Are you looking for the best logistics model for your company? Unfortunately there is no easy answer to this question. In this article, we will explain the differences between the five common models from 1PL through 5PL – and which solution might work best for you.
Logistics as a term originated in the military. Initially, it was used to define troop and equipment movements in the various areas of military operations.
Today, logistics is an integral part of Supply Chain Management. It is defined as the “planning, management, coordination, implementation and control of all intra- and inter-company flows of goods and information” by the logistics expert H. Baumgarten. By that definition, it involves the movement of goods from storage to packaging to shipping – including both the forward and reverse flow of products. The aim of an operation is to get that process done in the most efficient and cost-effective way.
Short overview of all logistics models: 1PL through 5PL
The entity that packs, moves and stores raw materials or goods is called a logistics provider. In the provision of logistics services, there are five different logistics models and types of logistics providers: 1PL, 2PL, 3PL, 4PL and 5PL. Have a look at the graphics to get a short overview of their differences:
The degree of outsourcing gradually increases from 1PL to 5PL. The red red framed icons in the graphics visualize which part of the supply chain is managed by an external service provider.
In a 1PL model, the manufacturer or producer of the goods manages the supply chain all alone. In a 5PL model, however, the supply chain is fully managed by an external service provider. Between this “all or nothing” setting, there are several alternative options. Let’s have a look at the different logistics models in detail:
1PL – First Party Logistics Provider
A First Party Logistics Model describes the most basic logistics model: Only one party is involved in the whole logistics process. It means that the manufacturer or producer of the goods takes care of the transportation. The company handles all activities from packaging to loading to delivery using its own company departments and assets, e.g. trucks, truck drivers, trailers and warehouses. In this case, the manufacturer is called a First Party Logistics Provider (1PL).
Example: 1PL in transport logistics
The startup company L.G. Stark produces innovative car components for the German automobile industry. To deliver them from their production site in Legnica (PL) to their central warehouse in Berlin (DE), they set up a logistics team. The team hires several truck drivers and buys company branded trucks to deliver the goods. No external party is involved.
2PL – Second Party Logistics Provider
In some cases, the manufacturer hands over the transportation of goods to a logistics services provider. That’s how a second party – a trucking company or a carrier – becomes involved. The carrier then takes over all transportation tasks on behalf of the manufacturer (shipper), providing assets like trucks and truck drivers. However, the shipping company retains full control and administrative management of its transport logistics.
This more elaborate model is known as Second Party Logistics Model with the trucking company acting as a Second Party Logistics Provider (2PL).
Example: 2PL in transport logistics
With their business growing and production increasing, L.G. Stark’s logistics team is challenged to manage the equally increasing transport volume from production site to central warehouse. Faced with the question whether to scale their own transport assets or contract a 2PL provider, they decide for the latter. From now on, L.G. Stark assigns each transport order to a trucking company that takes over the delivery of the goods.
3PL – Third Party Logistics Provider
Coordinating and communicating with many individual trucking companies and carriers might not be efficient anymore when a company grows. The shipper could then choose to contract a Third Party Logistics Provider (3PL) to take over the operational management of the transports. Third Party Logistics Services can also include fulfillment services like order processing, packing, inventory management and warehousing.
Shippers that commission one or several Third Party Logistics Provider(s) usually enter into a long-term contract. The agreement(s) allow(s) the shipper to measure, evaluate and take optimization measures relating to the performance of both the supply chain and the Third Party Logistics Provider.
Example of a 3PL in transport logistics:
Within the last year, L.G. Stark further scaled their business and now owns several production sites across Europe. Because the coordination of their carriers and transports becomes increasingly complex, the logistics team decides to switch to InstaFreight as their 3PL provider for inbound logistics. With its digital freight forwarding service, InstaFreight takes over all operational processes from now on and handles them transparently and efficiently: As soon as L.G. Stark’s logistics team books a transport via the InstaFreight platform, the order is automatically assigned to the best performing carrier within InstaFreight’s network of 25,000 transport partners. All transports are then monitored via automated status updates and real-time-tracking. This tech-based setup provides L.G. Stark’s team with a full overview over their daily operations.
