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Fourth-Party Logistics Model (4PL)

Introduction

Introduction

The learning outcome of this article is for you to be able to evaluate the role of 4PL in logistics strategy. Before discussing the role of 4PL in logistics strategies, let's get familiar with the definitions of PL logistics models. PL terminology reflects the number of parties involved in a supply chain.

First Party Logistics (1PL)

In a 1PL model, the business owns and manages the entire logistics process internally. For example, if a farmer delivers eggs to a grocery store himself, the logistics model is first-party logistics or 1PL, as the farmer is the only party involved in the supply chain.

Second Party Logistics (2PL)

In a 2PL model, a business contracts another party to handle transportation services. In the context of our example, a farmer hires a courier to deliver eggs to a grocery store. Here, the courier or delivery service provider is the additional party, making it second-party logistics or 2PL.

Third Party Logistics (3PL)

In a 3PL model, businesses outsource their logistics functions for operational efficiency. The example here is when a farmer hires a fulfillment company to handle transportation and logistics operations. The fulfillment company might also take responsibility for packing and storing the eggs, making it third-party logistics or 3PL.

Fourth Party Logistics (4PL)

In a 4PL model, a business expands further and finds the complexity of logistics management beyond its capability. Rather than investing manpower and capital internally, it can outsource the management and execution of logistics activities across its supply chain. The logistics management company becomes the fourth party in this 4PL model. This company might communicate with the farmer to produce more eggs when grocery store inventory decreases.

Distinct Features of 3PL and 4PL

Assets

  • 3PL: Usually owns transportation and warehousing assets.
  • 4PL: Often non-asset-based.

Focus of Operations

  • 3PL: Focuses on day-to-day operations.
  • 4PL: Focuses on optimizing the supply chain.

Point of Contact

  • 3PL: Multiple points of contact within the supply chain.
  • 4PL: Single point of contact for the entire supply chain.

Advantages of 4PL

  1. Greater Visibility: Achieved from the simplification and streamlining of logistics functions.
  2. Time and Effort Savings: Minimizes the time and effort spent by the firm on logistics functions.
  3. Unlocking Capital: Allows the firm's operating capital to be used for its core business.

Disadvantages of 4PL

  1. Loss of Control: There is an apparent loss of control over supply chain functions to the external vendor.
  2. Corporate Culture Adjustment: Adopting a new corporate culture where 4PL becomes a supply chain partner can be challenging.
  3. Partner Replacement Difficulty: If the 4PL provider is removed, finding a replacement is highly challenging.

See you in the next article!

Keywords

  • 4PL
  • Logistics Strategy
  • Supply Chain Management
  • First Party Logistics (1PL)
  • Second Party Logistics (2PL)
  • Third Party Logistics (3PL)
  • Fulfillment Company
  • Transportation and Warehousing Assets

FAQ

Q. What is 4PL in logistics? A: 4PL, or fourth-party logistics, is a model where a company outsources the management of logistics activities and execution across its supply chain to an external logistics management company.

Q. How does 4PL differ from 3PL? A: While 3PL focuses on day-to-day logistics operations and usually owns transportation and warehousing assets, 4PL is often non-asset-based and focuses on optimizing the entire supply chain with a single point of contact.

Q. What are the advantages of using a 4PL provider? A: The main advantages include greater visibility of operations, minimized time and effort spent by the firm on logistics functions, and the ability to unlock and use the firm's operating capital for its core business.

Q. What are the potential drawbacks of 4PL? A: Some disadvantages include a loss of control over supply chain functions, challenges in adopting a new corporate culture, and difficulty replacing the 4PL provider if necessary.

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