Keeping up with the latest industry terminology can be difficult, but it’s important to understand how the different types of supply chain operators are classified.
Logistics companies are categorised by the term ‘party logistics’ – usually shortened to ‘PL’ – which denotes their particular status and gives you an idea of what they tend to get up to.
A 1PL, or first-party logistics, is quite simply a company, or even an individual, with goods that need to be transported from one place to another. It’s used to denote both the organisation with which the products originate and the one that will receive them after they have been transported.
A 2PL is the business that handles the transportation and, critically as far as the term is concerned, owns the asset that does the transporting. In the road-going commercial vehicle world, 2PL refers to haulage companies – but specifically those which lease or own their own trucks and are involved in the hands-on business of carrying cargo from one place to another. It also applies to shipping companies with fleets of vessels expressly for transporting freight and to airlines that own, lease or charter cargo planes.
That’s the simple end of the spectrum, but 3PL is a more elevated concept. The term indicates a business that doesn’t actually own any assets but acts as a brokerage to arrange the movement of cargo. “3PLs are freight forwarders who put together services using various modes of transport – other people’s assets – be it trucks, planes or ships,” says Steve Walker, founder of freight forwarder and logistics specialist SWG, “in essence, it’s moving the freight on particular routes that various providers specialise in.”
“You can apply the same logic as you have with air freight and sea freight to road freight,” adds Rasmus Pedersen, SWG’s operation manager, “in this case, you could consider a 3PL a haulage company, but one that is essentially a broker. They don’t own any vehicles, but what they do is subcontract to independent haulage companies, who are the 2PLs – a local guy with a truck and a trailer.
“In this case, a 3PL could designate themselves as a trucking company, and they could have maybe 10% of their own trucks, but what they do is subcontract their freight to available trucking companies who don’t have clients.
“If you look at an independent trucking company who just have their own trucks and their own trailers, they most likely have their own [separate] clients, but their biggest client may be a freight forwarder, who designates themselves as a haulage provider. But that haulage provider may not even own a single truck – and that is a 3PL.”
The 3PL method is a well-established way of doing business in the logistics industry, but 4PLs take things a step further by reporting on the minutiae of the logistics process. Where a 3PL is essentially a broker, a 4PL is a consultant that provides the commissioning company with a detailed breakdown of the specifics of the freight forwarding process, which allows them to make more granular decisions about transporting their goods.
“A 4PL is a logistic service provider who acts on behalf of a client who buys freight; that means they can negotiate the rate and choose the best service with the freight forwarder, or the shipping line,” says Pedersen, “in essence, they’re acting on behalf of a client, on a consultancy basis. They report back on the performance: the best way to route the shipments, what’s the best way of buying the product, should it go by road, sea freight or air freight? They identify opportunities where you can save money by rerouting or by optimising your freight combination.
“It could be, for example, that you have a 4PL who sees that the client is using two freight forwarders from the same origin, where it would be opportune to just use one, because that freight company will consolidate more shipments, thereby saving money on behalf of the client.”
“A 3PL moves the freight; a 4PL reports on it,” adds Walker, “if it’s set up correctly, a 4PL will report that if a palette of parts has to be in the Midlands by a certain date in January [and let the client know] if it looks like it’s going to be late, if it hasn’t left the States, for example. Traffic lights [in the 4PL company’s software] start to change from green, to amber, to red; then someone can make a decision as to whether or not that becomes part air freight, for example.”
A more recent phenomenon in the logistics industry, Walker believes that the additional data provided by 4PLs will become more useful to companies in future, particularly when it comes to the prospect of environmental reporting.
“There will come a point where carbon footprint will become a reportable issue; it will become something that governments will subsequently derive revenue from. If a 4PL has all the shipments that a customer moves, they can give them a very precise carbon footprint calculation and, month in, month out, it will be discussed at a boardroom table and they [members of the board] will want to see it driven down.
“When you think that a palette of 450kg moving from Hong Kong to London on a 747 has a larger footprint than the same journey on an A380, someone moving a lot of freight might start to think about that. A manufacturer has their own problems in terms of keeping their carbon footprint down, but if they’re using carriers, they should put the pressure on them to come up with innovative ways [of reducing their carbon footprint]. Could it come by road, by sea, by air? Could they use bigger trucks rather than individual shipments? There are so many ways that it can be done.
“Transport is coming up with new innovation all the time, and you’ve got to review everything you do on an annual basis and ask carriers ‘what innovation are you bringing me to make a difference to the business?’”