Now more than ever, your business needs to be operating efficiently, and you may be wondering how you can streamline your processes to save money and stay competitive. Supply chain management may not be the first thing that comes to mind when you think of areas for improvement, but it should be. Understanding 3PL, 4PL, and 5PL logistics services and picking the right one for your business are critical. Let us help you get to the bottom of the terms 3PL, 4PL, and the newer 5PL with examples and the important takeaways you need to choose between them.
Background: 1PL and 2PL
Before we delve into 3PLs, 4PLs, and 5PLs let’s have a refresher on 1PL and 2PL definitions. The “PL” in these terms refers to the number of parties involved in the logistics of moving a product from point A (the beginning of the supply chain) to point B (the final consumer or retailer). 1PL means “First Party Logistics,” 2PL means “Second Party Logistics,” and so on.
1PL and 2PL Example: A baker selling baked goods to a local market and transporting them in a truck he owns is an example of 1PL. The baker is the only party involved in getting his goods to sale. If the baker chooses to hire a courier to transport his baked goods to the market, he graduates to 2PL. He no longer needs to own or maintain a delivery truck nor does he (or his employee) need to make the delivery.
Takeaway: A step up in PL allows the baker to focus on his baking rather than transporting his goods and maintaining transportation assets. However, he still maintains control over the process and is responsible for his customer’s satisfaction.
Often as a business increases in size and complexity, it makes sense to outsource more logistics functions, which brings us to 3PL providers. 3PLs provide an additional layer of outsourcing above a 2PL, acting as intermediaries between the enterprise and one or more carriers. They often have strategic relationships with carriers, vast resources, and offer additional services such as warehousing and storage, inventory management, packaging, cross-docking, and freight forwarding.
Common Functions offered by 3PL (third-party logistics) providers:
- Integrated operations
- Transportation services
- Inventory management
- Freight forwarding
- Note: These may vary based on the business model of the company.
How do 4PLs differ from 3PLs?
4PLs, also known as lead logistics providers, take logistics outsourcing a step further than 3PLs with complete outsourcing of the supply chain. Contrary to 3PLs, 4PLs often do not own assets and focus more on optimizing the supply chain rather than day to day transactions. Unlike 3PLs, they offer a single point of contact with the enterprise, sometimes managing several 3PLs.
3PL and 4PL Example: A company that supplies baked goods to regional grocery stores originally hires multiple 3PLs for delivery of raw materials, packaging and order processing, and transportation and delivery of finished goods to stores. As the company expands its product line and area, it opts to hire a 4PL to manage the entire supply chain, eliminating the need for the company to coordinate between the 3PLs.
Takeaway: Stepping up from 3PL to 4PL makes sense for larger, more complex businesses with multiple sources of raw materials, processes, and/ or distribution outlets. The enterprise’s control over logistics processes becomes more limited with a 4PL provider, which manages the entire supply chain and becomes the single point of contact. Choosing a trustworthy, dedicated 4PL is crucial.
What is 5PL?
If a 4PL represents the total outsourcing of the supply chain, what is the difference between a 4PL and a 5PL? Whereas the difference between 1PL, 2PL, 3PL, and 4PL is more layers of outsourcing, a 5PL provider uses technology to help companies that are driven by e-commerce and don’t have as much of a traditional physical presence. 5PLs combine logistics services for multiple customers to achieve cost savings from negotiated bulk rates. 5PL providers may assist an enterprise with the use of the following technologies:
- Radio Frequency Identification devices
Takeaway: Choosing a 2PL, 3PL, 4PL, or 5PL provider depends on many factors, including the size, structure, and strategy of your business as well as your willingness to relinquish control of certain elements of your supply chain management to another party. Whichever level is right for your business, choosing trusted and capable partners is essential and will directly impact not only your bottom line but your customers’ satisfaction.
How to Find the Right Logistics Strategy for Your Business?
Determining the right logistics provider(s) depends on your business structure and strategy. At East Coast Transport, we specialize in 3PL. We’ll meet your deadlines and customize operations in order to provide you safe, fast pick up, and delivery. We’ll communicate with you from start to finish, every time. If you are looking for a strategic logistics partner that can provide you with unlimited resources, 24-hour freight tracking and tracing, temperature monitoring for perishable products, and competitive rates, give us a call. We have the fleet to meet your needs.