Whether it is supplying goods to a store or shipping products across the globe – it is essential that the firms determine the best way to distribute their products. Due to innovations of complex supply chains across the globe, the process of shipping and distributing items has become swift.
Due to the growth of different party logistics (PLs), considering the best distribution method for a business may seem more difficult than ever. There is a lot of thinking required by businesses before a supply chain is finalized, from 1PLs to 5PLs. Here’s a breakdown of each level of PL and why businesses can benefit from them.
The simplest shipping method is First-party logistics (1PL). In this the producer supplies their own product, becoming the producer, supplier, shipper, and receiver of a good.
Most of the retailers fall under this category. For instance, a business that produces clothes, ships them to their own stores and sells them at their store is a 1PL.
However, for many businesses this model isn’t practical. For example a B2B company ships products to another business instead. When one orders something online from a business, the transaction is already beyond 1PL. That’s why most of the 1PL businesses are small and only ship and distribute locally.
Supplier needs to use their own transportation in 1PL Logistics. For bigger businesses, this means owning and managing an entire fleet of trucks, planes, and ships.
In order, to avoid the cost of having to run own fleets, businesses usually bring in a second party to ship for them. Thereby, avoiding huge costs of keeping every step of the shipping process in-house. This is called second-party logistics (2PL).
Any business that focuses on transportation is 2PL. Some examples of 2PLs are UPS and FedEx, two shipping businesses. A business can produce a good, sell the product online, and ship it to the customer through UPS.
Businesses may bring in a second party to take over their shipping, but if the shipping and delivery are complexed then less cost-efficient a 2PL becomes. Businesses often choose to bring in a third-party logistics (3PL) partner inorder to avoid 2PL inefficiencies. There is control and management over the supply chain in a 3PL partnership.
The best example of 3PL is Amazon. A platform where brands create their goods and sell them online. Rest of the elements like shipping, warehousing, and reverse logistics is taken care of by Amazon.
Though most of the 3PLs handle logistics optimization, warehousing, and distribution, others offer additional services too, for instance, Reverse logistics, Fourth-Party Logistics etc. Fourth-party logistics (4PL) and 3PL are similar, however 4PL are 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.
There are certain advantages that come with 4PL. for example not having to allocate resources to hire and train supply chain managers. 4PL partners work with other businesses on your behalf. 4PL providers also manage supply chains for other businesses.
4PL partners are not that common in comparison to 3PL partners. Smaller businesses are likely to have more to gain by sticking with a 3PL. Larger businesses opt for 4PL as they don’t want to worry at all.
Though not that common, fifth-party logistics (5PL) goes 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. 5PLs are only used as the best option for some niche industries.
Which PL Is Best?
Most businesses gravitate toward a 3PL or 4PL. 5PL is simply too large and costly for many businesses to take advantage of. While 1PLs and 2PLs seem ideal for some businesses, one cannot commit their businesses to these. Outsourcing some or all of the supply chain is the most cost-effective, efficient decision for most businesses.
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. One has to consider their long-term business goals and how a particular provider will fit into their current business model.