It can be hard deciding whether you need a third-party logistics (3PL) or fourth-party logistics (4PL) provider. The wrong choice can result in big losses, as well as impact customer relationships negatively.
Thus, it’s important to understand both to choose the right one to optimize your supply chain.
3PL and 4PL explained
Whether you need a 3PL or 4PL provider depends on the size of your business as well as the business goals you want to achieve.
Here’s what you need to know about these two types of logistics management.
What is 3PL?
3PL companies maintain management oversight while outsourcing transportation and logistics operations to a provider. The 3PL provider may at times subcontract some, or, all of the operations.
However, 3PL providers do not oversee the organization or the whole supply chain.
The focus of 3PL providers is mainly on logistics which include inventory storage and management, customer brokerage, contract management, freight forwarding and cross-docking. Services such as crating, boxing and packing are sometimes included for added value.
3PL offers several advantages, especially for small to medium-sized businesses:
- Helps save time and money as you will not need to spend on warehousing, transportation, technology as well as extra staff to manage logistics.
- It is scalable and affordable for small, fast-growing businesses.
- 3PL can be used for both local and international distributions.
- Small businesses can take advantage of the 3PL providers’ resource network, resulting in the reduction of overhead costs and better service.
Disadvantages of 3PL include:
- High expenses if orders are low in quantity.
- Not too suitable for large-sized businesses.
- Limited control of inventory.
- Limited control when it comes to order fulfillment and customer experience.
What is 4PL?
4PL logistics refers to the outsourcing of management logistics and its execution across the supply chain.
In this model, strategic insight and management are offered by the 4PL company. This often includes all aspects of logistics including warehousing, packaging and delivery.
Because 4PL providers offer effective supply chain management, customers have the opportunity to better focus on other aspects of their business.
4PL offers customers a number of advantages including:
- Effective outsourcing and management of operations, including warehousing, shipping, and distribution.
- Valuable IT and software services.
- The professional operational support allows manufacturers to focus on their products and building their business.
- 4PL providers are able to support their customers with the best logistics solutions.
- It is extremely cost-effective, giving business owners a much-improved profit margin.
While 4PL offers many advantages, there are also some drawbacks that should be considered:
- Business owners may not have as much control over logistic processes and/or order fulfillment.
- Small businesses and startups might not be able to afford the 4PL model
What is the difference between 3PL and 4PL?
Understanding the differences between third-party and fourth-party logistics providers can help you to decide which type of provider is suitable for your company.
The major characteristic that distinguishes a 4PL provider from a 3PL provider is that the latter focuses only on logistics while the former manages the entire supply chain for its customers.
Here are some other differences between these two types of logistics providers:
- 3PL providers are better suited for small and medium-sized businesses while 4PL providers work better for large businesses.
- 3PL focuses more on everyday operations while 4PL providers work to integrate and optimize business processes.
- 3PL providers usually do not have assets such as trucks and warehouses while 4PL providers do.
- The activities of 3PL providers are sometimes coordinated by 4PL companies. In fact, 4PL companies can do this very effectively.
- 3PL providers are great for one-off transactions while 4PL providers give their customers high-quality logistics services at great prices
- Businesses will still need to manage aspects of the supply process if they engage a 3PL provider. However, a 4PL provider has a point of contact for every aspect of the supply chain, which allows business owners to focus on growing their company.
There are many advantages offered by 4PL companies. However, the choice between a 3PL provider and a 4PL provider depends on factors such as budget, company size and the infrastructure that you need or have.
It is best to choose a provider that fits your current need and scale or make adjustments as your company expands.
For Asian manufacturers who are interested to expand their business to the USA, check out our article on How can manufacturers use 3PL inventory management to sell in the US?
The article is a part of our comprehensive series on “3PL logistics”