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.
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:
3PL | 4PL | |
Owns Assets | Yes |
No |
Responsible for Accountability | Partially | Fully |
IT Expertise | Medium | Very High |
Performance | Cost | Value Creation |
Source of Contact | Direct | Single Point |
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 |
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:
Here is a high-level breakdown of how a 4PL works:
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:
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:
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.
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.
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:
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:
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:
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:
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:
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.