Contract Logistics vs. 3PL: Things You Need to Know Before Outsourcing

Introduction

Ecommerce business owners often face a stumbling block while trying to understand the differences between contract logistics and 3PL. This problem is compounded by the very nature of these logistics service providers.

There is a significant overlap between the services offered by contract logistics and 3PL firms. While there are several distinguishing features, the bounds of these service providers are fluid.

This article will provide you with an in-depth view of the distinct features and overlapping characteristics of contract logistics and 3PL firms.

Salient Features of Contract Logistics and 3PL

To get a general idea of how these logistics service providers operate, we will review the salient features of contract logistics and 3PL operators.

Contract Logistics

1) Outsourced Shipping

Contract logistics firms specialize in outsourcing shipping operations. They primarily do this by subcontracting shipping operations like transportation and warehousing to a firm that specializes in the specific niche.

This provides them with a wide range of options with respect to which service provider to choose. Contract logistics firms often leverage this advantage to choose the best-suited shipping service provider for a certain job.

2) Outsourced Resource Management

Contract logistics firms will also have expertise in outsourcing various aspects of resource management. They can handle tasks like warehouse management and supply chain management as per client requirements.

The resource being managed might be owned by the original client, or might be leased by the client from another firm.

3) Integration of 3PL Partners

In case you are working with a contract logistics firm, and also leasing resources from a 3pl, the role of the former changes. At this point, the contract logistics firm can step into integration and management roles. 

They might help the client integrate the operations of various 3PL partners. The complication in this generally grows exponentially as the number of distinct services being used increases. This makes it necessary to have a specialized firm handle integration.

4) Fully-fledged Logistics Solutions

The features covered till now give a very distinct impression of contract logistics firms. That is, contract logistics firms only manage specific parts of logistics operations. This is simply not true.

A contract logistics firm is perfectly capable of providing full-fledged logistics solutions if the client demands it. They generally handle this by outsourcing specific parts of the supply chain to service providers specializing in those areas.

Contract logistics firms can in turn, integrate these service providers to construct fully-fledged logistics solutions. This meshes in perfectly with how contract logistics firms generally work, only on a larger scale.

5) Cost Optimization through Cross-shopping

As the contract logistics service provider does not own any resources and effectively leases them from other firms, they can cross-shop to optimize costs.

This optimization extends to streamlining operations in addition to simple cost optimization.

3PL

1) Management of a Specific Niche

3PL firms will generally specialize in the management of a specific niche. This can be something like warehouse management or shipping services. Depending on the service, this can also be something more specific like perishable goods warehousing or handling high-value shipments.

3PL firms are often used by contact logistics companies to handle the tasks they specialize in.

2) Direct Ownership of Assets

3PL firms will typically directly own the assets they need to operate. For example, firms offering warehouse services will generally have direct ownership of the warehouses they are using.

It is important to note that this is not a hard and fast rule. 3PL firms will lease assets whenever needed, and leasing might be the right business decision in certain circumstances.

3) Optimization of Business Processes

3PL firms can also step in to optimize the business processes of a company. They typically do this by taking over the operations of the company. This can be limited to a certain part of the supply chain, or extend to the entire logistical operations.

4) Cost Optimization through Economies of Scale

As 3PL firms generally own their assets and handle large chunks of the supply chains of several businesses, they can optimize costs by exploiting the volumes on offer.

3PL companies have a distinct advantage in cost optimization through economies of scale due to their business model.

Main Differences between Contract logistics and 3PL

While we have already gone over the defining traits of contract logistics and 3PL service providers, it is equally important to understand the main differentiating factors.

1) Ownership of Assets

Contract Logistics: Contract logistics firms tend to lease infrastructure or subcontract the work to other firms.

3PL: 3PL service providers will generally own the major assets they are using.

The interesting differentiating factor is that 3PL service providers might lease assets when needed. But contract logistics firms will rarely (if ever) get into direct ownership of assets.

2) Range of Services on Offer

Contract Logistics: Due to their asset-light business model, contract logistics service providers are able to offer a wide range of services.

Essentially, contract logistics firms can offer any service desired by the customer. They do this by teaming up with other service providers specializing in the specific job.

3PL: 3PL service providers generally specialize in and offer a relatively restricted set of services. This is a natural consequence of their leanings towards direct asset and infrastructure ownership. 

3) Integration with Other Service Providers

Contract Logistics: Contract Logistics firms have a stronger focus on integration with other service providers. Apart from the usual logistics services, they offer cross-service integration as a standalone service. 

Due to this, they are also better equipped to handle integration when they themselves are using several service providers.

3PL: 3PL service providers on the other hand do not offer large-scale integrations with multiple systems (typically offered by different service providers). Due to their direct ownership of infrastructure, they offer strong integration between the services provided by themselves.

4) Scope of Deployment

Contract Logistics: Due to the larger flexibility in choosing which vendors to use, contract logistics firms offer a better scope of deployment on apparent sight. But this is not strictly true.

