What’s the Difference?
Does an LLP perform the same service as a 4PL? Can you run a just-in-time operation without being lean? When push comes to pull, are logistics and supply chain management interchangeable? Industry experts explain the source of some common misperceptions regarding supply chain and logistics lexicon.
Are supply chain management and logistics the same thing?
The short answer is, no. Logistics is one component of supply chain management.
The fact that supply chain management (SCM) includes logistics functions may be the source of confusion about the terms. Making the terms even harder to define, the scope of SCM differs from one corporation to the next, according to anecdotal evidence.
During a recent professional organization meeting, for example, a senior logistician at a Fortune 500 corporation related that at his company, the bounds of SCM extend upstream from production to key vendors and involve only raw materials and sub-component flows. The supply chain organization in his firm falls under the auspices of the chief operations officer (COO), who had risen through production, and initiatives involving finished goods distribution are largely marginalized.
Conversely, as a major retailer's chief SCM officer commented at a University of Tennessee Supply Chain Management Forum, "SCM only makes sense from the perspective of the final customer backwards." In other words, the retailer's SCM includes everything in the company and its suppliers and customers.
In still other organizations, SCM represents a new name for activities formerly handled by the logistics department, with an exclusive focus on finished goods distribution and little interaction with inbound flow processes or production shop floor issues.
More than 500 published definitions of SCM share the following elements:
- Coordination/collaboration with suppliers and customers.
- Demand and supply side matching.
- A flow perspective that incorporates products, services, information, and finances.
What about logistics, then? At its most basic level, logistics management is concerned with effectively moving and storing products and services to create value through time and place transformation.
Logistics, therefore, involves managing facilities, transportation, inventory, materials, order fulfillment, communications, third-party providers, and information within the firm in a way that contributes to customer value. While originally considered a function with little added value, and primarily focused on cost management, logistics has evolved into a source of competitive advantage.
The modern era of logistics management focuses, to some degree, on all these themes. In essence, logistics involves systematically managing movement and storage activities for effective customer service, total cost efficiency, competitive advantage, and, ultimately, enhanced organizational performance. The domain of logistics management, therefore, consists of the following key elements within the firm:
- Transportation network design and management.
- Warehousing techniques, including location, design, and management.
- Materials handling management.
- System-wide inventory management.
- Order management and fulfillment.
- Customer service.
This does not mean that logistics does not manage these functions with other firms; it means it manages these third-party logistics relationships with an eye toward benefiting the logistics manager's firm.
A DISTINCT DIFFERENCE
Understanding the differences—and similarities—between a functional-level activity such as logistics and the cross-functional and cross-disciplinary concept of SCM can benefit companies. Such a distinction can help clarify the decision-making scope required for change initiatives, for example.
Many functional managers are frustrated by assignments that require them to secure significant cross-functional buy-in and participation, but do not give them the authority to guarantee it. Inventory improvement initiatives are often sub-optimized because achieving them while maintaining or improving customer service requires the participation not only of warehousing and transportation, but also procurement, sales, marketing, production, accounting, and finance.
This distinction between logistics and SCM can also help map out the skill sets necessary for managers in each area, both at the entry level and as careers progress, and suggest potential changes to organizational structure.
One high-level operations executive for a Fortune 500 firm suggests a new organizational structure that recognizes functional-level operations managers (director of logistics); firm-level operations managers (COO); and a new cross-organization level operations manager called a chief supply chain management officer who has broad responsibility for the processes that cross the firm and extend to goods and service suppliers, as well as customers.
Supply Chain Management: Supply chain management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, supply chain management integrates supply and demand management within and across companies. It includes all logistics management activities, as well as manufacturing operations, and it drives coordination of processes and activities with and across marketing, sales, product design, finance, and information technology.
Logistics: Logistics management is that part of supply chain management that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers' requirements. Logistics management activities typically include inbound and outbound transportation management, fleet management, warehousing, materials handling, order fulfillment, logistics network design, inventory management, supply/demand planning, and management of third-party logistics services providers. To varying degrees, the logistics function also includes sourcing and procurement, production planning and scheduling, packaging and assembly, and customer service. It is involved in all levels of planning and execution—strategic, operational, and tactical. Logistics management is an integrating function that coordinates and optimizes all logistics activities with other functions, including marketing, sales, manufacturing, finance, and information technology.
