In a global economy that demands efficient product delivery to satisfy customer demand, companies must find ways to optimize their production and delivery processes. For some this is an easy task, while larger companies need to adapt to meet customer demand. To assist in this process, companies can turn to logistics management services.
Logistics management services differ in their features and offerings. Companies can relinquish control of some or all of their supply chain to logistics management services, depending on their specific needs. At the most basic is first-party logistics (1PL), and services progress in involvement up to fifth-party logistics (5PL).
To capitalize on logistics management systems, companies must understand the difference between 1PL, 2PL, 3PL, 4PL, and 5PL.
PL in the supply chain
A company’s supply chain defines the ways in which a product moves through various phases to end up in the customer’s hands. Supply chains vary in complexity, and proper management of the process plays a crucial role in a business’s success. In managing a supply chain, businesses can decide how much of the process to outsource, if any. The party logistics system outlines the way companies use each level of outside logistics management.
How PL works
To ship products across the world, companies rely on logistics management to organize and implement their supply chains. Various kinds of party logistics enable companies to manage their complex supply chains. As each level of party logistics serves different purposes, it is important for companies to understand the difference between 1PL, 2PL, 3PL, 4PL, and 5PL.
First-party logistics (1PL)
First-party logistics is a simple method of transportation in which a company or manufacturer produces and ships a product from one point to another. They do not outsource any of the supply chain. Instead they handle all elements of logistics management internally, including production, transport, and retrieval.
Second-party logistics (2PL)
A second-party logistics provider assists businesses by providing transportation solutions. By employing trucks, ships, and airlines, 2PL providers move and deliver inventory for different companies. 2PL providers do not produce goods; they only ship them.
Third-party logistics (3PL)
For more complex logistical needs, a company may turn to a third-party logistics provider. This provider helps a company organize its supply chain while the company retains overall control of its supply chain. By handling shipment, warehousing, reverse logistics, and more, a 3PL service provider helps companies optimize their supply chains.
Fourth-party logistics (4PL)
A fourth-party logistics provider is further involved in logistics management. These providers manage the supply chain in its entirety by designing and implementing supply chain solutions. 4PL providers apply strategies to meet customer demand and help a business grow.
Fifth-party logistics (5PL)
Fifth-party logistics is the most in-depth and costly form of supply chain management. Like a 4PL, a 5PL provider controls every step of the supply chain, starting with production. Its services include ordering, warehousing, and transportation management systems, all of which optimize the supply chain. The difference, however, is that a 5PL provider manages several supply chain networks, implementing its solutions for a variety of different clients.
Why companies need supply chain PL
By outsourcing some or all of the supply chain, companies will save money and streamline their logistics. By 2017, 90% of Fortune 500 companies had shifted to 3PL management to improve logistics efficiency. This is because the success of a supply chain and the success of a business are linked.
By hiring experts in supply chain operations, companies feel safe with the knowledge that their product will reach the consumer. With a comprehensive supply chain solution, a business will strengthen its logistics chain. In a highly competitive market, companies can use supply chain PLs to strengthen their global supply chain and connect with more customers.
Benefits of 1PL, 2PL, 3PL, 4PL, and 5PL
Optimizing the supply chain can yield several benefits for any business. Eliminating errors in the supply chain can save time and money while improving customer satisfaction, thus boosting a business’s reputation with its consumers. Implementing the correct level of party logistics will help companies maximize the benefits of an efficient supply chain.
Cost and efficiency benefits
A notable draw of logistics management systems is related to efficiency. Logistics management systems at all party levels offer solutions to optimize a company’s supply chain.
Because the entirety of 1PL management is performed internally, it offers companies a heightened level of control over their supply chain. The company manages the fulfillment process, which allows it to tailor its packaging, transportation, and delivery to best suit its customers. If implemented correctly, the company’s control over the supply chain can boost its own efficiency.
2PLs provide companies with increased flexibility, as they outsource transportation services. 2PLs oversee the transportation for a company’s goods, which often means access to various transportation methods such as air or sea freight. Using a 2PL provider can open new avenues for transport that were previously unavailable to companies.
The infrastructure associated with transportation, such as staff and equipment, can be extremely costly. 2PLs provide access to these resources at a lesser cost than it would be if companies were to establish the infrastructure themselves.
3PLs allow a company to retain overall control of the supply chain but provide efficiency solutions. With services such as supply chain management, warehousing, and product tracking software, a 3PL provider allows companies to bypass obstacles such as delays.
Outsourcing to a 3PL provider saves companies money on logistics costs. Additionally, 3PL providers increase supply chain efficiency by protecting against lost or damaged goods and boosting delivery speeds.
With 4PLs, a company outsources logistics and its execution. 4PLs fully oversee the supply chain to ensure needs are fulfilled so companies can work without any logistics-related interruptions. This allows companies more time to focus on general business management and expansion.
