Third party logistics providers (or 3PLs) are in the midst of breakout growth. The retail or shipper ecosystem is burgeoning with more delivery orders than ever, more inventory to be managed, more deliveries and more services than ever before. The global 3pl market, valued at $830.99B USD in 2019 is expected to reach $1,789.94B USD by 2027. While third party providers want to adapt to the post-COVID era and its growing demand, their existing logistics operations have a hard time keeping up.
In this increasingly challenging environment, technology has become an integral part of expanding and maintaining a successful third party logistics provider. Industry giants such as FedEx, DHL, and UPS are capitalizing on the new incredible demand for delivery and finding new ways to keep up with supply chain trends by investing in supply chain technology and autonomous delivery services. These allow for faster and more efficient fulfillment services and options for customers.
In order to successfully provide the services that both eCommerce businesses and customers expect, 3PL providers must first understand what has driven the rapid growth in delivery volume, the skyrocketing demand for logistics services and the new competitive environment.
What has changed in third party logistics?
First, let’s define what third party logistics means.
What are 3PL logistics?
Third party logistics is the process of eCommerce businesses or D2C manufacturers outsourcing part of their supply chain operations to a third party logistics company. 3PL third party logistics allow eCommerce businesses and brands with high online order volumes to outsource fulfillment processes – from warehouse storage to transportation services – in an effort to increase customer satisfaction and offer a faster fulfillment process and a wider variety of fulfillment services.
Third party providers give retailers access to warehouse space (if they don’t have or don’t want to use their own warehouse), inventory management, logistics technology, and more in order to manage the entire supply chain and logistics of the company. With the boom in eCommerce store orders and increasing delivery demand, more and more retailers simply do not have the resources to handle the entire retail fulfillment process themselves, especially while scaling their operations.
Competition between 3PL providers is fierce, with providers offering different fulfillment services to differentiate themselves in today’s market. At the same time, with demand skyrocket, carriers have increased their prices in the aftermath of the COVID-19 market. With increasing issues throughout the supply chain, increased shipping prices (by land and sea), and more, eCommerce businesses need to look for the best deals possible when working with a 3pl, while not compromising on service and reliability.
3PL pricing works based on SLAs (service level agreements) between shippers and the third party logistics provider. An SLA lays out the terms and metrics that are agreed upon between the two parties. Pricing is largely dependent on what is included in the SLA and therefore is very situation specific.
The booming eCommerce market has led to increasing requirements for third party logistics providers.
The demand for premium last mile delivery has boomed – but so have the expectations around it. Customer satisfaction is harder than ever to achieve with Amazon and other eCommerce giants knowing the location of each piece of inventory and exactly where every order is, before and after it’s out for delivery. That end-to-end supply chain visibility and data allows them to accurately provide services such as next-day or even same day delivery, with the assurance that they can deliver on their promises. As a result, end-consumers now expect faster, less expensive deliveries, no matter who the logistics provider is.
Shippers and shipping companies now realize that they must focus on speed, convenience, and cost in order to stay in the game. The incentive for change is simple: customers will go to the shipper that offers better delivery options, and shippers will go to the 3pl provider who enables these options. According to Metapack, 70% of US consumers have purchased goods from one store over another because of better delivery options, as would 58% of consumers overall.
With the right strategy and processes in place, a 3PL provider is uniquely suited to empower shippers in today’s highly competitive market.
COVID’s impact on third party logistics
The effects of COVID-19 on the world have been vast, and eCommerce logistics operations are no exception.
The change began in 2020, when eCommerce experienced 30% year-over-year growth. This drastic increase was expected to occur in 5-10 years, while in reality it happened in 6-12 months. While this was an exciting boost for eCommerce, it required shippers and 3pl companies to reassess their supply chain logistics. By 2024, 19.2% of all retail sales are expected to go online, forcing retailers to prepare their supply chain operations, freight forwarders and work with multiple logistics providers.
