The third-party logistics (3PL) business model is a popular way to expand or get started in the logistics industry. A 3PL provider helps brands manage their inventory, transportation, and sales channels by taking on many of their logistical duties. This gives brands access to resources they wouldn't have otherwise while also giving them more time and money to focus on their core competencies as an organization. There are several types of 3PLs, each with its own hurdles to getting started.
3PL Business Models and How to Start Your Business
A 3PL business model is how a 3PL provider specializes in order fulfillment and supply chain management. A 3PL business model can be used for many ecommerce functions, including warehousing, outsourcing, transportation, and supply chain management.
As global supply chains become increasingly complex, the role of third-party logistics (3PL) providers has never been more critical. But what catalyzes a company to pivot towards a 3PL business model, and what are the tangible benefits of such a transition? Here we dissect the strategic underpinnings of 3PL business models, designed to streamline order fulfillment and supply chain management for eCommerce entities—critical in an era where the global logistics market is expected to surge to over $12 billion by 2027, as reported by Allied Market Research.
A 3PL is an organization that offers services such as warehousing, transportation, and distribution to companies within the supply chain process. A 3PL company usually has access to significant warehouse space and specialized technology or equipment, such as forklifts or automated storage units, for storing inventory at the lowest possible cost per square foot and optimizing the fulfillment process. In addition to providing these services, some 3PLs also offer configurable software that helps manage inventory levels and track shipments from suppliers directly into their warehouse facilities before being delivered to consumers who order them online.
What Is a 3PL Business Model?
A 3PL business model encompasses all aspects of being a logistics service provider. A 3PL can provide warehousing, distribution, and transportation services to various industries. In addition to this, many 3PLs also offer ecommerce or omnichannel fulfillment services for businesses that are selling products online.
A typical 3PL business model will involve the following steps:
- The client companies will provide their products for storage at the 3PL facility;
- The client companies will send orders to the 3PL facility when they need their products shipped out;
- The clients can choose how they want their merchandise handled by selecting options like drop-shipping or cross-docking;
- Once an order has been processed at the 3PL facility, it is then delivered directly to consumers in the appropriate quantity (for example, if 20 units have been ordered, then 20 units will be shipped).
Why Should Brands Partner with a 3PL Business?
The primary benefit of operating a 3PL business is that it expands your business. For brands, in addition to supplying products to your customers, you can also supply them for other businesses—which could provide new opportunities for expansion in the future. This works if you already have your own private warehousing space and want to convert it into a 3PL.
Alternatively, a benefit of partnering with a 3PL provider is that it reduces the cost of fulfilling your products. Rather than investing money in warehousing, facilities costs are borne by the 3PL provider and will be included in the price they charge. This means less money spent on capital expenses which can then be used towards increasing profits elsewhere within the company.
What's the Difference Between 3PL and 4PL Providers?
Both 3PLs and fourth-party logistics (4PL) providers offer logistical support to brands, but 4PLs operate as a network of 3PLs. Once you have a 3PL, you can partner with other 3PLs in other geographic zones to create a 4PL network to distribute your customers’ inventory in areas closer to the end consumer, and as the owner of the 4PL network, you would still own the client relationship with the brand. Expanding your services to include 4PL networks is another business model for 3PLs, and new technologies are emerging to make this even easier like Extensiv Network Manager.
How to Start a Successful 3PL Business
You can get started in the 3PL business with a number of different models. Before you begin, though, it's important to determine what type of model will work best for your situation. You'll need to look at what opportunities are available in the market and find a niche where you can add value. Once you've done this, make sure that your business plan is solid and that you've hired the right people and given them the tools they need to succeed.
When choosing a 3PL model, remember that there isn't necessarily one "best" option—it depends on which features will be most beneficial for your company. For more information about how to take things up another level with warehouse management system (WMS) software solutions such as Extensiv 3PL Warehouse Manager, schedule a demo here.
Don't forget how important branding is to online merchants. You'll need an excellent website and marketing materials ( for inspiration, check out these best business cards design).
