The use of 3rd party logistics and 4th party logistics models is a common practice throughout the world. Let’s look at what these terms mean.
1PL: First Party Logistic Model
In the 1PL model, the manufacturer carries out all the transportation and other logistics through its departments. No logistic service is outsourced in the model and usually, a dedicated department in the manufacturing company carries out all the tasks.
Any company that transports products from one point to another on its own is an example of the First Party Logistic Model.
A farm that grows strawberries and takes them directly to a store for sale would be considered an example of 1PL.
2PL: Second Party Logistic Model
In the 2PL model, the manufacturer hands over a particular transport task to a warehouse manager or a carrier. It is the responsibility of the manufacturer to give instructions to the warehouse or carrier to ensure the task is carried out in time and correctly. These instructions are provided to the carrier whose sole responsibility is to carry it out as instructed. The carrier is being told what to do with the shipment and paid to move that shipment. This can be just a short term arrangement and employed when there are issues/delays in the main logistic operation.
A company that has assets such as transport planes or transport vehicles and uses them to transport goods from one place to another can be considered working on a 2PL model. Using the example of the strawberry farm above, the farm can also hire a 2PL to move its strawberries to the grocery store. In that case, the carrier’s responsibility will be to move the product from the farm to the store as and when the farm owner orders.
In the 2PL model. the carrier does not have to deal with when the strawberries will be ready or when the grocery store will need them. All he/she does is move the product when told to do so.
3PL: Third-Party Logistic Model
In this model, the manufacturer hires a third party to carry out the shipment tasks. This third party has to organize all the logistic details and execute the shipment. It can even further hire a transport service to carry out the shipment on its guidelines and orders. Such a 3PL service will usually have constant communication with the manufacturer as well as the supplier of the goods.
The main role here is to act as the organizer of logistics between the supplier and the manufacturer.
A 3PL service is usually a long term solution for a company’s logistic needs. Due to the nature of the mutual interests, the manufacturer keeps an eye on the logistic provider’s activities to evaluate its performance and be able to make adjustments and corrections in the supply chain whenever necessary.
A 3PL service provider can also play a role in packaging or boxing the goods it is transporting. In our strawberry farm example, a 3PL logistic service provider could be responsible to package the strawberries itself and then transport them to the grocery store. In this way, the 3PL can add value to the already existing supply chain.
4PL: Fourth Party Logistic Model
In the 4PL model, the logistics provider acts just like a 3PL, with the added responsibility of managing the tasks itself. In other words, the manufacturer outsources the management of the logistic operations to the 4PL. The 4PL can then hire other service providers to organize and execute all the tasks necessary to satisfy the client’s needs.
Because management is also outsourced to the 4PL, it is often seen that 4PL companies do not own any logistic assets of their own. The reason for this is that the management of these operations itself is a big task and demands greater involvement in the manufacturer’s business activities. This is certainly not a short term or cast saving arrangement and quality of the logistic operations is of the highest importance. In most cases, the manufacturer and 4PL have shared benefits and risks and work together to achieve success for both parties.
To summarize the 4PL concept, it is a model where a company outsources both the management and execution of its supply chain to a 4PL. Such a 4PL company has greater insight into the operations of the enterprise that hired it. If we implement this model in our strawberry farm example, a 4PL would have constant communication with both the producer as well as the grocery store. As the inventory of the grocery store decreases, the 4PL will inform the strawberry farm which will then make sure more strawberries are available to meet the demand.
In a 4PL model, the external party may even own the inventory of the manufacturer, or act as the importer or exporter of record in cross border transactions.
5PL: Fifth Party Logistic Model
In a 5PL model, supply networks are established and used instead of supply chains. A 5PL will typically manage multiple networks of the supply chain. This kind of model is usually implemented in e-businesses. The 5PL guarantees a functioning network of supply chains for its client after consultation with that particular client.
Some of the technologies that 5Pl companies utilize are robotics, blockchain, automation, and RFID devices among others. The goal is to make the client more efficient and offer value by optimizing the supply chain.
Most of the bigger supply chains are in the hands of logistics companies and not in the hands of the manufacturer. Today, 3PL and 4PL are two of the most common models companies employ for the supply chain management. Let’s take a detailed look at these two.
A comparison of 3PL and 4PL Logistics
3PL companies have been around for some time now. To make it easy to understand, you can consider a 3PL as a service that adds value to the supply chain and acts in addition to the supplier, receiver and carrier of the goods. At no point does a 3PL own the goods it is managing and transporting. It merely provides value by managing, packaging, and regulating shipments on behalf of its client.
In the past, 3PL companies existed even though the term 3PL was not used to describe them. These were companies that took shipments from those moving their product and tendered them to transport companies. Today, any company that facilitates the movement of products between suppliers, manufacturers, distributors, and retailers would fall under the 3PL category. A manufacturer using the 3PL model doesn’t need to own any shipping equipment or assets of its own.
