3PL vs 4PL: What’s the Difference?

The key difference between  3PL vs 4PL is that a 3PL handles the physical execution of fulfilment activities on behalf of a business. Meanwhile, a 4PL provides strategic management of a business’s entire supply chain, coordinating 3PLs, suppliers and carriers to support the business’s goals.

In practice:

• A 3PL handles physical execution of fulfilment activities on behalf of a business
• A 4PL manages a business’s entire supply chain, coordinating 3PLs, suppliers and carriers
• A 3PL is asset-based, owning warehouse facilities, while a 4PL doesn’t own physical assets
• A 3PL’s core functions include inventory management, order fulfilment and transportation
• 4PL core functions include managing all aspects of a supply chain, including transportation, warehousing and inventory
• A 3PL is ideal for small-to-medium-sized businesses, while a 4PL is suited to enterprises with complex supply chains.

Third-party logistics are external companies to which businesses can outsource their fulfilment activities. They provide a dedicated warehouse or one that’s shared by multiple clients. The 3PL’s team takes care of inventory management, picking, packing and shipping.

When comparing 3PL vs 4PL, it’s crucial to point out that 3PL owns physical assets, while 4PL typically doesn’t. 3PLs can own warehouses, distribution centres, fulfilment centres or cross-dock facilities.  

• Core functions of a 3PL

  The key role of third-party logistics is to manage the physical execution of warehouse fulfilment activities. This includes:
  
  
  • Inventory management: Receiving, putting away and storing stock within its warehouse, which can be dedicated to one client or shared by many
  • Order fulfilment: The 3PL’s warehouse staff can pick and pack orders  
  • Transportation: Organising shipments to replenish stock, managing customer order deliveries, processing returns and managing shipping-related customer service.
    
    

• When businesses should use one

  The choice between a 3PL vs 4PL largely comes down to the complexity of a business’s supply chain. Small to medium-sized businesses with simple fulfilment needs will typically outsource to a 3PL when order volumes outstrip their capabilities.
  
  Businesses experiencing rapid growth or seasonal demand spikes can quickly tap into the 3PL’s fulfilment infrastructure, paying only for what they need and avoiding huge capital costs.
  
  Those with rising fulfilment costs can also leverage a provider’s economies of scale to reduce storage, labour and delivery costs. Outsourcing to a 3PL is a good option for businesses that want to expand into distant markets as they can leverage the provider’s ability to fulfil and ship orders internationally.

When comparing 3PL vs 4PL, a fundamental difference is that the latter doesn’t perform the physical fulfilment activities. Rather, a 4PL offers strategic management of a business’s supply chain.

As a single point of contact, it designs, builds and manages a business’s supply chain, coordinating multiple 3PLs, carriers and warehouses on its behalf.

• Core functions explained

  A fourth-party logistics acts as a ‘control tower’ that provides strategic management and optimisation of the end-to-end supply chain. Its key functions include:
  
  • Supply chain design: Creates a network of warehouses, decides where stock should be kept and defines how products flow from suppliers to customers
  • Vendor management: Oversees all logistics partners, including suppliers, 3PLs, freight companies and carriers, managing all contracts and communications
  • IT integration: Provides a unified view of the supply chain by integrating vendor warehouse management systems (WMS), transport management systems (TMS) and enterprise resource planning (ERP) platforms
  • Optimisation: Monitors key metrics and uses predictive modelling to identify issues and areas of improvement
  • Risk management: Creates contingency plans to reduce supply chain risks like carrier failures, natural disasters or geopolitical challenges.
    
    

• 4PLs manage the entire supply chain

  When comparing 3PL vs 4PL, a key difference is that 3PL manages a segment of the supply chain, while 4PL manages it in its entirety via a long-term partnership. It provides strategic expertise to manage the entire flow of stock, information and funds from the supplier to the customer.
  
  A 4PL aims to optimise the supply chain in line with a business’s goals, helping it gain long-term value and competitive advantage. It provides a single point of accountability, acting as a business’s ‘Chief Logistics Officer.
  
  

• 4PLs do not own physical assets

  The value of a 4PL is its strategic and managerial expertise. It’s typically non-asset-based, meaning it doesn’t itself provide physical assets like warehouses or trucks/ships. 
  
  A fourth-party logistics instead manages a network of vendors that offer physical fulfilment assets, providing a single point of contact that oversees and optimises everything. It provides the strategic expertise to manage this network in a way that’s aligned with the business’s long-term interests.
  
