“Contract logistics is the outsourcing of resource management tasks to a third-party company. Contract logistics companies handle activities such as designing and planning supply chains, designing facilities, warehousing, transporting and distributing goods, processing orders and collecting payments, managing inventory and even providing certain aspects of customer service.“
Thus contract logistics covers a much broader scope than warehousing and distribution. Contract logistics is the outsourcing of resource management tasks to a third-party company. Contract logistics companies handle activities such as designing and planning supply chains, designing facilities, warehousing, transporting and distributing goods, processing orders and collecting payments, managing inventory and even providing certain aspects of customer service.
Why use contract logistics?
Flexibility
Perhaps surprisingly, the primary motivation is not always cost. It is flexibility. This is true especially for FMCG companies or retailers that need preparation of less-than-full-case orders – 3PLs are more price-competitive in simpler full-case or full-pallet orders. A contract logistics partner will have more ability to absorb volume increases and fluctuations than an in-house operation. The ability to share facilities and labour allows contract logistics company to move resources around and respond in ways the manufacturer cannot. This has strong appeal to FMCG companies that have intense launch and promotional cycles that can create distortions in regular flows. Also ecommerce companies looking to penetrate more deeply into a market may find that working with contract logistics partner offers an agile way to establish a presence.
Improvement of business practices
When distribution is in-house, much commercial inefficiency that negatively impact logistics costs falls – fairly or not – on the shoulders of the supply chain managers, who are strongly encouraged to lower their per order and share of revenue costs. Yet often the drivers of the costs are behaviours that are outside the scope of a logistics manager. The nature of the order profile can strongly influence logistics cost. Order frequency, order minimums, preparations specifications and paperwork requirements are examples of how commercial teams can negotiate terms with a customer and have outsized impacts on fulfillment costs.
The transition to a 3PL exposes the different practices around order management, laying bare the real drivers of logistics inefficiencies. If this sounds familiar, it may be because this is the foundation of cost-to-serve, the method of looking at order treatment costs at the customer level, from order reception through fulfillment to returns and cash collection. The transparency of working with a 3PL is a vector for giving cost-to-serve a big boost.
Better efficiency
Building an in-house facility can take 15 months (read our article “How much time Is needed to build a warehouse“), but starting up with a 3PL can be done in weeks. Take for example a producer of large home appliances who is entering a new market in Europe. Such products lend themselves poorly to the efficiencies of automation, and the volume is relatively low. In this case working with a 3PL makes a lot of sense.
Costs
Salary costs can be lower than running your own logistics operations. Also, significantly lower regulatory costs drive down the outsourcing price tag. Furthermore, by handling business in another country, businesses are able to take advantage of lower tax rates.
Types of 3PL Companies
Four key capabilities of 3PLs are:
- Warehousing
- Transportation
- Distribution
- Shipping and receiving
While smaller 3PLs may offer better response times, greater flexibility or expertise in specific domain or geography, larger providers tend to have more complete full-service capability and global reach. Waredock has partnered with both large 3PL providers as well as small specialized boutiques. We help solve distribution challenges of our customers in a wide range of industries. Our core solution is a cross border distribution infrastructure that provides our customers a single point of contact while having access to a growing network of over 50 warehouses and distribution centers in Europe and Northern America.