4PLs Take Control
Much like air traffic controllers, 4PLs guide transportation operations, manage product flow, and sometimes help avert disaster.
Why is the flight delayed? Where is the aircraft? When will it arrive? At one time or another, everyone asks these questions. But answers rarely come fast enough from detail-oriented airline attendants, and arrival and departure boards don’t display the specifics.
Above the fray, however, a wealth of real-time information crisscrosses the skies at mach speed. With sweeping panoramas of runways and airspace, and constant contact among airlines and airport authorities, air traffic controllers always know what’s going on. They have visibility and communication. They have control.
Shippers and consignees often have similar questions and shared challenges trying to uncover answers deep within complex global networks. It’s why some seek control-tower visibility by partnering with fourth-party logistics providers (4PLs) and lead logistics providers (LLPs) that can broadly glean and communicate data among myriad supply chain partners. (See sidebar, left, for an explanation of the differences in provider types.) The more they see, the better businesses can cope with exceptions, identify redundancies, create synergies, and communicate details to logistics operations on the ground.
The 4PL Evolution
If this distillation sounds over-simplified, consider how the 4PL concept evolved. In 1996, Accenture (then Andersen Consulting) divined the idea after consolidating, then managing, a multinational company’s freight forwarder base. Strip away the marketing artifice of a neatly coined acronym and you’re left with a supply chain contractor barking out assignments and looking for answers from a motley logistics crew. In theory, not much has changed during the past 15 years.
In practice, however, the idea of creating multi-tiered supply chain networks administered by one point of control is picking up pace. As best-of-breed outsourcing— in terms of transportation and logistics function, vertical specialization, technology sophistication, and geographic coverage— continues to grow and add layers of complexity to the extended value chain, visibility and accountability need to be centralized in a common nexus.
Among 1PLs (shippers), 2PLs (asset-based carriers), and 3PLs (functional service providers), 4PLs and LLPs are the newest débutantes at the supply chain party. They are sophisticated and Socratic, yet oddly plebeian as logistics service providers go.
Fourth-party logistics is an elite outsourcing capability that is shared by many a common 3PL. Nearly 75 percent of 3PLs provide lead logistics and 4PL capabilities, according to Inbound Logistics’ 2010 3PL Perspectives market research report, which surveyed more than 300 service providers.
Outsourcing in general provides shippers with the means to gain better control of transportation and logistics operations and costs. As 3PLs seek to grow their value proposition, they are investing in technologies, services, and new locations to help take customers beyond tactical optimization to strategic business process improvement. They are taking the lead by chasing demand.
What makes the 4PL model so fluid is that the idea is in constant flux. Shippers want customized outsourcing solutions that float between non-asset-based objectivity and tactical execution. Demand is engineering how 3PLs, 4PLs, and LLPs continue to evolve in an overlapping triple-helix process of convergence and separation.
Distilling the Fourth Element
A number of factors inside and outside the enterprise make 4PL-managed networks effective. At the root, businesses want more authority over operational costs. Using a supply chain management strategy that targets silo optimization, without sacrificing end-to-end visibility and control, presents an obvious advantage.
“A company’s willingness to consider a 4PL arrangement is due to internal cost pressures and the strategic importance of logistics activities,” says Dr. Juergen Rahtz, senior vice president, lead logistics solutions for Kuehne + Nagel, a Switzerland-based 3PL. “Internal pressures can include changes within the organization such as an acquisition, divestiture, new market or product introduction, and supply strategy and management.”
Meeting Market Demands
Apart from these corporate-driven impulses, market pressures such as fuel cost increases and capacity restrictions can trigger a similar need for 4PL partnerships. As a recent example, the recession presented ripe conditions for businesses to consider hierarchical outsourcing strategies capable of flexing with, and absorbing, market volatility. More specifically, companies needed a widespread agent that could effect positive change across the supply chain.
