Understanding the benefits of a 3PL vs 4PL is the first step to finding the perfect outsourced logistics partner. This overview will help you set your priorities as you vet potential partners.
Understanding the benefits of a 3PL vs 4PL is the first step to finding the perfect outsourced logistics partner. This overview will help you set your priorities as you vet potential partners.
In researching outsourced fulfillment options, you may have come across the terms 3PL (third party logistics) and 4PL (fourth party logistics), sometimes even used interchangeably. While on the surface these two services may seem very similar, there are some major differences in service levels, technology, and network capabilities.
A 3PL, or Third Party Logistics provider, is an outsourced fulfillment solution. It provides warehousing and pick, pack, and ship services. The primary benefit of outsourcing fulfillment to a 3PL is reduced overhead and strain on internal resources.
The 3PL is a tried-and-true business model and has the largest market share in the fulfillment industry with $332.9 billion valuation. 3PLs usually have the following characteristics:
A 4PL, or Fourth Party Logistics provider, is a network of multiple 3PLs connected through a single technology platform. 4PLs have a nationwide footprint to enable 1- to 2-day ground delivery across the US. Partnering with a 4PL can enable a small to mid-sized merchant to offer the same delivery promises as major retailers without sacrificing margins.
A 4PL serves as a strategic partner and negotiates the best rates and SLAs across the 3PL network. Using historical sales and shipping data, 4PLs also advise merchants where to forward stock inventory in order to best serve their customers. 4PLs aggregate the inventory and shipping volumes of multiple merchants to negotiate the best SLAs and eliminate peak season surcharges.
According to McKinsey, traditional 3PLs struggle to keep up with the pace of ecommerce growth. eCommerce fulfillment requires speed, flexibility, diverse warehousing capabilities, and reverse logistics capabilities.
Generally, 4PL capabilities are more advanced and flexible than a traditional 3PL. The key differentiators of a 4PL include:
3PL services are a portion of what a 4PL provides. Most 4PLs have a variety of warehouses and 3PLs. in their network. They can provide more diverse shipping and storage capabilities and better geographical coverage. For instance, a 4PL network may contain warehouses that specialize in big and bulky storage, lot tracking, and Seller Fulfilled Prime — all within a single network.
With “on-demand” 4PLs, merchants pay for only the resources they need when they need them. They offer flexible contracts and service agreements, making them a highly scalable solution. 3PLs often require long-term contracts with stricter parameters around average daily order volumes.
4PLs typically operate through a cloud-based warehouse management solution (WMS), giving merchants visibility into order receiving, fulfillment, and delivery statuses across all of their facilities. A WMS should also integrate with e-commerce platforms like Shopify or WooCommerce and ERPs like Oracle or SAP for automated reporting. 3PLs rarely provide this type of technology component.
Today’s leading 4PLs will offer customer service beyond basic support. They offer strategic advice to merchants around inventory and distribution and management. Alternatively traditional 3PL usually can only respond to basic inquiries and addres day-to-day operational issues.
Whether you decide a 3PL or full-service 4PL is the best fit for your business, it’s important to vet all potential outsourced fulfillment partners. Below are 5 questions that will help you find the ideal fulfillment partner.
Do you have perishable goods that need to be stored and shipped at specific temperatures? How about fragile items that need special care? Do you require specialized kitting workflows? How much storage space will you need, and how will volume shift with seasonal demands?
It is important to understand each warehouse’s geographic coverage and how that aligns with your key customer markets and their shipping expectations. If you need to reach all customers with two-day shipping and only want to pay ground shipping rates, you need to narrow your search to partners that can meet those expectations.
Amazon sellers, in particular, should look for a 4PL with the capability to meet Seller Fulfilled Prime (SFP) and Fulfilled by Merchant (FBM) requirements.
Understandably, most small to mid-sized merchants are looking first and foremost to lower their customer acquisition costs. Look for a partner who understands the overall business impacts of streamlined fulfillment and fast shipping.
Data increasingly shows that advertising a 1 to 2-day delivery promise at the top of the sales funnel increases conversions and overall market share. Pay close attention to providers who offer these kinds of insights, and consider the relationship between top-line revenue and bottom-line profitability when comparing cost.
The trade-off to outsourcing your fulfillment is often visibility and control. Therefore, it’s vital to have a strong understanding of what your partner’s client support will provide to you. You’ll want to consider both sides of client support: the warehouse team physically performing your fulfillment workflows and the support team that will be your main point of contact.
Dig in and ask questions about on-time fulfillment speeds, dock to stock time, and security measures to understand their warehousing processes and service levels. Ask about the speed to resolve issues, and don’t be afraid to ask for a reference from an active client before signing a contract to ensure that you’re comfortable with the support and service you will receive.
Integrated technology is a huge advantage for merchants. It bridges the gap between delivery (where sales and operations meet) and every other part of the business. It allows a full-funnel view of both the supply chain and the sales cycle for more accurate customer acquisition costs (CAC) and overall cost to serve.
Consider your current tech platforms and how inventory and delivery data would enrich them. Most merchants see tremendous value by plugging their order management systems, marketplace sales channels, and ERP systems into their WMS. Additionally, the WMS will provide daily reporting on order status, inventory levels, and fulfillment status.
3PL vs 4PL Is Only the Beginning
As the ecommerce landscape continues to evolve, shoppers increasingly expect a faster, cheaper, and more transparent shopping experience. Many brands, therefore, are looking for partnerships that enable a headless supply chain for ultimate flexibility. These types of partnerships:
To learn how Ware2Go is simplifying the end-to-end supply chain with 4PL services and headless supply chain solutions, take a look at Our Solution.
