The right service for the right-sized business
Any business that delivers physical goods to customers scattered across a large market terrain needs an appropriate level of supply chain logistics. In this case size both does and does not matter. Size is irrelevant in that any supplier, whether wholesale or retail, needs to have goods on hand when the customer wants to buy, and raw materials on hand to continue production or assembly of new goods. On the other hand, size is an important factor in deciding on a logistics partner who can provide the right supply chain solution. Any operation bigger than a local stand-alone retailer or small online seller of niche handmade goods should consider engaging a specialist business partner to manage their logistics.
The pertinent question is “Which level of partnership is appropriate?” It’s not an easy or simple decision, but most large companies requiring sophisticated logistics management should consider partnering with a 3PL or 4PL supplier, but what does that actually mean?
Understanding the different options
In the world of transport logistics partnership levels are designated using a 1—5 numbering system and the alpha code PL. To find the right logistics partner for your business it is important to understand the nomenclature of the ‘PL’ system. PL simply stands for ‘Party Logistics” and so it doesn’t make sense without a number in front of it: 1PL is ‘first-party’, 2PL is ‘second-party’, and so on. The rule of thumb is that as the complexity of the supply chain increases, the value provided by a PL partner is enhanced.
A real-life example
Let’s take a simple example to demonstrate this axiom. A suburban retail florist must source their stock based on what is seasonally available and ensure it is in their shop while still in its finest bloom. The supply chain begins in a field or greenhouse that could be anywhere from 10 to 1000 kilometres (or more) from the florist’s location and ends where the customers are. A 1PL logistics system may work very well for the florist who can access a nearby wholesale market and collect their own stock on a daily basis or several times each week. The florist will have a good idea of what sells during each season, and what is available at the market. This florist might have their own truck or van for collecting the flowers. But we must consider the complexity hidden in this apparently simple supply chain.
An example in bloom
Different floral arrangements will be packed in different ways for transportation (some in gift boxes, some in vases, some in large bunches and so on). Plus, they are perishable so they must have a water supply in the form of containers or buckets, and lastly, they require a controlled temperature, so they arrive looking appealing and fresh. For these reasons, the florist might rely on a 2PL or even 3PL company to do deliveries. A 2PL might be a local driver who services connected suburbs. A 3PL delivery service might be Interflora or a similar entity who can arrange for deliveries remotely through a florist located in proximity to the destination for the bouquet.
Further, the flower grower cannot rely only on their own resources to get their blooms to their final retail customers. The grower most likely sells to a wholesaler who takes the flowers to the regional market, and who might run their own fleet of trucks but also have relationships with several second- and third-party carriers. If the grower is also supplying a supermarket chain, it is likely they will have interactions with third- and fourth-party logistics suppliers contracted by the retailer.
Even with a product as simple as cut flowers, there can be supreme complexity in the supply chain. All the moving parts need coordination and management. Each ‘bunch’ of flowers must move through several sets of hands on its journey from the grower to the retail buyer. The key aspect to understand is that the more complex the supply logistics —with more links in the chain—the benefits of contracting out to a 3PL or 4PL company increase.
Outsourcing assures supply
Engaging expertise to help manage supply chain logistics might seem counterintuitive: Surely, it’s cheaper to keep everything in-house? That’s certainly the appeal of 1PL solutions for small businesses, but there is a limit to the effectiveness of managing everything. For example, if the florist’s van is out of commission, there is no guarantee of supply, leading to lost sales and potentially a number of disappointed customers who will go elsewhere for their roses and gladioli. A dedicated supply chain manager at a 3PL or 4PL would be able to source another van or truck if one is off the road.
Returning to our opening gambit: Which level of service is most appropriate? As a guide the following discussion of pros and cons should help you decide.
1PL vs 2PL: A closer look
First and second-party logistics are fairly simple and straightforward: you either transport the goods yourself, or you hire a courier or haulage company to get the product from A to B. However, when these operations are scaled up, they tend to run into problems to do with volumes, route density, and needing to meet critical delivery deadlines. 2PL providers might claim to solve all of these problems, but in reality, they are limited by the assets and routes that they have proprietary control over.
