3PL vs. 4PL: Choosing the Right Logistic Solutions

In the world of logistics and supply chain, we use acronyms—a lot of acronyms. 1PL, 2PL, 3PL, 4PL, 5PL. What does all this mean?

1PLs, or first-party logistics, are businesses that harvest, build, or otherwise create their products, store them, and distribute them directly to their clients. 2PLs (second-party logistics) handle one aspect of that process, usually the delivery, on behalf of the original manufacturer or farmer.

Things get more complex when the process extends to a 3PL or 4PL. What is the difference between a 3PL and a 4PL, and why should businesses care?

What is a 3PL Company and What Do They Do?

3PL stands for third-party logistics. These companies offer logistics services to their clients. The term is quite broad and can encompass various areas of supply chain operations, including:

• Transportation – shipping goods
• Warehousing – storing goods
• Fulfillment – picking, packing, and shipping orders.
• Inventory management – tracking and reordering inventory.
• Freight Forwarding – shipping goods internationally.
• Reverse Logistics – returns and repairs.

Typically, 3PL companies will handle a combination or all the above logistics functions for their clients.

What is a 4PL Company and What Do They Do?

4PL, or fourth-party logisticss handle the entire supply chain for their clients. They help manage everything from demand to ordering raw materials, assembly, storage, transportation of finished goods, and shipping to the end customer. They also lead all the planning and supply chain strategy. So, a 4PL would hire and manage one or more 3PLs for its clients.

What’s the Key Difference Between a 3PL and a 4PL?

The key difference between a 3PL and a 4PL is their scope of services. 4PLs offer a wider array of planning and strategy. 3PLs execute logistics functions like ordering final goods, storing them, and shipping them to customers. 4PLs manage 3PLs for their clients.

What Makes a 3PL and 4PL Similar?

There are overlapping services because a 4PL can offer all the services a 3PL provides. However, a 4PL offers a more comprehensive supply chain solution rather than logistics only. Some of the key similarities include:

• Outsourcing logistics
• Reducing logistics costs
• Providing expertise and advanced technology
• Customizing solutions to the business needs
• Scaling as client businesses grow
• Helping customers focus on their core business

What Are the Key Benefits or Advantages of Working With a 3PL?

There are several key benefits to working with a 3PL. The benefit is cost savings. Since 3PLs have extensive networks and handle many shipments, they can spread out their costs and pass these savings on to their clients. Hiring a 3PL means you don’t need a fleet, warehouses, or distribution network.

Working with a 3PL also gives clients access to deep expertise in logistics without hiring a whole logistics team in-house. This helps businesses focus on their core business while 3PLs handle the logistics. Additionally, clients gain access to technology, like 3PL warehouse management software (WMS) and other dedicated logistic solutions.

Since 3PLs are experts in shipping and logistics, they can offer faster delivery times, which improves customer service and satisfaction.

What Are the Key Benefits or Advantages of Working with a 4PL?

4PLs offer many of the same benefits as 3PLs but also bring additional advantages.

4PLs manage the entire supply chain, bringing greater strategy, planning, organization, and coordination of all the tasks in the supply chain. Because of this, businesses can deal with a single point of contact for all their supply chain needs. That includes real-time visibility into shipments, inventory control, transportation, 3PL warehouse management questions, and more.

Most 4PLs are also interested in building long-term partnerships with their clients, which means clients benefit more over time as the 4PL gains a greater understanding of their needs, customers’ needs, and overall operations.

Industries that Benefit the Most by Partnering with 3PLs and 4PLs

Not every company or industry should partner with a 3PL or a 4PL. However, some businesses would have a difficult time operating without these partnerships in place. Below are some of the industries that benefit the most by outsourcing their logistics and supply chain tasks.

1. Ecommerce – Demand fluctuations and order fulfillment are two of the biggest reasons eCom companies choose 3PL solutions. Some of the world’s largest brands may use a 4PL as well.
2.  Spare Parts and Accessories – These industries rely heavily on just in time inventory (JIT) to get the parts they need. These supply chain networks are vast and complex due to the number of parts involved, which makes them the primary target customer for 3PL and 4PL providers.
3. Retail and Fashion – Inventory management is crucial for these industries, and fashion trends and styles change regularly. 3PLs and 4PLs can help ensure the right inventory is available at the right locations to maximize sales potential.
4. Appliances and Electronics – Shipping a $600+ appliance or electronic device safely is no small feat. Moving expensive goods requires an increased level of skill and care. 3PLs and 4PLs help companies in this space reduce damage and the risk of theft.
5. Healthcare and Pharmaceuticals – Industries with strict regulations, like in healthcare and pharmaceuticals, benefit from the skills 3PLs and 4PLs bring in navigating through the red tape. They can also offer specialized transportation to keep products safe, secure, and at the right temperatures when needed.
6. Food and Beverage – Perishable goods need constantly restocked and replenished to offer a fresh selection to customers. This causes additional complexities with transportation, inventory management, and replenishment activities that 3PL software calculates with ease. As a byproduct, waste is reduced, and sales can increase for customers once they get their inventory levels dialed in.
7. Consumer Goods – There are many consumer goods. Because of the great quantity of items, these markets have extensive distribution networks. 3PLs and 4PLs can manage these networks, leverage economies of scale, help products get where they need to go in the most efficient way, and reduce logistics costs for CPG companies.

What Are the Top Factors to Consider When Choosing Between a 3PL or 4PL?

Choosing between a 3PL and a 4PL depends on several key factors. Here are the top considerations to help you make an informed decision.

1. Scope of Services Required – A 3PL is ideal if you need clearly defined logistics services such as warehousing, transportation, and order fulfillment. If you require more comprehensive supply chain management from top to bottom, then a 4PL would be a better fit. As previously mentioned, 4PLs help with strategic planning and can coordinate multiple 3PLs on your behalf.
2. Business Size and Supply Chain Complexity – Small to medium-sized businesses typically only need a 3PL because their logistics needs are not as complex. Larger enterprise brands with global operations need a 4PL because they can manage everything for the global supply chain.
3. Control and Oversight – A 3PL provides control over specific logistics functions but will require more management from your side. But 4PL offers a very hands-off approach since they manage all logistics and supply chain needs for you.
4. Cost Considerations – 3PLs will generally be less expensive since they mostly deal with specific logistics services. 4PLs start at a higher price point due to the scope of services they provide. However, they can bring in savings in the long-term by more effectively managing your supply chain.
5. Industry Requirements – Ecommerce, retail, and some consumer goods companies would benefit most from 3PL level services. Industries with more complicated supply chain and distribution needs, such as manufacturing, automotive, and healthcare, would do well with a 4PL provider.