SUMMARY:
Because 4PL providers handle a company’s entire chain, including challenges that are thrown up by advances in technology, they are increasingly being favoured over third-party logistics (3PL) providers, especially by big companies with complex supply chains.
In its simplest form, fourth-party logistics is a model in which manufacturers hand over the entirety of the organisation and oversight of their supply chain to a 4PL provider.
By contrast, the third-party logistics model is where a manufacturer retains oversight of its supply chain but outsources such processes as warehousing, shipping, packing, and distribution to a 3PL provider.
When the COVID-19 pandemic began wreaking havoc in global supply chains, smaller companies turned to 3PL providers for help. Bigger companies with complex global supply chains, however, realised they needed sophisticated digital technologies and streamlined supply chain processes offered by 4PL providers to help them ride out the storm.
The concept of fourth-party logistics has existed for some time but only truly began evolving with the arrival of Industry 4.0—the digitisation of manufacturing.
Because 4PL providers handle a company’s entire chain, including challenges that are thrown up by advances in technology, they are increasingly being favoured over third-party logistics (3PL) providers, especially by big companies with complex supply chains.
The Differences between 4PL and 3PL
It will be helpful at this stage to determine the differences between 4PL and 3PL. The terms are often mixed up and some firms claim to be 4PL providers when in fact they only provide 3PL services.
What is 4PL?
In its simplest form, fourth-party logistics is a model in which manufacturers hand over the entirety of the organisation and oversight of their supply chain to a 4PL provider.
What is 3PL?
The third-party logistics model is where a manufacturer retains oversight of its supply chain but outsources processes such as warehousing, shipping, packing, and distribution to a 3PL provider.
The key difference between the two can perhaps be explained in the following example:
A 3PL provider working with a paint manufacturer may package and store products as well as transport them to retailers and/or customers. Unlike a 4PL, however, it won’t manage the paint maker’s entire supply chain.
There are, of course, some other important differences between the two types of providers:
- 4PL is, in general, better suited for medium-to-large businesses, while 3PL is more suited to small-to-medium businesses.
- 4PL companies operate at the optimisation and collaboration level while 3PL providers focus primarily on daily operations.
- 4PL companies often contract 3PL providers to carry out logistics services for them.
- 4PL organizations provide a high level of logistics services while 3PL providers are more focused on one-off transactions.
- 4PL providers allow companies to focus on their product instead of dealing with the complexities of their supply chain.
Why 4PL is on the Rise
When the COVID-19 pandemic began wreaking havoc in global supply chains early in 2020, many companies realised that they didn’t have the resources, personnel, or computing infrastructure to deal with the disruptions.
Smaller companies with less complex supply chains—and smaller budgets—turned to 3PL providers for help. Bigger companies with global supply chains, however, realised they needed sophisticated digital technologies and streamlined supply chain processes to help them survive.
It is at this level that 4PL providers come into their own, making use of digital technologies such as big data and cloud computing to maintain visibility in every link in the supply chain.
Even before the pandemic swept across the planet, larger companies were increasingly using 4PL providers to act as their logistics department, handling matters such as order management, legal compliance, warehousing, and supplier management.
This outsourcing allows the company to focus on its core manufacturing business and higher-value projects. Because they are focused on ironing out weaknesses in the supply chain, a 4PL partner can help minimise costs by finding the best solutions for the lowest price.
Significantly for these times, when last-mile delivery has taken on added importance, 4PL providers take charge of ensuring that orders reach customers. Even slight delays or inventory shortages can have a severe impact on a company’s bottom line.
The 4PL Market is Growing Exponentially
According to a study by The Insight Partners, the global 4PL market was valued in terms of revenue at $56,472.1 million USD in 2019. It is predicted to reach $78,981.5 million USD by 2027, growing at a CAGR of 4.5 percent between 2020 and 2027.
The study cautions that lockdowns and quarantines associated with the Coronavirus are expected to affect the revenues of the global 4PL market players in the short term. However, growth is expected to normalise from 2021 onwards.
