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What is 3PL (third-party logistics)? The ultimate guide

Third-party logistics, or 3PL, is an integral part of today’s supply chain management, particularly in eCommerce. A Statista report states that the 3PL industry may exceed 13.7 trillion U.S. dollars by 2027, further highlighting its significance. It allows businesses to outsource logistical operations such as warehousing, distribution, and fulfillment, which streamlines their processes and sharpens their focus on core competencies. 

3PL, also known as third-party logistics, refers to a company that facilitates product deliveries for sellers rather than buying or selling products themselves.

Understanding 3PL is key for businesses looking to adapt and thrive in the competitive market landscape so they can meet rising consumer demands while maintaining agility and control over their supply chains. 

3PL meaning

3PL is a widely popular service that allows companies to outsource their logistics to a third-party logistics provider. 3PL companies are neither the buyer nor the seller — they simply partner with the seller and facilitate smooth product deliveries to the buyers’ doorsteps.

In a 3PL setup, a company outsources its logistics and distribution tasks to a specialized provider. For example, a smartphone manufacturer might partner with a 3PL company to store, manage, and deliver their products to customers. The 3PL provider handles tasks like warehousing, transportation, and delivery, allowing the manufacturer to focus on production and sales. This arrangement benefits the manufacturer through cost savings and logistics expertise, and ensures efficient delivery for the customer.

3PL companies have gained prominence as one of the most important parts of the eCommerce industry. This is because their operations are highly sophisticated due to integrated logistics services, advanced technology and automation, scalability and flexibility, global reach and local expertise, inventory management software, and more, making them crucial to the success of an eCommerce company.

How does 3PL work?

Third-party logistics (3PL) companies extend their services beyond just managing transportation and distribution functions; they also delve into areas such as procurement, focusing on various segments of a business. These companies encompass a wide range of services, including product sourcing, freight shipping, and more, providing comprehensive solutions that address multiple aspects of a company’s supply chain and logistics needs.

 An illustration explaining what 3PL is and how it works.

If everything in your business is going well but you are struggling with supply chain management, you should start thinking about working with a 3PL company. But before you pick a 3PL logistics company, you need to decide what type of service suits your business and addresses your current issues. 

The most common 3PL services include:

  • Transportation
  • Distribution
  • Shipping logistics
  • Receiving products
  • Warehousing
  • Product storage

If you are running a huge business, then you will need a full-service end-to-end third-party logistics provider. On the other hand, a small business will probably require one or two of the services mentioned above.

The primary service offering of a 3PL provider is logistics for different aspects of your supply chain management. Generally, third-party logistics providers are integrated into the warehousing, inventory distribution, and transportation processes of a company.

When you scale and customize services, 3PL providers can meet your business requirements and help you expedite your order fulfillment process.

Types of 3PLs

Businesses today are looking to leverage services like 3PL warehouse management, 3PL inventory management, and a range of other 3PL solutions by partnering with a third-party logistics expert. This enables these businesses to focus on their core competencies while significantly enhancing customer satisfaction.

Here are some of the most common types of 3PL companies and contracts:

  • Standard 3PL providers: These providers offer logistics services, including warehousing, distribution, and transport. They are typically hired for straightforward logistics needs and are known for their broad network.
  • 3PL service developers: Service developers offer a more comprehensive set of services compared to standard providers. In addition to basic logistics functions, they might provide advanced services like tracking, network analysis, and advanced reporting. They often employ robust IT systems to support their services.
  • 3PL companies with forwarder capacities: These 3PLs not only manage logistics but can also act as forwarders, meaning they facilitate the movement of goods between different parties. They can consolidate small shipments, manage air or sea freight, and offer custom brokerage services, acting as intermediaries between shippers and transport services.
  • 3PL companies with financing options: These are specialized 3PLs that offer financial services alongside their logistics capabilities. This can include cargo insurance, payment processing, or even inventory financing. By combining logistics and finance, they provide a streamlined solution.
  • 3PL customer adapters: Customer adapters take control of existing logistics operations and run them on a company’s behalf. They do not necessarily bring their resources but optimize and operate the client’s logistics processes, essentially becoming the outsourced logistics department for that business.
  • 3PL customer developers: Customer developers establish a close, integrated partnership with their clients. They take over the entire logistics segment, often integrating themselves deeply into the client’s operations. This results in a highly tailored logistics solution, with the 3PL acting as a strategic partner rather than just a service provider.

