Like many specialized industries, logistics has its own vocabulary. Although shorthand makes communicating with other industry experts more efficient, it can quickly get confusing to anyone outside the logistics world.
One set of popular logistics terms has been causing significant confusion lately: 3PL vs. 4PL vs. 5PL. With many companies innovating in the logistics space, these terms are getting thrown around more than ever, and many people aren’t sure exactly what they mean.
To help you understand the difference—and find the right solution for your business—we’ll walk you through the difference between 3PL, 4PL and even 5PL providers.
Laying the Foundation: 1PL and 2PL
Let’s start with the basics. Once you understand how these terms were originally conceived, you’ll be able to unpack the increasing levels of complexity with ease.
1PL simply means first-party logistics. In this scenario, a company does all of its transportation and logistics in-house.
For example, imagine a company that manufactures OBD2 scanners that tell you why the check engine light on your dashboard has lit up.
In a 1PL situation, that manufacturer has its own in-house truck that an employee drives to pick up the raw materials for the OBD2 scanners. When the scanners are complete, it uses that same truck to deliver them to a reseller who gets them in the hands of consumers.
The advantage? Total control and oversight of all the logistics, including when the manufacturer receives raw materials and when the reseller receives the finished product.
The disadvantage? It’s time-consuming and perhaps not particularly cost-effective. For example, could that employee’s time be better spent building more scanners, rather than driving around, sourcing parts and making deliveries? Possibly.
Additionally, in today’s global marketplace, what’s the likelihood of being able to source everything you need to manufacture something like an OBD2 scanner?
That’s where 2PL comes in: second-party logistics.
In a 2PL scenario, the manufacturer hires a carrier to pick up the raw materials and deliver them to the warehouse. They might also hire a carrier to deliver the finished product to the reseller.
This is a fairly common scenario today. For example, the manufacturer might use the US Postal Service to deliver some of the raw materials. The USPS becomes that second party in the 2PL situation.
The advantage? That second party—be it the USPS or another carrier—can help the manufacturer redirect in-house resources. That might mean that its employees could focus on making more scanners or marketing them more effectively to boost sales. In other words, the manufacturer zero in on its core competencies and outsource the others.
The disadvantage? The manufacturer is giving up a little bit of control. It has to wait for USPS to deliver the package instead of, for example, driving across town to get the parts immediately. Of course, as we mentioned earlier, driving across town isn’t always an option. Either way, whenever you’re relying on a second party, you’re more vulnerable to delays that are out of your control.
Now that you understand the origin of these terms, let’s layer on the next level of complexity: third-party logistics.
Understanding Third-Party Logistics (3PL)
As the foundational levels imply, third-party logistics means adding a third party to your logistics operations. The term was originally coined in the early ’70s.
Since then, the definition of 3PLs had broadened to include companies who offer logistics services that may include:
- Managing multiple carriers on your behalf
- Warehousing and storage
- Inventory management
- Packaging or consolidating shipments
- Freight forwarding
In a 3PL scenario, our OBD2 scanner manufacturer may hire a freight forwarder to manage moving raw materials from China to the manufacturing location in Long Beach, CA. The forwarder will arrange to have the materials trucked to port in China, then work with a steamship line to have them loaded onto a ship bound for Long Beach.
As you can see in this scenario, it might be helpful to think of a 3PL provider as one who manages other 2PLs.
The advantage? The manufacturer gets to leverage the 3PL provider‘s expertise. In our example, the 3PL likely has an existing network of relationships that makes moving raw materials from China simple and efficient. As a result, the manufacturer can continue to focus on what it does best: Making ODB2 scanners, rather than training an employee to learn logistics in China.
The disadvantage? The manufacturer loses some oversight and control. (You may notice a pattern here!) Additionally, the manufacturer will pay for the freight forwarder’s services. However, that cost is likely well worth it. Firstly, the manufacturer will save when it comes to internal resources. Additionally, the freight forwarder’s existing relationships may result in shipping costs that are more cost-effective than anything the manufacturer could negotiate on its own.
Now let’s move up one more level.
Leveraging Fourth-Party Logistics (4PL)
4PL is a term originally trademarked by the consulting firm Accenture in 1996. Like Kleenex and Xerox, the trademarked term has gone generic.
Pro Tip: You’ll also hear 4PLs referred to as LLPs (lead logistics providers).
When Accenture coined the term, it defined fourth-party logistics (4PL) as “a supply chain integrator that assembles and manages the resources, capabilities, and technology of its own organization with those of complementary service providers to deliver a comprehensive supply chain solution.”
In other words, a 4PL acts as the sole interface between a client and multiple logistics providers so that the entire supply chain is managed by the 4PL.
In a 4PL scenario, our manufacturer wants to scale the operation and no longer wants to deal with any of the logistics. So the manufacturer contracts with a 4PL provider to take over all of the logistics along the supply chain: moving raw materials from various suppliers to the manufacturing facility, transporting finished products to resellers, accepting returns and moving them back to the warehouse, etc.
The advantages? The manufacturer can focus on what it does best and scale its operations on its strengths, while outsourcing operations that aren’t related to its core business operations. Additionally, with complete oversight of the supply chain, the 4PL may be able to uncover new efficiencies.
The disadvantages? With very little involvement in the day-to-day of its logistics, the manufacturer will need to work closely with the 4PL to ensure that it’s meeting procurement timelines and customer delivery timelines. If the 4PL isn’t as invested in the manufacturer’s success, it might not deliver as faithfully. That’s why it’s critical to choose a 4PL carefully.
Additionally, many manufacturers guard their sourcing and logistics operations closely from competitors. While a non-disclosure and even a non-compete may be part of the agreement with the 4PL, there may be some exposure that the manufacturer should guard against.
Now, let’s take a look at one more level up, at the future of logistics: the 5PL.
Examining an Emerging Trend: 5PL
5PL is a newer concept to the logistics world. As a result, its definition remains less defined than other levels of logistical support. That being said, 5PLs often:
- Focus on leveraging technology and big data to create efficiencies.
- Optimize not just supply chains but supply chain networks.
- Maintain a strong eCommerce focus and are most useful to companies who don’t have a brick-and-mortar presence.
As international markets and emerging technology continue to impact the logistics industry, keep your eyes out for the methods in which 5PLs innovate within this space.
3PL, 4PL, or 5PL: What Does Your Company Need?
At the end of the day, choosing your logistics provider depends heavily on how much you want to do in-house and how much you want to outsource. Outsourcing can allow you to focus more closely on your core competencies and leverage outside expertise. However, it also means you lose some control and oversight. You’ll need to choose a partner carefully to ensure they align with your business goals.
At the end of the day, your best bet is to do your homework. Talk to several providers. Schedule discovery calls to ask them how they can best add value to your business. Examine the costs against your bottom line. By weighing all the options, you’ll find the right balance for your business.
Want some help outsourcing your logistics? As a freight forwarder/3PL, we tailor logistics solutions to fit our clients’ specific requirements. Schedule a discovery call with us, and we’ll show you how we can help you focus on your core competencies and leverage our expertise.