Advantages and Disadvantages of Using a 3PL
3PL stands for 3rd Party Logistics. A 3rd Party Logistics Company manages your transportation needs for you. Wal-Mart is a company that has their own trucks to get product to and from locations. They do not need a 3PL because they are their own logistics manager. Most companies do not also own and operate a trucking company for their fulfillment needs. Some companies have a Shipping Manager, or a fulfillment expert to handle their shipping needs on a case by case basis. When your company gets large enough it will no longer be cost effective to keep hiring employees to manage your shipping needs. It will become no longer feasible to call on every shipment. Situations like this call for outside consultants or 3PLs.
Good logistics companies will integrate with your backend inventory system and streamline your shipping operations. This means instead of manning the phones all day for good rates, calling brokers etc. The system will automatically put in great rates, print shipping labels, and give you everything you need for shipping. A good system will take the place of 3 employees if utilized correctly. For example a large treadmill manufacturer will partner with UPS freight to get discounted rates, and also gain access to their software that seamlessly manages all of their online shipments, and wholesale orders. Orders being placed will come through a backend order management system and then will immediately be loaded into daily production and automatically print shipping labels. Usually scales are also provided with the system and daily scheduled pick-ups.
Discounted freight rates, based on volume, are the main advantage. When using a 3rd party you are able to piggyback on bulk rate discounts. Trucking companies love to have guaranteed shipments. If they can count on having shipments without waiting for the phone to ring they are more than willing to give discounts. Also trucking companies give large discounts for large volume of shipments. A 3PL will provide massive volumes of guaranteed shipments to trucking companies by pooling together the resources of all their clients. This means that instead of having the buying power of your single company, you now have the buying power of the entire client base of the 3PL you are using. This could be thousands of companies. Tying yourself into that buying power will save on the bottom line.
For example, if you have been paying $100 to ship a pallet to California, with a 3PL you might pay $50 to ship the same pallet. If you ship 3 pallets a week to California, that is $150 a week, $600 a month, and $7800 a year, just on your California shipments. Now say you ship 3 pallets a week to 10 different states, that is now $78,000 a year in savings. Shipping costs add up quickly if you don’t watch your bottom line. Shipping costs will significantly affect your cost of goods sold. As a business owner in this economy you need to do all that is possible to stay above water.
Logistics companies have varying strengths and weaknesses. There are some that completely integrate and manage everything for you, and there are some that are more for the medium to small business that allow for flexibility and a lot more manual control. If you are in a stage where the price of every shipment needs to be managed, instead of having your shipping guy spend all day on the phone with brokers, he could get all the quotes from one system.
This will accentuate the strength of each carrier. Some trucking companies are great to western states, some are great in the south, some are better for short trips, some for long hauls. Every trucking company has their fantastic priced routes, and their outrageous routes. It is very beneficial to utilize the strengths of each company. For large massive daily shipments you would want a more integrated bells and whistles kind of 3PL than a simple quoting system.
Expedia.com is to the world of travel as online freight quotes are to the world of freight. Travelocity does it as well for vacation packages. Essentially they give you one stop shopping for the best rates on the market using their buying power. This is different than partnering with a single trucking company like UPS. Trucking companies will want to get you locked into only using their services. If you only use one trucking company, it is difficult to know if you are always getting the best rates. With an online freight quote pricing you can easily allow all trucking companies to compete for your business without the hassle of calling every single freight carrier in the country.
Disadvantages to a 3PL, you may get one too big for your britches. Often you could be locked into carriers you don’t like. Make sure that your service level remains top notch. Shop around to get the best 3PL for your needs. Most 3PL’s have reliable customer service; make sure you get one that allows for returns and damage claims. Remember a 3PL is like a partner, so look for all the things you would like in a shipping partner. For example the benefits of a 3pl are that they provide instant quotes and 24 customer service hotline. When shopping for a 3PL it is helpful to write a list of wants and pain points you want solved before approaching a 3PL. This way you will be prepared to analyze them according to what you really need or what you really want.
To problem in dealing directly with the carrier are, first is low volume shipments means high retail pricing. The second is time lost. It takes hours to research, get quotes to find the best price for a lane. In general, local shipments it is best to use local small companies, for national shipments you need the big boys. For your immediate surrounding states, regional shippers might be best, but the prices vary between small regional carriers and big freight companies like FedEx. Basically not one single freight company will meet all of your destination needs equally. This is why you should avoid only using one carrier.
It is a misconception that by going directly to carriers, I am cutting out the middle man and getting a better price. In this case that traditional wisdom is not true. The problem with going directly to a carrier is if you have $100,000 or with some companies $1,000,000 or less a year in shipping costs, you are small potatoes to them and they will charge you their highest retail pricing. You are only using your own volume and not the volume of every customer that the 3PL combines together.
A 3pl can be great, it helps you manage your time, makes shipping hassle free, gives you an easy access way to manage costs, and allows for flexibility in shipping controls. A 3PL is a great partner to have especially if you do not have the funds to hire your own drivers, buy trucks and send them all over the country for you. A 3PL will save you money and time. Be smart and use one that works for your needs.
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