Fourth-party logistics (4PL) companies play an important role in the supply chain. They not only perform many of the same functions as third-party logistics (3PL) but they also take on greater responsibility while assisting corporate clients in achieving their objectives.
The primary distinction between a 3PL and a 4PL supplier is the degree of responsibility and control. 4PLs are more like trusted advisers who frequently rely on their expertise and services to grow and accomplish their clients’ objectives. Depending on the size, nature of business, and goals and objectives of your company, only one of these solutions will be ideal. Here’s what you need to know about the differences between these two logistics management systems.
What is a 3PL System?
3PL stands for third-party logistics, which plays an essential role in a supply chain system where a manufacturer retains control over their supply chain but hires a 3PL provider to handle logistics. Third-party logistics providers specialize in storing inventory, managing stocks of goods for a manufacturer, and transporting and delivering, generally by leveraging IT.
The Advantages of a 3PL System
3PL systems operate and maintain an extensive network of resources to provide multiple benefits to supply chain systems. One of these advantages is their relationship with transporters, saving manufacturers unnecessary expenses. 3PL providers keep their clients from spending money in acquiring warehouses, logistics staff, and technology. Some also handle billing, staff training, and other supply-chain-related matters. A 3PL system, hence, can increase warehouse space, transportation, and staff as per their client’s inventory and logistics needs.
Disadvantages of a 3PL System
Alongside multiple advantages, 3PL systems do have some disadvantages. 3PL systems are optimized to handle large orders from the get-go. Thus, if the client receives only a few orders, the respective client will be paying more supply chain expenses than you’ll be earning.
Large businesses need to manage their supply chains to earn a competitive advantage over their rivals and retain control over all customer touchpoints; therefore, outsourcing these operations to a professional third-party logistics company will not make business sense.
What is a 4PL System?
Fourth-party logistics is a strategic approach in which firms outsource the organization and administration of their supply chain to a third party. Moreover, 4PL provides companies with efficient supply chain management solutions. It allows manufacturers to outsource their logistics operations to specialists for better management and economies of scale.
For example, a manufacturer may outsource warehousing and distribution of its items to a 4PL business. A 4PL firm will then take over the responsibility of all of these operations, allowing the manufacturer to concentrate on other elements of the business, such as growth and expansion.
Advantages of a 4PL System
There are multiple advantages associated with using the 4PL system. One of the advantages revolves around the information technology the 4PL systems employ to manage a company’s logistics and supply chain networks. Moreover, the use of technology helps make these departments’ workflow more streamlined and efficient across the board.
The second advantage is the use of solution-oriented approaches to meet the business requirements set by the client. While managing complex operations such as the supply chain, there are many problems one can encounter. 4PL systems navigate these issues by deploying their powerful data resources, operational efficiencies, extensive networks, as well as their acute knowledge of shifting market dynamics.
Disadvantages of a 4PL System
One of the disadvantages of using a 4PL system is the loss of control an organization can face with its logistics and inventory management. As a result, the business owner loses control over transportation and logistics operations, as well as outcomes and efficiencies.
Similarly, the transition from a company-owned logistics to a 4PL system can be difficult and might lead to a cost increase, at least in the short run. Hence, hiring a 4PL provider may not be suitable for small and medium enterprises due to the costs involved.
When a manufacturer partners with a third-party logistics provider, he can benefit from accurate order fulfillment, faster delivery times, cost savings, and continuous improvements.
Whether one opts for a 3PL system or a 4PL system depends on what each system is designed to perform, and what specific benefits it can bring to the business.
4PL systems are generally meant to manage the entire supply chain of an organization. In comparison, a 3PL system handles mostly the logistics activities of an organization. The difference between the two systems makes them suitable for different types of businesses.
While the 4PL system is ideal for a large-scale organization aiming to improve its supply chain functions without losing focus on other departments, a 3PL system, on the other hand, is designed for growing businesses that aim to scale their operations at an affordable price