3PL vs. 4PL vs. 5PL—Here’s the Difference

Food Logistics breaks down the difference between 3PLs, 4PLs and 5PLs and why these partnerships matter, especially in a time of crisis.

Harnessing the power of data will drive innovation and improvements in execution for both 3PLs and 4PLs.
Harnessing the power of data will drive innovation and improvements in execution for both 3PLs and 4PLs.
Penske Logistics

It’s no secret that the Coronavirus disease (COVID-19) pandemic has placed a strain on several areas of the supply chain. Restaurants closed, leaving foodservice distributors to pivot into direct-to-consumer (DTC). Grocery stores shifted to keep up with online shopping, and for some, implement DTC delivery. Even, cold food and beverage processors revamped the way they produce, store and ship product in order to keep up with the influx of demand due to consumer stockpiling.

According to a study by Gordon Haskett Research Advisors, 41% of online grocery shoppers were buying groceries online for the first time as a result of COVID-19, which may result in a longer-term change in buying behavior.

“E-commerce, online shopping, food delivery, grocery delivery and pretty much everything else will experience hyper growth as the economy opens back up,” says David Miller, general manager of platform services for 3PL Central. “This means that 3PLs and 4PLs that cater to these segments are going to continue to see sustained growth.”

In a time like today, where COVID-19 has disrupted many links in the supply chain, it was the third-party logistics (3PL) providers who remained steadfast in keeping product moving from Point A to Point B.

In fact, the 3PL market size exceeded $1 trillion in 2019 and is estimated to grow at a CAGR of 9% between 2020 and 2026, according to a study presented by Global Market Insights, Inc.

But, when it comes to deciphering between a 3PL, 4PL and even a 5PL, there are many things to consider.

First off, neither a 3PL or 4PL is better or worse for the cold food and beverage industry; it just depends on a company’s core competency, resource needs and budget, says Darlene Wolf, senior vice president of strategic partners for Arrive Logistics.    

“The only downside to investing internally is losing flexibility to make timely changes effectively,” Wolf adds. “3PLs and 4PLs can and should be establishing best practices in the industry because they are working with a variety of companies with a variety of challenges, giving them more experience to navigate the unexpected.”

A 3PL manages outsourced logistics and distribution activities for a specific customer, while a 4PL manages customer 3PLs and provides complete visibility within a one-stop shop, says Don Klug, vice president of sales distribution center management, Penske Logistics.

“The main difference between a 3PL and 4PL is the control and accountability that the 4PL has over the customer’s supply chain,” he adds. “Not all 3PLs will transition into a 4PL, and the main reason is that they may not want to offer that specific service. Also, other companies may offer just the 4PL service, where they have a network of 3PLs to do the physical work; the 4PL then provides the complete visibility piece to offer overall accountability of the supply chain to the customer. There is such a thing as a 5PL, but it is simply a 4PL that is managing multiple clients through multiple solutions and technologies.”

3PLs are also directly responsible for designing, implementing and operating or managing a solution for a specific part of a customer’s supply chain, whereas 4PLs provide an integrated logistics and supply chain ecosystem covering multiple different parties, including different 3PLs, carriers, warehouse services providers and other solution and service providers, according to Rajiv Saxena, senior vice president, supply chain solutions and innovation for Kenco Logistic Services.

“A key difference from 3PLs is that 4PLs do not manage or have responsibility for performing or managing the day to day activities. 4PLs design the solution framework and 3PLs work as per the relevant part of the solution framework provided by 4PLs,” adds Saxena. “4PLs go beyond service providers. Like 3PLs, they provide full integration with different types of solution and service providers covering all aspects of a supply chain and have a deeper understanding of customer’s long-term vision and goals. Both 3PL and 4PL offerings can come from within the same company—it’s really based on the customer’s needs and provider’s capabilities.”

