The Five Levels of Logistics Providers

While most companies work with 3PLs and 4PLs, there are actually five distinct levels of logistics providers. Each offers unique services and solutions to help businesses succeed, but only the first four are typically used in today’s market. Before we compare 3PLs and 4PLs, here is a brief overview of the five levels of logistics providers.

First-Party Logistics (1PL)

A 1PL provider manufactures and transports specific goods. With this model, all transportation is taken care of internally, so there’s no need for any external points of contact. A 1PL will have their own fleet of trucks or other delivery vehicles.

Second-Party Logistics (2PL)

A 2PL focuses only on the transport of goods, and most of today’s parcel carriers — like UPS — are considered 2PLs. They do not, however, manufacture or assemble the goods being shipped. 2PLs typically own their own transportation vehicles, such as trucks, ships, or planes.

Third-Party Logistics (3PL)

A 3PL offers outsourced logistics support through a variety of shipping, warehousing and specialty solutions. They can either have their own fleet of shipping vehicles, or they may work with an external carrier network.

Fourth-Party Logistics (4PL)

A 4PL, sometimes referred to as a lead logistics provider, is similar to a 3PL in many ways. The key difference is that a 4PL will often oversee the entirety of a more complex supply chain. They may even outsource to multiple 3PLs for various processes.

Fifth-Party Logistics (5PL)

A 5PL also acts to manage whole supply chains through multiple outsourced service providers. They act as a more in-depth 4PL and are an up-and-coming phenomenon in the e-commerce arena. 5PLs are relatively new, meaning they are not as commonly used as 3PLs or 4PLs.

The Role of 3PL Companies in Freight Shipping

Typically, a 3PL will work with small to mid-sized businesses (SMBs) to manage their supply chain and day-to-day operations. They often monitor supply chain performance, which helps them identify key efficiencies and potential roadblocks that need to be fixed.

3PL services aren’t just for SMBs, however, as larger companies can also benefit from a 3PL company managing portions of their supply chain. Large companies and corporations often make use of several 3PLs that are contracted by a larger 4PL.

3PL service options vary by provider, but most include:

•    Logistics management --- involving the planning, coordinating and overseeing the storage and movement of commodities
•    Warehousing and inventory management solutions --- involving the storage of goods and the efficiency of day-to-day operations
•    Order fulfillment --- involving the picking, packing, labeling and shipping of commodities
•    Transportation management --- involving the physical movement of products, either by the 3PL’s fleet or an external carrier

The Role of 4PL Companies in Freight Shipping

4PLs often work with larger companies and corporations to manage their more complex supply chain operations. A 4PL will typically manage the entire supply chain, often contracting out to smaller 3PLs to manage various portions or processes.

4PLs do not own assets or employ any operation workers — their focus is on coordinating the supply chain network. They also provide consultative services to businesses, helping them to streamline and maximize their operations.

4PL services are often high-level and include:

•    Designing, analyzing and optimizing the entire supply chain for improved efficiency and cost—effectiveness
•    Providing strategic guidance and consultative services to maximize productivity
•    Researching and developing strategies for warehouse and inventory management solutions
•    Coordinating additional 3PL providers and any external companies hired to provide additional work
•    Streamlining the supply chain process and reducing associated costs
•    Organizing and overseeing the supply chain’s management
•    Analyzing and providing an action plan to lower transportation expenses and maximize carrier performance

3PL vs 4PL: Comparing Key Differences

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What is 3PL?

With 3PL, third-party logistics, businesses work directly with providers, especially those experiencing rapid growth. Specific industries (such as tech, retail and lifestyle companies) often need to outsource logistics operations, so 3PL can be the perfect solution. Across the industry a 3PL can have different characteristics, all falling into three types:

   This can be identified in a flexible Non-Vessel Operating Common Carriers (NVOCC) which as clarified by Marine Insight, do “not own or operate ocean transport vessels. Instead, they make arrangements with ship owners, charterers, or shipping lines for transportation of cargo”;

   A 3PL model acting more as a 2PL, a trucker, or a warehousing provider. A “traditional” 3PL model that can execute a variety of logistics and transportation services such as freight transportation, booking, documentation, order fulfilment, warehousing, customs brokerage, and procurement at scale, but providers don’t own assets (such as trucks, rail, or warehouses) and rely on 2PL providers for it;

   A 3PL model linked to supply chain management. Where the 3PL acts as the customer representative towards the goods’ suppliers and vendors. For instance, to ensure that contractual obligations such as delivery time, quantities, etc. are honoured, which is critical for the sourcing setup of the brand who is buying overseas.

