uTenant looks into the main differences between 3PL, 4PL and 5PL, and why these logistics partners matter in 2022.
The world of shipping and logistics can be broken down into a series of parties, each of which interact to perform some greater task in the long line of the supply chain and systems management. The evolution of a worldwide economic structure came with the need to coordinate multiple entities to successfully run large scale shipping operations. Now, with the breakdown of that established order, new strategies and entities are being looked into as safeguards for when the traditional models fail due to global economic pressures.
These collaborative models all dictate the flow of physical goods from raw materials to shipped products. The numbers are often associated with the number of entities that are included in the process. The more companies, or entities, that are needed for the whole supply chain to function, the higher the number. These higher forms of logistics, from 3rd-Party Logistics and up, are the most common form of shipping management present in the world today, so getting to know them and how they work should be considered crucial to any business that is involved in the wide-open world of shipping.
1PL and 2PL
Starting from the bottom rung, the 1st-Party Logistics and 2nd-Party Logistics represent much smaller scale and simpler forms of supply chain management. These are beneficial to smaller companies who want to exert total control over the whole manufacturing process.
1st-Party Logistics are companies with their own trucks that go to pick up raw materials and deliver them to a work site to be processed. Because the shipping is done in-house, it is fully controlled and within the company’s own payroll. 2nd-Party Logistics invites in another entity, a separate shipping company, to handle the retrieval and delivery of raw materials to a processing facility, allowing the current workforce to focus exclusively on working with the material rather than dedicating a small portion to retrieving it.
These two systems operate very differently from one another, and often require short distance or local shipping to stay manageable. From here, larger companies tend to refer on the more complex systems.
When introducing a third party, you are expanding your business to multiple collaborators and creating your own supply chain. This term first emerged in the 70s when overseas shipping started to take precedence over local or short-range shipping solutions. In this set-up, a manufacturer (the 1st party) will hire a company who manages freight forwarding (the 2nd) who then controls the shipping indirectly as part of contracted work (to the 3rd party). The 3rd party will retrieve the raw materials, ship them to the 2nd party’s preferred delivery or retainment method, which will then be offloaded to the 1st.
Involving this many extra players guarantees a level of quality control, as the 1st party leaves the coordination and supply management up to the 2nd while the 3rd party does the major labor of retrieving the material. It’s useful for overseas shipping projects, of very long-distance supply delivery where natural resources are required in an area that the 1st party may have no business experience with. The 2nd party will have a much wider reach, as they only handle coordination, not manufacturing on their own.
However, the more parties get involved in establishing a logistics chain, the more room for error you may have, and the less control you can enforce. It also increases the cost, as the 1st party will have to pay for every party’s involvement.
Also called Lead Logistics Providers or LLPs (a different kind of LLP), 4th-Party Logistics moves the 1st party up a whole grade away from the management of logistics itself. The main difference between a 3PL and 4PL is that the manufacturer (1st Party), instead of managing the logistics of the freight forwarder, will move that responsibility onto a logistics management company to act in their stead. The 4th Party is still the raw material transport company, with the 3rd Party transportation and freight company, who work with the logistics management and distribution 2nd Party company.
This is advantageous for any company that is scaling up their work and needs to focus more of its attention on quality and production, and can’t afford to spend the time managing their own supply chain. But of course, the more removed they are from that supply chain, the more error-prone the process may become. The 1st party will have to work more closely with the 2nd party to ensure that everything is smooth - and that the 2nd party company is faithful in the manufacturer in the first place, or they may shift their workforce to other companies who hire them for the same service.
Instead of adding a new player to this process, the new and somewhat ambiguous 5PL structure aims to take advantage of emergent technology and automation to expedite the process on all fronts. It relies less on the traditional one-way supply chain model and instead incorporate networks of distribution and storage facilities. This is done by adding a new kind of company to the 3PL structure, an aggregator who manages the supply chains for multiple companies.
Instead of the 4PL method of working with one company who works with yours, you are working with a company that works with other 3PL companies as well and manages multiple warehouses. They aggregate their inventory and use them all to service each individual business - swapping items as needed between them - to ensure that each company gets what is needed at the right time. 5PL companies manage the entire supply chain for you and are designed with digital platforms in mind. They are as hands-off as the 1st Party can get, but as such, are just as distant and automated. You’ll get what you need, as they can get it to you.
Beyond the 5th
As the world of logistics expands to meet the constantly rising demands of consumers, new methods and structures will emerge. 6th-Party Logistics are already finding use, and Seventh-Party Logistics take the traditional structures of 3PL and 4PL together to form a more united field of solutions.
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