In short: third party logistics is the outsourcing of warehousing, fulfilment and distribution to a specialist provider. A 3PL receives your stock, stores it, picks and packs orders, arranges carriage and handles returns, so you do not need your own warehouse or logistics team. This guide covers how the model works, the types of provider, what they charge for and what regulation applies in the UK.
What is third party logistics?
Third party logistics, usually shortened to 3PL, describes an arrangement where a business hands its warehousing and distribution to an outside specialist rather than running it in house.
The first party is the company that owns the goods. The second party is the customer receiving them. The third party is the operator who bridges the two: storing the stock, assembling the orders and getting them on a vehicle.
The arrangement suits businesses whose growth has outpaced their storage, and those who would rather put capital into product and marketing than into racking and forklifts. It also suits seasonal businesses, because a 3PL absorbs the peaks that would otherwise mean signing a lease for space sitting empty half the year.
In the UK the sector spans everything from single site operators handling a handful of ecommerce brands to national networks running dedicated contracts for major retailers. The financial shape of those businesses varies enormously, which is why accountants for third party logistics companies tend to look at contract level performance rather than headline revenue.
How does a 3PL work in practice?
Most third party logistics companies follow the same operational sequence, whatever their size.
Receiving and putaway
Stock arrives from your supplier or manufacturer. The 3PL checks it against the expected delivery, records any discrepancies, and puts it away into a location recorded in the warehouse management system. Poor receiving is the root of most stock accuracy problems later, so this stage matters more than it looks.
Storage
Goods sit in pallet racking, shelving, bins or bulk floor space depending on volume and product type. The type of storage a product needs is one of the biggest drivers of what it costs to hold, which is why two clients paying the same nominal rate can be very differently profitable for the operator.
Order processing and picking
Orders flow through from your website, marketplace or ERP into the 3PL system, usually by integration rather than manually. Pickers then assemble each order. How they do it varies: single order picking, batch picking across multiple orders, or zone picking where a tote moves between areas of the warehouse.
Packing and despatch
Orders are packed, labelled and manifested to a carrier. Most 3PLs hold their own carrier accounts and pass negotiated rates on, which is often cheaper than a smaller brand could achieve alone.
Returns processing
Returns come back, get inspected, and are either returned to saleable stock, repaired, or written off. In some categories the returns rate is high enough that this stage determines whether the contract makes money at all.
Value added services
Many operators also offer kitting, bundling, labelling, gift wrapping, subscription box assembly, quality inspection and light assembly. These are usually charged separately and are frequently the most profitable part of the operation.
What types of third party logistics companies are there?
The term covers several quite different business models.
Warehousing and distribution providers
Asset based operators whose core offering is storage and fulfilment from their own or leased sites. The most common model in UK ecommerce fulfilment.
Transport based providers
Businesses built around a fleet, offering distribution, trunking and delivery, sometimes with storage attached. Their financial profile is dominated by vehicle costs and driver pay rather than property.
Freight forwarders
Operators who arrange international movement by road, sea or air, handle customs formalities and often offer bonded storage. Many have added fulfilment to capture more of the chain.
Ecommerce fulfilment specialists
Focused on direct to consumer brands, marketplace sellers and subscription businesses. Characterised by high order counts, small basket sizes, tight cut off times and heavy systems integration.
Contract logistics providers
Operators running dedicated sites or dedicated space for a single large client, usually on multi year agreements. Lower margin percentages but far greater stability.
Specialist and regulated operators
Temperature controlled storage, hazardous goods, bonded and duty suspended warehousing, pharmaceuticals, high value and secure storage. Higher barriers to entry and correspondingly better margins.
What services do third party logistics companies offer?
Beyond the core storage and fulfilment, most UK operators offer some combination of inventory management and reporting, carrier management and rate negotiation, customs clearance and import handling, marketplace and channel integration, kitting and assembly, returns and reverse logistics, and dedicated account management.
The breadth matters when you are comparing providers. Two quotes that look similar on storage and pick rates can diverge sharply once the services you actually need are priced in.
What are the benefits of using a third party logistics provider?
The strongest argument is capital. Warehousing is expensive to set up and expensive to leave. A lease, racking, handling equipment, a warehouse management system and a team represent a substantial commitment before a single order ships. A 3PL converts that into a variable cost that scales with volume.
Flexibility is the second. Seasonal businesses can expand and contract without carrying empty space through the quiet months.
The third is capability. An established operator already has carrier relationships, systems integrations, trained staff and processes that took years to refine. Buying access to that is usually faster and cheaper than building it.
The fourth, and the one most often overlooked, is focus. Running a warehouse is a discipline in its own right. Founders who take it on frequently find it consumes the attention they intended to spend on product and customers.
What are the drawbacks of using a 3PL?
You lose direct control of the customer experience at the point where it is most visible. If orders ship late or arrive badly packed, your brand carries the complaint.
Integration can be harder than expected. Connecting your systems to theirs is rarely as simple as either party suggests at the outset, and the quality of that connection determines how much manual work you inherit.
Costs can be less predictable than the quote implies. Pricing in this sector has many components, and the ones that catch brands out are usually the ones they did not think to ask about.
Switching is difficult. Moving stock between providers takes planning, costs money and carries risk, which means a poor fit can be expensive to correct.
How do third party logistics companies charge?
Pricing is rarely a single rate. Most UK operators build a quote from several components.
Storage is typically charged per pallet, per shelf location or per square foot, usually per week or per month. Receiving is charged per pallet, per carton or by the hour. Pick and pack is charged per order and then per additional item within the order. Packaging may be charged at cost, at a markup, or absorbed. Carriage is passed through, often with a handling margin. Returns are usually per item. Account management may be a fixed monthly fee.
