You may have encountered terms like “brokerage,” “3PL,” and “non-asset-based provider” and wondered about their meanings and relevance to your business. Understanding these terms is crucial, especially when considering how to optimize your supply chain.
Almost every shipper leverages a mix of third-party providers for managing inventory, fulfilling orders, and transporting freight. Research indicates that a significant majority of shippers recognize the value of third-party support in their supply chain operations. In fact, studies show that across various supply chain management areas, 75% of shippers believe that some level of third-party involvement is beneficial.
If you’re not currently utilizing 3pl Services, you might be missing out on opportunities to streamline shipping processes, enhance capacity, and secure more competitive rates.
Beginner’s Guide to Third Party Logistics
What Exactly Are 3PL Services?
A third-party logistics company (3PL) provides outsourced services to manage various supply chain functions for businesses. These services can encompass a wide spectrum, from arranging and handling freight transportation to warehousing, order fulfillment, and even strategic supply chain planning and technology integration.
It’s important to note that the 3PL landscape is diverse, with different providers specializing in specific areas of supply chain operations. You’ll find various types of 3PL providers, each with its own focus and expertise.
Most 3PLs operate as non-asset-based entities, meaning they don’t own physical assets like trucks or warehouses. Instead, they act as intermediaries, arranging logistics services on behalf of shippers through networks of carriers and other providers. However, some 3PLs do own assets, particularly in areas like warehousing for e-commerce fulfillment.
Businesses choose to outsource parts or all of their supply chain management to 3PLs when they recognize the potential for improved efficiency, specialized expertise, and cost reductions compared to managing these functions internally. Whether it’s carrier procurement, warehousing, or other logistics needs, 3PL services offer a strategic advantage.
A third-party logistics company (3PL) is a service provider that either arranges or handles a variety of supply chain functions for a business.
Businesses outsource areas of their supply chain management to 3PLs to gain efficiency, expertise and/or cost savings.
Decoding What 3PL Services Encompass
3PLs connect providers with shippers needing capacity and supply chain solutions
3PL services cover a broad spectrum of supply chain activities, tailored to meet diverse business needs.
Some 3PLs specialize in a focused range of services, while others offer comprehensive, end-to-end solutions. Understanding this range is key to choosing the right 3PL partner.
Core 3PL services typically include:
- Transportation Management: This is often the cornerstone of 3PL services, involving the planning, optimization, and execution of freight movement across various modes – truckload (TL), less-than-truckload (LTL), intermodal, and more. 3PLs leverage their carrier networks and technology to secure capacity and manage shipments efficiently.
- Freight Brokerage: Within transportation management, freight brokerage is a critical function. 3PLs act as brokers, connecting shippers with carriers to move their freight. They handle rate negotiation, carrier selection, and shipment tracking.
- Warehousing and Distribution: 3PL services extend to warehousing solutions, including storage, inventory management, order fulfillment, and distribution. This is particularly vital for e-commerce businesses requiring efficient fulfillment operations.
- Value-Added Services: Beyond core logistics, 3PLs often offer value-added services like packaging, labeling, kitting, and assembly. These services streamline the supply chain and can reduce costs for shippers.
- Supply Chain Consulting: Many 3PLs provide consulting services to help businesses optimize their overall supply chain strategy. This can include network design, process improvement, and technology implementation guidance.
- Technology Solutions: Technology is integral to modern 3PL services. Providers offer Transportation Management Systems (TMS), Warehouse Management Systems (WMS), and other digital platforms to enhance visibility, efficiency, and communication throughout the supply chain.
- Reverse Logistics: Handling returns and product recalls is a growing concern. 3PLs offer reverse logistics services to manage the efficient and cost-effective return of goods.
In North America, the term “3PL” frequently refers to domestic transportation management, particularly freight brokerage.
Asset-Based vs. Non-Asset-Based 3PL Services: Key Differences
When evaluating 3PL services, understanding the distinction between asset-based and non-asset-based providers is essential. This difference impacts their operational models and the types of solutions they offer.
While every logistics provider should be a valuable asset to your supply chain, they don’t necessarily need to own physical assets to provide significant value. The ownership of assets defines the fundamental difference.
Comparison of asset-based and non-asset-based providers
Asset-Based Carriers: Owning the Wheels
In the realm of logistics, an asset-based carrier typically refers to a trucking company. These companies own their operational equipment, including trucks and trailers, and directly employ the drivers who operate them.
Asset-based carriers range in size and scope from expansive national fleets with numerous yards and warehouses to smaller, single-truck owner-operators. This diversity allows them to offer a variety of equipment and services, including specialized options like power-only, dry van, refrigerated, and open deck transport. They operate in both full truckload (FTL) and less-than-truckload (LTL) shipping environments.
