Contract logistics: outsourcing your supply chain

May 3,2024

As a result of globalisation and e-commerce, economic relationships today are more varied and more closely interwoven than ever before. And this is also true of goods flows. For companies wishing to outsource all or part of their supply chain, contract logistics specialists coordinate these different flows of goods and use their expertise to ensure that the various supply chain processes fit together perfectly. They optimise the value chain and develop tailor-made logistics solutions for their customers. In addition to increased competitiveness and flexibility, outsourcing logistics processes has many other benefits for companies.

What are contract logistics?

Companies that manufacture, sell or distribute products need to get them from the production site or warehouse to retailers and consumers. Often, this supply chain includes additional services such as storage logistics, packaging and repackaging, and returns management. For companies, this involves considerable cost and energy, which is why they are increasingly outsourcing these various tasks.

In this case, the customer and the logistics company enter into a contractual business relationship for a defined period, during which the logistics service provider takes charge of all or part of the logistics services defined in the contract.

Contract logistics: differences in levels

Depending on the degree of involvement of the service provider in its customer’s supply chain and the type of services provided, it is classified into different levels:

First Party Logistics (1PL): Outsourcing here only concerns the transport of goods, as well as their loading and distribution.

Second Party Logistics (2PL): As well as transporting goods, the logistics service provider also takes care of their storage and warehousing, usually on its own premises made available to its customer.

Third Party Logistics (3PL): It is at this level that we really start to talk about contract logistics, because here the service takes on another dimension by acting on the customer’s entire supply chain. The service provider takes charge of warehousing, order preparation and transport, as well as value-added services (customs formalities, unpacking, labelling, storage, quality control, etc.), with a view to improving performance and profitability.

Fourth Party Logistics (4PL): At this level, the contract logistics service provider simply provides advice on optimising logistics processes. It does not itself provide warehouses, staff or vehicles, but rather commissions subcontractors to do so.

Fifth Party Logistics (5PL): This level is mainly represented in e-commerce. The contract logistics of these large service providers include the combined services offered by 3PLs and 4PLs.

The advantages of contract logistics

For companies using service providers, outsourcing is often synonymous with cost reduction and improved performance. Companies themselves no longer have to rent or buy warehouses and the associated technology. Instead, they benefit from the warehouse logistics of their service providers. 3PL companies, for example, make their warehouses available, while ensuring that they work as efficiently as possible to reduce costs.

Thanks to a state-of-the-art, automated warehouse, 3PL companies can offer their contractual partners a number of advantages, such as:

Transparent, calculable costs
Warehouse scalability to meet seasonal peaks
Reliable systems and reduced labour bottlenecks

In return, the 3PL also benefits from numerous advantages thanks to the use of an automated warehouse shared by several of its customers:

Products from several principals can be stored, picked and prepared on the same site.
Staff costs are reduced and human error is minimised.
The storage volume or the number of autonomous mobile robots can be quickly adapted to suit the varying quantities to be prepared. This largely avoids costly ‘downtime’ or lost revenue due to unanticipated ‘peaks’.

The various services are precisely defined in the contracts, giving the company total control over costs and a high degree of planning certainty. Companies also benefit from the many years of experience of their contractual partner, who optimises processes and tailors them individually to the customer’s requirements. With 3PL providers in particular, customers do not need to rent or build a warehouse, but benefit from their partner’s existing storage infrastructure. The result for companies is an extremely attractive price/performance ratio.