With decades of experience catering to third-party logistics (3PL) providers, we know that these businesses have historically been a driving force in the logistics services industry, especially the warehousing sector. However, it’s becoming increasingly more common to see companies providing fourth-party logistics (4PL) or even fifth-party logistics (5PL) services.
With the rise of ecommerce, heightened consumer expectations (fueled by the Amazon Effect) now require service providers to become more agile to rise above the competition as logistics partners. Single-point distribution models increasingly struggle to keep up with the modern pace of ecommerce fulfillment and are less suited for complex supply chain operations. Now is the dawn of the 4PL era.
Through assembling a multi-nodal network of other geographically dispersed warehouses to provide consistently expedient last-mile delivery on behalf of their customers, these 3PLs are evolving into fourth-party logistics providers to create the future of fulfillment by embracing cutting-edge supply chain solutions.
In this article, we’ll dive into what makes up a 4PL and what’s driving the growing popularity of this logistics model.
There are two main forms 4PLs can take:
The main difference between 3PL and 4PL is that 4PL has an extra degree of distance between the logistics provider and consumer where the 3PL acts as an intermediary between the merchant and the final consumer, hence the “third-party” name.
Another key difference between 3PLs and 4PLs is that 3PL providers own all or most of their own assets necessary to provide logistics services in-house including warehouse space and sometimes even trucking fleets for freight forwarding.
By contrast, 4PLs can be non-asset-based; they provide logistics expertise and IT systems—fulfillment software—but may not own any warehouses or other physical assets. Instead, the 4PL provider acts as an outsourced partner that oversees the movement of goods, information, and services across the supply chain, utilizing advanced technologies and data-driven insights to optimize operations and improve overall supply chain performance.
A traditional third-party logistics provider owns the relationship with their client, say, a retailer or ecommerce business, and neither owns the products nor interacts with the purchasers of the brand’s products. However, let’s say this retail brand provides ecommerce customer service all over the country. If the 3PL only operates one or two warehouses, it can be difficult to provide the speed of shipping that the brand’s customers expect and remain cost-effective.
In this case, the 3PL provider may enlist other 3PL warehouses to assist with servicing regions in which it does not have warehouses. The organizer of this network of 3PLs is considered a 4PL and remains the single point of contact to their client.
The original 3PL can benefit from outsourcing portions of the logistics management process to others in different locations, allowing them to efficiently keep up with growing region and time expectations. It is a mutually beneficial process in which all 3PLs involved can take on more clients than they would be able to otherwise given capacity constraints and the difficult warehouse real estate market.
The rise of 4PL can be attributed to supply chains' increasing complexity and globalization. Today's supply chains are vast networks spanning multiple countries and involving numerous suppliers, manufacturers, distributors, retailers, and customers. Managing such complex supply chains requires high levels of coordination, visibility, and efficiency, which can be challenging for businesses to achieve independently.
This is where 4PL comes into play, offering a holistic and strategic approach to supply chain management with core competencies grounded in technological sophistication and risk mitigation against supply chain disruptions & economic fluctuations.
Beyond the standard warehouse management system (WMS) software, 4PL providers utilize advanced analytics, automation, artificial intelligence (AI), and other cutting-edge technologies to gain real-time visibility into the supply chain, track & analyze data, identify bottlenecks, and make data-driven decisions. This enables businesses to streamline their supply chain processes, reduce costs, improve delivery times, and enhance customer satisfaction. This also benefits their clientele by giving them access to advanced technologies—which can fuel business strategies like demand forecasting and improve supply chain visibility—that would be resource-intensive to acquire independently.
Traditional 3PL warehouses evolving to provide 4PL services can distribute inventory strategically by location, thereby cutting delivery times and costs. This organic 4PL network allows logistics companies to provide greater value for their clientele, such as the ability to deliver products across many geographic regions in ideal timeframes, while capitalizing on market opportunities to increase their potential revenue and profitability. This optimization of the logistics process enables the brands served to compete at scale in the world of ecommerce, which can boost customer retention and acquisition.
4PL companies often have access to a vast network of partners, suppliers, and carriers, which allows them to negotiate favorable rates and terms and optimize transportation routes, resulting in cost savings and improved efficiency. This means their clients wouldn’t need to manage multiple partners as the 4PL provider serves as the single point of contact for all of their logistics operations and fulfillment needs, enabling them to spend less time and energy orchestrating logistics processes and instead focus on other revenue-boosting business activities.
Businesses can engage 4PL providers on a contract basis, allowing them to scale their supply chain operations up or down depending on their needs. This eliminates the need for businesses to invest in expensive infrastructure and resources to manage their supply chains, making it a cost-effective solution. Additionally, 4PL providers can offer customized solutions tailored to the unique requirements of each business, providing a high degree of flexibility and adaptability.
Emerging technologies necessary to bring fourth-party logistics to life are more attainable than ever before.
Extensiv's fulfillment solutions combine elements from our order management tool and 3PL WMS platform to give real-time visibility into inventory status, order fulfillment progress, and data analytics metrics across the 4PL network, allowing you to optimize inventory management and route orders from one 3PL to another.
Outsourcing a portion of the logistics process doesn’t have to mean giving up control or losing business to a competitor. In fact, the opposite is true; by creating your own 4PL network powered by Extensiv Network Manager—which boasts automation features that streamline, simplify, and illuminate billing processes at every node—all parties involved in the partnership profit from working together.
Request a demo to find out more about how Extensiv can help you embrace the future of logistics!