Most people have heard the term third-party logistics (3PL), but there are actually many other types of companies that can offer various logistics solutions. 3PL is when a company outsources elements of their supply chain, including distribution, warehousing, and fulfillment to third parties. 3PLs provide integrated fulfillment, warehousing and transportation services which can grow along with your business and scale depending on the customer’s requirements. While the use of 3PL providers has been prevalent in businesses for years among larger companies, the use of 3PLs is on the increase for small to medium-sized businesses as the growth in ecommerce fulfillment continues to skyrocket. In organizations of this size, operating their own fulfillment, warehousing and distribution services is usually far more costly than using a 3PL that can provide on-demand services that scale with market demands.
So that covers 3PL, but while this is the most widely used third-party logistics term, you may also come across other terms such as 1PL, 2PL, 4PL and 5PL. Read on to find the definition of each and their main differences.
1PL - First-Party Logistics
A 1PL first party logistics provider is a company or individual that needs to have cargo, freight, goods or products transported from one point to another. First party logistics involves just two parties. There is the manufacturer or distributor that ships the goods (you), and then there is the retailer or customer that receives the goods (your customer). There are no other middlemen involved in the whole process.
2PL - Second-Party Logistics
A 2PL is an asset-based carrier that is responsible for the method of transportation. Examples of 2PLs include shipping lines which operate the ships, airlines that operate the planes and hauling companies that operate vehicles. A 2PL is often referred to as a forwarder because their business mainly consists of a means of transportation. For instance, it could be an airline company that also offers freight services to get things from you to your customer.
3PL - Third-Party Logistics
Third party logistics is outsourcing the supply chain operations and logistics to get a company’s products to their customer. The logistics solutions that 3PLs offer include receiving, storing, packing, and shipping services. Some 3PL companies also provide other logistics services, referred to as value added services. These include inventory management, kitting and assembly, postponement packaging, and others.
Because 3PL service providers have been managing logistics for years or decades, they have the expertise and leverage to make the process simpler, quicker, and more cost effective for the seller. The market for 3PLs providers has grown exponentially with the exponential growth of ecommerce. Most Fortune 500 (86%) companies and 96% of the Fortune 100 use services like these. 3PLs have also bloomed thanks to tracking technology, such as radio frequency identification (RFID) and global positioning system (GPS), both of which offer extended supply chain transparency. Meanwhile, internet of things (IoT) technology has improved tracking metrics for trucking and other carriers.
4PL - Fourth-Party Logistics
A 4PL provider is an integrator that manages all aspects of the supply chain. Going beyond physical logistics, a 4PL may include elements of IT, procurement, and finance. It may seem that the differences between a 3PL and 4PL are slight, but a company seeking the right fit of services and support for their growing business, the distinction can be huge. For example, both will rely on the latest in IT to help optimize your supply chain communication and accuracy. However, a 3PL is more likely to have proprietary tech systems for tracking units across the supply chain and bundle that service into the overall cost of their support, while a 4PL may provide a higher-level analysis of data to help inform your business decisions for long-term growth.
4PL will include all the benefits of 3PL providers but also include:
- Project Management, sourcing and negotiation
- Logistics strategy and analytics
- Impartial service advice
- A single point of contact
Crucially a 4PL needs to be impartial, while they may be able to offer the services its clients need, they need to compare those services and costs to that of their competitors and work in the best interests of their customer at all times.
5PL - Fifth-Party Logistics
5PL is a relatively new term in the logistics industry and reflects the development of full logistic integration through many outsourced providers. 5PL involves a fully integrated logistics solution to encompass the whole supply chain from beginning to end through multiple outsourced service providers. Critical to success in achieving this is the effective integration of IT and computer systems to ensure real-time visibility and control of the entire supply chain no matter how many different suppliers are involved.
Just like any method in business, there are always pros and cons to each option of handling logistics. Instead of getting caught up in the debates around 3PL vs. 4PL or 1PL vs. 2PL, it’s a good idea to take a step back first and look at what your business needs.
A 1PL system is definitely a simple system, and it doesn’t require a lot of integration or networking. Your business has full control over the process. However, it can hamper the ability to grow, and it is not always the most effective system once the business reaches a certain level of maturity or growth.
The 2PL system can also be a more simple system, but it doesn’t offer as many logistics solutions as the more complex 3PL or 4PL logistics models.
When a company matures to the point that they require a 3PL, it does mean you need to let go of some degree of control in order to outsource the day to day logistics of your business. However, what your business loses in control, you’ll make up for with flexibility, reach and consistently.
If you choose to go with a 4PL, this means giving up control of your supply chain almost entirely. The 4PL supplies most of the management and design functions. While these functions are highly personalized to match the business needs, they still keep most of the process out of the business’ hands.
If you are interested in working with an experienced 3PL, send us a note to connect about how we can help your company grow. You can read DCL’s list of services to learn more, or check out the many companies we work with to ensure great logistics support.