When it comes to logistics, many businesses are aware of 3PLs and their role in supply chain agility. However, 4PL is now gaining recognition as a single-source outsourcing partner for large organizations seeking cost-effective evaluation, strategy, implementation, operation and tracking of complex supply chain solutions.
With growing expectations, several warehouse management software providers are also taking on roles as 4PL providers.
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Article Roadmap
- What Is 4PL?
- Definition and Characteristics
- Levels of Logistics Providers
- 3PL vs. 4PL
- Services
- Advantages and Disadvantages
- Do You Need a 4PL Partner?
- How To Choose a 4PL Provider
- 4PL by Industry
- FAQs
- Next Steps
According to DataHorizzon Research, the global 4PL market is expected to grow from $63.09 billion in 2022 to $129.4 billion by 2032 at a CAGR of 7.4%.
For the uninitiated, that begets the question — what is 4PL? Which services do they offer? Does your business need a 4PL partner? We’ll cover that and more.
What Is 4PL?
Fourth-party logistics (4PL) is an operational model where businesses outsource their logistics and supply chain management to an external agency. These external providers offer broader services, including resource management, technological consultation and analysis to provide strategic insights.
4PLs are often known as lead logistics providers (LLPs). Simply put, 4PL service providers take care of all the activities that third-party logistics (3PL) service providers do. They also monitor the operational and financial efficiency of the supply chain by handling said 3PLS.
They support an organization’s supply chain management by acting as an integrator – they curate, evaluate and handle resources, processes and technologies required by an organization to manage its supply chain operations. Equipped with managerial-driven logistics concepts, 4PLs leverage technology to plan, execute and conduct compliance monitoring for their clients’ supply chain.
Definition and Characteristics
The term 4PL was first defined by Accenture (then Andersen Consulting) as an integrator that assembles the resources, capabilities and technology of its own organization and others to design, build and run comprehensive supply chain solutions. Accordingly, it has four major components – architect/integrator, control room, supply chain infomediary and resource provider.
To find and implement the best supply chain management software for their clients in a cost-efficient manner, 4PLs can use their capabilities and outsource different functions to different 3PL providers. They act as a singular accountable organization for supply chain performance and an array of providers as they synchronize the activities of various partners through IT systems.
As businesses focus on their core operations, 4PLs function as strategic and managerial touchpoints. They streamline supply chain activities to facilitate production, inventory management, distribution, supply/demand planning and all inbound and outbound logistic activities.
Apart from optimizing these processes, a 4PL also integrates it with other business functions such as procurement, manufacturing, finance, sales and marketing, customer service and information technology.
A 4PL shares financial and operational risks with its clients, which you can mitigate by optimizing logistics operations. Typically, a 4PL doesn’t own a means of transport or warehouses.
4PL providers focus on the cross-sectional nature of customer and process-oriented functions to gather insights and continually improve operations in a time, cost and schedule-efficient manner.
4PL providers offer complete visibility, real-time information and communication to collect, store and manage data from supply chain partners. They align 3PL providers, customers and other service providers to manage expectations and provide seamless supply chain services.
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Levels of Logistics Providers
Modern supply chain networks have successfully eased the delivery process around the globe. However, you must choose the most appropriate distribution strategy based on your business requirements.
As each level of party logistics becomes more sophisticated, the selection becomes more challenging. Here are explanations and requirements for each level:
1PL (First-Party Logistics)
Any organization that delivers an item from one place to another is a first-party logistics or 1PL provider. For instance, your local farm that delivers fresh vegetables directly to the market for sale.
2PL (Second-Party Logistics)
In this model, the business hires an external agency with a transportation mode for delivering products from the warehouse to the receiving end. The carrier is 2PL in this setup. For example, your local farm uses another logistics company to deliver vegetables to grocery stores.
3PL (Third-Party Logistics)
3PL services outsource tasks like order fulfillment, retail distribution, shipping, transportation and returns while maintaining management oversight. The provider is responsible for storing, packing and delivering your fresh vegetables to the market.
