3PL vs 4PL: The differences between logistics services
Brands often manage fulfillment by leveraging one of several thousand third-party logistics providers (3PL) and as of the past five years, fourth-party logistics providers (4PL). But what exactly is the difference between the two?
Understanding the differences between 3PLs and 4PLs can be challenging as, at a fundamental level, they do the same thing: receive and store inventory, pick, pack, and ship orders. However, differences emerge when you look at their operating model and scale. Let's dive in and explore the differences and benefits of each logistics model.
What is a 3PL?
A 3PL is a logistics provider that manages and executes various functions, such as transportation, warehousing, and distribution. These companies are often seen as external partners that help streamline operations and reduce costs for their clients. Some common services offered by a 3PL include transportation management, inventory management, order fulfillment, warehousing, and distribution.
Unlike first-party logistics or second-party logistics (working with another company's resources), a 3PL is an independent service provider that specializes in managing logistics operations for multiple clients. Over the past decade, a new model has emerged known as a 4PL which provides a network of 3PLs that brands can work with and technology to power it.
Types of 3PLs
There are two types of 3PL models: entrepreneurial and enterprise. An entrepreneurial 3PL primarily focuses on e-commerce fulfillment for small to medium brands. Brands use these 3PLs as their primary fulfillment provider to support all sales channels, and they offer general operations guidance to brands that typically lack in-house operations expertise.
An Enterprise 3PL offers a full suite of services including fulfillment and warehousing with additional core competencies in other areas such as transportation, freight management, payment processing, and IT services. Brands typically use them as their primary fulfillment provider, transportation manager, and wholesale distributor.
These providers have been in business for generations, operate very large domestic and often global networks, and work primarily with large Fortune 500-type brands. They promote omni-channel distribution, customized operations, and a global reach. They can do just about anything a brand needs and have the resources to support large enterprises at scale.
What is a 4PL?
A 4PL is essentially a technology layer that sits on top of a network of 3PLs doing the physical work. They act as a single point of contact and create a digital network of 3PLs. In other words, they do not own warehouses or perform fulfillment services themselves, instead they outsource both to 3PLs.
4PLs provide 3PLs the ability to farm out excess space and offer more advanced technology to customers.
How they operate
The 4PLs vet the 3PL partner and assist brands with identifying, selecting, and integrating with the provider that is best suited for them, often owning the technology (WMS), account management, and billing directly. It’s important to note that the brand engages directly with the 4PL whose technology sits between them and the supporting warehouse provider(s).
Brands can use these providers to quickly scale up and down their operations. They integrate quickly using a single technology platform and often have flexible contract terms. In a world increasingly dominated by on-demand and shared resources, this model makes brands feel comfortable testing ideas they have, knowing they can move on if it does not work.
Differences between 3PL and 4PL providers
While both 3PL and 4PLs provide the same core services, they do it in different ways. Here are some key differences:
Scope of services: While 3PLs focus on specific logistics functions such as transportation, warehousing, or order fulfillment, 4PLs oversee multiple 3PLs and other service providers.
Oversight: While 3PLs are more directly involved in the execution of the fulfillment services being performed, 4PLs function more as an integrator that assembles resources, capabilities, and technology to support the customer.
Ownership: The 3PL will be directly responsible for the day-to-day operations of the warehouse that they will own or lease directly, while 4PLs simply manage 3PLs on behalf of customers and have less say in what or how things are done.
Advantages of working with a 3PL
Outsourcing logistics services to a 3PL offers several benefits. If a business is looking for a long-term partner to serve as its primary warehouse and fulfillment provider, a 3PL is the right fit.
Partnership
Working directly with a 3PL allows you to develop a relationship with the people who are responsible for the important final touchpoint between your product and the customer. A well-functioning partnership will improve over time and the 3PL will be able to provide feedback to your team as they become familiar with your operation.
Accountability
Working directly with a 3PL increases the accountability of who is responsible for warehouse and fulfillment. You are able to communicate directly with the people who are performing the services and work with them to discuss and solve problems when they arise.
Direct Support
Working directly with a 3PL gives you direct access to the people who are performing the key warehouse and fulfillment services. With a 4PL model, there are multiple layers between yourself and who is performing the services you have outsourced which can lead to miscommunication and increase the time between when a problem arises and when it is resolved given the web of people from different organizations that has to be navigated.
Why a 3PL is the right choice for your business
Choosing between a 3PL vs 4PL depends on factors such as supply chain complexity, strategic objectives, technology requirements, scalability, and cost considerations. Understanding your specific needs and evaluating potential partners based on these factors will help determine whether a 3PL or 4PL is right for your business.
Factors to consider when selecting a logistics partner:
Complexity of supply chain: Assess the complexity of your supply chain, including the number of service providers involved, geographic reach, and the level of integration required.
Strategic objectives: Determine your strategic goals and whether you will frequently need a partner that you are able to communicate directly with.
Technology and expertise: Evaluate the technology capabilities and industry expertise of potential partners to ensure they align with your business needs.
Scalability and flexibility: Consider the scalability and flexibility of logistics solutions offered by each provider to accommodate future growth and changes in demand.
Cost considerations: Compare the cost structures of providers, considering both upfront costs and long-term value.
As businesses navigate the evolving landscape of supply chain management, the role of third-party logistics providers continues to evolve. By selecting the right logistics partner, businesses can unlock new opportunities, mitigate risks, and thrive in today's dynamic and competitive marketplace.
