Debating whether to use 3PL or 4PL can be challenging because only a few business owners know the difference. While both services may appear interchangeable, there are key differences in technologies, capabilities and typical applications.
If you want to introduce 3PL or 4PL into your supply chain management strategy, this guide will outline the major differences and how to choose the appropriate solution.
Logistics Terminology Explained
Whenever a customer purchases a product online, logistics providers become responsible for shipping them. Below are the different logistics services and what they offer.
First-Party Logistics (1PL)
First-party logistics (1PL) companies employ in-house freight carriers that transport goods and products from point A to point B. A 1PL transaction involves two parties: a manufacturer and a buyer.
For instance, a local farm (point A) might transport ingredients directly to a grocery store (point B).
Second-Party Logistics (2PL)
Second-party logistics (2PL) transport goods using owned assets, such as planes, boats or other vehicles. 2PLs are typically used in international shipping and wholesale goods.
For instance, a local farm might use an outsourced delivery service to ship ingredients to direct buyers.
Third-Party Logistics (3PL)
Third-party logistics (3PL) outsources delivery and additional services, including picking, packing and shipping. Some 3PL fulfillment services also offer warehouse management capabilities, such as real-time tracking, through connected software.
For instance, a local farm might use a 3PL solution to pack and ship goods, then deliver them to grocery stores more quickly.
Fourth-Party Logistics (4PL)
Fourth-party logistics (4PL) covers all supply chain management, including execution. 4PL providers, also known as lead logistics providers, act as consultants, giving the company feedback to improve operations.
For instance, a 4PL company might inform a local farm of changes in supply and demand, allowing them to make the necessary adjustments.
Fifth-Party Logistics (5PL)
Fifth-party logistics (5PL) or logistic aggregators employ highly advanced solutions – such as robots, automation, blockchain and Radio Frequency Identification (RFID) devices – to improve efficiencies within a company’s entire operation.
For instance, the same local farm might outsource all its logistics operations, focusing solely on production.
What Is a 3PL?
A 3PL, or third-party logistics company, ships products on behalf of a client. 3PLs act as an intermediary but do not take ownership of the imported products. A company might hire a 3PL provider if its supply chain becomes too complex to manage natively.
The types of logistics services a 3PL provides can range from warehousing to packaging and freight forwarding. Asset-based 3PL services directly manage a company’s resources to perform its services.
What Is a 4PL?
A 4PL, or fourth-party logistics company, controls a business’s entire supply chain strategy and has comprehensive oversight of warehouses, freight forwarders and shipping companies. A fourth-party logistics provider can make recommendations regarding changes to production and shipping strategies.
Hiring a 4PL company might make sense if you need more resources and staff to oversee transportation and other supply chain operations.
Differences Between 3PL and 4PL
While businesses have more hands-on involvement with a 3PL provider, there is an extra degree of separation with a 4PL provider. In addition, the relationship between companies and 3PLs might be more transactional than with 4PLs.
Below are other key differences between 3PLs and 4PLs.
While 3PLs oversee fulfillment operations like warehousing, packing and shipping, 4PLs take it further by managing all supply chain activities. This includes transportation services, supply chain software and potential stopgaps in your process.
Supply Chain Optimization
Working with a 3PL can give your business the upper hand in supply chain optimization. 3PLs demand more client involvement, so you can still make the decisions you feel is best for your business. For example, you can optimize fulfillment by picking strategically located fulfillment centers close to your customers.
In addition, 3PLs provide clients with access to shipping data, increasing demand forecasting accuracy and enabling better-informed decision-making.
Storage Capacity & Delivery Footprint
Compared to 3PLs, 4PLs have a more extensive warehouse network, better storage capacity, and broader geographical coverage. In addition, 4PLs can store heavier items and provide more accurate lot tracking.
Financial & Operational Scalability
3PLs typically run more expensive than 4PLs because they demand longer-term contracts to cover daily order volumes. Not only do 4PLs run cheaper, but they also offer more flexible and scalable contracts – 4PLs are on-demand, charging clients only for the resources they use.
Because 4PLs act as a business’s intermediary, all customer queries run through them before reaching you. This can cause significant delays.
Conversely, 3PLs work directly with merchants, allowing them to resolve issues quickly. Plus, 3PLs deploy the same customer service teams for businesses and merchants, which helps everyone stay on the same page and on top of customer demands.
While 3PLs can provide comprehensive warehouse management, they rarely offer the kind of advanced technology that a 4PL can. While both 3PLs and 4PLs use integrated warehouse management software (WMS), 4PLs often take their technological capabilities further with autonomous vehicles and robotics.
How the 3PL Process Works
While no two 3PLs are identical, these logistics service providers typically offer the following services:
- Transportation: 3PLs transport goods from warehouses to buyers. Occasionally, they might tap shippers like UPS, USPS and FedEx.
- Fulfillment and distribution: If necessary, a 3PL provider will manage warehouse operations, including storage, inventory tracking, rates and shipping strategies.
