To forward traffic through an MPLS network, MPLS routers encapsulate packets and assign and manage headers known as labels. The routers use the labels to index the MPLS forwarding tables that determine how packets are routed through the network.
When a network's inbound router receives traffic, it inserts an MPLS label between the IP packet and the appropriate Layer 2 header for the physical link. The label contains an index value that identifies a next-hop address for the particular LSP. When the next-hop transit router receives the packet, it uses the index in the MPLS label to determine the next-hop address for the packet and forwards the packet to the next router in the LSP.
As each packet travels through the transit network, every router along the way performs a lookup on the MPLS label and forwards the packet accordingly. When the outbound router receives a packet, it examines the header to determine that it is the final router in the LSP. The outbound router then removes the MPLS header, performs a regular IP route lookup, and forwards the packet with its IP header to the next-hop address.