Logistics Service Providers (LSP): 3PL vs 4PL vs 5PL

	1PL	2PL	3PL	4PL	5PL	6PL
Activities	Own conveyance of products	Subcontracting conveyance	Incorporates variety of services	Liaise with multiple 3PLs	Aggregates by polling of multiple PLs in one unite	Supervision of artificial intelligence
Advantages	Easy handling	Increasement of concurrency in sites	Drives for cost savings	Maximized efficiency	Efficient supply network	Sustainable logistics
Disadvantage	Only for Small-scale chains	Requires extra management	Loss of control	Increased costs	More focused on supply networks as to chains	Limited information on supply chains -theoretical

 

 

Most Used Logistics Service Providers (LSP): 3PL vs. 4PL

 

Organizations outsource the option 3PL to delegate their storage space rent or moreover, to manage their inventories, whereby this service is asset-intensive, and its return-on-investment (ROI) is volatile. 4PLs provide considerably more services such as assembling the technologies, resources, and capabilities to design, develop and implement extensive SCM solutions. Yet, the 4PL emerged originally from 3PL, however it covers and includes the tangibles and intangibles of human resources, technological advancements as well as intellectual capital. (Li, 2007). Krzepkowski, 2020 claims further that 4PLs support the growth of organizations by facilitating them to reach their overall goals. 

 

Thereby, the main divergence lies in the degree of control and accountability, especially when it comes to meeting the needs and wants of the clients effectively. Thus, companies can delegate functions and activities such as packaging, distributing, stockpiling, etc. to an externally outsourced specialized partner (Krzepkowski, 2020). 

 

 

Advantages of 3PLs

 

The Resource Network is one of 3PL’s benefits: A 3PL has a wide state of systems that benefit in-house supply chains; hence they will handle all aspects of a company’s logistics from start to finish. They can save corporate capital on expenses and give customers much speedier services due to their connections and incentives (Li, 2007).

 

Money and effort are saved: To implement the logistics operations, a 3PL will reduce the need to invest in distribution centers, technology, transport, and employees. Invoicing, auditing, strength and conditioning, personnel, and optimization are all things they can handle (Kennedy, 2020). 

 

Durability and Adaptability: 3PLs can expand capacity, conveyance, and labor to meet inventory requirements and order quantities as well as taking advantage of strategic analytics and a much more flexible supply chain approach (Krzepkowski, 2020).

 

Disadvantages of 3PLs

 

Yet, 3PLs have several drawbacks as well. It is lacking control over the customer experience and fulfillment and inventory management system is much less effective. If consumer purchases are insufficient, this is a time consuming and expensive process. Small-to-medium-sized enterprises (SME), but not large enterprises, will stand to gain from this. Further, discrepancies committed by the 3PL firm will be blamed on the organization instead of the provider and an occurrence of an increasing reliance on the service provider (Fulfillment and Distribution, 2019). 

 

Advantages of 4PLs

 

Effective 4PLs learn how to maximize efficiency and provide a better customer experience by optimizing and streamlining transportation at all stages, from packing to last-mile transportation. 4PLs have access to a wide variety of resources and infrastructure that can assist a business’s operations to new heights. Furthermore, their organizational and operational expertise can take some time, thus that a business can concentrate on their primary business goals (Logistics Transportation Review, 2021).

 

Disadvantages of 4PLs

 

The high expense of 4PLs due to sizable measure of amenities they offer, their primary compromise of relinquishing so much authority in exchange for their expertise and knowledge, and the lack of accountability and transparency they provide, accessibility to performance information is at the mercy of the logistical supplier and necessitates organizational change as it is entirely dependent on one quarterback are all disadvantages that come with 4PLs (Millar, 2019).

 

Further Considerations

 

Outsourcing Considerations

 

There are several reasons why companies should consider using a suitable and reliable 3PL or 4PL depending on the organizational needs and requirements. Outsourced partners facilitate the business to save time and money simultaneously, as there is no need to invest in inhouse inventory, technology, transportation, etc. while the firm can focus on its core competencies (Coakley, 2020).

 

Furthermore, since 3PLs have a consulting functionality, companies will be enabled to streamline and optimize their supply chains, improve their productivity, and eliminate the inefficiencies. In the same process, 3PL´s/ 4PL´s leverages resources such as human capital, sophisticated technology, logistical infrastructure, networking with 3/4PL´s existing partners, etc. (Stringa, 2013)

 

3PLs/ 4PLs also help organizations to improve the service quality while fulfilling customer´s needs & wants, due to their flexibility and scalability of warehousing, transportation, human resources, etc. Thus, the LSP focuses on speedy and secured services. Moreover, in order to stand out from the competition most of them have differentiation strategies, such as environmental stewardship. Ergo, in agreement with Coakley, 2020, collaborating with LSP that have these features will benefit the company in return automatically. 

