Traditionally, 3PLs (third-party logistics) providers offered conventional logistic services, specifically warehousing and inventory management, packaging, transportation, and other basic supply chain management functions.
But today, due to the increased volume and scope of services and demands put on the industry, the roles of 3PLs are changing. In short, many 3PL companies are engaged in deeper levels of strategic coordination of the supply chain activities of their customers.
Evolving Role of Logistics Providers
In the manufacturing and production sectors, many companies outsource supply chain management and logistics functions to another company. So, 3PL is a common practice and its functions vary from company to company. However, it usually include:
- Customs and freight consolidation
- Inbound freight
- Management of freight to customers
- Order fulfillment
Use of 3PLs enable companies to enhance the customer service offerings because it helps them to use insider knowledge and international distribution networks for exporting and importing, which has been established by 3PLs. Using third-party logistics is extremely beneficial for medium sized companies because it helps them to remain competitive and lean, and at the same time, they can receive the most cost-effective services.
However, it is not so useful for smaller companies because their logistics structure may not be large enough to justify the commissions, which a 3PL company will charge to take over managing and planning the functions. But, many major companies including IBM, use 3PLs for their logistics functions. However, some companies consider that using 3PL lead to:
- Loss of contact with clients
- Loss of control over logistics function
- Disagreement over service level that should be provided
Performance-based Logistics Contracts
Instead of awarding payments for services, performance based logistics contracts are helpful because it awards payments on the basis of level of performance. The defense programs in many developed nations have complex supply chains. Therefore, some governments are planning to adopt performance-based logistics contracts. When the service is paid on the basis of performance, it enables the suppler to reduce the cost. However, they will be given more control over all aspects of logistics. Performance-based logistics (PBL) will clearly outline:
Role and responsibilities of both parties
- Performance requirements
- Exceeding performance standards or incentives on meeting
- Metrics, which will be used to measure performance
- Detailed information on the assessment of performance
Effective implementation of PBL contract is helpful for managing critical and complicated supply chains effectively. This will include the optimal placement of inventory in supply chain to reduce transportation, distribution and manufacturing costs.
Future Advancements in 3PL
3PL is changing gradually, and it paves the way for fourth-party logistics (4PL). These types of companies are supply chain service providers, which searches for the best solutions for supply chain management for its client companies. In order to attain this objective, 4PL companies do not use their own resources. Instead, these services are outsourced to 3PL companies.
In recent years, lots of trends have affected the logistic service industry, which create more opportunities and new strategic challenges for 3PL. Due to the globalization of business, supply chain have become more complex and complicated. It leads to the development of more international supply chain configurations, which are typically longer.
Today, manufacturers and retailers are investing more resources in accomplishing their environmental objectives. Therefore, 3PLs are required to improve the sustainability competencies and green credentials to support the environmental strategies of their customers. So, criteria for selecting 3PLs are increasingly based on evolution of their performance and sustainability practices.