Logistics is becoming increasingly sophisticated. This is due in part to the growing complexity of global supply chains. As customer expectations demand faster lead and delivery times, expanded product offerings, and tailored experiences, companies have been forced to expand their reach and expertise.
Even with the growing need to keep pace with customer demand, many companies are still unsure of the difference between a 3PL vs. 4PL vs. 5PL. This blog will explore the differences between these levels of logistics services and how to determine which one may be right for you.
A Brief History of Logistics
Every fulfillment service is ultimately focused on helping a company with perfect delivery (i.e., on-time and in-full at the lowest possible cost). This is what we know as logistics, which, in its simplest form, is the process of getting products from point A to point B.
Much like our road systems, our current basis for today’s logistics systems hearkens back to Ancient Greek and Roman practices. Rome developed a highly efficient logistics system to supply its legions, and military officers called “logistikas” were in charge of ensuring the supply and allocation of resources.
Fast forward a few millennia, and a post-World War II landscape saw logistics management move primarily from warfare to business. As the economy grew and more businesses were formed, an entire industry (logistics) was born.
The Different Types of Logistics Providers
Before we explore the differences between a 3PL vs. 4PL vs. 5PL, it’s important to understand the different types of logistics providers that exist. We’ll provide a general overview of first— and second—party logistics providers below, and then dive deeper into the functions of the more popular options: 3PLs, 4PLs, and 5PLs.
- First-party logistics (1PL). This refers to the company handling its own shipping and warehousing needs. 1PL companies will typically have a dedicated fleet of trucks. Fewer companies rely on this model these days because outsourcing improves flexibility and delivery times.
- Second-party logistics (2PL). This type of provider offers modes of transport in a larger national geographical area than 1PL companies. They often offer their own (and external) logistics resources, including trucks and warehouses.
What is a 3PL?
Originally coined in the 1970s, third party logistics means adding a third party to your logistics operations. This strategy really took off in the 1980s after the Motor Carrier Act was passed.
On a foundational level, a 3PL offers logistics services to support certain (sometimes, all) aspects of shopping operations. A 3PL is often integrated into a company’s warehousing and transportation procedures. Typically, a 3PL will offer at least the following services:
- Carrier management
- Warehousing and storage
- Inventory management
- Coordination and shipping of goods
By taking care of the fulfillment process, a 3PL allows a company to focus on its day-to-day operations, instead of getting involved in the management of non-core (yet critical) functions. Also, by granting a company access to a wider demographic through multiple distribution centers, a 3PL can help an organization scale its business by increasing its ability to deliver products with accuracy and efficiency.
What is a 4PL?
Trademarked and defined in the 1990s, a 4PL (sometimes known as a lead logistics provider or LLP) is characterized as “a supply chain integrator that assembles and manages the resources, capabilities, and technology of its organization with those of complementary service providers to deliver a comprehensive supply chain solution.”
Under this model, companies do not have any physical assets, but function instead in a consulting role to manage processes for their clients. 4PLs often contract 3PLs to deliver the necessary support.
What is a 5PL?
Generally, this model looks beyond individual supply chains and focuses instead on broader supply networks. While a fairly new option in logistics providers, many 5PLs specialize in big data and typically service e-commerce companies over businesses with a brick-and-mortar presence.
3PL vs. 4PL. vs. 5PL
Is it really a matter of a 3PL vs. 4PL? Or even a 4PL vs. 5PL? Ultimately, not so much. It’s not about what type of logistics provider is better, but instead, which one is best for you and your business. While 1PLs and 2PLs are not as commonly used today due to the complexity of global supply chains, scaling up to a 5PL and beyond isn’t necessarily the best thing for your business. In short, “bigger” isn’t always better when it comes to logistics providers.
An ideal choice for many companies looking to outsource logistics but still maintain some control, a 3PL is the most popular choice for a variety of reasons. Typically more cost-effective than 4PLs and 5PLs, a 3PL can manage the fulfillment needs of small- to medium-sized businesses while maintaining the firepower needed to service large companies.
Is a 3PL Right for You?
When a company outsources to a 3PL, they’re able to scale space, labor, and transportation according to inventory. 3PLs can also ease the transition between seasonal periods and unforeseen industry fluctuations.
Among the advantages of third party logistics is the ability to help companies scale their business into new markets by offering the additional warehouse space needed to store larger amounts of inventory. A 3PL can also help improve customer satisfaction through faster delivery times and order accuracy.
When looking for a partner, you want to keep an eye out for a logistics provider that has multiple fulfillment centers. This will help you reach a larger demographic as your business grows. Looking for a provider with temperature-controlled facilities and integrated fulfillment technology may also prove beneficial for your business, especially if you deal with sensitive or hazardous materials.
When to Choose a 3PL
Knowing what to look for in a 3PL is crucial for a company’s fulfillment success, but so is knowing when it’s time to make the leap from personal fulfillment to outsourcing to a 3PL. If you’re experiencing any of the following consistently, it may be time to take the leap and partner with a 3PL:
- Crowded warehousing. If your goods and products are beginning to take over your warehouse, it’s probably time to find a 3PL with a fulfillment center large enough to handle your inventory. Partnering with a 3PL experienced in managing inventory can also help you avoid seasonal stock-outs during busy seasons or overcrowding during sudden slow periods.
- Order inaccuracies. Handling your own fulfillment on top of running a business is difficult. Often, the stress of day-to-day operations and inexperienced workers can result in order mispicks. In fact, around 23% of customers issue a return because they received the wrong item. Handling returns can be costly, and wrong orders can result in customer dissatisfaction and lost sales.
- Delayed orders. Another telltale sign you may need to outsource shipping to a 3PL is delayed orders. With most customers expecting 1-2 day shipping as is, orders arriving later than projected can cause a customer to cancel their order and find a competitor with faster delivery options.
Running a business can be complicated, and so is managing a supply chain. At Jay Group, our expertise in fulfillment and logistics takes the pressure off so you can focus on your business. Contact us today to learn more about how a 3PL can help you grow.
