In recent years, there has been a consolidated effort to nail down precise definitions of Third-Party Logistics (3PL) and Fourth-Party Logistics (4PL). Conceptually, they emerged roughly two decades apart, during the 1970s and the 1990s respectively, and their definitions have since become slightly blurred as competing providers have sometimes deployed the terms differently. 4PL, in fact, was originally trademarked by the Dublin-based consulting firm Accenture in 1996, although its registration of that IP has since lapsed into public use.
Given this history, many in the shipping industry, to say nothing of their clients across the global supply chain, have sometimes struggled to differentiate between 3PL vs 4PL logistics. Here’s what you need to know to better understand the differences between 3PL and 4PL providers and determine which one is right for you.
Understanding the differences between 3PL and 4PL logistics is a critical first step toward deciding which would better optimize your business’s supply chain management.
The term 3PL was initially used to describe intermodal marketing companies (IMCs) in transportation contracts — literal third parties in the 1970s when contracts for the transportation of goods typically only involved one shipper and one carrier. At the time, an IMC that was a 3PL simply accepted shipments from a client and helped tender those goods to an established rail carrier.
In the decades since, 3PL providers have expanded their purview and include many kinds of companies offering a variety of logistics services: transportation, warehousing, cross-docking (a practice designed to cut down on warehousing time and costs), inventory management, packaging, freight forwarding, courier services, or bundled suites of services integrating these. Today, the standard accepted definition of a 3PL provider is a subcontractor specializing in these integrated logistics and transportation services.
A 4PL provider is a distinct entity established as part of a joint venture or long-term contract between one client, which acts as a single interface between that client and multiple logistics service providers. Unlike a 3PL, a 4PL is ideally expected to manage all aspects of its client’s supply chain. In some cases, a 3PL will incorporate a new entity capable of acting as a 4PL, or simply form a 4PL within its existing structure: structural variations and legal subtleties that have made the 3PL and 4PL distinction hard for casual observers to parse.
While 4PLs are sometimes described as non-asset-owning service providers, their true distinction is in this broader scope, managing a client’s entire supply chain, and their deeper ties to that client’s internal organization structure.
Each have their own unique advantages and disadvantages, meaning either could be the right choice for maximizing efficiency and lowering costs, depending on the shipping client’s own specific needs. Let’s take a look at how 3PLs and 4PLs work.
In a 3PL model, a manufacturer or a shipping client retains oversight of their supply chain operations but outsources the details of transportation and logistics. Details could include inventory storage and management, customs brokerage, cross-docking, as well as fulfillment-style services like the picking and packing of goods. Logistics includes IT solutions, and many other ways in which new digital ecosystems are providing more relevant and timely data on shipments.
The 3PL model is most suitable for small and medium-sized businesses (SMBs), given that 3PLs tend to be more affordable for smaller enterprises, particularly those attempting to scale in response to a growing influx of orders. While their independence compared to a 4PL provider means that a 3PL’s shipping clients lose some measure of control over their inventory, the savings in time and money is an acceptable tradeoff to a more limited role over their customer's fulfillment experience.
That said, a 3PL provider can be too expensive if orders are low, but by virtue of 3PLs being highly decentralized and responsive as a logistics model, many SMB clients will have ample time to adapt and reduce their risk of cost-overruns. And typically, a 3PL will at least afford its client some measure of control over returns and other critical decisions.
Whether dealing with local or international distributions, a 3PL provider is likely to be a suitable option for a growing business whose supply chain is becoming too complex to manage effectively on its own.
The 4PL model is sometimes described as “lead logistics” but its main distinction is that a shipping or manufacturing client is outsourcing both the organization and oversight of their supply chain to a specialized entity.
4PL providers oversee the whole supply chain: the logistics, packaging, warehousing and delivery of a product to a retailer. Additional services beyond 3PL include freight-sourcing strategies, consulting, logistics strategy, analysis of transport expenditures and carrier performance. This analytical role can become quite expansive, including network analysis and adaptation, such as monitoring capacity utilization, or inventory planning and management.
In general, much more senior-level decision-making is contracted out to 4PLs than 3PLs. Those responsibilities can sometimes include business planning and project management, whether for inbound, outbound and reverse logistics — or even overseeing changes to a preexisting logistics management team.
Given all these additional managerial services, 4PLs can be cost-prohibitive for smaller businesses and startups. They also greatly reduce the client’s control over their own fulfillment and logistics processes, albeit with the aim of greatly minimizing inefficiencies in their supply chain. This allows shipping clients and manufacturers the opportunity to focus on their core competency. A key advantage of the 4PL is their neutrality, allowing them to manage multiple 3PLs in the best interest of their client.
For these reasons, the 4PL model tends to appeal to larger, more established clients, looking to streamline their current operations.
If you are a SMB looking to scale, or responding to rapidly increasing supply chain demands, then the support, flexibility, and cost-effectiveness of a 3PL provider is likely to be the most appropriate for your enterprise. Larger and more established firms looking to better manage their existing supply chain may fare better with a 4PL.
In some cases, a 3PL provider relationship will mature into a 4PL contract, as both the logistics firm and their client grow and evolve together. This is a process where 3PL software solutions are of considerable use as the data collected overtime can become of primary managerial utility for the emerging 4PL provider.
Ultimately, the choice of a logistics model will depend on particularities of your business itself and the unique sell propositions of the best available providers on the market.