The logistics industry is a big business; the largest 3PL companies each earn millions in gross revenue each year.
If you're looking for ways to improve the efficiency of your operations, you've probably come across the concepts of 3PL and 4PL. So, what are these services, and how could they help your business? We’ll compare 3PL versus 4PL so you can determine what’s best for your business.
What is a 3PL?
3PL stands for third-party logistics. This refers to a situation where a company that produces goods hires another service (the third party) to handle logistics. A 3PL partner’s responsibilities may include the following:
- Shipping coordination
- Inventory management
- Returns and exchanges
- Distribution to retailers
Third-party logistics services usually have their own trucks, warehouses, and other assets. This helps them offer economies of scale, enabling more affordable logistics services.
Some 3PL companies are also brokers, but this isn't always so.
3PL companies offer various services as a part of their core product. These include:
A primary function of 3PL companies is transporting goods, although 2PL (second-party logistics) companies also offer this. Rather than renting or buying a van and transporting goods themselves, a business that has hired a 3PL can take advantage of an existing fleet, saving on rentals, storage, insurance, and other issues.
Warehousing and distribution
3PL companies are set apart from 2PL providers because they can handle warehousing and distribution. If you're a rapidly growing business that produces a high volume of goods but can’t keep a significant inventory on-site, you could benefit from letting professionals handle your warehousing and distribution.
Many companies turn to 3PL services when they find the scale of their operations becomes too large or complex for them to handle themselves.
For example, suppose you find yourself working with multiple retailers. Third-party inventory management could simplify your operations, as the logistics company would track inventory for you and even pack products.
Order fulfillment is another 3PL service that reduces the logistical load faced by your business. It also offers a smoother experience for those who place orders with the company.
Freight consolidation can significantly reduce shipping costs, especially for organizations that regularly ship small or medium-sized loads. A 3PL service can handle loads from multiple companies and plan time- and fuel-efficient routes.
The pros and cons of working with a 3PL service
3PL services can provide massive benefits, but no solution comes without complications. Here are the pros and cons of 3PLs:
Working with a 3PL service can save you money by streamlining your supply chain and fulfillment processes. 3PL companies provide the infrastructure for packaging, storage, shipping, and inventory management for a lower cost than most small or medium-sized organizations can manage independently.
Even many larger organizations outsource to 3PL services because of their scalability and flexibility. For example, many goods experience seasonal sales fluctuations, and outsourcing to a dedicated 3PL provider helps manage peaks and troughs in demand.
Finally, 3PL services offer access to specialist resources and expertise, turning logistics management into a simple transaction rather than a complex process that requires hours of research.
When you outsource, you have less control over the process and depend on an external partner. You may experience communication challenges, especially at first. If you currently handle your own logistics and don't keep meticulous records (or use an up-to-date EDI solution), 3PL integration may prove challenging.
However, solid communication and a careful plan will ensure you reap the benefits of 3PL. You can mitigate the issues that sometimes arise when entrusting a third party with such an essential part of your business.
What is 4PL?
4PL is fourth-party logistics. It covers more supply chain logistics elements than even the most comprehensive 3PL arrangement.
When a business uses a 4PL company, they are contracting that company to be the primary point of contact for all aspects of the supply chain, not just delivery.
A 4PL company can cover many different services, but these are some of the most common offerings:
- Supply chain management
- Vendor management
- Technology integration
If your organization has been throwing stock into a warehouse and hoping for the best, chances are likely you'll need help scaling your operations. 4PL providers can help you manage your accounts receivable and set up a FIFO system to prevent stock spoilage and waste. They will also handle packing, processing, and picking more efficiently than an in-house team.
You will need a dedicated team working with the 4PL provider. However, this will be smaller than the crew you would need to perform these functions yourself. You'll also benefit from the expertise and additional resources of 4PL specialists, such as enterprise-grade supply chain management software, large fleets, and contacts with infrastructure providers.
The pros and cons of 4PL
Unfortunately, even a 4PL system isn’t perfect. Here are the primary factors you should weigh when considering a 4PL:
4PL offers a nearly complete end-to-end way of managing your supply chain. When you work with a 4PL service provider, you can take advantage of improved supply chain visibility. You’ll benefit from smoother communication and coordination since you have a single point of contact for the whole process.
4PL companies are specialized in dealing with supply chains, and you can apply their expertise and pre-built systems to your network.
4PL companies are pricier than 3PL companies due to their more complex services.
You'll also still have the downsides associated with 3PL: losing control over your supply chain operations and becoming dependent on a single provider. If your 4PL provider is affected by outages, industrial action, or other issues, you will be, too.
3PL vs. 4PL: Learn the differences
Some critical differences between 3PL and 4PL providers include:
- Their role: 3PL services typically limit themselves to logistics, whereas 4PL manages the whole supply chain.
- Integration: A 3PL provider will integrate services, but a 4PL provider does more, coordinating and integrating multiple providers.
- Interaction: Clients typically have more input when working with 3PL companies and greater control over how tasks are performed. 4PL providers typically take over many more duties.
3PL and 4PL companies serve distinct roles, and some companies offer both varieties of services. Depending on the industry you operate in, the size of your company, and the resources you already have access to, it may be easy to determine which service best fits your needs.
In general, 3PL services work well if you already have a robust logistics system in place and simply want to scale it. A 3PL company provides access to the packing, storage, and shipping systems you need to expand your resources or grow your market reach.
If you need help with other aspects of the supply chain or would prefer a more hands-off approach to supply chain management, a 4PL can provide. Their team will deal with the various parties involved in order fulfillment, inventory management, packing, and shipping.
A 4PL company charges more than a 3PL company but may provide significant cost savings because you can reduce the size of your internal supply chain team while expanding operations.
Enhance your supply chains with Orderful
Supply chain decisions are more complicated than 3PL versus 4PL versus 5PL — one isn’t always better than another. Consider the service providers, their offerings, and how each can help you better manage your logistics and assist your in-house team.
Whatever provider you choose for your logistics services, you must have the proper channels for efficient communication. That’s where electronic data interchange (EDI) comes in handy.