3PL or Freight Forwarder: What's in a Name?
After 30 years in the transportation business, I am still waiting for a clear, simple explanation of the differences between third-party logistics providers (3PLs) and freight forwarders or consolidators.
Is 3PL just a fancy name for a freight forwarder, or do they actually provide services that an old-fashioned consolidator does not?
Yes, there are differences between the two. But many 3PL executives muddy the waters by spouting rhetoric that almost no one understands.
For example, one 3PL executive recently claimed that his company provides "business process platforms" to customers. Another offers "enterprise applications" to shippers.
Can anyone explain what these phrases mean? What happened to using clear, simple English when describing services to shippers?
What's the Difference?
Let me attempt a simple explanation of the different functions carried out by freight forwarders and third-party logistics providers.
Basically, forwarders move cargo from one point to another. Third-party logistics providers move, store, and process inventory, and in doing so, may provide traditional forwarder services.
An important question arises from this overlapping of services. Do shippers obtain genuine value for the transportation segment of the 3PL's service? The answer is often ambiguous.
To determine if they are getting real value, shippers should ask their 3PLs some hard and straight questions about the transportation part of their services. For instance:
- Are your transportation charges less expensive than freight forwarders?
- Will a shipment under your supervision arrive at its destination any faster than utilizing a freight forwarder?
- Once a shipment arrives, will it clear Customs more quickly than using a freight forwarder?
- Because you are non-asset-based and rely on air carriers and shipping lines to move your customers' freight, can you obtain lower rates and more reliable service than forwarders?
Forwarders are specialists that focus on the cost and logistics of transportation. Third-party logistics providers are usually generalists who expect to be compensated for providing an overall service. This compensation may or may not be cost-effective for shippers.
How many people will shippers eliminate from their staff by turning over complete logistics management to a 3PL? Ironically, 3PLs may use forwarders to move customers' freight. How effective are they in negotiating rates with forwarders so that the total cost to the shipper is no greater than using a consolidator directly?
Shippers must balance the "one-stop" convenience of a 3PL who claims to handle every aspect of the logistics process against the generally higher cost of that service.
Room for Everyone
Unlike many forwarders who claim 3PLs provide the same services as traditional consolidators—while charging much higher fees—I believe there is a legitimate place for both parties.
The DHX-Dependable Hawaiian Express division of our company acts both as a forwarder and third-party logistics provider. For one customer, for example, we provide receiving services by inventory item. Each inventory item is linked to purchase orders on a specialized software platform.
Our other two divisions, DGX and DAX, act primarily as forwarders, moving cargo with no detailed receiving or specially developed software.
This concentration strictly on forwarding activities, however, is changing at DGX, our worldwide cargo service. For imports into the United States, we have developed a network that links shippers/manufacturers, consignees, and forwarders. This network acts in real time, communicating every order placed with the vendor.
Interestingly, the business of companies calling themselves third-party logistics providers has slowed considerably, with many smaller entities looking to merge or be acquired. Many freight forwarders whose primary business is transporting goods from Point A to Point B, with ancillary 3PL services, are thriving.
This balanced combination of freight forwarding and 3PL services creates genuine value for shippers.
Forwarders Still Going Strong
Traditional freight forwarders continue to play a dominant role in international trade, controlling 90 percent of all heavyweight international air shipments.
This percentage has remained remarkably constant during the past 30 years, despite all the technical and operational changes during that time. For ocean shipping, traditional forwarders control 75 percent of less-than-containerload revenues.
Air carriers and ship lines that in the not-too-distant past employed huge numbers of salespeople to market their services have cut these staffs to the bone. Direct carriers increasingly rely on the forwarders' ability to sell their transportation services instead of marketing directly to end customers.
Yes, there are differences between 3PLs and freight forwarders. Increasingly, however, these services are blending.
To remain successful in today's fiercely competitive logistics market, both freight forwarders and third-party logistics providers must never forget that despite all the technical advances and innovations, logistics remains a people business.