Anyone delving into logistics will inevitably come across the terms 3PL and 4PL, which describe services offered by logistics companies. These terms are often not clearly distinguished because practical applications rarely adhere strictly to academic definitions. Nevertheless, it is useful to understand the differences between 3PL and 4PL. Why? Because when taking the common distinctions between 3PL and 4PL services seriously, they reveal fundamentally different approaches - even if, on the surface, both seem to address the same goal: outsourcing the transportation of goods from point A to point B.
3PL vs. 4PL: Comparing Logistics Models
Our blog aims to contrast the basic nature of 3PL and 4PL to help you better choose the service that fits your needs. Additionally, we will examine the role of the Lead Logistics Provider (LLP) and explore how it fits into the dynamic between 3PL and 4PL.
A Brief Explanation: What is Behind 3PL and 4PL?
Before we begin: Since we have already provided in-depth explanations of both 3rd Party Logistics (3PL) and 4th Party Logistics (4PL) in separate blog posts, we will keep this section brief. If you are interested in more detailed information, we encourage you to check out those posts.
What is a 3PL Provider?
When considering how to organise logistics, who should handle it, and with what resources, there is a wide spectrum of possibilities.
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1PL (First Party Logistics): Logistics is managed entirely “in-house” with the company’s own resources, covering everything from delivery processes to warehousing.
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2PL (Second Party Logistics): A specific freight company, such as a carrier, is hired to transport goods from A to B using its own vehicles.
A 3PL provider is contracted to organise various logistics functions, from warehousing and packaging to labelling and transportation - often by coordinating third-party companies that they manage and oversee. As the contracting business, you can choose which specific 3PL services to use based on your requirements. Customers benefit from the expertise and resources of an established logistics company.
Since these partnerships are long-term and contractually regulated, the term contract logistics is often used. In addition to warehousing and transport management, a 3PL company offers numerous “added value” services, such as inventory management, labelling, assembly, configuration, quality control, and customer service related to the supply chain.
In cross-border trade, businesses especially value the expertise of a 3PL in areas like customs clearance, facilitated by local offices in the destination country. A business may use one or several 3PL providers but must coordinate between them as necessary.
What is a 4PL Provider?
A 4PL provider does not primarily focus on managing individual logistics areas but rather on holistically steering, analysing, and potentially restructuring existing processes and systems. For example, a 4PL might be tasked with optimising a supply chain structure involving several 3PL providers. Alternatively, it might set up an entirely new supply chain and take responsibility for selecting appropriate 3PL providers.
In its purest form, a 4PL does not own transportation or warehouse assets. Instead, it utilises powerful, specialised digital tools to consolidate, evaluate, and monitor various data streams across the supply chain from a central point. Integrating diverse information from different data sources is highly complex, but those who master it can unlock entirely new potential for analysing, optimising, and strategically aligning the entire supply chain.
What is the Key Difference Between 3PL and 4PL?
A 4PL, at least in theory, is not simply a 3PL provider with a wider range of responsibilities within the supply chain. While it also manages individual aspects of the supply chain, its role is far more strategic. Its task is to bring together the various threads of the supply chain to ensure that all the individual players are optimally aligned.
To achieve this, the 4PL needs all relevant data about ongoing delivery processes and the interconnected network of 3PL entities. Only with this “big picture” or control tower perspective can it determine which measures for improvement are most effective. A 4PL monitors ongoing transportation activities while simultaneously seeking optimisation opportunities.
To do so, it uses highly specialised IT systems. Many 4PL providers consider digital expertise to be a unique selling point (USP). Their role includes consolidating diverse data sources and interfaces into a single platform.
In contrast, a 3PL is initially a specialist in a specific area, such as efficient warehouse management or the organisation of cost-effective and reliable transportation.
For both 3PL and 4PL providers, industry knowledge is advantageous since different product categories impose unique requirements on supply chain design.
3PL, 4PL, and LLP: What Role Does the Lead Logistics Provider Play?
A Lead Logistics Provider (LLP) is a 3PL actor within the supply chain that is tasked by the customer to organise significant or even all parts of the supply chain. This brings it close to the description of a 4PL, with the key difference being that an LLP may also utilise its own resources (e.g., lorries or warehouses).
However, the terms LLP and 4PL are often used interchangeably, so it is more important to focus on what the service provider actually offers rather than the label used.
Avoiding Conflicts of Interest
With 4PL or LLP providers that own resources, it is crucial to avoid potential conflicts of interest. While a pure 4PL may act neutrally due to its lack of assets, questions may arise for an LLP or a 4PL with its own lorries, warehouses, etc., about whether it prioritises its own resources.
This can be avoided, for example, by requiring the LLP to demonstrate that its selection is economically and strategically the best solution. Employing independent auditors is another option. Finally, contracts based on a gain-share model can incentivise the logistics provider to persistently pursue the best solutions. In such models, both the business and the 4PL benefit equally, as improvements directly affect the 4PL’s remuneration.
Decision Guide: When Should You Use 3PL or 4PL Services?
Whether to engage a 4PL or 3PL provider depends on how extensively you wish to outsource logistics tasks to an external provider.
This decision may arise from recognising that logistics processes have become increasingly complex and unmanageable, leading to recurring problems due to poor coordination or limited capabilities.
Engaging a 3PL provider reduces complexity in areas such as warehousing, inventory management, and organising complex delivery processes. It also makes your business more flexible and easier to scale. A 3PL can usually adapt its resources, from warehouse space to transport capacity, to meet new demands much more easily. This allows the contracting company to maintain liquidity instead of incurring significant capital expenditure.
For businesses that wish to outsource certain areas but retain control and coordination functions, partnering with capable 3PL providers for specific logistics areas is a solid choice.
For 4PL, the approach goes further. A 4PL oversees not just individual or significant portions of the supply chain but the entire process. It provides a cohesive framework for the activities of highly specialised 3PL providers. Additionally, a 4PL becomes the single point of contact, eliminating the need for a business to manage multiple 3PL providers and the associated communication.
4PL is particularly suitable for larger companies with highly complex supply chains that require a high degree of flexibility and control. The larger the volume of available data, the harder it becomes to analyse and evaluate without appropriate tools. Therefore, 4PL providers often bring strong expertise in the digitalisation of logistics processes.
Engaging a 4PL provider is undoubtedly a significant step—one that is only viable within a long-term partnership. Outsourcing your entire logistics operations with the expectation that the provider will handle them more efficiently and cost-effectively requires considerable trust in their competence and reliability.
Additionally, it is essential to consider how to involve existing logistics departments in the transformation process and avoid unrest—such as fears of job cuts. In fact, even with a 4PL provider, it is advisable to retain in-house expertise to act as a point of contact and collaborate with the 4PL.
