Also known as supply-chain-as-a-service (SCaaS), fourth-party logistics (4PLs) act as a true extension of the business by assuming responsibility for all supply chain-related activities. By combining technology, processes, transportation, and more under one roof, a 4PL can help drive new levels of visibility and productivity as businesses face increasing supply chain pressures. This article explores this little known reality that portends a strategic disruption.
In the past three decades, many firms have chosen to outsource logistics operations management to specialised suppliers called logistics service providers (LSPs). This managerial reality has been described and analysed extensively in academic studies in marketing, strategic management and logistics management. More recently, a new generation of providers, called lead logistics providers (LLPs) and fourth-party logistics (4PL) providers have radically altered the logistics industry. They notably offer complete logistics service without necessarily possessing the physical assets (means of transport, warehouses, etc.). These providers are gradually becoming orchestrators within supply chains.
However, it wasn’t until recently, with the emergence of Industry 4.0, that the 4PL model is becoming more mainstream. Since its original inception, the definition of 4PL has been debated among supply chain and logistics experts, but most definitions center on the combination of technology usage, strategic integration, various logistics operations, the absence of physical assets (e.g. warehousing space and trucking fleets), and extensive relationships with outside logistics service providers.
Advent of 4PLs
On-demand delivery, trade uncertainties, siloed information…for today’s supply chain managers; the list of concerns is long. Current industry and geopolitical trends are complicating matters further. Companies are juggling more products and suppliers, leaving supply chains increasingly vulnerable to disruption.
To keep up in this evolving yet volatile environment, many businesses seek outside expertise. Traditionally, companies outsource one or more of their procurement and logistics processes to external third-party logistics (3PL) partners, who utilise their own fleets, facilities, and equipment to handle standard logistics procedures such as warehousing, shipping, packing, E-commerce fulfilment, and distribution. More advanced providers will also provide value-added services such as security and tracing. However, some find that this model doesn’t go far enough.
Unifying internal and outsourced teams remains a challenge, making it difficult to gain a complete picture of the supply chain. Businesses are also collecting vast amounts of supply chain data throughout the organisation, but don’t have the infrastructure or expertise to mine it for insights. That’s where 4PL come into play.
The increasing digitisation of freight transportation is also opening the door to this new kind of management within the supply chain. 3PL providers have been successfully managing company’s operations for years. But with new data streams and technologies such as blockchain that will allow disparate systems to operate in a single, unified and trusted chain, the rise of the 4PL is bound to be upon the industry.
According to the Council of Supply Chain Management Professionals, 4PLs, also known as LLPs differ from other models in the following features:
- 4PLs are independent entities set up as joint ventures or through a long-term contract between the main client and one or more partners.
- 4PLs act as an interface between clients and several suppliers of logistics services.
- 4PLs manage all or most aspects of its client’s supply chains.
- External logistics suppliers can become 4PLs with the structure they already have in place.
The 3PL-4PL difference
A 3PL consists of 1st party (the shipper), 2nd party (the receiver) and 3rd party (the carrier). These range from small independent carriers, often used for managing local deliveries up to the mega carriers and large logistics organisations.
Fundamentally, they all work on the same basis of utilising their vehicles as effectively as possible. Irrespective of size, 3PL optimise resources and manage volume fluctuations and seasonality through subcontracting excess activity to other 3PL. The key is minimising ‘empty’ running and ensuring vehicles are constantly utilised. For instance, UPS is a well-known example of a third-party logistics provider and operates on a global scale.
4PLs typically go beyond the traditional outsourced 3PL arrangement to oversee all supply chain operations, no matter who’s actually moving your cargo. For example, if a shipper uses multiple partners for his/her shipments, a 4PL manages the logistics services it provides as well as services from other providers.
