No, PL does not stand for the Premier League, Poland or the Liberal Party of Honduras. 3PL stands for Third Party Logistics Provider and refers to logistics service providers. The attentive reader will immediately ask, “Wait a minute, and what’s with the 3? And the 4?” That is precisely what we will clarify in this article.
Outsourcing logistics – but how?
Logistics is no longer limited to vehicle fleets and warehousing. Specialists are in demand. However, logistics is not part of many companies’ core competence. That’s why they want to leave their logistics in competent hands. The trend toward outsourcing logistics to specialists is in full swing. This is an understandable development, as the demands on supply chain management are increasing. At the latest since the pandemic and the Suez Canal blockage, supply chain management and global supply chains have been on everyone’s lips. With the networked Industry 4.0, the curve is getting a further boost. Ergo, there is a need for an outsourcing service provider. But now it’s time to get down to the details. After all, not all outsourcing is the same. The marriage-like arrangement with the logistics service provider needs to be planned precisely. Above all, there is one question: How much should be outsourced?
- Only the operational areas such as transport and warehousing?
- Or more complex tasks such as customs clearance, accounting, and order picking?
- Or right away the strategic management of the supply chain processes?
As the terms 3PL or 4PL indicate, there are several different types of logistics service providers. Let’s work our way through history one by one.
1PL
It all started with the First Party Logistics Provider. “First-party” is often translated as “own…”. This also explains the meaning of the term: Behind the abbreviation is quite simply the standard industry practice of the 1970s to carry out transport, handling, or warehousing with one’s own capacities. The company owns its own (expensive) fleet of vehicles and its own (expensive) warehouse – and does its own logistics. We are talking here about carriers, i.e. freight forwarders, who have the operational business in their hands – or their foot on the gas pedal of the truck.
2PL
Third Party Logistics Providers are composite service providers. Their business is operational as well as administrative. They take on logistics services that go beyond transportation; also involve other contractual partners. These include assembly, packaging, labeling, customs clearance, returns acceptance, etc. Some manufacturers even completely outsource their own infrastructure and fully integrate the 3PL service provider into their processes. In contrast to 1PL and 2PL, 3PL and 4PL service providers belong to the contract logistics sector. They take over the entire management of logistics processes. 3PL and 4PL services involve complex tasks and are characterized by long-lasting contracts. Processes that primarily involve standard services do not count as contract logistics.
The advantages?
- I save costs.
- I benefit from the partner’s know-how.
- I reduce my tied-up capital. Capacities are freed up.
- Quality and efficiency increase because everyone does what they do best (one takes care of logistics, the other produces their goods).
The disadvantages?
- I can lose my know-how. As a result, I also lose the ability to take over services internally at short notice.
- I make myself dependent on the logistics partner.
4PL
2PL, 3PL, 4PL … The world of logistics service providers is colorful. Colorful is also the world of definitions explaining the term 4PL. One of the most widely accepted theories puts assets first. The 3PL provider would be asset-based, as are 1PL and 2PL, – the 4PL provider, in contrast, is non-asset-based and therefore reliant on subcontractors for operational activities. An older theory refers purely to the 4PL’s function as a supply chain integrator. It does not specify that the 4PL may not have its own resources. Theorists also disagree on whether the 4PL provider is tied to a single company or can provide services to multiple supply chains. The term Lead Logistics Provider (LLP) is often used in this context. These emerge from the 4PL provider. In contrast to the 4PL provider, they have their own operational capacities and, if necessary, buy the most effective solution on the market. So what should we think of as a 4PL? 4PL service providers are system service providers; they are, so to speak, the fourth element in addition to the consignor, consignee and executing logistics operators. They work administratively and across companies. In practice, 4PL providers are supply chain design and management service providers. So they can also manage 3PLs. Many supply chain consulting companies refer to themselves as 4PLs. If you don’t have arachnophobia, think of the 4PL as a fat spider in a spider web. It networks suppliers, producers, retailers, IT service providers, consultants, financial service providers, marketplaces, and logistics service providers – in other words, everything that can be networked among market participants. All the threads come together in his company. To this end, he is building an Internet-capable platform with a corresponding software solution. At this point, let’s just throw the term SAP ERP into the room… In short: Logistics goes IT.
