What is fourth-party logistics (4PL)?
A 4PL or fourth-party logistics provider also referred to as a lead logistics provider (LLP) is a solution for an enterprise that wants to outsource its logistics management and execution across the supply chain.
4PL logistics providers enable businesses to:
- Optimize transportation management
- Synchronize inbound-outbound supply chain flows
- Coordinate suppliers, manufacturers, and distributors
- Consolidate shipments
- Design and manage distribution networks
According to a 2022 report by Allied Market Research, the global fourth-party logistics industry is projected to grow from $57.9 billion in 2021 to $111.7 billion by 2031.
In this article, we’ll look at some of the important services you should look for when choosing a 4PL service provider. We’ll also review the pros and cons of outsourcing your logistics operations to a 4PL company.
But first, let’s take a minute to do a comparative analysis of 3PLs and 4PLs.
3PLs vs. 4PLs
3PL or third-party logistics services are companies that provide outsourced logistics services to other businesses, including:
- Inventory management
- Picking and Packing
- Transportation services
- Freight forwarding
- Reverse logistics
- Order tracking
Most 3PLs have their own fulfillment centers where the seller’s inventory is received, stored, and fulfilled.
Both 3PLs and 4PLs play a significant role in supply chain management. Let’s examine the main differences between the two logistics solutions.
Third-party logistics providers concentrate on day-to-day operations and offer a few contacts along the supply chain. This gives companies some degree of managerial control over their supply chain.
In contrast, a 4PL provider manages every moving part of an enterprise’s supply chain. The 4PL is the single point of contact between the business and the 3PL provider. This means that companies have no control over how 4PLs manage their supply chain operations.
Most 3PLs own or manage their own warehousing and transportation assets.
On the other hand, 4PLs are often non-asset-based. They specialize in designing supply chain solutions by coordinating and optimizing the activities of 3PLs, carriers, packaging companies, etc. These services help businesses to improve customer service, reduce costs, and cut inefficiencies from the supply chain.
3PLs partner with carriers and subcontractors to achieve lower warehousing and transportation costs, and pass on these savings to their customers.
4PLs process and analyze large amounts of data from their supply chain partners to save you time and money. They are mostly hired by businesses that need flexibility and cost-effectiveness to meet seasonal periods and industry fluctuations.
Most 3PLs specialize in specific industries or markets their business processes allow them to effectively operate within and have a limited perspective on other industry verticals and markets.
Fourth-party logistics providers provide services to companies in various industries and markets while covering all facets of 3PL services.
Key Services of 4PLs in the Supply Chain
A 4PL service provider provides many of the same services provided by a 3PL, including warehousing, inventory management, freight forwarding, and reverse logistics. In addition, it is also responsible for managing the entire supply chain, taking over managerial decisions, and offering business advice.
Here’s a look at the different services offered by 4PLs to their customers:
- 3PL Management: While a 3PL is a logistics provider, a 4PL manages multiple 3PL companies on behalf of its customers. In addition, 4PL logistics companies use their high level of visibility, real-time data, and expertise to align 3PLs, carriers, and customers.
- Project Management: Fourth-party logistics providers offer end-to-end expertise in planning and executing complex projects. They monitor the efficiency and effectiveness of material and process flows and the movement of goods and information from the point of origin to the point of consumption.
4PLs have the expertise and resources to source and deliver critical materials and specialist transport services from multiple suppliers. For example, an enterprise building a new facility might need a smooth supply of various materials and equipment from its suppliers. Under tight deadlines, project managers can’t afford delays, so they outsource this function to a 4PL company.
- Logistics Strategy: A fourth-party logistics (4PL) strategy can help businesses achieve strategic business objectives and eliminate supply chain inefficiencies. 4PLs accomplish this by defining supply chain capabilities of the enterprise and their target logistic objectives and then implementing the methodologies needed to achieve that vision.
- Inventory Planning and Management: 4PL customers can split their inventory across a large number of distribution centers and can monitor inventory levels in real-time using the 4PLs warehouse management system.
Similarly, 4PLs can deploy critical or frequently required materials in distribution centers to ensure rapid, low-cost supply. This allows the retailers to replenish inventory on time and meet customer demand regardless of the location of the inventory.
- Coordination and Extension of the Supplier Base: Suppliers are susceptible to delays due to natural disasters, theft, or shortages. 4PL companies help their customers mitigate supplier risks by expanding their supplier base. This also allows them to negotiate more favorable contract terms and gain a competitive advantage.
