concept of Third Party Logistics (3PL) is well understood and has been adopted
widely. Then came the concept of Fourth Party Logistics (4PL), and now Fifth
Party Logistics (5PL). Is this just a new sales pitch from the logistics
companies to secure new business? What exactly is 5PL and how does it differ
from the traditional 3PL & 4PL logistics services.
A summary of the current logistics models before we start exploring the 5PL concept is as follows:
1PL - The cargo owner does his own transport with own fleet of vehicles. Many fast moving consumer goods (FMCG) manufacturers in the 1980s owned their own transport fleet for national distribution to retail chains.
2PL - Carriers. A transport company that has a fleet of vehicles that is used to deliver customer goods. Sometimes confusingly referred to in South Africa as “logistics companies”, but without any value-added service beyond delivering goods, they are just transport companies.
3PL - Logistics Service Provider. The difference between a 2PL and a 3PL is that a 3PL provider is always integrated in the customer's system. A company's use of third-party businesses to outsource elements of the company’s distribution and fulfilment services to their customers.
4PL - “Lead Logistics Providers and Consultants” manage the whole supply chain management function on behalf of a client. A 4PL provider has no own transport assets or warehouse capacity. They have an allocative and integration function within a supply chain, with the aim of increasing the efficiency for their client by managing the clients supply chain and all 3PLs contracted to deliver the clients products to market.
So, if 4PLs service is to deliver a start-to-end streamlined solution to design and execute all elements of a customers supply chain, then what possible extra value can be brought to the table by a 5PL?
There is no consensus on what 5PL means, but the central ethos is its commitment to collaboration and to obtain an increased degree of resource utilization to achieve savings and to open opportunities to secure the best possible solution at minimum cost. Therefore, the 5PL must be non-asset based, and it must also work seamlessly across all disciplines. However, many 4PL logistics companies will claim that this is exactly what they currently do.
Further research of the literature on 5PLs detailsvarying approaches, ranging from simpli?ed 5PL model interpretation (including lower logistics levels which are the same as 4PL activities) to a full-service e-business market capable of managing all links in the e-commerce supply chain.
As the lower level is identical to 4PL activities, it is difficult to distinguish between the 4PL and 5PL concept. The distinguishing characteristics for a 5PL, then, would appear to be at the higher level. This is where the 5PL ability claims to be able to integrate all the different logistics systems across the supply chain. Therefore, a key element is the effective integration of IT and computer systems.
Other terms used for providers who manage all parties in the supply chain in an e-business market are ‘virtual logistics service providers’. The major tasks of 5PL companies include mapping and reengineering the supply chain, the 4PL functions (integration and control of transport, handling, warehousing, etc) and providing integrated information systems to ensure real-time visibility and control of the entire supply chain.
This brings us to another trendy concept: the visibility and analytics networks (VANs). This concept was introduced to address common challenges identified across international supply chains, especially in health logistics. Leading supply chain organisations in the private sector have implemented VANs, often referred to as ‘Control Towers’, to improve the cost effectiveness and agility of their supply chains. The goal of the VAN Project is to use design approaches and leading practices to improve end-to-end visibility of the most relevant supply chain information and enable this information to be used in a way that improves beneficiary outcomes, by using integrated and closed-loop supply chain management practices. The VAN approach is proposed and implemented by leading consulting companies, while the 5PL approach is implemented by logistics companies in a consulting capacity.
The common theme to both approaches is that systems integration across the different stakeholder IT systems and their respective supply chains is urgently needed to optimise and create effective supply chains.
companies attempted to optimise their supply chains with enterprise
resource programs (ERPs), such as material requirements planning (MRP I &
MRP II). MRP was a push system. Another improvement to increase efficiency of
the MRP approach was the use of the Japanese’s “Just in Time “(JIT) systems.
This was a pull system. After this came the focus of improved effectiveness,
through the application of the “Theory of Constraints “(TOC). This was a
push/pull system which managed the supply chain around the inherent bottle-neck
(or multiple bottle-necks) found in all supply chains.
The common weakness regarding all these approaches was that normally it was implemented and applied from within the silo of each company. The JIT systems had the closest integration, in which integration between auto assembly lines and component manufacturers had to implement the planning system of the client (such as Toyota and Nissan) if they wanted to be a supplier. With globalisation and the integration of supply chains, the use of 3PLs and then 4PLs to obtain logistics efficiencies across regions, a single common approach such as JIT could no longer be applied, because the whole value supply chain was no longer in the control of the single original equipment maker (OEM).
We now have many supply chains that are running different legacy software, each with their own approach on how to balance demand and supply, found across single and multiple interconnected supply chains. And they are surprisingly not working.
Therefore I believe that the 5PL approach is not just another sales pitch, but is a serious attempt to increase efficiencies by integrating dysfunctional supply chains using the latest technology. The question now is who is best qualified to achieve the required results and lead the implementation pack regarding creating integrated Logistics IT systems across supply chains. Will it be dedicated consulting logistics companies, the more traditional consulting companies using best practise, or the IT system solution companies? They are all currently offering client’s solutions in this race to integrate supply chains using the latest IT technology.
And then there is the question of how procurement needs to be involved early in the outsourcing of logistics. This is required to create a strategic procurement strategy that will enable your organisation to leverage these new opportunities, without being locked into the incorrect type of contract or software solution. But that discussion is for another blog…
Contributed by: Dion de Gruchy, an Associate Director: SCM Advisory at Bespoke
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