3PL Vs. 4PL: What’s the Difference, and Which One Should You Choose?

Supply chains are getting more complex by the day. As businesses expand their reach, streamlining logistics becomes crucial.

The global 3PL market size is estimated to reach USD 1.29 trillion in 2024, while the 4PL market size is estimated to reach USD 3.42 billion.

With the explosive growth in outsourced logistics, what factors should you consider before choosing between 3PL and 4PL?

Many companies assume third-party logistics (3PL) and fourth-party logistics (4PL) providers offer similar services. However, there are key differences that impact supply chain efficiency and costs. 3PL handles specific logistics tasks, while 4PL manages and optimizes the entire supply chain strategically.

Selecting the right logistics partner is imperative, but a lack of clarity causes businesses to make ill-informed decisions.

So, in this guide, we’ll compare 3PL vs. 4PL. 

We’ll reveal the critical distinctions every supply chain manager should understand and learn when 3PL or 4PL works best based on the business objectives and requirements.

Understanding the Distribution Hierarchy

Before comparing 3PL vs 4PL, let’s first discuss the basic distribution hierarchy to create a better understanding of the topic.

It is because, when it comes to logistics and supply chain management, understanding the distribution hierarchy is essential for businesses aiming to optimize their operations. 

So, let’s shed some light on the various levels within the distribution hierarchy:

1PL (First-Party Logistics)

1PL is the most basic level, where companies handle their logistics internally. All aspects, from transportation to warehousing, are managed in-house. It allows for direct control over the entire logistics process.

2PL (Second-Party Logistics)

In 2PL, businesses engage external logistics providers, such as carriers or shipping companies, for specific logistics functions. This enables organizations to leverage external expertise while maintaining some control over their logistics operations.

3PL (Third-Party Logistics)

In the 3PL model, companies outsource specific logistics functions to external specialists. Third-party providers handle tasks like transportation, warehousing, and distribution, allowing businesses to focus on their core activities.

For a better understanding, think of it as hiring packers and movers when relocating. While you focus on settling into your new home (core activities), the moving experts (3PL) handle the transportation and logistics, ensuring a smooth transition.

4PL (Fourth-Party Logistics)

Going beyond individual logistics functions, the 4PL acts as a strategic partner, overseeing the entire supply chain management. It coordinates multiple 3PLs, providing end-to-end visibility and strategic optimization for enhanced efficiency.

For instance, a 3PL can coordinate all logistics functions, including shipping, warehousing, and distribution, to optimize the entire process.

5PL (Fifth-Party Logistics)

A fifth-party logistics provider essentially serves as an aggregator that can coordinate logistics requirements across multiple companies.They integrate the needs of various shippers to generate economies of scale.

For example, a 5PL may negotiate better transportation rates or warehouse pricing by bundling volume across clients. 

5PLs aim to provide benefits through this aggregated scale and shared resources. 

What is 3PL?

3PL stands for third-party logistics. It refers to companies that provide outsourced logistics services on behalf of shippers. The third-party logistics provider does not take ownership of goods but acts as an intermediary, handling transportation, warehousing, and other supply chain activities.

Common services that 3PLs provide include:

• Transportation (truck, rail, ocean, air)
• Warehousing and storage
• Inventory management
• Order processing and fulfillment
• Packaging and assembly
• Freight forwarding and customs brokerage

3PL services help businesses scale logistics capabilities, access world-class infrastructure, and harness logistics expertise without taking on fixed assets. Shippers can redirect resources towards core competencies and free up working capital.

Want to know which type of businesses can benefit from 3PLs the most?

Retailers and e-commerce businesses often utilize 3PL for order fulfillment and shipping. Manufacturers employ 3PLs for complex distribution needs. Even small businesses with limited resources can benefit from outsourced 3PL transportation.

How the 3PL Process Works

You may be wondering, when partnering with a 3PL, how the logistics process unfolds. 

While details vary by provider, generally 3PLs follow these key steps:

1. Set-up and integration

First, onboarding begins by evaluating your supply chain’s unique needs and requirements. The 3PL asks questions like: 

What volume of inventory and orders do you handle? How fast do you need to get products to customers? Do you require special services like kitting or labeling?

