More and more organizations worldwide want to develop products for global markets. At the same time, they need to source material globally to be competitive. One of today’s trends to solve this problem is outsourcing logistics or using third-party logistics (3PL) to manage complex distribution requirements.
Organizations have developed strategic alliances with 3PL companies all over the world to manage their logistics operations network. These alliances are also known as logistics or supply chain outsourcing and contract logistics.
3PL provider can be classified into
The Asset-based 3PL provider owns some assets, particularly transport-related assets such as trucks, warehouses, etc., while The Non-asset-based 3PL provider does not own such assets, and usually relies on sub-contractors’ assets. Examples of Non-asset 3PL providers include forwarders, brokers, marketing companies, and information system management companies.
There can be 3 Levels of Outsourcing with 3PL
•Transactional Outsourcing: Based on transactions, with no long term contracts and no bonding between the 3PL and the outsourcing company.
•Tactical Outsourcing: Outsourcing on a long term basis with 3PL with negotiated contacts and integrated IT systems to facilitate free information flow and create supply chain visibility.
•Strategic Outsourcing: Based on long-term relationships with successful outcomes, 3PL companies become partners in supply chain management and establish transactional transparency.
Advantages of 3PL
One of the advantages of using 3PL results from economies of scale (merits from large truck fleets, warehouses, etc.) and economies of scope, which encourage firms to increase net value by reducing costs. The effects of these economies are obtained depending on the type of 3PL provider (e.g. IT-equipped, marketing-based, non-asset-based (and then flexible), etc.) Competent 3PL providers possess high coordination ability, enabling them to search reliable partners or sub-contractors, and to manage efficiently the inter-firm flow of goods. Such ability can be developed through experiences as a 3PL.
Likewise, by outsourcing logistics activities, firms can save on capital investments, and thus reduce financial risks. Investment on logistics assets, such as physical distribution centers or information networks, usually needs large and lump sum costs, which involves financial risks. Furthermore, the 3PL providers can spread the risks by outsourcing to sub-contractors.