You want your business to have a competitive edge. Logistics is important. Oftentimes, it’s tough for businesses to choose third-party logistics (3PL) or fourth-party logistics (4PL). If the right choice is not made, it could cost millions and negatively impact customer service, which ultimately affects revenue. Herein lies the information you need to help you decide which one is of more value to your business, 3PL vs. 4 PL, the ultimate guide and comparison.

How The Logistics Supply Chain Works

Before we compare the 3PL and 4PL, it’s important to understand the strategy behind each of the five supply chains: 1PL, 2PL, 3PL, 4PL, 5PL.

1PL

A producer delivers a product to its destination to sell. In this scenario, the producer is doing it all himself.

2PL

A courier delivers the product to the destination for the producer. In this scenario, the producer hires transportation to move the product.

3PL

A fulfilment company with a fleet of trucks cartons the product and transports it to the destination for the producer. In this scenario, additional outsourcing happens, such as someone overseeing the transportation and logistics while the producer maintains management oversight over the entire process.

4PL

A logistics company strategically manages a 3PL on behalf of the producer to package and deliver the product to the destination. In this scenario, outsourcing is also for managing logistics and the execution across the supply chain.

5PL

A logistics company manages the producer’s complete supply chain network from production to delivery. In this scenario, the outsourced entity provides management oversight and logistics from the beginning of production to the delivery of the product.

As logistic models progress, more and more of the logistics function is in the hands of the provider rather than the company. Since the most common models are 3PL and 4PL, we’ll take a deeper look into them.

More About the 3PL

Third-party logistics is a supply chain that involves three parties — the business (producer), logistics provider, and the carrier (transportation).

The term 3PL has been around since the 70s and is simple in its definition. In essence, a third party is involved in a company’s logistics operation, along with a shipper/receiver and the carrier. There is no ownership on the part of the 3PL; they’re an intermediary or manager between the two parties.

That is beneficial to a company that has high demands for products because 3PL relieves the pressure. Instead of the small business having to focus on meeting the demand for products and managing inventory and fulfilling orders, 3PL takes some of that off of their plate by handling the inventory and fulfilling orders. The business can focus on making the product. 3PL will also handle shipping and storage.

3PLs have the capacity to handle processes including procurement, warehouse management, transportation of goods and distribution, freight consolidation, order fulfilment, and customs brokerage.

Some of the services provided by a 3PL include:

• Inventory storage
  
• Customs brokerage
  
• Picking and packing of goods
  
• IT solutions
  
• Contract management
  
• Cross-docking
  
• Proper inventory management
  
• Freight forwarding
  
• A 3PL relationship works well when the business has a solid, high-performance supply chain strategy in place and requires support to execute the plan. Working with a 3PL requires a high level of internal management commitment and oversight to ensure performance meets the business’ standards. That being said, many of the day-to-day decisions are out of the business’ hands as the 3PL oversees those efforts.
  

More About the 4PL

4PLs are also referred to as lead logistics providers (LLPs). They’re outsourced to manage mostly everything to do with the supply chain, including resources, technology, and infrastructure. They may even oversee 3PLs to provide supply chain solutions that can drive efficient communication between factories, employee carriers, and other stakeholders. They serve as the main project managers of the supply chain. They ensure the product gets delivered within budget and on time.

In this way, the 4PL acts as the single contact between all aspects of the supply chain and the company. A 4PL can even be established as a joint venture or long-term contract between the company and the other vendors serving in the chain.

Generally, the 4PL does not own transportation or warehouses. Instead, it coordinates those aspects of the supply chain with other vendors. The 4PL may coordinate activities of other 3PLs that handle various aspects of the supply chain. That puts the 4PL functions at the integration and optimization level, unlike the 3PL.

