3PL Guide: What is a 3PL (Third-Party Logistics Shipping Partner)?

Jun 7, 2024

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2 min read

A 3PL, or Third-Party Logistics Shipping Partner, is an intermediary between a seller and a carrier. They are responsible for the direct movement of goods from point A to point B. 3PLs provide inventory management, warehousing, packaging, and freight forwarding services.

The clients of a third-party logistics provider are often small and mid-sized businesses that cannot or don’t want to, manage their shipping operations. 3PLs can offer a wide range of services that may not be available if the company attempts to handle logistics themselves.

Among other reasons, businesses use third-party logistics to help improve customer service and satisfaction. Employing 3PL services, businesses can offer faster delivery times, more reliable shipping schedules, and better tracking for each shipment.

In this post, we'll discuss the different types of 3PL providers, their services, the primary benefits of working with them, choosing the right one, and finally, the best practices for working with a 3PL.

Types of 3PL Providers

The 3PL provider for you depends on exactly where you lack or need the most expertise. Let's consider the different types and the services and offerings they each provide.

Asset-Based 3PLs

Asset-based 3PLs provide a comprehensive set of services involving the physical movement and storage of goods. They own warehouses, fleets of trucks, and other transportation assets. The most common asset-based 3PLs specialize in trucking and inventory management.

These providers typically handle the full logistics process from start to finish, including picking up shipments from suppliers, warehousing/storage, and transportation to the customer. Their expertise may exist in warehouse management systems and techniques they've developed in-house.

Non-Asset-Based 3PLs

Unlike asset-based 3PLs, non-asset-based providers don't own any transportation or warehousing facilities.

Instead, they rely on a network of third parties to handle the various operations and services needed to transport goods from one point to another. Their expertise exists in creating a network of suppliers.

Non-asset-based providers offer more flexibility than their counterparts as they are not tied to any single asset.

Integrated Service Providers

Integrated service providers (ISPs) are a unique type of 3PL that handle the full chain of activities involved in moving goods from point A to point B, including transportation and logistics services. They're a one-stop shop.

ISPs may not own physical assets but integrate various services to provide comprehensive logistics solutions.

While an integrated service provider typically takes responsibility for the entire shipping process, they may outsource some activities to third-party providers.

Services Offered by 3PL Providers

3PL providers, as we've seen, offer different services catered to a range of clients. We'll detail some typical third-party logistics services to help decide which third-party logistics provider to use.

Transportation Management

Transportation management is the process of planning, controlling, and overseeing the transportation of goods. Some transportation services include:

Providing estimates and quotes.
Procurement (for manufacturing companies).
Coordinating carriers and shippers.
Picking up and delivering shipments on time.
Managing and submitting customs clearance paperwork.

Warehousing and Distribution

Warehousing and distribution services refer to the storage and movement of goods from warehouses to customers. Warehousing and fulfillment services may include:

Receiving, sorting, and storing inventory in secure warehouse space.
Tracking inventory levels in 3PL warehouses and fulfillment centers.
Liaison with carriers and distributors shipping items from warehouses.
Ensuring order fulfillment.

Other value-added services might include preparing shipping labels and documents for customs clearance and the ability to manage inventory on your behalf.

Freight Forwarding

Freight forwarding is organizing shipments to move goods from one location to another. Freight forwarders may offer services including:

Negotiating rates (shipping costs) with carriers for international transportation.
Providing advice on the most cost-effective shipping method (trucking, containerized freight, etc.).
Arranging transport and insurance.
Filing customs documents for international shipments.
Tracking the shipment from its origin to its destination.
Enabling visibility of the shipping progress for customer orders.

Customs Brokerage

Customs brokerage is the process of facilitating goods to cross international borders and ensuring compliance with customs regulations. Customs brokers provide services such as:

Advising clients on duties and taxes due for imported products.
Filing import/export paperwork with government agencies.
Receiving payment from customers and paying customs duties on their behalf.
Assisting customers in obtaining preferential shipping rates.

Technology and Data Management

Technology and data management services are used to monitor the logistics process in real-time and increase the transparency of operations. They can include:

Developing web portals for clients to track shipments online.
Implementing automated inventory tracking systems for warehouses.
Developing tracking systems to monitor the progress of every order.
Integrating third-party applications such as EDI (Electronic Data Interchange), WMS (Warehouse Management Systems), and TMS (Transportation Management Systems).
Analyzing data for insights into logistics performance and processes.

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Benefits of Using a 3PL Provider

Most businesses exist to take care of problems that other businesses have. You have expertise in one area and make money excelling at it. Other businesses are the same, and you can lean on them to make your life easier.

Logistics is an extremely complex industry with many moving parts and a steep learning curve. Unless your main business function is logistics, you're probably better off paying someone else to do it.

Here, we'll look at the benefits of using a third-party logistics provider for your business.

Cost Savings

By outsourcing your logistics operations, you can avoid the need for hiring and training staff to manage them in-house. This refers to the learning curve and complexity I mentioned above.