A shipping company might have regular routes with high capacity, but if your destination is not served by these routes then delays can occur. Goods can end up stationary in a warehouse which increases the overall time allocated to delivery. Such delays are very common when dealing with ‘less than a truckload’ (LTL) consignments on non-standard routes. If the delivery is not time-critical, short hold-ups and a degree of double-handling (loading and unloading to different transport vessels) is not too much of a problem. But problems multiply quickly if the supply chain involves ‘just in time’ delivery of componentry that requires further production, assembly or knitting into deliverable packages before it reaches the end-user.
2PL providers manage shipping, loading and unloading, along with pick-up from the supplier and delivery to the end-user. These are certainly advantages over 1PL consignment, particularly from medium to large enterprises. The supplier does not have the cost of maintaining a fleet of vehicles and additional drivers. This reduces supply chain complexity for the supplier, but it still requires a level of in-house coordination, daily management, and business oversight; all of which can be resource intensive.
In addition, a 2PL company may not deal with other aspects of the supply chain such as customs approvals, certification, in-transit tracking, or off-shore warehousing. Potential delays caused by issues internal to the 2PL supplier can also impact the supplier if delivery deadlines are missed resulting in contractual penalties or other unanticipated costs.
The 2PL model can be effective but it does not scale well to complex production and distribution scenarios. For example, 2PL is not adequate for managing complex supply chains that encompass multisite production lines, off-site assembly plants, connecting discrete components and products, and with multiple endpoint destinations. In these environments of higher logistics complexity 3PL and 4PL suppliers come into their own.
3PL vs 4PL vs 5PL: A closer look
A 3PL can manage several aspects of the supply chain from the initial packaging to warehousing and sometimes even to the unpacking and shelf-stacking at the retail outlet. The carriage of the goods can be done by a 2PL carrier contracted to the 3PL entity, which is often known as a fulfilment or freight-forwarding partner. In this third-party configuration, the supplying enterprise undertakes all supply chain management functions in-house.
A 4PL partner adds another layer of sophistication to this relationship. By remaining a layer above the 2PL and 3PL entities, a 4PL curates a logistics solution specifically designed to meet each customer’s unique requirements. By using proprietary technology, the 4PL provides a key advantage: an holistic overview of the entire supply chain. Armed with powerful data turned into meaningful insights, they can smooth out any kinks in the supply chain and ensure that costs are reduced for both the supplier and the end user. As a strategic partner to their customers’ businesses, the 4PL can also provide insights to manage demand and ensure continuity of inventory through both surges and slumps in sales (for example seasonal shifts).
The control tower view of a 4PL
4PL partners should also value-add to the business by offering innovation and continuous improvement across the entire supply chain, through use of sophisticated data analysis, robotics or other technological enhancements, such as vehicle tracking. This is commonly known as the ‘control tower’ view that enables the 4PL and their client to see deeply into the business and direct all aspects of the supply chain. A control tower approach gives both partners an additional level of agility and the ability to react at speed to both problems and opportunities as they emerge across the supply chain. efm is an agile 4PL partner that leverages real-time supply chain data to ensure prompt and proactive attention is focused on potential bottlenecks and breakdowns before they happen. Deploying the right technologies into your supply chain oversight matrix provides cost savings and enhances sustainability.
A strong 4PL has the ability to find the right transport solution, at the right time, at the right cost to keep freight moving in the right direction. This means that if a high-value, low-volume component is needed quickly along a non-standard route, a 4PL partner will provide a cost-effective solution because it is not dependent on only one or two contracted carriers. A 4PL logistics entity can provide bespoke solutions that guarantee an unbroken supply chain and end-user satisfaction, even in difficult circumstances and in short timeframes.
5PL for extreme complexity
In some circumstances a 5PL option might be suitable for large clients with a complex business. However, this is a relatively new conceptual area of logistics science, and its meaning is still open to interpretation. Generally, a 5PL partner will undertake all aspects of supply chain management removing it completely from the customer’s internal operations. 5PL partners are increasingly proving their value in the e-commerce space where complex delivery solutions are required. A 5PL partner is a strong strategic ally to the client business and will generally handle planning and long-range logistics thinking to ensure the road ahead is certain and suitable. efm has the capability, the vision, and the team to handle complex 5PL partnerships through its Enterprise Managed Services function, if you think this is what you need going forward.
If you’re looking for a comprehensive supply chain solution that will reduce your exposure to risk while increasing reliability and providing an agile response to difficult configurations of cargo, then a partner such as efm could be right for you.
To find out how we can add value to your logistics and supply chain function, contact us.
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