The market is also growing across a wide range of commercial sectors, including the following:
1) Food and Perishables
Transporting and storing perishable food requires advanced logistics that is beyond the reach of many companies. In looking for supply chain expertise to oversee their food logistics and transportation, businesses invariably turn to 3PL or 4PL companies.
For larger concerns with mountains of foodstuffs to transport and store, specialised 4PLs, with their broad and comprehensive supply chain expertise, are usually better placed to ensure wastage is minimised.
2) Medical Equipment Supply
In normal times, there is a constant need for medical equipment to be shipped from manufacturers to health workers and hospitals at short notice. Such need is dramatically intensified during a pandemic.
Making sure that sensitive equipment doesn’t end up in the wrong hands is a complex process that relies on vigilant tracking through the transportation process.
While 3PLs have the expertise to provide such a service, 4PL companies specialise in meeting tight turnaround times and seemingly impossible schedules, while applying the most advanced technologies to monitor supply chain movements in real time.
3) Ecommerce and Multi-Channel Retail
With the surge in demand for fast delivery that was spurred by Covid-linked lockdowns and quarantines, it has become more important than ever for retailers and e-commerce companies to provide next-day and same-day delivery.
While 3PLs can meet customers’ needs by offering speedy delivery services, 4PLs, because they take care of a client’s entire supply chain, are better placed to meet rapid delivery demands, reduce missed opportunities, and, importantly, to oversee same-day and next-day replenishment.
With e-commerce companies proliferating, it is essential that businesses keep up with what customers expect. Missed delivery deadlines or depletion of stock without replenishment quickly sends out a negative signal and chases customers away.
4) Industry
Industrial companies are increasingly discovering the benefits of handing over control of their logistics operations to a 4PL company, which not only provides logistics and transportation services but also takes charge of vital reporting, usually through a supply chain dashboard that tracks KPIs and metrics in a single display.
Amazon: A Hard 4PL Act to Follow
The best example of a 4PL model is Amazon.com.
The reason I say this is because Amazon does everything a 4PL provider should do: It stores products in its warehouses, provides a website for ecommerce, picks and ships orders to consumers, and provides software assistance for the transaction.
The reason Amazon is so popular with vendors is that it simplifies the selling process in the following ways:
- It has fulfilment centres where vendors can store their products
- It makes it easy for sellers to interface with its website
- Its website details its services to sellers in an easy-to-understand way
- It has a video which walks vendors step-by-step through the fulfilment process
- It allows sellers to test its services and cancel at any time should they wish to
- Sellers can interact with the company at low cost and minimal effort.
At the height of the pandemic-linked supply chain disruptions, Amazon set the bar extremely high for other 4PL providers, despite initially experiencing inventory shortages.
Some Australian 4PL Models
Two good examples of 4PL companies in Australia are Primary Connect and Coles Collect, both of which have been set up by major supermarket chains.
Let’s take a brief look at each one in turn:
Primary Connect
Part of the Woolworths group, Primary Connect operates a vast national distribution network comprising road, rail, ocean transport services and, like many 4PL providers, makes use of 3PL storage facilities.
The firm boasts that through partnering with transport carriers (again, this is a common practice by 4PL companies), it facilitates the movement of more than 6.5 million pallets per year from some 4,000 pick-up points.
The provider has more than 1,000 clients on its books and says it moves more than 110,000 individual loads annually.
It offers the following services:
- Pick up from an international port and deliver to Australian port or warehouse
- Local pick-up from production/storage facility
- Unloading of local freight and de-stuffing and palletising of international freight
- Ambient and/or temperature-controlled storage of supplier freight
- Distribution to Woolworths supermarkets and beyond
- Working with suppliers to plan smarter supply chain and reduce costs.
Coles Collect
Coles is a leading Australian retailer, with more than 2,500 retail outlets nationally, 800 of which are supermarkets.
Like Amazon and Primary Connect (through Woolworths), Coles offers a very extensive online service that provides customers with a choice of home delivery, including same-day and overnight drop and go services, or pick up from over 1,000 Click & Collect locations.
At the height of the supply chain disruptions in February and March 2020, the company suspended its Click & Collect service and apologised for delivery delays which it said were due to inventory shortages and high demand.