Some of the services provided by a 4PL include:

• Freight sourcing strategies
  
• Analysis of transportation expenses
  
• Business planning
  
• Proper coordination of a wide-supplier base in various geographic locations
  
• Analysis of capacity utilisation
  
• Logistics strategy
  
• Analysis of carrier performance
  
• Project management
  
• Change of management
  
• Consultancy
  
• Effective management of third-party logistics
  
• Proper management of inbound, outbound, and reverse logistics
  
• Network analysis and designs
  

Some of the industries 4PL has been successful include:

Medical Device Companies

Surgeons sometimes have to order multiple sizes of medical equipment for patients because they’re not sure what size will fit. And they often do this right before surgery or a medical procedure. 4PL has proven successful in managing the complex chain of custody requirements and delivery schedules to meet the requirements of physicians and reduce inventory costs.

Field Service Businesses

To serve field service and repair organizations, 4PL takes control of the supply chain, including warehousing, fulfilment, and transportation, and technology.

Retail/E-commerce

Large e-commerce companies like Amazon, are their own 4PL by owning and managing the entire supply chain. But not all companies have the ability to do that, so they turn to 4PLs for strategic management. Retailers have used 3PLs for transportation, warehousing and fulfilment.

As e-commerce boomed, retailers often bolted on those capabilities to existing systems, creating parallel supply chains to meet in-store and online demand. As e-commerce logistics matures, it's become apparent that an omni-channel approach is a sustainable direction to support customers, regardless of the channel from which they purpose.

3PL vs. 4PL: The Differences

The main difference between 3PL and 4PL is that 4PL has a broader role and more responsibility in the supply chain. 4PL handles all of the logistics, while 3PL handles daily operations. While that may sound simple enough, companies still debate which model is more superior. So, it’s crucial for companies to understand their differences. Some of the key differences include:

• 3PLs are more suitable for small-to-medium size businesses, and 4PLs are better suited for medium-to-large size businesses.
  
• 3PLs focus more on daily operations and 4PLs function at the optimisation and integration levels.
  
• When 4PLs are involved in the supply chain, they coordinate the activities of the 3PL.
  
• 3PLs own assets like trucks and warehouses; 4PLs do not.
  
• 3PLs are more focused on one-time transactions, and 4PLs provide a higher level of logistical services for more value.
  
• 3PLs cost less because 4PLs outsource both the organisation and oversight of their supply chain to a 4PL provider.
  

Major differences Between 3PL and 4PL

3PL- Owns warehousing or transportation assets.
VS
4PL- Non-asset-based, but will contract the assets needed.  

3PL-  Focused on day-to-day operations.
VS
4PL- Focused on the long-term strategy for the entire supply chain.

3PL-  One of two points of contact in the supply chain
VS
4PL- The single point of contact for the entire supply chain.

Pros and Cons

Both 3PL and 4PL come with their own set of advantages and disadvantages. Exploring them each a little further will make it that much easier for you to determine which one would work best for your business.

Pros

3PL

• Saves the company time and money.
  
• Improved customer service.
  
• Great for local and international distributions.
  
• Ensure fast and on-time deliveries.
  
• Affordable for small businesses with fast-growing and large orders.
  
• Ability to have control over returns.
  
• Highly decentralisation reduces the risk.
  
• Responsive logistics model.
  

4PL

• Offers a strategic relationship focused on providing the highest level of services for the best value.
  
• Unique and professional operational support.
  
• Effective outsourcing of all logistics needs of a given business.
  
• Offers a single point of contact for all the parties involved in the supply chain.
  
• Has more sense of ownership and control over your business.
  
• Creates a lean and cost-effective supply chain for improved profit margin.
  
• Outsources all logistics to third-party professionals so the manufacturers can focus on their products.
  

Cons

3PL

• Less control over inventory.
  
• Expensive if orders are low.
  
• Only suitable for small-to-medium businesses.
  
• Limited control over the customer service experience and order fulfilment.
  

4PL

• May be expensive for some small businesses and startups.
  

3PL or 4PL? Which One is Best?

As your business grows, needs change. As demand grows, it’s important for supply to be able to keep up. If fulfilling orders is a challenge for you, but you have the labour resources and expertise to manage the logistics of your growing operation, then 3PL may be a good option for you. However, if you need someone to take full control of the logistics and ensure supply is being met, then 4PL sounds like a better option for you.

In the end, the choice you make will depend on which model works best for your business. Consider your existing business model, company size, budget infrastructure, and other important factors.

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