Logistics Contracting: Definition, Benefits And Elements

Updated 28 August 2023

Logistics contracting is outsourcing resource management tasks to other third-party service providers. These service providers manage every task, like planning the supply chain, processing orders, transporting and distributing goods, managing inventory, collecting payments and conducting other aspects of customer service. Knowing more about contract logistics can help you understand ways to run a business run smoothly. In this article, we discuss what contract logistics is, explore its various elements and benefits and understand the industries that might benefit from this process.

What is logistics contracting?

Logistics contracting or third-party logistics is a business outsourcing process where a company transfers partial or complete material optimisation and flow to a third-party provider. Contract logistics include freight transport, customs clearance, warehouse logistics and freight forwarding. Typically, contract logistics providers follow a well-defined process. The elements involved include:

Warehousing of goods and taking inventory management into account.
Organising goods received in the warehouse, processing, order assembling and loading and unloading operations.
Preparing custom documentations.
Providing a report on work performance.
Offering additional services, such as barcoding, packing and stickering.

Contract logistics companies resolve every issue of the supply chain management so that the organisation does not invest in any infrastructure and establish a logistics department.

Benefits of logistics contracting

Here are some benefits of using contract logistics:

Provides flexibility: When an organisation hires a contract logistics company, it imparts flexibility because a logistics company can absorb more volume increase and fluctuation than an in-house team. The logistics company's ability to share labour and facilities allows them to move resources and ensure they fulfil every demand of the client.
Optimises cost: Using their expertise, a professional contract logistics provider saves time and cost of resource management. This helps reduce cost per order and because these companies have resources and a workforce, it results in cost optimisation.
Increases efficiency: As logistics contract providers specialise in managing logistics, they enjoy a higher operational efficiency. Contract logistics can start from the first day and do not require additional costs or resources.
Provides better infrastructure capabilities: Usually, a logistics provider has the required warehouse facility and IT systems that help in the smooth operation of a business. These providers often upgrade their processes and systems to remain up-to-date with the latest technologies.
Improves customer service: Apart from order processing, many providers manage customer and client relationships. By outsourcing logistics, organisations ensure customer communication and faster delivery of goods, thereby enhancing customer service.
Increases delivery speed: Contract logistics service providers maximise the delivery speed, which might be desirable for many online customers. When partnering with such service providers, organisations can offer free shipping, encouraging customers to purchase from the organisation.
Reduces the order fulfilment cost: Typically, a contract logistics provider reduces the order fulfilment cost. This is primarily because these providers have a network of logistics and supply chain connections that helps you get the best deal on shipping and delivery.

What are the elements of contract logistics?

Here are some key elements of contract logistics:

Inventory management

When an organisation plans to scale up production and receive more orders, they can outsource inventory management to a contract logistics provider. Typically, a contract logistics service provider has in-depth knowledge and valuable experience with inventory management. This primarily involves storing and stocking raw materials and finished goods in the warehouse. It helps in meeting customers' demands without adding extra costs. The main objective of inventory management is to have the right goods and materials at the right time in the right place.

Order processing and fulfilment

Order processing and fulfilment is the process of storing goods and products, packing orders and delivering products as per orders. Order fulfilment happens when a customer places an order and ends when the customer receives the desired product. These service providers store the inventory in the warehouse, which helps in reducing an organisation's operational cost. This element of contract logistics lowers the shipping cost, enhances customer service and expands the customer base.

Reverse logistics

Often, a contract logistics provider offers reverse logistics, a type of supply chain management that moves goods from customers back to the sellers or manufacturers. This process involves obtaining a product from a customer due to quality control issues, product becoming obsolete and product not desired by the customer. The reverse logistics process starts with the end consumer and moves back to the supply chain to the manufacturer.

Freight transportation

Freight transportation is the last and most significant element of contract logistics. After processing the order, the contract logistics provider allocates the resources to transport the freight to the destination. These providers check and analyse various transportation routes to deliver products cost-effectively on or before the delivery time. This helps the organisation deliver the best services to clients and customers. These components reduce the cost and increase work productivity.

When to use contract logistics

An organisation might consider using contract logistics under these scenarios:

For shipping a large number of orders

When a company ships many orders, it might be beneficial to partner with a contract logistics service provider. When it becomes challenging to find space for inventory and process many orders, contract logistics can help an organisation succeed. This allows the organisation to focus on key areas that result in higher growth.

For optimising the order fulfilment

A contract logistics provider optimises order fulfilment. It helps the organisation save money and time. Working with such a logistics provider can streamline and optimise multiple components, such as shipping, packing and delivery.

For scaling the order fulfilment

Using a contract logistics provider is helpful for companies looking to scale their order fulfilment. It helps an organisation expand the order fulfilment to different regions, increasing the overall sales. Expanding the order fulfilment gives the business potential to sell to a wider audience base.

Industries that can benefit from contract logistics

Contract logistics providers make other businesses efficient, effective and more profitable. Here are some industries that enjoy the maximum benefits:

Construction

Proper workflow is an essential component for the functioning of a construction company. Material logistics is essential because it ensures material travel safely and has a secure storage place unless it gets shipped to the customer. A contract logistics company manages equipment, sources raw materials and assists with order management.

Pharmaceutical

The pharmaceutical industry relies on contract logistics to ensure expedited shipping that protects the pharmaceutical products' integrity. Moving shipments of drugs that require refrigeration require strict temperature control throughout the process. Contract logistics providers are adept at transporting such drugs and other life-saving medications.

Manufacturing

Using contract logistics, manufacturers move a large number of products long distances. This helps maintain a steady flow of raw material they require to keep the production moving. Also, contract logistics is more beneficial because it eliminates the requirement for a dedicated fleet of vehicles and drivers for transporting goods around the country.

Retail

One common problem that retail stores faces are the need for profitability and competition. Using contract logistics, you can reduce inventory by consolidating storage facilities. The presence of a logistics firm eliminates the requirement for a dedicated fleet of vehicles responsible for transporting products all over the country. With such providers, a retail store can scale its warehousing space during the off-season and on-season.

Restaurants

For restaurants to create delicious dishes, they require fresh ingredients. This might be a problem if the vegetable or fruit is seasonal. A contract logistics works collaboratively with regional suppliers to get fresh ingredients and transport them to preserve quality and flavour. These providers ensure the required delicacy reaches the restaurant.

Home improvement

A logistics company helps a home improvement company ensure cost-effectiveness and efficiency during a project. It helps in overseeing distribution, installation, disposal and debris removal. Logistics service provider helps suppliers, retailers, homeowners, installers and general contractors to remain efficient and productive.

Hi-tech

A contract logistics provider combines an understanding of inbound and outbound logistics to ensure that the clients or customers receive the product on time. Electronics, computers and office equipment require their attention. They take care of warehousing and re-packing to ensure the safe delivery of computer products.