What is a 3PL?

Third-party logistics (3PL) providers vary as widely as the industries and customer bases they serve. They can be bulk-scale freight forwarders, private couriers, fulfillment services, and many others. But what they have in common is their subcontracting role, specializing in logistics and transportation for the movement of products. At its most basic, a 3PL firm provides warehousing, shipping and distribution, but more advanced operations, known as Service Developer 3PL companies, can also offer product and data security services, product tracking and tracing, supply chain management and specialized distribution techniques like cross-docking — where cargo is immediately unloaded from one incoming shipping method, like a tractor-trailer or railcar, onto another outgoing method, which obviates the need for additional warehousing costs or inventory handling.

In some cases, a 3PL can become wholly integrated with their client company, as with so-called Customer Adapter 3PL and Customer Developer 3PL models. A Customer Adapter 3PL works as something like a consultant, taking over a company's existing logistics, shipping and distribution infrastructure, and then managing it with an eye towards greater efficiency. Customer Developer 3PL contractors, in contrast, become much more directly enmeshed within their client firm's operations, becoming essentially the company's actual logistics department, not merely consultants or managers of that department.

3PL providers differ from second-party logistics (2PL) providers, like an express parcel service, in that their services are specifically tailored to each client. As 3PL digitization progresses, this frequently means close schedule-syncing with respect to future workloads and shipping timetables, such as API integration between an e-commerce site and its fulfillment service. Naturally, ongoing developments in 3PL digitization means that advances in 3PL technology and 3PL automation are poised to radically redefine what kinds of logistical support a 3PL firm can provide (and what new expectations their clients will demand).

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How will digital technology change the 3PL industry?

There are five broad categories of analytics software frequently cited to explain how 3PL software is helping businesses: descriptive, diagnostic, predictive, prescriptive, and cognitive/AI/machine learning. More commonly used than the more sophisticated and high-end latter categories, “backward-looking” descriptive and diagnostic tools help explain, respectively, what is happening and why it is happening across the supply chain. Recent survey data suggests that while nearly all (99%) of 3PL companies believe that analytics capabilities are a necessary element of their 3PL expertise, only 27% of 3PLs are currently satisfied with those capabilities — suggesting that this  “analytics gap” will likely be filled by advances in those high-end “forward-looking” categories: predictive analytics, which forecasts what is likely to happen; prescriptive software, which turns those predictive models into actionable suggestions for what should be done; and cognitive/AI/machine learning tools, which help identify emerging patterns of activity across the logistics space.

As 3PL companies focus on developing and utilizing more meaningful metrics and analytics for their operational intelligence, blockchain-based solutions are expected to provide significant information on supplier inventory stocks, purchase order data traceability and authenticated invoice approval.

Because blockchain is a distributed ledger technology which constantly records and secures transactions of precisely the kind that occur at many steps of a product's route through the supply chain, it has the benefit of producing a single source of information documenting the progress of goods through transportation and distribution. These novel features promise to increase settlement speeds and lower costs, while also opening up new opportunities for real-time sharing and tracking, which should enable 3PL firms and their clients to iteratively make and implement new decisions on how a product would best travel through the logistics process to the final point of sale.

“Blockchain has the potential to make significant improvements in security, transparency and governance, but only in supply chains where there is value in controlling consumer risk, valuable goods or complying with regulations,” as the Global Head of Infosys Consulting, Ken Toombs, has put it. “Shippers and 3PLs will need to work together to drive value from blockchain, using lessons collectively learned from missteps with other emerging technologies like radio frequency identification (RFID).”

3PL study overview

The Annual Third-Party Logistics (3PL) Study has surveyed the global outsourcing marketplace since 1996, to ascertain the leading trends for 3PLs and their clients in the logistics industry. Penske Logistics, Infosys Consulting, and Penn State University contributed to the 2020, 24th Annual Third-Party Logistics (3PL) Study, the third in the series to investigate blockchain, with results roughly similar the previous year; 14% of 3PLs and 6% of their clients were found to consider blockchain relevant to their enterprise.

One value that did increase in the year examined by this study was the percentage of transportation and warehouse operations expenditures managed by third parties. 3PLs constituted 55% of the total transportation spend, as well as 43% of total warehousing budgets. Comparatively, despite the ongoing 3PL digital transformation, activities requiring more strategy, IT-support and customer-care, continued to be outsourced to a lesser extent. According to the 2020 study the 3PL clients, known as “shippers”, outsourced the following tasks at these smaller levels: order management and fulfillment (21%), information technology services (15%), lead logistics provider (LLP)/4PL services (15%), and customer service (11%).

The study also found a greater need for global trade management (GTM) software tools, like customs processing and document management, as a result of steadily increasing trade volumes, which have grown at a rate of 4.4%. GTM tools promise to optimize, streamline, and de-risk trade by better ensuring adherence to global trade regulations. GTM also allows users in the supply chain to adapt to changing regulations by quickly identifying trends, positive and negative, in transport operations. 

Overall, while survey participants within the 3PL industry expect software solutions to become only more essential to the logistics enterprise, only approximately 51% of 3PL firms reported that they had data scientists or other specialists in analytics on staff. Perhaps relatedly, the survey found that 42% of 3PLs felt they currently do not have the analytics capabilities they need to operate optimally.

Future of 3PL 

The challenges facing 3PLs all bear directly on the field's digital transformation. Dealing with high labor costs, ensuring inventory accuracy, and promoting end-to-end visibility (which can be obscured by variable international shipping protocols) each have viable solutions in this new generation of enterprise logistics applications, including the use of cloud-based solutions and blockchain. Future logistics applications promise to be even more tightly integrated with the core warehouses, shipping infrastructure, labor management and asset tracking needed to enable new methods of improving the logistics enterprise.

Both shippers and their 3PL contractors see these technologies as having a greening impact as well, through the added efficiencies these optimization initiatives will provide. As the 2020 survey noted, 77% of 3PLs cited optimization initiatives (route optimization and load consolidation) as part of their future environmental plans, alongside 40% planning to implement alternative fuel use and 27% planning initiatives deploying autonomous vehicles or platooning technologies toward similar goals. While some of those latter technologies are further off, current trends show that software-based solutions to 3PL activities are slated to provide major economic and environmental efficiencies in the immediate future.