The 3PL, 4PL, and 5PL logistics businesses are some of the most misunderstood concepts in logistics and supply chains, especially for beginners. The situation is the same whether in Africa or beyond.
Supply chain management has evolved over the years. While it is the bedrock of many corporations or businesses, it can be a hassle.
Corporations today tend to focus on their core business, prompting them to streamline their supply chain as much as possible.
Why do businesses or supply chains rely on 3PL, 4PL, and 5PL partners or suppliers?
Logistics partners help businesses optimize their supply chains by facilitating the distribution of goods in and out of the supply chain.
Collaborating with logistics partners is also an opportunity for your business to cut costs in your supply chain and delegate the nuances of transport and logistics to more experienced companies.
Businesses allow their supply chain to collaborate with other logistic companies in three main ways. These are the third-party logistics (3PL) partnerships, fourth-party logistics (4PL) partnerships, and fifth-party logistics (5PL) partnerships.
What are they, and how do they differ? We will get to that in this article.
Third-Party Logistics (3PL)
Third-party logistic companies are businesses primarily equipped to interface between your business and its customers.
They handle the packaging, transportation, and delivery of products between a business and its customers.
Examples of 3PL companies are FedEx and DHL.
A cake bakery in Johannesburg with many daily customers may have issues with its delivery obligations. Realizing they do not want the hassle and would rather focus on baking their cakes, they partner with a logistics company.
The Logistics partner leverages its infrastructure to handle the packaging and delivery obligations of the cake bakery, allowing the bakery to serve its customers with less hassle.
The partnership will allow the bakery to become more efficient and reduce costs simply by eliminating the need for transportation infrastructure.
Pros of 3PL
- It takes the logistics responsibility off your business, which is particularly good if you have no expertise.
- Increases efficiency and reduces your business’s operational costs.
- Improves service options for your business, leading to customer satisfaction.
Cons of 3PL
- The business tends to lose some control over its service and image.
- Loss of control over inventory management.
- Finding a trustworthy 3PL company that shares your core values can be tricky.
Fourth Party Logistics (4PL)
Although the 3PL takes the logistics, transportation, and delivery hassle off the hands of your supply chain, you will quickly realize there is still a lot of monitoring and enforcement on your part.
What if you don’t want to handle those as well? What if your company’s supply chain is more complex than most?
The answer? Partner with a 4PL.
4PL companies are businesses tasked with overseeing the overall fulfilment process of their partners. They may do this themselves or leverage partnerships with multiple 3PLs to meet client expectations.
4PL companies take full accountability and responsibility for your logistics operations.
The cake bakery mentioned earlier partnered with a 3PL. But what if the scope of that partnership was increased to task the logistics company with the entire fulfilment process?
You cannot call that a 3PL partnership any longer. And yes, 4PL businesses can also provide 3PL services.
Packaging, storing, and delivery are all elements of the logistics company’s fulfilment obligation. However, they may not handle it directly.
The 4PL may outsource and oversee elements of these fulfilment obligations to other 3PL companies.
Pros of 4PL
- Your business relies on fulfilment experts to get your product to the customer.
- You have customer connectivity, which opens the door to customer analysis.
- Improved core competency and innovation.
Cons of 4PL
- Transition can be difficult.
- You lose even more control over your business image and customer service.
Fifth Party Logistics (5PL)
There are companies whose core purpose is research and development. These companies do not want to be tied down by their supply chain operations. An example of such a company is Apple Inc.
They can partner with 5PL businesses to handle their entire supply chain, from production to delivery. However, while playing a supervisory role.
5PLs are companies that can handle any particular company’s entire supply chain process.
Pros of 5PL
- A 5PL offers a high level of integration and coordination for any business or supply chain partnering with it.
- The central coordination and strategic oversight of a 5PL can lead to improved efficiency and optimization of the entire supply chain operation.
- 5PLs often leverage advanced technologies. This includes data analytics and supply chain management software, which it uses to enhance visibility and decision-making capabilities.
Cons of 5PL
- Some 5PLs may provide standardized solutions, limiting the level of customization available for businesses with unique logistics requirements.
- Relying on a single 5PL provider may introduce a level of dependency which could negatively impact the business.
Which is best for your business?
3PL, 4PL, and 5PL play unique roles in the supply chain.
3PL are great for small to medium scale businesses that do not have complexities in their supply chain. The 3PL companies can interface directly with them to meet their transportation and delivery needs.
4PLs are great for larger businesses with more complex supply chains, such as those that sell to customers worldwide. 4PL can help them consolidate their supply chain efficiently.
5PL are for large corporations that run multiple supply chains and want to outsource one or two of them to another company.
Conclusion
Initially, Logistics partners (3PL, 4PL, and 5PL) were tasked with delivering the finished goods to retail stores or consumers. As supply chains got increasingly complex, corporations or businesses relied on them to do more.
Today, logistics providers handle inbound and outbound goods (raw materials or finished goods) for businesses. Some do more.
Logistic partners now operate on different levels in the supply chain. They can focus on delivering goods to your consumers or managing segments of your entire supply chain flow.
Obinabo Tochukwu Tabansi is a supply chain mastro and writer with a decade of experience working in different facets of the supply chain. Today he is living his passion for writing on all things supply chain. His blog, Supply Chain Nuggets, is Africa’s fastest-rising supply chain blog, helping professionals, business owners, and curious minds navigate the supply chain complexities on the continent.