– Council of Supply Chain Management Professionals
IL Readers Weigh In...Are SCM and logistics the same thing?
"Logistics is the overall practice, and SCM is one specialized component of that practice."
"SCM is a business philosophy, while logistics refers to the activities that facilitate the flow of goods through the supply chain."
"Logistics focuses on movement, whereas SCM encompasses much more, including production, manufacturing, transportation, and supplies."
"Logistics is about physical flow, while supply chain involves data flow as well."
"Logistics is the study of the physical movement and storage of products, while SCM is a higher-level study. SCM incorporates sales planning, sourcing (inbound logistics), production, distribution (outbound logistics), and returns. In short, logistics is a sub-set of SCM."
Is a Lean Operation Different from Just-in-Time?
Just-in-time operations are always lean—but lean operations do not necessarily perform just-in-time.
Just-in-time (JIT) operating practices have been around a lot longer than the new kid on the block, lean operations. The JIT philosophy is usually credited to the manufacturing practices Henry Ford introduced at his Dearborn, Mich., River Rouge complex, where iron ore delivered on Monday morning rolled off the assembly line as part of a finished automobile three days later. Ford recognized that his plant would be overwhelmed with materials in various stages of production if he did not keep them tightly scheduled and rapidly moving to final assembly. He allowed no wasted time, which, in turn, meant no delays.
Delays directly translated to wasting resources—creating inventory and the subsequent need for storage space, additional handling, and scheduling. To avoid delay, policies such as, "You can have any color you want, as long as it's black" kept production lines moving and minimized administrative expense.
As management's understanding of JIT grew, it came to include fast customer service response and anticipating demand. Think quick response—the delivery of electricity when a switch is flicked, or when a fire department responds. These businesses expend many resources to obtain quick response. There is nothing lean about what goes on here.
Decades after River Rouge, principally as a result of the quality control and assurance theories and practices advocated by Dr. Joseph M. Juran, then implemented throughout Japan with guidance from Dr. W. Edwards Deming, the quality improvement derivative known as Kaizen—or the continuous improvement process—quickly took hold.
The initial objective of this movement was to improve terrible manufacturing quality and the associated waste. The ultimate objective was to reduce waste anywhere and everywhere in business processes, and the term "lean manufacturing" gained traction. Today, lean is synonymous with waste reduction.
Perhaps one cause for confusion between JIT and lean manufacturing is that both practices reduce waste. In the case of JIT, the focus is on eliminating time delays. Properly conceived, reducing response time is calculated to be of greater value than other required resources.
In lean operations, the focus is on eliminating or driving down cost. Any and all eliminated costs make an operation more lean. Because even the cost of time may be considered, the meanings of JIT and lean are likely to be misunderstood.
Successful logistics operations are both JIT and lean. It can be no other way. Even if they are not performing JIT, many organizations are challenged to spend intelligently to clean up unseen inbound and outbound operating tiers, communications, and reporting thought to be lean but, in fact, are quality and performance risks.
It is important for those in the business of providing high-quality product, information, or other services to understand how to develop a system that delivers high performance to customers. In the end, buzzwords don't count, but we must be absolutely sure we know what we seek. Future inbound and outbound logistics operations in successful organizations will be defined not only by being lean while providing JIT service, but by simultaneously achieving quality and performance through all the unseen tiers of the supply system.
Just-in-Time: An inventory system that controls material flow into assembly and manufacturing plants by coordinating demand and supply to the point where desired materials arrive just in time for use. Developed by the auto industry, it refers to shipping goods in smaller, more frequent lots.
—Kate Vitasek, Supply Chain Visions
Lean: The conduct of manufacturing operations with a minimum of the seven categories of waste identified by Toyota Production System founder Taiichi Ohno: over-production; waiting time; transportation; processing time itself; movement; the production of non-conforming product; and the maintenance of stock.
—Warehousing Education and Research Council
IL Readers Weigh In...Is a lean operation different from just-in-time?
"Lean emphasizes cutting out non-value-added activities. JIT concerns time postponement—the non-value-added activity of holding inventory before it is needed."
