Are 4PLs the Answer to Today’s Complex Supply Chain Challenges?
The supply chain has always had a degree of fragility, where a single disruption in one region has the potential to rapidly spread across the globe. Yet, many companies, especially those in logistics and warehouse management, never fully realized just how breakable it can be—until the pandemic.
It was a tough but valuable lesson, especially for third-party logistics (3PL) companies tasked with managing customers’ inventory, transportation, and other warehousing needs.
Faced with delayed product shipping, lack of inventory, and transportation issues, many 3PLs had to rethink business altogether. Would it be enough to improve operational efficiencies and optimize warehouse management? While certainly that realizes many benefits, for many, it wasn’t enough.
For some 3PLs, the solution was much broader—a complete shift in business focus.
Looking to better meet complex needs and evolving industry expectations, a growing number of 3PLs realized it was time to move away from managing warehouses and order fulfillment and evolve to create a larger, more effective supply chain network for their customers.
The result? More 3PLs embracing a fourth-party logistics (4PL) business model.
First, What is a 4PL, and How is It Different From a 3PL?
While 3PLs and 4PLs have some commonalities, unlike a 3PL, a 4PL doesn’t just specialize in inventory management and order fulfillment for customers like retailers and ecommerce companies. As a lead logistics provider (LLP), 4PLs often manage multiple independently owned 3PLs to build a diverse and broad warehouse network that handles the full scope of customer supply chain lifecycles.
Another big difference between a 3PL and 4PL is the distance between the logistics provider and customers. A 3PL, for example, works directly with customers and usually owns the assets necessary to handle warehousing and order fulfillment. A 4PL has a greater degree of separation. While the 4PL may handle all aspects of a supply chain, they generally don’t own the assets needed to do that. Instead, 4PLs outsource responsibilities to other vendors, for example, accessing warehouses from 3PLs or utilizing fleets from multiple transportation companies.
A report published in EconStor, “Outsourcing to 4PLs: Opportunities, Challenges and Future Outlook,” does a great job breaking down the differences in several key areas, such as:
|Responsible for Accountability
|Source of Contact
|Did you know there are five types of logistics providers?
|First-party logistics (1PL): Handles internal logistics straight from one business to another (B2B)
|Second-party logistics (2PL): Handles transportation for network distribution
|Third-party logistics (3PL): Handles inventory management, order fulfillment, warehousing, and distribution for multiple customers, and may also manage multiple 3PLs
|Fourth-party logistics (4PL): Is a single-point-of contact for the entire supply chain lifecycle
|Fifth-party logistics (5PL): Manages and optimizes the entire supply chain network, including working with 3PLs and 4PLs
What is a 4PL Business Model?
In a fourth-party logistics business model, a customer outsources its supply chain management to a single provider. This 4PL may manage multiple 3PLs to meet customer needs. In a 4PL business model, logistics companies will likely also manage:
- Customer communications
- Existing third-party supply chain relationships
- Vetting and sourcing new vendors as needed
- Inbound and outbound logistics
- A network of warehouses and suppliers
- Shipping companies, transportation, and freight
- Data analytics
- Technology investments that streamline and automate warehouse management, network management, inventory management, and other processes
How does a 4PL work?
Here is a high-level breakdown of how a 4PL works:
- Analyzes customers’ needs, goals, and objectives
- Develops a supply chain management plan and business management strategy including guidance on finances, resources, and other business needs
- Vets and outsources supply chain needs to third-party vendors and other logistics businesses, for example:
- Inventory management
- Shipping, order management, and distribution
- Freight management
- System, software, and other IT services
- Serves as a single point of contact for all supply chain needs
- Manages inbound and outbound logistics
- Handles inventory planning and management, including warehouse oversight
- As needed, partners with customers’ in-house logistics teams and managers
- Proactively and continuously manages the supply chain network and offers solutions for increased efficiencies and optimizations
Why 3PLs Should Consider Shifting to a 4PL Business Model
If you’re a 3PL that can’t find skilled logistics professionals to fill open positions or are struggling with warehouse capacity constraints, shifting to a 4PL business model may help increase operational efficiencies, decrease expenses, meet customers’ changing needs and expectations, and scale your business to serve more companies. However, before doing so, there are a few key things to consider:
- What are your business goals?
