What Is a Logistics Service Provider (LSP)? Types and Services Offered (2024)

Many small businesses and startups initially prefer to handle every part of fulfilling ordersthemselves to ensure a high-quality experience for every customer. But as a company grows,especially its ecommerce operations, staff may not have the time or resources to efficientlybox up every package, stamp every envelope and ship every item. When operating at capacity,businesses are often faced with two primary options if they want to grow: Expand theworkforce or outsource some of the responsibility. For businesses looking to rely onexternal expertise — and the potential savings that can bring — logisticsservice providers offer a wide range of services that can help a business meet its logisticsneeds, letting managers spend less time taping up boxes and more time growing the company.

What Is a Logistics Service Provider (LSP)?

Logistics service providers (LSPs), commonly referred to as third-party logistics (3PL)providers, are companies that specialize in the handling, storage and transportation ofgoods — also known as logistics. These goods includethe raw materials used to create products, as well as the final products shipped tocustomers. Some companies are capable of handling their own logistics, but that can presenta challenge as companies grow, especially for wide-reaching ecommerce businesses withcustomers expecting quick delivery times.

LSPs provide warehouse capacity wherever a company does business, offering a more affordablesolution than building and maintaining multiple warehouses. LSP services can range fromsimple shipping solutions to complex operations that control clients’ entire supply chain, soit’s important for businesses interested in LSPs to understand their own logisticsneeds to effectively balance the benefits with the costs they will accrue.

Key Takeaways

• Logistics service providers help businesses manage their supply chains, includingwarehousing, inventory management, shipping and returns (reverse logistics).
• Logistics service providers typically range from in-house, first-party LSPs to complexfifth-party LSPs. Different levels of LSPs provide different services and maintainvarying levels of control over a business’s operations.
• LSPs offer many services to help businesses grow efficiently, but they can be costly ifa business is able to more affordably maintain some aspects of its logistics itself.

Logistics Service Providers Explained

Logistics as a management service hasevolved from its beginnings in military science to now apply to the processes needed for anycomplex operation. In fact, the Merriam-Webster dictionary lists both definitions. The firstis the “procurement, maintenance and transportation of military material, facilitiesand personnel”; the second defines logistics more broadly as “the handling ofthe details of an operation”.

As a business’s order volume increases, so, too, do its logistics needs. For example,if it takes one worker 10 minutes to package and ship one order, the rate that orders can befulfilled is about six orders per hour per worker (60 minutes / 10 minutes per order). Abusiness with a small staff — let’s say five workers — can expect afulfillment rate of about 30 per hour (5 workers x 6 orders per worker). While it ispossible to increase staff to raise orders to 36, 42, 48 per hour, it may be morecost-effective to outsource order fulfillment to alogistics service provider that can more quickly process orders, leaving staff to focus ongrowth tasks, such as research and development and creating new marketing strategies.

Why Businesses Use Logistics Service Providers

Businesses that no longer want to handle their own logistics can benefit from using an LSPboth directly through efficiency and cost-saving measures and indirectly from theLSP’s expertise and support. Here are some common reasons why companies choose to workwith LSPs.

• Scalable growth and efficiency: Companies that start out handling theirown logistics often realize that doing so is unsustainable in the long run as theirbusiness grows. When staff is working at capacity and no productivity improvements canbe found, efficiently expanding staff can present a challenge, especially for businesseswith inconsistent sales periods or unexpectedly increasing demand. Growth may also bringunforeseen logistics costs, such as higher shipping rates, shipping insurance andpacking materials that chip away at profits. Those costly aspects of logistics —both in terms of time and money — can be better controlled by an LSP that isalready an expert in the field of logistics. Instead of taking a risk on a new factoryor a wave of new hires, many businesses turn to LSPs to efficiently scale theiroperations.
• Optimized supply chain: If a business has a complex supply chain or afar-flung customer base, an LSP can help ensure that customers’ needs are metwhile minimizing waste and adding value at each step of the supply chain more quicklyand effectively than most businesses can handle on their own. In the era of two-day oreven same-day shipping, many customers will abandon their carts and look for anothersource if they see week-out or month-out shipping estimates. LSPs can effectivelyallocate inventory among warehouses spread throughout a region — be it statewide,nationally or globally — to ensure quick and cheap delivery for customers,regardless of where they reside. Returns, or reverse logistics,can be similarly streamlined through local drop-off points or return processing centers,saving on shipping and increasing customer satisfaction throughout the sales and returnsprocess.
• Industry networking and experience: Many LSPs work with other logisticscompanies to handle tasks like shipping and custom packaging. By partnering with theright LSP, a business may also gain access to a large network of bulk discounts andcustomizable options for all its logistics needs. This can help minimize costs and speedup order fulfillment, creating a win-win for both companies and customers. Additionally,LSPs can use these networks to give businesses time-tested advice to plan futuredecisions, such as how to effectively allocateinventory or how to cost-effectively reach their customer base.

