Third-party logistics (abbreviated as 3PL, or TPL) is an organization's long-term commitment of outsourcing its distribution services to third-party logistics businesses. A 3PL provider is a company that supplies and/or co-ordinates logistics functions across multiple links in a supply chain. The company acts as acts as an intermediary between a seller or manufacturer (the first party) and a buyer or user (the second party). Basically, 3PL might be defined as outsourcing of transport and logistics activi-ties to outside companies that are neither consignors nor consignees. 3PL came into existence during the deregulation of freight transport industry in the 1980s and has pro-gressed in the 1990s along with the development of information technologies.
Third-party logistics providers typically specialize in integrated operations of warehousing and transportation services that can be scaled and customized to customers' needs, based on market conditions, to meet the demands and delivery service requirements for their products. Services often extend beyond logistics to include value-added services related to the production or procurement of goods, such as services that integrate parts of the supply chain. A provider of such integrated services is referenced as a third-party supply chain management provider (3PSCM), or as a supply chain management service provider (SCMSP). 3PL targets particular functions within supply management, such as warehousing, transportation, or raw material provision."Outsourcing Transport and Warehousing: Pricing, Honesty and Contentious Issues" Published in Australian Freight Logistics Magazine. Retrieved 2014-3-25.
Types Third-party logistics providers include freight forwarders, courier companies, and other companies integrating and offering subcontracted logistics and transportation services. Hertz and Alfredsson (2003) describe four categories of 3PL providers: Standard 3PL Provider This is the most basic form of a 3PL provider. They would perform activities such as, pick and pack, warehousing, and distribution (business) – the most basic functions of logistics. For a majority of these firms, the 3PL function is not quite their main activity. For many such organizations, logistics services are not their primary business activity., the 3PL capacity is not their primary action. Globalization has in a general sense changed the business condition. In light of this new money-related reality, creators and suppliers have gotten a handle on third social gathering collaborations (3PL) providers as key players in the generation organization. Service Developer This type of 3PL provider will offer their customers advanced value-added services such as: tracking and tracing, cross-docking, specific packaging, or providing a unique security system. A solid IT foundation and a focus on economies of scale and scope will enable this type of 3PL provider to perform these types of tasks. :: This type of 3PL provider works closely with the client and assumes responsibility for managing its logistics activities. The 3PL supplier enhances the coordination drastically yet does not build up another administration. The client base for this kind of 3PL supplier is ordinarily very little. The Customer Adapter this type of 3PL provider comes in at the request of the customer and essentially takes over complete control of the company's logistics activities. The 3PL provider takes over the customer's logistics activities but does not develop a new service. The customer base for this type of 3PL provider is typically quite small. The Customer Developer this is the highest level that a 3PL provider can attain with respect to its processes and activities. This occurs when the 3PL provider integrates itself with the customer and takes over their entire logistics function. These providers will have few customers, but will perform extensive and detailed tasks for them.Martin Murray, Selecting a Third Party Logistics (3PL) Provider, thebalance.com
Outsourcing may involve a subset of an operation's logistics, leaving some products or operating steps untouched because the in-house logistics is able to do the work better or cheaper than an external provider. Customer orientation is another aspect of 3PL provider relationships. The provider has to fit to the structures and the requirements of the company. This fit is more important than the pure cost savings, like a survey of 3PL providers shows clearly: The customer orientation in form of adaptability to changing customer needs, reliability and the flexibility of third-party logistics provider were mentioned as much more important than pure cost savings.
Lead logistics providers
3PL providers without their own assets are called lead logistics providers. Lead logistics providers have the advantage that they have specialized industry expertise combined with low overhead costs, but lower negotiating power and fewer resources than a third-party provider has based on a normally big company size, a good customer base and established network systems. 3PL providers may sacrifice efficiency by preferring their own assets in order to maximize their own efficiency. Lead logistics providers may also be less bureaucratic with shorter decision-making cycles due to the smaller size of the company.Simchi-Levi and Kaminsky, Designing and Managing the Supply Chain: Concepts, Strategies and Case Studies, third edition, McGraw-Hill International Edition, page 253Arno Heck, Strategische Allianzen, Springer Verlag pp. 47+48
Layers
First party logistics providers (1PL) are single service providers in a specific geographic area that specialize in certain goods or shipping methods. Examples are: carrying companies, port operators, depot companies. The logistics department of a producing firm can also be a first party logistics provider if they have own transport assets and warehouses.N. Schröter, I. Schröter, Supply Chain Management und Logistik, Kohlhammer Verlag, Stuttgart 2010, Seite 15
Second-party logistics providers (2PL) are service providers which provide their specialized logistics services in a larger (national) geographical area than the 1PL do. Often there are frame contracts between the 2PL and the customer, which regulate the conditions for the transport duties that are mostly placed short term. 2PLs provide own and external logistics resources like trucks, forklifts, warehouses etc. for transport, handling of cargo or warehouse management activities. Second-party logistics arose in the course of the globalization and the uprising trend of lean management when the companies began to outsource their logistics activities to focus on their own core competencies. Examples are courier, express and parcel services; ocean carriers, freight forwarders and transshipment providers.
