Logistics Outsourcing Strategy (3PL & 4PL)

What is Logistics Outsourcing Strategy?

Logistics outsourcing strategy involves the process of deciding which logistics functions to outsource, to whom, and how to manage the outsourcing relationship effectively. The objective of logistics outsourcing is to improve efficiency, reduce costs, and enhance customer service by leveraging the expertise and resources of specialized logistics service providers.

In supply chain management, the trend of subcontracting with external parties has become a common practice. These parties are called ‘third-party logistics providers’ or ‘3PL’. 3PL is the practice of hiring an external agency for performing all or a part of the product distribution and purchase management functions of an organization.

What is Third-party Logistics (3PL)?

A 3PL can either be an integrated association or a standalone operator. A standalone operator is called a wholesaler that extends only one service type in which it excels. Generally, these operators provide services in areas such as transportation, warehousing, inventory management, and packaging. On the other hand, an integrator is a 3PL provider that provides all logistics solutions and supply chain services to its client organizations.

In the 1990s, organizations started focusing on supply chain management and realized that logistics is a core process in the supply chain of an organization. This is when the concept of 3PL providers came into existence. The main reasons why 3PL providers were adopted so rapidly are reduced lead times and logistics costs.

In India, research on supply chain management practices has shown that outsourcing logistics activities are becoming popular in Indian organizations with a growth in the number of third-party logistics providers over the last many years. Using 3PL services is a strategic decision that is based on its impact on the performance of a business.

The following are some of the criteria for the assessment of 3PL providers:

• Impact on logistics performance
  
• Impact on customer satisfaction
  
• Improvement in inventory turnover rates
  
• Improvement in delivery times
  
• Decrease in capital investment in facilities and equipment
  
• Reduction in labor cost
  
• Increase in productivity

What is Fourth-Party Logistics (4PL)?

Fourth-Party Logistics (4PL) is a type of logistics outsourcing model where a single logistics service provider manages all aspects of the supply chain on behalf of a client company. In a 4PL arrangement, the logistics provider acts as a strategic partner to the client, taking on the responsibility of coordinating and managing logistics activities across multiple third-party service providers.

Unlike third-party logistics (3PL) providers who offer specific logistics services such as transportation, warehousing, and distribution, 4PL providers offer a comprehensive logistics management solution that includes strategic planning, execution, and control of the supply chain. The 4PL provider typically works with multiple 3PL providers and other logistics service providers to create a customized solution that meets the client’s unique logistics needs.

The primary objective of a 4PL provider is to provide end-to-end visibility and control over the supply chain, enabling the client to focus on their core business activities. A 4PL provider typically offers a range of services, including network design, carrier management, performance measurement, and supply chain optimization. They leverage technology and analytics to manage and analyze the supply chain data and provide real-time visibility to the client.

A 4PL organization meets the following conditions:

• Collaborates between more than two logistics service providers on a resource-sharing basis
  
  
• Covers the complete supply chain of the client organization
  
  
• Provides IT-based solutions and not based on the asset in the case of 3PLs

4PLs recognize the potential of supply chain optimization of clients organizations and provide required solutions like supply chain software or IT systems to these organizations.

Some of the benefits of 4PL providers are:

• Supply chain system integration
  
• Access to a broader base of potential suppliers
  
• Reduced order cycle times
  
• Automation and standardization of order placement
  
• Reduced procurement costs

Types of Logistics Companies

3PL services include transportation, inventory management, packaging, warehousing, and freight forwarding. Courier companies and freight forwarders are examples of 3PL companies.

Some of the types of 3PL companies include:

• Standard 3PL Provider: This type of company picks, packs, warehouses, and distributes the product for its customer.
  
  
• Service Developer: It provides services such as tracking, cross-docking, unique security, and other advanced services to the customer.
  
  
• Customer Adaptor: It takes over the entire logistics function of the company.
  
  
• Customer Developer: This type of company integrates itself with the customer and performs extensive tasks for them.

Various forms of 3PL are as follows:

• Transportation-based 3PL: Examples include Schneider Logistics, FedEx Logistics, UPS Logistics, etc.
  
  
• Warehouse-based 3PL: Examples include DSC Logistics, Caterpillar Logistics, USCO, etc.
  
  
• Forwarder-based 3PL: Examples include AEI, Circle, Fritz, etc.
  
  
• Shipper-based 3PL: Examples include AFS Logistics, Worldwide Express, GlobalTranz, etc.
  
  
• Financial-based 3PL: Examples include GE Information Services, FleetBoston, etc.
  
  
• Information-based 3PL: Examples include Nistevo, uShip, Trans-place, etc.

Although the businesses of different sectors may vary, it is important to consider the use of 3PL or 4PL service providers based on the needs of the organization.

It is also important to note that the logistics outsourcing strategy should be aligned with the overall business strategy of the company. The decision to outsource logistics should be based on a thorough analysis of the company’s logistics needs, the capabilities of potential service providers, and the potential benefits and risks of outsourcing logistics functions.