And How Does Each Fit Into the Supply Chain?
As in any industry, the terminology in the world of logistics service providers is complex and often daunting for both newcomers and veterans alike. With the continued growth of ecommerce driving the logistics industry in new directions, fourth-party logistics (4PLs) and even fifth-party logistics (5PLs) companies are becoming more common alongside the traditional third-party logistics (3PL) companies, and understanding the differences in these labels is even more critical.
What is a 3PL?
A third-party logistics provider manages logistics for a brand or retailer and traditionally does not interact with the final consumer.
At first glance, the different levels of logistics providers seem to correlate to the extent of supply chain management by a given company. But more accurately, the label describes the number of steps away a logistics provider is from the final consumer or end user.
For example, a 3PL working with a clothing retailer may transport or receive merchandise from the manufacturer to their warehouse for storage and ship ordered inventory from the warehouse to the retailer’s brick-and-mortar location in the mall. This would be a traditional B2B fulfillment relationship.
Increasingly with the growth of ecommerce and omnichannel buying, 3PLs may also fulfill online orders from multiple marketplaces and shopping carts for picking, packing, and shipping of inventory from the warehouse directly to the end consumer.
A 3PL’s services can include any phase of the logistics pipeline: transportation, warehousing and storage, packing and shipping orders, etc., but at no point does a 3PL own the goods they manage. Instead, the 3PL acts as an intermediary between the retailer and the final consumer, hence the “third-party” name.
So, then what are 4PLs?
Fourth-party logistics providers (4PLs) are simply an additional degree of separation away from the end consumer as 3PLs. However, their relationship to 3PLs ultimately defines 4PLs; 4PLs consist of integrated networks of 3PLs that they use to coordinate large scale logistics for a retailer, brand, or manufacturer. It is important to note that the 4PL owns the retailer-logistics relationship rather than the individual 3PLs. Similar to 3PLs, 4PLs do not own the goods they manage.
So why are these becoming more common? One reason is to shorten shipping times for end users who increasingly expect their orders delivered within just a couple of days. If a 4PL can distribute inventory for their customer more strategically across the country through multiple 3PLs, the 4PL can ship orders from the closest warehouse to the end user, thereby cutting delivery wait times. Compared to shipping goods from one warehouse potentially across the country to the end consumer, this 4PL network can improve the end consumer experience and reduce shipping costs for the consumer and/or merchant. For brands looking to deliver products long-distance in as little time as possible, a 4PL is a great upgrade from the standard 3PL, as it optimizes the supply chain.
What are 5PLs?
Fifth-party logistics providers (5PLs) typically manage the entire supply chain for their customers. 5PLs are yet another step away from the end customer in the logistics network. One way to conceptualize this is mathematically; for number N, the definition of (N)PL is a logistics provider that manages a group of (N-1)PLs. In other words, as described above, a 4PL manages a network of 3PLs, so a 5PL contracts with a group of 4PLs that in turn coordinate with their own web of 3PLs. However, the 5PL is still the company negotiating with the brand or retailer, but they use their networks of 4PLs to manage the logistics for that brand.
In many ways, a 5PL is very similar to a 4PL and is perhaps too new of a term to have a concrete definition in the logistics lexicon, but what differentiates 5PLs is that they usually tend to exist as an added technology layer in the logistics pipeline.
What might this look like? A 5PL might use technology like blockchain or connections to ecommerce and automation to optimize the whole logistics network, creating the most efficient processes for handling goods for a customer. As supply chain networks become increasingly complicated (think international), 5PLs may be the future of logistics solutions, fueled by technology, though they are still relatively new and less common than 4PLs or 3PLs.
How does Extensiv fit into this changing industry?
At Extensiv, we work with 3PL warehouses and 4PL warehouse networks. Our warehouse management system (WMS) 3PL Warehouse Manager was created to help 3PL warehouses with all aspects of the services they provide, from receiving products to managing inventory and, of course, to fulfilling orders–and we continue to garner recognition for our software.
4PLs and 5PLs are not replacements for the traditional 3PL, so much as they are ways to optimize or expand the supply chain capabilities of existing 3PLs.
To learn more about optimizing your 3PL warehouse, download our guide to evaluating warehouse management software.