Once your company’s shipping gets to a certain level, it makes sense to consider contracting with a logistics service provider. The terms 3PL and 4PL will start popping up as you investigate your options, but the question is “what is 3PL” and “what is 4PL?” The “PL” definitions and what they cover can get confusing. So, the 3PL consulting experts at Shipware want to provide you with a definitive guide, and then you can decide 3PL vs 4PL, or neither.
Let’s start with a more general foundation, with information on all the “PLs” to set the baseline.
- First-party logistics provider (1PL): This is just your company doing its normal thing. You create your products (or procure them), you package and fulfill your product orders, and you find your own carriers to transport your products to the customer.
- Second-party logistics provider (2PL): Your company still creates, packages, or fulfills your product orders. But you outsource one of the logistics tasks, and you do so for a short time period. Maybe a fulfillment company fills orders for the busy holiday season.
- Third party logistics provider (3PL): Your company produces the products (or procures them), but then outsources to a logistics company for warehousing, fulfillment, and shipping.
- Fourth party logistics provider (4PL): Your company produces or procures the products. A logistics management company oversees the multiple organizations conducting the logistics tasks, handling the entire supply chain.
What a 3PL Provider Offers
Third party logistics companies are a staple for outsourced logistics. They tie together the shipper and the carrier, often handling everything in between. Some offer order fulfillment services. They do not take title to any of the products, but receive them, handle them, and send them on their way. They may have their own warehouses, or they may work with warehouse owners. They may negotiate with and coordinate carrier services or they may have their own trucking and transportation services. Some third party logistic providers act as brokers or use brokers to help clients with freight forwarding.
Given the wide range of services, not all 3rd party logistic companies offer the same services, but they generally do provide a bundle of services. Here are some services they offer for a company’s supply chain:
- Inventory receiving of raw materials or finished products
- Inventory management
- Order fulfillment
- Reverse logistics
- Freight forwarding
What a 4PL Provider Offers
As it’s a higher level of service, a 4PL logistics company acts as a logistics partner to provide a comprehensive supply chain solution. The 4PL organization handles its client’s supply chain as the connection point between your company and several logistics service providers. They are a lead logistics role, providing strategic insight, supply chain strategy, and managing the entire supply chain. Consider the 4PL logistics operations as an air traffic controller, choosing and supervising warehouses, carriers, the freight forwarder roles, and any brokers. The 4PL organization may form as a long-term contract or a joint venture between the client and the partners, to outsource as a logistics model. It would be like hiring a human resources company to handle internal HR functions, or an outside bookkeeper or CPA firm to take over the company’s financial functions.
The Pros and Cons of 3PL vs 4PL
There are definitely times when you should consider a 3PL vs a 4PL, but sometimes it’s hard to know what that line in the sand is. So what is the difference between 3pl and 4pl logistics?
You would consider hiring a 3PL provider when your supply chain is too complex and inefficient to do in-house. A 3PL company can scale up quickly and provide differing levels of service based on your needs at the time. They often negotiate discounts with carriers and take care of shipping labeling and carrier management. They may offer access to their warehouse management system (WMS) and transportation management system (TMS) for greater visibility and tracking than your company can afford on its own. They may also have access to distributed warehouses, so you can move inventory closer to your customers and use multiple warehouses, even with smaller inventory levels. Using distributed warehousing should provide shipping savings and gives the ability to offer one or two-day shipping. If your company had to find and negotiate with multiple warehouses on your own, it’s a lot more work.
Using a 3PL allows your company to use its human resources in other ways. That might be to gain new customers, start company initiatives, or use capital for other purposes. Renting your own storage area, and hiring and managing employees may not be a great supply chain management strategy. Instead, you can focus on your strengths, and outsource to a logistics service. Since a third party logistics provider works with many clients, there is an economy of scale and savings you would not get on your own, and that can result in lower shipping rates or packaging rates.
The disadvantage of using a 3PL is that you give up some control of your business. You’re trusting another company to handle and track your goods and package the goods for your clients. If something goes wrong, your staff will hear about it, but they will not have first-hand knowledge of the cause of the problems. You’ll need to work with the logistics provider to iron out problems and create solutions to ensure customer satisfaction.
If logistics is not a core competency for your organization, and managing the supply chain operation is not a strength, a 4PL organization would be a good logistics solution. Those running a 4PL organization are supply chain management professionals. They could save your company money, provide needed expertise, and share technology solutions that you may not have otherwise. Your company would have one point of contact and not need to be involved in day-to-day contact with the various providers. It’s a one-stop-shopping situation. A 4PL organization can manage 3PL services.
Choosing 3PL vs 4PL
The third party logistics companies are focused on the daily details, a transactional focus. With a 3PL, you will still be involved in some management and oversight to keep up with your standards and needs. 3PL providers may push to use their own assets, which could end up costing you more.
Fourth party logistics companies are focused on optimization and integration. They have a higher-level role and your role as a company will be hands-off. That’s what you pay them to do. If the 4PL does not have its own assets, they would be neutral in choosing providers, finding the ones with the best price and service.
Determining what logistics process you are comfortable with can help determine which direction to go. With a 4PL lead logistic provider, your role is minimized. They are the conductor, and the 3PL and transportation carriers are the orchestra members. Either way, outsourcing your logistics is one of the best eCommerce shipping best practices that can help optimize your ecommerce order fulfillment process and minimize carrier shipping delays.
Getting the Most Out of Your 3PL vs 4PL Partnership
After you’ve determined which model you’re most comfortable with, you’ll need to find the right partner. Shipware can help you send out RFPs, and evaluate and negotiate with potential partners. As many as 20% of those using 3PL companies are paying too much for their services. It’s hard to know what to pay, especially if you’ve not worked with this kind of service provider before. Having expert advice to walk you through the process with a trained eye can save your company on the bottom line while ensuring you’re getting the service you deserve. If you are currently working with a 3PL, Shipware can still provide an audit of your contract to understand what savings are available. It is possible to optimize 3PL contracts and continue working with the logistics provider.
Fortunately, Shipware has this expertise in working with 3PLs. We know the various categories and costs for warehousing, fulfillment, shipping, and freight forwarding. It costs nothing to have us look at your contract and get an evaluation. If we can’t help you save money on your fulfilment costs, you won’t pay a cent. Reach out to us at (858) 879–2020 or contact us online.