What Is A 3PL Company? A Guide To Third-Party Logistics

By Indeed Editorial Team

Published 4 July 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

Businesses complete many tasks to manage their supply chains and fulfil customer orders. Companies can streamline these tasks by partnering with 3PL companies to outsource their order fulfilment, which can reduce shipping costs and maximise delivery speeds. If the company you work for wants to use 3PL, it is important to understand how it works and when to partner with a 3PL company. In this article, we answer ‘What is a 3PL company?' and describe how third-party logistics works and the advantages of using it.

What Is A 3PL Company?

A business employee may want to know "What is a 3PL company?" A 3PL company, which stands for a third-party logistics company, is a business that provides logistical solutions to companies that require help fulfilling orders. When businesses require additional supplies or administrative resources, they can work with 3PL companies to reduce shipping costs and increase the overall efficiency of the supply chain. A 3PL company is typically better equipped to handle certain processes. The following are some examples of the services that 3PL companies might provide:

Inventory management

Inventory management is the process of recording and storing products. When outsourcing inventory management to 3PL companies, businesses rely on the third party's larger or more centralized storage facilities. For example, if a business ships a large number of materials to a foreign country, it can work with a 3PL company that manages storerooms in that country rather than opening its own facilities.

Distributed inventory

Distributing inventory is a popular strategy that shipping companies employ to save money. When shipping to customers in different countries or remote locations, a business might be able to save money by relying on localized fulfilment centres. 3PL companies often operate these fulfilment centres and provide shipping and storage solutions to businesses that cannot access their clients through other means.

Warehousing and storage solutions

Many companies operate primarily through online sales, so they may not have physical storage locations. When these businesses want to store their products or materials, they can work with 3PL companies that own warehouses or other storage facilities. Utilising the resources of 3PL companies, an online business can to reliably store their products while they wait for orders.

Related: What Is An Inventory Manager? (Plus How To Become One)

Shipping processes

Many 3PL companies are shipping businesses that assist with transporting and receiving products. If a business wants to deliver products to its customers but does not have an extensive delivery system, it can work with such 3PL companies. This can help the business to save money while still ensuring that customers enjoy an efficient delivery process.

Returning merchandise

In addition to shipping and storage facilities, 3PL companies often operate return centres. These centres provide customers with a way of returning products they were unhappy with or do not want anymore. Offering return policies can promote product sales, but smaller businesses may find handling the logistics of this process challenging. In these situations, it is beneficial to work with a third-party logistics company that has a return system already in place.

Related: What Is A Logistics Manager? (With Salary And Skills)

How Do Third-Party Logistics Work?

The steps involved in third-party logistics can vary by company, but there are a few essential components. The following are the key steps of the third-party logistics process:

The business sends products to the 3PL company

The creation of a product is usually the first stage in this process. 3PL companies assist with shipping and storage solutions, but before this begins, the initial business designs a product and starts making sales. Once the business is operational, it can begin working with the 3PL company by sending them products for storage and delivery.

The 3PL company records the shipment

Once the 3PL receives a shipment from the business, it records that shipment. Recording shipments is an important part of this process because the logistics company tracks the status of the order through each stage of the delivery process. When recording shipments, 3PL companies track what the company sent, who the intended recipient is and when the customer expects the delivery.

The 3PL company organises each shipment

After recording these shipments, the next step is organising the merchandise. This allows logistics companies to create shipping schedules and timelines that match their client's requirements. When organising each shipment, the 3PL company arranges large storage containers and fills them with products that are going to the same area. In grouping products by destination, these companies create an efficient delivery system.

The 3PL company delivers the order

Once the 3PL company has created a schedule and organised orders, it can deliver these orders. When doing so, 3PL companies adhere to their client's specifications regarding time and destination. Working with their clients, the 3PL company ensures that every package arrives on time and creates detailed records that the primary business can use to track the progress of each shipment.

Advantages Of Using 3PL

The following are some advantages of partnering with a 3PL company:

Reduced costs

One of the primary benefits of working with a 3PL company is cost reduction. While a business pays a 3PL fees, it is typically cheaper to pay these fees than to create their own logistical solutions. 3PL companies have large networks of warehouses and shipping processes, so it is often cheaper for businesses to rely on these networks than to create their own.

Related: 7 Environmentally Friendly Business Ideas (With Benefits)

Faster deliveries

3PL companies specialise in fast and efficient deliveries. Working with them can reduce shipping time through faster shipping methods and fewer delays. Many consumers prefer to order from businesses that can deliver their products within a few days, so working with a 3PL can increase profits.

Greater efficiency

When businesses work with 3PL companies, they do not require to develop their own shipping and storage processes. Relying on the 3PL company to manage these aspects allows a company to allocate resources to other tasks. Additionally, businesses that rely on 3PL solutions do not require to hire additional employees to help with deliveries, which can be an expensive process.

Related: What Is An Inventory Manager? (Plus How To Become One)

Increased customer satisfaction

When a customer receives an order shortly after they make the purchase, the business sees higher customer satisfaction ratings. Working with 3PL companies can help businesses complete orders quickly, so this partnership can lead to increased customer retention. Many customers like to track their order throughout the delivery process, so working with a 3PL company that offers this feature can also increase product ratings.

3PL vs 4PL

4PL, or fourth-party logistics, is similar to 3PL, but the two differ in terms of order fulfilment. 4PL adds another step to the order fulfilment process, as 4PL companies connect with 3PL companies for their clients. Some may call this 'double brokering.' Essentially, 4PL companies can manage 3PL companies for their clients, allowing companies to outsource another element of the order fulfilment process.

Related: What Is Cost of Production? (With Factors That Affect It)

When Can 3PL Companies Help?

The following are some situations that 3PL companies can assist a business with:

Shipping a large number of orders

A company might want to partner with a 3PL company if it is shipping a large number of orders. If a company is having trouble keeping up with its orders or finding space for its inventory, it can outsource parts of the order fulfilment process to a 3PL company. This allows the company to focus on other areas and continue to grow.

Offering free shipping

Free shipping has become popular for many online companies, and partnering with a 3PL company can make this financially viable. Offering free two-day shipping is difficult for a company to do alone, so working with a 3PL company can make this shipping option more attainable. While the company may pay a service fee to the 3PL company, the increased amount of sales can still increase profits.

Scaling a business

3PL is useful when a company wants to scale up its order fulfilment. Partnering with a 3PL company makes it possible to expand order fulfilment to different regions or countries. This is because 3PL companies often have entire networks of fulfilment centres across different areas. Expanding the reach of order fulfilment can help a company do business with more customers, increasing profits.

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