Logistics and distribution is one of the key components to the success of any business. At best, the logistics function will go almost unnoticed. At the other end of the spectrum, poor logistics can result in low KPI fulfilment and the loss of sales opportunities. One key consideration is whether to keep logistics and distribution in house or to contract such operations out to a dedicated third party logistics provider.
What are Third Party Logistics Companies (3PL)?
Third party logistics companies are specialists who will provide a range of functions within the distribution channel for a given fee. Exactly what a 3PL provider offers will vary however, most third party logistics companies will offer at least a basic road haulage service and some from of warehousing operation.
Fees range from provider to provider however, common forms of contract include open and closed book contracts. In the open book model, buyers will pay a management free to a 3PL company based upon a percentage of the cost of the operation. On the other hand, closed book models see the provider charging a fixed rate for various services, such as a charge for distribution based upon a radial charge for a specified tonnage transported.
Third party logistics providers range in size from large multinational corporations, capable of handling international operations, to small regional providers offering only a basic transport service.
The Advantages and Disadvantages of Using a Third Party Logistics Company
The major advantage of using a third party logistics company is the potential for both cost savings and improvements in performance. As specialists, in effect 3PL companies should be able to provide greater levels of performance, thus resulting in a higher on time performance indicator.
In addition, many third party logistics companies also operate on multiple contracts. As such, this should result in cost savings through economies of scale and the effects of operating in a wider network with opportunities such as “backhaul.”
The disadvantage of a third party logistics contract is that in effect, a company using such a service loses a great deal of control over its logistics function. The effects of this can become apparent, where the performance of a 3PL company does not meet initial expectations and service levels subsequently fall. In addition, whilst 3PL companies should be able to offer cheaper logistics solutions in theory. The savings may often be eroded by management fees and other costs associated with third party logistics companies.
In summary, 3PL providers can often reduce costs and improve performance levels, where a reputable provider is chosen. However, not all third party logistics companies will live up to expectations, thus leading to an experience of inflexibility and loss of control.
Sources:
- Christopher, M. 2005. Logistics and supply chain management: creating value-adding networks. 3rd ed. Harlow: FT Prentice Hall.
Frank Smith - Frank Smith currently works as an full time industry analyst for a well known construction company in Lincolnshire. In his spare time, ...
