If you've heard one definition of a third-party logistics provider…you've heard one.

That's a paraphrase of a saying heard more often in connection with integrated supply. But a standard definition of just what a third-party logistics provider is can vary from contract to contract. Is everyone who thinks they are engaged in a "third-party contract" really involved in a "third-party contract?" If a distributor, for example, has the UPS truck pull up to their door a few times a day or week, is UPS their 3PL? And are third-party agreements a threat—a possible replacement, in some cases—for distributors?

Robert Lieb is a professor of supply chain management at Boston's Northeastern University. He defines a third-party logistics company as "a company that sells multiple supply chain services that previously had been done within an organization on a contract basis. You're basically taking the activities that ordinarily would be done in your organization and contracting them out to somebody else who will come in and take over, say, part of warehousing, inventory management or some combination of services."

So is the distributor who receives those visits from the UPS truck engaging them as a third-party provider? Not necessarily, Lieb answers.

"If someone goes to UPS for package delivery only, I don't look at that as 'third-party logistics,'" he says. "You're just buying their basic services… But when you go to them and say, 'I know your core competency is in package delivery, but you also have this unit I'd like to hear about called UPS Supply Chain Solutions.' These guys [UPS] are selling integrated logistics services that sometimes involve package delivery service and sometimes don't. There's the difference."

So if a strict definition of a typical 3PL has yet to be universally determined, has, at the least, a typical customer profile emerged? One example that seems to be as common as any is a distributor who is growing—and maybe growing "too fast."

"There are probably several different profiles of customers," says Shawn Barnett, vice president of business development at Ozburn-Hessey Logistics (OHL), a full-service logistics company in Jacksonville, Fla. "The customers we get have really good products but have grown so fast that they have outgrown their knowledge of their supply chain or how to build and develop one."

For example, such a business may need several strategically located warehouses, Barnett explains, but their size and the costs "make it difficult for them to justify being in several markets with very small warehouses (50,000-sq.-ft. range)," he explains. "So we can enable them to be in multiple markets at the inventory levels they need to be at, while [still] cost-effectively managing that inventory."

Better communication and making yourself a better-educated customer is vital before entering into an agreement with a third party, sources agree.

"I have heard people say they actually have more control over their 3PL than they do over their own employees," says Prof. John Langley, professor of supply chain management at Georgia Tech University's Logistics Institute. "Also, if you structure the contract properly, you can build in the requirements that will ensure that control."

Jim Butts is the vice president of transportation at C.H. Robinson, a third-party logistics company in Kansas City, Kan. He shoots down the notion that signing on with a 3PL means a loss of control for that customer.

"When you talk about installing best practices, monitoring results and adjusting performance accordingly—well, that's how you actually can have more control than if left to your own devices," he says.

Langley describes himself as "a believer in outsourcing." Nonetheless, he suggests companies proceed cautiously and ask themselves three basic questions before seriously considering outsourcing.

First, do they have the needed capabilities to perform the task themselves? Second, would doing it internally fit strategically with the mission of their organization? Third, would doing it themselves produce a good return on their investment?

"Unless you can answer 'yes' to all three, you may be a good candidate to consider outsourcing," Langley says.

He encourages a company considering outsourcing to go through a self-analysis to be certain a 3PL is right for them—not just a specific outsourcing candidate, but also the general overall concept.

Sometimes that analysis will show they are better off doing that task themselves, Langley explains, while pointing out that "a benefit to that analysis is companies can sometimes use that to benchmark their internal practices, figure out where to improve, and strengthen their internal capabilities."

Ed Van Dyke is the president of Lewis Supply based in Memphis, Tenn. As a veteran distributor, he has seen many a third-party agreement work—and many that have failed. He agrees with Langley's assertion that an honest self-evaluation is vital for a company considering the third-party route.

"They need to honestly evaluate their capabilities," he says. "You have to decide 'Am I capable of doing this? How comfortable am I with someone else doing it?' The only reasons you go down this avenue are that you physically cannot perform the service yourself, or you are looking to save money. But a third reason might be that the resources you have would be better invested in other areas."

It can come down to spending your money wisely, Van Dyke says.

"It's not necessarily [lacking] the resources. But if they wind up being able to apply those resources in other areas of their business, they could then get greater returns. I think that is what they're looking for more than anything else. Quite often, when you wind up getting in a situation where your business is expanding rapidly, those assets can be better utilized elsewhere. That's the main thing."

Especially vital for a growing company is being able to know, or forecast, how much actual warehouse space it will need. It presents a challenge that is beyond the financial means of many companies—especially knowing whether to buy or rent space or, even more important, how much space to buy or lease. It is a dilemma that Barnett has seen many companies struggle with.

"They'll wonder 'What happens if my forecast is for 50,000 square feet this year, next year it's 40,000, but the year after that it is 70,000? How, in my own network, can I be flexible within those requirements?'" Barnett says. "Companies that grow fast typically will have a hard time grasping that forecasting."

In such a case, the company could benefit from outsourcing the forecasting. If they did choose to do their own forecasting of their warehouse size needs, inexperience could cause them to underestimate their needed amount—and result in the possibility of their being unable to find sufficient space to lease.

For the right size company that has experienced rapid growth, such an arrangement will enable them to focus on their sales and marketing, without having to "worry about it from a supply chain side. This gives them a comfort level knowing they have this flexibility in their supply chain," says Barnett.

Langley sees more companies becoming better educated before going in on a third-party contract. Still, some become a bit too impressed with the various tools (especially technology) that many third-party providers have. Georgia Tech has recently published its eighth annual Third Party Logistics Study. In it, Langley points out, "The customer side of the business is beginning to sort out providers based on the quality of the tools they have, particularly information technology tools."

Part of this is due to another finding of the study, Langley says, and that is that "customers have pretty high expectations of the 3PLs with regard to their technology tools. But pretty low satisfaction to the extent that those have been met. They've been disappointed."

Ironically, one way some 3PLs strive to meet the technology demands and expectations of their customers is to—well, outsource it. Sometimes even a 3PL needs a 3PL, Langley laughs. And that can provide a potential customer with yet another possible criteria.

"One way a customer can gauge a 3PL," Langley says, "is by how well the 3PL conducts outsourcing for itself."

The success of some 3PLs has created concerns that third parties may be putting themselves in a position to do the work that distributors were hired to do not long ago. Some distributors are concerned about this, to say the least.

Langley agrees that distributors, traditionally, have been equity participants in many supply chains, taking ownership of inventory while providing a broad range of services.

"In some ways, [3PLs] have replaced the distributors," he admits. "I also see some 3PLs extending themselves, saying they'll also take ownership of the inventory as needed, effectively becoming distributors themselves."

Langley sees this as a challenge more than a threat to distributors.

"The challenge is for traditional distributors to make sure the value proposition they offer their customers is one that has unique capabilities that even well-managed 3PLs could have trouble duplicating," he adds.

Langley cautions distributors to not blame this scenario entirely on 3PLs, pointing out that in various cases, customers will also buy directly from manufacturers, something that can also be damaging to the distributor.

"Some distributors think 'part of the reason we're here is because we've always been here.' But you have to try to create new kinds of value every day," he advises.

Over the past few years, Langley has found that the recession resulted in a certain amount of cautiousness where people were intimidated about trying a new venture. He refers, however, to the recent Georgia Tech study that shows that "the companies that have been outsourcing fully intend to increase the amount of outsourcing that they do. There's been a growth in the 3PL marketplace. It's a pretty hot market right now," he says.