7 benefits of 3PLs for small businesses

The logistics industry is constantly changing, and for small businesses, managing all aspects of supply chain operations can be overwhelming. Incorporating 3PL services presents multiple advantages. Below are seven key benefits small businesses can harness by collaborating with 3PL providers.

1. Increases efficiency and reduces spend

Partnering with a 3PL firm frees up your time and rids you of a range of activities that would otherwise eat up other resources. This allows you to focus on your core business process, making your business much more efficient. 

Additionally, by leveraging the economies of scale and expertise of a 3PL, businesses can significantly reduce their overall logistics costs. Outsourcing these tasks also eliminates the need for substantial capital investments in warehousing, transportation, and technology, leading to further savings.

2. Allows access to industry expertise

Partnering with a 3PL allows companies to leverage the provider’s expertise in logistics and supply chain management. While some businesses may have concerns about outsourcing logistics and the associated costs, it’s important to consider the potential long-term benefits and efficiencies that a 3PL partnership can bring, alongside the immediate financial implications.

If you handle your logistics without quite understanding it, it’s likely you’ll make errors that will eat into your profits. Using a 3PL can help you avoid these errors, ultimately saving you money.

3. Expands your reach

By partnering with a 3PL company, you can expand your reach and ship your products to regions that would have otherwise been out of your scope.

This is because 3PL companies have collaborations in place with multiple shipment companies, which allows them to deliver your products at a much lower cost.

4. Scales with your business

3PL companies come with resources and operational experience that can help you scale your business very quickly. You do not have to worry about finding the right candidates, training them, and providing them with the necessary equipment; your 3PL partner will do it for you.

5. Enriches customer experience

Partnering with a 3PL company can help you streamline your logistics, supply chain, and warehouse operations. Ultimately, this partnership will result in your products reaching your customers on time and without any damage.

All of this will lead to heightened customer satisfaction and establish brand reliability and credibility.

6. Connects inventory processes

Partnering with a 3PL facilitates a seamless integration with your business’s inventory management techniques. One essential tool that aids in this integration is the 3PL connector. 

A 3PL connector is a software interface or application that integrates a business’s eCommerce platform, enterprise resource planning (ERP) system, or inventory management software with the 3PL provider’s warehousing and order fulfillment systems. This ensures synchronization of inventory levels, order statuses, and shipping details between the two platforms.

The ability to have real-time tracking and efficient stock control ensures that goods are always accounted for and in the right place. By efficiently managing inventory turnover through connectors and other technologies, businesses can minimize waste, maximize sales opportunities, and improve cash flow.

7. Enhances warehouse management

Working with a 3PL leads to an overhaul in warehouse management, introducing best practices and tools. Their expertise ensures that warehousing processes — from receiving to dispatching — are streamlined and optimized.

Businesses have access to strategically located warehousing facilities. This can drastically reduce transit times and enhance distribution networks. In combination with modern technology, you can achieve faster order turnaround times, improving overall customer satisfaction

3PL shortcomings

3PL providers can offer multiple advantages to businesses. However, there are potential pitfalls and limitations you must consider before entering into a 3PL partnership. Here are some of the most common shortcomings associated with 3PL services.

Lack of control

If you’re passionate about being in control of all your operations all the time, partnering with a 3PL may come with a few complications for you. Many companies insist on creating end-to-end branding for their customers. They feel they would be letting their customers down if any part of their services isn’t up to their standards.

Some companies are extremely protective of their user database and are hesitant to share it with anyone outside of their organization. Even though most 3PL companies do sign NDAs with their clients, some companies may not wish to sign up, fearing a data breach.

