Most people have heard the term third-party logistics (3PL), but there are actually many other types of companies that can offer various logistics solutions. One of those is known as 2PL, or second-party logistics. 3PL is when a company outsources elements of their supply chain, including distribution, warehousing, and fulfillment to third parties, while a 2PL is the actual carrier, such as shipping lines, airlines, freight forwarders, etc. 3PLs provide integrated fulfillment, warehousing and transportation services which can grow along with your business and scale depending on the customer’s requirements. While the use of 3PL providers has been prevalent in businesses for years among larger companies, the use of 3PLs is on the increase for small to medium-sized businesses as the growth in ecommerce fulfillment continues to skyrocket. In organizations of this size, operating their own fulfillment, warehousing and distribution services is usually far more costly than using a 3PL that can provide on-demand services that scale with market demands.
The Importance of Logistics Companies in Ecommerce
Ecommerce simply wouldn’t exist without logistics companies that could handle all of the industry’s fulfillment and shipping requirements. Brick and mortar companies have their own supply chains they can rely on to bring goods to their stores, but ecommerce companies have to deliver their goods straight to the customer. Companies like Amazon have made two-day and same-day delivery an industry standard that most customers now expect. These capabilities are simply beyond the scope of most ecommerce companies to handle on their own, which means they have to partner with an outside logistics provider.
Second-Party Logistics or 2PL
When shipping and storage activities are outsourced to an external logistics service provider, this concept is called 2PL. A company which has been engaged to provide these services would then be called a 2PL operator or second party logistics service provider or carrier (if it involves only the transportation aspect). 2PL operators own and manage their own assets, such as its own warehouse and a fleet of vehicles. The services rendered to clients are limited to one part of a supply chain without including integrated logistics solutions. Often they are transport companies which specialize in a particular segment or transport area. For example, ocean freight or railway transport. The vehicles used may be leased or owned by these companies.
Pros of 2PLs:
- Lower overhead costs than shipping product yourself
- Simple to contract and work with
- Easy to keep track of your goods
- You can choose the mode of transportation for your products
Cons of 2PLs:
- They can be a blunt instrument that doesn’t provide a sophisticated level of delivery
- It can be hard to scale if your company is growing
- You have little insight into your shipping or opportunity to optimize it
- The relationship with a 2PL partner is transactional and isn’t a long-term solution
Third-Party Logistics or 3PL
Third-party logistics is outsourcing the supply chain operations and logistics to get a company’s products to their customers. The logistics solutions that 3PLs offer include receiving, storing, packing, and shipping services. Some 3PL companies also provide other logistics services, referred to as value added services. These include inventory management, kitting and assembly, postponement packaging, and others.
Because 3PL service providers have been managing logistics for years or decades, they have the expertise and leverage to make the process simpler, quicker, and more cost effective for the seller. The market for 3PLs providers has grown exponentially with the exponential growth of ecommerce. Most Fortune 500 (86%) companies and 96% of the Fortune 100 use services like these. 3PLs have also bloomed thanks to tracking technology, such as radio frequency identification (RFID) and global positioning system (GPS), both of which offer extended supply chain transparency. Meanwhile, internet of things (IoT) technology has improved tracking metrics for trucking and other carriers.
Pros of 3PLs:
- Faster delivery times with fewer mistakes
- Higher levels of satisfaction from your customers
- Greater scalability than other logistics partners
- You can focus more on your core business and spend less time on logistics
Cons of 3PLs:
- Higher up-front cost than other shipping partners
- Customer service problems will be blamed on your company
- You have less control over your logistics
- Your business may become dependent on a 3PL
There is a broad spectrum of logistics providers for you to choose from for your ecommerce business. Each one offers a specific set of services and there are advantages and drawbacks to working with each. Your company might have to work with multiple partners to serve your customers depending on your size and your market’s geographic distribution. Just like any method in business, there are always pros and cons to each option of handling logistics. Instead of getting caught up in the debates around 2PL vs. 3PL, it’s a good idea to take a step back first and look at what your business needs. The 2PL system can also be a more simple system, but it doesn’t offer as many logistics solutions as the more complex 3PL model. When a company matures to the point that they require a 3PL, it does mean you need to let go of some degree of control in order to outsource the day to day logistics of your business. However, what your business loses in control, you’ll make up for with flexibility, reach and consistently.
If you are interested in working with an experienced 3PL, send us a note to connect about how we can help your company grow. You can read DCL’s list of services to learn more, or check out the many companies we work with to ensure great logistics support.