5PL
And another new term is haunting the supply chain industry… the 5PL … While there are already several inconsistent definitions for the term “4PL”, opinions are now drifting completely apart when it comes to the 5PL. To a large extent, this also has to do with which 4PL theory one adheres. The 5PL plan, organize and implement logistics solutions on behalf of the contracting company with a focus on the most appropriate technologies. They manage networks of supply chains with a focus on e-commerce. A 5PL comes into play when the supply chain is to become a supply network (Logistics 4.0 sends its regards). It should integrate different supply chains into one network. According to some. All complete nonsense, according to others. The division from 1PL to 4PL would have its justification, but there would be no reason for “xPL” excesses. That would be nothing but gigantism. Moreover, people would be misled into thinking that a higher number means something better and that 1PL and 2PL providers are just poor folk.
I want to outsource. But to whom?
Many factors play a role in the decision to outsource logistics. In addition, the picture varies from industry to industry. Before a company even examines the offers of logistics providers, the following points should be clarified:
- What are my company’s core competencies?
- What is the importance of logistics in my company?
- What specifically do we want to achieve through 4PL outsourcing?
- Are management and staff behind the decision?
- What are the benefits and risks for my company?
- How far is my supply chain management developed? Can we possibly achieve the goals under our own steam?
How do I benefit from a 4PL provider?
3PL providers do not have an overall view of the supply chain network. While 3PLs may also provide services such as warehouse and inventory management, optimizing the network, or providing IT infrastructure, they usually focus only on individual segments of the client. Since 3PL providers own assets, it is in their interest to primarily utilize their own resources. 4PL providers, on the other hand, work with an eye to the big picture. Sub-processes are merged, and interfaces are reduced. Ideally, they are neutral providers who act in the interests of their clients. Providers bring triple benefits to their customers:
- Outsourcing of non-core competencies
- Function as a service integrator
- cross-company supply chain optimization
For example, companies that own multiple warehouse locations can consolidate them with the help of a 4PL provider. Large companies, which typically use multiple carriers, no longer pay many individual invoices, but only one total invoice. In large companies, different departments often purchase logistics services independently of each other. Cost transparency is lost in the process. By bundling logistics management through a 4PL, cost transparency is regained. Modern companies need a specialist for all possible areas (foreign trade, hazardous goods, logistics purchasing …) and quickly reach their limits with their know-how. Small and medium-sized companies in particular benefit from the know-how of logistics service providers. 4PL providers combine transport orders. This enables small and medium-sized companies in particular to save a large proportion of their freight costs. 4PL providers pool human and, if necessary, technological resources. Small and medium-sized companies thus gain the flexibility they need to respond to peak loads through the 4PL provider. At the same time, they can convert their fixed costs into variable costs, since the 4PL provider relieves them of the burden of providing the resources needed for capacity peaks. In addition, 4PL providers also act as consultants in the area of logistics management. As such, they have the expertise needed to mitigate the tax burden on companies by taking advantage of legal opportunities. They also have the necessary expertise to advise on certification processes.
Conclusion
In traditional logistics, one-sixth of total logistics costs are related to administration and order processing. Paper-based communications that require manual data entry and multiple data entry are still commonplace in business. But these practices are error-prone, slow, and expensive. Traditional supply chains are fragmented. Companies separate themselves from each other like islands. A 4PL service provider that can integrate these islands takes the quality of logistics outsourcing to a new level. The technological know-how of the 4PL provider makes it possible to digitize and fully integrate the logistics processes of the companies involved in the supply chain. This results in enormous potential. However, the project of outsourcing its logistics to a 4PL provider poses major challenges for the company. One solution is to initially outsource only partial areas and then gradually expand the projects. The prerequisites for successful outsourcing to a 4PL provider are – in addition to corresponding transparent offers – a well-thought-out decision, as well as a large portion of trust.
