The markets that logistics service providers (LSPs) serve are changing rapidly. (For a summary of some of the key trends and changes, see the associated sidebar.) In response, both users and providers have been on a relentless drive for innovation and for expansion of available logistics capabilities. As a result, third-party logistics providers (3PL) and fourth-party logistics providers (4PL) have been making significant additions to the range and scope of services that they offer to shippers and other customers.
The evolving roles of LSPs
As the term “supply chain” continues to advance, there have been noticeable changes in many of the terminologies that are used to define various types of logistics service providers. Some of the most widely recognized of these are summarized below.
It is generally accepted that the term “third-party logistics provider” came into being in the 1970s and 1980s. It’s not a coincidence that this timeframe coincides with the legislated deregulation of several transportation sectors in the United States, such as trucking (less-than-truckload and truckload), rail, and air. The deregulated business environment expanded opportunities for logistics service providers to become more market- and customer-focused and created more incentives for LSPs to craft service offerings that better fit their customers’ logistics and supply chain needs.
In response to customer requests and in pursuit of new market opportunities, 3PLs embarked on expansions of their business models beyond what may have been the more limited province of asset-based services. While there are still some identifiable “pure-play” 3PLs, most of today’s 3PL organizations represent an outgrowth and expansion of logistics services from more traditional providers of asset-based logistics services. A quick internet search will validate the large numbers of organizations that operate in the 3PL category. New entrants continue to emerge from former logistics divisions of shipper organizations, wholesalers and distributors, IT organizations, and various international enterprises, to name just a few.
In 1996, Accenture invented and trademarked the term “fourth-party logistics” (4PL) provider to describe “a supply chain integrator that assembles and manages the resources, capabilities, and technology of its own organization with those of complementary service providers to deliver a comprehensive supply chain solution.” Many of these 4PLs are extensions of more traditional LSP organizations, while others have evolved from consulting organizations, firms specializing in data management and analytics, and former logistics divisions of shipper organizations.
In comparison with 3PLs, it is interesting to note that an internet search for 4PL organizations does not turn up much in the way of organized or comprehensive listings of primary participants in this sector. A logical explanation is that this is due to the significant breadth and diversity of the types of services available in general from 4PLs such as lead logistics provider (LLP), consulting/advisory services, advanced IT services, risk management, “control tower” services, and others.
LLP responsibilities are particularly interesting as they require 4PLs to use their high levels of visibility, real-time information, communication abilities, and broad knowledge to align 3PLs, customers, and service providers. A 4PL not only draws on the data it collects itself, it also can draw on data gathered from other supply chain partners. The visibility that is created from that data plays a crucial role in allowing customers and 4PLs to provide seamless supply chain services, manage exceptions, and remove costs and inefficiencies from the supply chain.
Now, some logistics service providers are expanding their offerings to offer the following innovative capabilities:
These innovations and offerings are frequently accompanied by the introduction of a newer term: “5PL.” At face value, these example 5PL capabilities may appear to be similar to those that may be ascribed to many 4PLs. So, a logical next question is: What exactly is a 5PL, and how does it differ from a 3PL and a 4PL? More generally, where in the lexicon of LSPs does the 5PL exist, and how is it unique and different from other types of LSPs? Or, is it perhaps too soon to expect a more succinct and widely agreed upon definition of a 5PL?
The future evolution of LSPs also will be impacted by the current trend toward thinking of supply chains as “ecosystems” instead of linear systems or processes. (See Figure 1.) Essentially, supply chains are evolving into complex international networks that include interlinked companies that interact and collaborate with each other to ultimately create value for their end-user customers or consumers. In addition to including traditional supply chain participants such as suppliers, manufacturers, and distributors, these ecosystems are characterized by the alignment and convergence of digital and physical flows via the internet of things, sensing devices, blockchain, and overall digitization of the supply chain. As this new and innovative context for supply chain continues to gain acceptance, there will be significant opportunities for LSPs to respond and participate accordingly.
[Figure 1] Evolution of supply chain management
Enlarge this image
Logistics service providers and their clients are facing some very significant changes in their supply chain environments. Just a few of those include:
• “Blurring” of definitions. Over time, the distinctions between terms such as less-than-truckload (LTL), truckload (TL), and parcel have blurred or, in some instances, disappeared. In the past, these terms were suitable descriptors of specific types of “pure-play” service providers, but today most organizations have materially broadened the scope of their service offerings.
• Asset- vs. nonasset-based services. Historically, the predominant model for LSPs was the “asset-based” model where the provider served its customers through use of its own assets and services. In recent decades, however, there has been significant growth and development of “nonasset-based” LSPs that rely on relationships with capable asset-based providers to serve their customers. Even though there are a growing number of products that have become digitized or otherwise electronically transformed (such as books, music, software, and 3D-printed parts and products), most supply chains still depend on capable asset-based services to manage the logistical flows of physical products.
• Greatly enhanced supply chain technologies. Supply chain practices have been greatly impacted by newer technologies such as cloud-based solutions, software-as-a-service (SaaS) platforms, advanced analytics, and 5G broadband networks. Findings from annual 3PL studies conducted by Penn State, Infosys, and Penske confirm that shippers overwhelmingly agree that information technologies are necessary elements of 3PL expertise.
• The “Amazon effect.” While there are many ways to define this term, it is clear that the presence of Amazon and the overall growth of the omnichannel phenomenon have had disruptive impacts on more traditional supply chains. In turn, this has created a need for individual LSPs to reconsider their operating strategies and to make appropriate changes.
• COVID-19. Regrettably, any discussion of the future of supply chains and the roles of 3PLs and 4PLs must consider the impacts of COVID-19. As the effects of this pandemic have become significantly intertwined with global economic and political issues, it is certain that there will be long-lasting and likely fundamental changes ahead for supply chains.