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Your Guide to Logistics / Supply Chain.
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Advantages & Disadvantages of 3PL

The use of third-party logistics providers has grown steadily since their inception in the 1980’s and continues to grow. Many large organizations have either partially or fully outsourced their logistics operations; however, smaller organizations have been slow to follow. Below are some advantages and disadvantages of outsourcing your logistics operations to a third-party logistics provider.

Advantages:

• Focus on Core Competency

  Perhaps the biggest advantage to using a 3PL is to allow your organization to focus on its core competency, or what it does best. For example, Nike (shoes) is great at marketing and selling their shoes, however they do not own any assets to produce them, nor deliver the shoes to retail locations. This allows them to focus on product development, engineering and customer satisfaction.

• Technological Flexibility

  With the current lightning-speed changes in technology, it is extremely difficult for an organization to keep abreast of the latest functionality without substantial investment in information technology. RFID and other developments require software that can utilize and process vast amounts of data that current systems may not. The new business model for information technology is to utilize software as a service (SaaS), where a usage fee is paid to access the application through a web portal. The software provider deals with upgrades and maintenance, freeing up your resources to focus on your business.

• Geographical Coverage

  Transportation costs will increase if you are servicing customers far away from your main distribution center (DC). One option may be to use satellite distribution centers closer to the market demand rather than build another DC, as the volumes may be too low to warrant another facility. 3PL’s that operate in that area are able to consolidate volume from other organizations to keep costs lower.

Disadvantages:

• Loss of Control

  This is the single biggest disadvantage of using a 3PL. Where there may be a certain comfort level to servicing your customer when logistics is in-house, that feeling is gone when you outsource to a 3PL. For example, it would be much easier to accommodate a retail location that needed a rush delivery of windshield washer fluid in the winter months prior to outsourcing, where the request must pass though many approvals as it affects the final budget.

• Higher Exit Barriers

  It is very difficult to reverse the decision to outsource once your organization has signed up with a 3PL provider. Contracts are usually 2-5 years in length with penalty clauses for early termination.

• Unexpected Fees

  Unless explicitly stated in the contract, extra usage fees may apply. This is dependent on the type of contract that is used, open-book or closed book. In open book, all costs are visible to both parties and a management fee is applied for the 3PL service. In closed-book a cost per piece is charged, so as the volume handled increases, the cost increases.