3PL vs. 4PL

Note to readers. A more updated version of this article will be kept here…

http://www.scmfocus.com/fourthpartylogistics/2009/05/3pl-vs-4pl/

The Concern

3PL providers often complain that they dislike the term 4PL because they feel intermediaries are taking business from them and leaving them with very less business or lower down on the food chain.

The Reality

The fact is they are asset based and will always be asset based. Their internal incentives are focused on selling transportation and warehousing services. Major third party providers have been consistency guilty of getting business for the sake of getting business rather than turning down business that does not fit with their network. This means that the “new” parts of their companies are still captured by the “old” parts of the companies. This is one reason why it is so difficult for companies to change, no matter how many times they say they would like to.


The Problems With 3PL

But something has happened on the yellow-brick road. The reasons are varied, but the bottom line is many have failed at their own business transformation. Some 3PLs have not moved past their core commodity service to become true multi-service providers. Or international 3PLs have not understood how to provide domestic services; or domestic ones have not succeeded at venturing into international logistics services.

Others have failed to differentiate themselves against the competition. Certain 3PLs have not done a good job positioning and defining themselves in the marketplace. Or the parent company has not given them the resources, especially sales and sales leads, to penetrate even their existing customers. And, sundry have commoditized their 3PL service, as a result undoing the very purpose of their 3PL. These setbacks have slowed down the growth of some 3PLs in terms of both customer retention, especially, and new customers. -http://www.esupplychain.eu/en/info/viewart/544,OUTSOURCINGSUPPLYCHAINMANAGEMENT_3PLVERSUS_4PL


This is one of the advantages of non-asset based intermediaries, that are computer focused will always have the advantage because they can span the gap across multiple modal types and their core competency is information technology. Ryder Logistics, for instance, will always be viewed with suspicion by rail or air cargo companies because they are competitors, so they will not be seen as impartial coordinators of the overall supply chain. Another issue that is missed or overlooked by 3PLs, is that 3PLs are not now, now will they likely be leaders in information technology. Integrating supply chains with monitoring technology, and making it appealing and providing an exceptional user experience is not a generic capability. It is an exceptional capability, and only those companies most focused no IT, where IT is their business line are likely to be able to pull it off.

Secondly, asset based third party providers have had their chance, and logistics has not improved very much with them, and there are massive miss-coordination in supply chains. Thus we feel its time to give a new group a chance to help solve the problem.

What Is Required

However, the companies that can provide the 4PL concept are few and far between. They must demonstrate the highest level of proficiency with IT and with customer service. They must be top grade at data integration, and at front end development or front end modification. A truly progressive 4PL will provide websites, where customers login, that encapsulate and hide the complexity of the integration behind it, to allow customers to manage their own freight empowered by the 4PL’s infrastructure. This is one of the lessons of Google, as is chronicled in the book — What Would Google Do?

  • Serve as a platform

Current 3PL Model

The old model of customer interaction was for companies to contact a 3PL and for a long courting process to follow, with lots of promises made, and efforts to “understand the client’s business” and then for a contract to be signed and for the logistics management to move from the client to the 3PL. This was essentially simply moving the location of where the work in freight coordination was being done. The client’s logistics function then became simply managing the 3PL for those parts of the business that the 3PL had obtained. This is not all that helpful.

The Web Centric Model

The old model has significant costs and significant lock-in. Once the client chooses one 3PL, it has to rebid the business to switch, which is a tedious process. Companies like Amazon.com have demonstrated that you can test their offerings (Amazon offers fulfillment to sellers) simply by interfacing with their website. You can become educated as to their services through their website, and send data through their website, and you can do this is you are a large company or small company. You can test their service, and if you don’t like it, simply cancel the service–on their website also. For this reason, Amazon is a low cost provider, because they have automated so much of the process and they create platforms that allow users to interface with Amazon at low cost and low effort, and they enable their sellers through their website. Companies like UPS have a great reputation for outsourced logistics, but even they do not offer the tools or web centric approach and ease of interaction provided by Amazon.com.

Amazon.com has both full text explanation as to how to use their fulfillment services as well as video that walks vendors through the process. This level of transparency is unheard of in the field of traditional 3PLs. This is because:

  • They are not web oriented
  • Their model is based upon large company interaction, not through creating and managing relationships through labor saving websites

Amazon.com’s model means they can interact with almost any sized shipper. However, traditional 3PLs can only service shippers of a certain size. The desire of 3PL is to allocate volume over their assets — not to create a platform that enables clients to enhance their own logistics management.

The Ideal 4PL Model

Instead, 4PLs should not simply recreate the wheel, but should create platform that internal client logistics departments can use to gain visibility into their system. The 4PL then focuses on data integration and web development and allows multiple companies to log into the same system (with authorizations that keep client’s data protected from other clients of course). In this way the platform begins to improve and the 4PL keeps is costs down. Following this approach, when a 4PL adds a new client, its costs do not increase at the same rate, because many of the feeds are already built to the major warehousing and transportation and 3PL companies.


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10 thoughts on “3PL vs. 4PL

  1. Pingback: Retailers as 4PLs « Fourth Party Logistics

  2. Pingback: Why Did SAP Name EWM Such A Little Used Term? « SAP SCM Planning

  3. Great post !
    I agree, the focus must be on customer value and not asset utilization.

    This is one of the biggest failings of the traditional 3PL model and will most likely be one of the most important motivators for change.

    Although I must conceed, leading change is not always about good ideas. Sometimes asset utilization and traditional business models need to be factored into the overall transformation of an industry or process.

    The modern internet has potential to change so many things…watch this space.

  4. Hi,

    Need some clarification whether a 3PL company that has the 4th party contract with MNC is excluded from serving them in the 3PL capacities.

    Appreciate your help

    • Hi Manish,

      There is no regulatory agency that works on this, so there is nothing preventing this from happening. However, its important to remember that the 3PLs have aggressively tried to co-opt the 4PL term. See my article on “7PL.” 3PL has not worked out very well as a concept and in many cases is has just been a rebranding of transportation services. A true 4PL would have no physical logistics assets, but serve as a platform for managing the logistics services of other companies. By that definition, I have never actually seen a true 4PL, although an advanced international freight forwarder (i.e. one with very good systems) comes very close to meeting the definition.

  5. Hi Shaun,

    I am looking at 4PL models and I have come across Unilever’s ‘Internal 4PL model’. Is this the same as the traditional 4PL model and if not what is the difference?

    I appreciate any advice you can offer.

    • If you think about the definition of a 4PL, it is an asset-less independent party which manages multiple asset based logistics providers. They could do this with people (the old model) or by enabling logistics departments at shippers with technology platforms (the new model, which is yet to be seen in practice)

      An internal department to say Unilever, is doing some of the same things as a 4PL, but it can’t be a 4PL because its internal to the shipper. This sounds like someone is interested at co-opting the term “4PL,” but is not using the term in a way which the description meets its definition.

  6. Hi Shaun,

    how can identify 4 PL working with us with in 3PL operation? how can we go to 7 PL logistics from 3PL operation? i am really confusing about those? please be good enough advice me.

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