 

Contract Negotiation Considerations

 

LSP are operating on regional, national, international, or global levels, therefore outsourcing them and sealing contracts with them require, among others, the application of the proper laws and regulations. Hence, the intuition of International Warehouse and Logistics Association (IWLA) provides standardized warehousing contract templates with the right terms and conditions to regulate if there is a disagreement or something goes wrong during the transportation “Importantly, many 3PL contract provisions are negotiable – but some are more negotiable than others.” (Weber Logistics, 2021)

 

It is strongly suggested that before companies do outsource any LSP they should take into account precisely the “worst-case scenarios” in advance. Thus, they can avoid disappointments and the aftermath after an unwanted and unplanned incident. Moreover, as corporations usually have an internal or external attorney, they should be involved and review the contracts with the intent to cover the organization needs rather than to point out minor legal paragraphs.

 

It is strongly suggested for a good business attorney to take these following considerations into account:

 

• To protect the goods of the client at LSP´s warehouse against any claims from the bank, shareholders or the LSP itself, in case of insolvency, non-payment or any other unplanned problems that may occur
• A proper LSP´s insurance needs to stipulate that they are taking “reasonable care” of the customer’s goods stored at their warehouse. In case of damages or losses of the goods the LSP´s insurance need to cover it and compensate for it. Further, the degree of liability must be discussed and clarified in advance, thus the loss is not exceeding the value of the goods stored. 
• To define the duration of the mutual agreement, as this fact is impacting the costs and expenses for both parties
• A good, long-term contract is usually always based on the win-win approach. Barely any business partner will agree if the organizational interest is not respected sustainably. 
• Even though the terms and conditions are standardized by intuitions such as IWLA, the prices are usually negotiated. Hence, it is important for both sides to know their strengths the offer, costs, market fluctuations, price volatility and all the other pivotal factors that impact their decision during the negotiation
• Communication is the key to every sustainable lucrative negotiation. Ergo, especially in the initial phase, both parties need to have a candid and transparent way of exchanging information and meet each other as much as needed. The clients and LSP´s should state their expectations and requirements clearly and inform the other parties to avoid confrontations and disappointments in the short as well as long-term (Weber Logistics, 2021); (Barry, n.d.).

 

 

Conclusion

 

Most companies need to focus on their key competencies and activities, to which the inhouse transportation and logistics usually don’t belong. Ergo, it can be claimed that producers are barely able to survive without collaborating and partnering with externally outsourced partners, especially LSP´s along the supply chain. Hence, LSP are providing, depending on the organizational need, different sets of logistical services that can be outsourced by the clients. 

 

Yet, before outsourcing services and partners, clients need to identify their own terms and conditions, needs and wants, financial, material, human and other resources, etc. and then go into negotiations. Above all, they need to predefine to which degree they need the services, as they are ranging from 1PL to 6PL. On the other hand, LSPs need to be aware regarding their capacities, obligations, level of performance, promise to the market, etc., whereby both parties need to be win-win oriented, otherwise the partnership will not function in the long term.

 

Hereby, the most frequently used LSP are 3PL or 4PL, whereby 3PL´s key focus is on logistics, while 4PL´s emphasis is on the entire supply chain. Both of them as well as all the other LSPs have their advantages and disadvantages.

 

About the Authors

 

Sinbl Hawro Yakoob, M.Sc.

 

Sinbl graduated in Int. Business Studies, specializing in Supply Chain Management (SCM), from the Zuyd University of Applied Sciences in Maastricht, NL. In 2016 she finalized her Masters in Int. SCM and Logistics at the Plymouth University, GB. Hence, she endeavored an academic career within multiple countries, in order to learn different facets of Logistics and SCM. While studying International Business, the subjects of Logistics and SCM have enhanced her interests considerably, and therefore she has decided to pursue masters in that field. 

 

Having a profound insight in this realm is significantly contributing and instilling to her knowledge, which is certainly pivotal for being able to write articles and transfer this know-how for the interested readers. Thus, combined with Sinbl’s interest in international development, she is positive that she has much to add to this blog and for its followers. Currently, Sinbl is working at the American University of Kurdistan, where she lectures among others SCM & Logistics as well as Production & Operation Management.

 

Aram Omar

 

Aram is currently studying at the American University of Kurdistan in the College of Business. The various realms and aspects of Business are highly interesting, however SCM seems to be the field with the greatest potential for Aram to pursue and specialize in due to its different components, dynamics and variations. He wants to extend his research skills and deepen his knowledge in this area on the one hand and share his know how with the great audience on the other hand, therefore he puts great effort in creating and publishing articles.

 

Bibliography

 

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Stringa, L. (2013, 06 13). 3PL Outsourcing, A 5 Point Summary . Retrieved from https://www.evansdist.com/3pl-outsourcing/

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Barry, B. (n.d.). 27 Point Checklist for Third-Party Logistics (3PL) Contracts. Retrieved from https://www.fcbco.com/blog/checklist-for-3pl-contracts

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