Supply chain management (SCM) is a term within the field of logistics that focuses on production and involves the supply and distribution sides of the company. In some applications, SCM and logistics are interchangeable.
There are five layers of logistics that are important for organizations to consider. However, there is debate and confusion among people in the supply chain industry about the differences between these terms, according to logistics company Cerasis. Embassy Freight offers the following definitions for the five layers of logistics.
- First-party logistics (1PL) refers to a company that does not outsource transport and logistic activities to third parties. The company’s departments carry out these functions.
- Second-party logistics (2PL) refers to a company subcontracting a clearly defined transport or logistics task. It is a cost-driven and short-term relationship.
- Third-party logistics (3PL) refers to outsourcing a package of transport and logistics activities. The service provider often comes into contact with the manufacturer and the supplier.
- Fourth-party logistics (4PL) refers to outsourcing not only logistics tasks, but the management of these tasks. The service provider often takes care of the entire supply chain.
- Fifth-party logistics (5PL) refers to the switch from supply chains to supply networks. The service provider manages the networks of supply chains, including strategic and innovative logistical solutions and concepts. 5PL is often linked to e-commerce.
Most commonly, businesses will choose between 3PL and 4PL service providers to handle their logistics and/or SCM needs.
Third-Party Logistics (3PL) Providers
Here is a definition for 3PL from the Council of Supply Chain Management Professionals (CSCMP):
A firm that provides multiple logistics services for use by customers. Preferably, these services are integrated, or “bundled” together by the provider. These firms facilitate the movement of parts and materials from suppliers to manufacturers, and finished products from manufacturers to distributors and retailers. Among the services they provide are transportation, warehousing, cross-docking, inventory management, packaging, and freight forwarding.
“Definition has broadened to the point where these days, every company that offers some kind of logistics service for hire calls itself a 3PL,” the CSCMP said in another description of 3PL. “In 2008 legislation passed declaring that the legal definition of a 3PL is ‘A person who solely receives, holds, or otherwise transports a consumer product in the ordinary course of business but who does not take title to the product.’”
Benefits of 3PLs include organizations receiving the provider’s existing network of valuable carrier relationships and a clear understanding of how to optimize performance for specific routes, according to Cerasis on Supply Chain 24/7. 3PLs are ideal for cost control, improving customer experience or expanding routes.
3PLs are changing the retail landscape. Free shipping is most important to consumers, management software company nChannel reports, and they expect it to be fast. Amazon has responded to these demands by offering same-day shipping in major cities: “Scrambling to meet customer demands, retailers are turning to third-party logistic companies to manage all or parts of their supply chain processes. They know that supply chain management is the foundation of customer experience.”
It is costly and difficult for organizations to manage the supply chain, so they turn to 3PLs for help.
Fourth-Party Logistics (4PL) Providers
A 4PL provider differs from 3PL in the following ways, according to the CSCMP:
- It is often a separate entity established as a joint venture or long-term contract between a primary client and one or more partners.
- It acts as a single interface between the client and multiple logistics service providers.
- All aspects (ideally) of the client’s supply chain are managed by the 4PL organization.
- It is possible for a major third-party logistics provider to form a 4PL organization within its existing structure.
“4PLs have also been referred to as ‘Lead Logistics Providers,’” the CSCMP added. “Now a new crop of companies have emerged who are actual transportation companies too. While a 4PL is sometimes described as non-asset-owning service provider, their role is to provide broader scope managing of the entire supply chain.”
A main argument for using 4PL is that “logistics is not a core activity of a shipper and it should be handed over to a contractual partner who has the required knowledge and is innovative enough to bring new solutions to servicing a shipper’s changing supply chains,” the European Freight and Logistics Leaders Forum found. Benefits include cost savings, expertise and better and more sophisticated information technology capability. 4PL providers are a “one-stop shop” for shippers.
Choosing a Logistics Provider: 3PL vs 4PL
Some businesses may have confusion when deciding between a 3PL and 4PL company, due to the various definitions and portrayals of these two types of logistics. “You might question anything more elaborate than a 3rd party providing logistics consultation or management, no matter how advanced or far-reaching their service might be,” according to Cerasis. “So are they still 3PLs who just invented a fancy title to set them apart from the competition, or is there a real differentiation?”
“A 4PL is neutral and will manage the logistics process, regardless of what carriers, forwarders, or warehouses are used,” Cerasis added. “The 4PL can and will even manage 3PLs that the customer is already currently using. Many 4PLs have addressed the huge requirements of electronic interface between numerous companies.”
Here are a few questions that companies can answer to help them decide between 3PL and 4PL providers.
- How much control do you want to have? If you want to maintain some control of logistics, a 3PL provider will allow you to have that because it requires coordination from people at your company.
- How much labor am I willing to invest? You can reduce labor by choosing a 4PL provider; this comes at the cost of logistical control.
- What logistical needs does your business have? Ultimately, if you decide to outsource your logistics provider, you will need to determine how much management you prefer your provider to have. 3PLs and 4PLs vary in the nature of the business relationship, amount of control your company will give up or retain, labor your company needs to invest and more. And due to some confusion and discrepancies in 3PLs vs 4PLs, you may need to focus on specific companies instead of a choice between these categories of logistics providers.
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