Why Businesses May Handle Logistics In-House

Not every business will benefit from using a logistics service provider. Here are two mainreasons why some companies may decide to keep logistics management in-house.

• Cost: LSPs are often large companies with long or expensive contracts,especially for businesses just starting out. If a business’s staff can effectivelyhandle the logistics responsibilities involved in day-to-day operations, especiallybusinesses with low order volume, an LSP may end up costing more than just hiring a fewmore pairs of hands.
• Loss of control: Some businesses may not want to relinquish control oftheir product or their operations to a second or third party. For example, a businessthat offers personalized products may include a note to each customer or provide someother type of customized experience with specific orders. This could be a marketingstrategy to capture repeat customers, increase word of mouth or help the product goviral. By giving up the hands-on approach to order fulfillment, a business may lose whatmakes it special and end up losing customers. It’s important for companies toanalyze the impact that outsourcing can haveon the final product and customer experience.

Types of Logistics Services

Logistics services look different depending on the needs of the client, but generallyspeaking, most services handled by an LSP fall into one of three main categories:warehousing, freight shipping and courier services. Businesses may choose to handle one ormore of these categories in-house and outsource the others or let their LSP handle allthree.

Warehousing Services

A business’s inventory needs to be stored somewhere during the period betweenmanufacturing and final product delivery to customers. For companies looking to expand intonew regional markets or for those with far-reaching client bases, purchasing or building andmaintaining warehouses may be too expensive to effectively handle in-house. By partneringwith an LSP that runs and maintains disparate warehouses, abusiness can store its goods closer to its customers without the large real-estateinvestment typically needed to maintain multiple warehouses. Instead, the business can payonly for the warehousing service, leaving the warehouse rent and upkeep to the LSP. And forclients that don’t sell enough goods in an area to justify an entire warehouse, manyLSPs store multiple companies’ products in a single warehouse, known as multi-tenancy,eliminating the waste in rent and utilities that can accompany a half-empty warehouse.

Freight Shipping

For domestic companies, freight may primarily involve a fleet of trucks moving goods from onelocation to another — both inboundmaterials and outbound products. But as a company’s operations expand, freightshipping can involve tasks that may be too complex for a company without a specialized— and expensive — transport management system. These tasks may includeoptimizing “less-than-truckload” shipments, using multiple transportation modes— such as air, ship and truck travel, known as multimodal transportation — routeplanning and more. Many LSPs are equipped with the technology to handle these tasks moreefficiently than a business that doesn’t specialize in transport management.Additionally, LSPs can manage the extra requirements that international shipping may need,including customs forms and tariff payments. Businesses without the infrastructure to handletheir freight needs can rely on LSPs and avoid having to employ an on-site staff of expertsto manage their more complex shipments.

Courier Services

Courier services typically provide the final delivery to customers but may also offerservices for shipments with special circ*mstances, such as fragile products that need extracare during delivery, small items or low-volume orders. Because courier services are oftenthe most likely to directly interact with customers, businesses must make sure these LSPsare reliable, or they run the risk of losing customers. Businesses that are unable toreliably handle their direct deliveries or lack the special equipment needed for deliveriesthat require features like temperature control can enlist an LSP to help meet those needswithout incurring the large startup investments that come with creating a delivery fleetfrom the ground up. LSPs may also offer more detailed tracking, regular updates and customizable deliverytimes to give customers more options and businesses more confidence that theircustomers’ needs are being met.

Tasks of Logistics Service Providers

Logistics service providers handle more than just storage and transportation — unlessthey’re first- or second-party LSPs, which only handle shipping (more on that later).For LSPs third-party and above, a more comprehensive list of tasks they manage may include:

Incoming-goods logistics:

When raw materials or supplies are brought in, the logistics service provider will make surethe shipment matches the initial purchase order and allocate the materials to theirappropriate destinations. For companies with multiple production facilities, this mayinvolve cross-checking current levels to make sure that no factory is left waiting whileanother has more supplies than it needs. More complex LSPs may also handle the orderingprocess in addition to incoming logistics.

