What is 3PL (Third-Party Logistics)?
Third-Party Logistics (3PL) refers to the outsourcing of logistics and supply chain operations to an external specialist company. A 3PL provider manages and executes functions such as warehousing, inventory management, order fulfillment (picking and packing orders), transportation, and sometimes other services on behalf of consumer goods manufacturers.
Basically, a 3PL doesn’t own or manufacture the products but helps store them and get them from “Point A” to “Point B” by managing product deliveries from seller (the CPG) to the buyer (the retailer). Consumer Goods companies leverage 3PLs because of their expertise and infrastructure instead of handling those activities in-house. This streamlines operations, reduces costs, and improves efficiency, and lets the CPG focus on its core business.
In the consumer goods industry, third-party logistics providers are commonly used to operate distribution centers and regional warehouses, handle transportation to retailers, and even fulfill direct-to-consumer e-commerce orders.
Why consumer brands use 3PLs
Consumer brands that use 3PLs do so because some of the followinf efficiencies:
- Allows a focus on core business: As a CPG you succeed by creating great products people love and marketing them well — often not by managing the best trucking fleets or warehouses. By partnering with a 3PL, brands can focus on sales growth, promotion performance and product innovation while logistics experts handle the complexities of distribution.
- Scalability and flexibility — in volume and costs: A 3PL offers logistics capacity that can scale with your business right away. If you go viral on Tik-Tok and demand surges, a 3PL can allocate more warehouse space or labor and arrange extra transportation quickly. And conversely, if sales slow down, your brand isn’t stuck paying for too much warehouse overhead – it can scale down the 3PL services. Many 3PL contracts are structured to be volume-based, so consumer goods firms have variable costs rather than high fixed costs. (This is especially critical in industries with a high degree of seasonality).
- Cost savings and efficiency: Third-party logistics providers achieve economies of scale. They operate large facilities and ship for multiple clients, which means shared resources and lower unit costs. Warehousing, in particular, is cheaper when space and staff are shared across clients. Similarly, 3PLs can consolidate shipments from multiple companies to get better freight rates. This translates into lower logistics costs than managing your own dedicated network. 3PLs also tend to have optimized processes and technology (like automated picking systems) that drive efficiency.
- Geographic reach and speed-to-market: A growing, mid-sized CPG might have one or two warehouses of its own, but a large 3PL can have dozens across different regions and countries. By using a 3PL’s network, brands get closer to their customers. This is crucial as Amazon’s focus on fast-delivery has raised consumer expectations. The 3PL’s trucking partnerships or even owned fleet also help reach retail distribution centers on time.
- Access to expertise and technology: When logistics is your core business, you tend to get it right. 3Pls do this by investing in more advanced Warehouse Management Systems (WMS), inventory tracking technologies, and transportation management tools that CPGs. Partnering with a 3PL gives CPGs the benefits of these tools and tech without the costs. A good 3PL will provide real-time visibility into stock levels, orders, and shipments that consumer brands can bring directly into a platform like Alloy.ai, giving them a complete view of demand and inventory across their network.
Important note: While 3PLs bring many benefits, they also require management. Outsourcing logistics means a CPG company must maintain strong communication and oversight to ensure the 3PL meets its service requirements (this is typically managed through service level agreements or SLAs)
Example Scenario: How CPGs work with 3PLs
Picture this scenario: You’re a mid-sized organic snack company sells granola bars and chips through major retailers nationwide and also via its own online store. Instead of running its own warehouses, the company decides to use a 3PL provider.
The company produces its products at two manufacturing plants. After production, they arrange transport of finished goods to the 3PL’s central warehouse. Upon arrival, the 3PL receives the inventory, stores the pallets of snacks, and updates the inventory records in their system (which the snack company’s supply chain team can view through an online portal).
As orders come in, the 3PL takes over. If a retailer (say Kroger) places a purchase order for 10,000 cases of an assortment of snacks, the snack company enters that into their system and hands off the order to the 3PL.
