Advantages and Disadvantages of Third Party Logistics

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A shipping and receiving clerk in a warehouse.
A shipping and receiving clerk in a warehouse. (Image: Jupiterimages/Stockbyte/Getty Images)

Businesses that operate across multiple different locations are familiar with the need for a logistical infrastructure: ensuring different facilities have the different products they need, when they need them. While some companies organize their own logistical needs, others outsource these tasks to third party logistics (3PL) companies. Such a decision is not without its disadvantages.

Cost Savings

3PL companies follow the economic principle of specialization by building up logistical infrastructures, methodologies and computer based algorithms to maximize shipping efficiency, then offer this expertise to businesses. These companies promise to cut a company's logistical costs. These rates can be especially attractive to smaller businesses. This is because 3PL firms have an economy of scale in logistical support. Adding another customer to their shipping routes costs them much less than it would cost the smaller business to build its own logistical infrastructure.

Increased Capabilities

Small companies must make extensive investments to expand its logistic capabilities. It is often more cost-effective and quicker to add capabilities through third-party logistics than to fund in-house expansion to provide these same capabilities.

Lack of Direct Oversight

One of the downsides of using 3PL services is that the client businesses have no direct control over their operation. They are relying on the 3PL company to consistently come through in delivering the promised services. This lack of direct control means that client companies are at the mercy of any problems the 3PL company faces. Beyond the possible loss of business, the damage that results from 3PL services failing to deliver certain products on time are the client company's problem, not the 3PL service's.

Pricing Models

3PL services promote their service as the most cost efficient way to get logistics done. While this may be true, contracting with such a service means that the company is locked into the pricing model specified in the business agreement. By handing logistics over to a 3PL service, companies are forgoing the possibility that an in-house logistics department could figure out a cheaper and more efficient solution.

Dependency

Handing over logistics to a 3PL service is a large commitment. Businesses need a reliable structure to function. Logistical downtime can translate into large amounts of lost productivity and revenue. Consequently, while the free market dictates that a business which is dissatisfied with its 3PL service could always find another, or develop its own logistical infrastructure, the reality is not so simple. Switching the nature of a company's logistical support can cost the company a great deal in unforeseen costs resulting from the transition. When businesses contract with 3PL services it creates a dependency which is no small matter to change. This dependency puts the client company in uncomfortable situations if pricing schemes or service reliability from the 3PL service is not working out as expected.

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