Inventory management:

Inventory managementis the entire process of managing inventories from raw materials to finished products. AnLSP can help businesses identify and respond to trends to ensure there’s always enoughstock to fulfill customer orders, and it can provide proper warning of a shortage.

Warehousing:

For finished goods, warehousing is more than just storage. Proper cataloging is crucial toensure that goods can be picked and shipped quickly. Without proper labeling, orders can beleft unfulfilled, leading to dissatisfied customers. For LSPs that use multi-tenantwarehouses, accurate organization and cataloging ensure that different clients’ goodsare kept separate and accounted for.

Order tracking:

When orders are received, it is the LSP’s responsibility to manage and fulfill them.Often, orders are placed and managed through a business’s own enterprise resource planning (ERP) system, whichshould be integrated with the LSP, allowing for both the client company and the LSP toeffectively track orders. Without proper integration, orders can be left unfulfilled, orin-transit orders may be mistakenly labeled “not yet sent” and reshipped.

Invoicing:

Many companies prefer to bill their customers themselves and pass the orders along to an LSP,but some LSPs offer direct customer invoicing. These invoices should be matched withoriginal order numbers and prices to ensure accuracy before orders are shipped. Paymentreceipts should be saved and tracked to keep accurate records for the future.

Logistics service providers also regularly bill their clients based on the terms of theircontract — often monthly or yearly. LSPs typically have several clients at one timeand may bill flat rates or vary charges by the services provided. LSPs offering more complexservices will generally have higher costs.

Picking and packing:

After an order is placed, the items must be picked and processed. The LSP will handle itempicking and label generation, often using internal track-and-trace systems with“license plate numbers” (LPNs) to ensure that every item and package are kepttogether as entire orders are completed. These tracking systems also keep inventory countscurrent and accurate.

Shipping:

Logistics service providers will either have their own fleet of vehicles for shipping oroutsource this service to another company. When an order is placed through the clientcompany, customer information is forwarded to the LSP with the order details to initiate thedelivery. Businesses that have specific delivery requirements, such as time-sensitivearrivals or temperature-controlled environments, often use LSPs as a more affordableshipping option. This is especially true if these types of deliveries account for only asmall fraction of a business’s sales, which doesn’t justify the large investmentneeded to purchase a specialized fleet of its own.

Payment and finance management:

LSPs manage the day-to-day costs of shipping and warehousing goods, including labor andpacking materials, with client companies outsourcing the payment management responsibilitiesfrom an internal accounts payable team to the LSP. Through detailed analysis of logistics key performanceindicators (KPIs), such as shipping cost per unit, shipping cost per mile/kmtraveled or shipping cost per lb/kg of package, LSPs are able to identify trends andoptimize their shipping methods and logistics operations to minimize waste and reduce costsfor themselves and their clients. Businesses can also receive bulk discounts through theirLSPs that they would not qualify for on their own, freeing up capital for other financialneeds, like growth or managerial investments.

Many LSPs process customer payments for their clients as well. Businesses relying on LSPs tocollect payments from customers must make sure accounts are properly integrated so thatpayments end up where they belong – with the client’s accounts receivable team.And for businesses extending credit terms to customers, it is important to ensure thatpayments are properly linked to purchase orders and shipping confirmations to match whatgoods were sent. Not every LSP takes over responsibility for payment collection, so in-houseaccounts receivable staff must fully understand what they are responsible for and what isbeing outsourced to the LSP. Otherwise, customers may get their goods without ever receivingan invoice, resulting in losses for the company.

Returns:

Returns, also known as reverse logistics, can present a challenge for a company operatingwith small margins. Many LSPs handle customer returns and also raw materials returns tosuppliers. Because LSPs typically have more locations and a wider reach than their clients,customer returns through an LSP can be cheaper and more convenient for both customers andsuppliers at either end of the returns process. Easier returnpolicies can give customers more confidence when shopping and lead to more repeatcustomers, even when orders need to be returned.

Disposal:

Some products will inevitably need to be disposed of due to damage, malfunction or outdatedand discontinued product lines. Businesses often end up with storage units and warehouseshelves filled with goods that will never be sold, so many turn to logistics serviceproviders to handle the disposal of unwanted inventory, freeing up space and reducingcarrying costs.

Types of Logistics Service Providers

Third-party logistics service providers (3PLs) are the most common structure for LSPs, butthere are several others that businesses can choose from, commonly ranging from first partyto fifth party. With the growing popularity of environmental and social accountability andadvances in artificial intelligence (AI) and machine learning, some innovators have begun toimagine sixth- through tenth-party LSPs; however, many elements of those higher-level LSPsare theoretical and have not been widely accepted or implemented.

