Last Updated: September 27, 2022
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. Recently, there’s even been talk of 6PLs and 7PLs. (!) With companies continuing to innovate in the logistics space, all of 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 between 3PL, 4PL, and 5PL providers—and find the right solution for your business—we’ll walk you through all the terminology and criteria. We’ll also discuss how the industry is looking at 6PLs and 7PLs, even though those definitions aren’t 100% set in stone yet.
Laying the Foundation: 1PL
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 of a 1PL Situation
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 of a 1PL Situation
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—without needing any assistance from an outside carrier?
That’s Where 2PL Comes In: Second-Party Logistics
To understand a 2PL scenario, take that example from above: a manufacturer of car code scanners. That 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 or a freight carrier to deliver some of the parts or raw materials. The USPS or the freight carrier would be that second party in the 2PL situation.
The Advantage of a 2PL Situation
That second party—be it the USPS or a freight 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, by outsourcing some of its logistics, the manufacturer can zero in on its core competencies.
The Disadvantage of a 2PL Situation
The manufacturer is giving up a little bit of control. It has to wait for the carrier to deliver items 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—and it’s not always the best use of time. 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: What are third-party logistics (3PL)?
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 (the first party) may hire a freight forwarder (a third party) 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 (with the help of a second party), then work with a steamship line (another second party) 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.
What Is an Asset-Based 3PL?
An asset-based 3PL is one that owns its own assets—trucks, warehouses, etc. A non-asset-based 3PL will hire these services out or leverage another company’s assets.
Hiring an asset-based 3PL has a number of advantages, including the fact that an asset-based 3PL has more control over its delivery fleet and its schedule. If you’re considering hiring a non-asset-based 3PL, make sure to understand how they operate before committing to a long-term contract with them.
The Advantage of a 3PL Scenario
When you choose to work with a 3PL, you get to leverage that 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 of a 3PL Scenario
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 by redirecting its internal resources to other activities. 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.
What Is Fourth-Party Logistics (4PL)?
4PL is a term originally trademarked by the consulting firm Accenture in 1996. Like Kleenex and Xerox, this 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.
Are 4PLs Asset-Based?
In the strict definition of the term, no. 4PLs are not asset-based, in that they don’t operate their own fleets or warehouses. Instead, they contract with other providers for these services.
By staying non-asset-based, this allows a 4PL to remain neutral and unbiased, which ensures that they choose the best providers for their clients.
So What’s the Difference Between a 3PL and a 4PL?
In short, a 3PL is generally more focused on logistics—things like order fulfillment, distribution, and warehousing. In contrast, a 4PL will take over the management of the entire supply chain to optimize operations throughout all its links. When working with a 3PL, an organization will generally maintain both control and oversight of its supply chain.
Additionally, while 3PLs can be asset-based, 4PLs, by strict definition are not, which creates even more differentiation between these categories.
The Advantages of a 4PL Situation
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 of a 4PL Situation
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 is a little more loose 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.
• Manage other 3PL and 4PL providers.
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.
Summing It Up: What’s the Difference Between 3PL, 4PL, and 5PL Logistics?
At the end of the day, it comes down to how many parties are involved in your logistics and supply chain activities. For example:
- 1PL – The original client, such as a manufacturer
- 2PL – A carrier like UPS or a freight provider, hired by the manufacturer
- 3PL – A logistics provider, hired by the manufacturer, who manages carriers, as well as delivers services like fulfillment, warehousing, and other logistics
- 4PL – A provider that manages not just the logistics, but the entire supply chain
- 5PL – An organization that manages other 3PLs + 4PLs
Keep in mind, though, that some of these terms can be fluid, especially as companies continue to innovate in this space. For example, some 3PLs may offer services similar to 4PLs, and the services 5PLs offer will differ from organization to organization. As you look for a provider, focus less on how they define themselves and more on whether they deliver the services you’re looking for.
What’s Next? 6PLs and Even 7PLs
As companies continue to offer new levels of service in supply chain management and logistics, expect to see new terms pop up, such as 6PLs, 7PLs, and so forth.
What Services Does a 6PL Deliver?
The definition for this one isn’t set in stone quite yet. Some people use the term 6PL to refer to companies who leverage artificial intelligence to optimize supply chain activities. Others suggest that 6PLs will focus on sustainability solutions within the logistics industry. In other words, this term is one to watch as its meaning continues to develop.
What About 7PLs?
Like 6PL, the definition of what constitutes a 7PL is still fluctuating a bit. The term was originally coined to represent the combination of a 3PL and a 4PL. In other words, 3PL + 4PL = 7PL. The idea behind this combination was to provide a completely outsourced solution for logistics and supply chain management. In some ways, this might sound like the function of a 4PL, right?
The difference is that the strict definition of a 4PL stipulates that 4PLs own no assets of their own. In a 7PL solution, the company has 3PL capabilities, and therefore owns assets it can leverage.
As we mentioned above, the industry has its textbook definitions, and service providers don’t always conform strictly to those same definitions. If you’re looking for someone to manage your entire supply chain, consider organizations that both call themselves a 4PL and a 7PL, then compare who delivers a solution that’s closer to what you want.
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? 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.
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