Since 3PL companies work with multiple carriers, they can get better rates than individual businesses due to the sheer volume of shipments they move. This allows customers to save on shipping costs and associated services (i.e., customs clearance).

For example, if you're shipping internationally, a 3PL would be responsible for paying duties and taxes due for imported items. They can also ship LTL orders (Less Than Truckload) by matching up your smaller shipment with that of another company to fill a truck.

Improved Efficiency and Productivity

When a 3PL manages your logistics operations, you can focus on other business areas. This is especially important if your core competency has nothing to do with logistics.

By outsourcing to a third-party provider, you will benefit from their expertise and services and access to technologies that may be too expensive or difficult to implement in-house.

A 3PL provider can also help reduce the time it takes to move goods through the supply chain, improving efficiency and productivity. They are experienced in managing complex shipping networks, especially for online retailers. This could involve reducing transit times or changing the route of shipments for greater cost savings.

Again – if a business's core competency is logistics, they'll probably be more proficient at it than yours!

Access to Expertise and Technology

A 3PL will understand the logistics industry, carriers, routes, cost-saving opportunities, etc. This means they can advise on the best practices for moving goods through the supply chain quickly and cost-effectively.

They may also have access to technology (chiefly management software) that would be too expensive or difficult to implement in-house. This could include:

Web portals.
Tracking systems.
EDI (Electronic Data Interchange) applications.
WMS (Warehouse Management Systems).
TMS (Transportation Management Systems).

Scalability and Flexibility

3PLs are experienced in managing supply chains and can help you scale quickly and efficiently to take advantage of new opportunities.

If you tried to do logistics in-house and doubled or 10Xd your volumes quickly, scaling up the logistics would require new hires, assets, and learnings that would consume valuable time and energy.

Outsourcing to a 3PL means they could tap into their extensive resources and adapt to your scale-up in near real-time.

Risk Mitigation

If something goes wrong during shipping, 3PLs can help quickly manage and resolve any issues. Some examples of things that can go wrong include:

Delays.
Damages or losses.
Customs clearance issues.
Incorrect shipments.
Overspending on shipping costs due to inefficient routing.

The other reason risk is mitigated, of course, is that the 3PL is accepting responsibility for your items and ecommerce fulfillment.

If something went wrong and you were doing logistics in-house, profitability would likely suffer. With a 3PL, you have accountability that they'll carry out the job and get the item to the end customer.

Choosing the Right 3PL Provider

We've discussed the different types of 3PLs, the various services they offer, and the benefits of having your business work with one instead of undertaking logistics in-house.

Now, we'll help you choose the right one. The 3PL will be a business partner on whom you spend significant money and energy, so the decision is important.

You’ll find small, agile 3PLs with niche service offerings all the way up to Fortune 500 companies like FedEx (and Amazon, if that’s where you sell). USPS will also be an option if you’re in the US.

Services Offered

Different providers will have different capabilities, and it will pay to take care in choosing the right one for your needs.

You'll likely want to keep costs low at the beginning, which will tempt you into choosing a lower-cost provider that only offers a few bespoke services. But consider that as your business grows and you need to move higher volumes, at faster speeds, in new geographies, your small, bespoke 3PL partner may be under-gunned.

A helpful way to choose, then, is to consider what services you need right now and how your needs may evolve. Then, look for a provider that can accommodate all of those needs.

That might mean looking for an Integrated Service Provider (ISP – see above) that can help you with your specific tasks early on and provide additional services across the entire supply chain as you grow.

Industry Expertise

It's useful to look for a company with years of relevant industry expertise and an extensive network of carrier partnerships. This could help you get better rates, faster delivery times, and access to more services.

Here are a few ways to identify the best 3PL for your business based on their expertise:

Industry awards – Has the 3PL won any industry awards or recognition for its logistics operations?
References – Does the 3PL have references from other businesses in your industry to back up their experience?
Experience and specialization – Look at the 3PL's website, case studies, portfolio, etc. Are they experienced with tasks related to your operation? Do they specialize in certain types of logistics (e.g., reverse logistics)?
Certifications – Does the 3PL adhere to quality and safety standards such as ISO 9001 or C-TPAT (Customs-Trade Partnership Against Terrorism)?
Technology used. Look at what technologies they're using across their supply chain. A good 3PL should offer access to web portals, tracking systems, EDI, WMS, and TMS. More on this below.

Technology Capabilities

Technology is not a benefit some 3PLs may have over others – it's a basic requirement in every industry. Supply chain operations are complex and prone to errors, so having the right technology in place is essential.

Look for a 3PL that can provide you with web portals, tracking systems, EDI applications, WMS, and TMS. These will help streamline operations and give you more visibility into the supply chain. You'll want to ensure they've invested in an up-to-date system that meets your specific needs (e.g., integration with your software).

Access to analytics and reporting will be another boon for optimizing your logistics services, especially at higher volumes. Analytics can help you understand performance metrics like order fulfillment times, cost savings opportunities, and customer satisfaction.

Track Record

A 3PL's track record is essential. Ask for references and case studies from other customers to understand how the 3PL worked for them. Check reviews on websites like G2Crowd, Capterra, or Google to get an idea of what others think.