3PL: 3PL service providers also have their own advantages when it comes to deployment. They have better control over their interfaces due to direct ownership, making it much easier to get customized solutions.

5) Geographical Reach

Contract Logistics:  They have better geographical reach owing to their flexibility in choosing service providers. They can subcontract the work or team up with partners operating in a specific geographical location when needed.

3PL: 3PL firms are at a disadvantage here as they are geographically limited by the locations of their assets.

6) Market Share in Various Industries

Contract Logistics: Contract logistics firms are deeply entrenched in legacy segments like military logistics and industrial shipping.

3PL: 3PL typically has a larger market share in modern internet-driven segments like e-commerce.

Overlaps between Contract Logistics and 3PL

As you must have noticed by now, there is a fair overlap between contract logistics and 3PL operations. The primary overlap is in the segment they operate in. Both are in the business of offering logistical services, unavoidably leading to competition.

But when we look closer, they also have a pretty significant overlap in the services offered. Due to this, there remains a grey area where we might be confused about which category a firm belongs to.

Contract Logistics Vs. 3PLs: 4 Tips to Lead You in the Right Direction

1) Look at your Existing Tech Stack

Contract Logistics:  If you've got a loaded tech stack, contract logistics may be right for you. Integrations with multiple carriers, inventory and warehousing systems, accounting systems, etc., can all be consolidated with a contract logistics service provider.

3PL: If you have a limited tech stack, with few carriers and a WMS, 3PLs can help you scale up gradually. They offer a range of services from the same provider, greatly simplifying the integration process.

In this case, you can look for a 3PL service provider to avoid the overhead costs of integration. This will also provide you with pre-integrated services like warehousing, inventory management, and shipment management.

2) Be Clear About Your Logistics Needs

Contract Logistics: If you wish to retain direct control over all your logistics-related operations, contract logistics forms might be the right choice for you. These providers will allow you to choose your own vendors for different services and help you manage and integrate their operations.

3PL: If you are open to completely outsourcing your logistics operations, take a look at 3PL services. These firms will completely take over the management and find vendors on their own. You will only need to state your requirements and they will handle the rest.

3) Analyze Total Cost of Ownership (TCO) vs. Return on Investment (ROI)

Contract Logistics: To analyze the cost of ownership, we first need to look at how you will be billed. Contract logistics firms either follow a unit pricing model (based on sales unit pieces handled), or follow a hybrid model where there is a fixed charge on top of the unit pricing.

You will need to know the pricing model followed and your expected sales to figure out the equation between TCO and ROI.

Contract logistics firms have traditionally handled large logistics operations and projects. Their pricing structure will reflect the same, and will be more suitable for businesses with large operations.

3PL: 3PLs generally follow a unit pricing model. To get an idea about your total costs in this model, you must monitor volumes and continuously evaluate forecasts.

3PLs might also have an option for hybrid pricing models (fixed + variable pricing). 

Additionally, you might be able to negotiate a payment structure where you pay the actual logistics cost and a management fee on top. This arrangement is ideal for businesses with limited historical data to negotiate unit pricing and forecast TCO.

4) Create a Shortlist of Top Contenders

Contract Logistics: Different contract logistics firms will offer you different pricing. Some of them might offer you different pricing plans for the same services. You will also be able to negotiate the exact terms of service and the pricing differences for the same.

Once you have the list of service provider; you are looking at and the quote(s) provided by them, you can create a shortlist. Look at this shortlist and note down the pros and cons before you proceed.

3PL: 3PL firms will mostly offer the pricing models we discussed above. Unit rate is the most common pricing structure here, but you can explore other options.

Similar to the case of contract logistics firms, you will need to create a shortlist here and evaluate each option.

It is generally a good idea to shortlist both 3PL and Contract Logistics providers. This way you will be able to understand how they overlap and differ. Cross-shopping across these segments will increase your chances of finding the right fit for your ecommerce brand.

Conclusion

Business owners are often confused about the differences between 3PL and contract logistics firms. The available literature on the internet barely helps, and often muddles up the topic even more. 

This makes it incredibly difficult to understand which kind of service provider one should opt for.

We have used our expertise in the ecommerce industry to provide a clear view of the distinct features and overlaps between 3PL and contract logistics firms.

FAQs

1) How is Contract logistics different from freight forwarding?

Contract logistics and freight forwarding are overlapping terms that are often used interchangeably in certain industries. Freight forwarding is a part of contract logistics, and can also be done without the help of contract logistics firms. 

2) Who are some well-known Contact logistics providers?

Some well-known contract logistics providers are UPS, FedEx Supply Chain, DHL Supply Chain, and Kuehne + Nagel. These are sometimes misclassified as 3PL service providers. Please note that while most of them operate in the 3PL space as well, those operations are handled by their subsidiaries or sister concerns.