4PL (Fourth-Party Logistics)
An enterprise outsources the logistics, distribution and supply chain management process to a third-party service provider. The 4PL provider oversees all supply chain modules, including measurement, construction, evaluation, design and implementation. They also offer strategic insights into your business. For example, a 4PL provider will inform you to produce more vegetables if the store’s inventory decreases.
5PL (Fifth-Party Logistics)
5PL providers typically cover everything from the beginning to the end of the supply chain. Your business would generally outsource planning, management and coordination to the 5PL provider. In this case, the provider manages your entire business, from vegetable production to delivery.
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3PL vs. 4PL
Often, businesses are divided between 3PL and 4PL as a solution to optimize their supply chain operations. While both providers offer distinctive advantages, the right logistics solution depends on factors such as the company size, infrastructure, existing business model, budget and more.
Refer to our ultimate guide to 3PL to learn all about them before understanding the difference between 3PL and 4PL providers and determining the solution required to improve supply chain efficiency.
In a nutshell, the main difference between these providers is that while a 3PL provider manages the logistic processes of an organization, a 4PL provider handles the overall supply chain strategy, implementation and optimization. Here are a few major differences between the two options:
| 3PL | 4PL |
|---|---|
| These are better suited for small to mid-scale businesses and smaller organizations. | They are more suitable for mid to large-scale businesses and organizations. |
| 3PL providers operate on daily logistics, warehousing and transportation operations. | 4PL providers focus on strategic optimization and integration of supply chain functions. |
| They are more concerned with one-off transactions. | They offer a higher level of logistics and supply chain services by integrating resources, processes and technologies. |
| 3PL partners generally don’t own such assets. | 4PL partners may own assets like trucks, fleets and warehouses. |
| Businesses need to manage and overlook certain aspects of internal logistics functions, such as audits and optimizations, to enhance cost efficiency and overall performance. | These providers act as a single point of contact for the client’s entire supply chain operation. |
| They don’t control the latter’s activities, services and processes. | 4PL providers often employ, manage and coordinate the 3PL provider’s activities. |
Now, to decide between choosing 3PL vs. 4PL to optimize logistics and supply chain operations, businesses need to evaluate their existing supply chain network and strategy, available budget and resources, business needs and top priorities and expectations from the required solution.
Guided by these factors, and knowing the difference between the two can drive the decision-making process and ensure a smooth implementation.
In certain cases, existing 3PL providers can step up and offer the role of a 4PL, as they are already aware of an organization’s existing supply chain and its challenges.
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The 4PL Process
Let’s understand how the 4PL process works for an eCommerce company:
Step One: Transportation
The 4PL provider coordinates and organizes the transportation of finished products from manufacturers to the 3PL company’s warehouses.
Step Two: Warehousing
Once the products are in the warehouse, 3PL providers handle warehousing processes. These include day-to-day fulfillment tasks like receiving, storing, picking, packing and shipping.
Step Three: Inventory Management
4PL providers manage inventory using centralized inventory tracking. They also offer advanced inventory management systems to provide inventory visibility to the merchant.
Step Four: Shipping
The last stage involves coordinating and communicating with carriers to pick up the right orders from the 3PL warehouse and ship them out on schedule. They often use warehouse management software for this stage.
4PL Services
As primary managers of supply chain operations of an organization, the services offered by a 4PL include basic 3PL services, along with the following:
- 3PL functions like receiving, warehousing, picking, packing, shipping, returns and reverse logistics
- 3PL management
- Business planning and consulting
- Change management
- Project management
- Logistics strategy
- Logistics management for inbound, outbound and reverse logistics processes
- Inventory planning and management
- Network analysis and design
- Freight sourcing strategy
- Coordination and extension of the supplier base
- Analytics and control tower for transportation expenses, carrier performance and capacity utilization
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Advantages & Disadvantages
Outsourcing your operations to a 4PL partner comes with many potential benefits. As strategic, operational and technological partners, 4PL providers bring about the required changes in logistics processes for greater efficiency and cost-effectiveness.