First-Party Logistics Service Provider (1PL)

First-party logistics service providers (1PLs) are companies that handle all their logisticsin-house. They have their own fleet of delivery vehicles and don’t outsource any stepsin their logistics workflow, retaining complete control. 1PL is also called self-logistics.

Second-Party Logistics Service Provider (2PL)

Second-party logistics service providers (2PLs) offer intermediary transportation options.2PLs have their own fleet of vehicles and offer customer delivery or freight options butdon’t handle warehousing or other services. Businesses that use 2PLs, or traditionaltransportation providers, package their goods themselves and either drop them off or arrangea pickup location for the 2PL to deliver the goods to their next destination.

Third-Party Logistics Service Provider (3PL)

Third-party logistics service providers (3PLs) control both inbound and outboundtransportation and warehousing. 3PLs typically lease warehouse space to clients and handleshipment preparation — like labeling and packaging — as well as transportation.They may own their own fleet of vehicles or outsource the actual delivery to a 2PL. Oncegoods are shipped, 3PLs may handle tasks such astracking, delivery status and customs. Many insiders use the term logistics service providerto refer exclusively to third-party LSPs.

Fourth-Party Logistics Service Provider (4PL) or Lead Logistics Provider (LLP)

Fourth-party logistics service providers (4PLs) take further control of a client’ssupply chain than 3PLs. Not only do 4PLs control inbound and outbound transportation andwarehousing, but they also oversee the rest of a business’s supply chain, taking ahands-on approach with suppliers, retailers and other relevant parties to thebusiness’s operations. 4PLs, also called supply-chain overseers, don’t own anyphysical assets themselves for moving goods. Instead, they play a consulting and managerialrole by contracting with 2PLs and 3PLs for shipping and warehousing.

Fifth-Party Logistics Service Provider (5PL)

Fifth-party logistics service providers (5PLs), also known as logistics aggregators, combine,contract and oversee multiple 3PLs to create a large supply network. These networks may growlarge enough to create market leverage and lead to further discounts for client companies.5PLs often provide businesses a full framework for how to best plan and execute theirsupply-chain operations. 5PLs require significant trust and communication from their clientsas 5PLs take over more responsibilities and control of a business’s operations thanthe other types of LSPs.

Self-Shipping vs. Logistics Service Providers

Some smaller businesses, especially those that offer personalized or one-of-a-kind productsand experiences, may prefer to handle all their shipping needs themselves, using aself-shipping model. If a small business isn’t looking to scale larger or give up anycontrol to another party, a logistics service provider may not be a good fit. However, everyhour spent packaging and shipping is an hour that can’t be used to create moreproducts, find areas for improvement or focus on growth.

Businesses looking to expand into new regional markets often turn to LSPs for a moreaffordable way to keep shipping quick and cheap — or even free — for customers,something that more and more customers every year value when shopping. According to a June2022 X Delivery and Santa Clara University Retail Management Institute survey of almost2,500 adults who regularly shop online, 90% said that delivery should take fewer than fivebusiness days. For businesses looking to build a far-reaching ecommerce customer base,partnering with an LSP can help meet customer shipping expectations without the highoverhead of building, stocking and staffing decentralized distribution centers.

Benefits of Logistics Service Providers

Logistics service providers offer services that cater to a business’s needs, from 2PLstaking over deliveries through 5PLs managing the entire supply chain. Some common benefitsthat LSPs provide include:

• Access to industry-leading processes and technology. LSPs are highlyskilled in running a wide network of shipping processes and generally operate moreadvanced shipping technology than many small businesses have in-house, includingtransportation management planning systems, transportation management scheduling systemsand warehouse/distribution center management systems. By partnering with an LSP,businesses can take advantage of this technology to bring their customers a morereliable experience without needing to build state-of-the-art infrastructure from theground up. LSPs can also offer clients the benefits of advanced technologies, such asInternet of Things (IoT) devices, which provide real-time information on the locationand status of goods, as well as data analytics that provide valuable insight intoclients’ operations.
• More shipping options. Logistics service providers are able to offerflexibility in how and when they ship goods because of their robust fleets of deliveryvehicles, often including planes, ships and trucks. Using these multimodal shippingoptions, LSPs give their clients a range of options to minimize cost, maximize speed ormeet other company-specific needs.
• Faster and cheaper returns process. LSPs offer return-by-mail ordrop-off locations in many areas, giving customers a convenient and quick way to processreturns. This reverse-logistics process saves customers and businesses time and money byavoiding long-distance shipping to one central return location, which can be plagued byshipping delays or bottlenecks. When an LSP handles returns, it also frees up abusiness’s staff to focus on making new sales, not refunding old ones.
• Scalability. Business growth can create logistics problems forcompanies as orders pile up beyond what current staff can handle. Logistics serviceproviders have the infrastructure needed to increase operations and meet customer demandas it grows, helping businesses avoid the stress and expense of quickly hiring andtraining an expanding work force to meet rising demand.
• Expertise. Logistics service providers offer more than just logisticsmanagement. They also provide their customers with a large network of diverse experts.For example, businesses looking to expand into a new region or effectively navigatemarket volatility can get time-tested advice and insight from their LSP.

