Logistics service provider – term, functions and classification

1. What is a logistics service provider?

A logistics service provider is an entrepreneur to whom companies can outsource their logistics tasks. The logistics service provider offers supply chain management services and thus acts as an intermediary between the demand side and the end consumer. Logistics services include shipping, warehousing and distribution.
Logistics service providers are similar to freight brokers, but have a higher level of tools, technology, knowledge, and services than freight brokers. Logistics service providers have a "big picture" strategy and use their logistics management software and business intelligence to optimize their people, technology, processes and industry knowledge for more complex shipping solutions.

Many companies initially see collaboration with logistics service providers as a cost-saving measure, but quickly realize that it brings many other positive aspects. These include freed-up resources, scalability, higher productivity, know-how, access to innovations and better technologies. Despite the many benefits of outsourcing, however, it is a path that should not be taken until the potential drawbacks have been weighed. These disadvantages include loss of control and communication problems. Read more about the pros and cons of outsourcing to logistics service providers.

2. What are the functions of a logistics service provider?

Most logistics service providers offer the following services:

• The acceptance of goods from suppliers or manufacturers
• The storage of consumer goods
• Inventory management
• Picking and Packing
• Customization and Assembly of Sets
• Shipping
• Handling Returns Management

3. The classification of logistics service providers

When it comes to outsourcing, most people probably think of 3PL (Third Party Logistics) or 4PL (Fourth Party Logistics). But there's also 1PL and 2PL. And what about 5PL? Confusing, isn't it? Is there a clear line to distinguish all these PLs? Here's a simple but clear insight into what the different PLs mean.

3.1. 1PL – First Party Logistics

The term refers to anyone who owns the goods, such as manufacturers, distributors, merchants, wholesalers or retailers in the business environment. The goods may be self-produced (manufacturers) or obtained through distributors (warehousing) to be transported from A to B. Anyone who intends to transport goods from one place to another or from one country to another is considered a logistics service provider.

3.2. 2PL – Second Party Logistics

This is about an asset-based transportation company that owns the transportation assets and provides the transportation service. This could be a shipping company, an airline, a rail operator, or a freight carrier. In this case, the logistics provider owns or leases the ships, planes, trains, or trucks to move the freight from a starting point to a pre-arranged destination.

3.3. 3PL – Third Party Logistics

The term 3PL refers to a company that receives, stores or transports various goods manufactured by other manufacturers based on specific and detailed documented instructions. It should be noted that this logistics service provider does not claim or own the goods or products delivered to the end users. 3PLs may also be referred to as freight forwarders or couriers.

3.4. 4PL – Fourth Party Logistics

This is about an independent, non-asset-based supply chain integrator. A 4PL combines the resources, capabilities, and technologies of its own organization and complements them with those of other organizations, including 3PLs, to design, build, and operate comprehensive supply chain solutions for its various customers. The main role of a 4PL is to provide a wide range of services with holistic management of the logistics chain.

3.5. 5PL – Fifth Party Logistics

Alternatively also referred to as e-business. 5PLs bundle the requirements of 3PLs and other providers into a total volume in order to negotiate attractive freight rates with railroads, airlines or various shipping companies. Essentially, it is a non-asset management business. The focus of a 5PL logistics service provider is to leverage existing resources to achieve savings and provide optimal solutions to customers.

The multiple benefits of 3PL providers have been well observed in the business world for some time. How valuable and advantageous the benefits of 4PL providers or even 5PL providers will be in our operational environment remains to be seen.

Conclusion

It's easy to say that outsourcing logistics is a viable option. However, each e-commerce company must judge for itself whether outsourcing is exactly the right solution. Order fulfillment expertise has increased significantly over the past decade, and in the future, a significant portion of ecommerce companies will likely share operations with someone else.