Understanding the differences between 3PL and 4PL

Third-party logistics (3PL providers) are well-known, and highly popular with retailers and brands. In recent years, rising demand has created an incentive for fulfilment companies to diversify their offering, and expand into other services. While 3PL is the process of entrusting a separate business entity with the picking, packing and distribution of finished goods, 4PL providers act as an intermediary between client and 3PL; 4PLs don’t typically own their own logistics infrastructure, such as warehouses and order processing technology. Instead, 4PLs work with 3PL vendors who themselves coordinate goods-in, storage, picking, packing and distribution. While 4PLs handle negotiation of 3PL contracts, integration between fulfilment centre and client, fulfilment centre and client's suppliers, leaving the 3PL to take care of day-to-day business operations.

When a retailer works with a 3PL, the 3PL will be focused primarily on hitting pre-agreed KPIs and OKRs, based on metrics such as order processing speed, customer feedback, and on-time delivery success rate. A 4PL, on the other hand, will take these metrics into account, across multiple fulfilment centres, ensuring you get the best deal with everything from shipping costs to picking and packing fees. However, distinguishing 3PLs from 4PLs isn't always so black and white; there are eCommerce fulfilment providers who offer the strategic consultancy that is normally the preserve of a dedicated consultant, or a 4PL. At Zendbox, while we pride ourselves on being recognised as a 3PL, we provide our clients with dedicated strategic account management, and inventory analysis technology, to help retail decision-makers determine when is best to, or not to, re-order stock, and avoid understocking and overstocking.

Zendbox combines the transparency and control of a 3PL, with the strategic insights of a 4PL

While 4PLs typically act as a single point of contact for an entire supply chain, 3PLs are broadening their service capabilities. A 4PL might coordinate disparate suppliers on behalf of a retailer, such as a customer outsourcing specialist, an inventory management technology vendor, a group of fulfilment centres, and a multi-carrier shipping solution. With some 3PLs, there isn’t a need for this complexity, because some eCommerce 3PLs offer services such as outsourced manufacturing, customer support, contracts with courier partners, and inventory analysis technology, negating the need to work with a 4PL that would normally be the preserve of major brands that ship thousands of orders daily, rather than the typical retailer that outsources eCommerce logistics, that typically ships between 10 and 1000 parcels per day. Zendbox functions as both a 3PL and 4PL for its clients; helping retailers with their inventory management, and offering ultra-late order cut-off times to help merchants convert more online shoppers with next-day delivery.

Zendbox can also work with suppliers to ensure rapid stock replenishment, and its predictive technology, Zendportal, can instigate the restocking of orders based on historical demand fluctuations. Zendportal gives retail leaders access to order processing data and analytics, demand forecasting, and shipping data, to help retailers make more profitable decisions and better manage capital allocation. This really is going above-and-beyond what a typical 3PL will offer. It can be argued that some of the world's largest retailers, such as Nike and Amazon, act as their own 4PL; they have the required internal resource to manage the entire supply chain. For the other 99.99999% of smaller businesses, there is usually a business case to be made for working with a 3PL or 4PL.

Working with a traditional 3PL involves a lot of trust, and 4PLs are a more extreme version of this - 4PLs add another degree of separation between you and your business process operations, which means you will have less control of your supply chain. Enterprise-level 4PLs will typically be chosen by large businesses that decide to appoint a 4PL instead of developing their own internal resource; an ideal strategic imperative for firms that have shifted to remote working, or those that are reaching the end of a warehousing contract.

The key differences between 3PL and 4PL

While 3PLs focus on specific operational functions, 4PLs can oversee the entire supply chain, from raw materials to orchestrating multiple fulfilment centres globally. While 3PLs typically own their own warehousing infrastructure and technology, 4PLs do not, and instead rely on their relationships with 3PL providers, manufacturers and suppliers. Operationally, a 3PL handles everything from receiving inventory, picking and packing, order processing, shipping, returns management, reporting and analytics. 4PLs, on the other hand, begin with developing a strategy for their client, presenting a selection of candidate fulfilment services, then coordinating the implementation of providers, and in the medium to long-term, optimising the supply chain, identifying bottlenecks and gaps in customer service quality. Both 3PLs and 4PLs require ongoing performance management, with periodical review meetings to monitor KPI and OKR metrics, the goals being to minimise overheads, enhance the customer experience, make more profitable business decisions, drive continuous improvement and innovate where possible.

The future of fourth-party logistics

A report by Market Research Future found the 4PL market was valued at $59.5 bn in 2022, and is projected to grow to $114 bn by 2032, exhibiting a compound annual growth rate (CAGR) of 7.5% during the forecast period. The increased complexity of the supply chains and rising emphasis on technology, and digitalisation within the logistics and supply chain industry are the key market drivers enhancing market growth. This growth is anticipated due to the rising complexity of supply chains, brought on by retailers' needs for international expansion, which can lead to delicate challenges with issues such as customs clearance, shipping and inventory management. In the future, 4PL providers will need to embrace IoT, AI and blockchain, to stay ahead of the curve and grow their market share. Furthermore, because of this anticipated growth in 4PL services, this will continue to place pressure on eCommerce 3PLs to offer value-added services that are normally the preserve of 4PLs.