Fourth-party logistics, also known as 4PL, is an operations model under which companies outsource all of their logistics, from manufacturer to last-mile delivery, to a single service provider. 4PLs go a step further than 3PLs by overseeing the entire supply chain, while 3PLs focus primarily on order fulfillment.
By handing off the responsibility and nuance of operational logistics, DTC brands can focus their time and energy on the strategic initiatives that will drive the business forward. Read on to learn what 4PL is, why you should consider it, and how to choose the right partner for your brand.
Fourth-party logistics providers, also known as 4PL companies, are external service providers that manage the supply chain and distribution channels for merchants and retailers. A 4PL provider takes on more responsibility than a 3PL by managing relationships with freight forwarders, warehouses, shipping carriers, and more. Typically, a 4PL oversees the operations of one or more 3PLs on behalf of its customers.
In short, ecommerce brands that use third-party logistics work directly with the 3PL, while ecommerce brands that use fourth-party logistics use a service aggregator that oversees the 3PL’s operations. While 3PLs manage one part of the supply chain—order fulfillment—4PLs oversee the entire distribution process, from manufacturer to end user.
Fulfillment refers to the part of the supply chain in which goods are stored in a warehouse until a customer places an order. The goods then go through the pick and pack process and are handed off to a shipping carrier for delivery. The rest of the products’ journey—including all of its travel to the fulfillment center and all of the travel after it leaves the fulfillment center—is part of the larger supply chain and distribution process.
It may seem like the difference is slight, but for a company seeking the right level and fit of service for their brand, the distinction is crucial. With a 3PL you will have to be more hands-on, but a 4PL will manage the elements of operations on your behalf.
There are pros and cons to using a 4PL, but sometimes ecommerce companies feel they have less control over their operations when they don’t have a direct line of communication with their 3PLs. On the other hand, 4PLs handle much more responsibility and oversight than 3PLs, which frees up time for the leadership of an ecommerce company to focus on strategic initiatives.
We’ve established that 4PLs oversee more of the supply chain than 3PLs, but what characteristics set a 4PL apart from a 3PL?
Most of the time, a 4PL does not own warehouses or other infrastructure. Instead, the 4PL manages one or more 3PLs—which usually do own their infrastructure—for their customers. Because 4PLs don’t own their assets, they’re able to expand their network more quickly for customers that wish to fulfill orders out of a specific region or that require more storage space.
Because a 4PL oversees the entire supply chain and acts as the main point of contact for all parties, they often are the single source of information for the ecommerce brands that use them. A 4PL will often find and implement the ideal management software for their clients, using information from various vendors across the supply chain to oversee warehouse management and inventory management.
It’s worth noting that modern, tech-forward 3PLs have placed a renewed focus on building customer-facing, user-friendly software so ecommerce brands can monitor their own orders and inventory in real time.
Think of a 4PL acting like the conductor of a very large and elaborate orchestra. 4PLs are hired to oversee all things logistics, so they have relationships with and insight into the performance of transportation companies, manufacturers, suppliers, warehouses, and shipping carriers. 4PLs will often aggregate and interpret data from multiple sources in order to optimize operations for their customers.
As we mentioned before, 4PLs manage relationships with all sorts of vendors, not just 3PLs. Part of the role of a 4PL is to optimize transport throughout the supply chain, finding the most efficient and cost-effective route for moving inventory. The 4PL may use several strategies to do this, including working with freight forwarding companies and using a transportation management system (TMS).
In addition to managing the movement of finished goods, a 4PL might also work with a company’s procurement and manufacturing departments to coordinate suppliers and manufacturers to produce the goods the company will ultimately sell.
How a 4PL functions will depend heavily on the company they’re providing services to. For example—a company with robust procurement and manufacturing divisions may use the 4PL only to oversee the movement of finished goods. On the other hand, some companies may keep those departments lean because they outsource to a 4PL.
At a high level, here are the steps a 4PL might take when working with a large ecommerce company.
A 4PL may provide the customer with resources to procure materials or oversee the movement of raw materials to a factory for manufacturing.
Once the company has a finished product, the 4PL will coordinate the freight shipment of the goods to a fulfillment center. This may include working with a freight forwarder to secure the most efficient route and mode of transportation.
When the inventory arrives at a fulfillment center, the 3PL will receive the order, verify the contents, and store the goods. The 3PL will also pick and pack orders as they are placed and pass them on to either another freight company or a shipping carrier, depending on whether it’s bound for wholesale shipping or parcel shipping.
The 4PL monitors and oversees all 3PLs used by the client and aggregates inventory management details from each 3PL into one source. (Note: When working directly with a single 3PL, merchants can see a holistics view of all their inventory on one platform, regardless of warehouse location).
As the orders leave the warehouse, the 4PL will manage either a direct relationship with the carrier (if the company moves so much volume that they use their own shipping account) or with the 3PL (if the company uses the 3PL’s negotiated rate table and shipping account) to monitor last-mile delivery.
Working with a 4PL offers all the benefits of a 3PL, plus added oversight and consultation.