LSPs vs. Freight Forwarders

A freight forwarder arrangestransportation for a company’s goods and plans shipments, often using multipletransportation methods and vehicles, much like a logistics service provider. However, thedifference is that LSPs offer wider-reaching services than freight forwarders and tend tohave longer working relationships with their clients. A freight forwarder typically acts asa liaison between a company and the transportation company, whereas an LSP traditionallyhandles additional services, including warehousing and returns. For businesses thatprimarily handle their logistics in-house with only a few complex shipments at a time, afreight forwarder may be a more affordable option to arrange shipments that require extracare. For ongoing logistic needs, an LSP may be the more efficient choice.

Give Your Logistics Operations Transparency With NetSuite

A business that has outgrown handling its own logistics in-house has also likely outgrownmanaging its financial operations using spreadsheets and other manual methods. NetSuite ERP is an all-in-one, cloud-based businessmanagement solution that gives visibility into a business’s data and performance.Using intuitive dashboards, data for tasks such as order processing, inventory managementand supply chain management is available in real-time and can be integrated with a logisticsservice provider’s system to make sure all orders and inventory are updated andprocessed effectively. An LSP can help a business handle the physical movement of goodswhile NetSuite ERP can handle the flow of information throughout a company’sorganization, both working together to free up staff to focus on growth and development.

Not every business needs — or wants — to outsource its logistics, but manycompanies benefit from the scalability that logistics service providers offer, especiallybusinesses looking to expand their reach or improve the efficiency of their ecommerceoperations. LSPs can provide a more affordable way to offer quick and reliable deliverytimes to customers and more convenient return policies. Beyond deliveries, LSPs also offerwarehousing, order processing, expertise and even full supply chain management services thatcan be customized to fit their clients’ needs. If a business’s staff is spendingmore time packing up boxes than growing the company, it may be time to consider outsourcingsome responsibilities to a logistics service provider.

Logistics Service Prover FAQs

How do I choose a logistics service provider?

Businesses interested in contracting with a logistics service provider should first assesswhat services they are looking to outsource to make sure they don’t end up paying forservices they don’t need. For example, if a business only needs transportation, asecond-party LSP (2PL) may be the most efficient option. Once a business’s needs areclear, it can start looking into LSPs that provide the appropriate services.

Is logistics the same as transportation?

No, transportation is just one aspect of services that fall under the umbrella term oflogistics. Logistics also includes warehousing, order fulfillment, returns and more.

What are the elements of logistics?

The five elements of logistics are storage and warehousing, packaging, inventory,transportation and information management. All of these elements work together to provide astreamlined workflow to efficiently move goods from the manufacturer into the hands ofcustomers.

What are the services provided by logistics service providers?

The services offered by logistics service providers include incoming-goods logistics,warehousing, order acceptance, invoicing, picking, shipping, payment and finance management,returns and disposal. Not every LSP offers all of these services, and their contracts areoften tailored to clients’ needs.

What are the three types of logistics?

The three types of logistics are warehousing services, freight shipping and courier services.Warehousing stores a business’s goods; freight shipping transports them in bulk; andcourier services provide direct delivery to customers.

How do I become a logistics service provider?

Logistics service providers can start small and offer delivery options or act as a liaisonbetween a business and a shipping company. Because not every LSP owns a fleet of vehiclesand may outsource the actual transportation or warehousing of goods, an entrepreneur with alogistics network or expertise can start offering services to businesses with logisticsneeds.

What is the difference between an LSP and a 3PL?

A 3PL, or third-party logistics service provider, is one type of LSP. 3PLs are the mostcommon type of LSP and control both inbound and outbound transportation and warehousing.3PLs typically lease warehouse space to clients and handle shipment preparation — likelabeling and packaging — and transportation. Many insiders use the term logisticsservice provider to exclusively mean 3PLs, rather than the other categories.