The acronyms 3PL and 4PL are commonly used when talking about logistics providers, but what do they actually mean? What difference does it make whether your company partners with one or the other? In this article, we explain both terms and highlight their differences, so you can find the perfect logistics solution for your business needs.
3PL – Third-Party Logistics
3PL simply means that a third party (aside from shipper and carrier) is involved in a company’s supply chain. In a 3PL model, a firm’s management outsources logistics to third party providers while maintaining operational overseeing themselves. The logistics provider can perform a number of services, such as shipping, boxing and packaging, and acts as an intermediary between the business itself and the carrier service. Third party logistics providers do not oversee the entire supply chain or work on strategic decisions, but they provide valuable infrastructure and assets like warehouses, motor pool and packaging facilities.
3PL services are mostly employed when supply chain management becomes too complex to manage internally. Most third-party logistics companies offer a wide range of supply chain services, including transportation, warehousing, cross docking, inventory management etc, Fulfilment companies usually have a lot of experience in international transportation and work for multiple clients across different industries and countries. Using their experience, technology, knowhow and economies of scale, they can offer low prices and shipping rates.
Advantages and disadvantages of 3PL
- 3PL services are highly cost-effective. They specialize in logistics and have the necessary infrastructure and resource network to reduce costs through their business relationships and bulk discounts.
- Fulfilment services are also quick to respond to customer demands and can deliver products on time by the means of thorough inventory management. As customers become more and more used to overnight shipping, this can be extremely important.
- 3PL providers offer a great deal of flexibility. They allow clients to scale operations based on inventory needs during market fluctuations.
- The biggest disadvantage of 3PL services is the lack of direct oversight and control. After all, every decision is still made by the client company; the logistics company merely acts as an outsourced service provider. Keeping an eye on the entire supply chain is hard work and requires a lot of diligence on the part of the client.
- 3PL can also create an unhealthy degree of dependency. Once a company outsources such a large portion of its business, it can be difficult to switch to another, maybe better or cheaper business partner. The same is true if the company in question wants to return to in-house operations. Obviously, this only becomes an issue if there are problems with the current 3PL provider.
4PL – Fourth Party Logistics
A fourth party logistics provider adds a whole new layer to supply chain management. Rather than simply outsourcing part of the supply chain to another company, clients of 4PL businesses hand over control of the entire logistics system, outsourcing both organization and management to an external provider. The 4PL then acts as a single junction or touchpoint between all aspects of the supply chain and the client company, taking on more responsibility. Fourth party logistics providers act as advisors and are directly accountable for supply chain management (unlike 3PL providers).
4PL logistics companies usually do not own transportation or warehouse assets. They coordinate the aspects of the supply chain with vendors and 3PL companies, hiring subcontractors as needed. The 4PL provider manages and optimizes the entire system, so to speak, and offers a strategic relationship at the highest level. The goal is to simplify and streamline the entire supply chain for the client who can now focus on core competencies, having handed off everything related to supply chain functions to the fourth party logistics company.
Advantages and disadvantages of 4PL
- 4PL services perform many more functions than a 3PL. They can act almost independently and can, therefore, achieve much higher levels of optimization.
- Due to the nature of the relationship, client companies have less control over their supply chain operation, as it is handed over to the 4PL partner. This is can be both an advantage and a disadvantage, depending on the situation.
- As the 4PL itself relies on 3PLs, it represents an additional cost centre: the client now has to pay both the 4PL and the 3PL partner. These extra expenses can be a major hurdle for small companies and start-ups.
What’s right for my company?
Whether a partnership with a 3PL or 4PL partner is best depends on a number of factors. Both allow the client company to save money as no investment in warehouses, technology, transportation and staff is necessary to maintain the supply chain.
3PLs are great at supporting and executing supply chain strategies. They require an organization that has a solid, high-performance operation already in place as well as good international management and oversight. As they are generally cost-effective, they provide an immediate level of scale for small companies.
4PLs are more expensive but also offer additional services. As they are usually non-asset based, they are sure to pick the best supplier, rather than using their own assets. Their knowhow and technology delivers a higher level of visibility and insight into the supply chain, providing data for strategical analysis.
Both 3PL and 4PL have many advantages. They help manage complex supply chain tasks and allow companies to respond faster to customer expectations. They also reduce costs through economies of scale on a different level than the client company could achieve on its own. Third party logistics providers focus on day-to-day operations, while fourth party providers function at the optimization and integration level of supply chain management. Generally speaking, 3PL providers are best suited for small to medium sized businesses, while 4PL providers are better for medium to large businesses.
Contact us for more information
If you want to know more about 3PL and 4PL services or have any other questions, feel free to contact us. We at BIZ Courier offer a wide range of services, so let us help you find the solution that best fits your company’s needs. We will make sure you get the best return on your investment!