Should I work with 3PL or 4PL? Pros and Cons

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✨ Post actualizado el 19/06/2024 por David Costarrosa

Should I work with 3PL or 4PL?

Some time ago we analyzed the importance of having good logistics planning as a critical element in successful ecommerce business models, aiming to provide the customer with the best possible service.

In fact, everything related to logistics management has become one of the most vital aspects for the success of an ecommerce business.

In addition, companies are devoting more and more resources to everything related to good practices and the importance of customer service within the process of selling a product.

For that reason, it is not surprising that, according to Granviewresearch.com, the ecommerce logistics sector projects annual growth of more than 20% between 2023 and 2030.

That is why today we are going to help you decide the best option for you when choosing between 3PL and 4PL, with all the information currently available.

We will discuss the advantages, disadvantages and differences between them and, above all, which one will adapt better to your business dynamics as per the current state of your ecommerce business.

Overview of 3PL and 4PL

Definition of 3PL and 4PL

As we have mentioned, in this article we want to give you as much information as possible so that you can make the best decision for the future of your ecommerce business.

So, let’s start with one of the million-dollar questions:

What is 3PL and 4PL?

Third-Party Logistics (3PL) is carried out by an external company that, in general, is also in charge of storing the stock and working with the transport company to carry out the whole process of shipping the package to the customer’s address.

This type of company acts as an intermediary between the manufacturer and the ecommerce business owner to facilitate and professionalize the logistics area with the objective of helping the growth of an online store.

Logistics Technology Integration is often a key service offered, ensuring that the 3PL systems are compatible with the ecommerce platform for seamless operations.

On the other hand, a company offering Fourth-Party Logistics (4PL) acts as an orchestrator. That is, it not only handles the logistics side but also gets involved in supply chain management, focusing on supply chain strategy and optimization to improve the overall supply chain.

Key functions of 3PL and 4PL

In order to help you make the right decision, we will analyze the main functions of companies offering 3PL and 4PL services.

Third-Party Logistics (3PL)Fourth-Party Logistics (4PL)
Transportation: 3PL professionally and efficiently coordinates the entire transport of goods from point A to point B through a logistics company.Strategic management: 4PL develops a logistics strategy that adapts to your company or ecommerce business. To do so, they integrate with your business to understand its needs, challenges and main objectives.
Warehousing: Through a warehouse or distribution center (or several of them), 3PL provides a safe place for you to store your goods and your products until they are sold and need to be shipped to the customer.Supply chain optimization: As we mentioned earlier in this article, through the use of tools and technology, the role of 4PL is to optimize every link in the supply chain of your ecommerce to the maximum.
Inventory Management: Thanks to the use of proprietary software, the customer will have access to its inventory and the status of each of the packages that are on their way to the different end customers. You will know exactly how much stock you have left of a product and where each of the packages that have been shipped is.Multi 3PL coordination: Thanks to their structure, 4PL can function as a central coordination manager and effectively integrate all of your company's outsourced services.
Packaging: It is common for 3PL companies to offer additional services such as customized packaging as well as checking the condition of the goods received before being stored in the warehouse.Customized solutions: Thanks to this analysis and integration into your ecommerce supply chain, a 4PL business' solutions are much more customized and less general than those offered by 3PL companies.
Customs clearance: Another of the additional services that 3PL companies usually offer is everything related to customs clearance and reception of goods from foreign countries.Monitoring and reporting: Through its own software, 4PL offers all kinds of reports and monitoring on the different areas of execution of the proposed strategy.

When would you use 4PL instead of 3PL?

When deciding on the future of your ecommerce business’ logistics, you must take into account your personal scenario in order to make the right choice of which of the two services will best suit the dynamics of your company.

Specific scenarios where 4PL is more suitable

LogisticsBureau claims that since the 2020 pandemic (even sometimes before) the growth of companies offering 4PL has been exponential.

In other words, companies have decided to intensify their logistics activity through a 4PL solution service.

In the article Why Large Companies Increasingly Opt for 4PL Services”, it remarks, again and again, the differences that we have also established in this article: In general, small and medium-sized companies turn to a 3PL service while the bigger fish do so through a 4PL provider.

That is why if your company has operations and logistics in several countries, a company offering 4PL will be able to organize and coordinate the different supply chains involving the various countries in a more efficient way.

Similarly, if you are looking for cutting-edge technology, utilization of multiple 3PL companies or an efficient way to integrate and analyze the supply chain operation, then 4PL will be the best choice.