4PL – Fourth Party Logistics Provider
A 4PL model goes one step further than a 3PL model. In this model, the Fourth Party Logistics Provider (4PL) handles an entire part of the supply chain on behalf of the shipper. It comes into play when a shipping company outsources not only the operational coordination and steering of transports or warehouse activities like in a 3PL setting – but the management of its transport or warehouse logistics as a whole. The model is then usually called a Fourth Party Logistics Model.
The 4PL provider oversees, manages and optimizes all processes, including the coordination of 3PL providers, trucking companies or warehouses. The main characteristics of this model is that the service provider operates non-asset-based, meaning that they do not own warehouses or trucks themselves. They only act as a neutral management partner, administering and monitoring the logistics processes.
Example: 4PL in transport logistics
L.G. Stark’s logistics team decides to externalize the management of their whole inbound transport logistics. The goal is to have all of their contracted carriers and transports managed digitally – so they contract InstaFreight as their 4PL provider. Within a few weeks, InstaFreight onboards all of L.G. Stark’s existing carriers, rates and lanes to the platform and manages them as a neutral service provider while L.G. Stark keeps control over strategic decisions. A Control Tower and regular KPI reports provide L.G. Stark with data analytics as a basis for those decisions. As payment, InstaFreight charges a small and transparent management fee. One further advantage for L.G. Stark is the fact that they can additionally use InstaFreight’s 3PL service and benefit from the capacities of InstaFreight’s large carrier network – for example in case one of their carriers cancels an order short-term.
5PL – Fifth Party Logistics Provider
The most encompassing logistics model is a Fifth Party Logistics Model. In such a case, the shipping company outsources not only parts of its supply chain like in a 4PL setting. Instead, they commission a service provider to manage their full supply chain network – from manufacturing to packaging to warehousing to transportation. The Fifth Party Logistics Provider (5PL) then strategically plans, organizes and implements its client’s transport logistics.
A 5PL provider may consolidate the demands and bulk volumes of 3PL and 4PL providers. It negotiates favorable rates and services with service providers such as transporters, carriers, airlines, etc. It also provides strategic, innovative logistical solutions and concepts.
The application of logistics services to a business also includes the provision of a framework for planning, implementation, and delivery of several aspects of a supply chain. This includes materials, services, information, and capital flow that require planning, delivery, scheduling, and tracking.
Example: 5PL in transport logistics
With L.G. Stark becoming a global player in the automobile industry, they decide to fully externalize the increasingly complex management of their supply chain – inbound, outbound and internal logistics. They contract a 5PL provider to handle their international supply chain network. Thus the flow of materials and goods is getting managed by one party from raw material to finished product to buyer. This involves the strategic setup as well as the operational planning and the execution, e.g. the choice of trade lanes and carriers and the negotiation of freight rates. A digital platform like InstaFreight might form the base of such a joint logistics by linking and connecting different players (e.g. suppliers, carriers, customers) in a supply chain, making it easier to cooperate and to harmonize streams.
1PL through 5PL – which logistics model works best for you?
1PL, 3 PL or 5PL – there are many different logistics models that all have their advantages and disadvantages. In order to decide which logistics model is best for them, shippers have to ask themselves the individual question: How much do I want to (and can I) handle alone?
It’s a fact that our economy has developed rapidly in recent years. Although the logistics industry is still quite traditional with manual and analog processes dominating the workflow, digitization is playing an increasingly important role. For example, data analytics, automated carrier matching algorithms and real-time-tracking have become critical in providing an efficient method of planning, scheduling, and tracking a shipment through the supply chain.
Digital 3PL and 4PL providers like InstaFreight are experts in providing their customers with a transparent and efficient management of their transport logistics. Although shippers hand over specific tasks and competences to their logistics provider in such a setting, they still keep control and can focus on what’s most important: Growing their business!