL market opportunity, especially in the area of warehousing and transportation....      
  Measuring the Performance of a 3PL  - Which performance metrics are best to be used to evaluate the worth of a 3PL provider? Why?...      
  Criteria in Selecting the Supplier of Logistics Service  - Could somebody give and explain 3 criteria for a logistics provider to transport petrol from the distribution terminals to Petronas service station?...      
  3rd Party Logistics Value Chain  - Does anyone have a 3PL Value Chain?...      
  Types of 3PL providers  - What are the types of 3PL providers??...      
  3PL in Third World Countries  - The reading on this well summarised 3pl has really assisted me understand on what it is. However I doubt its effectiveness and efficiency in the third world countries. Could someone comment please....      
  Difference 3PL and 4PL?  - What is the difference between a 3PL & a 4PL?...      
  End to End 3rd Party Logistic Provider (3PL)  - In Saudi Arabia, there is an emergenging trend of going for 3PL (outsource) and a number of petrochemical producers have started this practice. The area, however, is concentrated in cargo movements. Are there establishments or firms currently in Sau...      
  What is 3PL Logistics  - Thanks for all your articles. It's a little bit unclear to me what 3PLs are all about, are they independent logistic companies? I hope somebody will enlighten me about this. Thanks....      
  Decision-making for 4PL Solutions  - How does an end customer decide if they need 3pl or 4pl supply chain solutions?...      
  3PL Challenges and Difficulties  - What are frequent difficulties / challenges faced by 3PLs?...      
  Examples of 3PL / 4PL  - This information is truly appropriate.. But who can add an elaborated example to it?...      
  Criteria for Selecting a 3PL  - Who has good generic criteria to select a 3PL?...      



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Compare with 3rd Party Logistics (3PL): Vendor Managed Inventory  |  Outsourcing  |  Lean Manufacturing  |  CPFR  |  SERVQUAL  |  Customer Satisfaction Model  |  Quality Function Deployment  |  Core Competence  |  Business Process Reengineering  |  Vertical Integration  |  Value Chain  |  Benchmarking  |  Kraljic Model


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