"Lean is zero waste and a minimal resource requirement approach to managing costs within a supply chain. JIT is one of many techniques that lead to a lean supply chain."
"Lean is about eliminating waste. JIT can be about eliminating waste, but it can also push raw materials and in-progress inventories off to a third party."
"Lean is about improving processes; JIT is about minimizing inventory for the customer."
"Lean deals with the overall cost-of-time process review, while JIT deals with getting material at point of consumption on time."
Is There a Difference Between an LLP and a 4PL?
The distinction between a lead logistics provider (LLP) and a fourth-party logistics (4PL) provider depends on how an individual or service provider defines its offerings.
True LLPs are rare in today's outsourced logistics environment. In theory, an LLP coordinates logistics functionality in accord with the client's business plan. This requires that the LLP become part of the client's management team from a strategic perspective, with involvement in everything that follows sales forecasting—from vendor selection, through production planning and, ultimately, the client's customer interface. Naturally, the LLP oversees all associated tactical logistics functions, including collaborating with the client to select and negotiate with specialized service providers.
The LLP should also provide the technology interface, which gives a single point of reference for the various service providers' interrelated activities. This windshield view of all supply chain activity affords the ability to react early to any deviations from the plan or changes that occur in the client's business environment.
Effectively, the LLP would be the constable on patrol, not only monitoring its own and other service providers' activities, costs, and performance, but also identifying opportunities to revise the logistics operating system in order to enhance service and contain transportation, production, and inventory carrying costs. In reality, most companies don't receive this level of service from an LLP because of the inherent conflict of interest. Many LLPs tend to assume every revenue opportunity possible.
Think of buying LLP services in terms of planning a catered dinner. Ideally, an LLP helps you determine the menu and choose a caterer to prepare the food, arranges for the appropriate wait-staff and serving equipment, and provides only the menu items that fall into its specialty area. It ensures that all suppliers have provided the appropriate quantity and quality on time, and coordinates with those suppliers to fulfill the presentation specifications. The LLP then presents you with an all-inclusive bill.
In reality, working with an LLP is more like planning a dinner with a caterer that specializes in pasta dishes. If you select a menu of Chateaubriand, a pasta side dish, and French pastries for dessert, the LLP not only prepares the pasta, but also hauls out a French cookbook and tackles the entree and dessert, rather than contracting for the dishes that fall outside its specialty area. You receive separate bills from the caterer, the wait staff, and the equipment rental service.
THE 4PL FOCUS
The successful 4PL is a non-asset-based outsourcing provider possessing sophisticated SCM technologies that can easily link to both a client's and other service providers' systems. It tends to focus on its own area of expertise, such as domestic or international transportation and/or warehousing. The firm often maintains formal or informal partnerships with other organizations, with minimal competitive overlap. The more formal those working relationships, the greater the development of a fluid working collaboration.
In a true 4PL relationship, the 4PL is the single point of interaction with the client. This includes providing the technology interface, communications, and customer service, as well as a single bill for all services. If a partner service provider does not perform to service or cost terms agreed to with the client, the 4PL rectifies those issues or changes the service partner.
A 4PL provides you with an all-inclusive dining experience, but serves a limited menu and only pours the house wine.
Lead Logistics Partner (LLP): An organization that coordinates other third-party logistics partners for outsourcing of logistics functions. An LLP serves as the client's primary supply chain management provider, defining processes and managing the provision and integration of logistics services through its own organization and those of its subcontractors.
—Kate Vitasek, Supply Chain Visions
Fourth-party logistics provider (4PL): A supply chain integrator that assembles and manages the resources, capabilities, and technology of its own organization with those of complementary service providers to deliver a comprehensive supply chain solution.
IL Readers Weigh In...Is there a difference between an LLP and a 4PL?
"It's the same idea, just different jargon for an entity that manages the process."
"An LLP is the next level after a 4PL. In addition to 4PL activities, an LLP also provides technology support and consulting input. This is because, by virtue of deep visibility into the customer's supply chain, an LLP is positioned to suggest path-breaking improvements. Compared to an LLP, a 4PL is more transaction-oriented."
"Whatever you call it, it is an outsource manager of a logistics network that includes managing other 3PLs."
"There's no difference. They both are 'outsourcing' the outsource process."
"One is a management company, the other actually adds value."