What is first-party logistics? How does it work?

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The first party logistics sector is growing by leaps and bounds around the world. India is no exception. In fact, the country spends about 14 percent of its GDP on logistics and related activities. This is much higher than the 8-9 percent of GDP allocated by most other developing countries as well as many nations in Europe. 

The Growth of the Logistics Sector

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Much of this rapid growth in the logistics sector has been driven by the arrival of e-commerce in India. Since more people are buying things online, there is an increasing need for fast and reliable shipping and courier services. This process quickly delivers the purchased products to the doorstep of the customer. 

Factors affecting the growth of e-commerce logistics

In the modern world, many online sellers depend heavily on such courier and delivery services, with their entire business model being predicated on the viability and efficiency of the logistics and shipping sector. 

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A good logistics provider can enhance the reputation of the online seller, improving customer satisfaction and maximizing customer loyalty. In short, the quality of logistics and shipping – such as speed, reliability, logistics cost, and safety – can heavily impact the bottom line of an e-commerce company. Choosing a good logistics provider can also help sellers avoid losses caused by damaged goods and delayed deliveries. 

Misconceptions and a Lack of Awareness

Despite the rapid growth, this sector has experienced over the last few years, there are still quite a few misunderstandings and misconceptions about what the 1st party logistics sector actually is, what logistics providers can offer businesses, and what different types of business models this sector comprises of. 

This is because the business of logistics is complex and multi-layered, and can be hard to understand if you are an outsider looking in. Moreover, regulations and business norms vary between states and countries, so the logistics sector in one country may operate in a slightly different manner than that in another nation. 

All of these factors combine to create a certain amount of confusion and miscommunication, wherein the expectations and preconceptions of clients may not always be aligned with the ground realities at any given time.

The Importance of Understanding the First Party Logistics Industry

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However, if you are an online seller, you cannot remain in the dark about the drawbacks of the logistics business. This is because of the quality of shipping and logistics will greatly impact your customer service and satisfaction.

In other words, even with a great product, you cannot hope to retain your customers and gain their loyalty without a great logistics network to provide timely and safe deliveries. With that in mind, let us dive into the subject and try to understand the various elements and layers of the logistics and shipping industry. 

The Components of the 1st Party Logistics Industry

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At some point or the other, we’ve all heard the phrases ‘first party logistics’ and ‘third-party logistics provider’. And while we do have a vague idea about what all of it means, we don’t always understand the minute differences between these concepts and what they can mean for our business. 

A first-party logistics provider is essentially either the manufacturer of the product or the consignee. That is to say, the shipping, storing, and transportation is done either by the manufacturing company itself or by the buyer. The buyer, in this case, can be either the final consumer of the product or a retailer purchasing supplies from a wholesaler or manufacturer. 

Whatever might be the case, the defining characteristic of a first-party logistics provider is that there are no middlemen involved in the process of shipping. So, you might now be wondering, how does first-party logistics work? 

In this model, all logistics are handled internally by the manufacturer or the consignee. In other words, either the seller or the buyer must internally invest in a fleet of trucks. This is done for transportation, warehouses for storing the goods, tracking and supply chain management technology, packaging equipment, etc. 

Why Some Businesses Opt for First Party Logistics?

This can be quite an expensive route to take. The company in question will have to set up and operate an entire, independent logistics department. After that, they need to invest in all the relevant software, equipment, and gadgets. 

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This is the reason why, in recent years, third-party logistics companies have become so popular among online sellers. Many of them find it impossible to fund all the logistics operations internally.

However, first-party logistics is sometimes still used by large companies and manufacturers. These people have their own well-established distribution channels and networks. Older companies which emerged and grew before the age of the Internet also often make use of first-party logistics. They have established their distribution networks before the growth of online selling. Hence, they already have functioning logistics networks, which diminishes the need for outsourcing. 

Moreover, large companies involved in first-party logistics can take advantage of economies of scale. This is unavailable to smaller businesses and startups that are new to the market. 

As these large organizations have already established an internal logistics department and made the investments necessary to set up wide-ranging distribution networks, the 1st party logistics (1PL) approach might actually be more economical for them than outsourcing to a third-party provider.  

The Ideal Logistics Set-Up for Small Businesses and Startups

This, however, is often not the case with smaller online businesses and Internet-based startups. When starting out, few businesses have the resources to set up their own distribution network from scratch. This is done to manage an entire logistics department. Most online sellers would buckle under the financial burden of such an undertaking, or go into massive debt to finance it, which might hurt the long-term viability of the business.

This is why, for those who are just starting out, third party logistics providers can offer the perfect alternative. A 1st party logistics partner can help you take advantage of the economies of scale enjoyed by bigger companies, at less cost. Moreover, you will be able to share the expenses and liabilities with all the other clients of the 1PL company. 

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Conclusion

In a nutshell, a 1PL company can enable you to avail all the advantages of a large distribution network. Without the initial investment, you can set up a first-party logistics system. 

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