What Is Fourth Party Logistics (4PL)? A Simple Introduction
There are many types of logistics partners, depending on the extent of the partners' responsibilities. A fourth party logistics (4PL) partner can manage the entire supply chain and provide strategic insight into the logistics process. In this article, we'll look into what fourth party logistics is, why you may need it, and what benefits it brings.
What Is Fourth Party Logistics?
A firm using fourth party logistics outsources all its logistics operations to a single logistics partner. That partner is responsible for assessing, designing, planning, building, running, and even tracking an integrated comprehensive supply chain solution on the behalf of the firm. This is different from other types of logistics models, where the firm may outsource just the delivery process. Therefore, fourth party logistics represents a higher level of supply chain management for the client. A firm using 2PL or 3PL is more involved in the day-to-day operations, whereas 4PL focuses on strategic management and optimization levels. The responsibility of the 4PL goes far beyond just ensuring timely delivery.
Businesses nowadays are manufacturing diverse products and have activities spread across the world. With the advent of e-commerce and next-day delivery promises, customers expect a high level of omnichannel delivery service. Thus, businesses have to handle multiple logistics arrangements across online and offline channels. And they have to constantly strive for faster deliveries and cheaper logistics costs.
A 4PL Partner Manages Complexity
All of this has brought in a staggering amount of complexity to supply chain management for manufacturers. Big companies can have an in-house team to optimize their logistics and manage the entire process. However, most businesses don't have that luxury. That's where 4PL logistics come in.
In this model, the business outsources the management of the entire supply chain as well as the execution of the logistics activity. The 4PL partner proactively manages all aspects of the client's supply chain to offer higher value than just physically delivering a product.
4PL Means Managing the Entire Logistics Process
A 4PL partner is much more involved with the business's operations than a second party or third party (2PL or 3PL) partner would be. For example, a 4PL partner will manage the inventory at warehouses, the fulfillment transport, the technology solutions at the back end, and so on. The 4PL assembles, supervises, and manages the combination of warehouses, IT providers, business process management, shipping companies, freight forwarders, other downstream 3PL providers, and various other agents. Thus, the 4PL partner is almost like an in-house team. It is responsible for controlling all resources, capabilities, and technology of an organization’s supply chain.
More Expertise, More Responsibility
Manufacturers outsource all these responsibilities because the 4PL partner has more expertise in this area. The alternative would be hiring and training a team to manage the entire logistics operations, which would be expensive and take a lot of time.
However, this outsourcing also means that the 4PL partner has a lot more responsibility. Clients expect better results and performance. Otherwise, they might prefer taking care of these matters in-house.
What a 4PL Must Do
The 4PL partner will need to bring in proven results across the process and affect the entire supply chain. It has to manage people, process, and technology across the organization. It must constantly optimize logistics performance. Typically, the 4PL doesn't own transportation vehicles, employ drivers, or warehouse assets. Thus, the 4PL is also responsible for coordinating those aspects with vendors. The 4PL acts as an interface between the client and these logistics service providers. Also, the 4PL is responsible for ensuring all the partners seamlessly work together.
What else does the 4PL do? It provides its clients with a high-level, “control center” view of the different aspects of their logistics. Typically, this is a single dashboard to view, manage, and track the client's warehouses, shipping companies, delivery agents, logistics performance, delays, and so on. It also provides information on demand, supply, and other fulfillment activities. This dashboard acts as a single interface for all aspects of the supply chain process. Thus, it provides global visibility to enable easy planning and execution.
Should your company use 4PL? Read on to find out more before making a decision.
4PL Provides Strategic Insights Into the Logistics Process
As mentioned, managing your supply chain has become really complex. You may have to assemble raw materials and manufactured goods from different corners of the world. Customers expect fast delivery and a great experience, whether be it in stores or online. And businesses are expected to bear the costs of next-day deliveries, returns, and delays. Thus, supply chain management has become a liability for most businesses. In contrast, a properly managed and optimized logistics process has become a competitive advantage.
Large e-commerce companies, such as Amazon, have huge in-house teams that act as their 4PL. They spend a lot of money and effort to manage, control, and improve their logistics. Most businesses lack those sorts of resources and bandwidth. Thus, they can work with 4PLs who will carry out these tasks on their behalf.
An effective 4PL offers the strategic vision to plan and operate the supply chain network that efficiently manages the logistics across all platforms.
4PL Provides Global Visibility To All Elements of the Supply Chain
The modern, complicated supply chain process also mean that businesses need to oversee many issues. Companies that provide global deliveries typically work with two dozen or three dozen delivery partners specializing in different geographic areas. Coordinating with so many parties in different time zones, speaking different languages, and with their own separate tracking tools can be a nightmare. It's a highly disjointed and disconnected process. Moreover, businesses need visibility on all their deliveries to customers, OEMs, contract manufacturers, suppliers, and carriers. That's where the 4PL can also help.
The 4PL is the intermediary that readies, coordinates, and manages all the different partners in the logistics process. It makes sure all the partners work together and integrate enterprise resource planning and IT. The 4PL also provides a single view of all local delivery partners, inventory, warehouses, fulfillment capacity, and delivery status. This can empower your business to have a global view of your logistics operations at all times.
4PL Provides the Option of Demand-Driven Logistics
Logistics in the e-commerce era is complicated. A sale can happen across many channels, such as websites, offline stores, resellers, retailers, and so on. This omnichannel requirement may compel your business to serve both physical locations and e-commerce fulfillment. You may need to ensure all warehouses and fulfillment centers across the supply chain have enough stock to ensure timely delivery. You may also need to plan in advance how you're going to move the products before the customer even makes the purchase. If they have too much inventory and less demand, then it leads to wasted costs. If you don't have the right inventory at the right place, you won't be able to deliver on time. Thus, modern logistics requires accurate demand prediction.
Many 4PL providers these days have this capability. They can conduct a detailed analysis of historical demand data to predict future expected demand. They can build intelligent shipping processes to allocate inventory and meet customer demand, regardless of the location of the inventory. These demand-driven strategies can help your business successfully forecast when and where to move goods. An effective 4PL provider can also continuously optimize scheduling and other capacities.
Benefits of 4PL
Why might 4PL be worth the expense?
- It adds a strategic oversight to your firm's supply chain to provide the highest level of services for the best value.
- 4PL provides a single point of contact for the entire supply chain.
- Also, it provides greater visibility of the entire supply chain.
- Your firm can focus on its core competencies while your 4PL partner manages the logistics.
- The 4PL partner can coordinate with a broader base of potential suppliers to ensure the lowest transportation costs.
- It can reduce inventory wastage and eliminate inventory write-off costs.
- It provides standardization and automation of the logistics process through technology integration.
- Your company can benefit from optimized service levels and inventories.
- Your 4PL partner can offer a different perspective and experience when considering your existing logistics strategy.
Having a 4PL logistics partner has many potential benefits. It will add a new dimension to your logistics. If your business is growing too complex for your in-house team to handle, then getting a 4PL partner on board is one of the best decisions you can make.
This post was written by Aditya Khanduri. Aditya currently handles product and growth at Cryptio.co, and he's also built a couple of B2B products. He's proficient in data analysis with Python and has worked with multiple startups in the blockchain and artificial intelligence sector.