Analysis of 3PL and 4PL Contracts

INDEX

I) Introduction
II) Logistic Outsourcing
III) Different Party Logistics
IV) Different types of Third Party Logistics
V) Different Levels of Outsourcing
VI) Third Party Logistics Contracts
VII) Differences between Third Party and Fourth Party Logistics
VIII) The role of contracts in Third Party Logistics
IX) Fourth Party Logistics Contracts
X) Benefits of Fourth Party Logistics over Third Party Logistics
XI) Conclusion
 I) Introduction

The term ‘logistics’ has its etymological origin in late 19th century from French word
“logistique” (‘loger’ means to lodge) and was first used by Baron de Jomini. Popular dictionaries
define the term as – “1) the organisation of moving, lodging and supplying troops and
equipment. 2) the detailed organisation and implementation of a plan or an operation1” or as "the
detailed coordination of a complex operation involving many people, facilities, or supplies2". So
the platform where the logistical entities are used can be seen as a platform requiring a complex
and specialised set of processes which are to be employed to organise, coordinate and implement
different plans and strategies. In short, logistics can be seen to be in operation where it
necessitates a systematic organisation like in military, business, manufacturing operations,
governments, hospitals, service sectors etc.

II) Logistic Outsourcing

According to Corbett, “outsourcing is a management tool which is used to move an organization

away from the traditional vertically integrated, self-sufficient structure; one that is increasingly
ineffective in today’s hyper-competitive, performance-driven environment”. White and James
defined it as “a contractual relationship between an external vendor and an enterprise in which
the vendor assumes the responsibility for one or more business functions of the enterprise”.
Another definition can be seen to be given by Sangam which defines outsourcing as “handing
over the work formerly executed by an internal work stream to an outside agency that specialises
in these kinds of activities”. In short outsourcing deals with transferring the internal activities to
an agency external to the transferor. The transferees are termed as Logistic Service Providers
(LSP) and they would work upon the outsourced functions. Thus logistic outsourcing is a vital
part of the logistic practises and constitutes a large portion of the logistic spending.

III) Different Party Logistics

Although the third party logistics is known to comprise all other types of known outsourced
LSPs, there are several options under the notions of ‘first’ or ‘second’ or ‘fourth’ party logistics,
available to the business personals which are classified on the basis of the functions performed

1
Oxford Dictionary, Dorling Kindersley and Oxford University Press Ltd., 2007, pg. 478.
2
New Oxford American Dictionary
i.e. the logistic service provided by them. When assessing logistics providers, it is important to
select a provider that aligns with ones businesses strategy and can customise their services to suit
ones needs. Hence the classification can be seen as the following:

a) First Party Logistics (1PL)

A first party logistics provider sends their own products from one location to another, acting as
both the sender and receiver of the materials. It accounts for the two parties benefiting from the
transaction i.e. the manufacturer or supplier and the receiver. There are many different types of
businesses that are classified as 1st party logistics providers like importers and exporters,
manufacturers, retailers, traders and wholesalers and even families and individuals that move
from one place to another, and government departments.

b) Second Party Logistics(2PL)

A second party logistics provider owns the means of transportation they use to distribute their
products. Transportation-based businesses that fall into this category include trucking companies
that lease or own their trucks, airlines that lease or own their planes and shipping lines that lease
or charter their ships.

c) Third Party Logistics (3PL)

As mentioned earlier, the third party logistics umbrellas all the functions of logistic service
providers. Hence the term 3PL is used interchangeably with the other terms such as logistic
outsourcing, contract logistics, logistic alliance and contract distribution which all simply meets
the same definition as that of ‘logistic outsourcing’ as detailed above3. This means that there
would be an actual logistic service provider between the sender and the receiver who performs
certain functions outsourced to it.

d) Fourth Party Logistics (4PL)

The term 4FL was first coined and registered by Accenture as a trademark in 1996. The
increasing complexity of logistics management, coupled with the increasing needs of information
technology, has given the birth to a super manager, called 4PL which integrates customers,

3
See Chapter II.
businesses, and their suppliers. Fourth Party Logistics is essentially employing an overseer for a
company’s entire supply chain. The 4PL’s role is to implement and manage a value creating
business solution through control of time and place utilities and influence on form and
possession utilities within the client organisation as defined by Win. Consequently 4PLs manage
and integrate a series of 3 PLs and their activities.

e) Fifth Party Logistics(5PL)

Much the same as 4PL, 5PL is a new term circulating within the supply chain industry. A 5PL
will plan, organise and implement logistics solutions on behalf of the contracting company with
a focus on utilising the most appropriate technologies. Essentially, a 5PL manages networks of
supply chains with a focus on e-business across all logistic operations, other than 3PLs and the
parent company.

