3PLogistics Business Models
The Indian Economy is continuously evolving, which provides a lot of room for expansions and start-ups. Logistics plays a crucial role in almost all businesses and its importance increases with the size of the business. Logistics refers to the flow of resources from the point of production to the point of consumption. It involves planning, packaging, storing and transporting goods from one point to another. The logistics services can be broadly categorised into Freight Forwarder, Carriers and 3PLs. Types of Logistics Services Freight Forwarders refer to the business involved in arranging the most efficient and affordable transportation path. E.g., suppose a company wishes to transport goods from one country to the other. In that case, freight forwarders plan the transportation process, optimizing both time and cost involved, arranges the mode of transportation involving multiple freight companies (companies responsible for the transportation of goods from one point to the other through a particular or combination of modes) and takes care of all the paperwork involved.
Carrier business: Unlike freight forwarders, carriers are directly involved in the transportation process. Freight company’s limited resources provide service only for short distances. Carriers, on the other hand, possess multimodal transportation logistics that enable the entire transportation process under a single company name. 3P Logistics business: 3PL business’ services include transporting, warehousing, packaging, freight forwarding and providing strategies to reduce the overall cost involved. Hence the main difference between 3PL and Freight forwarders is that the latter is more focused on the transportation side of the supply chain, whereas the former provide broader services that form a part or all of the supply chain logistics of a business.
The 3PL lent business is more complicated than the other and thus, they adopt a variety of business models to increase efficiency and profitability. Some p business models that are prevalent among the 3PLsreva are discussed below. 3PL business models: Business models determine how an organisation should operate to increase its efficiency and profitability. The models widely used by the 3P logistics business include the broker model, gainsharing and commission model. Broker model This is one of the most common business models followed by a wide range of industrial sectors where the seller acts as a broker charging brokerage for their products and services. In our case, the 3PL business charges a fee for their services, including warehousing, packaging and transporting goods.
. The profit gained by business following the broker model depends on the level of economies of scale achieved during the process of purchasing storage space and transportation resources. A large 3PL purchases shipment space, exercising the economies of scale (i.e., as space purchased increases, the cost per unit area decreases) and sells/ leases it to the buyer. If a buyer directly buys from the seller, the cost involved is much larger than purchasing them from the 3PL business. Gainsharing model Gainsharing is one of the most efficient models, followed by companies from various sectors to increase productivity by motivating the customer/ service buyer based on productivity, time management and other measurable metrics. This model is different from a profit-sharing model, which provides benefits based on the overall profit. In the case of the b2b market, one organisation agrees to split profit if the other organisation agrees to provide benefits first. In our case, 3PL can reduce the shipping and storage cost per unit quantity of goods in return for a share in the profit gained.
Though this model can benefit both the organisation, a considerable risk is involved in profit sharing. During the initial stage, the buyer purchases service for a reduced price and is in an advantageous position, but in the end, sharing profits can become painful. Commission model: In the commission model, a percentage is given to the salesperson for each sale made. In the case of 3PL, this model is adapted when it doesn’t have its own transportation resources and is dependent on freight companies. A percentage of 3PL’s earnings is given as commission to freight companies. The usage of the freight company’s service helps the 3PL company use advanced tech products to increase efficiency at a reduced price. Which model is the most popular and why? The broker model is the most common business model used by 3PL due to various reasons.
Some are:
1.Privacy – only two organisations are involved in the trade. Hence 3PL has more freedom compared to the other models
2. A fee charged – in the broker model, the buyer agrees to purchase the service for a predetermined fee. In the case of gainsharing, controversies may arise in sharing profits.
3. Relationship – direct communication between the buyer and seller has a positive effect on their relationship. In the commission model, involving another organisation may disrupt the communication between the buyer and the 3PL company. Hence, even though the other two models have the edge over the broker model in terms of profitability, they are less popular and prevalent
– Akash
