Choosing the right third-party logistics (3PL) provider is a big decision for a company. More and more, companies are looking for single-source providers capable of managing a larger chunk of their overall supply chain. In the past, many vendors specialized in one particular area — small package, technology, packaging supplies, freight, etc. — and the varied sources made things inherently complex. That has long been counter intuitive for shippers whose No. 1 objective was to simplify.
As is the case with the trucking industry itself — there are more than 1,100 less-than-truckload and truckload carriers — 3PLs are all over the place, and it can be tough to decide which one best suits your needs.
One of the first questions you should ask a prospective 3PL provider is a simple one: Whom do they represent? Essentially there are three types of 3PL provider, and all play an important role within the industry. Deciding which one is right for your company will boil down to your specific needs. Those should be pretty apparent. As for the types of 3PL suitors, below is a breakdown to help you better understand which type is right for you:
In the simplest form, freight brokers are most concerned with matching cost and service needs to individual shipments. In other words, brokers are transaction-minded. When a shipper uses a broker, it’s a lot like investing in the stock market; sometimes you win and sometimes you lose. Brokerages can be great options for transactional shipments when the “stock market” is doing well. The downside is volatility and the fact that, because brokerages are commanding volume from different places to fill truckloads, they are basically middlemen. The brokerage itself owns the rates, not the customer, since the brokerage is responsible for the total volume. Sometimes shipments are a lot cheaper, and sometimes they are a lot more expensive. In many ways, technology has forced brokerages to either expand their service offerings or abandon the business altogether. Those that are still in the game, however, understand the strengths and weaknesses of their preferred providers and can match a shipper’s individual freight with a carrier that will make ends meet. Frequently used by companies with relatively light freight volume, brokerages can provide benefit, but freight moving with any regularity likely will require a 3PL with a broader portfolio.
Carrier agents obtain pricing from a network of carriers and resell their rates to shippers. Think of them like taxi drivers that get a cut of the cover any time someone requests to be taken to the “best bar in town.” Companies looking to move freight will contact their 3PL with the bill of lading, and the 3PL will match the freight, density and destination with the carrier within its network that can best meet the needs of the customer. The customer will never see the bottom line price that the carrier will charge for the freight, since the 3PL will obviously need to profit on the transaction as well. Therefore, it can be difficult for the customer to know where the markup is. Depending on volumes, the customer probably would negotiate better rates on its own, but not everyone has the resources. The downside of the carrier agent model is that only certain carriers will work with companies that fall within that model due to potential conflicts of interest. If only certain bars are paying cab drivers a cut of the money they bring in at the door, it will obviously facilitate bias and limit the number of carriers a company ultimately has to choose from.
Shipper’s agents determine which carriers best suit a company’s needs and negotiate rates with all of those carriers and thus build a customer its own network. This type of 3PL likely has its own version of a transportation management system (TMS) or is at least capable of loading a customer’s custom rates into the TMS they already use. This type of provider empowers its customers to analyze price and service for each shipment at manifest and to quickly notify a carrier and produce a bill of lading. While brokerages and carrier agents also provide similar visibility through TMS, a shipper can be more certain that their costs are market appropriate, since a shipper’s agent 3PL likely gets compensated based on measured savings; therefore, the better rates they negotiate for you, the larger their share. The customized rates combined with the level of visibility provided by the TMS can really make the freight shipping process more streamlined and cost-effective. The downside with some shipper’s agents is that they withhold the rights to the rates they negotiate for customers. Good 3PLs, though, will negotiate the rates in their customers’ names. These true partnerships will not only provide access to all carriers to ensure that a company can match its needs against the open market, but empower the company to free itself from a partnership down the road without incurring financial hardship.
The 3PL that’s right for a company can depend heavily on volume and overall spend. Shippers with relatively low freight volume can benefit from brokerages or carrier agents and may be too small to qualify for the services provided by a shipper’s agent. If you’re looking for outside help to manage your freight, however, knowing and understanding what types of help are out there are important first steps in making the correct decision. Shipper’s agents are a perfect fit for shippers with a sophisticated supply chain.