Deciding whether to move forward with a 3PL or a 4PL logistics provider can be a tough choice to make. But when you’re trying to optimize your supply chain, the wrong decision can end up costing you millions — that’s one mistake you can’t afford to make!
So before you rush to a decision that you may end up regretting, it’s important to make sure that you have all of the information you need. In this article, we’ll talk about the main differences between 3PL and 4PL and how each of these unique solutions can support your supply chain.
3PL – Third-Party Logistics Defined
In a 3PL model, the organization continues to maintain oversight of the supply chain process. However, transportation and logistics are outsourced to a provider who may subcontract out some or all parts of these processes. This subcontractor may also provide additional services, including crating, boxing, and packaging — activities that all work together to add more value to the supply chain.
To better understand how third-party logistics works, imagine a grocery store scenario where 3PL is responsible for packing the milk into the cartons and shipping them from the factory to the store.
4PL – Fourth-Party Logistics Defined
In a 4PL model, the organization continues to maintain oversight of the supply chain and logistics processes. However, what the 4PL provider will offer is more strategic insight to help guide the overall operation of the supply chain. A 4PL manufacturer in this scenario is responsible for supply chain execution and may outsource all of its logistics operations. Continuing with our previous example, 4PL will communicate with the farmer to let them know when a grocery store’s milk supply is running low and request that they increase production to meet demand.
3PLs vs 4PLs: Pros and Cons
A third-party logistics provider focuses on the logistics portion of a company’s operation. This may also involve communicating with the shipper or receiver and the carrier. However, they are not responsible for the shipping of any products and simply operate as an intermediary between the other two parties we just mentioned.
- 3PL is cost-effective
- Improves inventory management systems
- Responsive to customer demand
- Lack of direct oversight, which may impact quality control
- Dependency on the current 3PL can make it difficult to switch to a new provider or take operations in-house
A fourth-party logistics provider touches all aspects of the supply chain process and provides a big picture overview of the warehouse, shipping, freight forwarder, and agent operations. It’s essentially a way to outsource specific business processes.
- Provides a single interface for multiple transportation and logistics services
- Offers a comprehensive solution for managing complex supply chain needs
- All transportation and logistics operations are handled through a single point of contact
- Lack of direct oversight
- Increased expenses
- Dependency on the current 4PL can make it difficult to switch to a new provider or take operations in-house
Whether you work with a 3PL or 4PL depends on the specific needs of your enterprise. You should also consider how much control and oversight you’re willing to give up.
Since the structure of the 4PL can vary, in some cases, 4PL can serve as a component of a larger 3PL relationship. Both 3PL and 4PL can help support increasingly complex supply chains and help improve how well you respond to customer demand.