Logistics Models Explained: 1PL through 5PL
Logistics is 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 involves the process of planning, implementation, shipping, and storage of goods.
The aim of an operation is to move and store products in the most efficient and cost-effective way.
Transportation may include both, the forward and reverse flow of goods.The entity that offers and provides the services as mentioned above is called a Logistics Services Provider.
In the provision of logistics services, there are a few different logistics models and logistics service providers.
These are explained below:
1PL – First Party Logistics Services Provider
When the manufacturer, producer or exporter of the goods takes care of the transportation and logistics services themselves, then this model may be termed as First Party Logistic Model (1PL). In these events, the service provider is a First Party Logistics Services provider.The manufacturer, producer or exporter of the goods normally handle all activities. They use their own company departments and own assets, such as trucks, trailers, warehouses, etc.
2PL – Second Party Logistics Services Provider
In some cases, the manufacturer, producer or exporter of the goods may outsource the provision of transport and warehousing services to a logistics services provider. However, it retains the control and administrative management of the business themselves.The logistics service provider generally owns and operates their own assets in this model. This model is known as Second Party Logistic Model (2PL).
3PL – Third Party Logistics Services Provider
When the 2PL logistics services provider appointed to handle the transportation and warehouse operation further outsources the services (in part or in full), then this model may be termed as a Third Party Logistic Model (3PL).
In such events, the service provider is called as a Third-Party Logistics services provider.
The third-party logistics model is a common model used in commercial shipping today. This model may also include a variety of other services such as freight forwarding, customs clearance, weighing.
As per the definition of The Council of Supply Chain Management Professionals, a third-party logistics service includes transportation, warehousing, packing, freight-forwarding, cross-docking, and managing inventory functions.
Clients that use one or more third-party logistics services provider usually enter into a long-term contract. The agreement(s) allow(s) them to measure, evaluate and take corrective actions relating to the performance of both, the supply chain and the third party logistics service provider.
4PL – Fourth Party Logistics Services Provider
When the manufacturer, producer or exporter of the goods outsources the operational handling of the transportation, warehouse service and also the administrative management of the business themselves the model may be termed as the Fourth Party Logistic Model (4PL).
In the Fourth Party Logistics Model, the fourth party logistics service provider handles the entire supply chain operation.
The main characteristic of this model is that the logistic service provider operates a non-asset-based business model as they do not own warehouse or trucks or other assets used to provide the service.
A fourth party logistics model is more integrated than the most common third party or other logistics models. It also involves the administration management and monitoring of the logistics processes.
5PL – Fifth Party Logistics Services Provider
There is also another logistics model which employs the use of supply chain networks. This is called the Fifth Party Logistic Model (5PL) which happens when there is a switch from supply chains to supply networks.
A 5th party logistics provider may consolidate the demands and bulk volumes of 3PLs and 4PLs.
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.
Logistics services have developed and evolved rapidly in recent years. They are quite dependent on digital technologies and solutions. Big Data, IoT, digitalization, digital tracking, have become critical in providing an efficient and universal method of planning, scheduling, and tracking a shipment through the supply chain. The increased usage of intranet and Internet technologies related to shipment tracking, coupled with the interdependency of information and technological innovations have transformed the provision of logistics services.
Integrated logistics service models starting from the order desk to the point of delivery will continue to service the global industry forever.