3PLs and 4PLs are also similar in that, “they both enable shippers to focus on their core competencies by managing supply chain and logistics needs,” says David Commiskey, vice president of customer solutions for GlobalTranz. “Now, in terms of how they’re different—a common misconception is that 3PLs are brokers, and while the two are similar, they’re not interchangeable. 3PLs act as a strategic partner for shippers as they move goods across the country, and have ‘skin in the game’ because they’re taking on pricing and risk commitments with each load. 4PLs manage a company’s entire supply chain, also taking on that consultative role while managing other logistics providers.”

Another difference between a 3PL and a 4PL is the shipper relationship and how it integrates into a more national or global strategy across all facets of the supply chain.

“Typically, a 3PL provides the asset-based services to the 4PL and the 4PL integrates that data into a broader service and technological solution for the shipper. The value of the 4PL relationship is consistency across the shipper’s supply chain within the areas of communication, technology, reporting and integrated relationship management across key areas across the shipper’s supply chain,” says Marc Lebovitz, president of Romark Logistics.

At the end of the day though, all third-party logistics companies are 3PLs.

“A 3PL becomes a 4PL, also known as a lead logistics provider (LLP), when it engages and manages other logistics parties, resources or technologies to enhance its service offerings with increased capacity, expanded geographic reach or to provide additional capabilities as part of a total solution,” says Darin Cooprider, vice president consumer packaged goods for Ryder System, Inc. “For the food and beverage industry, which experiences seasonal peaks and troughs at different times of the year, the value in the 3PL/4PL transportation relationship is in having a single logistics provider that can oversee and manage all aspects of the supply chain. That includes executing transactional business in some geographies or lanes, leveraging capacity and resources of common carriers when available and cost-effective and then integrating the entire network under a single transaction-management and visibility toolset complete with business intelligence tools to inform decision-making.”

Plus, 3PLs are excellent at providing multiple service offerings, leveraging technology and expertise to create value for shippers that want to focus on their core business, adds Matt Parry, senior vice president of logistics for Werner Enterprises Inc.

“[3PLs] are able to leverage scale to create a nimble, technologically enabled supply chain, supported by industry expertise, which many shippers just can’t do on their own,” he says. “Services range widely throughout the 3PL market, but always include core execution function of shipments and often add back-office and compliance functions. Typically, 4PLs are most prevalent in large, complex global supply chains. They create value by coordinating the best service providers (direct and via 3PLs) into a single technology platform with sophisticated information management and modeling capabilities. A 4PL often oversees more management functions for the customer, including back-office functions, product sourcing, budgeting and distribution services across a variety of channels. A 4PL can provide more sustainable cost savings over time with its diverse network of internal and external stakeholders, however, they are often less nimble creating risk in rapidly changing market conditions.”

Meanwhile, 5PL is a newer concept that focuses on the management of supply chain networks, not just supply chains, says Jack Gerstner, vice president, collaborative transportation management for Coyote Logistics.

“Often linked to e-commerce, 5PL solutions would incorporate the management of a network of logistics providers on behalf of one or more customers,” Gerstner says.

However, others in the industry see no difference between a 3PL, 4PL and 5PL.

“From a service provider perspective, there really is no difference. It just describes the relationship between the members and partners in your supply chain,” says Rock Magnan, president, RK Logistics Group. “A company can be a 3PL and a 4PL at the same time. Most companies consider themselves 3PLs. It’s just a hierarchy, a way to define where in the service mix the participant resides. I’m a warehouse operator filling orders for a customer and then selecting a transportation provider to deliver that order. In this case, I’m both—a 3PL providing warehousing services for the owner of the freight, and a 4PL subcontracting with an independent trucking company for transportation services to deliver the order.”

Making the transition

While there are several similarities and differences between a 3PL and 4PL, there are some providers making the transition to become one over the other, even if it’s a short-term solution to a customer’s problem.

“For a shipper, the transition from a 3PL to a 4PL normally comes from a desire to tie into an integrated national or global ecosystem. With this move comes a great degree of trust and mutual benefit, as the relationship becomes part of the shipper’s overall strategy to increase visibility and cost savings,” says Lebovitz. “From our experience, a 5PL relationship is often linked to a provider who manages multiple relationships with a strong competency in e-commerce logistics support. These providers are focused on a supply network whereas a 3PL/4PL are more focused on a supply chain.”