From customs compliance and purchase order management to carrier allocation and warehousing, 4PLs provide a single point of contact, management, and accountability to simplify your operations. They’re also typically non-asset-based, giving them the flexibility to connect you with the carriers and solutions best for your business. As an example, Deloitte provides 4PL services that go above and beyond traditional 3PL by offering strategic business insights and consultative services in addition to logistics execution.
Jim Briles, Co-Founder and COO at Terra Worldwide Logistics says, “4PL Providers, have significantly greater responsibility and accountability in helping customers accomplish their strategic goals. Specifically, 4PLs serve as end-to-end supply chain integrators. And in many cases, 4PLs are, in effect, partners with the businesses they support. 4PLs have a broader scope than 3PLs.”
Technology plays a key role in the 4PL relationship. Many 3PLs offer their own proprietary systems, but may not offer visibility across multiple providers, modes, and steps in the supply chain.
The main strategic differences between 3PLs and 4PLs
- 4PLs offer more integration and optimisation features; 3PLs focus more on day-to-day operations.
- 4PLs form high-level strategic relationships; 3PLs focus more on operations.
- 4PLs offer a sole contact point for the supply chain and takes on the transportation, warehousing, and other processes; 3PLs does not manage these processes in their totality.
When a 4PL is actually a 4PL
A true 4PL relationship should be a proactive partnership with the 4PL highlighting waste in the business as well as an explanation of where and why it occurs. Cost to serve/supply is an important part of the information, identifying customers or suppliers who are under or over serviced. Many freight forwarder organisations refer to themselves as 4PL, whilst some carriers or 3PLs have a 4PL division. However, without the systems or processes and expertise, automatic 4PL classification is not guaranteed. 3PLs with a 4PL division are unlikely to be aligned from a business vision perspective to really offer a 4PL service as the core values of the different business are diametrically opposed.
Most industry experts contend that 4PLs are focussed on the logistics processes of the client, from the way they handle operations internally, through the partners/logistics suppliers they use, to customer service. Still, they say, there remains a number of ‘pretenders to the throne’, and severe scrutiny is advised before making a commitment. After all, the 4PL is obligated to provide the best supply chain solution, not the one that it’s in the best position to implement.
“It is very difficult to make the distinction between a 3PL and a 4PL,” says Rosalyn Wilson, Senior Business Analyst at Parsons Corporation, a technology company based in Virginia, US. Sharing a little anecdote, Wilson says, “During the Great Recession everyone was trying to grab onto anything that would get them more business. Even small trucking companies were trying to get in on the action by saying they offered 3PL and 4PL services, but most were well out of their element.”
According to Wilson, 4PLs by definition must be non-asset based. Wilson argues that many ‘wannabe’ companies are hiding transportation assets somewhere under false advertising, and that it’s not good enough to have a separate division offering the service.
“There must be complete mode/vendor neutrality,” says Wilson. “The element that complicates this issue even more is the fact that some non-asset based 3PLs says they offer 4PL services…but they are not really in a neutral position.” For example, the consulting arm of such an organisation would be hard pressed when making recommendations not to include their 3PL services as an option. “They can’t have warehouses, transportation equipment, or even a software product that would be recommended,” notes Wilson.
Alan Van Boven, Principal at the consultancy Supply Chain Visions is on the same page with Wilson. “Ideally, a 4PL would never have assets. It would typically work as the single partner for a shipper, selecting 3PLs, freight forwarders and customs brokers.” Van Boven allows that a 4PL could also be a 3PL with its own network, but must be mode neutral.
“Accountability and control help differentiate a 3PL from a 4PL,” explains Andy Moses, Senior Vice President of Global Products for Penske Logistics, in a blog post. “As a 4PL, we become a trusted advisor, and the customer becomes reliant on our data to drive them forward.”
The introduction of 4PLs is not new – they have been around for some time – but their mainstream use is growing, due in large part to advances in technology. Previously, different software systems and goals made it difficult for one party to control an entire supply chain. That is changing.
