Fourth-party logistics, also known as 4PL or lead logistics providers, is a logistics model in which manufacturers outsource both the organization and oversight of their supply chain to a 4PL provider.
4PL generally offer a high level of effective supply chain management to customers, allowing manufacturers to outsource their logistical process to third-party professionals in order to manage it efficiently.
Oftentimes, it’s a tough decision for businesses to choose either 3PL or 4PL logistics in order to optimize their supply chains. Understanding the differences between them and their own unique advantages and disadvantages is crucial to maximizing the efficiency and cost-effectiveness of your supply chain, giving your business a competitive edge overall.
Here's a look at how 4PLs work, their advantages and disadvantages, how 3PLs work, their advantages and disadvantages and the main differences between 4PLs and 3PLs.
How does a 4PL work?
4PL providers oversee the organization and management of a whole supply chain for manufacturers and wholesalers.
For example, under the 4PL model, the manufacturer of a product outsources the logistics, packaging, warehousing and delivery of a product to a retailer to a 4PL company. Essentially, 4PL providers take control of the entirety of all logistical operations for manufacturing companies.
Some of the services rendered by 4PL logistics companies include:
- Freight sourcing strategies
- Logistics strategy
- Analysis of transportation expenses
- Analysis of carrier performance
- Effective management of third-party logistics
- Business planning
- Project management
- Proper management of inbound, outbound and reverse logistics
- Proper coordination of a wide supplier base in various geographic locations
- Change of management
- Network analysis and designs
- Analysis of capacity utilization
- Proper inventory planning and management
Apart from all these, 4PL, just like every other business model, comes with its own advantages and disadvantages. Some of these include:
Advantages of 4PL
- 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
- Gives 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, letting manufacturers focus on their product
Disadvantages of 4PL
- Minimal control over fulfillment and logistics processes
- May be cost-prohibitive for some small businesses and startups
With fourth-party logistics, companies can minimize inefficiencies in their supply chain and ensure they focus more on their product as opposed to dealing with the complexities of their supply chain.
How does a 3PL work?
The 3PL model is where a manufacturer maintains oversight of their supply chain but outsources their transportation and logistics operations to a 3PL provider.
Third-party logistics, or 3PL, is similar to 4PL in many ways but differs in some key respects. For example, a 3PL provider working for a farm may package and store produce in addition to transporting it to a grocery store. Unlike a 4PL, however, it won't oversee the entirety of the supply chain management and organization.
Some of the services rendered by 3PL include:
- Inventory storage
- Proper inventory management
- Customs brokerage
- Freight forwarding
- Contract management
- Picking and packing of goods
- IT solutions
Third-party logistics providers serve as intermediaries between manufacturers and retailers and, just like 4PL companies, come with their own advantages and disadvantages. A few of these include:
Advantages of 3PL
- Saves time and money
- Great for local and international distributions
- Affordable for small businesses with fast-growing orders
- Ability to have control over returns
- Highly decentralization reduces risk
- Responsive logistics model
Disadvantages of 3PL
- Less control over inventory
- Expensive if orders are low
- Only suitable for small-to-medium businesses generally
- Limited control over customer experience and fulfillment
As 3PLs act as managers between manufacturers and retailers, the service provider doesn’t take ownership of the goods or products being shipped. If your supply chain turns out to be too complex for you to internally manage effectively, then a 3PL provider may be a suitable option for your business.
What is the difference between a 4PL vs. a 3PL?
The main difference between a 4PL and a 3PL is that a 4PL handles the entirety of a supply chain while a 3PL is mainly concerned with handling just the logistical process.
3PL vs. 4PL is hotly debated between companies these days as to which model is superior. Ultimately, each one works better for different situations and understanding how their differ is crucial for every company.
Some of their key differences include:
- Fourth-party logistics are generally better suited for medium-to-large businesses, while third-party logistics are more suitable for small-to-medium businesses.
- Fourth-party logistics functions at the optimization and integration level while third-party logistics focuses more on daily operations.
- Fourth-party logistics providers may own assets like trucks and warehouses while third-party logistics providers generally don’t own such assets.
- Fourth-party logistics companies can effectively coordinate the activities of third-party logistics providers.
- Fourth-party logistics provides the highest level of logistics services for a great value while third-party logistics is more focused on one-off transactions.
- Fourth-party logistics provider maintains a single point of contact for every business’ supply chain while with third-party logistics, businesses often must take care of certain aspects of the supply process internally.
While 4PL offers many distinct advantages, the choice of the logistics model you choose is mostly determined by your existing business model, company size, budget, infrastructure and other factors. Ultimately, the choice of logistics model depends on what works best for your own business.
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