You've likely made great efforts to provide persuasive 'social proof' for potential customers in your own business. Good reviews can mean a lot – typically, someone will have gone out of their way to write a review because they felt the service was particularly good. So, seek out 3PLs with promising social proof that are well-documented online.

Best Practices for Working with a 3PL Provider

It's clear by now that outsourcing to a 3PL for your logistics and supply chain management is the logical way for most businesses. There are a number of best practices for managing the relationship with these providers, such that you get the most out of it in both the near and long term.

Chief among these best practices is clear communication, including keeping good documentation. Let's look at five preferred behaviors for getting the best out of your 3PL provider.

Clear Communication and Collaboration

Be as clear and precise as possible about expectations. A 3PL should understand your specific business needs and have processes in place for managing the fulfillment process in a reliable way.

Clearly define what success looks like so that both parties know how to measure it if something goes wrong. Examples of success metrics might be delivery that's on time, within budget, and without damage to the product.

Set up regular meetings with your 3PL provider to discuss potential issues before they become problems. And make sure any changes to your supply chain are communicated clearly and on time – by both parties – which will help prevent delays, mistakes, or other unexpected problems.

For example, perhaps a pallet or truckload of items has gone missing or become damaged before you could release it, causing a delay.

Regular Performance Monitoring and Reporting

This can be done using KPIs (key performance indicators) or reports that show how the 3PL is doing against your expectations. A KPI is a specific value for a metric that, when you exceed it or come in under it, indicates optimal performance. Examples of KPIs might be:

80% of deliveries in the last three months were delivered within three days.
95% of orders were shipped without damage within 24 hours.
99% of customer inquiries were answered in one hour or less.

These KPIs will help you measure the performance of your 3PL with a level of detail and granularity that other measures may not provide.

Set up reporting processes with the 3PL that are easy for both parties to use on a regular basis. This should include a system for tracking costs, shipments delivered, orders processed, transit times, etc., and any other metrics relevant to your business.

An online dashboard (data visualization) displaying relevant values and thresholds is one such method. If the provider has an API, you can have a developer connect with it and build a custom dashboard.

Emphasize Transparency

The 3PL is managing many of your business’s operations, so they should be transparent and secure.

Check that they have robust security protocols in place for protecting customer data. It should be encrypted, stored securely, and compliant with local laws (CCPA, GDPR, POPIA, etc.).

You may also ask them about their chain of custody processes for ensuring goods are securely transported from one place to another without damage or theft. The chain of custody is a system of detailed documentation to ensure goods maintain the same condition during all stages of the supply chain.

Expect regular updates on how things are going (for example, a weekly status report). The more information you have about their operations, the better you'll be able to make informed decisions.

Evaluate Performance

Using the reports, dashboards, status reports, and other intel from the 3PL, it's up to you to do periodic auditing for how your provider is doing. It's only too common for fulfillment standards to slip slowly over time in small increments, which are hard to notice daily.

Take objective performance measures over longer periods (monthly or biannually) to indicate longer-term trends.

Continuous Improvement and Optimization

The above processes should be viewed as a continuous cycle, not a one-time event. The 3PL should always look for ways to improve your fulfillment process and make it more efficient.

Part of this is about understanding the data you've collected from tracking and reporting (mentioned earlier). Have conversations with the 3PL about how they can use data effectively to optimize the process. Explain to them what you mean by metric XYZ or expectation ABC for the best chance of an optimal logistics process.

Changes that the 3PL may need to make over time to maintain or improve its delivery standards include adjusting inventory levels, adjusting transit times and routing, revising pricing, streamlining (or adding automation to) processes, or adding new locations. Working with the 3PL to identify opportunities for improvement is key to success over the long term.

Bottom Line

Outsourcing your logistics to a third-party logistics company is a sensible and stress-reducing way to handle your ecommerce business' fulfillment. To do it effectively:

You'll need to choose the right type of 3PL – asset-based, non-asset-based, or integrated.
You should scrutinize the services offered by the 3PL, for example, freight forwarding or customs brokerage.
You might consider the benefits of using a 3PL versus handling logistics in-house.
Choose the appropriate 3PL based on both your current and future logistics and scale requirements.
Take note of the industry best practices for making the relationship with your 3PL effective.

Even once you've locked in a 3PL provider, the responsibility of collecting the customer's shipping details falls on your shoulders. The best supply chain management companies in the world can't carry out your fulfillment if the customer's address is wrong! Check out our best practices for validating addresses here.

Address Validator is a no-brainer service for ecommerce companies to mitigate the risk of collecting the wrong address from the customer. If your ecommerce platform is Shopify or BigCommerce, take Address Validator for a spin to see how easily it integrates and how bulletproof it makes your checkout process.

Higher delivery accuracy means a better customer experience! Try Address Validator free here.

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Ellie Bradford

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In-Product Marketing Lead

September 24, 2024

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3 min read

3PL Guide: What is a 3PL (Third-Party Logistics Shipping Partner)?

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