In such situations, the company is better off setting up a logistics framework on its own rather than outsourcing it.

Upfront costs

A 3PL takes a lot of things off your plate, like logistics, storage management, returns and refund management, etc. However, all of these come at a price. Many companies feel that the upfront costs don’t quite justify the services, which is why they prefer to handle their logistics themselves.

Since 3PL companies are in charge of warehousing as well as transportation, they independently decide the policies regarding the same, while their clients have to pay for the costs.

There are also instances where 3PL companies have slowly escalated the tariffs and costs over a period of time once they’re certain that the company is totally dependent on their services. However, you can avoid all of this by choosing a trusted and renowned 3PL partner.

Domain expertise

Businesses such as pharmaceutical companies and food and beverage companies have unique logistical requirements like cold storage, and packaging specifications. Not every 3PL company may have the necessary resources to provide these services.

So, if you require sophisticated delivery services, it’s best to either partner with a 3PL company that specializes in that domain or take care of your logistics yourself.

For example, if you’re a pharmaceutical manufacturer and wish to supply temperature-sensitive medicines around the world, then you should enquire specifically about a 3PL firm that specializes in healthcare logistics and only partner with them.

An illustration shows what to look for in a 3PL partner.

How to choose a 3PL partner

Selecting the right 3PL partner can positively influence the efficiency, growth, and reputation of your business. With numerous 3PL providers in the market, making an informed decision requires careful consideration.

Here are some important aspects to evaluate when choosing a 3PL partner to ensure they align with your business objectives and operational needs.

1. Consider location

Considering the location of your third-party logistics is an important step. You need to find out where your 3PL partner operates and their reach. The fulfillment centers and distribution plan should be close to your consumption area. By doing so, you will get a chance to manage all the work more efficiently.

Having your products close to your customers reduces shipping time. This is why you should look for a partner with a vast network to match your customers.

2. Ask about technology

In today’s technology-based world, it’s important to stay up to date with current technology trends. High-level software based on AI and market analysis should be used to augment all the operations and sales of your business.

Before you pick a 3PL provider, you must have a look at their technological systems. You should look for such logistics partners that opt to provide business intelligence and customized solutions matching your business needs.

3. Define KPIs

How will you get to know whether the 3PL team is matching your expectations or not? It is always vital to set standards to measure the efficiency of any operation. Key performance indicators (KPIs) that cover quantities, numerical measurements, and precise times are helpful in achieving your goals.

Utilizing logs and analytical tools enables you to monitor your logistics team’s performance and identify areas that require improvement. This is an essential aspect to consider when selecting a 3PL partner, as it aligns with both your current and future business needs. Defining KPIs will help ensure tasks are completed efficiently and allow for continuous monitoring of productivity.

4. Verify their capacity to scale

While choosing a 3PL provider, it is important to keep a future aspect. If you want to find success in your business, you must work with a capable team to achieve that level of growth. The right 3PL partner will be able to handle all your orders, even if you see a significant increase in order volume.

Ensure they have proper warehouse space and staff to meet your requirements. Also, make sure your partner has an online system to keep track of the orders and organize and ship the orders out of the door whenever required efficiently.

5. Visit their fulfillment center

Meeting your third-party logistics partner will give you a feel of the company and its work culture. Touring the facilities and getting a complete understanding of how your products will look on their shelves will help you know how they will be moving via your 3PL’s systems.

