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In the supply chain and logistics ecosystem, third-party logistics service is often a popular choice for businesses for goods transportation. However, realising the growing scope of logistics and the challenges and risks of 3PL services, fourth-party or 4PL logistics is gaining prominence. The 4PL service provider plays a vital role in supply chain in building a connected supply chain system especially with building a stronger, faster and evolved goods distribution system across urban and rural India.
In this article, we will understand the meaning of 4PL services, its advantages and role in the supply chain, and the difference between 3PL and 4PL logistics.
What is 4PL logistics?
There are two ways how 4PL logistics or fourth-party logistics services can be defined:
- First, when a 3PL company sub-contracts a part of their tasks and duties to another logistics company, this company is a fourth-party logistics provider. For example, if company ‘A’ has contracted logistics company ‘B’ for distributing their goods across India, and company ‘B’ has hired the services of company ‘C’ for last-mile delivery services to remote areas, company ‘C’ is a 4PL partner.
- Second, when a business (e.g., manufacturing company) outsources the entire planning, organisation, execution and management of logistics tasks to an external logistics company, this company is a 4PL partner. Put simply, this company is not only tasked with the actual transportation of goods, but also monitoring, analysing and managing logistics processes and how it is being carried out. It makes logistics strategies, draws insights on performance, and usually works with a wide network of vendors to offer services across the supply chain. Under the fourth party logistics model, the 4PL provider often has no assets (e.g., trucks/vehicle for transportation and warehouses for storage).
In the second meaning of 4PL logistics, the scope of work for the 4PL partner is wider than only the movement of goods. They are involved in the strategy building, process evaluation, implementation and general business activities and is usually in a long-term partnership with the overall goal of managing logistics costs and driving efficiency.
4PL logistics example
Now that we understand what is a 4pl logistics company, let us look at a simple example.
You are an entrepreneur and sell handwoven cotton saris by rural artisans. This requires you to receive orders, procure raw materials, stock goods, transport raw material to your artisans and the finished products to end customers, track orders, deliver, receive COD, manage returns and refunds etc.
This is naturally a time-consuming and complex task. A 4PL logistics company will carry out all of these tasks for you, i.e., manage and optimise your supply chain operations. You can focus on your core competencies and outsource logistics to a fourth-party logistics partner to reduce costs, streamline processes, and keep the supply chain running optimally.
Note: 4PLs are usually non-asset based. They have a wider network across geographies that enable them facilitate storage and transportation of goods.
Role of fourth-party logistics in supply chain management
As a business owner, you already know that supply chain involves multiple functions. Logistics transportation is a key component of SCM but so is inventory management, warehousing etc. For a business to run optimally, it’s imperative to have granular visibility on supply chain operations. This is why many large organisations (especially those with international orders) prefer to outsource their logistics functions to 4PL companies to manage complex supply chains and for complete supply chain visibility.
A 4PL provider is basically a facilitator or integrator across the supply chain. They will have a network of resources and capabilities across various functions of SCM to ensure efficiency. They work with external vendors and 3PL providers for their services based on requirements. Their importance lies in being able to understand the client’s need and offer custom logistics solutions based on business needs.
4PL services & solutions:
- Information technology management
- Operations management
- Procurement planning
- Warehouse management (automation & storage solutions)
- Inventory planning & management
- Logistics management (inbound and outbound, reverse logistics)
- Packaging and dropshipping
- Customer support
- Data analytics and strategy
- Billing and payments
- Vendor management (for logistics, warehousing, procurement)
- Legal and compliance solutions
3PL vs 4PL differences
As a business owner, it is likely that you have been working with a 3PL partner in the past and are wondering if it’s a pragmatic move to switch to a 4PL partner.
Let’s look at the main differences between a 3pl and 4pl in logistics and how to select what’s right for you.
Key differences between 3PL and 4PL logistics service providers
|Components||3 PL partner||4PL partner|
|Services offered||Specialists in providing logistics services including warehousing, storage, transportation, distribution and delivery.||Act like consultants/partners offering services and solutions across the supply chain. Contracts tasks to multiple vendors based on business needs. Wide network of logistics providers; coordination across inventory, warehousing, complete logistics solutions.|
|Flexibility||Flexible based on range of services offered (i.e., Based on the type of 3PL services, providers can be generalists or specialists)||More flexibility as they cover solutions across the wider spectrum of supply chain.|
|Scalability||Scalable based on 3PLs capabilities, services and resources (e.g., some 3PLs might not be offering modern warehousing solutions using warehouse automation tools).||Highly scalable and 4PLs can widen their network across vendors and locations, based on client’s business needs.|
|Expense/cost||As per services availed and can be need-based only. Can be one-time only, short-term and long-term.||Higher as services are rendered for multiple solutions for a longer period of time.|
|Control||Greater control as you collaborate directly with the 3PL.||Lesser control as you collaborate with the 4PL who sub-contracts tasks to other vendors.|
|Focus||Day-to-day logistics solutions for operational needs.||Overall supply chain optimisation and management for visibility.|
Why work with a 4PL company?
There are several advantages of working with a 4PL partner – the reason why many small businesses are also partnering with 4PL providers to manage their logistics operations.
- You have to work with only one entity for all your supply chain and logistics needs
- You will have better visibility on supply chain as data across processes is being collected, collated and shared by the same provider
- You will save on costs as you do not have to make investments in infrastructure development (except building an IT infrastructure) and all automation, IT and network design aspects will be managed by the 4PL company
- You will save on time as there will be no need to find suppliers or transporters, negotiate on rates, set contract terms, manage customer queries etc. as the 4PL company will coordinate with external parties for all these functions
- There will be lesser hassle on legal issues, claims and compliance, customs and other challenges as your 4PL partner will oversee these issues
- You can collaborate with your 4PL and design strategies on smarter ways to do things based on data-based insights provided by them
How to select what’s right for you?
So how do you decide if you should choose a 3pl or 4pl logistics provider. This is not an easy question. In general, a fourth-party logistics model is more suitable for mid and large sized businesses. This is because they provide a wider range of SCM and logistics solutions that’s more cost-effective and value-driven for a large business.
On the other hand, if you are a small or medium sized company, shipping regular markets and customers, 3PL services are more suitable. This is because all requirements e.g., storage, packaging, labelling, delivery are all planned and there’s little change in the logistics process.