Today’s logistics industry offers shippers many new and exciting options. Third-party logistics (3PL) and fourth-party logistics (4PL) have both seen an explosion in popularity and are now being used to ship all kinds of goods. Each offers big potential benefits for retailers to outsource major elements of their supply chain.
So, what are the key differences between 3PLs and 4PLs, and which is your best option? Here are some of the main differences, along with important considerations for making the right choice.
What Is Third-Party Logistics?
A 3PL provides contract logistics and transportation services. The client retains oversight of their supply chain and processes, but the 3PL does the legwork of arranging carriers, warehouse services and other key supply chain element.
3PL Advantages
Working with a 3PL is often the most cost-effective option for SMB retailers and ecommerce shippers. Many of them provide a variety of valuable services such as packaging, warehousing and inventory management on a scaled as-needed basis that makes them more accessible for an SMB.
Some 3PLs don’t own their assets such as trucks and warehouses, subcontracting out functions to carriers or warehousing businesses. This can improve flexibility and create cost savings the 3PL can pass onto its customers. Large 3PLs often own their logistics assets, creating improved reliability for clients and customers.
3PL Drawbacks
Businesses and 3PLs have a fundamentally transactional relationship. Advising a business on logistics strategies typically isn’t part of the deal, so don’t expect any input on an overarching logistics vision. The more complex a business’s supply chain, potentially the greater the number of 3PLs it has to deal with to fulfill all of its logistics needs.
3PLs also rely on economies of scale to be cost-effective. For an SMB shipper with low order volumes, this can be a problem because it makes shipping more costly. Additionally, 3PLs generally don’t handle the more advanced legal paperwork and insurance issues of a supply chain, meaning they have to be handled in house.
What Is Fourth-Party Logistics?
While a 3PL provides the assets and labor needed to move orders, a 4PL oversees and organizes the entirety of a supply chain. From transportation and warehousing to project management and supply chain design, a 4PL takes care not only of day-to-day operations but broad oversight and authority over how the supply chain functions.
4PL Advantages
Quality 4PLs know how to optimize and streamline shipping at every level, from packaging to last-mile logistics, in a way that creates efficiencies and provides a next-level customer experience. 4PLs can leverage a huge range of assets and provide services that can take a business’s logistics to the next level. Their expertise in planning and operations can free up your time to let you focus on core business pursuits.
Many 4PLs subcontract with numerous 3PLs to create supply chain flexibility and improved performance, giving them access to a huge range of services that can be easily scaled. What’s more, 4PLs provide a single contact point for an entire supply chain, reducing the need to work with a multitude of consultants and logistics providers.
4PL Drawbacks
On the other hand, the cost of a 4PL is often substantial due to the number of services they provide, potentially putting them out of reach for many SMB shippers. Additionally, the basic tradeoff of the 4PL is giving up some control in exchange for their expertise. Some 4PLs also may not offer the fine-grained supply chain control and transparency that many businesses demand.
Which Is Right for Your Business?
The right logistics solution for your business is the one that fits your needs and your budget. For anyone thinking 3PL vs. 4PL, here are some factors to take into account:
- A 4PL typically cost substantially more than a 3PL, since their services cover more parts of the supply chain and include strategic planning and management services.
- Many 3PLs don’t own their own fleets and/or warehouses, while 4PLs often do. That means that 4PLs (or a fleet-owning 3PL) can sometimes provide more flexibility and stability when it’s most critical.
- A 3PL keeps the client in the driver’s seat, so to speak. For businesses that want more control over their supply chain strategies, 3PLs typically offer more visibility on the client end. But for those ready to relinquish some control, 4PLs can elevate your logistics performance.
- Businesses with large, complex supply chains can often benefit from using a 4PL to provide a logistics “nerve center” with the resources to coordinate all of the moving parts.
Whichever system you choose for your business, remember that due diligence is critical. Any logistics partner that a business works with should have all appropriate certifications (including hazmat certificates if necessary) and carry appropriate insurance and surety bonds. These are key requirements, so any provider that hasn’t taken the time to put them in order should be avoided.
Both 3PLs and 4PLs are cornerstone elements of the logistics landscape today. By knowing the differences between the two and evaluating each on its merits, you can find a better way forward for your logistics and a package of options that suits your needs.
Jason O’Leary is a cofounder and managing partner at Surety Bonds Direct