How to Best Understand the Difference Between 3PL and 4PL

Executive Summary

• The reality of 3PL and 4PL must be understood regarding the ownership of logistics assets.
• How the 3PL model differs from the non-asset based 4PL model.

Introduction to 3PL vs 4PL

3PL must be differentiated from 4PL. You will learn the differences in this article.

See our references for this article and related articles at this link.

The Difference Between 3PL and 4PL

A 3PL and 4PL are highly linked concepts. 4PLs were based upon a promise that was never actualized. The concept was that 3PLs would be technology leaders, and they would combine technology along with coordination and their assets and would add lots of value to the logistics field. This never happened. 4PLs are based on the concept of meeting the promise of 3PLs, but doing so with no assets. Therefore, 4PLs of the future would not focus on transportation and warehousing assets but rather would focus on the technology and coordination angle. Similar to non asset based logistics providers. The idea is that asset-based transportation companies are too limited and not sufficiently focused on technology to meet their original objectives. But other businesses that are focused enough on technology and coordination may be up to the job. Furthermore the ability to be more objective about the logistics assets used to manage freight is an added benefit.

The Reality of 3PL 4PL and the Issue with Having Logistics Assets

3PLs often complain that they dislike the term 4PL because they feel intermediaries are taking business from them and leaving them with very little business or lower down on the food chain. But on the other hand, if 3PLs had come close to meeting the promises made in their glossy brochures and their sales presentations, it is doubtful the concept of 4PLs would have arisen.

Characteristic #1: Their Asset Bias

The fact is they are asset-based and will always be asset-based. Their internal incentives are focused on selling transportation and warehousing services.

Characteristic #2: Inconsistent Wall Between Divisions:

Major third-party providers have been consistently guilty of getting business for the sake of getting business rather than turning down business that does not fit with their network. This means that the “new” parts of their companies are still captured by the “old” parts of the companies. This is one reason why it is so difficult for companies to change, no matter how many times they say they would like to. When using a 3PL, they have the orientation to use their logistics assets over other logistics assets that they do not own but are a better fit for the logistics needs of their customers.

The Problems With 3PLs

The problem with 3PLs is well covered in the following quotation.

But something has happened on the yellow-brick road. The reasons are varied, but the bottom line is many have failed at their own business transformation. Some 3PLs have not moved past their core commodity service to become true multi-service providers. Or international 3PLs have not understood how to provide domestic services; or domestic ones have not succeeded at venturing into international logistics services. Others have failed to differentiate themselves against the competition. Certain 3PLs have not done a good job positioning and defining themselves in the marketplace. Or the parent company has not given them the resources, especially sales and sales leads, to penetrate even their existing customers. And, sundry have commoditized their 3PL service, as a result undoing the very purpose of their 3PL. These setbacks have slowed down the growth of some 3PLs in terms of both customer retention, especially, and new customers. – eSupply Chain

This the issue at the center of the 3PL 4PL discussion. It is one of the advantages of non-asset based intermediaries, that are computer focused will always have the advantage because they can span the gap between multiple model types and their core competency is information technology. Ryder Logistics, for instance, will always be viewed with suspicion by rail or air cargo companies because they are competitors, so they will not be seen as impartial coordinators of the overall supply chain.

Another problem that is missed or overlooked in the 3PL 4PL discussion is that 3PLs are not now, nor will they likely be leaders in information technology. Integrating supply chains with monitoring technology, and making it appealing, and providing an exceptional user experience is not a generic capability. It is an excellent skill, and only those 3PL 4PL companies most focused not IT, where IT is their business line is likely to be able to pull it off.

What Are the Characteristics of a True 4PL?

The companies that can provide the 4PL concept are few and far between. The area is still developing, but to meet the 4PL logistics definition, a company would need to be the following characteristics.

Characteristic #1: Be Non-Asset Based

They must not own or lease assets.

Characteristic #2: IT Capabilities

They must demonstrate the highest level of proficiency in IT. 

Characteristic #3: Customer Service

They must be able to provide updates at any time to their shippers.

Characteristic #4: Maintain Integration Capabilities

They must have strong capabilities in data integration and at front-end development or front-end modification. Without this, it would be difficult for a 4PL to add sufficient value to the process. 

Characteristic #5: Provide Web Site Access

A genuine 4PL will provide websites, where customers log in, that encapsulate and hide the complexity of the integration behind it, to allow customers to manage their freight empowered by the 4PL’s infrastructure. This is one of the lessons of Google, as is chronicled in the book — What Would Google Do? They must allow customers to log into their website and to engage in some degree of self-service.

The Current 3PL Model

The old model of customer interaction was for companies to contact a 3PL and for a long courting process to follow, with lots of promises made, and efforts to “understand the client’s business” and then for a contract to be signed and for the logistics management to move from the customer to the 3PL. This was mostly only moving the location of where the work in freight coordination was being done. The client’s logistics function then became directly managing the 3PL for those parts of the business that the 3PL had obtained.

This is not all that helpful.

The Web-Centric Model of 4PLs

The old model has significant costs and significant lock-in. Once the client chooses one 3PL, it has to rebid the business to switch, which is a tedious process. However, better ways have been fond of doing this already.

Companies like Amazon.com have demonstrated that you can test their offerings (Amazon offers fulfillment to sellers) simply by interfacing with their website. You can become educated as to their services through their website, and send data through their website, and you can do this is you are a large company or small business. You can test their service, and if you don’t like it, simply cancel the service–on their website also. For this reason, Amazon is a low-cost provider, because they have automated so much of the process and they create platforms that allow users to interface with Amazon at low cost and small effort, and they enable their sellers through their website.

Companies like UPS have an excellent reputation for outsourced logistics, but even they do not offer the tools or web-centric approach and ease of interaction provided by Amazon.com.

Amazon Fulfillment

Amazon.com has both full-text explanations as to how to use their fulfillment services as well as a video that walks vendors through the process. This level of transparency is unheard of in the field of traditional 3PLs.

This is because:

• They are not web oriented
• Their model is based on large company interaction, not through creating and managing relationships through labor-saving websites

Amazon.com’s design means they can interact with almost any sized shipper. However, traditional 3PLs can only service shippers of a certain size. 3PL desires to allocate volume over their assets — not to create a platform that enables clients to enhance their logistics management.

The Ideal 4PL Model

Instead, 4PLs should not just recreate the wheel but should create a platform that internal client logistics departments can use to gain visibility into their system. The 4PL then focuses on data integration and web development and allows multiple companies to log into the same system (with authorizations that keep client’s data protected from other customers of course). In this

The 4PL then focuses on data integration and web development and allows multiple companies to log into the same system (with authorizations that keep client’s data protected from other customers of course). In this way, the platform begins to improve, and the 4PL keeps the costs down. Following this approach, when a 4PL adds a new client, its costs do not increase at the same rate, because many of the feeds are already built to the major warehousing and transportation and 3PL companies.

Conclusion

Asset-based third-party providers have had their chance, and logistics has not improved very much with them. This is the obvious conclusion from the 3PL 4PL discussion.

Furthermore, there is large miss-coordination in supply chains. Thus it’s time to give a new group a chance to help solve the problem.

Thus it’s time to give a new team a chance to assist in resolving the problem.