Contract Logistics: Definition and Advantages

What Is Contract Logistics?

Contract logistics refers to the outsourcing of resource management responsibilities by one company to another. Contract logistics companies specialize in matters such as planning and creating supply chains, designing facilities, warehousing, transporting and distributing goods, processing orders and collecting payments, managing inventory, and sometimes handling certain aspects of customer service.

KEY TAKEAWAYS

•Contract logistics refers to the outsourcing of resource management tasks by one company to a third-party company specializing in logistical matters, such as transportation, warehousing, and order fulfillment.

•Companies, including manufacturers and retailers, may contract with logistics firms when they don't want to manage these processes themselves. Other, typically larger, companies may have their own logistics departments.

•Using a contract logistics firm can sometimes save a company money, in part because of the negotiating leverage a large logistics firm may have in dealing with suppliers.

How Contract Logistics Works

The term "logistics" originated in the military, where it is still in active use. In its training materials, the U.S. Army defines it as "the processes, resources, and systems involved in generating, transporting, sustaining, and redeploying or reallocating materiel and personnel."

Businesses, particularly those involved in manufacturing, adopted the term to describe their own procedures for acquiring, storing, and transporting resources—from raw materials to finished goods.

Some companies handle their own logistics and may have departments with logistics managers (sometimes called logisticians) to supervise the various steps in the process. Other companies find it more efficient and cost-effective to hire specialized contract logistics firms to manage all or part of their logistics for them.

Because industries vary in their logistical needs, contract logistics companies need to develop an understanding of business practices in the different sectors they serve. For that reason, many contract logistics companies have been started by former corporate logistics managers, who already have a good understanding of a particular industry and useful contacts at every point along the supply chain.

Contract Logistics and 3PL

The terms "contract logistics" and "third-party logistics" (3PL) are often used interchangeably. In other instances, third-party logistics refers to a wider range of logistical services, while contract logistics may refer simply to the transportation of goods by sea, air, and land.

Examples of Contract Logistics Companies

Among the largest and best-known contract logistics companies are United Parcel Service and FedEx Supply Chain, both based in the United States; Kuehne + Nagel, based in Switzerland; and DHL Supply Chain, based in Germany. These companies have been around for a long time and are well-established internationally. There are also many smaller and newer competitors, some specializing in particular niches of the market.

Benefits of Contract Logistics

The most obvious benefit of contract logistics to a company is cost savings, particularly by eliminating the need to build and maintain a costly logistics infrastructure. By farming out the work, a company can avoid the expense of shipping facilities, trucks, packing materials, and so forth, as well as the personnel to do the work. It can also focus more of its attention on its core business.

In addition, since large contract logistics companies have the benefit of scale, they are often able to negotiate lower prices from suppliers than a typical business could. For that reason, it may be be cheaper to work with a contract logistics company than to manage those tasks internally.

Contract Logistics and E-Commerce

In addition to traditional brick-and-mortar manufacturers and retailers, contract logistics companies now play a major role in e-commerce, taking on responsibility for the warehousing, inventorying, packing, and shipping of an e-commerce company's products.

The biggest online retailers may still find it more economical to handle their own logistics. Amazon, for example, has its own fleets of planes and trucks, as well as more than 175 "fulfillment centers," or warehouses. The consulting firm McKinsey & Co. estimates "that if Amazon’s logistics unit were a separate company, it would be the fifth-largest third-party-logistics company in the world."

What Is a Supply Chain?

A supply chain represents the step-by-step process through which a product ultimately reaches the consumer, which might be an individual or another business. In its most basic form, it can begin with the procurement of raw materials or components, followed by the manufacture of a product, and then its packaging and shipment to the ultimate consumer.

A company's various suppliers represent the links in its supply chain. The reliable production and movement of goods depends on the performance of each link in the chain, as the world saw in 2021 when the failure of several U.S. ports to keep up with container ship traffic resulted in delays and shortages of many products. The terms "supply chain management" and "logistics" are sometimes used interchangeably.

What Is Logistics?

In industry, logistics describes the step-by-step process through which companies acquire the raw materials they need, manufacture a product using those materials, then package and ship the product to the ultimate consumer.

What I Reverse Logistics?

The logistical process isn't entirely finished when the buyer receives the product. The buyer may find the product unsatisfactory and decide to send it back for a refund. The retailer or manufacturer may then recycle the product, reclaim its raw materials or valuable components, refurbish it, or resell it. When a product travels in this direction, back from the consumer rather than to them, reverse logistics becomes involved. Contract logistics companies can handle reverse logistics, as well.

The Bottom Line

Contract logistics refers to the farming out of certain essential tasks, such as shipping and warehousing, from a business like a manufacturer or retailer to another company specializing in logistical matters. While most consumers may be unaware of the many steps involved in producing a product and delivering it to their doorstep, failures in the supply chain can cause shortages and other inconveniences for individuals and businesses, and even major damage to the overall economy as was seen in 2021. Those relatively rare situations highlight the importance of logistics and the role played by by contract logistics companies in keeping things running smoothly.

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