COVID introduced a new factor into 3pl logistics, and the supply chain in general: safety. Social distancing, contactless delivery and the desire for self-pickup from stores or fulfillment centers or even curbside have become a reality that every shipper and third party logistics provider must take into consideration if they want their services to be competitive.
The 2022 Bringg Barometer provides fascinating insights about the state of the eCommerce and fulfillment markets. For example, 53% of respondents said that their top challenge for last mile delivery is a lack of real time visibility once their orders are out for delivery – and 26% struggle with visibility in general when working with third party delivery providers. This puts a 3pl provider who can provide visibility across the supply chain at a true advantage.
At the same time, logistics stakeholders are looking to boost their use of technology to scale operations. In a Bringg survey of logistics and delivery providers, 41% of survey respondents said that outdated processes and technology have gotten in the way of their expansion. Lastly, automation is a top goal for many, but only if it’s cost-effective. 61% of LSPs stated that automation as a top wish-list item for moving forward.
B2B consignees expect B2C delivery experiences
Innovators in the commoditized and competitive world of B2C parcel eCommerce made next-day delivery, short and convenient delivery windows, real-time tracking and other premium services the new standard.
Now, people ordering deliveries for their business expect the same services and experiences that they receive in their B2C lives. This has created further challenges for 3PLs, shipping carriers and service providers, having to up their B2B supply chains as quickly as possible.
Urbanization brings new logistics challenges for 3PLs
Most logistics operations and supply chains were built to manage long-distance deliveries via large commercial vehicles. After all, that’s how logistics services operated for years. Rising urbanization has changed the rules, with deliveries increasingly made in urban areas that necessitate different methods of transportation and adjustments to the last mile of the supply chain. These changes also require that every 3PL provider must take new criteria into consideration, including traffic congestion, narrow streets, parking availability and more drop offs per route.
Whereas third party logistics companies once primarily delivered from decentralized warehouse locations, they are now being challenged with delivering from local fulfillment centers and even retail locations, which require entirely different logistical and supply chain requirements. These hyper-local middle mile and last mile deliveries require a different approach than that traditionally used in long-haul logistics.
While urban deliveries are surging, COVID has changed consumer preferences. 26% of Americans have plans to move to less densely populated areas in the future. At the same time 35% of consumers plan to continue to BOPIS (buy online pickup in store), an option that took off in the pandemic.
This change in customer approach has caused logistics providers to add ship from store models, hyperlocal fulfillment centers and services to guarantee that they are able to meet the demand for same-day (or next-day) fulfillment.
By having more local options, third party logistics are able to control the supply chain more easily for fast fulfillment, increasing customer satisfaction as well as maintaining an advantage with shippers.
To successfully offer services in urban environments, carriers and 3PLs must make significant adjustments to the way they deliver today.
Shippers are increasingly turning to their shipping logistics providers for the capabilities needed to meet delivery expectations. According to an Infosys 2021 third party logistic study, 93% of 3PLs and 92% of their customers agree that supply chains are moving from leaner chains to complex networks, and both expect the relationship to change to strategic partnerships. Consignees expect more, shippers feel the pressure to serve them, and transfer that pressure to 3PLs, who are rushing to capitalize on this demand.
Now more than ever, 3pl logistics providers should adapt their operations and logistics solutions in order to maintain a competitive place in the market.
Retailers are prioritizing sustainability
Prices have increased across all markets, causing 3pl third party logistics to face issues when it comes to their shippers who, as expected, want to lower shipping costs as much as possible.
The drive to reduce costs amongst shippers has led to an emphasis on green logistics initiatives (which also suits customers who are also looking for sustainable options in their lives). 40% of retailers today are making efforts to prioritize and incentivize sustainable fulfillment options. Examples include offering free pickup or paid delivery at checkout, or higher pricing for multiple day delivery as opposed to same day.
Third party logistic providers that can prioritize sustainability efforts across their supply chain – for example, reducing carbon emissions through route optimization, batching, and the use of zero-emission vehicles – will be at an advantage in the eyes of shippers.
