From the Shipping Mavens at ShipHero – Provider of 3PL Software Solutions
The success of any business rests in the hands of the customer. If your customers aren’t happy, they won’t purchase your products or recommend your company. This leads to a reduction in sales which can ultimately drive your business into the ground.
There are many factors that come into play when dealing with customer satisfaction, but one of the biggest is the order fulfillment process. The speed and accuracy with which orders are fulfilled is one of the biggest determining factors in customer satisfaction, but it is also one of the most challenging aspects of running a business. To simplify and streamline this process for reduced costs and improved customer satisfaction, many businesses turn to 3PL providers and 4PL providers.
In order to truly understand the difference between third- and fourth-party logistics, you first need to understand the basics of PL terminology. Keep reading to find simple definitions of 1PL, 2Pl, 3PL, and 4PL followed by an in-depth look at the difference between third-party and fourth-party logistics.
A Review of “PL” Terminology
An online retailer has a wide variety of options when it comes to fulfilling orders. Choosing the right logistics provider is the key to optimizing your supply chain and maximizing both profit and customer satisfaction. If you make the wrong choice, it could end up costing your company thousands – even millions of dollars – and it could end up tanking your customer satisfaction rating as well.
Before getting into the specifics of third-party versus fourth-party logistics, here’s a quick review of “PL” terminology to put things in context:
- First-Party Logistics (1PL) – A model in which the retailer sends products from one location to another. For example, a farmer delivering eggs directly to a grocery store for sale.
- Second-Party Logistics (2PL) – A provider that owns assets to transport products from one location to another. For example, a farmer might hire a courier (2PL) to transport eggs from the farm to the grocery store for sale.
- Third-Party Logistics (3PL) – A provider that retains oversight of the management process but outsources transportation and logistics to an outside provider. The company may also subcontract some or all of the execution of the supply chain and may provide additional services such as packaging to add value. For example, a farmer might hire a 3PL to pack the eggs in cartons and to transport them from the farm to the grocery store for sale.
- Fourth-Party Logistics (4PL) – A provider that outsources the management of logistics activities in addition to the execution of the supply chain. These providers usually offer greater strategic insight and management. For example, a 4PL might manage communication with a farmer to increase egg production as the grocery store’s inventory declines.
- Fifth-Party Logistics (5PL) – A provider that develops an optimal supply chain network with innovative and customized logistics solutions. These providers use technology such as robotics, automation, and RFID devices to improve efficiency and value along the entire supply chain.
In the above overview, the egg and farmer business is a hypothetical example that could be applied to any ecommerce business.
Every business has its own unique needs for supply chain logistics. For medium- to large-sized businesses, however, it usually comes down to choosing between third-party and fourth-party logistics providers. Keep reading to learn the basics of both and to receive some tips for making the best choice for your company.
Understanding the Basics of Third-Party Logistics
Simply put, a third-party logistics provider is a model that involves three separate parties. The first is the business itself, the second the logistics provider, and the third is the carrier. In this supply chain model, the business turns over logistics operations for storing, packaging, and managing inventory as well as turning it over to the carrier for shipment. Another way to think of it is that a 3PL becomes the middleman between the business and the shipping carrier, taking care of the tedious aspects of shipping.
This supply chain model has been around since the 1970s, and the first 3PL providers were intermodal marketing companies that received packaged loads from shippers and transferred them to railroads. Today, the role of a 3PL provider has expanded to include services such as managing the movement of parts and materials from suppliers to manufacturers. It also includes transferring finished products from the manufacturer to the distributor or retailer.
In most cases, third-party logistics providers offer bundled supply chain services which may include some or all of the following:
- Warehouse storage
- Inventory management
- Crating and packaging
- Freight forwarding
- Shipment tracing/tracking
- Reverse logistics (returns)
These services can be scaled and customized according to the business’s needs. Generally speaking, businesses hire 3PLs when their supply chain becomes too complicated for internal management. For example, if a small business significantly expands their inventory as sales increase or grows through a merger or acquisition by another company.
Pros of 3PL:
- They offer innovative strategies customized to your business to optimize your supply chain, making it more efficient and cost-effective.
- In most cases, 3PLs are able to reduce transportation costs by 5% to 25% compared to a manufacturer running their own shipping operation.
- They handle all regulations, both domestic and international, which makes it easier for a manufacturer to test and enter a foreign market – they also manage customs issues.