Comparison of control, complexity and cost in using 4PL vs. 3PL

Making the right choice about hiring a 3PL or 4PL provider is not just about a job, it’s about a way to develop and take your business to the next level.

That is why you should be clear about where you are today and, based on that, use this chart as a guide to make the right decision.

Additionally, consider a Cost Analysis (3PL vs. 4PL) as part of your evaluation to fully grasp the financial implications of your choice.

3PL

Control: It focuses on specific tasks such as the transport and storage of goods and is therefore limited in scope.

Complexity: Its resources are more limited and its capacity caters to simpler and more direct operations.

Cost: Although its cost is lower, the scope of its services is also more limited and could entail some loss of opportunity.

4PL

Control: Thanks to its capacity and structure, it offers much more comprehensive control.

Complexity: Can deal with much more complex operations in order to optimize the supply chain.

Cost: Although at the beginning it is seen as a much pricier investment, the benefits will be greater thanks to its effect on the dynamics of the company.

Real-world examples of businesses benefiting from 4PL

Apple

This technological giant created by Steve Jobs has a complex and sophisticated manufacturing and distribution system for its products.

Given the magnitude of its structure, it has a wide network of suppliers, manufacturers and distributors that ensure that its products reach the final consumer quickly and maintain the company’s quality standards.

As confirmed by Dfreight.org, Apple uses the SCM & ERP system to manage and ensure the efficiency of its products and services.

IKEA

IKEA’s supply chain is supported by 3 fundamental pillars: global sourcing, process automation and lean manufacturing.

From a global sourcing standpoint, IKEA works to procure products from a wide range of areas including Europe, Asia and the United States.

Then, it automates all its processes through the use of robots and proprietary systems that allow it to lower costs and optimize its resources to the maximum.

Finally, through lean manufacturing it drastically reduces material costs with the aim of improving production.

This comprehensive strategy is overseen by a 4PL service that has also become a key component of its success and has enabled the company to maintain its position as one of the leading brands in the market.

Advantages and Disadvantages of 4PL and 3PL

Making the right decision requires information. That is why in this chart we will show you the advantages and disadvantages of 3PL and 4PL in 3 fundamental pillars: The pros and cons of each, alignment with business objectives and the scalability and flexibility in logistics of each of them.

Advantages 3PLAdvantages 4PLDisadvantages 3PLDisadvantages 4PL
Pros and ConsLower initial cost. Easy to integrate into the business dynamics. More direct contact.Customized solutions adapted to your business. Strategic control over the supply chain.Less ability to control the supply chain.A major cost that is difficult for a small or medium-sized company to meet.
Alignment with business objectivesIt is up to the company to adapt to the services offered by 3PL companies. It is ideal for companies with basic logistics needs.It is aligned and adapted to each business or company in order to optimize the logistics process. It is an integral optimization.It will be difficult to establish specific requirements or company-specific requirements.It requires time to adapt to the dynamics of the company and a higher level of investment to achieve the objectives.
Scalability, flexibility and technologyIt can be open to adopting new technologies and offer a flexible service.Greater flexibility and scalability thanks to its large amount of local and global resources. In addition, accompanied by a high degree of technological implementation.Scalability is limited and dependent on the 3PL company structure. Flexibility and technology are also limited to its own structure.Not as much flexibility for short contracts. Implementation of resources can take time.

How to Choose Between 3PL and 4PL for Different Business Sizes

We have previously discussed the advantages and disadvantages of each of the services, both 3PL and 4PL.

But it’s time to decide and for that the first thing you have to do is to establish the size of your business.

From there, it will be much easier to make the right decision on which model to opt for.

If you are a small company, it is very likely that you do not need large resources to manage the logistics of your ecommerce business, that is why opting for a 3PL service will help you to optimize the shipping processes of your packages and handling of your goods.

If instead your company is in the middle ground, you can consider a 4PL service that will give your business that leap in quality to the next level thanks to its large amount of resources or start with a 3PL service and evaluate the change in the future.

For large companies, the only viable path is through a 4PL service in which they can optimize the supply chain to the maximum.

A step-by-step guide to evaluating options

The million-dollar question would be: How can I make the right decision?

Of course, we cannot, from where we stand, know what the best option for you will be. But we will leave here a guide of 7 fundamental steps with the aspects that should be taken into account so that you can put it on the table when the time comes to make the decision.