“When we speak to clients about what exactly is the difference between a 3PL and a 4PL, there’s no textbook definition of the relationships,” says Josh Nelson, Associate Principal, Strategy & Transformation at the Hackett Group. “A 4PL is an enhanced 3PL. A company will look at its supply chain and choose a 3PL for transportation, warehousing and distribution. These same partners are separated from each other. It’s a portfolio of relationships— a 3PL.”
A 4PL, however, manages all of those supply chain operations, including carriers, warehouses, reverse logistics and more, breaking down silos and providing end-to-end visibility and transparency. Quite often, Nelson added, 3PLs will acquire other 3PLs that have different capabilities — distribution, warehouse, reverse logistics — and naturally expand into 4PLs.
Nelson mentioned about a consumer durable company that had transportation and distribution relationship with a 3PL, but had to deal with returned goods needing minor repairs, or a change in colour. The 3PL had acquired a number of reverse logistics capabilities with facilities in several regions, in essence becoming a 4PL.
How and Why 4PLs make a lot of sense
The outsourcing of transport via the 3PL route has long been an effective way of reducing costs, utilising expertise and improving processes. Whilst this continues to offer benefits for many businesses, 4PLs are increasing in popularity as multi-service providers, enabling a company to outsource its entire transport operation, from planning through to reporting.
So what can a 4PL offer above and beyond a 3PL – and is outsourcing an entire supply chain always the best way to go?
Briles says, “Looking back to the Industrial Revolution, you can see the logistics landscape has undergone tremendous change. Industry 4.0 has significantly transformed logistics and supply chain management. It has indelibly changed business processes, roles, responsibilities, and relationships. With the rapid advancement and adoption of technology and the spread of globalisation, logistics and supply chain management have become complex.”
Briles believes that these changes and the complexities that come with them serve as a tailwind leading to the rise of 4PLs. They also seem to aptly fill the gaps left by 3PLs. The logistics industry has become more specialised out of necessity in Industry 4.0. Therefore, as complexity grows, 4PLs will continue to grow and become integral to successful supply chain management.
“Not only is 4PL the next step from 3PL mechanism, it serves a larger goal and is a critical process based approach, integral to companies that operate on a scale. It not only involves the functions of a 3PL system, it at the same time, brings together various suppliers, manufactures and customers to the main fold of an organisational structure,” explains Sandeep Chadha, Founder & CEO of Warehouster Capital Advisors India. While outsourcing is a key alternate to minimise costs and increase efficiency, in 4PL adaptation it becomes a strategic function in the company’s overall mission. Minimised costs, enhanced efficiency and synchronisation of various verticals of an organisation are some of the main benefits of using a 4PL mediator.
The 4PL model, Igor Jakomin, Chief Strategy Officer at SmartCargo says, enables an enterprise to completely outsource its logistics activities and the execution thereof. This enables them to completely focus on their production and specialisation, while their 4PL partner can focus on the complete logistics around the production. The 4PL can also act as a large buyer, demanding the producer to deliver large enough quantities for the supply chain in which the 4PL partner is a part.
I am sure that in certain cases companies who produce something cannot keep pace with the novelties in logistics and supply chain management like specialised 4PL providers can. The logistics, here, becomes a product of another company.
The ones that we discussed above as inclusive to a 4PL, which also Amar More, CEO of Kale Logistics Solutions lists as some of the main benefits of 4PL are – neutrality, single point of contact, open-book management, full transparency, material flow optimisation, substantial logistics costs savings, gain in productivity, global sourcing strategy and synergies, industry best practices benchmarking, data ownership and visibility and continuity of personnel.
When we talk about newer way, adoption and implementation of technology 4PL companies are far ahead of traditional 3PL and other logistics companies, informs Rishi Singla, Director at Jhanu Logistics. There are lot many advantages of using 4PLs. To begin with, most of the 4PL companies are part of bigger business groups and MNCs. These companies have better and deeper access to resources like technology, manpower, finance, and vision and acceptance being the most important ones. By using these resources, 4PL companies are able to scale up their business and make the right investments.
