Investing in a logistics partner often requires a crash course in acronyms. Companies talk at length about 3PLs, 4PLs, and other equally confusing designations, sprinkling in terms such as "brokers" and "brokerages." It's enough to make anyone's head spin.
In essence, you only need to understand the concept of a logistics service provider (LSP) and a broker; all other terms are superfluous. For instance, a third-party logistics (3PL) company is typically the same thing as an LSP. The same holds true for a fourth-party logistics (4PL) company, a relatively recent outcropping that further muddies the logistics waters.
You can often tell when someone started in the logistics world based on his or her preferred terminology (seasoned veterans tend to stick with 3PL, and 4PL is particularly common in Europe). Industry newcomers opt for the more sophisticated LSP designation, but they’re effectively referring to the same thing: a company that offers holistically managed transportation solutions for its clients.
On the other hand, a broker is a broker — and always has been. Brokers purchase transportation from mode-specific carriers, such as a less-than-truckload or truckload provider. They make a profit by marking up the rate, essentially functioning as transactional agents rather than true partners.
Some companies enjoy fruitful relationships with brokers, and others lean on LSPs to handle their logistics needs. It’s a matter of preference and the specific requirements of the companies in question. To cut through the confusion and determine whether a broker or an LSP meets your needs, ask yourself the following questions:
-How often do you send out shipments?
A lot of the debate over whether to use a broker or an LSP service boils down to the size of your company. Smaller organizations that send out a handful of shipments every month generally can get everything they need from a traditional broker. The broker is able to help them get the best rates and carriers for their needs, serving as a middleman to coordinate getting products from point A to point B.
For a larger organization that sends out dozens of shipments a day, a broker might not cover all the bases. LSPs offer a more full-service solution, taking care of your entire supply chain without the risk of anything slipping through the cracks. If your daily shipment log makes your head spin, an LSP can help simplify things by taking tasks off your plate.
-How much visibility does your business need of your transportation network?
Various stakeholders — customer service, sales, manufacturing, and buyers — demand real-time information on shipments. The more they know about estimated arrival times, options for expedited shipping, and related costs, the more comfortable they feel working with an organization.
It takes a lot of time and energy to gather and accurately present this insight, even with technology picking up a lot of the slack. An advanced LSP is able to accurately collect and analyze this information, eliminating the burden and the high costs of delivering unreliable data to stakeholders. Companies rarely have the external data, modeling tools, or capability to run a sound logistical analysis, but a reputable LSP can provide this sort of robust data interpretation on an ongoing basis.
Plenty of companies are content to send out their shipments without worrying about the numerous elements involved — aside from whether it arrived on time and to the correct destination. If you care more about your products getting from point to point than about perfecting your supply chain, a broker is probably a better fit.
-Are freight expenses pinching your profit margins?
Feeling pinched as it relates to logistics costs? As companies grow, their freight expenses can take unexpected twists and turns. Changes in geography, commodity type, order and shipment size, volume, service expectations, and other factors can all cause freight costs to shift.
Depending on the complexity of the network, it can be difficult to accurately determine the true costs to serve your customers without help from sophisticated analytics tools. And once you’ve diagnosed any freight expense problems, managing those issues is another matter entirely.
Working with a broker to handle a limited quantity of shipments can keep things moving without problems. Provided your expenses aren't hampering your revenue, there's no need to change things.
But if your customers are requesting supply chain savings to lower costs, an LSP can help you take control of your transportation network while creating confidence in your ability to deliver on time and within budget. There's less unpredictability when you're working with an LSP, as you aren't at the mercy of the spot market every time you have to coordinate a job.
-Is your in-house team struggling to juggle your freight?
It can be a challenge to maintain the flow of products to retailers, and it's easy for one person to become quickly overwhelmed when asked to juggle a growing company's evolving freight and shipping trends. When your freight expert is buried in work, the result is often poor customer service and rising costs.
Putting the burden on a single person’s shoulders might not make sense, which is where an LSP can serve as a true partner. LSPs can take on some of the most complex aspects of logistics work, avoiding common hurdles while empowering your team to work more efficiently. They effectively serve as an extension of your in-house team, meaning you don't need to hire new employees.
If your company has a small freight team — or is considering hiring some new team members to stay on top of your shipping needs — a skilled broker can keep things moving. If you're experiencing some growing pains but feel like you can take control of the situation with a little bit of assistance, a broker should be able to help you remedy the problem.
Making decisions regarding company logistics doesn’t need to involve wading through a swamp of acronyms or diving headlong into perplexing terminology. Simply weigh your current — and anticipated — needs with what you might be able to achieve through a business affiliation with an LSP or a broker. In relatively little time, you’ll recognize which path makes the most sense for your organization.
Joe Egertson is the CEO of Sheer Logistics, which he founded in 2009.