Interview with ShipHero: why the 4PL model doesn’t always work

If you’re someone who has been paying close attention to newer entrants in the logistics market, then chances are you’ll know about ShipHero. The logistics provider is multi-faceted and runs its own 3PL fulfilment business which is facilitated by ShipHero’s own proprietary technology, though this accounts for just 5% of its business. The company largely uses its buildings to learn what 3PLs need and to prove that its technology works. By far the majority of ShipHero’s business is centred around being a SaaS provider for 3PLs and brands that ship for themselves, although the fulfilment side continues to generate profits too.

Nia Hudson, Research Analyst at Ti, recently caught up with Aaron Rubin, CEO of ShipHero, to discuss the beginnings of ShipHero, which started off as a 4PL.

In one of Aaron’s recent LinkedIn posts, he revealed that ShipHero used to be a 4PL – where a company acts as a middleman between various different parties – before pivoting to a more traditional 3PL fulfilment model.  Thanks to the advice of Maggie Barnett, who was brought in to run the 4PL side of the business, ShipHero then opened its first warehouse in Las Vegas and pivoted its fulfilment side to a more traditional 3PL model. Barnett had told Rubin that the “4PL model will never work”.

Rubin’s post raises an important point regarding the difficulties and the issues with the 4PL model, which can increasingly put margins at risk. One of the most prominent examples of a company abandoning its pursuit of this business model is Shopify, which recently announced it was selling off its asset-light logistics business acquisitions after senior leadership said it became a distraction from the software company’s core offering.  

When asked about the key challenges of running a 4PL, Aaron highlighted several:

Issues with inbound stock and communication, and capacity and margins hamper the 4PL model. Aaron said that “inventory would often land at a 4PL partner’s dock that is non-compliant. The logistics partner wouldn’t want to deal with this – fixing non-compliant inventory is a pain and hard to charge for, and it is more lucrative to receive compliant inventory. The next issue was the communication chain with non-compliant inventory. ShipHero was ultimately just a middleperson, and the game of telephone would take days instead of hours, making it incredibly frustrating for all parties”.

He continued: “When Covid hit, our 4PL partners were suddenly at capacity. Our orders were their last priority. Why? Because with a middle layer of management, there is less margin. This means the 3PL made less money on the orders they shipped on ShipHero’s behalf. Our orders were always the last out because they were less valuable to the 3PL. Further, the reputational hit didn’t fall on our 3PL, instead, it was ShipHero’s reputation that was tarnished by late orders.”

According to Aaron, the shift from 3PLs to 4PLs stemmed from critical shortcomings in the brand-facing experience offered by 3PLs. Aaron highlighted that many 3PLs failed to provide brands with real-time inventory visibility, prompt order adjustments, or a satisfactory mobile interface. Recognising this gap, 4PLs capitalized on the opportunity to enhance brand interaction by developing superior interfaces. However, this advantage diminished with the widespread adoption of platforms like that developed by ShipHero by numerous 3PLs, equipping them with robust web and mobile portals. Additionally, 4PLs once leveraged VC-subsidized pricing to undercut costs, but this strategy has since become unsustainable. As a result, many 4PLs are struggling. Most recently, 4PL provider Airhouse announced a round of major layoffs and transferred customers to partner 3PLs.

What’s next for ShipHero?

Exciting developments are on the horizon for ShipHero, according to Aaron. The company is growing its SaaS customer base rapidly and entering new geographies including Mexico, Oceania and Europe. Additionally the company is launching an in-person training centre in Fort Worth, Texas, scheduled for June. This facility will offer warehouse operators a comprehensive three-day certification course on the ShipHero Warehouse Operating System, empowering them with advanced skills and expertise.

Author: Nia Hudson

Source: ShipHero