The logistics industry is constantly evolving. It has become a multi-layer service from first party to fifth party logistics. There are more than five layers but this article will only touch on 1PL to 5PL.
The oldest and first form of logistics is 1PL with 5PL being one of the newest. The layers beyond already exist in some countries but firmer definition of these terms might be available in the near future.
What is causing this proliferation of layers? It is due to a number of factors. Globalisation and e-commerce are among them. Another is the incorporation of information technology and artificial intelligence, which are spurring the advancement of the logistics industry.
First Party Logistics or 1PL
1PL is the first layer of logistics. It involves the transportation of goods and materials using the company’s internal resources.
Therefore, a first party logistics service provider is often a department, division or section of an organisation. Such distribution operations are normally conducted by producers, sellers and distributors.
Here is an example to illustrate 1PL:
Company A is a chain of restaurants. Each week, it collects ingredients from wholeseller markets using its own fleet of lorries. The ingredients are delivered to every restaurant in the chain and stored in their respective cold rooms.
The fleet of lorries is managed by a department within Company A. The lorries may be bought or rented by Company A. Regardless, the department is the 1PL service provider to the company. Or rather, Company A uses 1PL to fulfil its distribution needs, i.e. the transport and storage of ingredients.
Second Party Logistics or 2PL
When transport and storage activities are outsourced to an external logistics service provider, this concept is called 2PL. A company which has been engaged to provide these services would then be called a 2PL operator or second party logistics service provider or carrier (if it involves only the transportation aspect).
2PL operators own and manage their own assets, such as its own warehouse and a fleet of vehicles. The service rendered to clients are limited to one part of a supply chain without including integrated logistics solutions.
Often they are transport companies which specialize in a particular segment or transport area. For example, ocean freight or railway transport.
The vehicles used may be leased or owned by these companies. 2PL operators are mainly used for international transportation of heavy and wholesale goods, as well as in international trading.
Third party logistics or 3PL
According to the Supply Chain Management Terms and Glossary provided by the Council of Supply Chain Management Professional (CSCMP) in America, third-party logistics (3PL) is defined as the following: outsourcing all or much of a company’s logistics operations to a specialized company.
How does this concept differ from 2PL? The diagram below can illustrate 3PL more clearly.
A client engages a Logistics Company A to deliver cargo from its warehouse to a port in another country. Logistics Company A does not have the capacity to carry out the sea freight leg of the delivery. Therefore, it outsources this segment to Logistics Company B.
Nonetheless, the definition of 3PL has broadened to the point where any company that offers some kind of logistics service for hire calls itself a 3PL. What differentiates a 3PL from a 2PL is the range of services offered.
3PL service providers are more integrated. Apart from transportation, it includes other elements of the supply chain. Typical functions fulfilled by 3PL operators include:
- transporting, handling and storing loads;
- warehouse management and distribution;
- terminal operations;
- customs brokerage;
- range of additional services such as services connected with package tracking, management of stocks, handling clients’ transactions and so on.
What a third party logistics provider does not do is design the supply chain. The design is decided by the logistics department of the client. As the operator, a 3PL company only ensures selection of the means of transport and supervises work to fulfil the flow of supply chain designed by its client.
Examples of third-party logistics providers are:
- Freight forwarders
- Courier companies
- Other companies integrating and offering subcontracted logistics and transportation services
Fourth party logistics or 4PL
This concept appeared some time in the 1990s. It is a step above 3PL where a logistics company plays a much bigger role.
The CSCMP defines 4PL as follows:
Differs from third party logistics in the following ways –
1) 4PL organization is often a separate entity established as a joint venture or long-term contract between a primary client and one or more partners;
2) 4PL organization acts as a single interface between the client and multiple logistics service providers;
3) All aspects (ideally) of the client’s supply chain are managed by the 4PL organization; and,
4) It is possible for a major third-party logistics provider to form a 4PL organization within its existing structure.
Often called a Lead Logistics Provider or LLP, a fourth party logistics service provider is treated as a consulting company for many supply chains. It provides a single invoice solution and streamlines logistic work for clients.
A client merely informs a 4PL operator what needs to be stored and details of its supply chain needs. Then, the operator designs and manages the entire supply chain process for the client. Clients who use this form of outsourcing usually do not have their own transport and logistics departments.
Fulfilling every activity within a supply chain order is extremely costly, taking into account the ownership and management of a wide range of vehicles, warehousing facilities and staffing. That is why 4PL consists mostly of outsourced logistics services.
The coordination of activities across an entire supply chain can even start from the raw material suppliers up to the buyers; not just a particular section of the chain as in the case of 3PL. However, 4PLs which are global players such as UPS or DHL, may possess all or some of their own storage facilities and vehicles.
As an LLP, a 4PL uses its high level of visibility, real-time information, communication abilities and broad knowledge to align customers and other logistics service providers.
The data it collects from other supply chain partners helps it to provide seamless supply chain services, improve customer service, manage exceptions as well as remove costs and inefficiencies from the supply chain.
Fifth party logistics or 5PL
This relatively new model is a combination of 3PL and 4PL whereby all the operations in a supply chain are controlled using information technology (IT). Another differentiating feature is that a 5PL operator consolidates logistics solutions of several clients.
Also known as a logistics aggregator, a 5PL aggregates the demands of its clients into bulk volume to get better rates with different operators such as airlines and shipping companies. The same goes for other logistics services such as warehousing and distribution.
Apart from integration, management and control of a supply chain, 5PL companies also offer additional services such as call centers, online payments and courier networks.
The diagram below illustrates a 5PL process.
The example shown in the diagram above illustrates how 3 clients have approached a 5PL operator to deliver their cargo abroad to different destinations. The 5PL operator consolidates similar aspects of the 3 clients’ orders, i.e. sea freight, air freight and online payment system.
It then signs bulk order contracts with Logistics Company A, B and C. The 3 clients need not know about these contracts as long as their delivery orders are fulfilled.
The 5PL operator coordinates the entire process of cargo delivery by communicating closely with its contracted logistics companies, whether they are 1PL, 2PL, 3PL or 4PL. In this case, it has signed a contract with Logistics Company A for the sea freight segment and a contract with Logistics Company B for the air freight segment.
To fulfil the e-commerce end of the supply chain, it contracted with a 4PL operator. Logistics Company C then works with Logistics Company D to handle courier delivery for B2C. Company C also engages Company E, an IT firm, to create and manage a digital platform for B2C e-commerce transactions.
Conclusion
Each of the five parties has a role to play in the supply chain. 1PL to 3PL may be sufficient for local distribution of goods. However, 3PL to 5PL may be better for international shipments as cross border transportation is far more complex than a purely local market.
For instance, one might want to engage a freight forwarding company in Russia for import and export of cargo whereas a logistics company in Russia can accommodate the distribution of goods within the country. A 4PL such as TOP Logistics will be able to handle both these regards in a seamless manner.