4PLs and 3PLs: To Use or Not to Use
From increased localization, consumer demand swings, transportation constrictions, and geopolitical complications, the obstacles in global supply chains are putting the heat on 3PL (third-party logistics) or 4PL (outsourcing an entire supply chain management and logistics).
Supply chains presently “are efficient but brittle – vulnerable to breaking down in the face of a pandemic, a war or a natural disaster. Because of outsourcing, off-shoring and insufficient investment in resilience, many supply chains have become complex and fragile,” noted in a 2022 Council of Economic Advisers report.
The question is, what does this mean for your third-party sourcing and logistics model?
Remember how we started
Before “disruption” or “shortage” prefaced any reference to the global supply chain, remember why your business partnered with a third-party logistics provider. Taking the burden off internal resources so your primary focus can be scaling and perfecting your business operations.
Of course, lead-time problems remain, and forecasting these days is as easy as getting a needle from a haystack. However, complaints of raw material shortage and delivery delays are becoming rarer. And strategic procurement is getting back on track rather than the equivalence to rolling the dice.
Run the numbers
Before third-party logistics service providers came to the scene, entering a market assumed a significant investment in infrastructure to ensure effective delivery. A third party can handle every component of the supply chain process for you, enabling your time and resources to focus on driving your business goals.
If you’re expanding into a new market that requires importing, supply chain and logistics service providers can solve the laborious shipping and customs requirements that, if not done correctly, can be very expensive to your bottom line.
Outsourcing your supply chain cycle provides expertise, technology, and resources without adding to your payroll or IT budget.
The peace of mind of expert supply chain management, without internal investment and development, can actually prove to be more economically viable.
Are you ready to say “I do”?
Like any relationship, trust requires a shared understanding and vision. A third-party provider must have the customer’s interest at heart and be vital in nurturing and developing their business goals.
Like any meaningful union, choose your partner wisely. Be sure to have a good sense of understanding each other in good times and in bad (sound familiar?).
Advantages and Disadvantages
Whether or not you use a 3PL or 4PL depends on various factors, such as the size and operation complexity, the product nature, the target market, and specific logistical needs. Here are some potential advantages and disadvantages of using a third-party provider:
- Expertise: Third-party providers specialize in logistics and supply chain management, so they often have the knowledge and experience to streamline your operations, reduce costs, and improve efficiency.
- Scalability: Third-party providers can handle fluctuations in demand and seasonal peaks, allowing you to quickly scale up or down your logistics operations without making significant investments in infrastructure.
- Cost savings: By outsourcing logistics to a 3PL provider, you may save on transportation, warehousing, and other logistics-related costs.
- Focus on core competencies: Outsourcing logistics allows you to focus on your core competencies and strategic initiatives, such as product development, marketing, and sales.
- Less control: Outsourcing logistics may mean you have less control over certain aspects of your operations, such as shipping times or the handling of your products. The trust level of your third-party provider fundamentally determines your feeling of control in your outsourced operations.
- Communication issues: Poor communication between your business and the third-party provider can lead to delays, errors, and other logistical problems. Your communications should include frequent status meetings, forecast requests, and order status updates.
- Additional costs: 3PL or 4PL management fees must account for in your budget so there are no surprises.
Ultimately, whether or not to use a 4PL or 3PL provider is a decision based on your specific business needs and circumstances. Testing a third-party provider based on a project basis to measure may be helpful.
Ben Casselman and Ana Swanson, “Supply Chain Problems Will Outlast Pandemic, White House Says,” New York Times, April 15, 2022, p. B3.Olivia White, The McKinsey Podcast, McKinsey Global Institute, 02/09/2023