Logistics Service Providers – 3PL & 4PL

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  • Third Party Logistics (3PL) and Fourth Party Logistics (4PL) refer to the outsourcing of some or all logistics operations.
  • The most compelling reason to let another party take over logistics functions is the decision to focus on core competencies – a common supply chain strategy.
  • The recent trend in 3PL arrangements is toward long term contractual relationships with providers of integrated services, such as transportation plus storage.
  • The 4PL setup extends that trend by removing all logistics functions from the client firm and putting them under integrated management by a general contractor.
  • Logistics outsourcing may put the contractor into direct communication with the firm’s customers, and that entails definite risks. The 3PL employee (or 4PL subcontractor) becomes a representative of the client firm, which may be judged by the contractors behavior. The 3PL may also contract with a client’s competitors, with the risk that confidential information may pass through the contractor to the competitor.

How 3PL & 4PL are Related

3PL (Third-Party Logistics)

  • A 3PL is a buyer and supplier team with a third party that provides product delivery services.
  • This third party may provide added supply chain expertise.
  • In a 3PL arrangement, the third party takes over some or all logistics functions and performs them itself.
  • A 3PL may be a specialized provider that focuses, for instance, on airmail or over-the-road transport or warehousing.
  • It may also be a multipurpose logistics provider capable of taking over the entire logistics function.

4PL (Fourth-Party Logistics)

  • In a 4PL arrangement, logistics specialist takes over the entire logistics operation and subcontracts some or all specific functions.
  • Playing the role of general contractor, the fourth-party provider hires out the various logistics services and coordinates the efforts of the subcontractors on the client’s behalf.
  • Sometimes this is still called third-party logistics, but the presence of subcontractors makes this in reality a fourth-party setup.
  • Typically,the 4PL charges a fee for its service, not a markup.

Advantages / Disadvantages of 3PL and 4PL

Advantages


3PL

4PL

  • Improved business focus.
  • More current logistics technology.
  • Greater technological flexibility.
  • More efficient warehousing for rapid replenishment.
  • Improved service to customers.
  • More workforce and resource flexibility.
  • Improved business focus.
  • Higher-quality logistics operations (or reduced costs, or both).
  • Greater business flexibility.

Disadvantages

3PL

4PL

  • Loss of control.
  • Potential for inefficiency.
  • Loss of direct control over the logistics process and all specific functions.
  • Potential for less effective or more costly operations if the 4PL writes biased contracts with favorite suppliers rather than seeking out the most efficient partners.

Outsourcing Caveats

Before outsourcing logistics to a third or fourth-party provider, a firm should ask itself the following questions:

  • What are our current costs?
  • What customer skills does the contractor possess?
  • What are the contractor’s special strengths?
  • Will the contractor hire the most-qualified partners (if necessary)?

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