Getting your head around 3PL and 4PL

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If you are a business owner and find yourself at a loss to discern exactly what 3PL and 4PL are, fear not, you aren’t alone. These supply chain/logistics terms have developed in a similar way to ‘cloud computing’ and ‘Internet 2.0’. After originally being coined, their usage has taken off and been used in a variety of different contexts and with different shades of meaning. While these terms are commonly known and used, it is still difficult for people to define them when actually asked.

The basics: what are PLs? 

PL stands for ‘party logistics’, with 1PL, 2PL, 3PL, standing for first-party logistics, second and third-party logistics, and so on. 1PL and 2PL are when businesses handle logistics internally, or hire a carrier for a specific part of the transport chain. These terms are used less frequently.

3PL and 4PL

The Council of Supply Chain Management Professionals’ (CSCMP) glossary defines 3PL, especially useful for businesses utilizing dropshipping as “outsourcing all or much of a company’s logistics to a specialized company.” This term was first used in the 1970s before which transportation contracts were between two parties only: the shipper and the carrier. The logistics company will typically provide a bundle of services: transportation, inventory management, warehousing, and packaging for example. Over the years the usage of 3PL has widened to encompass any company providing some sort of logistics service.

The CSCMP glossary differentiates 4PL from 3PL in the following ways: 1) a 4PL organization is often a separate entity established as a joint venture or long-term contract between a primary client and one or more partners; 2) the 4PL organization acts as a single interface between the client and multiple logistics service providers; 3) all aspects (ideally) of the client’s supply chain are managed by the 4PL organization; and, 4) it is possible for a major third-party logistics provider to form a 4PL organization within its existing structure.

We can glean from this that 4PL is a more comprehensive provision of logistics services. The term has existed for a while, having first emerged in 1996 when U.S. company Accenture registered it as a trademark. Since then it has widely been accepted that a 4PL company needs a high amount of technological expertise and management capabilities. But is this enough to meaningfully distinguish it from 3PL?

The confusion caused by the usage of these terms has been further inflated by companies referring to themselves as 5PL, where the scope is increased to include eBusiness, and 7PL, which is a combination or 3PL and 4PL. This may quite rightly leave you wondering whether it has become common practice to simply increase the number in front of PL to make one’s business sound more impressive.

So is there really a difference between 3PL and 4PL?

The simple answer to this question is yes. Ideally, a true 4PL can provide all the functions of a 3PL mentioned above as well as the ability to provide a customer with the outsourced financial, customer services and computer systems to support commerce. A useful illustration is the ‘spare parts’ example. An importer of a product – let’s use lawnmowers for example – maintains its own stock and moves 8000 lawnmowers a year.

The law might impose a condition that a certain amount of spare parts must be stocked so that consumers will be able to have their faulty/broken products fixed. Because the company’s supply chain is set up to move lawnmowers, it may be unprofitable, and in fact very costly, to run a spare parts side business. This is where the 4PL company comes in. It completely takes over the spare parts business, which it is able to run at a profit as it contracts to run many similar businesses with other companies, spreading its costs as a result. Hence, 4PL involves more comprehensively contracting out supply chain management for one or more products.

Unfortunately there is no ‘bright line’ test to distinguish between 3PL and 4PL. You are likely to meet people that define these terms differently, and likely to encounter companies that you may have otherwise thought to be 3PL but describe themselves as 4PL. Hopefully the above discussion will allow you to decide for yourself which category is appropriate when you need to.

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Melanie - Unleashed Software
Melanie

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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