The 3PL then establishes processes for integrating with order management systems, ERPs, and other technology platforms. Data exchange and API connections enable seamless order hand-off and status updates.

2. Transportation management

Once setup is complete, the 3PL transportation process arranges outbound shipping from suppliers and the manufacturing facility to the 3PL warehouse. 

Routing guides and carrier agreements optimize transit routes, modes, and costs.

3. Warehousing and inventory management

At the warehouse, the 3PL receives and checks-in supplier shipments. Inventory is stored, tracked, and replenished with accuracy. 

Even the space, layouts, and equipment are designed to enable efficient order processing.

4. Order fulfillment

As customer orders arrive, the 3PL performs the work of picking, packing, and shipping orders from inventory. Orders are checked for accuracy, protected with packaging materials, and labeled for shipping.

5. Delivery

The 3PL tenders shipments to the chosen carrier(s) for final delivery to customers. Status updates are provided throughout transit. For business customers, deliveries may include tailgate service, inside delivery, or white glove service.

6. Returns and reverse logistics

And we can’t forget about returns! 

Many 3PLs also facilitate returns and reverse logistics. They receive returned items, communicate with customers, inspect inventory, and manage defective and excess merchandise.

This end-to-end process illustrates how 3PLs handle all the complex legwork involved in operational logistics. They make it look smooth and easy, so you can focus on your core business!

Pros and Cons of 3PL

What is 4PL?

4PL, or Fourth Party Logistics, refers to a logistics model where a company outsources the management of its entire supply chain to a fourth-party logistics provider. 

The 4PL providers, also known as lead logistics providers (LLPs), typically act as supply chain integrators, overseeing and coordinating all aspects of the supply chain on behalf of the client. This includes managing various 3PLs, carriers, and other service providers, optimizing processes, leveraging technology, and providing overall supply chain visibility and control.

If we put it simply, 4PL services typically include:

• Strategic planning and network optimization
• Managing relationships with logistics company and multiple 3PLs
• Integrating supply chain systems and visibility
• Warehouse and transportation sourcing
• Freight spend management
• Compliance and risk management
• Data analytics and reporting

How the 4PL Process Works

If a company opts for a 4PL to manage and optimize its supply chain, the logistics process unfolds in a strategic and consultative manner:

1. Extensive analysis and strategic planning

The 4PL provider begins by conducting a thorough analysis of the client’s current supply chain operations. The logistics provider understands the client’s goals, challenges, and specific requirements.

Then, based on the assessment, the 4PL develops a strategic plan. The plan outlines the optimal supply chain structure, logistics processes, and technologies needed to meet the client’s objectives. 

The strategy even involves the identification of the best third-party logistics providers (3PLs) and carriers to execute tactical operations efficiently.

2. Supply chain network design and optimization

The 4PL designs the overall structure of the supply chain network. It includes the number and location of distribution centers, transportation routes, and inventory placement to enhance efficiency.

3. System integration for visibility

Ongoing in the process, the 4PL integrates systems across the logistics network to achieve end-to-end visibility. 

The 4PL combines advanced technologies such as real-time tracking, inventory management systems, and data analytics to provide visibility into the entire supply chain.

4. Coordination and collaboration

The 4PL acts as a liaison between the client and various stakeholders. They coordinate activities between suppliers, manufacturers, carriers, and other third-party logistics providers.

Effective collaboration ensures seamless communication and coordination among all parties, optimizing the flow of goods and information.

5. Monitoring KPIs

Throughout the operations, the 4PL closely monitors Key Performance Indicators (KPIs) to identify inefficiencies and areas for improvement. 

Their oversight not only enhances compliance and lowers risks but also ensures that the supply chain meets its objectives.

6. Strategic recommendations for improvement

At the conclusion of the operational cycle, the 4PL delivers strategic recommendations and innovations to improve the supply chain continuously. 

Their recommendations allow for long-term gains and adjustments to align with evolving business needs.

While not involved in day-to-day execution, the 4PL provides oversight that guides strategic optimization at each step. 

This approach allows the client to focus on their core business while the 4PL manages the intricacies of the supply chain.

Pros and Cons of 4PL

What are the Key Differences Between 3PL and 4PL?