- Finances: 3PLs that provide cost control can lower freight forwarding rates. Financial 3PLs are more common with larger enterprises.
Advantages of 3PL
A third-party logistics service provider can make your supply chain more cost-effective and efficient. Below are a few other benefits you can reap from hiring a 3PL:
- Reduced operational costs: Outsourcing your logistics operations to an outside party is significantly cheaper than hiring an in-house team. You can pay for work as it is completed and invest more in core business processes like marketing and sales.
- Optimized space: If your warehouse is too small to stock all your inventory, hiring a 3PL eliminates the need to pay for a larger space. Instead, you can finance the space you need and scale as necessary, improving your business’s cash flow.
- Minimized inefficiencies: With the appropriate technology, 3PLs can increase speed and efficiency while reducing errors. By automating information transfer, your logistical operations become more accurate.
- Industry expertise: A reliable fulfillment provider has ample knowledge of the logistics industry and how best to reduce costs, increase savings and give your business a competitive edge.
Disadvantages of 3PL
3PLs may not be suitable for all businesses, as they can pose the following considerations:
- Forfeited control: Trusting a third-party fulfillment provider could be difficult, as you have to give up full control of the delivery process. In addition, guaranteeing a positive customer experience is challenging because you lack direct oversight.
- High upfront costs: Because most 3PLs adhere to a long-term strategy, investing in their services can be incredibly costly upfront.
How the 4PL Process Works
The goal of a fourth-party logistics service provider is to oversee your entire supply chain. To do so, it typically provides the following services:
- Transportation: A 4PL service will move your finished goods to one or more 3PL warehouses for distribution.
- Inventory management: 4PLs employ technology for real-time inventory tracking and provide better data visibility for merchants.
- Shipping: Most 4PLs provide last-mile shipping, which involves transporting packages from fulfillment centers to their final destination.
Advantages of 4PL
There are many reasons you might choose a 4PL company instead of a 3PL. Below are a few advantages that might convince you to hire these transportation providers:
- Comprehensive supply chain solution: With a 4PL, you’ll get a single point of contact for all your transportation and operational needs. Your business can eliminate inefficiencies and avoid wasteful logistical practices.
- Improved customer connectivity: While giving up control of your consumer management process can be daunting, hiring a 4PL provider can drastically improve customer satisfaction. 4PLs can increase engagement and answer queries from your target audience.
- Advanced technology: In contrast to 3PLs, 4PLs employ more advanced automation technology like robotics and integrated software.
Disadvantages of 4PL
Despite its bells and whistles, 4PL fulfillment isn’t always the solution. Here are a few cons to look out for:
- High dependency: Because 4PLs play a critical role in your daily operations, transitioning out of one can be extremely difficult. Think about a 4PL as your strategic partner before entering a long-term contract.
- Expensive: Compared to 3PLs, 4PLs may not be appropriate for small business budgets.
3PL vs 4PL: What’s Best for Your Company?
Whether a 3PL or 4PL is best for your company will depend on your business goals and current capacity. While 3PLs are eCommerce companies’ most common logistics model, there are also many reasons to choose a 4PL.
For instance, 4PLs can provide excellent logistical solutions for your supply chain if your business is on an enterprise level. On the other hand, newly expanding businesses can benefit from delegating their fulfillment responsibilities to 3PLs with logistical experience.
Both 3PLs and 4PLs provide significant advantages that can increase sales, improve your ROI and encourage business growth. However, your choice will depend on your business’s unique requirements. Before you make a decision, remember these key takeaways:
- There are five types of logistics services: 1PL, 2PL, 3PL, 4PL and 5PL. Each model introduces new intermediaries.
- 3PLs follow one of the most common logistics models, providing transportation services and some warehouse management. They are ideal for growing businesses that need to focus on other operational aspects, such as marketing and sales.
- 4PLs provide a more comprehensive solution for enterprise-level businesses that want to delegate fulfillment tasks. They are most appropriate for established companies that are ready to develop a franchise.
- The core difference between 3PLs and 4PLs is the level of logistic services they provide. While 3PL allows for direct communication between merchants and buyers, 4PL creates a second degree of separation that tends to make businesses more dependent on its services.
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3PL vs 4PL FAQs
Is 4PL Better than 3PL?
Whether 4PL is better than 3PL depends on your business needs. For enterprise-level businesses with more complex logistics processes, 4PL may be more appropriate.
What is an Example of 4PL?
An example of 4PL is a logistics company that manages a merchant’s entire supply chain, from logistics to order fulfillment. While a 3PL will only be in charge of fulfillment and delivery, a 4PL will also handle communications between merchants and buyers. For instance, if a buyer is running out of a particular product, a 4PL will inform the merchant that they need to start producing a new batch.
What Services Does a 4PL offer?
While they differ from provider to provider, some services that a 4PL could offer include:
- Warehousing and storage
- Picking and packing
- Distribution and order fulfillment
- Last-mile and same-day delivery
- Optimized inventory placement