3PL vs 4PL
The logistics industry doesn’t stand still – after all, it’s all about movement of goods! 3PL (aka 3rd party logistics or TPL) has developed over the years to serve businesses by getting products from A to B via any number of interim stages. But what is the difference between 3PL vs 4PL?
This guide explains everything you need to know regarding 3PL vs 4PL, what solution is going to suit your business, and what to look for when you are choosing a logistics company.
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There was a time when companies would handle logistics themselves (e.g. with old-fashioned delivery vans from neighborhood grocery businesses). In the main, that’s history – especially for businesses with complex global supply chains. Enter 3PL specialists, who provide expert services for any organizations which ship goods around the country.
Beyond 3PL comes 4PL which takes logistics expertise up a level to include strategy, planning and overall management of the supply chain. While 3PL focuses on operational logistics, 4PL adds a layer of oversight and analysis which can further improve the way your business works.
What is 3PL?
3PL, or Third-Party Logistics, refers to outsourcing supply chain operations to an external provider. These logistics partners manage various aspects such as warehousing, distribution, order fulfillment, and shipping, allowing businesses to focus on core activities while benefiting from the expertise and efficiency of the 3PL provider.
To run a business well, you need to know what to do yourself and what to get external experts to do. It makes good sense to call on external experts for support on marketing, legal, finance or IT – and the same is true for logistics and fulfillment. According to wikipedia, in 2014, 96% of Fortune 100 used some form of 3PL services.
3PL takes the monkey off your back. If you have to worry about logistics yourself, you can’t spend the time you need on what makes your business tick. Getting your logistics right means you can max out your profits – get it wrong and you can be left staring at losses, however hard you’re working.
The logistics flow is specific to every individual business, but you can expect it to breakdown as follows:
- Warehousing of incoming materials and components
- Storage of products ready for dispatch
- Inventory management
- Packaging and labeling
- Shipping, distribution and delivery
Each stage has options. For example, if finished products arrive at ports or airports, they may be suitable for DTC (direct to consumer) shipping, with no warehousing needed. That’s known as cross docking. Alternatively, goods containers can be moved from port to warehouse, which the logistics industry calls drayage.
Individual items can be packed together in one SKU (stock keeping unit) – that’s kitting and assembly. Workflows often involve items being packed together in larger boxes (pick and pack), sometimes with labels. Actually getting the finished packages out to customers can be through different types of trucking, using national or local carriers.
What is 4PL?
4PL, or Fourth-Party Logistics, takes logistics outsourcing to the next level. In addition to the services provided by a 3PL, a 4PL partner manages and oversees the entire supply chain, often coordinating multiple 3PLs. This comprehensive approach enhances efficiency, visibility, and coordination across the entire logistics network.
The scope of 4PL services can be comprehensive and extend to:
- business assessment
- strategic planning
- analysis of carrier costs and performance
- analysis of capacity utilization
- inventory planning and management
- optimization of supply chain
- management of inbound logistics for raw materials and components
- management of outbound logistics for ready to ship goods
- reverse logistics for returns
At the heart of 4PL services is full management of the many complexities of logistics. That can involve:
Managing all the vendors involved in a company’s supply chain including suppliers of commerce-enabled websites, warehouse management systems.`
Running physical locations such as warehouses, distribution hubs and delivery.
Optimized logistics systems provide a suite of valuable management information covering data on everything from inventory to order tracking, as well as related financial and performance data.
Expect 4PL companies to allow you to keep right on top of technology options, and to look after implementation of upgrades and new systems.
Being part of the management team
By providing high level strategic and management input, 4PL organizations can be successfully integrated into core business thinking and leadership.
What are the key differences between 3PL vs 4PL?
In a nutshell, 3PL is all about doing logistics. So is 4PL, with the addition of strategy and planning. If you take on a 3PL business, it’s like bringing extra staff into your team. With 4PL, it’s more like handing over full control of all your supply chain.