Some of the advantages of 4PL include:
- Access a single point of contact for all vendors involved in the supply chain.
- Back-end system integration of logistics processes with other business functions.
- Reduced procurement costs and order cycle times.
- Standardization and automation of inbound, outbound and reverse logistics.
- Access to a broader base of suppliers, ensuring lower costs of transportation.
- Increase market transparency for goods and services.
- Reduced inventory wastage and inventory write-off costs.
- Greater visibility over the entire supply chain.
- Leverage strategic insights to create a lean, cost-effective supply chain with an improved profit margin.
While 4PL providers offer an array of benefits, they also have a couple of disadvantages, as they:
- Can be cost-restrictive for small businesses and organizations.
- Offer little control over fulfillment and logistics processes.
- Might have potential biases unrelated to efficiency or performance.
- Can be a daunting task to change a 4PL provider.
Do You Need a 4PL Partner?
As the upfront costs and data exchange involved in partnering with a 4PL provider are fairly intensive, it is advised to deliberate thoroughly before choosing. To evaluate further if your business needs a 4PL partner, you should answer these questions:
Are your supply chain expenses out of control?
In earlier stages of business, managing costs aligned with 3PL partners to ensure cost savings is easy. But, as growth happens, it becomes more difficult to manage sourcing and negotiation. Slowly, it gets to a point where margins are affected, and growth slows.
Especially in the “new normal,” creating economic profit within logistics functions can prove to be a tougher deal than it already was. If your business is already there or getting to that point, you should consider outsourcing your supply chain to a 4PL partner. Their ability to provide agility in resource allocation can manage supply chain operations in an uncertain world.
Is your network of 3PL vendors getting hard to manage?
Like the case with supply chain expenses, growing businesses partner up with more and more 3PL partners. Handling each with their own processes can be burdensome as they take away precious time from core activities. Bringing in a 4PL partner will offer you a single point of contact and accountability while standardizing processes.
Is your business planning to or ready to serve customers globally?
Setting up and managing international supply chains can be complicated. You need to consider multiple factors like customs, taxes and international regulations. With their experience and expertise, 4PL partners can ease the effort of operating a complex global supply chain while allowing your business to grow rapidly.
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How To Choose a 4PL Provider
Choosing the right partner can be tough without the right evaluation parameters. As you consider and evaluate multiple options, consider the following key points:
Map out your existing supply chain network and processes first
Before evaluating a partner, map out the existing supply chain network and get your 3PL partners’ details, processes and technological capabilities. This will highlight the gaps and leaks in your supply chain processes.
In some cases, existing partners can provide additional services similar to 4PL functions, including IT and strategic consulting, cross-docking, analytics and more. Working on restructuring and optimizing supply chain operations with an existing partner can be time-efficient since they already understand the business model.
Define business and financial goals
A critical factor in deciding on a strategic 4PL partner is ensuring their financial health is up to par. A business trying to set itself up to be sold or acquired can cause issues. Similarly, a 4PL company dependent on raising funding from VC firms or investors can leave you in a lurch if they fail to secure the required funding.
At the same time, you should also be clear on your business and financial goals with the 4PL partner you plan to implement. This list of warehouse management software requirements can help you create your own list of 4PL requirements.
Lay down the right metrics
As 4PL companies tend to go heavy on IT solutions and data-based analytics, they offer their own metrics and KPIs to evaluate their and their network’s performance. As important as these metrics are, they shouldn’t be the only guiding factor for performance evaluation.
You should also consider metrics like transportation and warehousing costs, warehouse locations, geographic coverage and asset network, on-time delivery, volume handling capacity, and ROI while choosing a provider.
Metrics like transportation and warehousing costs, warehouse locations, geographic coverage and asset network, on-time delivery, volume handling capacity and ROI should also be considered while choosing a provider.
Explore the assets, resources, network and expertise of the 4PL partner
Continuing from above, take time to understand the full scope of services you can expect from your potential provider. Apart from warehouses and freight, delve into their assets and resources, partner network and vendors, expertise and experience related or similar to yours.