One can expect a 3PL provider to offer some or all of the following services:
- Inventory Management
- Freight forwarding
There are many reasons why companies opt for 3PL companies to manage their logistic needs. It could be to make the process more efficient. Another reason could be to add value to the supply chain that the company itself does not have the time to manage. But one of the main reasons is to avoid complexities and let specialists manage the supply chain. Due to many reasons, such as mergers and acquisitions, the supply chain over a period of time can become really complex and too big for the company to manage. A 3PL is the perfect way out of such a scenario.
Another reason manufacturers opt for 3PL solutions is technological edge. Large companies need to develop in-house software to keep track of shipments. This is costly but the same task can be performed by a company specializing in such solutions. 3PL providerss today carry such software with them so a manufacturer hiring a 3PL automatically gets to use their software for tasks like inventory management. This is how a good 3PL adds value to a client’s supply chain and makes it efficient and affordable.
Advantages of 3PL
A 3PL company offers value to the supply chain by providing innovative services that the manufacturer may not be able to deploy on its own. Since 3PL companies specialize in moving goods, they are always one step ahead and can adjust quickly even in case a problem arises. Another benefit is that 3PL companies have a network of warehouses located strategically to get the product to the consumer as quickly as possible. Such a decentralized model ensures timely delivery in case of spikes in demand for a product. Even if there are no delays or problems in shipment, such a system comes in useful. This is the system that allows overnight delivery and presence of stock in areas where the demand is high. Companies save a lot on warehousing, transportation, and shipment of products through a good 3PL.
Disadvantages of 3PL
Even though the 3PL model looks great in theory, there are a few drawbacks to this model. One major drawback is that the manufacturer or the client loses oversight over their own goods. Since the manufacturer is outsourcing the logistics, most shipment related activities happen without direct supervision of the company that owns the goods. This means that you are not in direct control of whether or not your goods are being transported carefully or not. Imagine a customer receives a broken LCD screen and you don’t know how the screen broke. Even though the 3PL is responsible for it, the customer blames your company and you have to accept the blame.
Using 3PL services also creates a dependency on using third party services in the future. In case the 3PL increases its prices or doesn’t offer the quality you expect, it is hard to make a switch. It is also hard to stop using a 3PL altogether because moving all the logistic in-house is a massive task in itself.
What is a Fourth-Party Logistics Provider?
In a 4PL model, the client oversees the logistic flow from a bird’s eye view. The client can keep an eye on the warehouses, agents, freight forwarders, and the shipping companies that the 4PL is using to transport the goods. The whole point of using a 4PL is so that the client only has to communicate with the 4PL. The 4PL then manages the whole process on behalf of the client while giving him access and control over the whole procedure.
A 4PL can take on many forms but is mainly a long term solution to either one business’ needs or multiple businesses in a single sector.
Difference Between 3PL and 4PL Logistics
It is typical for a 4PL company to not own any assets for carrying out shipments. All it does is manage the supply chain on behalf of the client with those that are carrying out the shipments on the ground. In fact, a 4PL provider may hire several 3PL companies to meet its requirements. The job of a 4PL is mainly to handle the integration as well as optimization of the supply chain. On the other hand, a 3PL manages the operations on the ground on a day-to-day basis.
Another way to look at the two is that a 4PL offers a long-term relationship to the client in which the client benefits at a strategic level. A 3PL, on the other hand, is a relatively short term solution and based more on targets like cost-saving, which itself is sometimes only a short term focus for companies.
A 4PL manages all your logistic needs on your behalf while being your sole point of communication. With a 3PL, you are not only communicating with the 3PL but also managing some parts of the logistics yourself. A 4PL takes over these management responsibilities on your behalf and deals with the 3PL companies on its own.
One can also look at a 4PL as overseeing the logistic process just as the enterprise would. If the enterprise were to run in-house management, it would have the same tasks as the 4PL currently manages on its behalf.
We have already mentioned above that logistic managers prefer having small warehouses in multiple locations instead of one big one in one place. As the company grows, these warehouses can increase in number. A 4PL is perfectly placed to manage this complexity without putting any burden on the enterprise.
It is not easy to decide whether a 3PL or 4PL would work for your company. A 3PL works well when you need someone to execute your plan. You have to create the plan yourself which means internal management and oversight is necessary. Without it, the 3PL won’t know what to do.
A drawback of this is that the 3PL will mostly look to utilize its own assets to full capacity in order to maximize its own profits rather than work in a way that minimizes your costs.
As an enterprise, it is your responsibility to make sure the 3PL works for your benefit.
A 4PL, even one that doesn’t own its own assets, is mainly there to offer the best value to your supply chain by offering you the latest technological solutions for management. These solutions provide high visibility into the details of your supply chain as well as allow for better analysis for the improvement of the supply chain. The enterprise may still need to manage a 4PL but this management isn’t as hard as that for a 3PL, with the added advantage that you have great oversight over the whole process thanks to the 4PL’s solutions.