Should you outsource ecommerce fulfillment? What are the pros and cons of using a 3PL or ecommerce fulfillment provider? This post helps you decide.
4PL: Complete Guide
In this guide, you’ll find out what fourth party logistics (4PL) is, how it’s different from 3PL and 5PL, and its benefits for your business.
This is a complete guide to fourth-party logistics.
In this new guide, we’ll explain:
- What is 4PL
- How it's different to other types of logistics
- Benefits of fourth-party logistics for business
- The main difference between 3pl and 4pl
- And much more!
So if you're looking to switch to 4PL, you'll find everything you need in this new guide.
Table of Contents
1PL, 2PL, 3PL, 4PL, and 5PL Explained
Before we go any further, let’s distinguish between different logistics models.
This part will help you understand why some companies use 1PL.
And why others use 4PL providers for their supply chains.
So let’s take a look:
First-Party Logistics (1PL)
First-party logistics is a business that sends products from one location to another. It’s a basic type of transportation and distribution. Think local farmers that deliver products from the farm straight to a grocery store.
Typically, they use a single vehicle and bring the product directly from the place of production. In this case, the farm.
Second-Party Logistics (2PL)
In a second-party logistics model, a business owns a delivery fleet that consists of transportation vehicles, vans, or trucks. Such an operation transports items from one location to another.
In the same example as before, a farmer would hire a 2PL fleet to deliver the eggs from the farm to the grocery store.
Third-Party Logistics (3PL)
Businesses that use third-party logistics providers (3PLs) are those that maintain management oversight, but outsource transportation and logistics operations to providers.
These providers subcontract out some or all of the delivery execution. They may perform some extra services like crating, boxing and packaging.
Going back to the farm example. A 3PL may perform the service of packing the eggs in cartons, too, in addition to delivering them to the grocery store.
The 3PL market size was valued at more than USD 1 trillion in 2019 and is estimated to grow even more due to globalization and the rise of e-Commerce.
Fourth-Party Logistics (4PL)
We go a step further in 4PL logistics - an enterprise outsources both the management of logistics activities, as well as the overall execution.
A fourth-party logistics provider holds strategic insight over the supply chain.
When combined with the management of logistics activities, businesses that employ the services of 4PL companies outsource their whole logistics operations.
Let’s explain this via our farm-to-grocery example again:
In this case, the 4PL would also handle the communication between the farm and the grocery store.
For example, the 4PL company will let the farmer know that the store is running out of eggs and needs a fresh batch.
4PL logistics are great for such deliveries that can be considered white-glove delivery since you want to be sure your delicate products are organized, handled, and delivered with care.
Fifth-Party Logistics (5PL)
In a fifth party logistics model, the provider offers innovative solutions and constructs an optimized supply chain network.
5PL providers incorporate new technologies such as blockchain, robotics, automation, Radio Frequency Identification (RFID) devices, and Bluetooth devices.
A majority of businesses today allocate a large part of their logistics operations to 3PL, 4PL, and 5PL companies to streamline logistics activities.
That’s why 4PL logistics companies and their increased efficiency are fast becoming the next big thing in the logistics sector.
Even before the coronavirus pandemic started, there was a growing demand for e-Commerce delivery.
That is where 4PL can help since it allows businesses to allocate their logistics operations to an outsourced company and lets them focus on other important activities.
What Is 4PL?
A fourth party logistics provider takes the actions of a third-party logistics provider and pushes them further.
It does so by managing resources, infrastructure, and technology, all with the goal of building and providing optimal supply chain solutions for enterprises.
4PL is thus a higher form of supply chain management.
What Are the Components of 4PL?
A 4PL encompasses all the services 3PL offers, as well as additional ones:
- Freight sourcing services
- Transportation cost analysis
- Carrier performance analysis
- 3PL management
- Project management and business planning
- Control tower and network management services
- Managing inbound, outbound and reverse logistics
- Capacity utilization analysis
- Inventory planning and management
How Does 4PL Work?
There are multiple aspects that 4PL providers cover to successfully manage another company’s logistics.
First, the 4PL assesses the business, then makes a management plan.