Nevertheless, the food retailer enjoyed record sales growth in the March quarter 2020, with supermarket sales up by 13.1 percent (boosted by a 30 percent rise in the month of March), as shoppers stocked up on staples, toilet paper, and liquor.
And the trend towards online shopping continued, with the company reporting that online sales for the financial year ending June 2020 grew by 18.1 percent over FY19.
Phoenix Freight: 3PL and 4PL Provider
Another provider of note is Phoenix Freight, which is based at Port Botany. As its name suggests, the company specialises in handling freight but also offers a range of 3PL and 4PL services.
3PL Services
The company’s warehousing and distribution service offerings include:
- Contract or 3PL warehousing
- Container packing and unpacking
- Reefer container storage
- Cross-docking and staging
- Sorting
- Kitting
- Picking & packing
- Consolidating final delivery from multiple orders from supplier receipts
- Organising deliveries to retailers
- Tracking and managing orders
4PL Services
The company also offers standard 4PL services such as logistics and supply management consultancy, supplier evaluation, order entry, planning, purchasing plus inventory management, and invoicing.
Healthcare Logistics
An example of an alternative kind of 4PL provider is Healthcare Logistics (HCL), which has operated in the Australian healthcare market for more than 20 years. It first began as a 3PL healthcare distribution provider but later, as demands for its services grew, it evolved into a 4PL.
The services offered by Healthcare Logistics include warehousing, distribution, clinical trial logistics support, and chain supply solutions.
What sets this provider apart is its 25,000 square metre warehouse in Sydney, which features modern warehousing technology for pharmaceutical, medical consumables, and over-the-counter products, with storage for up to 30,000 pallets.
The facility also offers secure storage for controlled medicines and dangerous goods, provision for cold chain and sensitive products, and specialty areas for sample distribution, secondary packaging, and clinical trials.
The Australasian 4PL Model
Spanning the Tasman Sea, independent company efm Simplified Logistics is the largest 4PL provider in Australia and New Zealand, offering services such as consulting, solution design, data intelligence, transportation, warehousing, implementation, and management.
The company boasts customers in the following market segments:
- Manufacturing
- Print and packaging
- Technology
- Healthcare and pharmaceuticals
- Mining
- Transport
- Agriculture
- Retail and consumer
It has developed its own cloud-based logistics management software, OneFlo, which provides data analytics, pricing, reports, and monitoring from anywhere at any time. The software system allows users to quote, book shipments, and track in real-time.
The Future of 4PL
According to a Gartner’s Logistics Outsourcing Survey, more businesses than ever before are looking to outsource to 4PL, with 42 percent of respondents looking for providers that can design, build, run and measure logistics functions.
The survey noted that at least 80 percent of respondents plan to hike logistics outsourcing budgets beyond warehousing and fulfilment in 2020.
It concludes that the demand for 4PL services is being driven by increasingly complex logistics operations that 3PL companies cannot provide.
With global medical supply demands skyrocketing due to the pandemic, 4PLs have stepped into the breach, finding ways to optimise shipping from a distribution centre to branches and developing a network of inventory centres to stock hospitals and clinics, all the while trying to minimise shipping costs.
Watch out! Here Comes Fifth-Party Logistics (5PL)
Just when you thought that you finally understood the differences between 3PLs and 4PLs, a fifth-party logistics (5PL) model is already arising. This model aims to increase end-to-end efficiency and value using technologies like robotics, radio frequency, and blockchain. It is also focused on e-commerce.
5PL providers are still rare, although some 4PL providers are evolving and offering specific 5PL services—in the same way that 3PL providers are evolving into 4PL companies.
As the COVID-19 crisis continues to act as a catalyst for accelerated technological advancement, we’ll doubtless see an uptick in the rate of 3PL to 4PL, and 4PL to 5PL service offerings, especially from the biggest players in this burgeoning sector of logistics-service provision.
Editor’s Note: This post was originally published on September 29, 2020, under the title “Why Large Companies Increasingly Opt for 4PL Services” on Logistics Bureau’s website.