  

• When businesses should use one

  Businesses with complex, international supply chains turn to 4PLs when they need:
  • Global management: A 4PL can standardise and optimise a supply chain with multiple product lines, sales lines and international customers
  • Rapid transformation: If a business is undergoing restructuring or rapid global expansion, a 4PL helps design and manage a new supply chain
  • Enhanced control: A 4PL takes away the burden of strategically managing the supply chain from a business’s internal leadership, offering unbiased, expert and more cost-effective control.

Step 1: Receiving and check-in

The warehouse team unloads a shipment (from the client or a supplier) and performs an inspection to check quantity and condition. A barcode is applied to each item, which is logged into the provider’s WMS.

Step 2: Warehousing and storage

Stock is placed in pallets, bins, shelves or racks according to its dimensions, weight and the rate at which it sells; e.g. fast-selling items are stored closer to the packing area.

Step 3: Picking

When a customer order is made, the client’s ERP or order management system routes it to the provider’s WMS. The latter allocates the ordered stock and creates a pick list.

The WMS directs pickers to retrieve items via a specific picking strategy (e.g. discrete, batch or wave picking) and provides them with an optimised travel path.

Step 4: Packing

Once items are retrieved, they’re taken to the packing station and placed in packaging. Documentation like invoices, client branding and the shipping label are applied.

Step 5: Shipping

The package is scanned, sending its dimensions, weight and delivery address to the WMS. It then sends these details to the provider’s TMS, which selects the fastest, most cost-effective delivery partner.  

The 3PL’s WMS relays tracking information to the client’s systems and the customer, updating them on delivery progress.

Step 6: Returns processing

If returned, the 3PL receives the package at its warehouse, where it’s inspected for condition and either returned to storage or disposed of. It communicates with the client’s systems to trigger a refund. 

Step 1: Transportation planning

The provider analyses all of the client’s transportation needs, including inbound deliveries from suppliers and outbound shipments to customers. It develops the most efficient routes and transport modes, before selecting carriers based on data from the client and its networks of 3PLs and carriers.

Step 2: Warehousing coordination

The provider selects multiple 3PLs from its network, each located in different regions to support distribution to the client’s customer base. It manages this via standardised service level agreements and procedures to ensure consistent fulfilment practices across all vendors.

Step 3: Inventory forecasting and optimisation

The 4PL forecasts order demand via data-driven analytics, which is partially informed by the client’s sales data. Based on this, it optimises stock levels and movements at multiple 3PL partners to minimise carrying costs and ensure the right stock is available at the right time to service demand.

Step 4: Shipping orchestration

Via integration with 3PL and carrier systems, the provider selects the optimal shipping partner and the service level required (e.g. to be delivered in two days). The 4PL also coordinates the arrival of stock at 3PL warehouses.

Step 5: Performance monitoring and reporting

The provider continually monitors KPIs like on-time delivery, inventory accuracy and cost-per-shipment across all partners.

Startups and small retailers

A third-party logistics makes sense for these businesses as it can take care of their fulfilment, opening up time to focus on driving sales. It offers them instant access to fulfilment infrastructure, without significant capital outlays.  

Fast-growing businesses

A 3PL is most suitable for fast-growing businesses as it gives them the ability to scale their fulfilment and tap into new regional markets, while still maintaining strategic control. They also benefit from the economies of scale achieved by providers.

Enterprise and multi-warehouse operations

A 4PL makes sense for these businesses as it can manage the complexity of disparate, complex fulfilment networks, providing strategic guidance and a consolidated view of the supply chain.

A 4PL can manage contracts, systems and processes across multiple 3PLs and carriers, as well as monitor the business’s entire supply chain to continually enhance efficiency.

When to switch from a 3PL to 4PL

A business should upgrade when their supply chain becomes too complex to manage and requires a unified supply chain strategy. They may be managing multiple 3PLs in different regions, grappling with an excessive administration overhead. They may also lack a unified view of their supply chain, i.e. of their inventory, costs and performance.

Here’s how the 3PL vs 4PL dynamic works.

Strategic orchestration

The 4PL acts as the overarching manager of a business’s supply chain, while 3PLs execute the physical fulfilment activities. The 4PL designs a network of 3PLs, decides where and how much stock should be stored at 3PL warehouses, manages the budget and sets performance metrics.

Technology and systems integration

The 4PL integrates with the platforms of 3PLs and carriers, including WMS, TMS and ERP platforms. This allows the 4PL’s control tower system to pull real-time data, including inventory levels and order statuses, from across its network of vendors.

The provider’s system uses this data to route orders to the most relevant 3PL (e.g. the one with stock available, closest to the customer).

Combined performance and reporting

The 4PL is accountable for overall supply chain performance. If there's an issue with an order, the client addresses the provider, rather than the contracted 3PL.
The 4PL aggregates all operational and financial performance data from its network of 3PLs and carriers into daily, weekly or monthly reports for the client.