4PL services mean managing complexity. While some larger companies have in-house teams to manage logistics, many cannot afford to do so. That is where the 4PL steps in, proactively managing all aspects of a customer’s supply chain to provide value.
4PL providers also supervise and manage inventories at warehouses, help achieve greater delivery speed, offer tech solutions at the back end, and much more.
Such logistics providers both assemble and supervise IT providers, other 3PL providers, and other players. That means that the 4PL works as an in-house team.
The most distinguishable example of 4PL is Amazon.com.
Amazon conducts all the things a 4PL provider does:
- Storing manufactured items in warehouses
- Managing an e-Commerce website
- Delivering orders to end-users
- Providing software assistance for the transaction process.
What Is the Difference Between 3PL and 4PL?
What are the key differences between 3PL and 4PL logistics?
What are the main pros and cons of 3PL?
Can 3PL and 4PL coexist?
Let’s find out.
What Is 3PL?
Before we find out what sets apart 3PL and 4PL providers, we will go over 3PL in more detail:
3PL means the manufacturer keeps oversight of the supply chain but outsources some activities like warehousing, packing, deliveries, and distribution to a 3PL company.
3PL companies are frequently even contracted by 4PL companies to deal with logistics services that 4PLs have.
Advantages of Using 3PL
3PL providers offer a plethora of advantages, some of them being:
- Wide Resource Network: A 3PL company brings a lot of pros for in-house supply chains. It manages the logistics of a business from start to finish. You can save money on overhead and get quick service due to such a partnership and the discounts it offers.
- Saving Time and Money: Say goodbye to higher transportation costs, unused warehouse space, and hiring extra staff to perform logistics activities. 3PLs can handle billing, audits, training, hiring, and optimization for you.
- Scalability and Flexibility: 3PL companies help you scale warehouse space, transportation, and staffing by first assessing your company’s needs.
Disadvantages of Using 3PL
Every upside has a downside. Here is why some companies are turning to 4PL companies:
- Less control of the inventory
- Can get expensive when customer orders are lower
- Great for SMEs (small and medium enterprises), but not good enough for bigger ones
- Restricted control over the customer experience and order fulfillment
3PL by Industry
3PLs are especially useful for particular industries, such as the medical device industry. These trades prioritize value-added delivery processes. To get the job done these medical devices need to be tracked through the whole process via driver tracking. 3PL providers need to ensure a lot of stages - from on-site inventorying to delivery to the end-user.
Field-service-focused firms also benefit from 3PLs. A good deployment program has to exist to meet service level agreement (SLA) expectations. The 3PL can make a database of the most commonly ordered items to ensure that the inventory can meet the demand.
And lastly, due to the Amazon effect, people expect that products are always available and delivered quickly in the retail industry.
3PLs create strategies that innovate supply chain discipline and compete with Amazon’s delivery rates and fulfillment levels.
4PL vs. 3PL
When it comes to the key difference between 3PL and 4PL, the first one often owns warehouses and transportation fleets, while 4PLs more often than not don’t have such assets.
Furthermore, while 3PL providers focus on day-to-day operations, 4PLs aim to optimize the overall supply chain and integrate new solutions.
And finally, a 4PL acts as a single point of contact in the client’s whole supply chain, while 3PL doesn’t deal with every single aspect of the supply chain. 4PLs can help out here and act as an intermediary for 3PL providers, carriers, warehouse owners, and other supply chain players.
How Can 3PLs and 4PLs Work Together?
3PLs and 4PLs can work together.
A 3PL can make the transition to a 4PL, but it will change the type of data the provider can access.
Still, both have the goal of providing transparency. 3PLs and 4PLs both strive to proactively provide customers with information, to keep them up to date.
That can be done via confidentiality agreements that bar employees from spreading sensitive information about other third-party employers and transportation providers.
If you develop trust as a 3PL, you can ease the shift to a 4PL. But don’t forget - once you are a fourth party provider, you must act and deliver as one!
Benefits of Using 4PL
The 4PL market is gaining a lot of popularity due to its many advantages.
A study by The Insight Partners showed that the worldwide 4PL market was valued at USD 56,472.1 million in 2019. It is estimated to climb to USD 78,981.5 million by 2027.
