As we were talking about the trade-off between transportation and storage costs in the last lecture and shortly introduced the concept of Vendor Managed Inventory (VMI) I wanted to present other related concepts, the Third Party Logistic (3PL) and Fourth Party Logistic (4PL) providers. In the literature you might find slightly different definitions of these concepts. Therefore the author of the following article http://cerasis.com/2013/08/08/3pl-vs-4pl/ uses the definition of the Council of Supply Chain Management Professionals’ (CSCMP) glossary as it seems to be a generally accepted definition amongst practitioners. The CSCMP defines 3PL as the “Outsourcing all or much of a company’s logistics operations to a specialized company.” At the beginning the term “3PL” was used for intermodal marketing companies (IMCs) in transportation contracts. When these companies arouse contracts for transportation had to be extended from two parties (shipper and carrier) to three parties (shipper, intermediary and carrier). Nowadays the definition has broadened and pretty much every company that offers some kind of logistics service for hire calls itself a 3PL. The provided services are transportation, warehousing, cross-docking, inventory management, packaging and freight forwarding.
But let’s get to the important part. Why should companies work with 3PL providers? What advantages can they offer? I found another article (http://cerasis.com/2014/10/15/3pl-providers/) that gives 7 reasons why non-core transportation management functions should be outsourced:
- Save time and money: This is kind of the most important reason and some of the following reasons might be necessary to explain why this is really the case. The company clearly saves time as they don’t have to handle transportation anymore. But on the first sight it might seem as it comes with a higher costs. This is where the following reasons kick in
- Economies of scale: As 3PL companies have several customers the act on a larger scale which can bring several cost advantages. E.g. when merging loads to achieve FTL.
- No need to buy an expensive transportation management system (TMS): Also 3PL providers have all the necessary computer software and again the costs are divided between all their customers.
- Utilize more carriers: By using several carriers 3PL providers may be able to always get the best services and prices.
- Liability: 3PL providers manage the legal part, carrier contracts and more. This does not only reduce the workload but also shifts the liability to the 3PL.
- Visibility of loads: Many 3PL providers offer additional services like on-line tracking to give shippers visibility of their loads. This real-time information provides additional value and helps to improve planning.
- Reduce back office duties: 3PL providers have the systems, manpower, and the know-how to process thousands of bills a day at a fraction of the costs.
To see how 3PL providers work you might want to watch this commercial video from a 3PL supplier called Total Logistic Control (TLC) (preferably minutes 0:25 to 0:48 and 2:00 to 7:14)
Now that we know what a 3PL is let’s get to the next PL, the 4PL. 4PL was originally defined by Accenture as “A supply chain integrator that assembles and manages the resources, capabilities, and technology of its own organization with those of complementary service providers to deliver a comprehensive supply chain solution.” The CSCMP differentiates 4PL and 3PL the following ways:
- 4PL organizations are often a separate entity established as a joint venture or long-term contract between a primary client and one or more partners.
- 4PL organizations act as a single interface between the client and multiple logistics service providers.
- (Ideally) all aspects of the client’s supply chain are managed by the 4PL organization.
- It is possible for a major third-party logistics provider to form a 4PL organization within its existing structure.
Sometimes 4PLs are described as non-asset-owning service providers so their role is to provide broader scope managing of the entire supply chain.
To make the difference more clear you find can find a link to a commercial video from a 4PL supplier called Ally (it’s a short video so from the beginning until minute 3:15)
As I said the problem can be like in many other fields that once a term is out in the world it is used in many different ways and may confuse you when you are trying to understand a new concept. So if you are still not really sure what’s the difference between 3PL and 4PL I invite you to watch the following video that has another explanation and also talks a little more about current developments in both fields. (I’m not writing which minutes to watch because it is relatively short and in my opinion worth watching all of it.)
Have you watched it?
What do you think is Amazon a good example for a 4PL provider?