Do you know which of your warehouses are the most cost-efficient? Can you see each shipment from procurement to fulfilment? Jon Slangerup, Chairman and CEO at American Global Logistics says working with a 4PL partner with a full understanding of your supply chain can help you:
- Gain end-to-end visibility: Getting a true picture of the supply chain is a top priority for organisations, but many current platforms can’t deliver. A 4PL can help you design and implement a cloud-based solution that pulls data from all internal and external sources, giving insight into each step of the process—regardless of who handles the shipment.
- Optimise operations: Leveraging a broad set of capabilities and industry relationships, 4PLs customise full-service solutions based on what success looks like for each business.
- Get data-driven insights and analytics: By acting as the keeper for all supply chain information, a 4PL can help you turn data into business intelligence. Customisable KPIs and reporting offer insights on staffing costs, service levels and more, helping you drive value throughout the supply chain.
- Deliver value: Between economies of scale and multifunctional expertise, 4PLs help businesses find new ways to lower landed costs and minimise supply chain risks. The right supply chain partner takes full accountability for meeting your business rules and requirements, freeing you to focus on more high-value tasks.
When selecting a 4PL, consider how well they know your industry, their core capabilities and how they’ll service your business day-to-day. A successful relationship combines powerful technology, full-service logistics, and a keen eye for identifying and implementing processes that give you a competitive advantage.
Demystifying the cons of 4PL
4PLs are a relatively new concept, but typically they’re sought after by medium to large sized businesses that are seeking a complete logistics solution from both an operational and a strategic perspective. However, little control over logistics and fulfilment processes and involving a bigger budget are the rough drawbacks of a 4PL. Many E-commerce businesses therefore choose 3PLs because they provide a good combination of support, flexibility, and cost-effectiveness.
According to Jakomin, companies are often careful about outsourcing to 4PL providers, and sometimes they just outsource certain lines of products, to mitigate any damage arising from a partner lock-in. Sometimes, the 4PL seems more like a big wish of a logistics company than the true need of a production company.
Further, the feasibility lies in the perfecting of the company’s specialty– whether this is manufacturing certain goods, or producing something else of material, or immaterial nature, and on the other hand the 4PL provider can become a much better logistics expert than a department within the producing company ever would. So there are investments to be made on both side to improve their core business and boost their market share, but each case really needs to be evaluated really carefully.
Chadha does not take issue with Jakomin’s assessment—but only to a point. Chadha says, “Well, the expectation of new age customer is sky high. He wants it quick, he demands quality, and he wants to be pampered. Once you outsource your supply chain and integrate it with the customers, suppliers and manufacturers for a synchronised structure, it gives you time to enhance your product development, brand building, and expand with the right kind of opportunities to be exploited. There is no apprehension as long as the customer is served well, served in time and is given the enough attention for his concerns.”
Talking about feasibility, Chadha says, while the companies who outsource the entire supply chain to focus on their core area may have to shell out a little more, it’s sensible over the long haul. Companies get time, they can focus where it matters and it allows them room to experiment further. Gauging it from the monetary aspect only wouldn’t be the right assessment. Given the returns over the long, it not only makes sense, it’s all the more desirable for a synchronised organisational system.
“Choosing 3PLs vs 4PLs can be a complicated decision, which depends on the complexity of the supply chain and a company’s strategic goals,” observes Raajeev Bhatnagar, Vice President, HTL Logistics India.
As with most areas of transport management, utilisation and timing are key, the longer the notice period of demand, the more optimised the 4PL solution will be for the client. “The 4PL provider has the same issues as any shipper when little notice is given, but their database of options is far larger than a 3PL,” contends Bhatnagar. Besides, Bhatnagar says, 4PLs overall objective is to drive down cost for a given service level, and they will have a good understanding of the carriers offering the best synergy for any given lead time, geographical or delivery size combination.