Third party logistics – the digital opportunity
In the 3pl provider world, digitization provides opportunities for 3pls and shipping carriers to reduce shipping costs and expand efficiently with competitive new services:
Stand out with faster, on-demand and shorter planned deliveries
Faster delivery can mean the same day, next day or two-day, depending on your current SLAs and local industry standards. But on-demand goes beyond shipping speed and includes other elements that shippers and customers are looking for, like flexibility around dropoff points, click and collect, curbside pickup, as well as more, shorter, and more accurate delivery windows.
Offer effective in-store fulfillment services
Manual in-store fulfillment options simply aren’t efficient or practical for shippers looking to scale. 40% of retailers are using manual methods, causing them to miss out on streamline opportunities and to manage their supply chain practically to meet customer demands and expectations.
Expand your logistics services
Do you offer deliveries that pass the customer threshold? Do you offer services or installations with your deliveries? If not, now is the time to start. The same goes for improving oversized deliveries and large package shipping, which are growing rapidly as people order more furniture and large appliances from an online store or marketplace.
Customize premium service packages
Digitized delivery makes it easier to offer multiple service plans across all shippers ranging from basic to premium delivery. For example, a third party logistics company provider can monetize white glove or next day delivery, or live tracking, by including it in a premium service package.
Optimize your warehouse space, fulfillment centers, and inventory management
Do you use a hyper-local fulfillment center? 3PL providers are opening additional distribution centers, often close to urban areas. Restructuring warehouse locations for local delivery helps with delivery capacity in times of high volume, but more specifically with on demand delivery.
Fast, next day delivery relies on storing inventory closer to the end customers, and enough square footage to store it. That means keeping inventory levels for fast-moving items high in local fulfillment centers. Slower-moving inventory, or products which are not ordered for on-demand delivery, can be kept in a warehouse further off. This requires digitized inventory management that is connected to your other fulfillment systems.
Offer branded deliveries, better experiences, and performance insights
For a fulfillment company, improving the order fulfillment experience – from the moment the customer places an order, through the entire shipping process – goes hand in hand with more efficient supply chain management.
For example, if deliveries take place in the planned time window, fewer consignees will need to call customer service centers, asking where their deliveries are. Moreover, many shippers have limited insights into their orders once they reach the 3PL warehouse (or even once it leaves their own warehouse) and few opportunities for branding third party deliveries.
A third party provider who provides a digitized, branded tracking and delivery experience and elements will differentiate themself with both shippers and consignees. For example, when a customer orders from an online store, if the 3pl has proper integrations with the shipper, then the person ordering will see accurate delivery quotes at checkout.
If, on top of that, 3PLs provide the shipper with delivery and customer data, they will be placing their core business in a competitive position in the 3pl market.
What do competitive services from a third party logistics provider look like?
✓ Providing businesses and the end customers with a variety of service packages and convenient delivery options.
✓ Instant quotes for both the retail business and their end customers
✓ Branded notifications for the business and end customers when the package or item has arrived or left the final warehouse, and when it reaches its destination.
✓ Real-time delivery updates to businesses and consignees, including live tracking while the order is out for delivery.
✓ Tracking chain of custody and providing visibility to the ecommerce business
✓ Tracking performance data from the 3pl warehouse to proof of delivery, in order to identify issues and improve your services.
✓ Contactless order fulfillment options (e.g. threshold, curbside delivery) including digital methods of confirmation such as photographic proof of delivery
✓ Flexible assembly and installation services on demand – even allowing the consignee to request and pay for them at their door.
✓ Reverse logistics services such as removing and recycling old products as part of an eCommerce fulfillment flow.
This list doesn’t include the basics of a good customer experience: on time delivery, pleasant drivers or technicians, and a consistent experience that customers and businesses learn to identify with your services.
3PL supply chain management challenges
In 2022, no third party logistics provider is surprised by the challenges and demands presented from the market. However, this doesn’t make creating a successful shipping process easier. The key to successful third party logistics processes today is efficiency.