Now that we’ve defined the 3PL and 4PL models, what are the major ways they differ? Understanding the key difference between 3PL and 4PL enables smarter supply chain decisions.

1. Scope of services and specialization:

• A 3PL typically provides integrated supply chain services such as transportation, warehousing, or distribution. It focuses on the execution of operational functions within the supply chain.
• A 4PL takes on a more comprehensive role. While they outsource execution, 4PLs manage and optimize the entire supply chain, including planning, coordination, risk management, and continuous improvement. It goes beyond specific functions and acts as a supply chain integrator.

2. Asset ownership

• 3PLs typically own or lease physical logistics resources, including warehouses, distribution centers, transportation fleets, and inventory. This enables them to control and execute operational activities directly.
• 4PLs do not own logistics assets. Instead, they coordinate and manage networks of external 3PLs, carriers, and other service providers who perform logistics activities. 4PLs leverage strategic relationships and technology instead of physical assets.

3. Strategy and execution

• 3PLs concentrate on day-to-day logistics execution and operations, like shipping orders, running warehouse operations, and transporting products. They provide the infrastructure to perform these tactical activities.
• 4PLs operate at a strategic, consultative level, designing optimal supply chain networks and overseeing the company’s logistics operations. 4PLs analyze, integrate, optimize, and coordinate activities across end-to-end supply chains.

4. Technology

• 3PLs leverage transportation management systems, warehouse management systems, EDI, and other technology to execute operational logistics activities.
• 4PLs implement advanced integration, predictive analytics, optimization, and end-to-end visibility tools that provide insights and aid strategic decision-making across the supply chain.

5. Customer interaction

• 3PLs typically have direct interactions with the client, focusing on the specific logistics functions they are hired to perform. This interaction is task-oriented and revolves around the logistics services they provide, such as transportation, warehousing, or distribution.
• The customer communications with a 4PL are broader and involve discussions about the entire supply chain. This includes strategic planning, coordination of various logistics management functions, and aligning the supply chain with the client’s business goals.

6. Pricing

• Pricing in 3PL contracts is often transaction-based or tied to specific metrics, such as the volume of goods shipped or stored. Clients pay for the services they use within the defined scope.
• Pricing in 4PL contracts may involve a combination of fixed fees and performance-based incentives. The pricing structure reflects the comprehensive nature of the services provided, covering both strategic and operational aspects.

7. Flexibility

• 3PLs offer flexibility within their designated logistics functions. Clients can choose specific services based on their needs and scale them up or down as customer demand fluctuates.
• 4PLs provide flexibility at a strategic level. They adapt the entire supply chain strategy to changes in market conditions, business objectives, or other external factors.

8. Control

• While 3PLs provide operational control within their assigned tasks, clients retain overall control of their supply chain strategy. The 3PL adapts to the client’s needs within the agreed-upon scope.
• The 4PL has a higher level of control over the entire supply chain, managing and coordinating multiple logistics functions. Clients benefit from a more hands-off approach as the 4PL takes on a greater role in decision-making and optimization.

3PL vs 4PL: Which One is Right for Your Business?

Now that we’ve explored the key differences between the 3PL and 4PL models, how do you determine which is the best fit for your supply chain? 

There are several important factors to consider when making this strategic decision.

1. Scope and complexity

• 3PL: Do you need support with specialized logistics functions like transportation, warehousing, or distribution services? If yes, then a 3PL might be a suitable choice. It’s ideal for companies with well-defined and isolated logistics needs.
• 4PL: If your business has complex supply chain structures involving multiple functions and requiring strategic oversight, a 4PL is more appropriate. 4PLs are equipped to handle the intricacies of integrated supply chain management.

2. Strategic focus

• 3PL: If your primary concern is optimizing specific operational aspects of the supply chain, such as reducing shipping costs or improving warehouse efficiency, a 3PL can address these targeted objectives.
• 4PL: When your focus is on strategic planning, long-term supply chain optimization, and aligning logistics with broader business goals, a 4PL provides the necessary expertise and consultative approach.

3. Integration and coordination

• 3PL: Are your supply chain functions relatively independent? Are you focusing on enhancing the efficiency of specific supply chain tasks? Then, multiple 3PL providers can be leveraged and integrated. However, careful coordination is essential.
• 4PL: If your business is seeking seamless integration and coordination across the entire supply chain, a 4PL offers a centralized approach. It streamlines communication and ensures a unified strategy.