3PLs, freight forwarders and 4PLs all have the same generic issues of time and utilisation, the 4PL solution is geared up to make savings and give control back to the customer, providing them with the information to make decisions and the flexibility to meet fluctuating transportation needs.
As a matter of fact, partnering with a 4PL will offer the opportunity to the users to focus on their core business elements and outsource the complex bit. “Users can determine the goals and the 4PL will manage it better and in a cost-effective manner. If done properly, there is an opportunity to save cost, and manage the functions more effectively,” says Singla.
Looking at the cost side, Singla believes 4PL will bring in more cost saving and will be one of the most feasible model. “When we talk about the bigger picture, there can be lot of savings directly or indirectly. The new technology and methodology will bring in better control, efficiency and savings,” states Singla.
Echoing a similar sentiment, More says, “There are bound to be pros and cons with any new or next generation technology, is what More feels. What would be a key determinant in its adoption is the relative ease of use and the pain areas that it addresses. In the case of 4PL, there is a distinct advantage over other PL variants in its ability to tame even the most complex supply chain network into a docile data system. So that should address some of the apprehensions of the users.”
More adds, “As with any new technology, the investments in 4PL need to be weighed against the benefits in the short-term and long-term as well. So the cost-effectiveness and feasibility of the 4PL system would be entirely dependent on the supply chain network it harnesses and would thus need to be evaluated on a case-by-case basis.”
4PL and Industry 4.0
Industry 4.0, which has brought about a digital overhaul of the manufacturing industry, has paved the way for 4PL. By leveraging the power of sophisticated digital technologies and streamlining supply chain processes, 4PL can offer companies a serious competitive edge.
For example, 4PL partners can utilise Big Data to cull keen business insights. By following the trail of digital footprints provided by Big Data, organising the information into sensible, actionable systems, and using precision analytical processes, 4PL providers can rapidly identify and mitigate potential supply chain risks and are able to maintain visibility throughout every link in the supply chain and open the lines of communication between companies, facilities, carriers, employees, and other partners— thereby improving visibility, transparency, operations, and productivity.
As more advanced technologies such as the Internet of Things (IoT), automation, robotics, and sensors become more prevalent in the manufacturing industry, the need for a centralised 4PL system will likely become more acute.
“Only a few years ago, 4PL providers still occupied a mere niche market in the shadow of the big logistics companies. Today, potential new players in this segment are finding a new and promising approach for their idea in the tools offered by cloud-based platforms and transport management solution,” says Frauke Heistermann, Member of the board of the Association for Germany-based Bundesvereinigung Logistik. The new 4PL providers can conquer the market using the power of modern IT while exposing themselves to only minor risk. The software required to manage all the various stakeholders was once a barrier, but all that has changed: register, customise, and you’re good to go – including end-to-end visibility.
Heistermann surmises that more 4PLs will enter the market as software advances have lowered the bar for entrance, but the industry will also see more logistics departments leverage their expertise and become 4PLs in their own right.
For many, logistics serves as a tool for customer retention and customer satisfaction, and its importance is enhanced by service factors such as quality and reliability,” Heistermann says. “Logistics is also a major cost factor; however, special trips, costly express deliveries, wasted resources, and excessive complexity drive up expenses. The question for shippers, then, is whether they wish to build up or expand their own logistics expertise or instead outsource it to partners such as 4PL providers.”
While not addressing blockchain specifically, Heistermann describes one of the possible scenarios blockchain could be used for.
“Truck manufacturers are equipping their vehicles with smart telematics, sensors, and software,” notes Heistermann. “This will eventually allow them to offer their own transport capacities and compete in the traditional carrier marketplace. Shipping systems and trucks will then communicate directly about shipping demand and transport capacity without the need for carriers as the middlemen. The smart systems work together to automatically suggest free capacities that meet the needs of the shipper. Rating portals and user communities bring transparency to the quality of service so that this factor can be taken into account in the selection process.”