🚀 Scope of your company's services

At this point you should evaluate the needs of your ecommerce business in relation to the service provided. If all you need is to optimize your logistics and merchandise handling process, a 3PL service will surely be the best.

If you are looking for a more comprehensive development of the entire supply chain of your ecommerce business, the scales will tip in favor of the 4PL service.

🔎 Market options research

Once you have established which of the two services best suits your business, it is important to open the range of options to establish which company will carry out the work.

📝 Request for Quotations

Once you have selected 3 or 4 options from the list, it is time to contact each of them and request a quote based on the needs established in the first point.

⚖ Cost-Benefit Evaluation

With the budgets in hand, it is time to evaluate each of them and establish costs and benefits in order to fine-tune the choice.

⚙ Evaluation of tools and resources

When it comes to the success of your decision, evaluating the available tools and resources is crucial. In this context, Decision-Making Tools and Resources for Logistics Selection play a significant role.

The objective here is to assess the management software and logistics tools that each company offers. This will help you determine if they can be adapted to and enhance your business operations.

☑ Pilot test

Before agreeing to move forward, you can request a trial period to evaluate that the proposal fits what you have been looking for.

🤝🏻Hiring

After this trial period and with the certainty that the chosen service will optimize and improve the quality of the business, you can proceed with the execution of the contract.

Case Studies

Case Study 4PL service

One of the biggest companies in the power systems industry needed to optimize its systems for B and C hardware for its more than 50 suppliers worldwide.

With an average of 1,000 parts per million, they were looking to reduce costs, increase efficiency as well as improve on-time delivery (it was below 80%) and quality to focus on core activities.

To achieve this, the company chose Incora to develop and implement a customized logistics program at the manufacturer’s facilities combining its expertise with 4PL forecasting systems to achieve the most optimal results.

What were the results?

Before IncoraAfter Incora
On-time delivery in full79%99+%
Parts spend26+ million25+ million
Suppliers to manage581
Employees managing suppliers60
Inventory months40
Working Capital$23+ millionNegative
Parts per million (Quality)1000+17

Thanks to the success of this implementation, Incora has expanded its work to more than 28 global sites in the same group.

Case study 3PL service

Company: Puma

Objective: Improve the speed of delivery of retail orders and increase warehouse space through automation.

Bastian Solutions has been in charge of carrying out this work for PUMA, which due to the growth of ecommerce was at a crossroads with its only sourcing center in California.

Bastian Solutions was already part of the team and as a result was able to coordinate a strategy at the automated facility in Indianapolis.

With the implementation of the AutoStore Black Line system and packaging automation, they have been able to offer 10 times more capacity and, in addition, have increased their speed in retail package processing by 20%.

Conclusion

Making the right decision will be difficult but necessary.

When the time comes to set the stage, you will be able to take into account each of the points we have discussed in this article to know exactly which service will be the right one for your company.

In addition, having an overview of where your business stands needs to be a priority, including what you can already control and what needs to be covered in order to make that leap in quality and focus your energies on other areas of development.

Remember that you have at hand the guide with the 7 fundamental steps to help you make the right choice when it comes to your logistics service as well as the keys to what each one can give you.

FAQ

How do 3PL and 4PL integrate with existing ecommerce platforms?

While both 3PL and 4PL providers can be seamlessly integrated into ecommerce, the nature of the integration may be different.

While on the 3PL side this is generally done through an API that connects to environments such as Shopify or WooCommerce, 4PL offers a much more comprehensive service that includes everything from the sourcing of raw materials to management with the customers themselves.

Can small businesses benefit from 4PL?

While it is true that some small companies could potentially benefit from a comprehensive 4PL service, they should consider whether the costs and implementation of the service make good business sense and would not be a risk to the development of the business.

How to transition from 3PL to 4PL if needed?

Transition can be complex but at the end of the day it must be necessary. A stormy start cannot overshadow all the benefits in the future.

At this point, it is important to point out that it must be a slow and steady process.

With clear objectives, evaluating each of the companies and knowing perfectly well that the moment to make this transition is the right one.

When deciding between 3PL and 4PL services, Legal Considerations (Contracts, Compliance) should not be overlooked.

Firstly, 4PL services usually require a long-term contract with specific clauses whereas a 3PL service is subject to a more “day-to-day” service.

In the case of 4PL, it is important to make it clear in the contract who will be responsible for any possible inconveniences, since the decision-making and management power of this type of service is much greater than that of a 3PL provider.

Finally, you must ensure that the companies of both services have the appropriate regulations and comply with all aspects of GDPR.

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