Strategic consultancy and support functions are among the most important aspects of outsourcing supply chain operations to a 4PL company. Understand their expertise in IT, finances, taxation, logistics and customer services to benefit from the full services of the chosen provider.
A detailed review of their tech expertise can also help you understand whether your 4PL partner would be able to match stride with emerging supply chain trends such as AI, IoT, automation and robotics.
Discuss unique requirements
Since each business has its own unique model, challenges and goals, discuss each detail and set expectations early on to determine the right match for your provider. Moreover, if you already have a network of 3PL partners, check if your 4PL provider is willing to manage and optimize your existing network.
Check customer references
Before deciding on a partner, speak to their existing customer base to fully understand their experience. Seeking details about implementation processes, problem solving, goal completion and coordination with the team provides practical insights into the 4PL partnership.
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4PL by Industry
E-Commerce
Top eCommerce companies like Amazon use 4PL to manage their supply chain. However, since very few companies can match the resources of eCommerce giants to own and handle the entire supply chain, smaller companies generally use it to gain strategic insights.
4PL can help you build a new supply chain or optimize your existing one by analyzing business data and providing strategic insights. Though 3PL has historically been the preferred model for retailers and eCommerce businesses, 4PL is gaining popularity rapidly. As eCommerce companies become more sophisticated in their operations, the requirement for a holistic management approach becomes increasingly prominent.
Medical Industry
Surgeons place several last-minute orders, some even after the anesthesia process has begun. They may also order products in various sizes, like knee replacements. In these cases, your timeliness and order fulfillment can save lives.
A 4PL provider has enough resources to efficiently manage tightly scheduled product deliveries and complex chain of custody requirements with top-notch precision while reducing inventory costs.
Field Services
Field service businesses require a 4PL provider to take control of warehousing, transportation and fulfillment. Integrative technology allows it to streamline the supply chain by analyzing previous order data to determine requirements based on anticipated demand.
Field technicians aren’t required to work as warehouse operators anymore. All technicians get better visibility into inventories and locations of parts, ensuring quick delivery times and better order fulfillment.
FAQs
What is a 4PL model?
In a 4PL model, an organization outsources its end-to-end logistics processes as well as the execution, management and optimization of the supply chain. Apart from the operational management of the supply chain function, a 4PL provider offers strategic insights into the organization’s supply chain to bring and manage change for better performance and cost efficiency.
What are the advantages of 4PL?
As mentioned above, the primary advantages of one of these providers include a single point of contact and accountability for the entire chain, improved focus on core competencies, standardization of logistic processes, optimization of material flow, cost-effective sourcing, global expansion opportunities and more.
What are the components of 4PL?
As defined by Accenture, a 4PL has four key components: Architect/Integrator, Control Room, Supply Chain Infomediary and Resource Provider. Being an architect or integrator is the core definition of a 4PL in the sense that they define supply chain design solutions and offer the supporting skills to integrate the required resources, capabilities and technologies.
The control room component of 4PL focuses providers on daily operations as decision-makers and manages multiple 3PL partners. A supply chain infomediary refers to creating an interlinked infrastructure between various supply chain vendors and members, providing better visibility and control to the enterprise partnering with the 4PL provider.
The capability of being a resource provider has been modified since its original formulation since providers are more asset neutral and don’t necessarily have extensive physical resources.
What are some examples of 4PL?
Some famous examples of 4PL providers include Amazon, Delivery, ShipHero and the Shopify Fulfillment Network.
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Next Steps
Overall, a reliable 4PL partner can add a lot of value to an organization’s logistics process and supply chain performance. Large-scale and rapidly expanding businesses can especially benefit from outsourcing their supply chain operations to 4PL companies, as they offer a re-engineered and insightful strategic approach. With a single point of contact and accountability, they let businesses focus on their core activities.
Also, integrating a warehouse management system helps get the best out of your 4PL process. Check out our free comparison report to analyze top products, their features and scores to make informed software decisions.
Which operational challenge can a 4PL company help you solve? Drop your thoughts and concerns in the comments below.