3PL features to look for

When evaluating 3PL providers, you should focus on the features that directly align with your business needs and future growth. The right 3PL partner should not only streamline your logistics but also improve your supply chain overall. Here are some essential features to consider when choosing a 3PL provider:

  • Fast shipping: 3PL providers with fast shipping capabilities can meet business expectations and enhance customer satisfaction. Offering expedited shipping options or same-day delivery can set a business apart from competitors and increase repeat purchases.
  • Returns processing: The right 3PL provider will have a streamlined returns processing system, ensuring products are received, inspected, and either restocked or disposed of promptly. This reduces overhead costs for the business and ensures customers receive timely refunds or replacements.
  • Kitting: Kitting is the process of assembling individual items into ready-to-ship sets or kits. 3PLs that offer kitting services can help businesses improve efficiency, reduce shipping errors, and offer bundled products to customers. This can be especially valuable for businesses that sell complementary products or subscription boxes.
  • Custom product packaging: 3PL providers that offer custom product packaging can ensure products are not only secure during transit but also presented in a manner that aligns with the branding guidelines. 
  • Ample warehouse space: 3PLs with ample and scalable warehouse layouts and space ensure that inventory can be stored efficiently without overcrowding or mismanagement. Additionally, strategically located warehouses can reduce shipping times and costs, offering further advantages.
  • Inventory management: A top-tier 3PL provider will integrate seamlessly with inventory management software, providing real-time updates on stock levels, order status, and more. This integration ensures businesses can maintain optimal inventory levels, prevent stockouts, and make informed decisions based on accurate data. It also reduces manual errors and streamlines the entire supply chain process.

What is 3PL inventory management software?

3PL inventory management software is a specialized digital tool designed to facilitate and optimize the operations of 3PL providers. To ensure efficient and accurate handling of goods, the software integrates various aspects of inventory management, such as:

  • Tracking stock levels
  • Managing order fulfillment 
  • Coordinating warehouse storage 

Inventory management software often has features that enable seamless communication between businesses and their 3PL providers. It can integrate with eCommerce platforms, point-of-sale systems, and other enterprise software, ensuring inventory data is consistently updated and accurate across all channels. 

3PL vs. 4PL

A Fourth-Party Logistics (4PL) provider represents an evolution in supply chain management and logistics. Unlike a Third-Party Logistics (3PL) provider, which typically focuses on singular aspects of a company’s distribution and fulfillment services, a 4PL provider offers a more comprehensive set of supply chain services.

4PL refers to further outsourcing the logistics management to the external organization. The 4PL provider will oversee the entire process, which also includes processes like return merchandise authorization (RMA), and thus, it further eases work on your part. UPS 4PL services, Amazon FBA, and Accenture 4PL services are some of the market leaders in this category.

Generally, 4PL providers command considerable expertise over the end-to-end execution, which ultimately helps you project yourself as a customer-focused brand.

Feature 3PL 4PL
Core focus Operational logistics such as warehousing, distribution, and fulfillment Strategic management and oversight of the entire supply chain
Services Transportation, warehousing, cross-docking, inventory management End-to-end supply chain management, including return merchandise authorization (RMA), strategy formulation, and analytics
Level of involvement Limited to specific logistic operations Comprehensive management, often overseeing multiple 3PLs and other partners
Customer relationship Direct involvement with day-to-day operations Strategic partnership, focusing on overall supply chain optimization and long-term strategies

3PL vs. dropshipping vs. freight forwarding

3PLs, dropshipping, and freight forwarding offer a unique approach to handling, storing, and shipping products. Each model has differentiating features.

Feature 3PL Dropshipping Freight forwarding
Definition Companies that provide outsourced logistics services to other businesses A retail fulfillment method where stores don’t keep the products they sell in stock Firms specializing in arranging storage and shipping of merchandise on behalf of shippers
Inventory ownership Typically, the retailer or manufacturer owns the inventory Retailer doesn’t own inventory; directly forwarded from supplier to customer Does not own inventory; arranges transportation
Storage Provides warehousing and storage solutions No warehousing needs for the retailer; supplier handles inventory Might provide temporary storage but not long-term warehousing
Shipping & handling Manages shipping, handling, and often offers fulfillment services Supplier handles the shipping directly to the customer Manages and arranges the shipping process, often consolidating shipments
Primary responsibility Warehousing, distribution, fulfillment, and often transportation Selling products without holding inventory; transferring order details to suppliers Arranging transportation and documentation for international shipments
Relationship with retailer Acts as a partner handling logistics operations for the retailer Acts as a supplier, directly shipping products to the retailer’s customers Acts as a middleman between shipper and transportation services
Financial investment Investment in warehousing, fulfillment centers, and transportation Minimal upfront investment as no inventory is held Investment in coordinating, documentation, and working with carriers
Customer interaction Limited to none; operates behind the scenes No direct interaction; operates behind the retailer Directly works with shippers and carriers, but not typically with the end consumer


