1PL-5PL: Logistics Service Providers – Advantages and Disadvantages

1PL-5PL: Logistics Service Providers – Advantages and Disadvantages

4. November 2020

1PL, 2PL, 3PL, 4PL or 5PL – There are different ways of outsourcing logistics processes. From inhouse execution of all logistics processes to outsourcing the entire logistics, including digital solutions. With the increasing challenges facing the industry, many companies are reevaluating the value of insourcing logistics processes against outsourcing. With each form there are some advantages and disadvantages. 

1PL – Taking logistics into your own hands 

1st Party Logistics refers to the widespread practice until the end of the 1970s, when the manufacturing companies carried out most of the logistics services themselves. The companies often have their own vehicle fleet and warehouse, only international transports are handed over to a forwarding agency. A great advantage is that the control remains completely with the company itself. It is independent and has control over all processes and data. The disadvantage, however, is that manufacturing companies themselves are rarely specialists for logistical processes. The focus  and know-how is on the product and not on transport. Furthermore, inhouse distribution logistics requires expensive equipment, means of transport and storage space.  

2PL – Basic services  

By commissioning a 2nd Party Logistics Provider, companies hand over individual parts or the entire transport, cross docking processes and storage services (“TTS-services”) to a service provider. This could be a forwarding agency or a shipping company, which has its own means of transport. The trend towards outsourcing, and thus also towards 2PL, began increasingly in the 1980s. In the spirit of “Lean Management”, it was the goal of many companies to focus fully on their individual core competencies and to outsource all other functional areas to external service providers.

3PL – Logistics and additional services 

Hiring a 3rd party logistics provider is the next step in outsourcing. The trend towards 3PL developed particularly in the 1990s. In addition to the “TTS-services”, 3PL offers additional services by involving further partners/subcontractors. These services can include labelling, product packaging or customs clearance. Since the outsourced service provider is integrated very comprehensively into the internal processes of the commissioning company, the cooperation usually results in a long-term business relationship. Thus, the 3PL model similar to 4th Party Logistics, explained below, both belong to the field of contract logistics. 

One advantage of contract logistics is that complex logistics processes can be outsourced to a specialist who then manages the entire logistics process. This allows the commissioning company to concentrate completely on production. Especially in the case of high volume volatilities,  it can be advantageous to also hand over the storage of the articles, and with that ensuring the optimized use of the storage space at all times. 

On the other hand, disadvantages can arise if products have very specific requirements, which can  lead to errors in outsourcing. Not every 3PL provider has the expertise to handle dangerous and/or  perishable goods. 

4PL & LLP – Control and integration of the entire supply chain 

The 4th Party Logistics Provider is an external logistics service provider that takes over the optimization, control and integration of the supply chain without its own resources. In cooperation with other service providers (e.g. 3PL providers), the 4PL offers its customers a complete solution and provides consulting services in connection with the optimization of its customers’ logistics processes. If the 4PL also has its own operational capacities, it is also known as a Lead Logistics Provider (LLP). As with the 3PL, advantages arise primarily from the high level of specialization and competence of the logistics partner. In addition, a 4PL can bundle orders, e.g. in the form of framework agreements and offer cost-efficient solutions. As a rule, the 4PL not only manages individual sub-processes, but constantly has the big picture in mind. The disadvantage of such a cooperation is again the increasing dependency. The commissioning company outsources entire areas of logistics and thus a significant part of its own business activities and value creation. This form of cooperation therefore requires a high degree of trust. 

5PL – From the supply chain to the supply network

A further expansion stage of the cooperation is the 5th Party Logistics Provider, which supports its customers with consulting services in the development of the supply chain into a supply network. The 5PL manages the integration of the supply chains into a network and delivers concepts and solutions, additionally focusing on finding suitable supply chain technologies for the commissioning companies.

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