Third-Party Logistics (3PL)

What it means

The FHWA glossary describes a 3PL as "a specialist in logistics who may provide a variety of transportation, warehousing, and logistics-related services to buyers or sellers. These tasks were previously performed in-house by the customer."^[1]

The label covers very different businesses. Some 3PLs run their own warehouses, docks or trucks; others arrange services performed by someone else. A 3PL that arranges truck transportation for pay is acting as a freight broker and needs broker registration.^[3]

There is no separate federal license called "3PL." The rules that apply depend on the work actually done. Federal law defines a broker as a person, other than a motor carrier, that sells, negotiates or arranges "transportation by motor carrier for compensation."^[2] So when you hire a 3PL, it helps to know which role it is playing for each part of the job.

Main types of 3PL

Providers describe themselves in different ways, but most fall into one of these groups.

• Warehouse-based (asset-based) 3PL. Runs its own or leased buildings with docks, racking, forklifts and staff. It physically receives, stores and ships your goods. The Bureau of Labor Statistics notes that warehousing businesses "may also provide a range of services, often referred to as logistics services, related to the distribution of goods."^[4] Some asset-based 3PLs also run their own trucks.
• Non-asset 3PL. Owns little or no equipment. It plans and manages the work and hires carriers or warehouses to do it. What it sells is its network, software and staff.
• Freight broker. Arranges truck transportation with motor carriers for pay and must be registered to do so.^[3] Many brokers call themselves 3PLs, but a broker does not haul or store the freight itself.
• 4PL (fourth-party logistics). Penske describes a 4PL, also called a Lead Logistics Provider, as a single provider that "manages all aspects of a customer's supply chain" and acts as a single point of contact with multiple other logistics providers and carriers.^[5] In practice, a 4PL often manages the 3PLs.

Common 3PL services

BLS lists the logistics services a warehouse may offer as "labeling, breaking bulk, inventory control and management, light assembly, order entry and fulfillment, packaging, pick and pack, price marking and ticketing, and transportation arrangement."^[4] In day-to-day terms, a 3PL contract usually covers some mix of these:

• Receiving. Unloading trucks or containers, counting, checking for damage and putting stock into inventory. For floor-loaded ocean containers this includes devanning.
• Storage. Holding pallets or cartons in racks or on the floor until they are ordered.
• Inventory management. Tracking quantities by SKU and location, running cycle counts and reporting stock levels to the customer.
• Pick and pack or case picking. Pick and pack pulls single units for small parcel orders. Case picking pulls full cartons, which is common for wholesale orders.
• B2B vs. B2C fulfillment. B2B orders go to stores, distributors or other businesses, often as cartons or pallets with retailer labels and packing slips. B2C orders go to consumers, usually one parcel at a time.
• Transportation management. Booking parcel, LTL or truckload shipments, choosing carriers, auditing freight bills and tracking deliveries. Some 3PLs do this; many warehouse-only 3PLs leave it to the customer.

RapidShips is a warehouse-based 3PL in East Brunswick, NJ: it devans containers, stores pallets and handles B2B case picking with labels and packing slips, shipping by UPS, FedEx or truck, without retained freight management.

How 3PL pricing is usually structured

Rates vary by region, product and volume, so there is no standard price. The structure is more consistent than the numbers. Most warehouse 3PL quotes split charges into a few buckets:

• Receiving fees. Charged per container, per pallet, per carton or per hour. Floor-loaded containers usually cost more to receive than palletized loads because they take more labor.
• Storage fees. Commonly charged per pallet per month. Some 3PLs bill per bin, per shelf or per square foot instead.
• Pick fees. Charged per order, per carton or per unit picked, sometimes with a separate charge for each added line or item.
• Packing and materials. Boxes, labels, stretch wrap, pallets and packing slips may be billed separately.
• Outbound and transportation. Parcel and freight charges, plus any handling fee or markup.
• Accessorials and minimums. Extra charges for work outside the standard quote, such as relabeling, kitting, rush handling or after-hours work. Many contracts also set a monthly minimum.

When comparing quotes, run your real volumes through each fee. A low storage rate can be offset by high receiving or pick fees.

Why it matters

Knowing what kind of 3PL you are dealing with tells you who actually touches your freight and who answers when something goes wrong. A warehouse-based 3PL holds your inventory, so its counts, security and receiving practices matter most. A non-asset 3PL or broker hands the work to someone else, so you need to know who that is.

It also shapes cost. A warehouse 3PL bills mostly for labor and space. A broker earns the difference between what it charges you and what it pays the carrier. Mixing the two in one quote can hide where the money goes.

What to ask a 3PL before signing

Our guide to choosing a cross-dock warehouse covers facility questions. Beyond the building, ask about the business side:

• Which services does it perform itself, and which does it hire out?
• If it arranges trucking, is it registered as a broker, and who is the actual carrier?
• Which fees apply to your freight, and what triggers an accessorial charge or a monthly minimum?
• How does it report inventory, and how often?
• Who is liable for loss or damage in the warehouse, and up to what limit?
• How much notice does either side need to end the contract, and how do you get your inventory out?

Example

For example, an online retailer could hand its inbound containers to a 3PL that devans them, stores the pallets and ships orders to customers, so the retailer does not run its own warehouse. If that 3PL also books an outbound truckload with an outside carrier, it is acting as a broker for that leg, and the retailer can ask for the carrier's name.

3PL vs. freight broker vs. freight forwarder

Under federal law, a freight forwarder assembles and consolidates shipments, performs or provides for break-bulk and distribution, and "assumes responsibility for the transportation from the place of receipt to the place of destination."^[2] One company can hold more than one of these roles, which is why the labels blur.

Frequently asked questions