Heistermann goes on to suggest that truck makers may become the carriers themselves with the 4PL handling everything else. She notes that 4PLs could reduce risk, waste, complexity and improve the overall environmental profile of moving freight through more effective end-to-end management.
In the near future, Heistermann suggests a 4PL will be able to monitor data for all parties involved – shipments, tracking, documents, freight costs, customs, dangerous goods, transport packaging, transit times, schedules, telematics and sensor data, pallet and container data, even data specific to real-time monitoring of the supply chain such traffic, weather, labour strikes, and environmental disasters.
4PL: The Takeaway
The explosion of digital advancement precipitated by Industry 4.0, combined with an increasingly complex supply chain, has created the need for a more holistic approach to logistics. Today more than ever, businesses need solutions that offer end-to-end visibility and accountability. Because all of the complex details are handled by one entity, 4PL providers are able to achieve this — greatly simplifying the process and acting as a centralised point for operation management and communications.
Thanks to their distinct specialisation, sophisticated resources, and valuable connections, 4PL providers are flexible enough to offer a customised suite of full-service solutions that are uniquely beneficial to an individual company. These partners can create multi-tiered plans that can be adapted to various scenarios, offering companies a wider range of business and logistical options.
Singularly focussed on handling both day-to-day and overall master-plan for logistics, 4PL can help minimise costs by constantly assessing situations and finding the best solutions for the lowest price. Not only does this add value through cost savings, it also frees up businesses to focus on higher-value projects.
Chadha says that although 4PL is still in its evolutionary stages, it is becoming critical for companies with a very complex supply chain and a diversified manufacturing system with a vast distribution base. In times to come, with the advancement of technology, with companies focussed to minimise costs, with, with companies dealing with a complex supply chain structure, 4PL is bound to take the center-stage in times to come. An increased throughput, an enhanced efficiency, minimised costs are always so integral to an organisation’s objectives, so we might see a greater role for 4PL in the times ahead.
Adding to, on a personal level, Singla says that in the next few years, 4PL will play a major role and will have the advantage to manage complex supply chain networks. In India most of the 4PL are part of big business houses, which have been managing complex and challenging supply chain networks. Their understanding and approach to solutions is completely different to other companies and service providers. It’s time for another round of consolidation in the industry. Smaller elements of the supply chain will be serviced by smaller companies and 4PL will macro-manage to bring in transparency, visibility and functional benefits. All of these will be achieved with the help of Artificial Intelligence (AI), Robotics Blockchain and the evolving theory of COBOTS.
Talking about the underlying factors, Jakomin says, it is difficult to foresee the future, as the market is saturated with different approaches. Some companies will embrace this model, if they will see in it better profits for their core business, and some companies will still need to control their own logistics. But as logistics becomes more and more complicated, the 4PL partners have the opportunity to present a viable business case for enterprises to embrace. This needs to be evaluated case by case.
Complementing Jakomin’s opinion, Bhatnagar expresses that the level of information visibility that a 4PL is able to obtain from its systems allows it to drive savings and service improvements. A 4PL system will also highlight areas of inefficiency within the shippers/customers operation.
There is a future for 4PL, and to take advantage of this offering market has to mature, which is accepting this offering and benefiting from the services provided.
The idea of 4PL is to optimise complex supply chain networks by providing an all-encompassing overview that provides visibility across the network, says More. So going forward, as global supply chains increase in complexity and geographic spread, 4PL and eventually 5PL will be the norm rather than the exception to how supply chains will be managed across the globe.
Despite the cache of 4PL, we may wait for some time before it gains currency. However, one thing seems certain; the ‘5PL’ is not a coinage that will command much attention, although it seems as the pinnacle and forefront of logistics technology and services. For most businesses, 2PL and 3PL providers are sufficient. Nonetheless, determining the right logistics providers depends on your business structure and strategy.