Everyone in eCommerce has heard of — and at least considered partnering with — Third Party Logistics companies (3PLs.) But what about Fourth Party Logistics companies (4PLs)? What are they? And — when it really comes down to it — what’s the real difference between 3PLs and 4PLs? Finally, how do you know which one to choose as your fulfillment option? Do you even need to choose or can you use both? Let’s examine the differences, similarities, pros and cons of 3PLs and 4PLs.
What’s a Third Party Logistics Company (3PL) anyway?
At its most basic, a Third Party Logistics Company (3PL) is an outside company hired to handle ecom logistics like inventory management, warehouse storage, and order fulfillment. Instead of handling all these processes internally — and building a supply chain that can do it all — they outsource.
Not all 3PLs are the same. Some specialize in transporting your products; some specialize in warehousing/distribution; some even offer freight auditing, bookkeeping and inventory management. Their services differ too: some stick to the absolute basics while others handle returns, use your packaging choices for fulfillment, or support kits and bundles. They also come in different sizes, with different distribution patterns: some 3PL only have warehouses in one state or location while others are all over the country.
Outsourcing to the right 3PL for your needs can come with plenty of benefits. Because 3PLs tend to serve more than one business, they can build processes at scale, renting larger warehouses or transport fleets and negotiating better bulk prices for services. This also allows their fulfillment teams to automate or streamline specific operations processes so that things flow faster and smoother.
Partnering with one — or several — can cut down on hiring needs, dealing with carrier companies to optimize freight costs, or facing shipping and fulfillment delays because all your inventory is in one place. In short, third-party fulfillment can help lower costs of storing inventory and fulfilling orders; it can also increase the number of orders you can fill.
What’s a Fourth Party Logistics Company (4PL)?
You would think that — like 3PLs — 4PLs would be professionally run logistics companies that handle storage, packing and fulfillment at scale. But that’s not the case: not exactly, anyway. A 4PL isn’t just a 3PL with something extra stuck on top. If a 3PL is more like a bed and breakfast — owning property and renting out rooms and services — a 4PL is closer to AirBnB. It’s a software interface that connects you with different available warehouses and 3PLs that fit your fulfillment needs without actually owning any of them.
Essentially, a 4PL is an overlay control center that helps you track efficiency, cost and resources. The idea behind 4PLs is this: they try to take everything you’re doing — your whole operation — into account and make it as efficient as possible so you can streamline fulfillment. 4PLs include services like Deliverr and Ware2Go. These services contract with 3PLs to handle fulfillment and write the software that picks up, routes and packs orders.
3PL or 4PL: which one is right for you?
The main difference between a 3PL and 4PL is their business model.
A 3PL typically owns — or leases — the assets it “lends” to eCommerce businesses like the equipment and space. When you sign up with a 3PL, you’re essentially “renting” a part of the service they offer. You’re also competing for space — and deals — with other eCommerce businesses. However, because they own what they offer, this gives 3PLs closer control over the pricing and services they offer which, in turn, can give eCommerce businesses more negotiating power.
A 4PL, on the other hand, are essentially a management company that makes software. Their job is to — typically — help you integrate and optimize your supply chain. A 4PL can work with 3PL providers, helping you find the best way to move and distribute products across multiple 3PLs and warehouses so that you create the most efficient operations process possible. Theoretically, a 4PL gives you access to a larger fulfillment network.
When a 4PL works as intended, you get most of the benefits of a 3PL with access to a larger distribution network. However, this decreases the level of custom negotiation you can do with individual 3PL providers. Let’s go back to the traditional BnB (3PL) vs AirBnB (4PL) comparison.
If a BnB has a lot of empty rooms or has experienced a bad season and wants to win customers, they have a lot more room to negotiate because they decide what their interests are. AirBnB on the other hand does not have the power to negotiate — or offer extras — for individual vendors: each vendor sets their own controls and the company can’t influence that too much without risking the relationship.
In short, both 3PLs and 4PLs can be viable options. Ultimately, you need to decide which approach makes the most sense for your business goals. If you need help connecting your 3PL or 4PL to your other tools, Pipe17 is here to help.