The most significant difference between a second party logistics provider and a third-party logistics provider is the fact that a 3PL provider is always integrated into the customer's system. The 2PL is not integrated; in contrast to the 3PL, it is only an outsourced logistics provider with no system integration. A 2PL works often on call (e.g. express parcel services) whereas a 3PL is almost every time informed about the workload of the near future. As technology progresses, the methodology for notifying a 3PL of inbound workload usually falls on API integrations that connect, for example, an E-commerce store with a fulfilment center. Another point that distinguishes 2PL and 3PL is the specification and customizing of services. A 2PL normally only provides standardized services, whereas 3PLs often provide services that are customized and specialized to the needs of their customer. This is possible due to long-term contracts that are usual in the third-party logistics market. Cost-effectiveness of a third-party logistics provider is only given over long periods of time with stable contract and profits. In contrast to that, second party logistics services can't be customized, concerning to the fluctuating market with hard competition and a price battle on a low level. Another distinguishing factor between 2PL and 3PL is the duration of contracts. 3PL contracts are long-term contracts, whereas 2PL contracts are of low durability so that the customer is flexible in responding to market and price changes.
With companies operating globally, the need to increase supply chain visibility and reduce risk, improve velocity and reduce costs – all at the same time – requires a common technological solution. Non-asset based providers perform functions such as consultation on packaging and transportation, freight quoting, financial settlement, auditing, tracking, customer service and issue resolution. However, they do not employ any truck drivers or warehouse personnel, and they don't own any physical freight distribution assets of their own – no trucks, no storage trailers, no pallets, and no warehousing. A non-assets based provider consists of a team of domain experts with accumulated freight industry expertise and information technology assets. They fill a role similar to freight agents or brokers but maintain a significantly greater degree of “hands-on” involvement in the transportation of products. These providers are 4PL and 5PL services.
A fourth party logistics provider has no owned transport assets or warehouse capacity. They have an allocative and integration function within a supply chain with the aim of increasing the efficiency of it. The concept of a fourth-party logistics provider was born in the 1970s by the consulting company Accenture. Firms are outsourcing their selection of third-party logistics provider and the optimization process of the integration of these to a PL as an intermediary. That reduces costs and the 4PL have to have an overview of the whole logistics market to choose the ideal 3PL for all operative logistic activities. For being able to provide such an ideal solution fourth-party logistics providers need a good knowledge of the logistics branch and a good IT infrastructure. A fourth party logistics provider selects the 3PL providers from the market which are most suitable for the logistical issues of their customer. Unlike the allocative function of a 4PL in the supply chain, the core competence of a 3PL provider is the operative logistics.
Fifth party logistics providers (5PL) provide supply chain management and offer system-oriented consulting and supply chain management services to their customers. Advancements in technology and the associated increases in supply chain visibility and inter-company communications have given rise to a relatively new model for third-party logistics operations – the "non-asset based logistics provider."
Horizontal alliances
Raue & Wieland (2015) describe the example of horizontal alliances between logistics service providers, i.e., the cooperation between two or more logistics companies that are potentially competing. Logistics companies can benefit twofold from such an alliance. On the one hand, they can "access tangible resources which are directly exploitable". This includes extending common transportation networks, their warehouse infrastructure and the ability to provide more complex service packages by combining resources. On the other hand, LSPs can "access intangible resources, which are not directly exploitable". This includes know-how and information and, in turn, innovation.
Advantages Cost and time savings
Logistics is the core competence of third-party logistics providers. Providers may have better related knowledge and greater expertise than the producing or selling company, and may also have more global networks enabling greater time and cost efficiencies.