Naturally, there’s an argument for each approach. It all depends on your business, your priorities and your budget.
If you are running a business and have a clear need to improve logistics without delay, you’re more likely to benefit from 3PL. If you can get your products from factory or port faster and at lower costs, you can look forward to improved customer loyalty and more profit. By leaving it to experts, you don’t have to divert from your main business activities and USPs.
In the early days of a start-up, the priorities are more likely to be operational rather than long-term. After all, if you can’t get operations right early in the life of your business, you’re not likely to keep viable for long.
As businesses mature and have deeper pockets, longer term planning becomes more important. With time, organizations generally get more complex, and planning over longer time frames becomes more of a top line priority. A fully developed logistics strategy can build in sustainable profits and give the business a rosy future. That’s where 4PL providers come into the frame.
What is 5PL?
5PL, or Fifth-Party Logistics, represents a high-level extension of logistics management. It involves collaboration among multiple 3PL and 4PL partners to optimize supply chain operations. A 5PL orchestrates these partnerships, integrating technology and data to drive seamless coordination, enhance efficiency, and achieve strategic supply chain goals.
5PL is driven mainly by advances in technology such as:
- Machine vision
- RFID (radio frequency identification)
- AI and machine learning
Like I said at the beginning, logistics is always on the move, and it is technology that’s driving it forward.
How to find the right logistics services for your business
Before deciding between 3PL vs 4PL, the place to start is to answer some important questions about your business as it is, and how you think it’ll pan out for the future.
How many products or packages do you deliver?
The scale of your business is central to finding the right logistics partner. The average monthly total will give a clear idea of the type of services you need.
When do you see peak demand?
You need resources to match the times when orders are at their highest – for some businesses (such as gift companies) it’s the run-up to the December holidays, for others such as leisurewear it could be summer. If your business is markedly seasonal you need flexibility in your logistics.
How many pallets or cubic feet do you store?
Your warehouse requirement is a key measure you need to know when considering logistics solutions.
How many unique SKUs do you have?
The number of different types of SKU is a key indicator of complexity and is likely to impact on your need for kitting and assembly services.
How does your product arrive?
There are different fulfillment requirements depending on whether your goods arrive in containers, LTL (less than full load) or as small parcels.
What shopping cart and systems do you use?
For 3PL and 4PL providers, integration with your existing systems will be a critical factor. Integration with mainstream systems is not likely to be an issue, but bespoke or legacy systems are likely to involve development either by the client or logistics partner.
Which carriers do you use?
Moving your logistics operations forward will involve a review of your existing carriers, and comparison with alternatives.
Which parts of the country do you deliver to?
Different fulfilment services are available in different parts of the US and Canada. It’s important to understand the geography of your market and to explore ways of ensuring that you serve key areas in the best way.
How much does it cost you to fulfill an order?
When it comes to weighing up future options you will need to compare your current costs with what else you could achieve. One of the key benefits of working with an external logistics business should be a reduction in costs.
What are your operational pain points?
There are always challenges in logistics and it’s always healthy to understand where you are experiencing problems, whether it’s late or damaged deliveries or lack of flexibility for peaks and troughs. Once identified, you can charge your 3PL or 4PL partner to provide solutions.
What are your business plans for the future?
Successful businesses thrive on growth and planning. You need a logistics partner who can increase the services they provide and help you to understand how your operations will be impacted as your business matures.
And so, in conclusion…
Simple logistics may be easy enough to manage completely through an in-house team, but as soon as they get more complex, expertise from outside the business is most likely the way to go. If you have a fundamentally operational focus, it’s right to find an established 3PL provider. If you also want operational and management input, 4PL is the better solution. However, the lines between 3PL vs 4PL can be blurred, with some elements of planning, strategy and management coming under the wing of 3PL businesses (maybe there should be 3.5PL?).
Whether yours is a start-up or well-established enterprise level business, you need the right level of logistics service. To understand what will work best for you, a good place to start is by finding out about costs for the services you want from established experts.
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