Some companies deal with logistics on their own, other use external services. Such services are rendered by more and more entities, and their organization may vary. What do 1PL, 2PL… 5PL models mean?
Forwarding, transport and storage are only some examples of logistics services. They are accompanied by related activities, supporting the flow of goods between cells of a supply chain. Thus, there are plenty of options to choose from. Recently, the models of logistics services have been constantly modified, e.g. due to popularization of digital technologies, including Big Data.
1PL (First Party Logistics Service Provider) is the main solution – a basic form of organization of the company’s own logistics (without outsourcing)
There is no “big philosophy” in it. The producer or exporter of goods handles transport and logistics services (such as transporting packages to customers), and, dealing with all types of business activities, it uses his own company units and technical resources, e.g. cars, trailers, warehouses, internal transport vehicles. This solution is equally simple and safe; it applies to both a sender and a receiver of the products, and such operations are conducted by producers, sellers and distributors. 1PL ensures full control over individual processes. It also has its drawback: in the times of narrow specialization, the “I can do it myself” approach does not always guarantee maximum effectiveness.
Slightly more “sophisticated” concept 2PL is a formula when a producer or exporter outsources transport and storage services to an external logistics service provider
It is, however, of a limited nature because the company retains control and administrative management. Generally, in this model, a logistics service provider owns and manages its own assets. A good example is when an operator provides services within the company, but also combines them with other cells of a supply chain. A 2PL operator is e.g a carrier providing transport services to a client but without offering integrated logistics solutions.
Transport companies having their own fleet often are specialized in a particular segment, such as maritime or railway transport. And air or maritime carriers e.g. Maersk or FedEx are often actual providers of such services.
Sometimes, a 2PL logistics service provider chosen for handling transport and storage operations further outsources these services (partially or entirely). This way, a model of external logistics service provider appears (3PL; Third Party Logistics): a method in which one or more logistics functions are outsourced to an external company. A 3PL operator (company having resources which allow it to fulfil tasks commissioned by other companies on every stage of a logistics chain) renders a much wider range of services, such as transport, storage, co-packing, order picking … number and type of actions and the area covered are not limited.
Typical functions fulfilled by 3PL operators include:
– transporting, handling and storing loads,
– warehouse management and distribution
– range of additional services, e.g. services connected with package tracking, management of stocks, handling clients’ transactions etc.
The operator’s role is to ensure selection of the means of transport and works supervision, but it is the logistics department of the client that is responsible for designing the supply chain.
The 3PL method is usually implemented by entities which are not focused on logistics as a main area of activity and which are at least middle-sized enterprises (logistics costs are high enough, so that hiring a third-party company for individual processes becomes economical). The advantages of the 3PL model include: possibility to focus on the company’s activities other than those outsourced to an external party, lower costs of management and improved price competitiveness, release of resources (no need to invest in logistics functions), higher quality of services thanks to the scale effect and experience.
The model has its advantages, but also a few disadvantages, which include: smaller control over the function outsourced to an external company and a limited contact with clients. The clients who use one or more external logistics service providers usually conclude long-term contracts. So the 3PL model integrates companies within a system, consisting of logistics operators such as DB Schenker, Kuehne+ Nagel or DSV and forwarding companies such as DHL.
The 3PL methodology has gradually evolved to 4PL (Fourth Party Logistics Service Provider), a model which appeared in the ‘90s
The 4PL models are characterized by higher integration; the client only points what to store, what and where to transport, while the operator is responsible for designing and managing the whole process.
Currently, in the market of logistics service providers, we can observe a growth of the number of 4PL operators, that is integrators of supply chains. 4PL actually consists in the outsourcing of logistics services, and the clients using this form of cooperation usually do not have their own TSL departments. Operations are strongly personalized because they are fully designed to fulfil the needs of a specified user. The entities managing their supply chains also choose to outsource functions connected with the integration of these chains, delegating their competencies to 4PL external logistics operators (such phenomena have been initiated in the automotive industry).
This model can be observed, for example, when the producer or exporter of goods outsources operation of transport, storage and even administrative management of the company. 4PL covers also monitoring of logistics processes, coordination of activities across the whole supply chain, starting from the raw material suppliers up to the buyers (not only on a particular section of the chain as in the case of 3PL).
A 4PL operator does not even have to have its own warehouse or fleet – coordinating processes with the use of resources of other service providers is sufficient. The group of 4PL operators is not homogenous. It includes operators that do not have their own logistics infrastructure and are focused on the information integration (and outsource other services), on the other hand, there are global logistics operators such as UPS or DHL.3PL and 4PL are currently the most common models.
It is not true that the 4PL integration is always better than 3PL. When choosing the best model, it is recommended to take into account the size and scale of the company, complexity of logistics needs, available resources, qualifications and knowledge about the market. “4PL is simply moving to a higher level, which means going deeper into the logistics structures and processes of a client, so that he can concentrate on his basic activity” – said Gefco specialists.
Gefco is a 4PL operator which provides services to Groupe PSA, an owner of such brands as Citroen, Peugeot or the American corporation General Motors.
5PL is a relatively new model (its origins come from the current decade). It combines the already proven methods of 3PL and 4PL and controls all the operations in a supply chain with the use of information technology
A 5PL operator is a logistics service provider which plans, organizes and implements logistics solutions on behalf of other economic entities. The “fifth” logistics service provider can consolidate demand. It also negotiates rates with other service providers, such as carriers, airlines etc.
The companies which outsource management of their logistics functionalities to third parties make a good example of such a solution. The 5PL concept appeared with popularization of e-commerce. In addition to integration, management and control of a supply chain, the 5PL companies offer also call centers or… online payments. Such services are delivered for example by coordinators of all e-commerce aspects which provide multi-channel logistics services, but also are specialized in managing a courier network.
Photo: Still