A 3PL would also cross into 4PL territory when it begins accepting business from a broker rather than working directly with a customer.

“This could happen for a number of reasons, but is often predicated on helping other regional logistics businesses virtually expand their footprint, participating in a program that gives a the customer a national solution made up of regional service providers, managed by a primary 3PL or 5PL,” says Miller. “A 3PL may also transition to a 4PL on short notice to accommodate local overflow of competitive or collaborative warehouses. Having technology to support visibility across both the 3PL and 4PLs that they manage is critical for a seamless experience to producers, grocers, retailers and other parties in the supply chain.”

When looking at your own supply chain and how to improve it, Wolf advises going back to the basics.

“Suppliers, shippers, 3PLs—everyone should fulfill their commitments. If you are working with a partner who can’t deliver on their promises, why are you working with them?” she adds. “A 3PL can transition into a 4PL when a company outsources all supply chain responsibilities to their 3PL, and then that 3PL leverages others 3PLs to complement their service offerings. The original 3PL has essentially become a 4PL because it is still being held accountable to the company that originally outsourced supply chain responsibilities.”

One is not necessarily better or worse, according to Geoff Kelley, president of Nolan Transportation Group.

“It really depends on the complexity of the shipper and their needs,” he adds. “If the 3PL’s capabilities don’t address the full supply chain needs of the shipper, a 4PL can provide a more comprehensive solution to the customer with a portfolio of logistics providers.”

Technology takes 3PLs to a new level

It’s hard to have a discussion about 3PLs and 4PLs without talking about technology, says Abtin Hamidi, chief executive officer at Torch 3PL.

“Initially, the pandemic exposed the strengths and weaknesses of the technology infrastructures. The ones with most modernized platforms were able to navigate the unexpected challenges with more ease. The ones with outdated platforms are not surviving. Surprisingly, we also learned about the importance of having a strong culture of trust both internally and with our clients,” he adds. “There’s been an important trend in which companies are narrowing their focus on the specific product they produce and outsourcing other non-core business functions. For example, several health beverage companies have relocated their resources to create a better product, and outsourced other functions of their business such as transportation and supply chain.” [Go to https://foodlogistics.com/21128755 to learn more about how 3PLs will remain an integral part of the distribution process for functional beverage brands].

One technology designed to improve the 3PL and 4PL experience are application programming interface (API) platforms.

“API connectivity is a great way to share information across the entire supply chain in more or less real-time. It helps link point solutions and connects suppliers and their 3PLs to the complete supply chain,” says Miller. “Warehouses taking advantage of paperless warehousing and mobile scanning technology are able to not only validate activities, reducing mistakes, but also onboard new warehouse employees quickly and record user KPIs and productivity metrics. These metrics can then be layered into business intelligence tools that allow 3PLs and their customers to benchmark, iterate and improve their operations, inventory distribution, lane negotiations and more. Collecting and combining these metrics from systems across the supply chain allow for 3PLs and their customers to make better business decisions. Leveraging business intelligence to share highly visual performance dashboards can also help 3PLs monitor, achieve and exceed service level agreements.”

Other solutions entail on-demand freight quoting and shipping, real-time load tracking and visibility, procurement solutions, network optimization and load consolidation technologies.

“In the past, non-asset-based transportation capacity provided shippers the ability to be flexible in different economic environments. Now it applies to other services, as well. For example, the current climate shows how the inherent flexibility and transparency in a managed [transportation management system] model can create tremendous value—both in the ability to recalibrate processes and procurement strategies quickly as the market changes, as well as the variable-cost nature of many billing models. Contracts that are designed to flex with the shippers’ needs in either direction work well in a recessionary environment, and can create a lot of competitive advantage for those that have chosen to outsource some portion of their TMS capabilities in this fashion. Furthermore, those that can promise rapid implementation and be fully self-funded in Year 1 tend to work the best,” says Gerstner.

