3PL operators have gained great popularity in logistics in recent decades, but recently 4PL operators are also proliferating and there is even talk of 5PL, but what exactly are they? In this article we explain what 3PL and 4PL are, their differences, their origin and their main advantages and disadvantages.
What is 3PL?
3PL means “Third Party Logistics”, in Spanish “Logística de terceros” or “Logística tercerizada”, that is, the outsourcing or outsourcing of logistics to an external operator.
Typically, a 3PL operator provides transportation and storage services to a manufacturer, as an intermediate actor between it and its customers. But the 3PL operator does not own the goods it stores and distributes. For the end customer, there is no difference between a 3PL operator and the manufacturer managing its own logistics, since orders and invoices are ultimately managed by the manufacturer itself. A 3PL operator is a provider of logistics functions that allows optimizing part of the manufacturer’s supply chain management, which will be freed from having to have its own fleet of vehicles and its own warehouses.
Understanding PLs
Once you understand what 3PL is, it is easier to understand the rest of the PLs. Basically, the higher the number in front of “PL” the higher the degree of logistics outsourcing. For example, 1PL refers to when logistics is not outsourced and a manufacturer is responsible for directly distributing its products to its customers, while with 4PL, ideally, the manufacturer would delegate the entire supply chain management to the logistics operator. .
What is 1PL?
1PL refers to when logistics are not outsourced. The manufacturer itself stores and transports the merchandise to its customers. Typically the 1PL occurs in small manufacturers that operate locally, being self-sufficient in their logistics services.
What is 2PL?
2PL implies outsourcing some of the logistics functions, which is mainly transportation. When a manufacturer expands its geographic area of operation, it may need to go from 1PL to 2PL.
The history of the 3PL
50 years ago, logistics was still highly segmented. Transport companies only provided transportation and companies with warehouse facilities only provided warehousing. Manufacturers still managed all or most logistics functions themselves.
In the 1970s, little by little, manufacturers gradually outsourced some of their logistics functions.
In the 1980s, companies began to improve their processes through quality management. Manufacturers focused on optimizing their production processes and just-in-time and six sigma methodologies became popular. But this was not enough to get the desired performance. It was increasingly necessary to optimize the entire supply chain. In this same decade, the transport sector began to deregulate in favor of a more open market and this led to the proliferation of more flexible logistics operators of various sizes, beginning to combine storage and transport services.
In the 1990s, the rise of information technology and the beginnings of market globalization gave rise to more complex logistics needs, with a predominance of international logistics, which continued to encourage manufacturers to outsource more and more of your logistics.
The decade of the 2000s, which ushered in a new century, was characterized by the ubiquity of Internet connections and, with it, the explosion of electronic commerce. Even despite the economic crisis, e-commerce business figures have continued to grow above 10% globally, and well above that percentage in countries where it was not yet so established.
Markets have evolved, raising the demands on supply chains more and more, making the logistics sector one of the cornerstones of economic growth. This evolution is also determining the operation of the 3PL operators themselves, which little by little have been incorporating new technologies and providing greater value-added services. 3PL operators can offer inventory controls, reverse logistics, traceability, etc.
Globalization, the evolution of markets and the rise of electronic commerce are shaping modern logistics. This introduces greater complexities in the supply chain that has to face much more competitive and volatile markets. All this has led to the emergence of 4PL operators or also called “Lead Logistics Providers”
What is 4PL?
4PL (“Fourth Party Logistics”), also called LLP (“Lead Logistics Provider”), can be defined as a logistics operator that does not have its own physical resources (fleets, warehouses, etc.), but that provides logistics consulting services. , planning, integration of new technologies, management, location, etc., and delegates the execution of the physical functions to the most appropriate 3PL operators for each case.
In this way, a 4PL operator acts as a single interface between the manufacturer and its supply chain. Ideally, the operator would fully assume the management of the contractor’s entire supply chain. The manufacturer’s dependence on its logistics operator is much greater and because of this, long-term relationships are usually established with 4PL operators.
Differences between 3PL and 4PL
A 4PL operator should be independent, having no physical assets to monetize (unlike 3PLs), focusing on achieving maximum efficiency in supply chain management. The 4PL operator will manage a network of 3PL operators and thus will be able to delegate the execution of logistics functions to the 3PL operators that best suit each case.
Although this does not prevent a 3PL operator that has large infrastructures from offering value-added services by taking advantage of its own assets and thus evolving to compete as a 4PL operator.
In practice, there are many cases where the boundaries between being a 3PL or a 4PL are more blurred. 3PL operators have had to remain competitive by offering more and more services that can sometimes overlap with what a 4PL operator offers.
Advantages of 3PL and 4PL outsourcing
To be competitive, some 4PL operators are specializing vertically. That is, they specialize in a particular business sector. For example, for a consumer electronics manufacturer, it will be essential for the 4PL operator to be very efficient in handling shorter product lives, as well as in managing reverse logistics, both to cover guarantees and for recycling and waste management. .
