The benefits, risks, and future of third-party logistics services.
In an age where globalization and specialization are more than just passing trends, many companies are choosing to focus on their own core competencies while outsourcing everything from accounting and human resources to manufacturing and IT. Logistics processes like warehousing, transportation, and distribution are also frequently outsourced, as third-party logistics providers (3PLs) use their experience and economies of scale to help businesses expand into new markets and streamline their operations.
In this blog post, we review the scope of the fast-growing 3PL market, along with the benefits and pitfalls of outsourced logistics that every business should consider. We also take a closer look at the promising future of 3PL outsourcing as new tools and technologies continue to emerge.
The growing importance of outsourced logistics
Outsourced logistics have grown in both importance and popularity for many reasons. As eCommerce retailers go from concept to launch in months or weeks, they rely on the resources and expertise of 3PLs to help them ramp up quickly by taking over complex shipment, storage, inventory monitoring, and order fulfillment processes. Over half of all Fortune 500 companies also use 3PL services to augment their own internal operations, scale up (or down) as their logistics requirements fluctuate, and leverage the knowledge and experience of logistics experts.
Additional factors that make third-party logistics essential in today’s economy also include:
- Improved access to automation and technology
- Easier expansion into international markets
- Responding to seasonal and economic fluctuations
- Risk management and contingency planning
The role of 3PL in supply chain management
Logistics outsourcing practices are often associated with manufacturing and retail operations, but nearly every industry now leverages 3PL or supply chain outsourcing in some form. It should come as no surprise that the 3PL market is expected to exceed 2 trillion USD by 2032, demonstrating 8.8% annual growth. The breadth and depth of services offered are key drivers of this growth, especially within three core areas:
- Transportation: With more than 10,000 packages delivered globally each second, transportation is the most expensive logistics function as well as the most in-demand. Industry giants like FedEx and DHL offer outsourced shipping options ranging from small local package delivery to complete management of international shipping operations with multiple carriers and transportation modes. The diversity of this segment also opens the door for small 3PLs focused on niche services like oversized cargo or last-mile delivery.
- Warehousing: Inventory storage is another area where fast-growing businesses including eCommerce retailers often find it difficult to scale quickly enough using only their own infrastructure. The boom in eCommerce and 3PL outsourcing will drive the total number of warehouses worldwide to nearly 180,000 by 2025.
Along with on-demand physical space for multiple customers, many 3PLs also provide options for managing and receiving inventory and scheduling warehouse deliveries. Floating in-demand warehouse personnel between multiple customers helps to control costs and maximize efficiency.
- Distribution: Outsourcing in supply chain management also encompasses important distribution processes that help to maintain customer and brand loyalty. These essential processes include picking, packing, and delivering orders to customers.
Reverse logistics, with a global market size of over one trillion dollars, ensure seamless product returns and expedited refunds. Outsourced distribution will continue to be a high-growth area as businesses find new ways to meet customer demand for faster and more efficient delivery options.
Pros and cons of 3PL outsourcing
Convenient ramping of logistics services and the economies of scale that come from large networks of warehouse locations, shipping fleets, and support personnel are among the more obvious benefits of logistics outsourcing. Specialization also provides access to expertise in complex subjects like international trade regulations and customs that can prevent costly delays. Many businesses also experience intangible benefits when they outsource logistics, including improved customer experiences from reliable deliveries and hassle-free returns.
While enjoying these advantages, 3PL customers must keep a close eye on the potential drawbacks, including communication issues that can develop when requirements or other information sources are not clearly conveyed. Despite the emphasis on cost-efficiency, customers should be wary of additional expenses incurred through third-party set-up charges, handling fees, or surcharges. Most importantly, businesses utilizing 3PL outsourcing should fully comprehend the loss of operational control they will experience.
3PL risk factors
Placing logistics, or any facet of business operations, into the hands of a third-party brings inherent risk, since their decisions and performance will directly impact customer perception. This makes choosing the right 3PL partner through a careful vetting process essential. Along with recommendations and testimonials from previous customers, performance guarantees and service level agreements (SLAs) are good practices to hedge against risks from:
- Incorrect material shipping/handling and other quality issues
- Overdependence on 3PLs to keep operations running
- Lack of direct oversight leading to misalignment of goals and objectives
- Third parties not properly adhering to legal or regulatory requirements
The future of 3PL and outsourcing in supply chain management
The future of outsourced logistics appears to be bright, with growth driven by global commerce expected to continue for many years. Industry and cultural trends are melding with new technologies and customer preferences to produce the next generation of 3PL offerings.
- Customizable services: 3PLs continue to move away from one-size-fits-all solutions as they tailor their services to the needs of each business. Specialized handling, delivery, and storage practices are especially important in industries like healthcare and life sciences where the condition of products must be assured around the clock. Personalized services also allow 3PLs to synchronize with customers on their supply chain goals and strategies.
- eCommerce growth: With over 26 million eCommerce stores already in existence around the world, the growth of logistics outsourcing has mirrored the explosion in online shopping over the past two decades. Virtual business models make it easier for eCommerce proprietors to bootstrap their new businesses into existence, and cost-effective 3PLs allow them to launch new products with little or no brick-and-mortar footprint or capital investment.
- Technology and integration: Breakthrough technologies like self-driving trucks and drones may be grabbing headlines when it comes to the future of 3PL, but other emerging technologies are converging to make transportation, warehousing, and distribution more efficient for third-party logistics providers and their customers. Digital twins are already used to model entire supply chains in virtual space, and AI-driven autonomous robots are making warehouse operations safer and more efficient.
- Sustainability: Customer preferences for eco-friendly logistics services have increased demand in the sustainable 3PL space. Green logistics providers emphasize reduced carbon emissions through the use of electric vehicles and sustainable fuel sources, minimized waste, and optimized reuse and recycling during reverse logistics processes. Recycled or biodegradable packaging materials are also incorporated into the supply chain to reduce both cost and environmental impact.
The bottom line
Outsourced logistics is proving to be a win-win for companies of all types and sizes as they streamline their operations by leveraging the support and guidance of top 3PL experts. Businesses looking to join the growing list of 3PL customers should carefully weigh their options to choose the best logistics provider for their needs. As the market expands, exciting new options and breakthrough technologies will continue to support the dynamic needs of each business.