In the past, a 3pl provider may have had the luxury of doing things “by hand”. They could receive an order, pick it from the shelf, select a driver to deliver it, etc. Today, for companies that have scaled, this is no longer an option.
The automation trend is accelerating – Retailers and 3PLs are aggressively investing in warehouse automation and delivery, driven by the shortage of workers, the high turnover and the decreasing productivity. Walmart is already developing a scalable drone network for last mile deliveries. Drones will be used in the US for last mile within one or two years, with the support of consumers. This will change the unit economics on last mile delivery (no driver cost, only fuel and maintenance) and will accelerate the transition to same day delivery as first delivery option.
3PLs who want to remain competitive and able to keep up with companies at large cale, must begin investing in automation today.
Connect the Supply Chain
3PL logistics providers often participate in large ecosystems and supply chains of warehouses, distribution and fulfillment centers, shippers, contractor and subcontractor fleets spread over large geographical areas. Each of these bodies generally has its own IT system and processes.
Connecting all the data across the supply chain in order to understand and improve the supply chain logistics together with the delivery experience is no easy feat, especially when providers don’t always know where the data silos are (i.e. you don’t know what you don’t know).
For many third party logistics providers, creating an integrated logistics ecosystem is the first step towards understanding and optimizing delivery operations. By creating 3pl warehouses and distribution centers, 3PL companies may be able to centralize the supply chain, creating a more efficient system for themselves and shippers, which in the long-term means benefits for the customers.
Meeting order fulfillment capacity and speed through hyperlocal fulfillment locations
As discussed above, opening fulfillment centers close to population centers can support larger delivery capacity and faster order fulfillment. However, real estate in these urban areas is often at a premium. While adding square footage quantity isn’t an option, warehousing automation is – but it can be costly. Every third party logistics provider experiences different inefficiencies, and needs to research where their most pressing paint points are.
Automating warehouses may speed up the flow of inventory and improve inventory tracking and management. But automating other parts of a company’s supply chain – such as dispatching and routing, or fleet and driver management – can have as great an impact on efficiency and cost savings.
Hyperlocal fulfillment locations may also help with reverse logistics efforts. By allowing a quick return to the warehouse for failed deliveries or the ability to return conveniently in person, local fulfillment locations make the entire reverse logistics process faster and more efficient.
Measuring and understanding logistics performance
Do you know how often your delivery packaging rips, or how this impacts an end-customer’s return rate? What is the rate of later deliveries per driver? Where is inefficiency costing you the most across the supply chain? Do you know why every delivery exception occurs?
If you can’t answer these questions, you’re not alone. Nothing brings more return business than a high delivery satisfaction rate – and that includes satisfaction from shippers as well as their customers. But many 3PL providers lack the capabilities to track, collect and measure the impact of delivery on the consignee’s experience or return rate. And all of that is necessary to support customers today.
A logistics provider must be able to benchmark and improve every step in the supply chain, in order to ensure you’re providing the services and delivery experiences expected by both shippers and consignees alike.
Optimizing efficiency for more cost savings
For many 3PLs, increased shipping costs are the top cause of disruption in logistics. Labor costs, too, are disrupting the industry, as companies fight over qualified workers.
To prioritize better experiences as part of a shipping strategy, shippers have to find a balance between efficiency and price point. The two go hand in hand: the more efficient and cost-effective the logistics services around order fulfillment and delivery are, the more 3PLs will be able to offer the order fulfillment services that shippers and their end-customers expect.
3 Ways to introduce cost savings into 3PL Logistics:
- Optimize truck capacity – ensuring trucks are sent out filled to capacity
- Optimize route efficiency – using a delivery route planner in order to reduce fuel and delivery times
- Improve onboarding and driver retention – the quicker drivers and dispatchers learn, and the longer they stay on, the greater the operational savings
What are the top pain points for retailers when scaling delivery?
Retailers are quick to move towards third party logistics when scaling and expanding retail delivery options in order to help manage new fleets and to integrate technology for greater visibility and control.
