From supplying goods to a local store to shipping products across the globe, businesses need to determine the best way to distribute their products. Thanks to innovations of complex supply chains around the world, the process of shipping and distributing items has never been easier.
However, because of the growth of different party logistics (PLs), choosing the best distribution method for your business may seem more difficult than ever. PLs are represented using numbers, and each level of PL becomes more complex.
From 1PLs to 5PLs, businesses have a lot to think about before they finalize their supply chain. Here’s a breakdown of each level of PL and why businesses can benefit from them.
First-party logistics (1PL) are the simplest of all shipping methods. 1PL means that the producer supplies their product themselves, essentially becoming the producer, supplier, shipper, and receiver of a good.
Many retailers fall under this category. For example, a business that produces t-shirts, ships them to their stores, then sells the shirts at their store is a 1PL.
For some businesses, this model isn’t practical. A B2B company may not be shipping products to themselves, but to another business instead. Also, whenever you order something online from a business, the transaction is already beyond 1PL. This is why most 1PL businesses are small and only ship and distribute locally.
One shortcoming of 1PL logistics is that the supplier must use their own transportation. For larger businesses, this could mean owning and managing an entire fleet of trucks, planes, and ships.
To avoid the cost of having to run their own fleet, businesses often bring in a second party to ship for them. For a fee, businesses can avoid the huge cost of keeping every step of the shipping process in-house. This is an example of second-party logistics (2PL).
A 2PL is any business that focuses on transportation. Some great examples of 2PLs are UPS and FedEx, two shipping businesses. A business could produce a good, sell the product online, and ship it to the customer via UPS.
Businesses may bring in a second party to take over their shipping, but the more complex the shipping and delivery are, the less cost-efficient a 2PL becomes.
In order to avoid 2PL inefficiencies, businesses often choose to bring in a third-party logistics (3PL) partner. 3PLs provide complex logistics services to keep supply chains running smoothly. In a 3PL partnership, the business maintains control and management over the supply chain while the 3PL finds ways to improve the supply chain. Think of this as outsourcing logistics.
Amazon is a prime example of a 3PL. Merchants can create their goods and sell them online. After that, Amazon takes care of the rest, including shipping, warehousing, and reverse logistics.
Different 3PLs offer different services, too. While most 3PLs handle logistics optimization, warehousing, and distribution, others offer additional services, such as:
Fourth-party logistics (4PL) is similar to 3PL, but it takes things a step further. If you choose to use a 4PL provider, you’ll be surrendering control of your entire supply chain and letting the 4PL take over.
Yes, you will stop managing your own supply and distribution — but using a 4PL comes with certain advantages. 4PL providers are experts at what they do, meaning that you won’t have to allocate resources to hire and train supply chain managers.
4PL partners also work on your behalf with other businesses. They may notice that a store you’re supplying products to is running low, and then negotiate a larger contract for you to produce and provide more. 4PL providers also manage supply chains for other businesses, and by pooling all their resources together, can reduce shipping and warehousing costs even further.
4PL partners are much rarer than 3PL partners, and many businesses — particularly smaller businesses — will likely have more to gain by sticking with a 3PL. However, for large businesses that don’t want to worry about their supply chain, a 4PL could be the right choice.
While most businesses won’t make use of fifth-party logistics (5PL), it is worth knowing what they do.
Going beyond 4PLs, 5PLs manage every step of the supply chain, from production to delivery. The goal is to create the most efficient supply chain possible by making each individual step as efficient as it can be.
Because of the size and scope of this PL partner, 5PLs are only going to be the best option for some niche industries.
Which PL Is Best?
The million dollar question: Which PL is best? While no PL is suitable for every business, most businesses will gravitate toward a 3PL or 4PL.
For the most part, a 5PL is simply too large (and expensive) for many businesses to take advantage of. While 1PLs and 2PLs seem ideal for some businesses, committing your business to one of these could be a mistake.
Businesses have learned that outsourcing some or all of their supply chain is the most cost-effective, efficient decision. Since 90% of Fortune 500 companies were using at least one 3PL in 2017, it’s clear that using 3PLs is becoming the new norm.
Popularity aside, a 3PL or 4PL partnership is a smart decision for most businesses. These partners drive the costs of supply chains down without shifting the costs onto the consumer. In fact, many 3PLs make free shipping possible, and free shipping plays a significant role in consumer decision-making.
3PL vs. 4PL
Most businesses will be choosing between a 3PL and 4PL partner. There are pros and cons to each, but each business will likely see a clear advantage of one over the other.
- 3PLs are a cost-effective way to run a supply chain.
- It’s easier to outsource logistics than to hire and train in-house logistics.
- 3PLs are scalable with growing businesses.
- 3PLs offer different tools and services, making for a partnership that fits your specific needs.
- You retain control over the supply chain.
- Outsourcing logistics costs money.
- 3PLs add another point of communication to your supply chain, increasing the chance of miscommunication.
- 3PLs interact with your customers and could cause negative customer experiences.
- Your supply chain could become dependent on a specific 3PL, making it difficult to switch providers.
- The entirety of your logistics is outsourced, reducing in-house costs and removing an additional step of communication.
- 4PLs offer the same services as 3PLs, plus more.
- You retain little to no control over any supply chain functions.
- 4PLs are more expensive than 3PLs.
Choosing Your PL Partner
To stay competitive, most businesses need to choose a 3PL or 4PL. However, this doesn’t fit every business. Before deciding on a provider, consider your long-term business goals and how a provider will fit into your current business model. It’s your supply chain, so you should pick the provider that works for you.