When your small business researches logistics providers to help get your goods to customers more efficiently, you'll often come across third-party and fourth-party logistics providers. Both of these options can handle procurement, inventory management, packaging and transportation, but they differ in the control your business will maintain over its supply chain.
While you'll maintain some control over these decisions when you choose a 3PL, you allow a 4PL to have full control over your supply chain management processes but can benefit from strategic expertise that helps with business planning.
A 3PL provider involves a collaboration between a business, carrier and logistics provider to handle packaging, warehousing and inventory management while allowing the business overall control of the supply chain. A 4PL provider takes over a company's whole supply chain management process, offers the business high-level expertise and directly supervises all parties involved.
Third-Party Logistics Business Model
The role of a third-party logistics company is to handle the packaging, storing and transporting of a manufacturer's products to the destination where they'll be sold to customers. This logistics model creates a three-party relationship between the manufacturing business, a logistics provider and a carrier. The manufacturer still maintains control over its supply chain, while the provider acts as a middleman.
While 3PL providers usually offer basic packaging, inventory management and transportation services, some have additional options you can choose for your company to get even more benefits. For example, some 3PL providers can handle customer returns, keep track of outgoing shipments, forward your freight and handle cross-docking. The use of information technology helps 3PL providers to provide these services and help you improve your daily operations.
3PL Business Example
As an example, you might own a small business that makes furniture in a small space where you don't have a good way to package the items and store them until they're ready to go to the destination. If you choose a 3PL provider, you might manage your supply chain but have the provider package the furniture, manage the inventory and ship to local stores or even customers directly.
Fourth-Party Logistics Business Model
A fourth-party logistics business model goes a step beyond the third-party logistics model to have a logistics company handle the management of your entire supply chain. The 4PL provider will oversee various carriers, warehouses and agents and will communicate with your business throughout the process. This model allows the 4PL to help you reorder stock, package your shipments, ship orders and store inventory in a way that optimizes your whole supply chain. This leaves you without having to worry about managing individual relationships or making specific decisions about the logistics process.
The breadth of services that 4PL providers can offer your business vary but go far beyond those of a 3PL. For example, providers may offer consulting services, help design effective supply chain networks, monitor carrier performance, analyze costs and even play a role in overall business planning. They also often specialize in global logistics and efficiently coordinate suppliers around the world.
4PL Business Example
As an example, you might run an online store where you acquire merchandise from various suppliers for resale to customers around the world. When you choose a 4PL provider, that company can handle the whole process of ordering the goods for sale, packaging them, managing the inventory levels and ultimately mailing the orders to your customers. The provider will work with you to learn about your business goals and ensure their processes meet your requirements.
Pros and Cons of 3PL
A big advantage of using a third-party logistics business model is that your company saves money in terms of not needing to have its own warehouse and having a more efficient way to track inventory levels to optimize the stock needed.
You also benefit from expert knowledge since a reputable 3PL provider will handle your shipping and packaging services in a way that boosts your company's value and offers better customer satisfaction that you might be able to offer yourself. Also, you can find it easier to expand your business and offer international shipping when you use a 3PL provider that can handle the complexities of global commerce.
While choosing a provider in the third-party logistics industry can save you money in the long run, the initial investment can run steep and may be hard for a less-established business to afford. You also have to consider that you lose some control when you outsource logistics duties to a third party. Not only will the 3PL provider control most of your delivery process, but you won't have as much access to your products themselves when the 3PL provider stores them in its own warehouse.
Pros and Cons of 4PL
The main benefit of choosing a 4PL provider is the level of support you get for the whole supply chain management process. This option is good for when you want to develop a lean supply chain that both meets customer demand and boosts profits. You also save a lot of time with the 4PL logistics model so that you can put your resources toward product development, marketing, customer service and other key business areas. Also, the relationship with the 4PL provider is streamlined and makes it easier to communicate with a single contact versus having to manage communications with various parties yourself.
A pitfall of choosing a 4PL logistics model is that you give up a lot of control when you allow the provider to take care of everything from procurement to final delivery. This brings some risk if the company doesn't end up meeting your standards and causes problems with logistics and distribution. At the same time, this method comes at a cost that small businesses may struggle to afford or justify. If you do decide to stop using the 4PL provider, your business may find it hard to make the switch back, especially if it has grown.
Choosing Between 3PL and 4PL
To decide between using 3PL and 4PL providers for your business, you'll need to consider your current supply chain, the level of control you desire, your budget and your business needs. Both options will save you time and provide some expertise your business might need. However, small businesses more often use a 3PL as they grow and stretch beyond their resources, while medium and large businesses find a 4PL a better solution.
If your small business has started to grow to a point where you need help storing and shipping products, using a 3PL provider can potentially provide a cost-effective way to manage your inventory and ship orders. The catch is that you'll still need to have the time and ability to handle your overall supply chain. You also give up some of the business planning expertise that a 4PL can offer.
On the other hand, you might consider a 4PL if you have a larger business with high demand and global customers, and you just don't have the time, resources or ability to manage your supply chain. By turning your logistics over to a 4PL provider, you can get advice to optimize your whole supply chain, easily ship overseas and better monitor logistics costs and performance. You'll also find it easier to manage a relationship with one point of contact.