August 3, 2022
Differences between standard Logistics Models and what they mean for your Business
The freight sector forms the backbone of today's global economy driven by production, consumption, and trade. Thanks to the freight sector, all goods arrive at their destination. Yet, in this complex industry that connects the world end to end, combines all transport modes (sea, air and in-land carriers), not many people understand how it all happens. How are these transports managed? Which actors are involved in the management of transports and logistics? What factors should I consider managing my supply chain?
This article will first run through the different ways in which a shippers can transport their goods from origin to destination, whether it is a one-stop or multi-stop transport. Second, it will explain the rationale behind choosing one method of logistics service over the others. Finally, it will explain the importance of data integration and visualization as a critical factor that will enable you to achieve excellence in your supply chain and how the Logward supply chain cloud platform can help you transform your supply chain into a value driver.
Then, let's get started! What are the different methods of managing your supply chain? Which players are involved in the management of transports and logistics?
At first glance, it looks easy, doesn't it? It is just like ordering online: you search a product, go the website, select it, add it to the cart, buy it, and you receive it in 24 hours. Another example would be the case of buying vegetables at your local grocery store. Although it looks simple, to be sold online or at the store every product has to go through a complex process that usually involves many parties, including:
- the shipper: in the case of the example used throughout the article about the food that one buys at the local grocery store, the shipper would be the farmer that produces and harvests the land and then ships the vegetables to the local store;
- the consignee: the party that is designated to receive the goods and, returning to our case, it would be the local grocery store;
- the carrier: the party that transports the vegetables;
- and the freight forwarder: a third-party that arranges the transport of the vegetables on behalf of either the seller or the buyer.
These are the main logistics actors that play their roles so that we can buy and receive anything easily and in time. Now there are different models in which our farmer can transport its vegetables to the local grocery store.
First-party logistics (1PL)
The first approach would be the so-called first-party logistics (1PL), representing a situation in which the goods produced by a company are transported and managed by its internal departments with their own capacities. In this case, there are no other players involved in the storage and delivery of goods as the company does not outsource any of the activities to third parties. On the one hand, 1PL preserves a high-level control of the logistics and transportation processes; and on the other hand, it entails intensive investment in infrastructure, equipment, and staff. Following our organic vegetable producer, 1PL would be the case where the farmer directly handles the entire transportation and distribution process to the local grocery for sale.
Second-party logistics (2PL)
A second model would be the second-party logistics provider (2PL), in which the manufacturer outsources a specific part of the transports or logistics to a subcontractor, generally the transport or the warehousing management. In this case, the subcontractor takes responsibility for the method of transportation and usually has its own assets. For example, a 2PL would come into place when the organic vegetable farmer employs a trucking company to bring the harvest to the local grocer. 2PLs represent the first step towards outsourcing logistics and transport processes, which reduces the investment of time and resources the producer has to make, but at the same time means having less control over some part of the logistics process.
Third-party logistics (3PL)
Next, is the third-party logistics (3PL), a supply chain model in which the shipper outsources all or almost all of its logistics operations. The term emerged in the 1970s and has expanded to a wide range of services, which include transportation, warehousing, cross-docking, inventory management, packaging, and freight forwarding. Essentially, the 3PL model adds a third-party in addition to the shipper, the receiver, and the carrier, and this third-party takes over the logistics operations. Returning to the vegetable producer example, a 3PL would coordinate with the vegetable producer to arrange the transport and might even pack the veggies into boxes. If the trucker gets lost between the farm and the grocery store, the 3PL will try to solve the issue instead of bothering the producer.
Fourth-party logistics (4PL)
Finally, the fourth-party logistics model (4PL), a term introduced by Accenture in 1996, refers to the supply chain model in which a company subcontracts the orchestration of suppliers and logistics service providers (3PLs & 2PLs) to a fourth-party. A 4PL offers a strategic vision of the supply chain as it oversees the entire supply chain and has the mission to ensure the optimal use of the available resources and increase efficiency. 4PLs act as the "leading logistics provider," and their success directly depends on their ability to coordinate the different parties across the supply chain. Thus, the role of 4PLs is more focused on technology than on asset management. 4PLS must be at the cutting edge of technology and make the most out of blockchain, robotics, and artificial intelligence (AI) to increase the supply chain's efficiency from end to end. Also, a 4PL must act as a neutral intermediary between the client and the various service providers, always looking for the client's best interest. In the case of the example of the organic vegetable farmer, the 4PL may serve as the coordinator of the vegetable producer and the different logistics providers to increase the efficiency of the supply chain, for instance, helping the farmer identify the most reliable trucker, or checking whether the grocery store is paying the correct amount in their transports.
The evolution of logistics shows how supply chains have become more and more complex to maintain the competitiveness of the business. Nowadays, every business manages multiple layers of networks - manufacturing plants, suppliers, distributors, transporters, etc.-. 3PLs have become a key component in the supply chain of many brands. In fact, 86% of US domestic Fortune 500 companies use 3PLs for logistics and supply chain functions according to a 2013 report issued by Armstrong & Associates. Furthermore, some companies use more than one 3PL in their supply chains, such as General Motors, Procter & Gamble, and Wal-Mart, which use 50 or more 3PLs.
Collaboration among the different parties in the supply chain has made possible a world of global trade. Nevertheless, complexity has blurred supply chains and hindered the decision-making of supply chain managers. COVID-19 is putting the entire industry and, more specifically, the 3PL model to the test. Despite the resilience of supply chains and the advances in new technologies such as artificial intelligence and robotics, the challenge remains at the level of supply chain data integration and visibility. According to the 2020 Third-Party Logistics Study conducted by Infosys Consulting, Penske Logistics and Penn State University, only 26% of shippers and 27% of 3PLs are satisfied with their current analytic capabilities. Now it is time for 4PLs to take the stage; global trade, shippers, and consumers need them.
Logward has developed a cloud platform that enables the farmer to integrate the data from all the different sources - either freight forwarders, carriers, warehouses, etc.-, to manage and track its shipments, to communicate with all the stakeholders across the supply chain, and to gain the visibility that the farmer and every company needs to make data-driven decisions and to transform supply chain into a value driver.
Logward is a Hamburg & Bangalore based logistics technology company.
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