Similar to 3PLs, 4PLs increase efficiency and reduce the costs associated with disruptions to the supply chain. Inefficiencies in supply chain logistics can result in lost time, damaged or lost products, and other issues. 4PL providers coordinate with external 3PLs to achieve a smooth supply chain and save time and money.
5PLs relieve all logistic responsibilities from a company. These providers work as strategic partners, managing each aspect of the supply chain. By relying on these specialists, companies can increase their efficiency while 5PL providers develop new strategies to help a company succeed.
Going one step beyond 4PLs, 5PLs offer further efficiency by serving as full strategic partners and finding the best logistic solutions for a company. Leveraging their established infrastructure, 5PLs help reduce costs for the companies with which they partner. By capitalizing on the benefits of 3PLs and 4PLs in their network, a 5PL provider can find the best prices available.
Challenges of 1PL, 2PL, 3PL, 4PL, and 5PL
Each level of party logistics offers unique benefits and is effective when integrated into the supply chain in an optimal way. Challenges arise, however, when party logistics are incorrectly implemented. Businesses must make certain considerations about their supply chain to identify the best solution for them.
What to consider when implementing supply chain PL
When seeking supply chain solutions, it is important for a company to assess which party level is most appropriate for its needs.
Cost is often one of the most important factors for determining the best solution. At lower levels, payments to providers are less expensive. At 1PL, there is no external provider to pay; at 2PL, the payment is just for transportation costs. This cost continues to increase with the level, 5PL being the most expensive. However, by outsourcing less of the logistics process, companies must coordinate their own supply chain and acquire the expensive infrastructure associated with logistics. In 1PL, these costs can be high.
It is also necessary to determine the needs of the company. Is the company small or large? Are there international shipping requirements? How complex is the supply chain? In situations where a company needs to coordinate transit across a complicated supply chain, it may be useful to consider higher-level PLs to benefit from the efficiency solutions they offer. This is particularly true for international shipping needs.
What to avoid when implementing supply chain PL
Each level of supply chain solutions offers different costs and benefits to suit companies based on their needs and budget. For example, for companies with a small, simplistic supply chain, a 4PL or 5PL provider may be too advanced a solution.
The necessity of choosing realistic logistics management solutions is especially relevant for small businesses. The in-depth logistics management 4PL, 5PL, or even 3PL providers offer may seem to be the strongest option, but 1PL or 2PL may be the best fit. If a company is shipping locally and has the capacity to store products in-house, it can often handle logistics autonomously.
Finding the right PL solution for your company
Once a company considers the benefits and challenges of various party logistics, it must decide which level works best for its needs. Since every supply chain is different, companies must take several elements into consideration, such as the size of their business and their primary focus.
Supply chain PL for small and medium-sized businesses
Small and medium-sized businesses looking to save time and money on logistics have a strong option in 3PL providers. While 2PL providers help a business save time and effort on shipment fulfillment, with 3PL solutions, companies can open up space for growth.
As 3PLs help a company with sending and receiving products, warehousing goods, and organizing logistics, small and medium-sized businesses can focus their attention on growing their business. Because small and medium-sized businesses often have simpler supply chains, party levels higher than 3PL are typically unnecessary.
Supply chain PL for large businesses
Large businesses can benefit from both ends of the PL spectrum. 1PLs mean companies have full control over their supply chain, which is difficult to attain without infrastructure in place. Large businesses often will have the infrastructure and the high-volume needs that make 1PL solutions ideal. They can reap the rewards of 1PLs without it being cost prohibitive.
Alternatively, 4PLs or 5PLs are also fitting solutions for large businesses. They offer strategic insights and enable large companies to focus their efforts elsewhere: on improving their products or customer service, for example. Large companies often have more complicated supply chains, which makes 4PL or 5PL providers helpful partners in increasing supply chain efficiency.
Supply chain PL for e-commerce businesses
While 5PL is the newest form of logistics management, it can offer companies advanced logistics management solutions. 5PL providers focus heavily on technology and the ways in which they can use it to optimize the supply chain. They can, for example, use new technologies to perform sales analysis, inventory management, and product tracking.
This focus on technological solutions makes 5PL a strong option for an e-commerce business. These companies rely on internet transactions to meet high customer demand. As such, e-commerce businesses require advanced technological solutions to keep items in stock, the ability to manage returns with reverse logistics, and innovative online payment systems.
A 5PL’s focus on technology allows businesses to quickly adapt to the expanding e-commerce market.
Use the strength of 2PL and 3PL with Agility
All companies, from small to large to e-commerce based, can benefit from the strengths of logistics management services. To do so, they must understand the difference between 1PL, 2PL, 3PL, 4PL,and 5PL. For companies looking to retain control of their supply chain while reaping many logistical benefits, 2PL and 3PL are strong solutions. Agility offers 2PL and 3PL solutions for companies looking to optimize their supply chain. It offers beneficial services from logistics and freight forwarding to warehousing. Boost supply chain operations with solutions provided by Agility.