3PL and 4PL: How Can Supply Chain Management Minimize Costs

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Thinking about outsourcing logistics? 

 

One of the most important decisions you will have to make at this point is whether a 3PL or 4PL logistics provider is right for you. 

 

To make the best choice, you need to fully understand how both models work, their pros, and their cons. 

 

But fear not! Today we’ll explain how 3PLs and 4PLs work, their differences, how they manage supply chain costs and which to pick depending on your circumstances. 

 

Let’s begin!

 

What is “PL,” anyway?

 

In logistics, “PL” refers to Party Logistics. As in 3rd Party Logistics and 4th Party Logistics

Layers of Logistics

The term is mainly used to refer to the level of logistics outsourcing. 

 

So the higher the number in front of the PL, the higher the level of outsourcing. 

 

While 1PLs, 2PLs, 3PLs and 4PLs are the most common forms, you’ll find that many supply chain operations vary all the way to 10PL, depending on the scale and complexity of operations.

 

What is 3PL 

 

A 3PL is best defined as the middleman between your business, your supplier and the carriers that deliver products to the final users.

 

These service providers deal with a host of order fulfillment duties, from sourcing to warehousing, inventory management, picking, packaging, and shipping. 

 

Additionally, most 3PLs have their own facilities and assets where they store, transport and fulfill your inventory.

 

By outsourcing to a reputable 3PL, you effectively create the time and space to concentrate on building your business through marketing and strategy. 

 

Meanwhile, we will work tirelessly in the back-end to streamline your fulfillment operations and guarantee satisfied customers!

 

Pros of 3PL logistics 

 

1. Discounts, Infrastructure and Scalable resources

 

Every ecommerce seller knows package and return shipping can be one of the largest expenses. 

 

Because shipping rates are mostly dictated by order volume, working with the right 3PL opens the way to more economical logistics rates.

 

But apart from bulk discounts, top 3PL providers can acquire numerous cost advantages thanks to our infrastructure and extensive industry networks. 

 

As a result, you can execute every step of logistics cost-effectively and efficiently. And you’ll never have to worry about inventory and logistics hurting your profitability.

 

2. International reach

 

A reputable 3PL provider will overcome cross-border obstacles. 

 

With specialized knowledge of local markets, regulations, and government agencies, we will help you facilitate cross-border orders while you focus on areas of your core competence.

 

3. Industry expertise

 

To succeed at what we do, 3Pl providers have to stay on top of the newest trends and advancements in manufacturing, technology, and logistics. 

 

That way, we can ensure only the best service to drop shippers and e-commerce sellers in need of timely order fulfillment.

 

Furthermore, tech-enabled 3PLs like Globallyfulfil operate robust software systems that are capable of inventory management, real-time monitoring, and advanced reporting.

 

Looking for the best 3PL solutions in China? Check out our comprehensive guide to find the perfect 3PL fulfillment fit.

 

4. No manual inventory audits. 

 

When you house your inventory at a 3PL fulfillment facility, you do away with the awfully intensive task of auditing your inventory yourself. 

 

This will save a huge amount of time, which in turn, opens more opportunities to refine the revenue-generating aspects of your business.

 

As your fulfillment provider, Globallyfulfill takes on these duties and syncs the findings with our 100% free stock management tools so you are always informed about your inventory quantities.

 

Cons of 3PL logistics

 

Cons of 3PL logistics 

 

1. Limited customization 

 

A lot of 3PL companies offer standardized services, so this can be limiting if your situation requires customized logistics and fulfillment solutions. But don’t take that to mean every 3PL isn’t flexible. Far from it. 

 

2. Reduced visibility and control;

 

Another disadvantage that might follow working with a 3PL is the potential loss of visibility and control. 

 

While you benefit from abundant expertise and resources, you’re no longer in control of operations like quality control, warehousing and fulfillment, so hiring an unreliable 3PL may pose drastic consequences for your ecommerce business.

