What is a 4PL?
As the supply chain has evolved over the past decade, so have the players that have entered the space to address growing complexities and challenges associated with operating in a global market. In the case of Fourth-Party Logistics, or 4PL, necessity was the mother of invention.
As time has become commoditized and margins continue to shrink, the need for end-to-end supply chain management providers has been a natural progression. Enter the 4PL, a one-stop shop where manufacturers outsource every aspect of the supply chain to a single provider.
The driving force behind the 4PL movement has been operational efficiency. With every aspect of the supply chain under one roof, traditional barriers are removed. Like other models, there is a give and take, as this does require you to relinquish control over your systems and processes.
At Trax, we help global organizations leverage technology to tackle complex challenges within the supply chain. Our technology is used by companies and 4PLs alike, all in an effort to streamline operational efficiencies and reduce transportation management spend.
Understanding Traditional Logistics and 3PL
Before we dive into the nuts and bolts of 4PL, you may wonder how it differs from other traditional logistics models, like 1PL, 2PL, and 3PL. Here is a quick breakdown to help make sense of it all.
First-Party Logistics (1PL) → You produce and transport a product to the customer. These are traditionally small companies with minimal market share.
Second-Party Logistics (2PL) → You produce a product and then you work with a transportation provider to deliver the goods to your customer. In most cases, this might be a local trucking company or final mile delivery.
Third-Party Logistics (3PL) → You produce a product, then outsource the logistical components to a third-party provider. This can include warehousing, fulfillment, and final delivery. Think of a 3PL as a middle-man that has an extensive network to make the process easier.
Each of these models has benefits and limitations that must be taken into account, as they may not fit your specific needs. 3PLs have dominated the global marketplace for years because they addressed a significant portion of the process.
Where 3PLs fall short is in the fact that they remain a fragmented approach, as they only address the logistical components of supply chain management. Fragmentation opens the door to delayed information and systems that don’t work well together.
Recent advancements in supply chain management technology have made it possible for providers to defragment the process and go with a single point of contact in the form of a 4PL.
The Role Of Fourth-Party Logistics (4PL)
The best way to think of the progression of logistics providers is as a pyramid. As you go from the top down, each new layer takes on a larger percentage of the process. 4PLs rest at the bottom of the pyramid, assuming total supply chain control for a specific organization.
4PLs will manage the following(and potentially more):
- Logistics strategies
- Analytics, including transportation expenses, analysis, and carrier performance
- Freight sourcing strategies
- Network analysis
- Business planning
- Project management
- Control tower and network management services
- Inventory management
- Inbound, outbound, and reverse logistics management
As you can tell, this is a very hands-off approach. By removing the burden of managing each component, or even a few, it means that organizations can devote additional resources to product improvement and customer service.
The Benefits of Partnering with a 4PL
If each logistics model is a progression, why would you make the jump from a 3PL to a 4PL? After all, 3PLs have been a consistent piece of the supply chain puzzle for the past few decades and will continue to serve a role in the future.
The fact is that neither one is better than the other. They each serve a different segment of the market and each has their own pros and cons. From a benefits perspective, the most glaring benefits gained by working with a 4PL revolve around supply chain visibility, operations, and access to technology.
Improved Visibility
The challenges compound as your organization grows, potentially into different verticals or global markets. When working with a 4PL, the process is clearly defined – they take care of the process and report back. Information gaps that might exist when working with several 3PLs across the world are no longer an issue with a 4PL.
This is because data becomes centralized when the entire process is handled by a single provider. Instead of a disjointed process that involves multiple parties, it can now be combined for better tracking, increased transparency, and reliable metrics.
Streamlined Supply Chain Operations
As visibility improves, operational efficiencies are the next dominos to fall. 4PLs have the added advantage of controlling all of the levers. Gain efficiency across the board with a more fragmented model is possible but significantly more complex. This is because information filters through in bits and pieces, only allowing you to see individual components.
As the process becomes centralized, the entire picture becomes clear, and making adjustments becomes easier. This is particularly powerful with components such as inventory management and fulfillment.
There are no intermediaries when working with a 4PL, so getting accurate information on supply levels and changes in demand happens in real-time with incredible accuracy. This, in turn, makes organizations, regardless of size, significantly more flexible and adaptive during peak seasons or when unexpected increases or decreases in demand occur.
Access to Advanced Technology and Analytics
The final advantage is one that many companies overlook when weighing their options between a 3PL and a 4PL – access to advanced technology and analytics. 4PLs are constantly stirring numerous pots, so they all gravitate toward technology that makes the management process easier.
Tools such as AI, IoT, edge computing, and advanced analytics are par for the course rather than nice-to-haves. 4PLs leverage these tools out of necessity because small gains in efficiency when operating a large book of business result in increased ROI and better customer retention.
Access to this abundance of granular information creates a more informed decision-making process, as data-driven insights help create a roadmap toward improvement.
Implementing a 4PL Model
There is no right or wrong model, and as we have explained, each has pros and cons. Having an open and honest evaluation of your pain points and challenges is the only way to determine if a 4PL is right for your organization.
What is clear is that the global supply chain is rapidly evolving, and the only way to stay ahead of the competition is to leverage the latest in supply chain management technology. Technology and analytics should be at the forefront of every conversation when evaluating 4PLs, as these components will drive efficiency and help reduce costs.
At Trax, we see how the supply chain is changing, and we are proud to provide the latest technology to help global organizations and 4PLs simplify the complex business challenges they face. Connect with our team to learn more about how we are leveraging AI and other cutting-edge technologies to improve supply chain management across the globe.