In addition to this, 4PLs can help companies coordinate with suppliers to plan sales and inventory levels. This cooperative planning not only allows companies to achieve predictable revenue but revenue that maximizes profit by removing inefficiencies and achieving economies of scale.
Advantages of Using 4PL
Here’s a look at some of the key benefits of partnering with a 4PL service provider:
Single Point of Contact for Vendors
4PL service providers can manage the logistics processes of a business, regardless of which suppliers, carriers, or distribution centers are used. This means you can have a single point of contact for managing your supply chain instead of communicating with multiple vendors.
As a single point of contact with its client’s vendors, 4PLs are responsible for the vendor evaluation, onboarding, and the ability to monitor and optimize the entire supply chain. Similarly, 4PLs can handle your in-house shipping operations and manage shipping contracts with shipping companies on your behalf.
Better Supply Chain Visibility
Fourth-party logistics providers offer end-to-end transparency across your supply chain network. This includes complete order and shipment visibility about all partners. As a result, 4PLs can resolve issues by exploring the client’s entire ecosystem of suppliers, carriers, and supply chain processes.
4PLs use logistics tracking data and technology to impose operational discipline across many suppliers and partners and manage their customer’s supply chain operations as though they were managed in-house. This allows companies to focus on their core competencies.
Are you lacking a strong logistics strategy? Sifted Logistics Intelligence can help simplify parcel logistics for your business.
Less Inventory Wastage
When companies overstock items to meet unexpected demand, it often increases storage and depreciation costs. 4PLs offer accurate inventory forecasting to help companies optimize their inventory levels and save on inventory holding costs.
Similarly, 4PL service providers have the resources and expertise to manage all aspects of the supply chain and logistics. This becomes particularly important for medical, aerospace, pharma, and food businesses as they deal with materials that have special requirements.
Usually, 4PLs hire niche 3PL providers to meet the requirements of their customers, such as designating dedicated assembly lines and product teams to ensure quality or handling and packaging guidelines to transport goods safely.
Cost Reduction in Procurement
Cost reduction in procurement is the main focus for many companies because it is easier to track compared to other costs and directly impacts the bottom line.
When businesses deal directly with suppliers, they have to choose off-the-shelf solutions available in the market. As a result, you end up paying for materials, equipment, and technology that you may not necessarily need in the first place.
In contrast, 4PLs offer custom-designed solutions that meet their customers’ right supply chain needs, including procurement. Moreover, cost reduction in procurement offered by 4PLs is not limited to savings made during the purchasing process. They also re-negotiate vendor and supplier contracts, improve operational processes, and optimize supplier risk management.
Disadvantages of Using 4PLs
Below, we discuss common drawbacks of outsourcing your logistics operations to a 4PL service provider.
High-Cost May Deter Small Businesses
Hiring a 4PL service provider requires a significant amount of capital, making it a cost-prohibitive option for most small businesses. It can be a cost-effective option for companies that deal with multiple carriers, vendors, and suppliers.
However, since 4PLs manage the entire supply chain as an in-house team, the costs are usually higher than other logistics management solutions such as 3PLs. And since the processes are bundled and managed by the 4PL provider, it could reduce cost transparency over time.
Not Much Control Over Fulfillment and Logistics Processes
When you outsource your logistics processes to a 4PL provider, you become highly dependent on them for your business’s implementation and supervision responsibilities. In other words, you won’t have much control over how they run that part of your supply chain.
Similarly, since the 4PL service provider directly interacts with your vendors, suppliers, and customers on your behalf, you may also lose the power to interact with your business partners.
Furthermore, considering the 4PL logistics model involves a long-term contract with your provider, it can be difficult for your business to regain control quickly.
Determine Your Logistics Needs with Sifted
Working with a 4PL can help eliminate operational inefficiencies, reduce costs, and gain visibility in your supply chain operations. However, if you don’t want to keep control of your own logistics network, you can turn to other logistics management models such as a 3PL, or even a software solution to help you better manage your shipping on your own.
Sifted Logistics Intelligence offers tools for shippers and eCommerce businesses to track their key metrics and identify supply chain disorders so you can make informed outsourcing decisions for your business.
Ready to streamline your logistics processes? Get a free demo from Sifted!