Warehouse staff at the 3PL facility will pick the specific products and quantities needed for that order, and prepare the shipment. They then arrange transportation (perhaps using a contracted carrier) to deliver these pallets to the retailer’s distribution center by the requested date.
At the same time, individual e-commerce orders from the snack company’s online store flow to the 3PL as well. Each day, the 3PL also runs a direct-to-consumer fulfillment operation: picking small quantities (maybe 2 boxes of granola bars for one order, 5 bags of chips for another), packing them into parcels, and shipping them via parcel carriers (like UPS/FedEx) to customers’ homes. They might even handle customer service aspects like managing returns if a customer sends something back.
Throughout this process, the snack company’s team monitors performance. They see that the 3PL shipped the big Kroger order on time and in-full, and that tracking shows it was delivered to the Kroger’s DC as scheduled. They also monitor that consumer orders are going out within 24 hours of being placed.
Inventory levels in the 3PL’s warehouse are watched closely; when stocks of certain SKUs fall below a threshold, the snack company plans another production run and uses the 3PL’s inbound receiving services to restock. This example highlights how deeply integrated a 3PL becomes – effectively running the logistics backbone so the CPG company can focus on making and selling snacks.
Key metrics and KPIs for 3PL performance in the consumer goods idustry
When a CPG brand entrusts its logistics to a third-party, measuring the 3PL’s performance is critical, as now the 3PL plays a vital role in the supplier-retailer and supplier-consumer relationship. Common KPIs to watch include:
- Order fulfillment accuracy: This KPI tracks how correctly the 3PL picks and packs orders. It answers: Did the customer (retailer or consumer) get exactly what they ordered? A high order accuracy (often targeted at 99%+ accuracy) is expected. In fact, an accuracy of 99.9% is typical in 3PL contracts, meaning virtually no errors are tolerated. Errors (like sending the wrong flavor of chips, or the wrong quantity) can lead to OTIF fines, returns and damaged trust between retailers and suppliers. CPG companies monitor error rates and work with the 3PL on process improvements if accuracy dips.
- On-time shipping and delivery: As you might imagine, this measures whether the 3PL is shipping orders out by the agreed ship date and ensuring they arrive by the customer’s required date. For retailer orders, the key is often hitting the delivery window at the agreed upon day and time. Consistent on-time shipping helps the CPG company maintain a good OTIF score with retailers and keeps online customers satisfied.
- Inventory accuracy: Since the 3PL stores the product, its inventory counts must be reliable. Inventory accuracy compares the inventory records versus the actual physical count of product on hand. A top-tier 3PL will maintain inventory accuracy of 98% or better. High accuracy means fewer stock discrepancies – so the CPG brand can trust the data when planning replenishments. Inaccurate inventory can result in the 3PL either short-shipping an order (thinking they had product which isn’t actually there) or holding excess phantom inventory that isn’t selling.
- Throughput and capacity utilization: These metrics look at how efficiently the 3PL is processing volume. Throughput might be orders processed per day or lines picked per hour, etc. Capacity utilization assesses how much of the warehouse or labor capacity is being used. While these are more internal to the 3PL, they impact the cost and service.
- Logistics cost metrics: A consumer goods brand might also keep an eye on the costs incurred via the 3PL. Metrics like cost per unit shipped or cost per order help ensure the partnership remains cost-effective.
Using these and other KPIs, the consumer brands company and 3PL hold quarterly business reviews or similar meetings to discuss performance. For example, if order accuracy fell to 99.5% one month (below the 99.9% target), they might identify that a new product’s similar packaging was causing picker mistakes and decide to improve labeling. Or if on-time delivery dropped, they might add an extra day lead time for orders from a certain distribution center.
A well-chosen 3PL partnership is a win-wi. It can significantly enhance a CPG brand’s capability to serve its retail partners. The brand gains logistic expertise, agility, and scale that would be costly to build on its own. When managed closely through clear metrics and open communication, the 3PL becomes a seamless part of the supply chain.