However, according to Bringg’s 2022 survey of enterprise retailers, 41% said they struggled to scale delivery models because of the challenges of working with multiple delivery providers (crowdsourced delivery, 3rd party, owned, etc.). Almost two-thirds cited lack of real-time visibility once orders are out for delivery, 55% cited inefficient manual dispatch and route planning processes, and 46% struggled with scheduling delivery times with customers.
When looking specifically at external fleets, 36% cite lack of brand control, and 26% struggle with visibility.
3PL providers must recognize and meet the pain points of shippers, to make their processes more efficient and ultimately earn more business.
Solutions to major logistics challenges: 3PL software
Whether you take a pen-and-paper approach to how you manage inventory, dispatching, and routing, or boast complex in-house logistics management software, your shipping operations will need to quickly advance and adapt in order to capture additional business.
If the first step is to identify your business needs, then the second is to identify the right logistics solution to address these needs.
Any logistics management software for 3PLs should include the following:
Technology should function as a middle-man that helps your different operational systems and units to communicate with one another and perform their individual functions as part of a larger, coordinated effort.
Business and performance insights
Unifying and standardizing how data is measured across disparate sources (internal and external) in order to accurately track your delivery performance, understand how it is impacting your business, and take decisions to improve it accordingly.
Automating the delivery flows speeds up processes and creates the flexibility necessary for offering more premium 3PL services.
Shipper and end customer experience – Shippers rely on their shipping companies and delivery providers to help them offer customers standout experiences: branded deliveries and branded communications; tracked delivery, consignee feedback, shorter delivery windows, and easier returns. Good logistics management software will make it easier to answer these needs and the costs around them.
Shipper and end customer experience
Shippers rely on their third party logistics providers to help them offer customers standout experiences: branded deliveries and branded communications; tracked delivery, consignee feedback, shorter delivery windows, and easier returns.
Dispatcher and driver efficiency
The right 3PL software or delivery driver app provides solutions for onboarding, driver data and other tools that increase efficiency and retention rates for drivers and dispatchers.
It’s time for a digitized 3PL supply chain
The relentless focus on customer experience in the order fulfillment process has set a new bar for shippers and delivery providers.
Old standards for reasonable delivery windows, times and services are no longer relevant. Last mile carriers, 3PLs, shipping companies and other providers face an unprecedented challenge, which is also an unprecedented opportunity to grow business: how to take the same levels of flexibility, convenience and speed presented by eCommerce, and translate it into the optimal delivery experience.
To compete, 3PL providers will need to rethink their technology, rethink distribution center and fulfillment center location, and digitize their professional services for speed, convenience and cost savings.
Frequently asked questions
What does 3PL stand for?
3PL, or third party logistics, is a term that describes companies which manage multiple steps of the order fulfillment process for Ecommerce companies, including logistics. The order fulfillment process and its management is outsourced to a 3PL company. There are several types of 3PL providers, each serving a specific business need. As eCommerce continues to expand, 3PL providers are starting to offer customized services.
What do 3PL companies do?
3PL companies often offer either one or two special services. For instance, an all-inclusive 3PL provider will handle the entire fulfillment process, including starting from the customer’s order, through inventory store and management, and up through delivery. In contrast, a logistics company might take care of only the last mile delivery. It’s worth noting that not every eCommerce shipping company will offer 3PL services.
How does third party logistics work?
Third party logistics offer many services including order fulfilling, warehousing, and logistics capabilities. A 3PL company will receive your order from the manufacturer and deliver it right to the customer’s doorstep. 3PLs are similar to outsourced providers that administer a significant aspect of a company’s distribution and fulfillment, including the transportation, production consolidation, etc.
Third party logistics do not have ownership claims over inventory. However, they are legally responsible for fulfilling the order.
What does 3pl and 4pl mean?
A 4PL company will add additional value to the services offered by 3PLs. When a company hires a 4PL, the fourth party logistics provider will manage and arrange a 3PL provider for the company. 4PLs are sometimes called “double brokers”. A 4PL company may offer end-to-end supply chain managing services including inventory procurement, 3PL services, and more.