4. Flexibility and adaptability

• 3PL: Are you anticipating fluctuations in demand or need flexibility in specific logistics functions? Then, a 3PL’s scalability allows for adjustments in services based on evolving requirements.
• 4PL: Is your company one of those that operates in dynamic environments, requiring frequent adjustments to the overall supply chain strategy? A 4PL’s strategic focus provides the necessary adaptability.

5. Cost considerations

• 3PL: If your business seeks cost efficiency in specific logistics functions, a 3PL can be a cost-effective solution. It is because, generally, the services are scaled based on actual usage.
• 4PL: It’s right that a 4PL involves a bit higher initial costs than a 3PL. However, it can offer cost savings through strategic optimization, reducing overall supply chain expenses in the long run.

6. Operational control

• 3PL: If you prefer more direct control over specific logistics functions, then you may find 3PLs suitable. It allows for a hands-on approach to managing operational aspects.
• 4PL: On the other hand, you might find the centralized control that a 4PL offers useful if you’re looking to delegate a higher level of operational control and decision-making in the supply chain.

7. Technology integration

• 3PL: If the focus is on technology solutions specific to individual logistics functions, 3PLs can implement technologies for tasks such as real-time tracking or inventory management.
• 4PL: For comprehensive technology integration across the entire supply chain, including advanced analytics and visibility, 4PL is best suited. It ensures the effective implementation of integrated technologies.

8. Growth trajectory

• 3PL: If you have one of the fast-growing companies, you can leverage the flexibility of 3PL. It’ll help you rapidly scale specific logistics functions in response to increasing demands.
• 4PL: If your company has stable operations and a global footprint, you may hire a 4PL. It’ll assist in optimizing and streamlining complex global supply chains.

9. Risk profile

• 3PL: If you prefer direct management of risks, such as service failures or disruptions in specific logistics functions, may find 3PLs more suitable.
• 4PL: If you are looking to reduce end-to-end risks and enhance coordination across the entire supply chain, you may benefit from the services of a 4PL.

10. Geographic reach

• 3PL: If your business primarily operates within a local or regional market, a third-party logistics (3PL) with local expertise may be a suitable choice.
• 4PL: If you are looking to expand your business operations beyond a local or regional level, especially on a global scale, a 4PL is better equipped. It’ll manage the complexities of coordinating logistics across diverse geographic regions.

How do 4PLs and 3PLs Collaborate?

While 4PLs and 3PLs have distinct roles, they regularly work hand-in-hand to deliver integrated supply chain solutions. 

Acting as the conduit between the business and 3PL providers, the 4PL coordinates workflows, provides insights from data, and ensures alignment with strategic goals. The 4PL brings specialized expertise to manage the supply chain end-to-end.

Meanwhile, 3PLs concentrate on efficiently performing logistics functions matching their capabilities. With the 4PL’s guidance, 3PLs can continuously improve execution. And with real-time visibility across 3PL partners, the 4PL can identify synergies between their services.

This symbiotic relationship harnesses 4PL’sbig-picture thinking and 3PL’s statistical proficiency. With a perfect collaboration of 3Pl and 4PL, you get the best of both worlds.

Do You Need Your Own Delivery Team?

What if you handled logistics in-house rather than using 3PLs or 4PLs? Many growing Ecommerce businesses are considering building their own Ecommerce logistics operations.

By using in-house logistics, the biggest advantage is gaining more control over the logistics operations.

Additionally, owning your delivery fleet allows you to:

• Customize branding, 
• Interact directly with customers, and 
• Avoid outsourcing margins. 

Also, in-house warehousing gives you ultimate oversight of inventory management and order processing. You can tailor processes to your exact requirements.

So, if you are looking forward to managing your deliveries and maintaining control over your logistics operations, Upper can be a suitable solution for you. 

Our delivery management platform empowers you to plan and optimize routes, track drivers in real-time, send delivery notifications to customers, and streamline your entire delivery process. To unlock the full potential of your logistics operations, take advantage of Upper’s 7-day free trial today!