3PL and 4PL: An Introduction to Layers of Logistics

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In logistics and supply chain management, third-party logistics (3PL) and fourth-party logistics (4PL) both refer to levels of service outsourcing. A significant cost of getting a product to the consumer can be attributed to the supply chain, so outsourcing some of these functions to a specialist company can realize significant efficiencies.

What is 3PL?

The concept of third-party logistics began to develop in the 1970s, primarily referring to third-parties as traditional shipping contracts between the sender and a freight company. As outsourcing became more prevalent, the logistics industry’s understanding of 3PL subsequently extended to essentially any outsourced core logistics functions, including warehousing, inventory management and packaging, among others. Because a 3PL service provider’s core business is outsourced logistics, it can deliver significant economies of scale through both specialization and client pooling.

Often a 3PL provider will sell a number of different outsourced services together, but they need not do so in order to be considered 3PL and in fact, doing so can blur the lines between 3PL and 4PL. Some markets have even implemented legislative definitions of 3PL. For example, in the United States, a third-party logistics provider is defined as “a person who solely receives, holds, or otherwise transports a consumer product in the ordinary course of business but who does not take title to the product.”[1]

What is 4PL?

Fourth-party logistics services can be thought of in simple terms as an overlay that pulls together a variety of 3PL services. 4PL is generally thought of as delivering a consultative, rather than operational, level of service. It matches the logistics capabilities of 3PL providers with the client organization’s supply chain requirements in order to create a comprehensive solution. The distinction between 3PL and 4PL is an ongoing debate. Some experts suggest that 4PL implies that the service provider does not own any assets. However, companies who both coordinate and provide outsourced services are challenging the idea that the business of a 4PL is purely consultative, is always independent and never operational. In this regard, 4PL might be understood more in terms of what it does (coordinating outsourced logistics services) rather than in terms of what it is not. Although the benefit of engaging a 4PL provider is not immediately clear, 4PL has the potential to reduce supply chain costs by implementing increasingly efficient approaches to coordinating the various logistics functions that are traditionally outsourced at the 3PL level.

Is there room for further innovation in outsourced logistics?

Some logistics providers are beginning to market a 5PL service, although there is a lack of consensus as to what 5PL actually means. Some providers use 5PL to describe outsourcing procurement and accounting services, although this may be better understood as a lower level of logistics outsourcing. Some firms define 5PL as broadening the scope of outsourced logistics to eBusiness, however 5PL is also understood as aggregating 3PL and 4PL services in order to negotiate more economic rates with operators. 5PL providers are on the edge of supply chain innovation, and as the concept of 5PL continues to develop, the characteristics of 3PL and 4PL will also become more apparent.

[1] 15 U.S. Code § 2052

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Melanie - Unleashed Software

Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.

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