- A 3PL generally has the warehouse capacity to execute fulfillment from multiple locations around the country or around the world.
- It is generally cheaper to hire a 3PL provider than to purchase or lease warehouse space in markets you want to test or expand into.
Cons of 3PL:
- Hiring a 3PL necessitates a loss of control over your shipping functions – one of the functions that has the greatest impact on your customer satisfaction.
- Not all 3PLs offer both domestic and international logistics services – some have failed to grow and change with the industry.
- There is always a risk that a business’s relationship with a 3PL provider will become untenable which can lead to a significant loss of relevant market knowledge, making it more difficult to resume in-house management of shipping functions, if necessary.
- The cost to hire a 3PL is not always clear or up-front – it may be cheaper initially but could become more expensive than in-house management if operations expand sufficiently to allow it.
If you’re still not sure whether a third-party logistics provider is right for your business, here are some examples of industries that can benefit from hiring 3PL providers:
- Medical Devices – Medical device companies need to not only ship their products from the distribution hub to individual locations, but those shipments must be expedited and tracked through every step of the process with a chain of custody that can be easily verified. This requires complex technology which is a skill 3PL providers are able to provide.
- Field Services – Service and repair businesses can benefit from 3PL services because these services use integrated technology to create a database of commonly ordered items to ensure that inventory meets demand. Businesses can pick up parts directly from the hub or place an order for expedited delivery to the specific job site.
- Retailers – Retail businesses are now expected to offer expedited delivery to their customers due to the “Amazon effect.” A 3PL provider makes it possible to provide same-day and next-day deliveries while managing the retailer’s costs.
Hiring a third-party logistics provider could help you expedite your order fulfillment produces while also reducing costs and improving customer satisfaction. Before you commit, however, there is another option to consider – fourth-party logistics. Keep reading to learn more.
Understanding the Basics of Fourth-Party Logistics
In a fourth-party logistics partnership, a business is basically outsourcing the entirety of their supply chain management to a provider. The fourth-party logistics provider oversees all of the different pieces of the supply chain puzzle including warehouses, transportation companies, and agents. The goal is for the 4PL to be the single interface for the business between all aspects of the supply chain and it is a concept that was developed in the 1990s.
In most cases, the 4PL does not actually own warehouse or transportation assets. Rather, it coordinates these services with vendors – it may also coordinate the activities of 3PL providers that are handling various aspects of the company’s supply chain. The difference is that 3PL providers are focused on day-to-day operations while 4PL providers focus on integration and optimization. A 4PL provider may also be known as a Lead Logistics Partner (LLP).
The primary benefit of hiring a 4PL provider is that the 4PL will be focused on simplifying and streamlining logistics for the highest level of services for the best value. The 4PL becomes your single point of contact for the entire supply chain which is ideal for large business that have complex order fulfillment operations.
Here is a quick summary of some of the benefits a 4PL provides:
Simplicity. The 4PL acts as your single point of contact for the entire supply chain.
- Neutrality. The 4PL has no assets to protect, so they act on behalf of the client.
- Transparency. Most 4PLs have an open-book management style with no margins on transportation; costs are controlled.
- Optimization. Integrated technology and management systems ensures optimal flow of inventory and shipping processes.
- Savings. A combination of logistics sourcing and reduced transportation spending leads to substantial savings across the board.
- Productivity. Taking the weight of logistics off your shoulders expands your ability to grow the company as you see fit.
Now that you know a little more about what a 4PL does take a minute to review the potential pros and cons for hiring a 4PL provider.
Pros of 4PL:
- A 4PL becomes the “control tower” for the entire supply chain process, managing everything from inventory to shipment.
- Most 4PLs are non-asset based which means that their entire focus is on simplifying and streamlining to logistics functions to improve value and reduce costs.
- Hiring a 4PL takes the burden of logistics entirely out of your hands with minimal oversight required, freeing you to do the things it takes to grow and expand your business.
- A 4PL can manage complex supply chain models which include domestic and international distribution, as well as managing multiple warehouse locations.
- Hiring a 4PL provider could enable your business to provide same-day or next-day shipping options for improved customer satisfaction.
Cons of 4PL:
- Hiring a 4PL provider means you are giving up control over the logistics process as well as the specific functions – you’ll be relying very heavily on an outside provider for one of the biggest functions of your business in terms of customer satisfaction.
