1PL, 2PL, 3PL, 4PL...how many PLs can there be?? In this article, we break down the major differences between 3PLs and 4PLs and provide examples for each type of logistics party.
What is a 3PL? Why use a third party for logistics?
3rd party Logistics Provider (3PL)
Companies choose to outsource their transportation and logistics activities to service providers. Companies can dictate the level of involvement service providers have with performing logistic activities meaning they can outsource one activity or many. 3PLs often work directly with shippers and consignees to facilitate transportation needs. This unique position also makes working with a 3PL attractive for carriers because the 3PL may have knowledge of shippers and loads that the carriers do not.
The benefits of working with a 3PL for shippers include cost reduction and gaining better control over logistics operations. Shippers using 3PLs also hope that the service providers will also improve the speed of service. Carriers also benefit from working with 3PLs by leveraging their network and having more freight opportunities. 3PL service examples are typically based on transportation or warehouse activities to help companies gain cost-efficient solutions.
There are more benefits to using a 3PL than just lowering costs, such as:
Improve transportation and logistics
Allowing quicker delivery times to increase customer satisfaction
More responsive supply chains
Carriers gain strategic insights into load availability
3PLs scan sources and engage carriers to add them to their network and 3PLs will track payment information and insurance documents for carriers to make sure this information is up to date. 3PLs will use information technology as a tool to manage customer relationships and provide more visibility on freight as it moves through the network.
Utilizing a 3PL allows companies to tap into external expertise while also maintaining control of operational tasks. Balancing which activities should be outsourced and which should remain in-house will result in the added benefit of better-performing operations. 3PL companies differentiate themselves based on the variety and level of services they offer, but some common services provided by 3PL companies include:
Disadvantages to using a 3PL include the potential loss of control and the looming fact that any mistakes the 3PL may make will often be attributed to your business rather than the 3PL. Therefore, it is important to use services like the FMCSA Company Snapshot SAFER (Safety and Fitness Electronic Records) service ratings and other reviews to ensure a company has a quality reputation worth considering doing business with. Additionally, shippers and carriers alike are tasked with the responsibility of understanding their company’s unique needs, goals, and objectives, and finding a 3PL that will be best aligned to do business with. For instance, a shipper may seek out help from 3PLs in cases where they have experienced rapid growth and they need help coordinating shipments. Similarly, carriers will seek out adequate 3PL partners to gain access to contract shipments they may not always be privy to.
What is a 4PL? Are 3PLs and 4PLs the same thing? How are 3PLs and 4PLs different?
4th Party Logistics Provider (4PL)
Utilizing a 4PL means a company is seeking to outsource all logistics activities as well as the management of their supply chain to service providers. Also known as lead logistics providers, 4PLs are tasked with similar responsibilities to a 3PL with the additional tasks of managing the technology integration, order track and trace, financial services, as well as any carriers, to ensure there is an efficient supply chain. A 4PL can be involved in every aspect of a company’s supply chain and are able to incorporate its own resources and capabilities to ensure the supply chain has the best design. When working with a 4PL, clients do not retain much oversight of the outsourced activity.
3PL companies can naturally transition to performing as a 4PL, even if they only perform this way for a few customers. 4PLs should be designed to fully integrate into their partner supply chain to provide better services, meaning they have complete access to the client’s business operations. The 4PL becomes an extension of the partner company and acts as a representative to speak on their behalf. The best 4PLs will provide strategic insights for their clients, performing in more of a consultative approach than their 3PL counterparts.
Disadvantages to using a 4PL include the potential to incur higher costs as 4PLs are more integrated into a consultative position. This integration could also lead to the client giving up significant control over operations, thus leading to complications should the client seek to transition away from the 4PL.
When should I use a 3PL or 4PL partner?
Whether you use a 3PL or a 4PL depends on your company's needs and the level of control and oversight you desire. If it is feasible to sign off control of logistics operations to another organization, then a 4PL will be a good option to help gain strategic insights. On the other hand, if you see the need to maintain some control over operations then it makes sense to explore 3PL service providers. 3PLs provide a wide range of services with cost-effectiveness in mind that can make a difference for client companies.
3PL and 4PL companies alike provide potential benefits to both carriers and shippers but are always recommended to explore various providers to determine which offer the best operational solutions as well as suitable tech and software solutions that can be easily integrated into client businesses smoothly without interruption. In today’s business environment, it is important to consider how technology will be integrated because most organizations already have existing software preferences and approaches in place. If you're a carrier that needs help finding freight or a shipper that needs help finding a carrier to haul your freight, a freight broker (aka 3PL) can help.
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Soshaul Logistics LLC and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. It is meant to serve as a guide and information only and Soshaul Logistics, LLC - Copyright 2023 - does not assume responsibility for any omissions, errors, or ambiguity contained herein. You should consult your own tax, legal and accounting advisors before engaging in any transaction or operation.