What you need to know about fourth-party logistics

Review of 3PL

Third-party logistics refers to the outsourcing of one or more aspects of procurement or fulfillment to an outside organization that specializes in that area. Many companies use FedEx or UPS for package delivery and freight companies for larger shipments. These 3PL suppliers provide transportation and delivery. Other 3PLs might handle the details of warehousing, import-export logistics or even the entire distribution process. 3PLs can deliver efficiencies and superior performance due to their specialization and economies of scale.

What is fourth-party logistics?

A fourth-party logistics partner is a type of 3PL that is authorized to subcontract out a portion of their responsibilities. A 3PL is expected to provide all of the contracted services through its own resources. When the 3PL outsources any part of their duties to a separate party, they become a 4PL.

For example, a company might contract with logistics supplier X to handle shipping and remote storage of an organization's products across the southern United States. If supplier X then contracts with another company for warehousing the goods, that supplier becomes a 4PL.

Some industry observers object to these definitions. Some define the cargo owner as first-party logistics (1PL) and the carrier as second-party logistics (2PL). The 4PL is considered more of an agent or general contractor that supervises multiple service providers. Some even specify that a 4PL cannot be asset-based or that it must be mode- or vendor-neutral.

Contracting out logistics services is a business decision that is normally driven either by economic or resource considerations. A company that doesn't have the resources or ability to conduct the logistics tasks will engage a 3PL or contract partner to store or move goods, take and fulfill the orders or whatever is needed to complete the business's transactions. Other companies may find that a partner who specializes in shipping, warehousing or customer service can do the job more cost-efficiently.

Third-party logistics vs. fourth-party logistics

There is little difference between partnering with a 3PL and a 4PL except for one significant factor: With a 4PL, some portion of the logistical services are performed by an indirect subcontractor. In other words, you're trusting the primary contractor -- the 4PL -- to select and manage another company to deliver the services. Therefore, your oversight and control are limited. There is an extra level of trust when dealing with a 4PL, as you're trusting it to manage those contractors on your behalf.

The labels themselves don't really matter much, but the existence of 4PLs offers more options for manufacturers in addressing their logistical needs. Many manufacturers recognize that logistics, such as transportation, warehousing, distribution, even sales and customer service, might not be core competencies. Contracting with specialists to carry out these tasks can save money and provide a higher level of service. It can also free up internal resources, allowing workers to focus on the business's core competencies, such as production, design, engineering, marketing or other competitive strength.

Third-party logistics and fourth-party logistics services are critical to customer service and play an important role in the customer experience. Supply chain managers need to select and use reputable, reliable logistics suppliers that will deliver great service to customers and enhance the customer experience to help build an organization's own brand and reputation.

Fourth-party logistics is an innovative form of outsourcing and has gained popularity in the past few years. 4PL also helps organizations better manage inbound raw material supply, dynamic logistics and demand-driven logistics.