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  -

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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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