What Is Contract Logistics?
Contract logistics entails outsourcing the resource management activities to a third-party firm. Contract logistics corporations design and plan supply chains, design facilities, do warehousing, transport and distribute goods, process orders and collect payments. Contract logistics companies also manage inventory and offer certain aspects of customer service.
Understanding Contract Logistics
Logistics management is one of the most vital components influencing the profitability and overall success of most companies. Even though some corporations handle their logistics, others consider hiring specialized contract logistics firms to take care of their logistics as they find it more efficient. Contract logistics firms must have a deep understanding of how different industries operate to help them efficiently manage the logistics of a wide range of companies.
Logistics management is one of the essential elements helping businesses that operate internationally create a sustainable competitive advantage. Accordingly, former logistics managers often start most contract logistics firms, as they already have a deep understanding of the industry they work in and where they can best place their contracts.
Examples of Contract Logistics
Some globally known contracts logistics corporations are DHL, Genco, United Parcel Service, Exel, and Kuehne + Nagel. These contract logistics companies have been there for decades, making their mark in their respective industries. They offer cost-effective solutions to both business owners and clients.
It is worth noting that the rise of startup culture has influenced the introduction of many new services to market, which have significantly disrupted the traditional supply chain model. For instance, Doorman has restructured the delivery concept to allow pickups and custom delivery to go beyond the normal scope of delivery hours. Besides, some companies have become more B2B focused; for example, ClearMetal, focuses on large-scale logistical automation, tracking items such as freight deliveries and shipping containers for their clients using modern software learning tools. This model has helped companies save a significant amount of money.
Benefits of Contract Logistics
Contract logistics has multiple benefits, with the most obvious one being saving costs. Cost-savings can come either in time or equity, eliminating the need to develop a costly infrastructure. For instance, a company that manufactures steel doors may have a big factory and still create office buildings to accommodate extra staff. Such a company would save costs using a contract logistics company to meet their shipping needs. As a result, they would not budget to invest in large shipping trucks, shipping facilities, airplanes, and packing materials, among other items that do not directly influence their design or product.
In addition, we should note that many contract logistics corporations are usually the largest in the field. Therefore, they can negotiate much lower prices than smaller production companies, making it cheaper to work with a contract logistics company than build the infrastructure yourself.
Contract Logistics vs. Freight Forwarding
Who are Freight Forwarders?
Freight forwarders—also known as forwarding agents or non-vessel operating common carriers (NVOCC)—are agents or companies that arrange transportation on behalf of corporations or individuals to get cargo from producers or manufacturers to markets and customers or final points of distribution channels.
What Do Freight Forwarders Do?
Freight forwarders make contracts with multiple shipping lines to help them move goods locally and internationally. Note that forwarding agents do not move goods by themselves but act as experts in the supply chain link. Carriers can use a wide range of shipping types, including but not limited to airplanes, vessels, railroads, and trucks. They often utilize intermodal methods for a single shipment from the source to the recipient. For instance, a forwarding agent can arrange to have cargos moved from the factory to the port by trucks, sail to the destination city, and from the discharge port to customers’ doors by other trucks.
How Deep Do Freight Forwarders Go?
Instead of optimizing the whole supply chain operation, NVOCCs essentially focus and specialize in more specific logistics functions in supply chain activities. Freight forwarders usually partner with many contract logistics companies (either nationally or internationally), giving the contract logistics companies price checking capabilities that are far much better and more thorough than what you (the manufacturer/producer) can get if you handle the shipment tasks directly. Like contract logistics companies, freight forwarders also have a deep understanding and experience in specialty companies, which usually vary regarding lead times, types of transport, fragile goods, and house moving, among others.
Benefits of Working with a freight Forwarder
Working with a freight forwarder presents multiple benefits over working with a contract logistics company. They include the following:
- They offer you a network of multiple contract logistics companies, helping reduce prices with more diversity
- Freight forwarders give more transparent pricing, as they often give their clients an in-depth breakdown for all costs
- Technology-based forwarding agents can give instant quotes
- Freight forwarders maintain data based on specialty routes along with route optimization to minimize delays
- Freight forwarders have a deep understanding of contract logistics companies in various areas of specialty, including fragile goods, household goods, and cold storage.
Freight forwarders may also manage all the paperwork related to freight forwarding, including bills of lading, customs documentation, shipper’s export declarations, letters of invoice, and insurance forms.
Differences between Freight Forwarders and Contract logistics Companies
Freight forwarders
Freight forwarding companies provide a broker-type of service that allows you (their customer) to get good rates and combination of carriers that they figure out on your behalf. They are intermediaries who coordinate almost everything from booking your cargo space to filing your insurance claims. Nevertheless, their services end at organizing the way your products will get from the source to the recipient. As a result, you will have to arrange for other tasks such as packing, warehouse storage, and picking packing.
Contract Logistics Companies
Contract logistics companies can be full-service, meaning that they are able to handle the entire supply chain, including packing, shipping, warehouse storage, and picking. As opposed to freight forwarders, contract logistics companies own all of their own assets, including the intermodal fleets of airplanes, trucks, or boats. Contract logistics companies usually specialize in specific elements, such as long haul, dry box, cold storage, large scale, or intracity. They will also attempt to cover all aspects of the supply chain.
