The Evolution of Third-Party Logistics (3PL)
Less than 40 years ago, trucking, international shipping, warehousing, and technology industries were all separate entities. Therefore, in the grand scheme of things, third-party logistics providers (often referred to as a 3PL) are relatively “young.” However, they’ve revolutionized how we think of delivery services. In the following article, we’ll explore the history behind and evolution of the industry and where it could go next.
What does a 3PL do?
Third-party logistics providers typically specialize in integrated operations of warehousing and transportation services that can be scaled and customized to customers' needs based on market conditions. Simply put, they are a way for a company to outsource some or all its distribution or supply needs at every stage of development. All the services offered by a 3PL provider are documented and explained in contracts, agreements, and service level agreements (SLAs).
The history and evolution of 3PL
1980s
It’s unclear who coined the term “third-party logistics,” but companies began trending toward outsourcing inbound and outbound logistics services to third parties in the 1970s and ‘80s. The number of trucking carriers grew significantly in large part due to the industry deregulation via the Motor Carrier Act of 1980. This, combined with the surge in production and the need for better supply chain management solutions, led to the rise of the first version of third-party logistics companies. Companies that had previously solely focused on warehouse storage facilities expanded their services and entered the market as freight movers. as freight movers.
1990s
3PL services began significantly grow in the 1990s because of the demand for these services in emerging economies. Countries like India and China incentivized businesses to start delegating some of their production processes to take advantage of cheap labor and local resources. This resulted in streamlining previously complex supply chain processes domestically and globally. It also provided the industry with creating niche services to better fit certain clientele, like those in frozen food, construction, and farming.
2000s
The technological advancement of the 2000s rapidly created changes in the evolution of 3PL. The internet exploded the doors of opportunity off their hinges, providing innovative tools like more powerful computers and mobile devices. Other technological advancements, like advanced software for inventory management and order processing, allowed more supply chain visibility for customers. The digitization of workflows through WMS and TMS software now saves money on labor and other additional overhead costs.
Industry challenges of 3PLs today
As the industry evolves, so do the challenges, and two remain prevalent: labor shortages and efficient supply chain processes.
The e-commerce boom spotlighted a deeper need for more sophisticated logistics solutions, significantly affecting supply chain operations. Consumer demand trends have created pressure to offer more same- and next-day delivery options, meaning 3PLs must expedite their pick, pack, and ship processes, making fulfillment times even more crucial. In fact, 53% of 3PLs now fulfill orders in less than 1 hour.
Labor scarcity can mean companies are forced to raise wages to attract workers, increasing business costs. Additionally, the industry is seeing a shift in demographics, with younger generations less inclined to enter logistics, though attempts are being made to address this. That said, the focus has shifted to better retention efforts of workers already ingrained in freight logistics.
The future of 3PL
Due to those challenges, the industry had to adapt and will continue to do so. The 3PL industry is rapidly growing at a rate of 8%.
In 1980, the number of carriers was around 20,000 and is now about 1.564 million as of 2022. “Although last year heightened concerns around inflation, a recession, greater labor constraints, and some global uncertainty,” Extensiv’s 2022 benchmark report says, “3PLs fared better than in past years regarding order volumes at 91% growth. 2022 also showed fewer declines in volume growth, dropping from a high of 12% in 2020 to only 4% in 2022, demonstrating momentum for nearly the entire industry.”
Lastly, many businesses are looking for ways to be more sustainable and reduce their environmental impact. In response, 3PL providers have begun offering green logistics solutions to help companies lower their carbon footprint.
Benefits of working with a 3PL
Working with a third-party logistics (3PL) provider can bring several benefits to a business, including:
Cost savings: 3PLs often have economies of scale and established relationships with carriers and suppliers, leading to lower transportation and inventory costs.
Increased efficiency: 3PLs are logistics and supply chain management experts and can help a business streamline its operations and improve its delivery times.
Flexibility: 3PLs can provide various services, such as warehousing, transportation, and inventory management, which can be customized to meet the specific needs of a business.
Improved focus on core competencies: By outsourcing logistics and supply chain management to a 3PL, a business can focus on its core competencies and better allocate its resources.
Scalability: 3PLs can help a business quickly scale up or down its logistics operations to meet changes in demand, which can be particularly useful for companies experiencing rapid growth.
Sparrow Logistics is a 3PL powerhouse
Sparrow Logistics’ experience in the industry has allowed our team to help more clients source distribution, transportation, warehousing, manage resources, and inventory goods.
What makes Sparrow different?
In an industry where lack of communication with clients and carriers is still tolerated, we believe that blending honesty, transparency, and positivity is the recipe for providing an incredible experience— every time— for everyone involved. This philosophy of rooting a solid customer service mindset into our shipping solutions process is what we believe sets us apart, and we hope you agree.
Curious about how 3PLs can help your business grow?