IV) Different types of Third Party Logistics

The different types of 3PL services are:

a) Transportation Based Third Party Logistics Services: These services extend beyond
transportation to offer a comprehensive set of logistics offerings.
b) Warehouse/Distribution Based Third Party Logistics Services: Many 3PLs provide
warehouse along with distribution experience.
c) Shipper/Management Based Third Party Logistics Services: These 3PLs focus on the
management of the shipping process from beginning to end. They provide technology,
such as a transportation management system, and integrated freight management services
to eliminate heavy process and cumbersome features such as claims and accounting.
d) Financial Based Third Party Logistics Services: They provide freight payment and
auditing, cost accounting and control, and tools for monitoring, booking, tracking,
tracing, and managing inventory.
e) Information-based firms Third Party Logistics Services: In addition to the basic logistics
services offered at the standard level, the service developer 3PL offers support in IT,
security, and product tracking. This means they can further ensure the delivery of your
package is safe and on time.
 f) Customer Adapter Third Party Logistic Services: Customer adapter 3PL’s are different in
that they take over and run the existing logistics operation from the partner company
rather than creating their own.
g) Customer Developer Third Party Logistic Services: At this level, the customer developer
3PL will not only inherit the logistics operation of their partner company, but they will
also adapt their own systems. That means that the 3PL in essence becomes the entire
logistics department as opposed to simply offering services.
V) Different Levels of Outsourcing

The following are the different types of levels of outsourcing:

a) Transactional Outsourcing: Based on transactions, with no long term contracts and no

bonding between the 3PL and the outsourcing company.
b) Tactical Outsourcing: This level of outsourcing is on a long term basis with negotiated
contracts. There is also an integrated IT system to facilitate free information flow and
create supply chain visibility.
c) Strategic Outsourcing: Based on long-term relationships with successful outcomes, 3PL
companies become partners in supply chain management and establish transactional
transparency.
VI) Differences between Third Party and Fourth Party Logistics

Win had differentiated the 4PL and 3PL in the following ways

1) Asset basis- 3PLs are asset based (e.g. Warehouse/ transport), while 4PLs are not asset
based (except perhaps information technology systems).
2) Accountability- In 3PLs the accountability is only partial (in conjunction with internal
resources &/or the other 3PL’s). In 4PLs, there is total singular accountability (as if
internal).
3) Role- The role of 3PLs extends to Logistics (typically) while that of 4PLs includes
logistics, supply & demand chain integration.
4) Business impact- While 3PLs influences time & place utilities, the 4PLs controls time &
place utilities while also influencing form & possession utilities.
 5) Performance/success measurement- Cost is the measure for success/performance of 3PLs
while value creation within client organisation is the success measurement in 4PLs.
6) Activity- While the 3PLs act as logistic performers, the 4PLs are found to be logistic
consultants.
VII) Third Party Logistics Contracts

Use of third-party logistics (3PL) contracts has grown rapidly since 1990. They play a necessary
role in defining the terms and securing excellent results in logistic industries. 3PL providers are
basically integrated, contract-based logistics providers. The relationship between shippers and
3PL providers can be viewed as a principal–agent relationship. Contemporary 3PL arrangements
are based on formal (both short- and long-term) contractual relations as opposed to spot
purchases of logistics services. According to the works of Andersson and Norman, 2002, Boyson
et al., 1999 and Logan, 2000, a typical 3PL contract includes:

a) contract term (i.e. number of years);

b) costs per activity;
c) service and activities description;
d) service levels;
e) bonus payment for excellent performance;
f) penalty clauses for service failures;
g) allocation of roles and responsibilities, risks and insurance costs and
h) contract termination clause.
VIII) The role of contracts in Third Party Logistics