- There is potential that the 4PL could form biases with certain suppliers instead of seeking out the most efficient or cost-effective option.
- Transitioning from a 4PL provider model back to in-house management of supply chain services could be very difficult for a large business.
If you’re still not sure whether a fourth-party logistics provider is right for your business, here are some examples of industries that can benefit from hiring 4PL providers:
- Medical Devices – In the industry of medical devices, surgeons often make last-minute orders and order multiple sizes of devices since they don’t know exactly what they’ll need. A 4PL provider is better equipped to manage complex chain-of-custody requirements and tight delivery schedules while reducing inventory costs.
- Field Services – Integrative technology enables a 4PL to optimize all aspects of the supply chain including determining the ideal parts, quantities, and locations based on anticipated demand. Field techs no longer have to double as warehouse operators and parts can be delivered in 30 minutes or less, improving efficiency and maximizing customer satisfaction.
- Retail/eCommerce – By managing the entire supply chain network, 4PLs can allocate inventory to meet customer demand and to reduce missed opportunities. They also enable companies to provide same-day delivery regardless of location as well as same-day replenishment.
Now that you know the basics about third-party and fourth-party logistics, you may already have a sense for which one might be best for your company. Before making your choice, however, you should take a closer look at the unique differences between 3PL vs 4PL providers.
3PL vs. 4PL – What’s the Difference?
A third-party logistics provider is focused on the day-to-day operations of your supply chain logistics – it is more transaction-focused than a 4PL. That being said, a 4PL takes it a step further by optimizing your entire supply chain, including any 3PL providers your business might have hired. They take over the entire operation and become your single point of contact which leaves you free to pursue other things that might help grow and expand your business.
When an organization already has an effective, high-performance supply chain strategy in place, a 3PL provider can provide the extra support needed to execute that strategy efficiently. This type of relationship usually requires a significant degree of internal management to ensure that the 3PL’s performance meets business standards. While the day-to-day functions may be out of your hands, you still need to retain a certain degree of oversight. You should also keep in mind that because 3PLs are asset-based, some companies may be more concerned with utilizing their own assets than with providing competitive rates or more valuable services.
A fourth-party logistics provider is non-asset based which means that their focus is on finding the ideal combination of service and value. These providers utilize integrated technology to ensure a high level of visibility across the entire supply chain for both strategic and tactical analysis. Your business will still need to utilize some internal resources to oversee and manage 4PL performance, but it takes most of the weight off your shoulders when it comes to optimizing services and minimizing costs.
There are a lot of factors to consider when it comes to choosing between a 3PL and a 4PL, so be sure to do your research before you decide. Keep reading to receive some simple tips to employ as you start making your decision.
What’s Best for Your Company?
Know that you understand a little more about third-party and fourth-party logistics and how they differ, which option is best for your company? Unfortunately, there may not be a clear-cut answer. You’ll need to take a deeper look at your business operations to see where you are struggling and whether hiring a 3PL or 4PL provider might help.
Here are some of the signs that your company could benefit from hiring a 3PL provider:
- Your business is a startup manufacturer or B2C company in the range of $1 to $5 million.
- Your business’s ability to produce and sell good is outpacing your ability to store and ship them.
- You are spending too much time fulfilling orders when you could be focusing on factors that influence the growth of your business (e.g. marketing).
- Your customer satisfaction levels are falling due to poor shipping and return practices.
For many businesses, hiring a 3PL provider is the first step as the business grows and expands. Over time, however, it might make more sense to move to a fourth-party logistics model. If your business has outgrown your in-house capacity for managing supply chain services and you want to optimize the entire process for efficiency and controlled costs, you may do best with a combination of 3PL and 4PL providers. The benefit of hiring a 4PL is, of course, that you can also gain the benefit of 3PL services without having to manage them yourself.
Whether you are hiring a 3PL or a 4PL provider, you need to do your research to ensure that you choose the company that is the best fit for your business. Take the time to delve deep into each company’s set of skills as well as their experience and reputation in the industry. You’ll be turning over a significant portion of your business’s essential operations, so you need to choose a provider you can trust 100%.
Every business is unique in terms of the services it provides, but all businesses have the same basic needs. Optimizing your supply chain process for reduced costs and improved customer satisfaction should always be a priority and hiring a 3PL or 4PL provider could be your next step to doing so.
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