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Difference Between 3PL, 4PL, And 5PL
In the e-commerce industry, the logistics portion is a crucial part of the supply chain, involving the movement, storage, and management of goods and materials. Within the logistics industry, there are various models that online businesses can use to manage their supply chain, each with its own strengths and weaknesses. These models are known as third-party logistics (3PL), fourth-party logistics (4PL), and fifth-party logistics (5PL) services.
Now there are circumstances when handling fulfillment internally is the right call. This would be for low-volume, personalized products; delivering yourself can make more sense than outsourcing. But once the threshold where delivering internally becomes so time-consuming, it drags the business' progress. It is time to outsource.
If your product is featured on TV or an influencer shares it, that threshold can be crossed quickly. Once that case is reached, it’s about finding the right partner – and ensuring to follow the dos rather than the don’ts of end-to-end fulfillment.
So, which of the logistics model should we use for our e-commerce business?
Let's discuss and explore.
Third-Party Logistics (3PL)
3PL services involve using an external company to handle all or part of a company's logistics operations. This may include transportation, distribution, warehousing, order processing, inventory management, and reverse logistics of e-seller's products.
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Pros: An e-commerce business can outsource all the fulfillment needs for their customers, from order management to receiving to last-mile delivery of goods. The competency and proficiency of a 3PL to handle substantial amounts of fast-moving consumer or branded goods frees up the online sellers of time and logistics resources. This help online business owners focus on growing their brand and expanding their reach to customers.
Cons: It is difficult for the e-commerce owner to monitor the quality control processes done by the 3PL. It is very critical, therefore, to choose a reputable 3PL with a good track record of service. Integrating systems between the e-commerce owner and the 3PL help ensure inventory and order management is done correctly and efficiently.
Fourth-Party Logistics (4PL)
4PL services, also known as lead logistics providers (LLPs), are an evolution of the 3PL model. Instead of providing specific logistics services, 4PL providers act as a single point of contact for coordinating and managing a company's logistics operations. This can include working with multiple 3PL providers and other partners to create a seamless supply chain. 4PL providers often focus on technology and innovation, using advanced systems and tools to optimize logistics processes. 4PL providers assume more accountability and responsibility in the process.
Pros: A 4PL has a larger scale of operational management that saves time and effort for the e-commerce owner. The 4PL manages the full supply chain, like warehousing, shipping, distribution, and physical sites. They also have advanced technology software (artificial intelligence and automation) that helps improve network communication and increase real-time visibility. 4PL providers have a design solution approach that specifically meets targetted needs of their clients. Their expertise in end-to-end operations like warehousing, distribution, freight, and software allows them to tailor-fit the best solutions for the business.
Cons: Little or no control over fulfillment and logistics processes as you don’t work directly with 3PLs. Cost is also high, and thus not advisable for start-ups or small businesses.
Examples of 4PL companies include Shopify Fulfillment Network, Deliverr, and ShipHero.
Fifth-Party Logistics (5PL)
5PL services, also known as collaborative logistics providers, take the 4PL model a step further by bringing together multiple companies to work collaboratively on logistics operations. This can involve sharing resources, such as transportation and warehousing, and jointly developing and implementing logistics strategies. The goal of 5PL services is to create a highly efficient and flexible supply chain that can adapt to changing market conditions and customer needs.
According to a recent report published by Allied Market Research, the global fifth-party logistics market is expected to be valued at $9.21 billion in 2025 and is projected to reach $17.30 billion in 2035, registering a CAGR of 6.5%. The key players operating in the global fifth-party logistics market include 5PL Logistics Solutions LLC, Toll Holdings Ltd, DHL International, Renaissance Network Reinvent, MGL Global Logistics, Maine Pointe, Deloitte, Bain and Company, Boston Consulting Group, and McKinsey & Company.
The U.S. is forecasted to dominate the global fifth-party logistics market share in 2025; the growing e-commerce industry in the United States support the fifth-party logistics market due to the rising demand for efficient supply chain by manufacturing companies, as well as 3PL and 4PL companies. On-demand and cloud-based warehousings, such as Stord, Flexe, and Flowspace, are gaining popularity which helps propel the growth of the e-commerce sector in the U.S.
Pros: 5PL companies leverage technology and systems to manage highly efficient logistics networks. They specialize in dealing with e-commerce companies that don't want to manage their warehouse and logistics. These companies can provide logistical support in all areas of their client's business, not just customer-to-client transactions.
Cons: Just like the 4PL, there will be little or no control over fulfillment and logistics processes. They are also very expensive if matches between businesses are not aligned properly.
So, what are the key differences between these three models?
First, 3PL services focus on specific logistics services, while 4PL and 5PL services involve coordinating and managing the entire logistics operation. 3PL providers specialize in one area, such as transportation or warehousing, while 4PL and 5PL providers have a more holistic view of the supply chain.
Second, 3PL providers operate on a transactional basis, charging clients for their specific services. In contrast, 4PL and 5PL providers often work strategically, providing long-term logistics solutions and consulting services.
Third, 3PL providers generally work with multiple clients, while 4PL and 5PL providers typically have a more exclusive relationship with their clients. This allows 4PL and 5PL providers to deeply understand their client's operations and needs and tailor their solutions accordingly.
The logistics model choice depends on a company's specific needs and goals. Using 3PL services is a good option for companies that need specialized logistics services on a transactional basis. 4PL and 5PL services, having multiple supply chains, are better suited for companies that want a more comprehensive and strategic approach to logistics management.
So How to Find the Right Logistics Strategy for Your Business?
Finding the right logistics strategy for your business can be a challenge. To start, you need to assess your current needs and capabilities. This includes looking at freight, 3PL logistics, warehousing, and other logistics services or partnerships necessary for optimal efficiency. Once you understand what is needed to meet your requirements, you can then begin exploring potential logistics strategies and partners.
Consider partnering with a third-party logistics (3PL) provider or working with a dedicated logistics partner that can provide customized solutions based on your individual needs. Researching and assessing the market will help you make the best decision when selecting the right logistics strategy for your business.
Additionally, it's important to stay informed about industry trends and technology advancements to ensure that you’re always leveraging the most up-to-date tools and processes available. Ultimately, careful consideration of all aspects of your supply chain operations will enable you to find the perfect fit to identify the best logistics strategy for your business.
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