Technology

Logistics 101: Our Guide to 1PL, 2PL, 3PL, 4PL, 5PL

This is our new regular series to help you navigate and understand the logistics industry. In this edition, we dive into the concepts of “xth-party logistics”.

What is x-party logistics anyway?

Over the last few decades, the logistics industry has given rise to new logistics concepts that rely less on asset-based and more on contract-based business models. Today, logistics companies are often acting as an intermediary that orchestrates and manages parts of or the entire supply chain for their customers. As a result of this development new challenges have surfaced. Companies struggle with the interoperability and the information flow between legacy and disparate IT infrastructures as well as the stakeholder management along the supply chain.

Let’s take a look at how the increasing complexity of global supply chains and the rise of digitalization has altered the services of logistics providers over the last 50-60 years.

  1. First-party logistics – 1PL

    The term first-party logistics (1PL) describes companies that use their own capacities (trucks, warehouses etc.) to store and deliver goods to their customers. This was common practice until the late 1970s: original equipment manufacturers (OEM) built up their own internal capacities to handle all transport, handling and storage operations (trucks, warehouses etc.). Only cross-border and global transport was sometimes handled by external logistics providers.

  2. Second-party logistics – 2PL

    In the wake of internationalisation and new management concepts (especially the Lean Management movement) during the 1980s, the trend towards outsourcing logistics services allowed companies to focus their efforts on their core competencies. Service providers who provide transport, handling or storage services for OEMs are referred to as second-party logistics providers (2PL).

    Typical 2PL providers include freight forwarders, shipping companies, forwarders and warehousing companies as well as providers of courier, express and parcel services (CEP services). Such companies are integrated service providers that offer several individual logistical services, sometimes combined, and have their own assets, such as trucks, cargo ships or warehouses.

  3. Third-party logistics – 3PL

    In the 1990s, the third-party logistics (3PL) providers emerged. Today, the growth in online sales and increasing customer demand for faster, more convenient delivery and lower prices have spiked demand for 3PL services. In fact, according to a 2017 report from Armstrong & Associates, 90% of US Fortune 500 companies rely on 3PL providers to handle their logistics, compared to the 46% Armstrong reported in 2001

    What does a 3PL exactly offer?

    The 3PL provider is completely integrated into the processes of their customers, and is neither easily interchangeable nor replaceable, as the manufacturer usually dismantles its own infrastructure completely. Long-term partnerships between the logistics service provider and the customer are usually the result. They organize the flow of goods and information for their customers and take over their entire logistics processes. They also include further value-added services in their offerings:
    They are specialists for customs clearance and freight forwarding. Sometimes they take orders themselves and process them. A 3PL provider can handle invoicing and monitor payment. Many companies also offer assembly, packaging and labelling support. Return acceptance and repairs can also be handled by a 3PL company.

    What is the effect of working with a 3PL?

    The logistics costs of the OEM using a 3PL are reduced by an average of 10%, while the delivery time is reduced by 30%. 3PLs are also particularly advantageous when the customer’s volumes fluctuate greatly during the year. In such cases, a company’s own warehouse would be very poorly utilised. This allows OEMs to reduce their tied-up capital considerably, as they do not have to buy and maintain their own warehouse or fleet. By outsourcing the logistics area, customers can focus on their core competencies.

  4. Fourth-party logistics – 4PL

    The concept of fourth-party logistics service provider (4PL) was established in the mid-1990s. They are understood as asset-free system integrators who stand between their customers (usually OEMs) and other logistics service providers (often 3PLs) to ensure the coordination and organization of all business processes along the value chain. They oversee the entire supply chain to ensure an optimal use of the available resources. The ability to coordinate complex, cross-company business processes with the help of modern technologies and to supplement its own strengths with additional service providers is one of the key competencies of 4PLs. The concrete task of a 4PL provider is therefore to take over the control and integration function within the supply chain without its own operating resources and to increase the efficiency of the supply chain. In this respect, a 4PL provider acts as a neutral intermediary between the client and the various service providers, trying (to the client’s advantage) to optimise the various service offers in an overall package.

    Since this coordination must be carried out continuously with the aim of further optimisation, 4PL providers rely on a well-developed IT structure. This is the only way to ensure the integration of different external service providers. Furthermore, a solid industry and practical knowledge is essential, since the respective business specifics must be taken into account.

  5. Fifth-party logistics – 5PL

    As 5PL is still a rather recent concept, there are still varying definitions. At its core, a 5PL provider aims to obtain a higher degree of available resource utilization and collaboration across different disciplines. This goal is achieved as 5PL providers aggregate the demands of 3PL providers and others into mass volume in order to negotiate more favorable rates with shipping companies.

If you have a topic you’d like to have us take a look at in a future edition, please reach out via lukas@beamberlin.com.