The term “logistics” was once synonymous with the military and referred to supplying troops with proper equipment and rations. It began to evolve outside the arena of war in the latter part of the 20th century, however, with the rise of consumerism and the subsequent growth of more complex and globalised supply chains. In today’s world, logistics refers to planning and implementing the movement and storage of goods, services, or information.
1PL to 5PL: What Do Logistics Companies Do?
Consider a hypothetical apple farmer, who delivers his apples to a grocery store for sale. This direct relationship between the supplier and the receiver of goods is known as “first-party logistics” – or 1PL – and is the most basic level of the logistics operation.
If the farmer wants to sell his apples further afield, he will need to use a second-party logistics company to transport them. 2PL companies, such as airlines and courier services, transport goods but are not otherwise involved in the supply chain.
3PL companies, on the other hand, are still primarily concerned with goods transportation but will provide additional services such as warehousing or customs brokerage. A 3PL company may pack and label the farmer’s apples before taking them to the grocery store.
If the farmer wants to outsource his entire logistics operation, he can engage a 4PL company. 4PL providers help to manage and provide strategic insight into a supply chain. For example, they might contract a 3PL to pack and deliver the farmer’s apples.
Finally, 5PL companies manage entire supply chain networks on behalf of multiple clients and can aggregate the needs of their clients into bulk volumes to achieve reduced costs.
In essence, as we move through the spectrum of 1PL to 5PL models, more and more of the logistics function is transferred away from the producer of goods and into the hands of the contracted logistics provider.
What Is a Freight Broker?
A freight broker is a middleman who connects our hypothetical apple farmer to the most reliable and respected transport companies.
Freight brokers build relationships with hundreds or even thousands of small- to medium-sized freight carriers so they can offer their clients a wide array of transport options. These smaller freight operations often rely on brokers for the bulk of their business.
Freight brokers may also manage various other aspects of a supply chain, such as insurance, freight tracking, warehousing, and more.
Third-Party Logistics Companies
Different third-party logistics providers may handle some or all of the functions within a company’s supply chain. Functions that can be outsourced to a 3PL provider include:
- Inventory forecasting and management
While the potential cost savings from outsourcing logistics functions to a 3PL provider are attractive, the bigger consideration for most companies is whether the provider can reliably meet and adapt to the needs of their customers.
Why Third-Party Logistics Providers Are Essential
3PL providers enable increased economic specialisation by allowing companies to outsource parts of their supply chains, leading to potential increases in efficiency, profitability, and customer value.
Drawbacks of Third-Party Logistics
The 3PL model is an ideal solution for many businesses, but there are some caveats to be aware of.
Perhaps the most significant disadvantage of engaging a 3PL provider is the lack of direct supervision you will have over the outsourced logistics functions. If the 3PL provider delivers an inadequate service to a customer, the customer will blame your company. Extra diligence is therefore required to ensure quality control.
Another issue is that your company can grow very dependent on a 3PL provider, making it difficult to switch providers or move the operations in-house if service levels no longer meet your expectations.
Because of these reasons, choosing a highly experienced and respected 3PL provider is vital.