Managing a warehouse or overseeing a supply chain is like conducting a symphony. Every process must be perfectly timed and seamlessly connected. But what happens when your brand gets hot, demand spikes, your storage space runs low, and shipping delays impede order fulfillment and threaten your bottom line?
That’s where third-party logistics (3PL) comes in.
By outsourcing warehousing, transportation, and fulfillment to specialized providers (3PLs), businesses often can cut costs, improve efficiency, and scale faster without operational headaches.
The right 3PL partner can be a game-changer for your business. But how does it actually work, and how do you choose the right provider?
Let’s break it down.
What Is 3PL?
Third-party logistics companies, or 3PLs, are specialized businesses that provide outsourced logistics services such as transportation, warehousing, inventory management, and order fulfillment to retailers and brands.
Partnering with 3PL companies can also be a way for brands to lower their logistics costs and scale operations without investing in infrastructure or workforce expansion. Perhaps most important, 3PLs can allow brands to focus on their core business activities rather than logistics.
How 3PL Differs from 1PL, 2PL, and 4PL
3PL differs from other logistics models in terms of control, responsibility, and the scope of what tasks are outsourced.
- 1PL (First-Party Logistics): Manufacturers, retailers, or other businesses transport their own goods using their own assets. For example, a manufacturer that owns trucks to deliver products to distributors would be operating as a 1PL.
- 2PL (Second-Party Logistics): A company hires a transportation provider, such as a shipping line or trucking company, to move goods but still manages warehousing and inventory in-house.
- 4PL (Fourth-Party Logistics): A 4PL provider manages the entire supply chain on behalf of a company, coordinating multiple 3PLs, optimizing processes, and providing 360-degree visibility.
Types of 3PL Providers
3PLs often provide logistics and warehouse services for businesses in many different industries. According to Don White, Senior Director of Solutions Engineering for Da Vinci, “A 3PL doesn’t get to control who knocks on their door. So in the same warehouse, you’ll have keychains and bulldozers for sale.”
While many modern 3PLs offer solutions across multiple service categories, businesses can still choose to work with specialized providers based on very specific needs. Some 3PLs excel in particular industries (such as cold chain, hazardous materials, or apparel), while others differentiate through geographical coverage, technology capabilities, or service depth in specific logistics functions.
Some common categories of more specialized 3PLs are:
Transportation-based 3PLs
These types of 3PLs focus on getting goods from point A to Point B, whether it involves shipping raw materials from a supplier to a factory or delivering goods from a distributor to the final destination. Examples of such 3PL providers are FedEx, DHL, UPS, and more. They also provide other integrated services like transportation management across various methods of transport. Others include last-mile delivery, transportation optimization, and tracking capabilities.
Distribution/Warehouse-based 3PLs
Warehouse/Distribution-based 3PLs focus on storage, warehouse management, inventory management, shipping and reverse logistics, and order fulfillment. They work by receiving inventory from a supplier, inspecting and verifying the product before moving it to storage or the next stage of distribution.
Financial and information-based 3PLs
These 3PLs offer services beyond the physical aspects of logistics. They use sophisticated software to handle paperwork, payment, audit services, cost accounting, and inventory management for businesses.
3PL vs. 4PL
3PLs focus on executing logistics tasks like warehousing and transportation, while 4PLs take a more strategic role, overseeing the entire supply chain and managing multiple 3PL providers for maximum efficiency.
| 3PL | 4PL | |
| Services | Warehousing, order fulfillment, inventory management, transportation | All services 3PLs offer plus strategic planning and analysis |
| Control | Manages specific aspects of the supply chain assigned to them | Manages and integrates the entire supply chain |
| Ideal Choice | Great for businesses who need efficient execution of specific logistics tasks | Good for businesses that need strategic partners to optimize their supply chain |
| Responsibility | Efficiency and accuracy of assigned tasks | Overall performance of the supply chain |
3PL vs. Freight Forwarding
3PL handles broad logistics operations including warehousing and fulfillment, while freight forwarding coordinates international and other complex shipments: managing customs documentation, ensuring regulatory compliance, and finding optimal routing solutions across carriers and transportation modes.
| 3PL | Freight forwarding | |
| Services | Offers a wide range of logistics services like warehousing, inventory management, transport and shipping | Transportation booking, cargo consolidation, route planning and documentation |
| Focus | Overall supply chain efficiency | Cost-effective and efficient transportation of goods |
| Control | Manages specific areas of the supply chain depending on the contract | Organizes transport and overseas-related documentation |
| Ideal choice | Great for companies that need comprehensive logistics support | Businesses that need international shipping, especially with expertise in transit documents |
How Does a 3PL Work?
Picture an online clothing brand that receives hundreds of orders daily. Instead of renting a warehouse, hiring staff, and managing shipping logistics, the brand partners with a 3PL provider. The 3PL stores the inventory in its warehouse, processes each order as it comes in, packs the items, and ships them to customers using the most efficient carrier.
If a customer returns an item, the 3PL also handles the return process. This allows the clothing brand to focus on designing and marketing its products while the 3PL takes care of the logistics behind the scenes.
3PLs function as strategic partners rather than simply space providers like public warehouses do. Those “contract” warehouses typically focus on providing storage space with basic receiving and shipping services, charging primarily for space used and handling fees.