For its part, Ryder introduced RyderShare, a one-of-a-kind collaborative logistics platform that enables everyone involved in moving goods through supply chains, including shippers, receivers, carriers and service providers to work together in real-time to prevent costly delays and find efficiency gains.

“Everyone talks about visibility, about being able to see where your goods are, but that’s just the beginning,” says Cooprider. “For visibility to be meaningful, it must be in real-time, not in 10- to 15-minute increments, so you know exactly when your goods will arrive, if there are potential delays and the ability to collaborate and take action in real-time. Without that, you’re just tracking a truck on a map.”

Kenco opened a dedicated physical warehouse space, an expansion of the Supply Chain Innovation Lab, to serve as a true test facility for the Kenco team of innovation specialists to assess value-added technology and provide advanced visibility into these solutions.

“From autonomous drones to advanced vision-picking goggles, there is a lot of new technologies being deployed and in development that will aid in maintaining and enhancing efficiency and safety in the supply chain,” says Saxena. “New technologies allow for quicker decisions to be made and the turnaround process to be virtually seamless. Artificial intelligence (AI) and machine learning (ML) are making waves in the industry by providing amplified data management capabilities allowing for increased visibility. Through advanced AI and ML data analytics solutions, logistics providers can collect, manage, analyze and utilize data to provide solutions and decision support. With these tools comes predictive analytics, as technology continues to develop data that can provide users with predictive and prescriptive analytics for areas like volume forecasting, inventory deployment, equipment maintenance and labor planning. For the food and beverage sector specifically, analytic technologies are also useful in meeting different regulations. Additionally, connected Internet of Things (IoT) solutions utilizing AI and ML allow for remote monitoring and control.”

Meanwhile, warehouse management systems (WMS), transportation management systems (TMS), enterprise resource planning (ERP) and equipment suppliers are refreshing their capabilities to better align with the ever-changing expectations of shippers, customers and warehouse, packaging and transportation providers.

“These enhancements look to use analytics and data to drive efficiency and cost reductions throughout the supply chain,” says Lebovitz. “Material handling and production equipment manufacturers are implementing automation throughout their offerings to create a more efficient and safe approach to everyday tasks. This coupled with constraints and limitation within the labor market are creating stronger ROI evaluations which enable these enhancements to be viewed in a positive light.”

Advances in digital technology and automation are also arming logistics leaders with the tools needed to fortify supply chain strategies.

“A growing array of remote sensors linked to the Industrial Internet of Things (IIoT) are available to monitor temperature, shipment location, transit time and other metrics during transportation to prevent spoilage or contamination,” says Commiskey. “Drones and sensors also are being used to inspect farms and warehouses to meet company and government standards. Robotic process automation (RPA) has made it possible for 3PLs and 4PLs to regularly pull critical industry information and statistics, which has become increasingly critical during the pandemic to share real-time updates with customers and inform strategy. Tech-enabled 3PLs and 4PLs are building these features into their TMS.”

“All of these technologies have made it possible for food shippers to not only have visibility into every detail of their supply chain, but to also mine data that can optimize their networks and strategy in the future. As the country collectively seeks to return to this New Normal, leveraging data on-hand and staying on top of new insights can make or break the success of a company’s supply chain strategy,” he adds. 

Likewise, electronic logging devices (ELD) help increase hands-free communication, while digital freight matching, dynamic route optimization and load stacking help reduce overall miles and empty miles, resulting in improved efficiency, sustainability and safety, says Kelley.

“Much of this is facilitated by the adaption of IoT devices and improved tracking/visibility. IoT and geofencing also allow for participants to know when a truck has arrived on property, potentially reducing detention and dwell times,” he adds. 

The 3PL, 4PL and 5PL sector is also experiencing continued exploration of the use of blockchain across the logistics industry. 

“Blockchain was an emerging technology five years ago, but adoption was limited until recently when we’ve observed a resurgence of legitimate use cases where blockchain or similar technology can make a safety and optimization impact to the industry,” says Parry. “Some examples include the ability to manage cold chain and distribute vehicle, equipment or carrier data to interested parties safely and securely. The technology can ensure that logistics participants track and actively comply with existing and new laws and regulations and can safely report violations. Improved visibility of freight and its transportation across shippers, carriers and any third parties in between.”  

