July 30, 2021
each with their pros and cons for enterprises of different sizes and types. Here’s all you need to know about two of them: 3PL and 4PL.
Third party logistics (3PL) as a model whereby a manufacturer or retailer hands its warehousing, packaging, labelling, tracking and distribution operations to a third party business. It allows eCommerce retailers to focus on their core business activities – making and/or sourcing goods to sell, and marketing them – while allowing a company with expertise in order fulfillment to see the products from storage to customers’ front doors.
In the 3PL model, it is usually the vendor’s responsibility to get the products to the fulfillment centre, so distributing from their own warehouse or workshop to the 3PL partner is something they need to factor into their time and cost management.
Retailers of other companies’ products will often have those original wholesalers send their goods directly to the 3PL company rather than to the retailer, although this isn’t always appropriate or possible.
In short, 3PL companies take orders straight from eCommerce companies’ websites or via manual orders from the seller, and put them into their delivery procedure.
When a company wants to get its products to customers, it has several options. For small or local businesses where customers are all close by, it might actually be optimal to deliver products direct to customers’ addresses from the factory or shop. This does have cost implications, and time spent delivering means time away from manufacturing, but it could work. This model could be described as 1PL.
A modification would be to have a courier take goods from the seller to the buyer, either directly or through a hub-based delivery company, possibly (but not necessarily) with collection included. It gives more time to devote to productivity, but comes at a cost. This can be called 2PL.
The next step up, to 3PL, becomes financially viable where a business is processing a larger amount of orders, and is delivering to addresses that could be remote from the seller, perhaps globally. It just isn’t an efficient use of time to process every order manually, so the 3PL partner takes over the task.
That means the seller needs to keep a stock of goods stored with the fulfilment company. They will usually do this in anticipation of sales, rather than as a direct result of individual sales. That way, the order can start being processed the moment payment has been completed. If stocks look like running low or if a rush is expected, it’s up to the seller to pre-stock the warehouse.
An example would be an eCommerce shop that has a 3PL integration in its website. The logistics company already has a stock of widgets delivered ahead of time by the retailer, so when someone buys a widget on the website, the order automatically goes through and is shipped by the 3PL company with no real involvement from the retailer.
As businesses grow in sales and complexity of supply chain, some of them take a step up from 3PL to 4PL. Under this system, the so-called 4PL (“fourth-party” logistics) company manages everything that a 3PL company does, but can have a much deeper role in overseeing the supply chain for goods from original sources to customers’ doors.
That could mean that the 4PL provider is getting goods from wholesalers and manufacturers, taking them to storage, and distributing them to order. A result is that in theory, the retailer never has to worry about stock being sufficient to meet demand. The 4PL company could also be in charge of making projections based on their own analytics with regard to future demand, and sourcing goods from suppliers who are offering the optimum prices, to help maximise the profits of the retailer.
4PL businesses might actually employ the services of 3PL companies, and in some cases have no physical warehousing or fulfillment real estate or vehicles of their own.
4PL is generally a much more hands-off model from the perspective of the retailer. If 3PL has a drawback, it’s that the retail company must devote time and resources to ensuring there’s always enough stock to cope with demand, and actually organising delivery to or collection by the fulfillment centre.
However, to say 4PL is always more hands-off isn’t necessarily true. Retailers can select which elements of the fulfilment process they entrust to the 4PL provider. They might choose to forward some stock themselves and ask the 4PL company to source other things.
Alternatively, the 4PL company could be sourcing raw materials and components, delivering them to the factory, and then picking up finished products ready for warehousing and delivery to customers.
An important thing to note is that if the 4PL company subcontracts 3PL companies, the retailer might have no direct relationship with the fulfilment company. Indeed, there could be several different 3PL companies in the arrangement.
Companies that use 4PL tend to be those that want as little as possible to do with their distribution, or even how they source the materials or ingredients that go into their products if they are manufacturers as well as retailers. It can be an efficient way to do business, especially if the skills of the company are focused on the manufacture of the product from relatively fungible input materials that aren’t selected on the basis of quality or provenance.
However, the retailer has to be able to trust the 4PL company to make the supply chain efficient and reliable. They must also be sure that any logistics companies they partner with are trustworthy, reliable and timely, as it’s the retailer’s reputation that is at stake.
In balance, the 4PL company should in theory already be an expert at logistics, and should have done its homework with regard to the retailer’s specific sector.
So if you’re running a retail business, especially an online one, how do you know whether 3PL or 4PL is the model for you? It ultimately comes down to the relationship you want to have with your logistics partner and, to some extent, to your customers.
With 3PL there are essentially three players: the retailer, the 3PL company, and the customer. Yes, the 3PL company will probably subcontract couriers and logistics partners to take products to customers’ doors, but that decision should always be based on local availability or expertise in carrying specific types of products, for example frozen or fragile goods.
In the 4PL model, there’s that extra layer of accountability, as the logistics partner might well not have any physical assets, and so the retailer’s stock could be spread over multiple sites. That can make bundled orders difficult to fulfill in single deliveries, leaving customers waiting by their doors for longer. It can also make it more difficult to get to the bottom of issues like lost or damaged packages, or missing stock.
The advantage to the eCommerce retailer of 4PL is that they just have to keep their website updated with products, and the logistics partner should deal with everything else. It means that they will be able to devote more time to their specialism and to sourcing new products.
The 4PL service, as you would expect, costs more than 3PL, but whether that equates to higher total costs depends on the efficiency of the eCommerce company’s own sourcing and forwarding costs. The 4PL company should in theory be more efficient as they would probably be sourcing and distributing goods for multiple retailers from single wholesalers, but it really is down to the contract you have with the 4PL company, and costs should be calculated on a case by case basis.
For most small and medium eCommerce companies, however, the supply chain isn’t complex enough to justify handing control over to a 4PL company. One reason is that retailers tend to operate in niches, so have relatively small numbers of suppliers, whom they can instruct to forward certain amounts of stock direct to the fulfillment centre.
Another is that retailers often demand to have full control and visibility over the sourcing and location of their stock, and it plays an important part in how they see themselves as retailers.
If a retailer is successful, and grows enough to diversify away from its niche or to sell more items within it, then it probably makes just as much business sense to broaden its internal resources to take account of the more complex logistics. They’ll retain full control and visibility, and have a direct relationship with the fulfillment centre that could be a little more foggy under 4PL.
The choice between 3PL and 4PL ultimately comes down to the size and complexity of the retail business, and how much time, money and energy they are willing to devote to logistics rather than sourcing, selling and marketing.
Ceding some control might suit some businesses if they are looking to keep their involvement with logistics to an absolute minimum. The majority of retailers consider their logistics partner as an integral part of their fulfillment process, so there should be no reason to switch from 3PL, which finds a happy medium for customer service, stock visibility and convenience.
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