 

What is 4PL logistics?

 

On the other hand, 4PL providers (or lead logistics providers) are operators that focus on designing and optimizing your supply chain. 

 

Moving beyond physical logistics, 4PL providers tend to deal with tasks like management, IT, consulting and finance. 

 

In practice, a 4PL is responsible for managing your 3PLs who in turn will perform the physical operations. 

 

Pros of 4PL logistics 

 

1. Central Vendor management

 

As a single point of contact, a 4PL provider essentially serves as an intermediary between you and your 3PL agents.

 

Put another way, you won’t have to disjointedly deal with the difficulties that usually come with managing multiple partners yourself. 

 

Rather, your 4PL will supervise the operations of your 3PLs and deal with any problems that arise.

 

2. Reduced data complexity

 

Another benefit of 4PLs is the reduced data complexity. 

 

Your 4PL will aggregate data from all your 3PL providers and give you a bird’s eye view of your inventory, orders, shipments, and other key metrics. 

 

This enhanced visibility will only enable you to react quicker to market demands and to get a better feel of the weaknesses and strengths within your supply chain.

 

3. Client and solution-driven approach

 

A 4PL is meant to be a neutral party that will design supply chain solutions that align with your unique requirements. 

 

As a result, your 4PL leverages its expertise in warehousing, distribution, IT, and logistics to model a supply chain tailored to your specific logistics needs.

 

Cons of 4PL

 

1. Limited logistics control 

 

Just like with 3PLs, one drawback of 4PL providers is that relinquishing supply chain oversight to them can result in limited control over the logistics process. 

 

2.  Potential biases against other carriers

 

A potential disadvantage of 4PLs is existing biases against carriers and agents that refuse to work with them. 

 

This is concerning because it’s your 4PLs responsibility to pinpoint and strengthen weaknesses in your supply chain, which often means routinely selecting the best carriers for your specific logistics situation.

 

3PL Vs 4PL Compared

 

3PL Vs 4PL compared

 

1. Responsibilities

 

A 3PL solely focuses on the day-to-day responsibilities of order fulfillment and supply chain logistics.

 

This includes all the processes from sourcing and warehousing to picking, packing, labeling, and shipping orders.

 

A 4PL takes this responsibility a mile forward by overseeing and optimizing the entire supply chain. 

 

With a 4PL, you work directly with them to resolve any logistics issues, and they address it with the supply chain “nodes” (1PLs, 2PLs, 3PLs) you hire them to supervise.

 

2. Assets and Systems

 

Though it’s not always the case, most 4PL providers don’t own or lease assets. Rather, they provide “intellectual support,” with tasks like logistics expertise, management, IT and more. 

 

3PL providers, on the other hand, own many necessary supply chain assets like trucks, warehouses, and distribution centers.

 

3. Cost-management

 

Most professional 3PLs have many industry partners and connections to resources like shared warehousing, which can increase efficiency and reduce fulfillment costs.

 

Conversely, a 4PL is focused on managing costs through various logistics strategies like bundling, lean manufacturing, reverse logistics, and procurement practices optimization.

 

4. Merchant Relationship

 

With a 4PL provider, your relationship will be more about long-term strategy. 

 

You and your 4PL provider will collaborate to organize, lead, design, and coordinate your supply chain.

 

With a 3PL provider, however, the relationship is typically centered around physical operations. 

 

By that I mean your interactions are more about your day to day fulfillment requirements and costs rather than strategic planning.

 

5. Customer Communications

 

Customer Communications

 

With 3PLs, there’s no middleman, so you can work directly with the 3PL’s service team to handle issues and communication. 

 

This way, issues are resolved faster, and you’re able to work with a team that understands your customer’s dilemma closely.

 

Since the 4PL is your main point of contact for most companies that hire them, all communication from customers and 3PLs is filtered through them. 

 

Bear in mind that this can cause delays in resolving issues when your 4PL oversees many independent 3PL providers.

