In the most general sense, logistics management refers to planning and executing a task.
When it comes to supply chain management (SCM), that consists of multiple stages, each stage depends on the previous one for data, products, or services. So here, logistics refers to organizing and bringing together all the necessary resources (materials, inventory, equipment, manpower) that are involved in the chain, and moving them from one stage to the next. Without logistics in the picture, each stage would not be able to work with the others, which would result in delays, miscommunication, and expensive errors.
Logistics management can be handled either internally, with a business taking care of its processes by itself, or externally by hiring another business to help. The way a business chooses to manage its logistics depends on how the business operates. Below we will be discussing the five most common forms of logistics management, to help you figure out which method might work best for your business.
1PL, or a first-party logistics provider, refers to a company that manages all of its logistics and distribution processes internally, instead of outsourcing them. In other words, this is a company that is equipped to take care of all of its transportation and distribution processes by itself. Any company that requires transportation and logistics to operate, regardless of whether it is delivering or receiving, can be a 1PL company. For instance, a manufacturing company that delivers to a retailer can be a 1PL company, and if the retailer chooses to pick up their orders from the manufacturer directly, then it can also be a 1PL company.
The most prominent benefit for first-party logistics providers is that they can control logistics and distribution factors like quality, speed, efficiency, packaging styles, branding, and modes of transport. This gives businesses more room to make changes, improvements, and customizations. All of this can also help create a stronger bond between the business and their customers, since they now have the freedom to adjust their operations according to their customers’ requirements.
As advantageous as it is to be a first-party logistics provider, it comes at a price, literally. High-quality, efficient, streamlined logistics and distribution can be costly, since being a 1PL means that you’ll have to purchase and own the necessary space, equipment, and transportation mediums needed to facilitate these processes. You may also need to hire more staff, which is an extra cost. For this reason, first-party logistics is typically taken up by bigger companies that can afford it, and even save money by operating at scale.
Where 1PL companies take care of transportation for their own company, 2PL or second-party logistics providers take care of transportation for a supply chain. These companies offer their transportation vehicles, equipment, or services to other companies in the supply chain, on a rental or lease basis. Companies that offer transportation for just a portion of a supply chain, instead of the entire supply chain, are also considered 2PL companies.
Since 2PL companies are only in charge of the transportation portion of a supply chain, they only need to own the equipment and vehicles they use, and don’t need to own any inventory or storage spaces. This significantly reduces their expenses.
The main drawback of 2PL is the fact that it doesn’t provide complete logistics and distribution support. 2PL companies primarily focus on transportation and movement of goods from one location to another, but typically don’t offer other logistics services.
3PL companies, or third-party logistics providers, are companies that can take care of a range of logistics processes such as storage and warehouse management, order management and fulfilment, transportation, inventory management, and even forecasting. Although they offer a variety of services, they don’t typically expect customers to use all of them. Customers can just pick the services that they need for their business.
3PL companies offer many benefits, which we cover in detail in this guide. In brief, the biggest benefit is that they help you save time, which you can use to focus on other business processes. 3PL companies can also save you money in the long run, help you grow your business and even expand it globally, and allow you to be flexible with your capital investments.
While 3PL can be the best thing that has happened to some businesses, it does come with some downsides.
With a 3PL business taking care of your logistics, you may not have as much control over the processes that they take care of. So if there’s a mix-up in fulfilling a particular order, you may not be able to intervene or resolve it, because the 3PL company will be working on it instead.
You may also lose a way to promote your brand, since some 3PL companies choose to use their own branding and logos.
Additionally, although 3PL providers can help you save costs in the long run, you may have to make a bulk payment at the beginning of the relationship, which can hurt your cashflow.
4PL, or fourth-party logistics providers, are companies that provide the same logistics services as 3PL companies, but also oversee and organize these services. In other words, they are like an upgraded version of 3PL providers.
In addition to completing 3PL services, 4PL providers can also manage, plan, and strategize your logistics, business/supply chain, projects, and supplier and buyer networks. Some 4PL providers even offer consulting services.
4PL providers can save you even more time than 3PL providers can, since they take care of your end-to-end logistics services. You may also be able to make better business decisions with the additional business operations insights they offer .
Using a 4PL provider may mean that you will have even less control over your logistics operations than you would with a 3PL provider. They are also usually very expensive.
A 5PL, or fifth-party logistics provider, is a business that can manage an entire network of supply chains. When a 5PL is hired by a company, they take care of planning, organizing, and managing all of the company's supply chain operations. 5PL providers usually hire and manage other 3PL and 4PL companies to take care of certain tasks.