Hello beautiful people!
Another day, another blog.
Today, I wish to share my views and insights on 4PL and 3PL. If you just need a bit of knowledge, I bet you can find academic content everywhere on the internet with just a simple search for "4PL, 3PL..."
I might not go the academic route, as it's not really necessary. What I want is to share my perspective as a logistics consultant for DTC brands.
If you're starting an online business seriously, you can't DIY - Do It Yourself the whole journey of supply chain management. In fact, there are parts of it that you can't handle even if you wish to.
This means that at certain points in the journey, you need to interact with a logistics partner (3PL or 4PL) to help you out.
Deciding which type of logistics partner you need to work with along the road is really important. Let me illustrate how important it is throughout this post.
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What is 3PL?
In the current situation, I know this definition is somewhat limited in practice. Let me explain: Most DTC brands interpret 3PL as solely the fulfillment center, but in fact, there are two types of 3PLs. One is capable of offering only certain logistics services, while the other can provide a comprehensive range of services from A to Z, including freight forwarding, customs clearance, haulage, fulfillment, warehousing, and even last-mile delivery. In other words, a 3PL can act as the intermediary between you – the DTC brand – and carriers such as shipping lines, airlines, and couriers. Most 3PLs manage or own facilities and fleets where you can store goods at their facility.
Let me provide an example: Suppose you have a bulk shipment that needs to be moved from China to the US and delivered to the fulfillment center. You have two options:
- Ask your fulfillment center directly if they can offer freight forwarding services to handle your bulk shipment from the factory to the warehouse. If they can, that's good; if they can't, they will inform you which parts of the journey they can handle.
- Ask another logistics company – still a 3PL – to handle your shipment from start to finish.
In reality, for just one shipment, you might need at least 3 or 4 3PL parties to assist you. For example, one might handle the pickup from the factory, another might manage ocean freight, and another might handle transportation from the US port to your warehouse. This complexity can be overwhelming, so try to simplify things by asking the logistics company to handle as much as possible. Perhaps involving 2 3PL parties would suffice.
What is 4PL?
In an academic context, 4PL acts as a control tower, and their focus is to optimize the whole supply chain in terms of cost and operation. 4PL acts on behalf of the brand to deal with multiple 3PLs, as well as shipping lines or couriers.
In my findings at this point in time, in the practical logistics world, there are two types of 4PL logistics, I would say:
Type 1: 4PL-T1 acts as the middleman of the brands and their 3PLs (I mean DTC brand’s 3PLs). They act on behalf of them to look at various aspects of the operation and cost for better optimization. They will collect the fee called “handling fee”.
Type 2: 4PL -T2 and their ecosystem, what I mean by their "ecosystem" is if you search on the internet, 4PL is a non-asset owner. They aren’t the same as 3PLs owning fleets or warehousing. So what they need to do is get competitive quotations of different logistics services from different 3PLs. For example, they want to build the supply chain solution for DTC brand A for their international shipment up until the goods reach the warehouse and are delivered to the final customer. 4PL then issues the RFP to the market to get good rates from each 3PL for each part, such as ocean freight, fulfillment, last mile… or another way, they act as a trading company in the middle between 3PLs and DTC brand but of course adding the margin built into the rate card they submit to the DTC brand.
What I see in the market is that type 2 is more prevalent than type 1. If I could meet any 4PL in type 1, I will go back and share more insights with the new blog.
Comparison between 3PL and 4PL
Here are some key differences between 3PL and 4PL, let's take a look together:
Core Focus
3PL is more focused on day-to-day operations rather than long-term strategic aspects, such as solution design for better operation in the supply chain. 4PL can handle the entire supply chain operation for you as a DTC brand, while 3PL might only handle a certain part of the operation. Since you may work with multiple 3PLs, you eventually need someone to act as a control tower or main contact point to manage them.
Vendor Relationship
The relationship between you and a 3PL tends to be more transactional. In contrast, a 4PL may focus more on long-term goals, helping you to organize, lead, design, and operate your supply chain.
Assets
3PLs are asset-based, including trucks, warehouses, distribution centers, etc., while 4PLs are non-asset-based, meaning they don’t own any physical assets. Instead, their value lies in their people and their expertise in logistics. When comparing 3PLs and 4PLs, you might find better expertise from a 4PL due to their broader view of the logistics landscape.
Cost
First and foremost, "cost" here refers to the cost of services that DTC brands outsource to logistics parties to handle their logistics operations.
From my perspective, what I observe is that most of the time, the cost from a 4PL will be higher than from a 3PL. This is because 4PLs, especially type 2, must obtain rates from 3PLs as their buying rate and then add a margin before reselling to DTC brands.
Advantages of working with 3PL
Direct Relationship
When working with a 3PL, you can directly involve yourself in the operation and speak to someone at the 3PL site about daily operations. They can address your concerns immediately without involving any extra layers. If you were to work with a 4PL, any daily issues would need to be communicated to them, and they would then relay them to the 3PL. You would see a gap here…
Scalability
3PLs offer scalable resources such as labor, space, and transportation, enabling you to meet your inventory needs and adapt to seasonal demands. This means you don't have to worry about inventory and warehouse costs impacting your bottom line.
Advantages of working with 4PL
Flexibility
Working with a 4PL allows you to avoid being tied to one 3PL. If the performance of a particular 3PL is unsatisfactory, the 4PL can swiftly transition your operation to another 3PL. Since they work with multiple 3PLs, they can quickly find an alternative solution.
Global Reach
In scenarios where you're scaling up and expecting to expand into other markets with increased complexity, working with a 4PL becomes an attractive option. Most 4PLs, regardless of whether they are type 1 or type 2, possess extensive expertise that can help you mitigate risks associated with expansion.
3PL or 4PL? Which Should You Go With?
This is actually a good question, and it depends on the nature of your business.
If you are a small business and currently focused on cost, meaning you're primarily concerned with obtaining good logistics costs from a 3PL as it directly impacts your margins, and your operations are relatively simple, then please consider going with a 3PL.
However, if over time you are expanding both horizontally and vertically—not just increasing order volume but also diversifying sales channels (such as Shopify, eBay, Amazon, wholesales, brick-and-mortar stores), and you're planning to expand into multiple countries—then consider the challenges of dealing with multiple 3PLs in each country. This complexity might become a headache, especially if you're not an expert in logistics. In this case, I highly recommend working with a 4PL. They possess the expertise to help you manage expansion and coordinate with various 3PLs. While the fees may be higher, the value they bring in managing your logistics operations and expansion is worth it.
Final Thought
I hope this helps you understand the differences between 3PL and 4PL and offers another perspective on choosing a logistics partner. This insight is derived from my experience rather than academic research. My definitions of 4PL type 1 and type 2 are unique to my own understanding and observations. If you come across similar concepts elsewhere, it's likely someone has borrowed my idea.
See you in the next blog!
Cheers!