On top of that sit the variables: minimum monthly charges, peak surcharges, fuel surcharges from carriers, charges for non standard packaging, and fees for ad hoc work outside the agreed scope.
For the brand, the lesson is to model your own order profile against a quote rather than comparing headline rates. For the operator, the lesson is that a pricing structure built without accurate cost to serve data will win contracts that lose money, which is exactly why specialist 3PL accounting support focuses on margin at contract level.
What is the difference between 3PL and 4PL?
A 3PL executes. It stores your goods, picks your orders and arranges transport, and it usually owns or leases the assets involved.
A 4PL, sometimes called a lead logistics provider, manages. It sits above the supply chain, designs it, and coordinates the providers who carry it out, often without owning warehouses or vehicles itself. A business using a 4PL typically has one relationship to manage rather than several.
In practice the boundary blurs. Many large 3PLs offer 4PL style management for clients who want it, and some 4PLs have acquired physical capability. The distinction matters most when you are deciding who is accountable when something goes wrong.
How do you choose a third party logistics company?
Start with fit rather than price. An operator whose other clients look like you will have processes suited to your order profile. One whose clients are all pallet out retail will struggle with single item ecommerce, and the reverse is equally true.
Ask what systems they run and how they integrate with yours, then ask to see it working rather than accepting that it is possible. Ask how they handle peak, and specifically what capacity they have committed to other clients during the same period. Ask what their stock accuracy is and how they measure it. Ask what happens when an order is picked incorrectly and who bears the cost.
Visit the site. A well run warehouse looks and feels different from a poorly run one, and an hour on the floor tells you more than a tender document.
Finally, read the exit terms before you sign. The point at which you need them is the point at which the relationship has already broken down.
What regulation applies to third party logistics companies in the UK?
Operators storing goods on behalf of overseas sellers need to be registered under the Fulfilment House Due Diligence Scheme, and the obligations that come with it include record keeping and due diligence on the clients whose goods they hold.
Businesses running goods vehicles above the relevant weight for hire or reward need an operator licence, with the associated requirements around transport managers, maintenance and financial standing.
Warehouses carry the full weight of health and safety duties, and the risk profile in a site running mechanical handling equipment alongside pedestrians is significant. Racking inspection, vehicle segregation and working at height all sit here.
Customs and import obligations apply to anyone handling goods from overseas, with bonded and duty suspended storage carrying further conditions. The VAT treatment of storage and fulfilment services also varies depending on who the customer is and where they are established, and the evidence requirements are stricter than many operators expect.
Data protection applies too, since a 3PL processes customer names and addresses on behalf of its clients and needs the contractual position to reflect that.
What does running a third party logistics business involve financially?
Operators face a different set of questions from the brands they serve.
The first is visibility. Margin in this sector lives at contract level, not company level, and a blended figure will hide both your strongest client and your weakest. Producing management accounts that separate margin by client, by contract and by site is the single most useful thing an operator can do, and it depends on the chart of accounts being built for it from the start.
The second is cash. Wages, carrier invoices, rent, rates and fuel leave on fixed cycles. Customers pay on their own terms. Growth consumes cash before it generates any, and peak amplifies the gap.
The third is capital expenditure. Racking, mezzanines, handling equipment, dock infrastructure, vehicles and warehouse systems are treated differently for tax, and the split within a single fit out invoice is rarely obvious. Reviewing capital allowances before a claim is prepared protects the position in a way that reviewing it afterwards cannot.
The fourth is pricing discipline. Operators who cannot see cost to serve tend to win work on rate and discover the problem at renewal. Building the reporting first, then pricing from it, is the approach that holds margin as volume grows. This is where business advisory work tends to earn its keep.
Frequently asked questions
What does 3PL stand for?
3PL stands for third party logistics. It refers to a provider that handles warehousing, fulfilment and distribution on behalf of another business.
What is the difference between a 3PL and a fulfilment centre?
A fulfilment centre is usually focused on picking and shipping individual orders to consumers. A 3PL is a broader term that can include fulfilment, but also bulk storage, distribution to retailers, freight and value added services. Every fulfilment centre is a 3PL; not every 3PL is a fulfilment centre.
How much does a 3PL cost?
There is no single rate, because pricing is built from several components including storage, receiving, pick and pack, packaging, carriage and returns. The only reliable way to compare providers is to model your actual order profile against each quote rather than comparing headline rates.
Do I need a 3PL for my ecommerce business?
It depends on order volume, growth trajectory and how much capital you want tied up in warehousing. Businesses shipping small volumes from home often manage well without one. The case usually becomes compelling when fulfilment starts consuming time that would be better spent on product or customers, or when space becomes a constraint.
What is the Fulfilment House Due Diligence Scheme?
It is an HMRC scheme requiring businesses that store goods in the UK on behalf of overseas sellers to register and carry out due diligence on those clients. Operating without registration where it applies carries serious consequences.
Can a 3PL handle international shipping?
Many do, either directly or through carrier and forwarder relationships. If international is important to you, ask specifically about customs documentation, duty handling and which destinations they routinely ship to, rather than accepting a general yes.
How do 3PL companies make money?
Through a combination of storage income, transactional fees on receiving, picking and packing, margin on carriage and packaging, and value added services such as kitting and returns handling. Profitability depends heavily on how efficiently space and labour are used, which is why cost to serve varies so much between clients.
Speak to a specialist logistics accountant
If you run a third party logistics operation and cannot currently see which contracts are making money, that is where to start. Pulse works with 3PL, warehousing, fulfilment and transport operators across the UK. You can read more on our logistics and 3PL sector page, or if you are based in the capital, on 3PL accountants in London.
Speak to our team about what your reporting shows you now, and what it would need to show you instead.
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