In the intermodal sector, asset-based carriers may own containers and sometimes manage drayage operations, while the railway infrastructure and train operations are managed by railroad companies.
Non-Asset-Based Providers: Leveraging Networks
Non-asset-based providers, in contrast, do not own physical transportation equipment or employ drivers directly. Instead, they cultivate extensive networks of carrier partners. They connect shippers with these carriers, matching freight needs with carrier availability, often utilizing digital freight matching technology for enhanced efficiency.
When you engage a non-asset-based provider for truckload, LTL, or intermodal shipping, you are essentially outsourcing your carrier procurement process to them. This model allows for greater flexibility and access to a wider range of capacity options. The majority of 3PLs fall into the non-asset-based category.
Asset-Light Carriers: A Hybrid Approach
A smaller segment of the industry comprises asset-light providers. These companies represent a middle ground, strategically leasing or owning a limited number of assets such as terminals, trailers, or intermodal containers. However, a significant portion of their business operates on a brokerage model, leveraging their network for capacity.
3PLs: Predominantly Non-Asset or Asset-Light
Generally, 3PLs tend to be either non-asset-based or asset-light. However, the specific services they offer can influence their asset profile. For example, a 3PL specializing in e-commerce fulfillment might own and operate warehouses and last-mile delivery fleets to directly manage those aspects of the service for their shipper clients.
3PL Services vs. Freight Brokerage: Understanding the Relationship
The terms “3PL” and “freight broker” are often used interchangeably, but it’s important to understand their precise relationship.
All freight brokers are indeed 3PLs, operating under the broader umbrella of third-party logistics. However, not all 3PLs are freight brokers. Many 3PLs offer freight brokerage services as part of their portfolio, while others may focus on different logistics functions.
Think of “3PL” as the overarching term, encompassing a wide range of outsourced supply chain services. Freight brokerage, particularly for truckload, LTL, and intermodal freight, is a specific type of non-asset-based service that falls under the 3PL umbrella.
Visualizing the relationship between 3PLs and freight brokers
Freight Brokerage: A Key Entry Point for 3PL Services
While 3PL services encompass many areas, freight brokerage is often the most common entry point for shippers looking to outsource logistics functions.
Research consistently shows that freight brokerage is the most frequently outsourced area of supply chain management. Studies indicate that an average of 82% of shippers rely on third-party providers to secure capacity for at least a portion of their freight. Notably, 38% of shippers utilize 3PLs for the majority of their shipping needs.
High percentage of shippers outsource freight procurement
For more detailed insights, you can explore the complete research study on supply chain outsourcing.
Choosing Between Asset-Based Carriers and 3PL Services: A Strategic Decision
The decision of whether to partner with asset-based carriers or utilize 3PL services isn’t about choosing one over the other. Instead, it’s about strategically selecting the right type of provider based on your specific needs and priorities.
Factors to consider include equipment requirements, service diversity, geographic coverage, flexibility needs, capacity demands, pricing sensitivities, and reliability expectations.
Think of asset-based carriers and non-asset-based 3PLs as complementary tools in your supply chain toolkit. The goal is to use the most appropriate tool for each specific task.
While an asset-based carrier might offer competitive pricing and excellent service on certain, consistent lanes, they may lack the necessary equipment density to be reliable in other areas. In such cases, a 3PL, with its broader network, can be an ideal solution.
Many shippers adopt a tiered approach to managing their provider relationships, aligning provider types with specific performance indicators and service requirements. This allows for a more nuanced and effective utilization of both asset-based and non-asset-based options.
Shippers strategically select providers based on their needs
Detailed results are available in the full KPI research study.
Performance and Service Quality of 3PL Services
Moving beyond hypothetical scenarios, it’s valuable to consider the real-world experiences of shippers working with 3PLs. How do 3PL services measure up in terms of performance and service quality compared to asset-based carriers?
When evaluating key performance indicators (KPIs), a significant portion of shippers, 51%, perceive no difference in performance between asset-based and non-asset-based providers, or even express a preference for non-asset-based options.
These findings suggest that the service experience with 3PLs is generally positive, ranging from satisfactory to excellent. Concerns about diminished service quality when using 3PLs appear to be largely unfounded.
Majority of shippers find 3PL service comparable to or better than asset-based
For a deeper dive into performance metrics, the complete KPI research study is available for download.
Pricing and Rate Considerations with 3PL Services
A common perception is that because 3PLs act as intermediaries between shippers and trucking companies, their services must inherently be more expensive. However, this isn’t necessarily the case.
While 3PLs do take a margin for their services, the final price shippers pay isn’t always higher and can often be more competitive.
- Negotiating Power Through Volume: 3PLs handle a substantial volume of freight daily. This aggregated volume often allows them to negotiate more favorable rates with carriers on behalf of their clients, potentially offsetting their service fees. This is particularly true when leveraging 3PL services for LTL shipping.