A 3PL can also work as any of the three models in one.

Old 4PL vs new 4PL

With 4PL, fourth-party logistics - also called lead logistics or control tower– providers offer even more, particularly taking away the burden of managing the entire supply chain. 3PL provides an extension of the logistics team that is actively present and participates in locations where there is a need for the customer to be represented (e.g., at origin with the vendors). A traditional 4PL provider is an orchestrator that oversees all transport management. Providers take ownership of the coordination and management of a variety of 2PL/ 3PL players involved in an end-to-end logistic offering, as well as coordinating the vendors. This solution is great for large businesses, for example in FMCG or chemical, that have complex supply chains operating over multiple origin countries and multiple destinations.

It is very interesting to also see how the role of 4PL is changing into a “new 4PL”, which is a more holistic supply chain control tower, with a capabilities not only on logistics, but also on supply chain planning, inventory management, demand management, and supply management. The key difference is that while a 3PL provider focuses solely on logistics, and an advanced type of 4PL provider gives full visibility across the supply chain. “According to Gartner, “4PL service providers are becoming increasingly popular in today’s highly complex logistics environment, which is awash with risk and disruption.”

Each of these above-mentioned supply chain models has pros and cons, depending on the needs and strategies of a company. So, when should a company consider using a 3PL vs 4PL? It all depends on what benefits and advantages a business is looking for.

What are the benefits of choosing 3PL?

The advantages when choosing a strategy like third-party logistics depends on the kind of 3PL that is chosen:

A 3PL as a flexible Non-Vessel Operating Common Carriers (NVOCC) or non-asset operating, a “traditional” 3PL model offers both:

   Lower cost: Choosing a 3PL provider might help with eliminating the costs associated with warehouse space, technology, transportation, billing, audits, and optimization. This results in less spending, therefore higher chances to re-invest in other parts of their businesses, such as production, customer care, etc.

   Scalability and flexibility: Choosing a 3PL provider can also help with scaling space, transportation, and labour according to inventory needs, giving a chance for businesses to divert their focus on expanding or flex their distributions.A 3PL model linked to supply chain management can offer:

   Geographical presence: This model allows businesses to have the ability to be where their suppliers and customers are, without having to be present in all locations worldwide. For example, if a brand sees the need to produce in Asia, but can’t build offices in all countries, this kind of 3PL model can support and enforce their guidance, regulations, standards, and strategy locally.

What are the benefits of choosing 4PL?

Fourth party logistics has become an “end-to-end supply chain and logistics partner” confirms Gartner, orchestrating all supply chains actors for the best possible outcome. Choosing 4PL has the following advantages:

   Handled complexity: With a 4PL provider the entire logistics process is streamlined and integrated for better coordination. By integrating systems and supply chain steps, while using a single point of contact – eliminating complications or possible mistakes – a 4PL provide can elevate a business’ supply chain to a higher standard that allows for growth, resilience, efficiency, and flexibility.

   Better visibility:4PL providers can tap into innovative technology such as specialised software, AI technology and automation to improve visibility across the supply chain, predict congestions and effectively manage logistics with better visibility. This advantage can be used to boost resilience and flexibility as well as sustainability of processes across the entire supply chain.

Both 3PL and 4PL can offer a solution-oriented service that focus on strong partnerships (with 4PL reaching a deeper level), operational excellence, great customer care, and strategic guidance based on industry trends and insights.

Combining models

Another option for businesses is to create unique value by combining 2PL, 3PL or 4PL models through hybrid options. This solution can bring to life a unique model that fits the specific requirements of each individual business, as well as using add-ons for a compelling solution. Technically, every brand uses a combination of models, but the key is how they combine such models to fit their specific business outcomes and stay resilient. A big part of this is how deep they outsource, being able to focus on their core business.