On the other hand, a manufacturer of pharmaceutical products or medical utensils could require that a 4PL operator have extensive experience in legal services, taking into account the regulations that will vary between different geographical areas.
The advantage here is clear. A manufacturer can focus on what it does best, i.e. produce, while delegating to a 4PL operator what it does best, i.e. supply chain management. The manufacturer is thus freed from the investment in logistics resources as well as their management.
Another advantage of the externalization or outsourcing of logistics is that it allows a manufacturer to penetrate foreign markets without having to invest in its own infrastructure. In addition, the logistics operators already established in said geographical area will have experience related to the local culture.
4PL operators can offer a complete supply chain management service. This can even include marketing functions. In this case, expansion into foreign markets or emerging markets is easier for the manufacturer.
One of the barriers for manufacturers to opt for a 4PL is the high dependency it implies, as well as having to share sensitive internal information. In addition, a 4PL operator error will seriously harm the manufacturer’s brand image. For this reason, long-term relationships based on trust are established, with contracts that guarantee protection in these areas.
4PL operators, due to their high degree of outsourcing, tend to consider themselves more of a logistics partner or strategic partner than a service provider.
The 3PL operators are those that provide the physical logistics resources (vehicle fleets and warehouses), either contracted directly or indirectly through a 4PL. Since the relationship with 3PLs is related to the use of those resources, relationships of shorter duration are established than with 4PLs, which provides greater flexibility. For example, a manufacturer that has seasonal campaigns could hire more resources in peak seasons and reduce them the rest of the year. This saves the manufacturer from having to invest in its own logistics assets and keep them underutilized throughout the year.
3PL operators have been evolving, offering more and more services that allow greater logistics profitability, both for themselves and for their contractors. In this way, 3PLs can offer inventory control, reverse logistics, and traceability.
These services require a large investment and technological capacity, even more so when it comes to international logistics. This investment would be unaffordable for small manufacturers and for medium-sized manufacturers. With 3PL, manufacturers can access these services, since logistics operators obtain their return on investment by serving multiple customers.
Recently, with the proliferation of additive manufacturing, some manufacturers allow the customization of their products in later phases of the supply chain. 3PL operators specialized in a certain business sector could offer customization services, allowing the manufacturer to focus on production processes.
Can we talk about 5PL?
5PL, or “Fifth party logistics”, is a term that is being talked about more and more, but one that does not have as clear a definition as 3PL and 4PL.
If it is necessary to admit that the evolution of 3PL operators has meant that in practice there is a certain overlapping of services between some 3PL operators and some 4PL operators, it is logical to think that the same could happen between 4PL and 5PL.
Some operators refer to 5PL as the management of supply chain networks, so that the management is more global, taking advantage of economies of scale, reducing costs in transport by volume, greater environmental efficiency in emissions, etc. 5PL operators have more to do with strategic alliances than with contractor-supplier relationships.
Frequently, 5PL is associated with e-business (electronic business), since the focus of the 5PL is the global management of the entire supply chain, or networks of multiple supply chains, and said management is strongly supported by the new technologies.
In short, we could say that talking about 5PL is talking about the complete outsourcing of the supply chain, globally.
Modern metal shelving is key to 3PL competitiveness
Today’s markets have increased pressure on 3PL operators, who are increasingly required to provide higher levels of service at lower cost.
For a 3PL logistics operator, it is essential to obtain the highest profitability from its warehouses. To do this, they have to opt for metal racking systems that allow maximum use of space, such as clad-rack warehouses for storage at height, elevated walkways and mezzanines.
When providing warehousing services for different clients, operators need to be able to handle different loads, turnover levels and merchandise flows, combining conventional racking with FIFO live racking, high-density racking and push-back racking.
Together with the maximum use of space, it is necessary to optimize maintenance tasks in order to achieve the performance levels currently required. Automatic warehouses with stacker cranes for palletized loads and miniloads for medium and light loads allow solutions to the needs of large distribution centers.
As you go down the supply chain, picking becomes increasingly important. Picking optimization, beyond slotting, is achieved with automated systems such as ATOX light guidance, for pick-to-light and put-to-light operations, combined with internal transport systems such as intelligent roller conveyors. Automatic order preparation provides a solution in those warehouses that require maximum speed or that have to handle work peaks in certain time slots.
ATOX Storage Systems designs and manufactures metal racks and automation systems tailored to each warehouse. With more than 50 years of experience and a consolidated international presence, ATOX has provided high-performance solutions in various business sectors, optimizing warehouses of all sizes, from large distribution centers to small urban logistics warehouses.
The philosophy of quality and excellence in service makes ATOX more than a manufacturer and supplier of metal racks, becoming a logistics partner for its customers, contributing its own experience in logistics and internationalization.