- Efficient Carrier Selection: 3PLs maintain relationships with vast networks of carriers. This extensive network enables them to efficiently identify and secure the most suitable carrier (or combination of carriers) for each shipment, optimizing both cost and service.
Core Advantages of Utilizing 3PL Services
The 3PL market is a substantial $60 billion industry and continues to grow, reflecting the significant value these providers bring to shippers. The widespread adoption and continued growth of 3PL services underscore their tangible benefits.
Here are key reasons why businesses strategically integrate 3PLs into their provider mix:
Expanded Network Scale and Reach
3PLs effectively consolidate access to the highly fragmented truckload market. They provide a single point of contact to tap into the hundreds of thousands of small and mid-sized trucking companies that constitute the vast majority (97%) of the industry. This level of access would be incredibly challenging and inefficient for individual shippers to achieve independently.
Responsive and Scalable Capacity
Unlike asset-based carriers limited by their owned fleet and equipment, 3PLs offer flexible and responsive capacity solutions. When an asset-based carrier lacks available drivers or specific equipment types, their options are constrained. 3PLs, however, excel at sourcing the necessary capacity, regardless of the specific requirements, through their extensive networks.
Enhanced Flexibility and Scalability
The “build vs. buy” decision is a constant consideration for businesses, particularly regarding supply chain capabilities. Outsourcing logistics functions to 3PLs provides a rapid and effective way to bridge competency gaps. By leveraging 3PL services, companies can easily scale their logistics operations up or down in response to fluctuating shipping demands, adapting to market dynamics and seasonal variations.
Service Line Diversity and Consolidation
While some 3PLs specialize in specific areas like truckload brokerage, many offer a diverse portfolio of integrated logistics services. This breadth of services simplifies procurement, particularly for shippers with varied freight needs, such as managing both LTL and truckload shipments. Working with a 3PL offering diverse services streamlines operations and reduces the complexity of managing multiple providers.
Comprehensive Supply Chain Coverage
Even businesses that primarily rely on asset-based carriers can benefit from 3PL services to address gaps in their supply chain coverage. For challenging lanes or specialized requirements where asset-based solutions may be limited, 3PLs can step in to provide solutions where others might fall short. They act as a valuable safety net and problem-solver for complex shipping scenarios.
Access to Advanced Technology
Many 3PLs prioritize technology as a core component of their service offerings. They provide access to powerful digital freight matching platforms and opportunities to streamline processes through API/EDI integration. Because they are not burdened by investments in physical assets, non-asset-based 3PLs often channel significant resources into developing and deploying cutting-edge technology solutions that benefit their shipper clients.
Strategic Integration of 3PL Services in Your Supply Chain
3PL services can be strategically implemented across virtually any aspect of supply chain management. Their versatility and breadth of offerings make them adaptable to diverse business needs.
Research involving over 500 shippers explored preferences across 21 distinct areas of supply chain operations. Interestingly, in no single area did a majority of respondents believe that a fully in-house approach was ideal. The strongest preference for in-house management was only 36% in any given area, highlighting the broad acceptance and utilization of outsourcing.
While 3PLs demonstrated particular strength in areas like carrier procurement, the study revealed significant 3PL usage and perceived value across all supply chain disciplines. This underscores the pervasive applicability of 3PL services.
Related Resource: 3 Steps to Building a Strategic Supply Chain Outsourcing Plan
Selecting the Right Logistics Partner: A Balanced Approach
Both asset-based and non-asset-based providers play vital roles in modern supply chains. It’s crucial to remember that most successful businesses strategically leverage both types of providers.
Excluding either 3PLs or asset-based carriers from your provider mix likely limits your capacity options and service flexibility. A balanced approach that considers the strengths of both is generally optimal.
Key Considerations for Provider Selection:
- Asset-based carriers often excel at handling consistent, high-volume, drop trailer freight within their established service areas. Their asset ownership and dedicated driver base can lead to efficiency and reliability for predictable freight flows.
- 3PLs frequently excel at managing spot freight, non-standard shipments, and opportunities involving live loading. Their network and flexibility are advantageous for handling variable and less predictable freight needs.
However, it’s important to recognize that these are general guidelines, and exceptions are common. The logistics landscape is dynamic, and provider capabilities are constantly evolving.
For example, RXO, a leading 3PL, manages capacity for thousands of contract loads daily, including drop trailer shipments, demonstrating that 3PLs can effectively handle a wide spectrum of freight types and service requirements.
Pro Tip: Cultivate long-term, mutually beneficial relationships with a core group of both asset-based and non-asset-based providers. Gain a deep understanding of their respective strengths and strategically deploy them where they offer the greatest value to your supply chain.
