When it comes to shipping, there are a lot of moving parts. Businesses have to worry about paperwork, regulations, warehousing, transportation, and more. To make things easier, many businesses outsource their logistics.
This can be a very cost-effective way to do business, as it allows companies to focus on their core competencies while leaving the logistics to experts.
In fact, a Gartner survey finds that 74% of logistics leaders expect their logistics outsourcing budget to increase in the next 2 years.
As a small business owner in the shipping industry, you may be wondering whether a fourth-party logistics (4PL) provider or a third-party logistics (3PL) provider is the right fit for your company. Both options have their advantages and disadvantages, which we will explore in more depth below.
What is Third-Party Logistics (3PL)?
Third-party logistics (3PL) is a logistics outsourcing type involving contracting a company to handle all or part of your company's logistics operations. According to Armstrong & Associates, 86% of US Fortune 500 firms use 3PLs for logistics and supply chain activities as of 2018.
Third-party logistics providers offer a wide range of services, which can be customized to meet the needs of your business. These services may include transportation, warehousing, order fulfillment, freight forwarding, inventory management, customs brokerage, cross-docking, and more.
However, they do not offer the same end-to-end suite of services that fourth-party logistics providers do. Instead, they focus on specific areas of supply chain management.
What is Fourth-Party Logistics (4PL)?
Fourth-party logistics (4PL) is a newer model of outsourcing that takes a more strategic and all-encompassing approach to supply chain management. An unprecedented number of businesses are looking to outsource fourth-party logistics.
While 3PL providers focus on the execution of logistics services, fourth-party logistics providers, also known as lead logistics providers, offer comprehensive logistics services by integrating and managing all aspects of the supply chain. In other words, 4PL providers act as a single point of contact for their clients, overseeing the entire process from start to finish.
Thanks to their holistic approach, 4PL providers are uniquely positioned to optimize the supply chain and drive significant efficiencies for their clients.
The Differences Between 3PL and 4PL
The biggest difference between third-party and fourth-party logistics is the level of involvement.
While 3PL providers offer services that can help businesses with their supply chains, they are ultimately focused on the execution of logistics services.
4PL, on the other hand, is a more comprehensive solution that integrates multiple logistics service providers into a single, seamless network. In other words, 4PL is a one-stop shop for all your logistics needs.
Here's a more detailed look at the key differences between third- and fourth-party logistics:
- 3 PLs offer a la carte services that can be customized to meet your needs, whereas 4PLs offer an end-to-end solution that integrates multiple service providers into a single network
- While 3PLs focus on the execution of logistics services, 4PLs focus on the strategic management of the supply chain
- 3PLs are more transactional in nature, whereas 4PLs take on a more consultative approach
- 3PLs usually own warehouse and/or transportation assets, and 4PLs usually don't own assets and outsource to 3PLs
- A 3PL is just a link in the supply chain, whereas a 4PL is the single point of contact in the supply chain
- With a 3PL you have more control over the shipping process and a 4PL takes complete control over it
When to Use a 3PL vs When to Use a 4PL
Now that you understand the difference between third- and fourth-party logistics, you may be wondering when to use each type of service.
Here are a few factors to consider:
- The size and scope of your operation — if you have a small business with relatively simple logistics needs, a 3PL may be a good fit. However, if you have a large or complex operation, you may need the comprehensive services of a 4PL
- Shipping volume — if you have high shipping volumes, a 4PL may be able to provide a more efficient and cost-effective service
- Shipping destinations — if you ship to multiple destinations, a 4PL with a global network may be able to provide better service than a 3PL.
- Budget — in general, 4PLs tend to be more expensive than 3PLs. However, the increased cost may be worth it if you need the comprehensive services of a 4PL
- The amount of control you want over your supply chain — A 3PL offers less visibility and control than a 4PL, which gives you complete visibility into every step of your supply chain so you can make real-time adjustments as needed
The type of logistics provider you decide to work with will depend on your specific needs. A third-party logistics provider (3PL) will likely suffice if you need basic shipping services. However, if you need more customized shipping solutions, then you may be better off working with a fourth-party logistics provider (4PL).
By keeping the right selection criteria in mind, you can rest assured knowing that you're making the best decision for your business.
3PL vs 4PL
As your business grows, you might find that managing your shipping and logistics internally is no longer feasible. That's when it might be time to outsource your logistics.
When deciding whether to work with a third- or fourth-party logistics provider, it's important to weigh the pros and cons carefully and choose the option that best meets the needs of your business.
If you're looking for comprehensive services and willing to pay extra for them, then a 4PL provider may be the right choice. However, if you're on a tight budget or prefer to have more control over your shipping process, then working with a 3PL provider may be the better option.
Ultimately, the decision comes down to what type of service will best meet the needs of your business. If you're still unsure which type of logistics provider is right for you, reach out to us, and we'll be happy to help you make the right decision.