Definitions of X-Party Logistics providers are often confusing. Understanding of the types, especially the 5PL, will help you choose a model with the best fit to your business.
The logistics industry is filled with technical terms and evolving jargon that can be difficult for new and even experienced professionals to understand. This can make communication and collaboration between different parties involved in the supply chain more challenging. We wrote an FAQ page on many of the technical terms but in this blog post, we will address confusing 1PL/2PL/3PL/4PL/5PL/… terminologies used by many.
Each Logistics Service Provider (LSP) offers a unique set of services and has a distinct value proposition, so it is essential for their clients to have a clear understanding of the different types and their respective capabilities.
1PL, or First-Party Logistics, refers to companies that directly own or lease assets and handle all of their logistics operations in-house.
2PL, or Second-Party Logistics providers are companies that offer customers specialised services e.g. haulage, warehousing, yard management or freight forwarding. The relationship between such 2PL and a client is usually tailored to meet their specific needs and contractual requirements.
Both of the above types are fairly straightforward and require a client (manufacturer or product/inventory owner-shipper) to employ a fully staffed supply chain management function which includes colleagues that cover all aspects of logistics operational requirements ranging from procurement to inventory planning and transport or warehouse management.
The subsequent xPL types are becoming more sophisticated with their capabilities and service offerings and that is what creates most of the confusion and misunderstandings among clients. Some authors go as far as artificial 7-9PL definitions which often lack substance and are mostly used in a novel marketing narrative. We would like to take a simpler view on those definitions, especially from the position of what it means for the clients’ operations and decision making point of view.
The simplest of the rest is a 3PL, or Third-Party Logistics providers, which offer integrated logistics services across multiple operational categories e.g. haulage and distribution, warehousing and inventory management. 3PL providers usually operate their own asset base but also have an extensive network of partners that offer a wider range of related services such as co-packing and customs clearance documentation management.
3PLs are generally more focused on logistics services like order fulfilment, distribution, and warehousing as well as tend to offer more comprehensive service contracts which may include provisions for outsourcing some of the supply chain and logistics management functions. These types of contracts allow their clients not only to take advantage of the scale and expertise of a 3PL but also reduce internal management headcount as well as “outsource” some of the supply chain management risks and efficiency improvement programmes. The upside of having lower logistics administration costs is often undermined by the loss of in-house logistics operational knowledge. Overreliance on such an LSP often results in weakened negotiating positions and subsequent growth of external operational spend for their clients.
In order to deliver the above comprehensive contracts many 3PLs sub-contract parts of their service offerings to 2PLs or other 3PLs, which may have available capacity. Such “layered” operations have ultimately led to creation of an “asset-light” 4PL, or Fourth-Party Logistics, service provider category.
In 1996 Accenture registered “4PL” as a trademark which was defined as: “A supply chain integrator that assembles and manages the resources, capabilities, and technology of its own organisation with those of complementary service providers to deliver a comprehensive supply chain solution.” Since then the registration has expired, but the concept still means that a 4PL acts as the sole interface between a client and the range of its LSPs. So in contrast with 3PL the pure 4PLs could be completely asset-less and provide services of managing the entire clients’ logistics operations, leaving them with only strategic planning and executive control responsibilities.
This is a very appealing model, especially to manufacturer-type clients which can focus on what they do best, whilst outsourcing operations that aren’t related to its core business competency. Additionally, with complete oversight of the supply chain, 4PLs are often incentivised to uncover efficiencies and operational cost reduction opportunities. However, with very little involvement in the day-to-day logistics operations, such clients will need to work closely with their 4PL to ensure that it’s meeting procurement imperatives and order fulfilment timelines. Subsequently, this may lead to excessive relationship management and administration efforts as well as overdependence on a single LSP. Additionally, many manufacturers guard their sourcing and logistics operations closely from competitors and even non-disclosure or non-compete agreements may leave too much risk in the operations.
Development of the advanced analytical tools, AI / Machine Learning and other cloud based technologies has driven the emergence of the newest 5PL, or Fifth-Party Logistics Service provider type. The category has a range of definitions where some believe that 5PLs are integrated Lead Logistics Providers (or LLP), coordinators or managers of other 3-4PLs. This view essentially describes a glorified 4PL and only creates confusion and an additional administrative layer with magnified negatives of the traditional 4PL model.
By our definition - 5PL is a pure Technology based and completely asset-less Service Provider which offers clients an operational management software solution centred around the following key principles:
- integrated across end-to-end supply chain networks and their functional requirements
- uses advanced data management and analytical technologies
- LSP agnostic and reliably manages all aspects of provider relationships
Integration across all supply chain networks of an individual client is critical as it enables effective and synchronised management of different logistics channels, inventory levels, impound supply and procurement activities. These processes are highly interdependent and traditional siloed approach to optimisation of either of them often leads to delivery of local benefits at an expense of the other functional areas (e.g. minimised inventory at the expense of product availability and transport costs or optimised transport utilisation at the expense of inventory levels and warehousing operations).
Only recent advancements and emergence of powerful analytical technologies based on deterministic algorithms as well as AI/ML tools are now allowing fast analysis of vast arrays of interconnected datasets which enable an end-to-end optimisation of logistics networks. The main advantages of pure 5PL tech systems is that they are used by in-house supply chain management teams which not only allows them to take back full control over logistics operations from 3-4PLs, but also retain operational know-how and effectively manage supply chain risks in-house.
In this post we will ignore 6PL, 7PL, etc models, which appear to be pure artificial constructs that combine elements of the earlier types but without substantial differentiation in meaning or service provision.
The impact and relationships between a typical xPL operating / service model and their respective clients could be summarised as follows:
|Client (shipper / manufacturer)
|All operations in-house
|N / A
|All decision-making, operations and risk management
|Specific service functions delivery as an when required
|Decision-making limited to overall planning and operational control
|Short-term planning and day-to-day operations management
|Only strategic planning and high level operational control
|Planning, overall management and subcontracting LSP selection
|Automated decision-making and full operational control back in-house
|On-Demand delivery of specific service functions as directed
Understanding the differences between logistics providers is essential for businesses looking to optimise and improve their supply chain operations. Each provider type offers unique services that cater to different clients' needs, making it essential to choose the right provider for your business. Whether you choose a 1PL, 2PL, 3PL, 4PL, or 5PL provider, make sure to consider all trade-offs and choose a model that aligns best with your business goals and objectives.