Logistics and transportation is a vast business function which requires in-depth understanding and expertise for efficient execution. Many large companies and international corporations have dedicated in-house teams of logistics experts to drive operations smoothly. But if you are a small or medium sized business, acquiring the same level of expertise can be very expensive.
Often, SMBEs are driven by the entrepreneurs or a single managerial team, which overlooks all business functions, from procurement to production, sales and marketing. In such cases, it is essential to have basic understanding of how transportation and logistics work in order to make sound business decisions and plan delivery strategies.
What is logistics?
In business terminology, logistics is defined as the commercial activity of transporting goods to the end customers. While the physical transfer of goods from the producer to consumer is termed as “transportation”, logistics as a business function includes planning, efficient management and strategic execution of the transfer or transport.
This article talks about the various types of logistics approaches that businesses take, depending on their size, requirements, and capabilities available or needed. These approaches, called as first, second, third party logistics and so forth are strategies based on the nature of transportation job, complexities involved, need for additional consulting or services etc.
First Party Logistics – 1PL
Logistics arrangement in which the entire transportation process is undertaken by the corporation itself is known as first party logistics. The company is responsible for delivering its goods to all the points of sales i.e. whole sellers and/or retailers. All the resources like vehicles and staff are managed by the company itself.
Second Party Logistics – 2PL
When the producer or seller hires a transport service to shift its goods from the site of production to the point of sale and/or distribution or to other entity involved, it is called second party logistics. In 2PL, the transport agency utilizes its staff and fleet of trucks to transfer goods from one point to another.
Third Party Logistics – 3PL
In third party logistics, the transport service provider offers a wide gamut of solutions beyond mere transfer of goods, like warehousing, packing, inventory management, and freight forwarding activities. These services require special supervision and efficient execution, which is managed by the logistics provider.
Fourth Party Logistics – 4PL
As the logistics requirements become more complex, businesses often outsource major processes and tasks like procurement and storage as well. This type of arrangement involves building and executing supply chain functions, and demands state of the art resources and capabilities on the part of the logistics provider.
Fifth Party Logistics – 5PL
This aims to aggregate logistics solutions in order to deliver optimum cost and supply chain efficiency. 5PL brings together many 3PL service providers and help businesses find the best solutions for their requirements in a timely manner.