- What are your current capabilities?
- Do you have enough resources and financial support to shift into broader service offerings?
- What does current market demand look like?
- Are you comfortable working with third-party logistics providers and other vendors where market fluctuations may influence pricing and availability?
After reflecting on these key questions, you may feel your company has the bandwidth to move into the 4PL market and do so successfully.
By adopting a 4PL business strategy, you can expand your value-added services to go beyond warehousing, inventory management, and order fulfillment. As a 4PL business, instead of managing the hands-on, day-to-day responsibilities like a 3PL, you can shift to a more strategic oversight position, managing all aspects of your customers’ supply chains to ensure they’re getting the most out of their logistics network opportunities. For example, you can offer additional services such as:
- Becoming a single point of contact so your customers can focus on other parts of running their businesses.
- Conducting vendor risk assessments and handling vendor management.
- Utilizing new technologies to improve supply chain efficiencies.
- Providing strategic oversight.
- Managing supply chain budgets and resources utilization.
- Optimizing omnichannel fulfillment across vast geographical areas.
- With data analytics and insight into the entire supply chain lifecycle, you can provide much-needed insight and expertise to help your customers make better data-driven business decisions.
By offering these value-added services, you can also set your business apart from 3PL competitors, expanding your operations into a new and growing market.
The logistics market for both 3PLs and 4PLs is expected to grow within the next five years. For 4PLs specifically, a report from Facts and Factors predicts the 4PL logistics market to exceed $71 billion by 2028. Another report from Polaris Market Research predicts the 4PL market will grow more than 7%, reaching nearly $112 billion by 2031.
There may never be a better time to get your foot in the 4PL door than now.
What Are Some Benefits of Moving from a 3PL to a 4PL Business?
While not without risk, there are many benefits of moving from a 3PL provider to a 4PL company.
First, you could potentially save money on operations, even if you’re scaling. How is that possible? As a 3PL, you likely own your warehouses and all the technologies and other resources needed to operate them and manage customer fulfillment needs. But, as a 4PL company, the up-front costs and depreciation of owning facilities and other assets don’t fall to you. Those costs are with the third-parties that you’ll outsource supply chain services to. This means many of the fixed costs you have to account for now, may drastically decrease.
Compared to a 3PL, here are some other potential benefits of becoming a fourth-party logistics company:
- You can serve more ecommerce customers, which are driving 4PL market growth.
- You can manage more customers’ orders faster and in some cases can offer two-day or same-day delivery, which might not have been possible as a 3PL.
- Meet more of your customers’ evolving requirements with a focus on quality customer support.
- Manage more complex supply chain needs with access to more flexible logistics alternatives.
- With more customers and more logistics needs, your supply chain volume may help you qualify for better rates for transportation, shipping, carrier networks, and other sources.
- Handle more of the “back-office” responsibilities for your customers’ supply chain using integrated technologies, for example:
- Automated billing
- Automated order management
- Simplified scheduling
- Providing accurate, on-demand analytics and reports as needed
- Replenishing inventory and automatically reordering stock as needed (no more over- or under-ordering)
- Tracking and integrating customer shipping
- Accurately forecasting future demand
- Ensure regulatory and compliance standards are met.
- Offer customers more services with greater value.
Examples of Successful 4PLs
Amazon is a well-known 4PL. The company handles everything from ecommerce hosting and software, to warehousing and inventory, and also serves as an order fulfillment center that manages product picking, shipping, and distribution.
Other 4PL examples include:
How Does a 4PL Business Make Money?
With a 4PL business model, your company can optimize revenue opportunities and make money in a variety of ways. These opportunities may vary based on the size of your company and the services you offer, but here are some money-making opportunities for a 4PL:
- Charge fees based on supply chain management services and oversight, for example, on a monthly or annual basis or set rates based on your customers’ total logistics spend.
