Deciding whether your organization needs a 3PL or a 4PL provider is an integral part of your supply chain management. Mistakes on this front can and do happen, costing companies big money.
The key here is to understand the five kinds of logistics parties and learn to distinguish between the services they provide. While in first-party logistics an enterprise sends goods from point A to point B, in second-party logistics the enterprise owns the modes of transportation. Whereas third and fourth-party logistics come into the picture when the enterprise outsources its supply chain process to other businesses. On the other hand, 5PL providers meet the logistics needs of multiple customers and lean on technology to simplify end-to-end logistics.
Before diving into the differences between third-party logistics and fourth-party logistics, let’s explore the advantages and disadvantages of undertaking either of the logistics parties.
Image credits: Warehouse Anywhere
What is 3PL?
Third-party logistics (or 3PLs) refers to the outsourcing of logistics processes, including inventory management, warehousing, and fulfillment. Third-party logistics providers allow e-commerce merchants to accomplish more, with the tools and infrastructure to automate order fulfillment. The enterprise maintains management oversight, but most of the inbound and outbound logistics are taken care of by the third-party business. Some of the Third-party logistics providers are Freight Forwarders and courier companies.
Advantages of 3PL:
- Proves to be cost-efficient for SMBs
- Distribution of goods is easier
- Highly decentralized
- Warehouse and inventory management at their disposal
- Saves on time if undertaken efficiently
- Slow responsiveness
- Lack of data collection
- Disruption to visibility
- Less control over inventory
- Lack of responsibility and accountability
What is 4PL?
Fourth-party logistics (4PLs) or lead logistics providers, is a model in which the enterprises completely outsource both the structure and oversight of their supply chain to a fourth-party logistics provider. Fourth-party logistics generally offer a high level of effective supply chain management to customers, allowing manufacturers to outsource their logistical processes to third-party professionals to manage it efficiently.
Advantages of 4PL:
- Professional operational support
- Effective outsourcing of all logistics needs of a given business
- Single point of communication for all stakeholders in the supply chain process
- Helps companies to focus more on their core competencies
- Creates a lean and cost-efficient supply chain for a more significant profit margin
- Proves costly for Small and Midsize Businesses (SMBs)
- Minimal control over logistics and fulfillment processes
- Lack of data collection and reporting
Key differences between 3PL and 4PL
Let’s look at some of the fundamental differences between 3PLs and 4PLs:
- As highlighted before, fourth-party logistics are the most cost-effective solutions for medium to large businesses whereas third-party logistics are more suited for small businesses and startups
- Fourth-party logistics functions at the optimization and integration level, while third-party logistics focus more on daily operations.
- Fourth-party logistics companies can effectively coordinate the activities of third-party logistics providers.
- 4PLs are often separate entities established as joint ventures or long-term contracts between a primary client and one or more partners, while third-party logistics is more focused on one-off transactions.
- 4PLs maintain a single point of contact for every business’ supply chain. In contrast, with third-party logistics, companies often must take care of certain aspects of the supply process internally.
Image Credits: Warehouse Anywhere
There are a variety of services offered by both these logistics providers. 4PL services include Freight sourcing strategies, Logistics strategy, Consultancy, Analysis of transportation expenses, Analysis of carrier performance, etc. 3PLs’ services include Inventory storage, Customs brokerage, Freight forwarding, etc.
Most modern-day logistics providers present enterprises with IT solutions for further betterment and optimization of their services. When it comes down to which logistic provider you should use, it depends on where your preferences lie. If control is crucial for your business, it is best to integrate an in-house IoT solution with a Container Tracking or Shipment visibility platform. This way, you can regain control over your entire supply chain with minimal responsibilities and maximum visibility.