 

How can work with a 3PL help minimize supply chain costs

 

How can working with a 3PL help minimize supply chain costs

 

  • Cost-effective shipping

When you transport cargo yourself, you often have to make do with whatever shipping methods are readily available. 

 

Contrastingly, with a 3PL you can take advantage of their advanced carrier networks. Thus giving you the flexibility to choose optimal shipping options for each shipment at the best price and timeframe. 

 

  • Labor and warehouse automation resources

Some 3PL companies continue to rely on manual processes like outdated software and human-intensive workforces. 

 

Leading 3PL providers, on the other hand, have extensive labor and automation resources. Better yet, their qualified warehouse staff are only brought in to oversee and enhance the output of automated warehouse robots, thus reducing the risk of human error. 

 

This efficiency beats finding, hiring and training your own workforce. Because with the right 3PL, you only have to pay for the amount of reliable, experienced staff you need. 

 

  • Technological support 

3PLs offer access to an array of sophisticated technology solutions. From;

 

  • Stock management systems that offer real-time inventory visibility.

 

  • To order management software that syncs with your store to track customer orders,

 

  • And transport management systems that pinpoint inefficiencies in logistics methods,

 

These advanced logistics tools help minimize costs by streamlining processes and reducing dependence on human capital.

 

  • Cargo consolidation 

When you handle shipping alone, you may not ship a high enough volume of orders to secure great discount rates. 3PLs on the other hand, consolidate your shipments with their other client’s shipments, so they can negotiate more cost-friendly rates.

 

How can work with a 4PL help minimize supply chain costs

 

How can working with a 4PL help minimize supply chain costs

 

  1. Supply chain strategy 

Through an analysis of market dynamics, product demand, supplier capacities and geographical considerations, your 4PL will plot a tailored logistics strategy that reduces inefficiencies and minimizes supply chain costs.

This approach brings about many improvements like quicker lead times, enhanced transport routes and others. 

 

  1. Risk management and planning

Risk management is an integral part of every logistics operation. 

 

A 4PL actively addresses potential disruptions by finding substitute sourcing options, finding backup suppliers, mapping alternative transport routes, and implementing dynamic risk assessment tools. 

 

All these methods put money back into your pocket by mitigating the financial impact of a supply chain disruption.

 

  1. Bundling of services

Fourth-party logistics providers minimize costs through a technique called operational bundling. 

 

This is when diverse supply chain functions like procurement, shipping warehousing, assembling transportation, and more are consolidated and purchased from one reliable provider instead of various carriers, leading to reduced operational costs for e-commerce sellers. 

 

What logistics model is best for your dropshipping business

 

What logistics model is best for your dropshipping business

 

1. You’re just starting out

 

As an e-commerce startup, you might begin by fulfilling orders in-house. 

 

Note, however, that more often than not this model isn’t scalable. 

 

This is because packing, labeling, and shipping orders can be so time-consuming, meaning you won’t have time to focus on important operations like marketing and product development.

 

2. You’re scaling operations

 

As the volume of orders you receive increases, outsourcing fulfillment is one of the best ways to scale.

 

A resourceful 3PL will oversee your order fulfillment processes, including sourcing and warehousing, inventory management, picking, packing, labeling, and shipping. All so you can devote your time and resources to building your brand.

 

3. You’re reaching enterprise level

 

At this stage, your business has grown so big that you need a logistics company to manage your entire supply chain. 

 

Just keep in mind that having a 4PL might introduce a layer of separation between you and your supply chain, leading to less control and visibility.

 

Final Thoughts

Final Thoughts

To sum up, if fulfilling orders yourself gets in the way of scaling your business, then working with a 3PL is for you.

 

On the other hand, working with a 4PL is best when you’re reaching “enterprise” level and fulfilling tens or hundreds of thousands of orders a day and in several continents.

 

While both options have their benefits, the right one for you depends on your business needs. 

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