Some common benefits of a 4PL are:
A 4PL employs a unique approach that provides brands a single point of contact, likely a customer support manager (CSM). Through this single point of contact, a 4PL company will manage vendors and act as an intermediary between you and logistics providers. Therefore, you don’t have to deal with the challenges that normally exist across managing multiple partners. In this scenario, your CSM will have all of the information they need to solve problems as they arise and the ability to contact any stakeholder they need. This way, getting support is both simple and fast for you and your team.
Ultimately, a 4PL will coordinate the efforts of one or multiple 3PLs so it’s one less thing that you have to worry about.
A 4PL is a neutral party that will design supply chain solutions that are tailored to your unique business requirements. From transportation to warehousing, 4PL services are not as limited as 3PL services that can only access the available infrastructure that they own. As a result, your supply chain will be tailored to your specific needs and industry requirements.
Tech-forward 4PLs focus on identifying the best software solutions for its clients to view all aspects of their supply chain logistics, from managing inventory to tracking individual orders. Because 4PLs act as data aggregators across a spectrum of vendors, they’re able to consolidate this data into a single point of reference, so their clients don’t have to use the warehouse management software (WMS) provided by a 3PL or pull data from multiple information systems.
Unlike a 3PL which specializes in the tactical movement of products, 4PLs specialize in strategy and optimization. 4PLs own their relationships across the fulfillment spectrum and proactively manage hiccups, leaving them better equipped to handle errors quickly and directly.
4PLs typically don’t own their infrastructure, instead focusing on customer support, technology, and partnerships with 3PL warehouses that suit a range of diverse needs. Because choosing a warehouse is one of the most significant drivers of your overall fulfillment strategy, partnering with a 4PL company may help you get your product into a warehouse that not only meets your needs, but is able to scale with you as you grow your brand.
This is because 4PLs have the freedom to partner with new warehouses quickly, while 3PLs are not as nimble. Under a 3PL, onboarding a new warehouse means either constructing a new building or a major acquisition, both of which take time and resources to get up to speed and result in growth bottlenecks for the companies using those 3PLs.
Ecommerce companies often struggle to balance managing fulfillment logistics with their core business operations—which is why many turn to experienced 4PL providers.
Entrusting your ecommerce fulfillment logistics to a 4PL provider can offer you the following perks:
4PL pricing is complicated. As an external services provider that oversees multiple other vendors, the cost of 4PL services will vary significantly based on your company, the degree of complexity in your supply chain, and how much you’re asking the 4PL to oversee.
Because 4PLs take on the responsibility of managing the entire supply chain, companies that use them have less control over operations. They’re effectively hiring the 4PL to make strategic, data-backed decisions on their behalf. As a result, pricing can vary not only based on the 4PL’s fee structure, but also based on the decisions the 4PL makes, like what freight companies to use and which 3PLs to work with.
Fulfillment accounts for a significant portion of any ecommerce business’ operational costs, and as such, the 3PLs that your 4PL oversees will have a big impact on your overall distribution costs.
Each 3PL company offers a different fulfillment pricing model based on its service inclusions. There are two dominant types of fulfillment pricing models: a la carte and all-in-one.
The cost of using a 4PL will be inclusive of all of your other operational costs, including your 3PL’s fees. Before deciding to work with a 4PL, you may want to ask about which 3PLs they partner with and their pricing structure, as well as how the 4PL plans to use that information to optimize your fulfillment operations.
Oftentimes, outsourcing logistics to a 4PL is a secondary step after years of outsourcing to a 3PL. 4PLs are most commonly used by large enterprise companies that need help overseeing many moving parts across different regions, manufacturers, warehouses, suppliers, and so on. That’s not to say that smaller companies never use 4PLs, but 4PL services are often cost-prohibitive for growing brands.
If you’re wondering how your company should manage fulfillment, consider this guide:
At this point, you’re probably able to handle fulfillment in-house, but you should be actively looking for an outsourcing solution so you’re able to maintain speed and efficiency once you surpass that 100-order threshold.
Once you’ve started to experience rapid growth, you’ll probably need to outsource to keep up with demand. As ecommerce companies scale, so does the complexity of fulfillment—exponentially. A 3PL is probably the best fit here, because it will afford your company the time and cost savings to reinvest in the business, while keeping you in the driver’s seat and allowing you to experiment with new channels like retail partnerships and dropshipping.
If you’re fulfilling tens of thousands of orders monthly but want to further optimize and offload the responsibility of managing fulfillment, a 4PL may be for you. In this case, a 4PL can offer more time savings and may be able to identify cost savings, though you’ll ultimately have less control over your own supply chain.
Logistics is not typically a core competency for scaling ecommerce brands. Unless, or until, the company has a robust operations team, most businesses will instead opt to outsource fulfillment.
Whether you choose to outsource to a 3PL or a 4PL—or not to outsource at all—you should consider how much control you want to have over your supply chain. If you’re seeking complete and total control, you’ll likely need to invest in a large operations team very quickly. For companies looking to outsource the day-to-day labor but exercise control over strategy and growth, a 3PL is your best bet. And for companies that want to bring in an expert to run logistics for them, 4PLs are the answer.
Some well-known 4PL companies are:
Our fulfillment experts can help you determine what logistics services are best for your business. To learn more about Airhouse fulfillment, schedule a call with us today.
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