#1 Better Operations Management
4PL providers are better at managing operations such as delivery, distribution, warehouse storing, and handling physical sites.
4PL supply chain managers handle the overall information flow, too.
#2 Use of Quality Technology
Expect better information technology with fourth-party logistics providers. They come with automation and software that improve communication across the board.
Such valuable data technology and software help with your business’ visibility in real-time
#3 Solution-Focused Approach to Delivery
Another advantage 4PL brings to its clients is solution-focused methods.
After assessing a business, a fourth party logistics provider designs a solution that can meet the needs of a business. It has the means and knowledge to offer end-to-end operation solutions.
These solutions are focused on warehousing, distribution, freight, information technology, and offer the top solutions for the client.
#4 Lower Costs and Higher Returns
Expect saving some money by getting a 4PL provider.
A fourth party logistics company can coordinate a higher number of potential suppliers to make sure you get the lowest transportation expenses possible.
Such services also lower idle inventory space and eliminate inventory write-off expenses.
#5 Better Oversight
Your business will benefit from 4PL’s optimized services and inventories because a fourth-party logistics provider gives you a different outlook and experience. Especially when taking into account the logistics strategy you already have in place.
Getting a 4PL partner to handle strategic oversight means you have more time to focus on your company’s core competencies.
Having a 4PL logistics partner has many potential benefits. It will add a new dimension to your logistics. If your business is growing too complex for your in-house team to handle, then getting a 4PL partner on board is one of the best decisions you can make.
4PL by Industry
4PLs are useful for a number of different industries that heavily rely on deliveries.
Some of these industries are:
- Healthcare and Pharmacy
- Field Services
- E-Commerce and Retail
- Groceries, Food, and Beverages
Let’s look at each a little deeper:
4PLs for Healthcare and Pharmacy
Even in regular times, there is a high demand for medical device delivery.
But when a pandemic hits, the demand jumps up drastically.
4PLs are useful for handling healthcare- and pharmacy-related deliveries since ensuring that delicate equipment doesn’t get damaged or lost along the way is a complex operation.
One of the key tools used in this sector is tracking via the transportation process.
A fourth-party logistics provider specializes in meeting tight schedules and turnaround times, along with using innovative tech for tracking.
4PLs for Field Services
A 4PL helps you manage your field service and overall supply chain.
That means helping you achieve fast fulfillment, effective warehousing, technology, and shipping.
The procedure starts with a thorough analysis of the client’s supply chain and needs.
Historical data and an installed customer base are used to assess separate parts, quantities, and areas required to meet the demand.
Such 4PLs are made to have real-time inventory tracking and 24/7 inventory availability.
4PLs for E-Commerce and Retail
The majority of companies don’t have enough budget and staff to handle their whole supply chain.
That is where 4PL companies step in to take over from 3PLs.
3PLs were used by retailers a lot over the years. They handled deliveries, warehousing, and fulfillment. But as the need for e-Commerce booms, retailers find that they need an omnichannel approach as a sustainable direction for supporting customers.
4PLs thus create a new strategic vision of the supply chain system. They manage the overall product flow across the network.
If you are a retailer, one glance at your inventory can be enough for you to know how to allocate inventory and meet client demand, no matter where the inventory is located.
4PLs for Groceries, Food, and Beverages
To transport perishable items like groceries and beverages, you need advanced logistics.
Businesses thus often turn to 3PL and 4PL logistics.
4PLs are especially useful since they concentrate even more on minimized wastage. This comes great if you are concerned with aggregating and storing food and beverage.
A 4PL provider can use its comprehensive supply chain knowledge to minimize such needless costs.
4PL vs. 3PL: What’s Best for Your Business?
Since you’re reading this article, we can assume that your company has a growing issue with your complicated supply chain.
3PL or 4PL will serve you well if you are trying to meet that customer demand quickly.
No matter if you are delivering straight to the customer or providing service agreements to B2B partners, your customers expect professional delivery.
4PLs make your job easier by taking over the whole supply chain procedure and allowing you to focus on other parts of your business.
4PL provides a level of technology that 3PL simply doesn’t have, with more intricate transportation tracking methods.
By investing in 4PL service, you are saving up on transportation costs and getting great feedback from customers for the delivery!