The future for 3PLs

Partnering with a 3PL or 4PL is critical when market conditions are uncertain, says Commiskey, “because they are able to provide nimble solutions that align with business goals. It’s important to consider factors like scale and technology when choosing a partner, but logistics remains a relationship-driven business—without the right relationships with carriers and other industry stakeholders, logistics leaders won’t see the results they’re seeking.”

And, by nature, logistics providers are managers of multiple resources, adds Magnan.

“Some they own, some they contract out. For the shipper, the desire is to have one responsible, overriding party—one ‘throat to choke,’ if you will. I may give that firm a contract to manage my logistics worldwide,” says Magnan. “That relationship could be either a 3PL or 4PL. Basically, I’m relying on my 3PL/4PL to be the expert in supply chain management, rather than having an inside team do that.”

Plus, the COVID-19 pandemic came at a time when tariffs posed additional complexity.

“The global supply chain was out of sequence from both events happening together and different parts of the globe quarantining and being affected at different times with very different magnitudes of disruption,” says Lebovitz. “The global supply chain was able to deal with these interruptions skillfully, and thanks to some additional inventory measures many had in place, there was a good head start in overcoming major supply disruptions.”

Harnessing the power of data will drive innovation and improvements in execution for both 3PLs and 4PLs.

“COVID-19 has exposed many gaps in shippers’ supply chains,” says Joe Carlier, senior vice president of global sales, Penske Logistics. “Consumer behavior has shifted, and it is more critical than ever before to have the ability to quickly adapt to the new normal. With all the uncertainties that are in front of us, shippers will need strong partnerships with proven capabilities in engineering, technology as well as execution.”

The challenge post-COVID-19 won’t be so much the way product moves through the supply chain as it will be keeping up with accelerated consumer demand.

“The challenge for food and beverage shippers continues to be how to support e-commerce fulfillment and final-mile services cost-effectively, and it is unlikely that the future will be a one-size-fits-all strategy,” says Cooprider. “In fact, I believe that the future will belong to those shippers who can most effectively embrace complexity within their supply chains and manage that complexity seamlessly and cost-effectively.”

It would be an understatement to say that the COVID-19 pandemic has disrupted supply chains for the foreseeable future, continues Commiskey.

“The second quarter saw demand to transport goods plummet amid steep declines in business and world trade,” he adds. “For a supply chain strategy to remain resilient, especially amid unprecedented market conditions, it’s critical that 3PLs and 4PLs have deep carrier and industry relationships in place. In crisis situations, constant communications are crucial, as they keep a partnership between a shipper and their 3PL strong while mitigating the impact of disruptions.”

COVID-19 has also caused a fundamental disconnect in supply chains focused on moving food. 

"The traditional commercial, government and industrial food markets where these products would normally go have dried up. The normal supply chains and end-users who were the recipients of these goods are closed or operating at a fraction of previous capacity. It’s not that farmers have over-produced; it’s just that the supply chains [that] served traditional large consumers--government food programs, restaurants, industrial kitchen operations such as schools and college dorms, as well as large event venues like stadiums and ballparks–were disrupted. These markets went silent overnight," says Magnan. "Exacerbating the problem is how goods in these supply chains were labeled, branded, packaged and shipped. Most of these deliveries were in large bulk quantities or millions of small quantities, such as individual serving milk cartons for school lunch programs that could not be transitioned for retail grocery sale. The supply chains could not pivot , and still cannot. It’s not necessarily a problem of not enough food, or where food is sourced geographically. It’s more an issue of sector disruption and the inability to redirect and repackage those food consumables to flow through an alternate supply chain structure. That presents a real opportunity as we come out of the pandemic, for farmers and the firms to think about how to re-engineer supply chains to be more flexible and resilient, from farming methods to production to packaging, labeling, distribution and consumption. And, be prepared for when schools and other organizations that feed millions start to ramp back up."

 

 

 

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