In contrast, 3PLs can offer integrated logistics services beyond storage, including transportation management, order fulfillment technology, returns processing, custom packaging, inventory optimization, and specialized handling for different product categories.
When Should a Business Use a 3PL?
The functions of 3PL providers revolve around managing logistics activities and inventory management. If your business requires any of these services, then you should use a 3PL provider:
Warehousing and storage
3PLs receive goods, check the shipment for accuracy and documentation, and store it in designated locations. This ensures that goods can easily be retrieved when an order comes in while optimizing space and resources.
Inventory management
3PLs oversee your stock levels using WMS, which offers real-time visibility into inventory, preventing over or understocking. This provides timely data for demand forecasting and replenishment
Order fulfillment
Once a customer places an order, the 3PL team retrieves the item from storage and securely packs it for shipment. This process helps maintain prompt delivery of goods and overall customer satisfaction.
Transportation management
3PLs select the most suitable transport mode based on factors like cost and speed. A competent 3PL provider can also conveniently manage reverse logistics and ensure that returned items reach their proper destination.
Data Analytics
With warehouse management systems (WMS) like Da Vinci fully integrated into 3PL’s operational systems, they can constantly optimize businesses and supply chains. Data that can be derived from WMS include shipping times, customer buying patterns, and inventory turnover rates.
How to Choose a 3PL Partner
Choosing the right 3PL provider is important for optimizing your supply chain, reducing costs, and ensuring seamless order fulfillment.
Here’s what to consider when making your decision.
Advanced technology
A 3PL company that will remain relevant and capable of handling evolving e-commerce demands must be committed to employing advanced technology for efficiency and higher productivity. There’s only so far manual labor can take you in this industry, and it ends up costing way more. You need technology for smoother, error-free operations.
Safety records
3PLs have to have a standing track record of safety consciousness. You need one that is fully capable of reducing the risk of losses and managing situations that can lead to losses.
Company reputation
Long-standing companies with excellent reputations are the best options when deciding on which 3PL to partner with. They have been tested and trusted for a long time and can apply their wealth of experience to combat modern problems.
Customer satisfaction
The single thing that drives growth is customer satisfaction. A company that focuses on pleasing its customers will ensure that they meet every demand and task assigned to them. This ensures you better efficiency and a higher turnover rate from customers.
Benefits of Using a 3PL Provider
Here are some perks you stand to gain when using a 3PL provider.
Value
Building or purchasing their own warehouse infrastructure requires companies to make significant capital investment, even in the most rural and inexpensive areas. Beyond these acquisition costs, businesses must consider ongoing expenses for staffing, equipment, maintenance, insurance, taxes, and technology systems—making 3PLs an attractive alternative for many growing companies. 3PLs already have the necessary physical assets and personnel needed to provide end-to-end logistical support to your business.
Scalability
3PLs provide the infrastructure, technology, and logistics expertise needed to handle growing demand without the company having to invest heavily in warehouses, staff, or shipping networks. As order volumes increase, a 3PL can quickly adjust storage space, fulfillment speed, and transportation solutions to keep up with demand, especially during peak seasons. For example, an eCommerce brand experiencing a holiday sales surge can rely on a 3PL to manage increased inventory, process orders faster, and ship products efficiently, all without the brand needing to expand its own operations. This flexibility allows businesses to grow without the logistical headaches.
Efficiency
3PLs are experts in warehousing, fulfillment, and shipping. The best 3PLs use the latest technologies and innovations to improve operational efficiency and reduce warehousing costs. They use automated systems for inventory management, order processing, and shipping, reducing errors and speeding up fulfillment. Instead of a business handling packing and shipping in-house, which can be time-consuming and prone to delays, a 3PL ensures that orders are picked, packed, and shipped with precision.
Challenges of Third-Party Logistics
Deciding to go the 3PL route not without its challenges for brands. Here are the two most common challenges to address as you consider 3PL services.
Reduced Control
When partnering with a 3PL, you give up direct control over your logistics operations. While 3PLs consider your requirements, they follow their own established processes and systems. This works well for companies ready to outsource logistics completely, but can frustrate businesses that want more say in how their inventory is handled or have unique operational needs that don’t fit standard 3PL workflows.
3PL service costs
As much as you may save on staff and warehouses, 3PL services can be prohibitive for some brands. Businesses will have to consider whether setting up an internally operated warehouse outweighs the monthly service fees of 3PL providers, which have invested in distribution networks, advanced automation, and software solutions. Small retailers and manufacturers may not have sufficient order quantities to make 3PL services worth it.
3PL Efficiency with an Advanced WMS
To address control issues, look for 3PLs with strong tracking systems in which their WMS shows you what’s happening with your inventory and orders in real-time. This lets you stay informed without managing daily operations.
For cost concerns, the right partner with the right WMS should save you money through better shipping rates, less inventory costs, and happier customers, delivering not just operational efficiency but measurable ROI.
The most successful 3PL relationships are built on clear communication, shared performance metrics, and technology integration that bridges the gap between the 3PL’s operations and the client’s business systems. By carefully selecting a partner with user-friendly and powerful WMS capabilities, companies can enjoy the benefits of outsourced logistics while minimizing the potential downsides.
3PLs with experienced decision-makers invest in warehousing solutions like Da Vinci to best meet customer demands, leading to higher margins for them and quicker, more consistent results for their clients.
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