Three Common 3PL Business Models
Full-Service 3PLs offer all of the logistical services a company needs. This means that they offer warehousing, transportation, and distribution services. Full-service 3PLs can also provide value-added services such as:
- Inventory management
- Transportation planning and coordination (including route optimization)
- Inventory replenishment with Kanban card systems or just-in-time (JIT) inventory management systems
Partial Service 3PLs
Partial service 3PLs provide only a limited range of services. In other words, they may specialize in distribution or logistics but not both. Because they offer fewer 3PL services than full-service providers, partial service 3PLs tend to be more flexible in terms of what they can do.
They may be able to offer the exact mix of expertise and efficiency that brands need without having to fit into an existing framework.
Hybrid Service 3PLs
Hybrid service 3PLs offer a combination of full service and partial service. They provide their own warehousing and transportation services as well as other services such as packaging and labeling or inventory management. Hybrid 3PLs may also use a network of other third-party providers including freight companies, trucking companies, and shippers.
How Does a 3PL Business Make Money?
The brand pays a fee for the services provided by a 3PL. The fee is usually based on the volume of goods being picked, packed, and shipped, which means that if clients ship more products, they will pay more money to use the 3PL's service.
Another way that most 3PLs make money is by charging businesses a fee for the space they use to store a client’s inventory. Again, this charge is typically calculated by square feet, volume, or weight (and sometimes all of the above). If a company ships large quantities of inventory frequently, it may be beneficial to use a third-party logistics provider who offers warehouse space as part of their services—but keep in mind that renting warehouse space isn't cheap!
What You Should Know Before Starting a 3PL Business
As a 3PL business owner, you'll be responsible for inventory and fulfillment services and transporting shipments from one place to another on behalf of your clients. You must be aware of all transportation laws in your area and make sure that you're following them at all times, especially if you plan on making international shipments (which may require special licenses).
You'll also need to have enough space available at each location where you operate to store incoming goods until they're ready for transport elsewhere or shipped out once again by your own staff members who work directly within these warehouses.
Finally, you will need a robust WMS platform that can manage inventory transactions for all of your customers separately. Having a WMS that is configured for 3PLs with operations divided by customer and featuring a customer portal will make managing your clients significantly easier.
How Do Brands Benefit from Working with a 3PL?
The following are just some of the ways that brands can benefit from working with a 3PL:
- Reduce costs. Whether it's in warehousing and fulfillment, or transportation between warehouse and stores, retailers are likely to see a reduction in costs when they work with a 3PL partner as opposed to managing it all on their own. This is possible because 3PLs have economies of scale that allow them to offer competitive pricing on their services and products.
- Increase speed. If a company is growing quickly, outsourcing operations to the right 3PL can help it keep up with demand while reducing inventory levels and increasing efficiency—all things that increase speed for consumers as well as for the retailer.
- Increase efficiency. Your goal should be to deliver the highest level of service possible while simultaneously reducing operating costs; this means ensuring that everyone involved in getting products out the door has everything they need at their fingertips when needed most (i.e., during peak sales periods).
- Faster ecommerce fulfillment. Some 3PLs and 4PLs offer multiple distribution centers, which puts them closer to the end consumer. In the ecommerce world, this means delivery times under two days, allowing retailers to compete with Amazon.
Empowering 3PLs with Advanced Technological Integration
Working with a 3PL business has always been about expanding capabilities and reducing overhead for brands. With Extensiv's suite of intelligent solutions, 3PLs gain the agility to scale operations, meet the rapid pace of consumer demand, and offer a brand experience that rivals the best in the business.
Extensiv's Integration Manager, for instance, streamlines connectivity between multiple sales channels and fulfillment processes. It's a testament to how brands can adapt their fulfillment strategies as effortlessly as booking an Airbnb, with technology that simplifies the complex web of omnichannel commerce.
By integrating Extensiv's powerful warehouse and order management platforms, 3PLs can offer a level of service that meets and exceeds the expectations set by giants like Amazon—fast, free, and reliable fulfillment. It's not just about storing and shipping products; it's about delivering a brand experience that turns first-time buyers into lifelong customers.
In summary, a third-party logistics provider (3PL) offers logistical services that can help businesses expand their supply chains and reduce the costs of supplying their products. If you are interested in starting your own 3PL business, this site has countless articles to help you establish and grow your 3PL business. For even greater insights into the opportunities and the challenges 3PLs are currently facing, read the 2022 Third-Party Logistics Warehouse Benchmark Report that offers insights on more than 30 industry-specific topics.