Chapter 6 – Third Party and Fourth Party Logistics

6.1 Introduction

Logistics services range from a 1PL – level one logistics provider to a 6PL – sixth level service provider. This chapter will focus on the most common type of Logistic Service Providers, namely, 1PLs to 4PLs, and their roles and functions.

6.3 Pre-Assessment

6.4 Defining Logistic Service Providers

A common term used in logistics when describing a logistics service provider is 3PL (third-party logistics). Unfortunately, many companies call themselves 3PLs but may not offer the services expected by a 3PL service provider. In an attempt to reduce confusion around the terminology, legislation was passed in 2008 which legally defined a 3PL as “a person who solely receives, holds, or otherwise transports a consumer product in the ordinary course of business but who does not take title to the product” (Vitasek, 2013).

The Council of Supply Chain Management Professionals further explains 3PL (2013) as the following: “[o]utsourcing of all or much of a company’s logistics operations to a specialized company.” Furthermore, the term “3PL” was first used in the early 1970s to identify intermodal marketing companies (IMCs) in transportation contracts. Up to that point, contracts for transportation had featured only two parties, the shipper and the carrier. When IMCs entered the picture—as intermediaries that accepted shipments from the shippers and tendered them to the rail carriers—they became the third party to the contract, the 3PL. (Vitasek, 2013).

To understand the form and function of a 3PL, one needs to understand the different layers of logistics services and the supply chain integration at each level.

Level 1 (1PL)

The most basic level of a logistics service provider is the 1PL. A 1PL model is a simple arrangement where the manufacturing company utilizes its own internal resources to ship goods to a consignee (recipient of the goods being shipped). All the supply chain functions from order acceptance, manufacturing the goods, and shipping the goods are managed and completed by the consignor (company shipping the products). The trucks and labour used in the delivery process are resources of the consignor. An example of a 1PL is a farm delivering its products to a local store for sale.

Level 2 (2PL)

Once an organization decides to outsource the transportation component of the supply chain (i.e., trucking), it often turns to the services of a 2PL service provider. The 2PL service provider often specializes in a mode of transportation. It could specialize in over-the-road trucking, ocean transportation, or one of the other modes of transportation. The 2PL does not integrate into the consignor’s supply chain, nor does it provide logistics planning or solutions. It simply moves the freight as specified by the consignor to the consignee. The 2PL manages the assets and labour required to move the freight. Often the shipping company will have a contractor with the transportation company, or the freight could be moved on an as-needed basis.  FedEx is an excellent example of a 2PL provider.

Level 3 (3PL)

Once a company decides that it is time to outsource logistics functions to a 3PL, it requires more than a delivery company. 3PL providers offer supply chain integration, warehousing, possibly customs clearing services, or expertise in more than one mode of transportation. To be a 3PL, one does not need to offer all of the supply chain functions, but it does need to manage the delivery elements on behalf of the customer. An important distinction between a 2PL and a 3PL is that a 3PL executes and manages the delivery function of the supply chain. Even though the 3PL does not design the supply chain on behalf of a customer, it does manage all the delivery-related supply chain elements. A 3PL will offer one or more of the following supply chain functions:

• Warehousing, Cross Docking, Load Consolidation
• Customs Brokerage
• Multimodal transportation
• Freight Forwarding Services
• Freight Verification
• Transportation sourcing

Level 4 (4PL)

According to Vitasek (2013), a 4PL (fourth-party logistics) differs from a 3PL in four ways:

1. A 4PL organization is often a separate entity established as a joint venture or long-term contract between a primary client and one or more partners;
2. The 4PL organization acts as a single interface between the client and multiple logistics service providers;
3. All aspects (ideally) of the client’s supply chain are managed by the 4PL organization; and,
4. It is possible for a major third-party logistics provider to form a 4PL organization within its existing structure.

Essentially a 4PL, or Lead Logistics Provider (Vitasek, 2013), works with a customer to design and manage their entire supply chain. The Lead Logistics Provider (LLP)  will work with the customer to establish which routes should be Full Truck Loads (FTL), Less than Truck Loads (LTL), the pick-up frequency, decide on optimal warehouse locations, and aid in the negotiation of transportation rates and warehousing rates. A fully integrated LLP will have the following expertise and personnel:

• Material follow up
• Traffic department
• Logistic/route Planning
• IT – aids in system integration
• Yard Management
• Customs
• Receiving
• Compliance and safety

6.5 Summary

IIPMR’s video, Difference between 1PL, 2PL, 3PL, 4PL and 5PL Logistics Providers, provides a great recap of the type of service providers and their functions. This video also includes a definition of 5PL, which was not discussed in this chapter.

6.5 Post Assessment (Check Your Understanding)

6.7 Chapter References

IIPMR. (2020, October 10). Difference between 1PL, 2PL, 3PL, 4PL and 5PL logistics providers [Video]. YouTube. https://www.youtube.com/watch?v=2X6rD1nJx4M.

Vitasek, K. (2013, August). Supply chain management terms and glossary. Council of Supply Chain Management Professionals. https://cscmp.org/CSCMP/Academia/SCM_Definitions_and_Glossary_of_Terms/CSCMP/Educate/SCM_Definitions_and_Glossary_of_Terms.aspx?hkey=60879588-f65f-4ab5-8c4b-6878815ef921