Logistics Outsourcing Explained: Defining the 3PL, 4PL and 5PL Models

Posted: 07/08/2020 - 05:21
Logistics Outsourcing

Cloud-based platforms and globalization have pushed supply chains to new limits and capabilities, creating many new business opportunities for those who can manage the growing complexity.

Outsourcing is becoming a common way companies handle these changes and needs, but it can be confusing, especially when new industry terms crop up with little explanation. So, we're looking at three common logistics outsourcing models to explain what they are and what they can do for your business: the 3PL, 4PL and 5PL.

What Is a 3PL?

Third-party logistics providers (3PLs) are the most familiar outsourcing option for many businesses, especially in the e-commerce space. A 3PL is designed to help individual companies manage their inbound and outbound moves, plus operate warehouses and distribution centers for their clients to use.

The company that owns products will work with its manufacturing partners and producers to deliver the goods to a warehouse owned by the 3PL. Then, the 3PL will use its own staff to manage inventory storage, counts and fulfillment of orders. By integrating with sales software — especially e-commerce tools, but also delivery support for brick-and-mortar operations — the 3PL can ensure delivery to the end customer.

In these scenarios, the 3PL can automate the delivery of tracking and other information to the client. Automation allows this interaction so that a company’s customer management software can instantaneously put this in emails and send that to customers are soon as orders are created.

Typically, a 3PL will not have its own fleet of trucks or other vehicles. They'll work with established carriers like FedEx, UPS and USPS to handle freight and shipping. However, some 3PLs do manage a small fleet, not for parcel delivery to final destinations but to move client inventory between distributions locations. This can help the 3PL limit risks in the event of a local disaster or ensure they have proper inventory allocation to reach end-consumers by a specific date.

The now-standard two- to three-day shipping options can be much more affordable for 3PLs and their clients when they operate multiple warehouses.

Who Are 4PLs?

Fourth-party logistics companies (4PLs) are logistics outsourcing partners that don’t own the physical assets they rely on to support customers. Generally, a 4PL operates more like a consultant that can help run your logistics programs and operations as needed. They can be short-term partners who set you up with a 3PL, carriers or other arrangements that you then simply need to keep to for ongoing support.

However, a 4PL can be a long-term partner that manages your ongoing contracts and support, too. In this case, your 4PL will set up your distribution supply chain and manage contracts and requirements with freight companies, 3PLs and other service providers on your behalf. Some procurement support is possible, too.

They offer a little more flexibility and can generally integrate with different services based on your options. Their job is to help you accomplish logistics goals and answer questions while also troubleshooting problems, so you don’t need to intervene. Not only can they contract with 3PLs and freight carriers, but a 4PL could also work with platforms like Mothership to manage local moves between any of your locations, partners or customers when there’s an issue with an existing partner.

A 4PL will often work both up and down the supply chain and can be used to manage how goods move from the moment they leave a manufacturer. So, they’ll have a lot more data at their fingertips, which they can use or provide to clients to help optimize supply chain moves. It’s a way to outsource much more of your operations, including coordination of suppliers

How Does a 5PL Operate?

The fifth-party logistics model (5PL) is a level higher and often involves more complex consulting arrangements. Many 5PLs provide support for multiple 3PLs, bringing all of their operations under a single set of agreements and software platforms to handle all sourcing and movement of goods.

A 5PL can often negotiate significant freight and shipping discounts with carriers because they "control" all of the parcels and other shipments coming from multiple large warehouses. They're a large-scale logistics aggregator. There's a focus for 5PLs on minimizing service and shipping costs and this comes with significant demand for software to look at your supply chain from manufacturing through final delivery.

Due to the way contracts and data are handled, you might benefit from a 5PL’s negotiation power even if you’re working directly with a 3PL. Or, you may engage directly with a 5PL and have them handle your entire supply chain from start to finish. You’ll empower them to select what they feel is the best way to move your goods.

If you consider working with a 5PL, it’s a smart idea to iron out exactly how customer service is managed. You’ll want to define how to handle packaging errors, damaged products, mis-picks and returns. Typically, you’ll want the customer to be able to turn to you for support, and have integration with the 5PL so you can seamlessly deliver information and solve issues without the customer having to deal with any contracted party.

A Mix of Control and Choice

The 3PL, 4PL and 5PL models are just the starting point of many new logistics companies and services. Determining which is right for you will depend on your company’s size and shipping volume, as well as the amount of direct control you want to maintain over your supply chain.

Look at what you believe you must control, the choices you’re willing to give up and the value of convenience for empowering others to make decisions or troubleshoot on your behalf. You might find that a 3PL helps you best ensure that customer service can be managed to specific expectations, while a 4PL can be a logistics concierge ready to take care of things for you as you need. If you’re a large operation or are considering splitting inventory between multiple 3PLs, a 5PL could help you do this best and cut costs, though you’re putting more of your operations in their hands.

As with any logistics decision, it's smart to discuss specifics with providers and walk-in with something like a standard fulfillment questionnaire that makes it easy to evaluate each fairly and equally.


About The Author

Jake Rheude's picture

Jake Rheude is the Vice President of Marketing for Red Stag Fulfillment, an order fulfillment company for online retailers and ecommerce businesses specializing in heavy and large products. He brings a highly motivate approach to learning and sharing all aspects of order fulfillment and business management, alongside traditional marketing, SEO, and brand positioning. Marketing plays a pivotal role in the ability to attract and audience and build loyalty, and Jake’s goal is to show companies how shipping is essential to that relationship by creating a promise you must meet with every purchase.