Most individuals by now are familiar with 3rd Party Logistics (3PL) providers. As e-commerce and subscription services have continued to explode many start-up and scale-up companies have turned to 3PLs as they have grown. Outsourcing the fulfillment makes sense as it allows experts to manage your receiving, storage, and shipping of your products while you focus on growing your business. So what is a 4th Party Logistics (4PL) provider? Read on to learn more and see how 3PLs and 4PLs are alike and how they differ.
What is a 3PL?
A 3PL focuses on direct management of your fulfillment needs. This can be pretty defined or broad in scope. The warehouse space utilized is usually directly owned or leased by the 3PL. Some providers specialize in just one main core service like e-commerce fulfillment, Amazon prep, Kitting Services, or Business 2 Business (B2B) wholesale/distribution management. Others pair multiple service offerings that you can select a la carte.
A lot of 3PLs are strictly transactional relationships. The fulfillment company is contracted to perform ‘x’ services at ‘y’ costs. If your needs are simplistic (IE – “I need someone to manage my Shopify and Amazon orders.”) you can expect a matching clear fee structure. If your needs are more complex your fulfillment fees will typically be higher. Look for 3PLs that are just transactional, but also strategic! You may have to interview several 3PLs to find a strategic one but it will be worth it over time. They can be an extension of your brand and offer tangible advice on growing your business vs. strictly shipping your packages and processing your returns.
What is a 4PL?
A 4PL adds another dimension and layer to your supply chain management. These companies are typically non-asset based and they work to contract all your transportation AND warehouse needs. It is a higher level management of your entire supply chain but done so in a fashion where the 4PL is not actually performing any of the warehouse activities.
A 4PL is often contracted when a business is looking to outsource all supply chain activities. If a company is running a Request for Proposal (RFP), they may engage a 4PL which will ‘shop the market’ with transportation brokerage companies and different 3rd party warehouse providers. Your company would have 1-2 individuals that they would engage with at the 4PL for all needed services.
Comparing 3PL vs. 4PL
Third party and fourth party logistics are both purchased professional services that help companies plan and execute their supply chain needs. The main difference is a 4PL is focused on the design and high-level management of a business’ supply chains. A 3PL focuses more so on the actual work: the inbound receiving, storage, pick/pack/ship, and reverse logistics management within their warehouse. A 4PL is broad. A 3PL is focused.
Let’s look at some other differences:
- Longevity of Engagement – A 4PL can offer one-time engagement (RFP management) while a 3PL is a consistent ongoing relationship that grows and deepens over time. Your 3PL partner will be deeply integrated into your business. Your 4PL engagement can either be a short period of time or on an ongoing basis, dependent on the opportunity.
- Extension of Your Brand – Since by nature a 4PL is more hands off in regards to the actual day-to-day operations, it is far more common for 3PLs to be better long-term partners. There is constant communication and syncing between the brands and Third Party Logistics providers.
- Customer Type – 4PL engagements are more common for medium-to-large companies while 3PL engagements are much more common for small-to-medium companies.
- Market Expertise – 4PLs outperform 3PLs in this area due to the fact they are working with multiple brokerage and fulfillment companies on an ongoing basis. They have more resources and access to market trends.
- Cost – Typically, 4PLs are going to cost more than working directly with 3PLs. Any time you add a layer in business you also add more expense. Not only will you be paying the partners the 4PL has lined up for you, but you will also pay a management fee to the Fourth Party Logistics provider.
- Accountability – Again, the layers come into play. Who do you think is going to have more accountability to you, the customer? The answer is the 3PL that is directly integrated with your marketplaces and shipping your orders daily. If you have issues with a fulfillment company a 4PL has brokered out you will have multiple levels of accountability which can lead to finger pointing.
There is no one-size-fits-all when it comes to the decision to partner with a 3PL or 4PL. Size and opportunity often determine which approach may be best for a business. There are benefits and downsides to both models for sure. If you are a small to medium size company it probably makes more sense to partner directly with a 3PL that is strategic in nature. If you are a large company that wants to fully optimize your supply chain a 4PL may be right for you.
Lessgistics is a leading 3PL that is located in central Indianapolis, Indiana. With 20 years of supply chain and brand management we are confident we can help if you are a brand looking for any type of fulfillment services. We specialize in customized solutions. Reach out to us below today!