- Earn fees related to negotiated rates or charges with third-party suppliers.
- Partner with a technology provider and offer clients opportunities to implement integrated technologies to improve and automate operational efficiencies. This could be in the form of implementation, licensing, or subscription fees.
- Attach payment metrics to key performance indicators.
- Earn commissions on the vendor contracts you negotiate for clients.
What You Should Know Before Starting a 4PL Business
3PLs interested in becoming a 4PL have a leg up on new companies, quite simply because you already know industry basics. While that is a good starting point, before starting a 4PL business, think about how deep your industry knowledge is, especially across the entire supply chain ecosystem, and assess your capabilities of expanding that knowledge.
It may also be helpful to seek out a niche in the 4PL services market. For example, based on your business goals, would you be more successful if you specialized in a specific industry, for example healthcare or automotive? Your geographic location and network distribution may play a role in this decision.
Also, think about your industry connections. Do you have existing strategic relationships (or can you develop new ones) to ensure you can build the depth and type of network necessary to meet customer needs? If you are looking for 3PL partners to expand your 4PL network, check out Extensiv’s Fulfillment Marketplace for a listing of 3PLs willing to collaborate in the 4PL space.
A couple other areas to consider before adopting a 4PL business model:
- Do you currently have, or can you attract and retain the talent and expertise you need to start your business and ensure you’re optimizing resources and operations?
- Have you shifted business focus before? If yes, was it successful? What did success look like?
- Do you have key stakeholder support to make this transition?
- Do you understand the supply chain compliance and regulatory environment and the standards you will have to meet?
- Do you have (or can you develop) business continuity, operational resilience, incident response, and disaster recovery plans, not just for your 4PL, but also to manage supply chain disruptions?
- What are some of the risks becoming a 4PL would introduce? Do you have the ability to mitigate, remediate, or reject these risks based on a risk threshold?
11 Steps to Start a 4PL Business
While the exact steps you’ll take to start a 4PL business will vary based on your location, objectives, industries you want to serve, financial support and more, here are 11 steps that can help you get a fourth-party logistics company off the ground:
- Conduct industry and market research
- Decide on industries you want to serve or your niche area
- Get to know your competition
- Create a business plan
- Build relationships with current and new partners, vendors, and service providers
- Develop an infrastructure
- Select and implement technologies to streamline and automate operations
- Hire the right talent for the right positions
- Consider working with an industry consultant for additional expertise and support
- Start small and measure success
- Start your 4PL
Attracting and Retaining 4PL Customers
In addition to the opportunities and benefits becoming a 4PL can introduce to your business, there are also perks you can market to attract and retain 4PL customers:
- Customers will experience supply chain cost-savings.
- Supply chain operations will be more efficient.
- They can count on your network to meet their supply chain needs, even if those needs are complex or evolving.
- They can access integrated technologies they might not otherwise know about or can’t afford to implement.
- They’ll be happier because they can focus on scaling their business while you focus on everything supply chain related.
- With access to data analytics and customized reports, your customers will have more insight into their inventory and supply chain processes so they’ll be able to make more effective business decisions.
- You’re an expert in all things related to inventory, warehouse management, distribution and shipping, and other supply chain needs. They don’t have to be.
- Your customers can have confidence they have the right type and right amount of inventory when they need it.
- They can access more resources without hiring more employees.
- You’ll keep up with and inform them about industry changes so they’re never blindsided by costly oversights, lack of knowledge, or mistakes.
Is It Time to Make the Shift?
There are many compelling reasons to implement a 4PL business model. With the right forethought and support, backed by industry-recognized technologies and expertise, you’ll be well on your way toward new opportunities to attract new customers, meet their needs, increase your bottom line, and make a name for yourself in the emerging 4PL market.
Interested in learning more about becoming a 4PL–and the technology you would need to run your network? Schedule a demo today to discuss our 4PL software solution, Extensiv Network Manager! Also be sure to download A Guide for Creating & Executing a 4PL Network for tips on how to make the transition from 3PL to 4PL.