In general, a contact logistics corporation is responsible for handling the physical movement of goods along the supply chain. They may also manage documentation for the goods.
Therefore, the fundamental difference between freight forwarders and contract logistics companies is that forwarding agents have a narrower focus on the transportation side of the supply chain, while the contract logistics companies have a more wide focus. However, these roles are changing as the logistics industry is constantly evolving.
Choosing between a Contract Logistics Company and a Freight Forwarder
Although it seems a challenging decision to make between working with a freight forwarding company or a contract logistics company, you (the customer) should know your needs and expectations that should be met by the companies, regarding performance and service.
Review the prevailing picture as you perform a cost analysis, evaluate flexibility, and assess the quality of quality to help you make the best decision. No matter which option you choose, ensure that all the goods transportation documents are completed in a time before surrendering your cargo.
3PL vs 4PL vs 5PL
What is 3PL?
Third-party logistics (referred to as 3PL services) is a model in which manufacturers maintain the oversight of their supply chain but outsources their logistics operations and transportation to a third-party logistics provider.
Services Rendered by 3PL Providers:
- Services offered by 3PLs include:
- Proper inventory management
- Inventory storage
- Contract management
- Freight forwarding
- Customs brokerage
- Picking and packing of goods
- IT solutions
- Cross-docking
- Affordable for SMEs with fast-growing orders
- Highly decentralization minimizes risks
- Saves time and money
- Responsive logistics model
- Ability to have control over returns
- Appropriate for local and international distributions
- Expensive if orders are low
- Limited control over inventory
- Only suitable for SMEs and MMEs businesses
- Low control over customer service experience as well as order fulfillment
Advantages of 3PL Providers
Disadvantages of 3PL Providers
Since 3PL providers act as managers between manufacturers and retailers, the service provider does not assume ownership of the items being shipped. A 3PL provider can be a suitable option for your business in case your supply chain is too complex for you to handle it effectively internally.
What is 4PL?
Fourth party logistics (4PL) services handle the management and organization of a whole supply chain for wholesalers and manufacturers or producers. In this model, product manufacturers outsource the packaging, logistics, warehousing, as well as delivery to retailers to a 4PL corporation. As a result, the 4PL company takes charge of all logistical operations for such producers.
Services Rendered By 4PL Logistics Companies
Below are services rendered by 4PL companies:
- Logistics strategy
- Freight sourcing strategies
- Analysis of transportation expenses
- Consultancy
- Effective management of third-party logistics
- Analysis of carrier performance
- Proper coordination of a wide supplier base in various geographic locations
- Project management
- Change of management
- Business planning
- Management of outbound, inbound, and reverse logistics
- Proper inventory management and planning
- Analysis of capacity utilization
- Network analysis and designs
- Effective outsource of all the logistics needs of a given business
- Unique and professional operational support
- Offers more sense of ownership and control of your business
- Gives one point of contact for all parties that are involved in the supply chain
- Outsources all the logistics to third-party professionals, allowing the producers to focus on product design and development
- Creates a lean and cost-effective supply chain for improved profit margin
- Can be cost-prohibitive for startups and small businesses
- Minimal control over logistics processes and order fulfillment
Advantages of 4PL
Disadvantages of 4PL
Manufacturers can minimize or eliminate inefficiencies in their supply chain by using 4PLs, making them focus more on product development and letting experts deal with the complexities of their supply chains.
What is a 5PL?
Fifth-party logistics (5PL) companies refer to organizations that source all their supply chains to logistics service providers. 5PLs offer similar services of both 3PLs and 4PLs logistics providers in addition to controlling and managing all networks in the given supply chain.
Functions of 5PLs
5PL providers serve the following three primary functions:
- Plan the 5PL logistics process
- Oversee and manage the entire logistics solutions
- Continuously improve and optimize the process for maximum efficiency
5PLs focus on e-commerce and strive to deliver these services at low cost.
Advantages of 5PLs
They manage many supply chains, presenting multiple benefits to fast-growing businesses
They negotiate best rates with other service providers on behalf of their users
They offer innovative automation systems, which speed up logistics processes
Disadvantages of 5PL
They may provide services for competing brands: they may do business with your competitors
Your business should be fully electronic, which gives you (the business owner) makes you virtually lose control over the order fulfillment process.
Contract Logistics Companies Vs 3PLs
Although many people treat contract logistics companies and 3PLs as same entities, they are somehow different.
3PLs are just like a partner company for their clients (your business) as the are fully liable for fulfillment of all logistics requirements of the business from the start until the end. 3PLs assume responsibility to handle everything, from minor to major tasks linked to the supply-chain management of the business.
On the other hand, contract logistics companies are logistics companies hired by a business on contractual basis only. These companies are liable for the job roles in which they are contracted only. The contract pre-defines and pre-decides these job roles.
Therefore, contract logistics companies are limited to offering their clients (manufacturers) services that are mentioned in the contract they signed. You can choose a wide range of the services, which are relevant to logistics based on your unique requirements with contract logistics.