3PL providers are companies that offer outsourced logistics services to other businesses, standing as a critical bridge in the supply chain. In contrast to other methods like dropshipping or freight forwarding, 3PLs have a broader scope. They handle warehousing, distribution, fulfillment, and transportation for retailers or manufacturers that own the inventory.


In dropshipping, retailers do not own or store inventory. Instead, when a product is sold, the retailer transfers the order details directly to a supplier or manufacturer, who then ships the product to the end customer. This model reduces financial risk for the retailer, as there’s minimal upfront investment in inventory. 

While the 3PL model involves a partnership between the retailer and the logistics provider, dropshipping establishes a direct link between the retailer and the supplier, bypassing traditional inventory management.

Freight Forwarding

Freight forwarders specialize in the storage and shipment of merchandise, typically focusing on the international transport of goods. While they share some similarities with 3PLs in handling shipping, they don’t provide comprehensive warehousing or own the inventory. Their role is coordinating between shippers and transportation services. 

They manage documentation, work with carriers, and might provide temporary storage solutions. Compared to dropshipping, freight forwarders don’t directly interact with the end consumer and have a broader responsibility, ensuring that goods navigate the complexities of international shipping.

Frequently asked questions

Whether you’re new to the logistics world or looking to deepen your understanding, these answers to common questions might shed some light.

What is an example of a 3PL company?

3PL companies offer various logistics and supply chain services to other businesses. One notable example is DHL Supply Chain, a division of the larger DHL company. 

DHL Supply Chain provides solutions in warehousing, distribution, and transportation, making it an all-encompassing 3PL provider. They serve multiple industries, ranging from consumer sectors to specialized areas such as life sciences, ensuring goods move seamlessly and efficiently throughout the supply chain.

Is Amazon a 3PL company?

While most know Amazon for its eCommerce platform, it also operates as a 3PL through its Fulfillment by Amazon (FBA) service. FBA allows sellers to store their products in Amazon’s fulfillment centers, where Amazon handles storage, packaging, and shipping to customers, making it a 3PL service within the broader Amazon ecosystem.

Is FedEx considered a 3PL?

FedEx offers 3PL services through its subsidiary, FedEx Supply Chain. While most know FedEx for its express shipping services, FedEx Supply Chain provides comprehensive logistics solutions, including warehousing, distribution, and transportation management.

What are the three types of 3PLs?

The three types of 3PLs are transaction-based 3PLs, tactical-based 3PLs and strategic-based 3PLs.

  • Transaction-based 3PLs: These 3PLs offer standard logistics services on a per-transaction basis without needing long-term contracts. Their services might include transportation, warehousing, and freight forwarding, catering to businesses that require sporadic or infrequent logistics support.
  • Tactical-based 3PLs: Tactical 3PLs provide more specialized services and usually engage in short- to medium-term contracts (a few months to three years). They focus on specific aspects of the supply chain, such as warehousing or transportation, but offer a deeper level of service, often integrating their systems with their clients for better coordination.
  • Strategic-based 3PLs: These are the most comprehensive 3PL providers. They often form long-term partnerships with businesses and offer end-to-end supply chain solutions. 

Connect with 3PL experts

Embarking on a journey with 3PL can be transformative for your business, but like any significant venture, it requires expertise to navigate effectively. Fortunately, you don’t have to do it alone. 

Cin7 offers an in-house team of 3PL specialists ready to guide you. Whether you’re starting from scratch or aiming to optimize your existing setup, our experts stand ready to ensure a seamless integration. Trust in Cin7’s seasoned professionals to set up and streamline your 3PL operations with ease.

Start a 14-day free trial of Cin7 today.