“The line between disorder and order lies in logistics…” (Tzu, 496 B.C). Accordingly, if organizations want to succeed and grow in the long-term, they need to cooperate, organize, and manage their logistics very wisely and mitigate its problems and risks simultaneously. In this effort, Logistics Service Providers (LSPs) are essential because they provide a variety of supply chain management solutions that simplify warehouse operations, order processing, and transportation. We’ll delve into the realm of LSPs in this blog, examine their various categories, and compare the benefits and drawbacks of the most popular kinds.
Understanding Logistics Service Providers (LSPs)
Logistics Service Providers Definition
A logistics service provider (LSP) is an organization that focuses on delivering Supply Chain Management (SCM) assistance such as warehouse operations, order processing, and order transportation, etc. A dependable LSP is an essential factor for corporate development and growth. (Callarman, 2020)
Ergo, working with the correct LSP may further help an organization to optimize expeditiously and plan for potential growth. As risky as outsourcing logistics may appear, it is frequently an essential process in the growth curve of any profitable organization — and one which, if you find a suitable LSP, can yield substantial advantages for organizations. LSPs generally endow tremendous inventory management and warehousing solutions, conveyance of orders and international logistics. Depending on the organizational need and request there are a set of different types of LSP, ranking from 1PL up to 6PL. Whereby, the most utilized and requested service degrees can be categorized as third-party logistics (3PL) or fourth-party logistics (4PL) (Kennedy, 2020).
Is a service that offers companies to delegate or hire third-party companies to complete tasks in their supply chain whereas the fourth-party logistics, or 4PL, is a logistics model in which producers’ offload all their logistics and SCM to a single outsourcing supplier (Callarman, 2020).
[Read More: 6 Logistics KPIs Attributes That are Essential]
Degree of Services from 1PL to 6 PL
There are numerous types of ‘party logistics,’ as shown in the figure below, with a range of providers ranging from 1PL to 6PL. The greater the standard and quality of service interaction, the more of a company’s logistics system is controlled by outsourcing organizations as it advances from 1PL to 6PL and even beyond (Kennedy, 2020).
1PL and 2PL Logistics Service Providers
The first is the 1PL, a business or a person that transports and conveys their own products by their own vehicles. Whereby, the 2PL entails a business utilizing a differentiated transport company, referred to as a subcontractor, to convey its products. A 2PL company will be based on equity, meaning that they will own the transportation vehicles.
3PL and 4PL Logistics Service Providers
The 3PL network is a distribution network that focuses on the conveyance of numerous products, but also encompasses a variety of other services such as packaging, terminal services, customs clearance, supplier management, and other services that are provided by 3PL. It also covers logistical IT systems and analytical services for track & trace of the status of various products’ transportation. In addition, it deals with a variety of roadblocks that arise. Also, they are experts in domestic & global warehouse operations, as well as other SCM solutions.
On the other hand, the 4PL is a novel concept that is making its way into the industry, and it entails hiring a supervisor to manage a company’s whole supply chain. To deliver and personalize the optimum customer service, a 4PL will communicate effectively with one or more 3PLs. Hence, the 4PL provider encompasses all the advantages of a 3PL provider, moreover, a 4PL offers a specific invoice approach and a logistical workflow that is unrivaled.
5PL and 6PL Logistics Service Providers
The 5PL is known and referred to as a logistical aggregator, meaning they will pool the requests of 3PLs and others into a granular unit to negotiate lower pricing with various airlines and LSPs. Yet, this kind of logistics isn’t reliant on assets. It generally works throughout all fields without a hitch. 6PL is a comprehensive and partly mechanized supply chain system supervised by Artificial Intelligence (AI) technology, also known as “AI guided SCM.” It is still primarily theoretical. While the notion is still largely theoretical, implementing AI throughout the supply chain would result in significant technological improvements (Logistics, iThink, 2019); (Callarman, 2020).
Table 1 Comparison list of Logistics Service Providers (LSPs) (Omar, 2021)
|Own conveyance of products
|Incorporates variety of services
|Liaise with multiple 3PLs
|Aggregates by polling of multiple PLs in one unite
|Supervision of artificial intelligence
|Increasement of concurrency in sites
|Drives for cost savings
|Efficient supply network
|Only for Small-scale chains
|Requires extra management
|Loss of control
|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).
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.).
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 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.
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