The importance of these contracts can be seen as follows:

i. Liability and Consequential Damages

The relationship between the outsourcing company and the LSP depends greatly upon
determining the extend of liabilities and the conditions for bearing of damages. Thus, a 3PL
contract should have the following details:

a) Exact parameters for storage––temperature, humidity, movement, storage time, and so

on.
 b) A reporting system to indicate how these parameters is to be adhered to, hence resulting
in less potential exposure.
c) Contingency plans if those parameters fail for a certain period of time i.e. whether the
affected product is to be moved to coolers, transferred to another company, or discarded.
ii. Contract Term and Termination Obligations

The parties need to sign dedicated contracts with staff and facilities to build customized
infrastructure, secure equipment, capital expenditures, and real estate (be it leased, purchased or
built), and a specific obligation from the company to do so is needed which acts as a defined
term of service in the contract and how obligations are to be addressed at the end of the business
relationship or contract term, e.g., equipment leases, real estate, fixtures. A defined term allows
the financial sector to anticipate costs accurately; allowing the company to grow sustainably and
also supports the business relationship with 3PL provider.

iii. Warehouse Lein

The LSP can exercise a warehouse lien which extends to the entire product in a warehouse,
giving the 3PL provider flexibility for satisfying the outstanding debt by the outsourcing
company. A warehouse lien in the contract offers a smart solution and provides freedom to
liquidate a portion of product under lein to satisfy the debt. In bankruptcy, this process must go
through bankruptcy court to enforce the lien, providing a distinct timeline to keep everyone on
the same page.

iv. Compensation

The amount of compensation and the determinants of compensation are to be negotiated by the
company and the LSPs at the time of entering the contract itself. The service provided by the
LSP, extend of benefits, time duration of service are all factors that need to be analysed before
fixing the compensation rate.

IX) Fourth Party Logistics Contracts

It must be noted that the fourth party logistics is usually the manager and integrator of several
third party logistics provider. Thus, the contracts entered between a third party logistics provider
and fourth party logistics manager can be seen to be the subject of studies upon Fourth Party
Logistics Contracts. Langley and Allen (2005) affirmed that the 3PL, by incorporating new
activities required by the market, has changed in the last years, in a movement that demonstrate
progress and maturity of the operators. However, clients expect to obtain more ability in service
development, relationship improvement, relevance in information and involvement in the rules
and concepts of integration in the supply chain from the 3PL, as well as building expertise and
dedicated operations which have paved the way to the development of 4 PL contracts.

X) Benefits of Fourth Party Logistics over Third Party Logistics

a) The 4PL contracts must suggest how to reconfigure in terms of space and functionality
the supply chain, to cut costs and improve services. The 4PL develops intense knowledge
and logistics competence, besides providing studies for their client to improve the chain.
Thus, the 4PL suggests, designs and implements new solutions in the supply chain.
b) The innovation is in the fact that the 4PL presents other priorities in relation to the
traditional logistics company.
c) A candidate to 4PL has to invest in their image and reputation, specialize in certain
activities and sectors and find new ways to demonstrate their reliability.
d) The 4PL takes part in the coordination of the chain, while the traditional 3PL simply
provides operational services.
e) Becoming a 4PL lifts the traditional 3PL to a position of coordinator of the product flow,
instead of simply operating the physical transportation of the product.
f) The 3PL model requires more assets than the 4PL, since the latter is more dedicated to
the coordination process.
XI) Conclusion

Analysing the role played by the Logistics spectrum in conducting organised activities, it is
impeccably true that the newest innovations to logistics in the forms of the 3PLs and 4Pls has
broadened the scope and pushed forward the ease with which an organisation functions.
Transparency is the key for 4PLs that may also function with a 3PL. They must proactively work
with customers to demonstrate the checks and balances they put in place, such as creating
confidentiality agreements that prohibit the sharing of information and data from the customer's
other 3PLs and transportation providers. For this, the credentials of 3PL and 4PL contracts are
important. Building trust as a 3PL helps smooth the transition to a 4PL function.