“Companies may have well-organized and optimized customer-facing distribution, but limited control over their inbound supply chains, potentially buying from suppliers on a landed cost basis, thereby missing opportunities to un-bundle part price and logistics expense, for example,” says Rahtz. “They can gain better control of the logistics spend and execution through a 4PL.”
At the same time, decreased product life cycles and inventory carrying costs can also be supported through global direct-ship and build-to-order models that need very tight order and transportation management, using merge-in-transit and crossdocking to achieve reliable, short lead times.
A global 4PL or lead logistics provider allows companies to react faster to trade swings— and more quickly and efficiently than relying on a disparate band of service providers that are optimizing logistics functions in situ. The inevitable costs and inefficiencies of doing so without proper oversight are prohibitive.
“It takes talent and time to establish a proven network,” explains Matt Lewis, director, global logistics for Armonk, N.Y.-based IBM. “When these two variables are not aligned to provide a response to a competitive opportunity, the 4PL model can be an excellent alternative.”
The technology and consulting firm knows this firsthand. In 2008, IBM divested its global logistics arm to Geodis Wilson. As part of the agreement, the French 3PL (with U.S. headquarters in Iselin, N.J.) became IBM’s sole lead logistics provider, managing the company’s worldwide asset recovery services, service parts logistics, and flow management of all hardware and software products. The strategic move was an effort to separate non-core transportation and logistics functions so that IBM could focus on its primary business.
“The 4PL model is, at its core, variable and flexible, so it provides many C-suite executives with an alternative, especially when capital is tight,” says Lewis. “IBM has developed a perspective that logistics is critical to our overall business success, but it should not be a strategic investment area for the company.
“Logistics is important in our demanding global supply chain; however, it is of significantly greater value to have a 4PL partner such as Geodis to provide the operational expertise and make the required investments,” he adds. “This allows IBM to invest in its core businesses and let our logistics partner make the necessary outlay to keep its logistics capabilities world-class.”
For some industries, the transition to a 4PL-managed outsourcing model has simply been a matter of time. Automotive, for example, has a legacy in regionalizing supply chain networks to more quickly source, manufacture, and assemble a wide array of moving parts just-in-time. Decentralization is a common strategy for locating resources closer to demand, thereby increasing responsiveness and time to market, and reducing transportation costs.
Over the past few years, supply chain localization has become a favored approach for consumer product industries as well, especially where demand sensitivity is a competitive differentiator.
“Many large multinational companies are decentralized and operate on different ERP systems. Therefore, they have difficulty gaining supply chain efficiencies across the entire enterprise,” explains Rahtz. “A 4PL can be the integrator for multiple business units and geographies, and be a change management agent.”
what right looks like
Locally or globally, technology integration and compliance can stimulate a change in how businesses organize supply chain networks. Some 3PLs have become de facto 4PLs because of their IT sophistication, serving up proprietary logistics solutions to other service providers who leverage these capabilities among their own shipping customers. Transportation management and freight brokerage are other areas where 3PL asset and expertise stratification has allowed for multi-tiered partnerships.
But even these instances offer only a small slice of what 4PLs are truly capable of. Many global 3PLs see the lead logistics role as an opportunity to help customers understand the value proposition of outsourcing by making functional improvement more strategic— by integrating logistics best practices across the supply chain.
“The 4PL establishes what ‘right’ looks like for any part of the supply chain,” says Carl Fowler, senior director of operations, and leader of Menlo Logistics’ 4PL practice in Fremont, Calif. “4PLs use analytical tools and processes to assess supply chain design and performance, identify disconnects, and define the optimum supply chain design based on changing economic, market, and business conditions, and customer demand.
“The ‘set it and forget it’ methodology is a common trap companies fall into, whether it’s a business line, region, or global,” he continues. “As a 4PL, we first establish a true understanding of how the supply chain machine works, then find ways to lean it out and optimize it.
“Next, we put measures and controls in place so we can identify and understand when a problem is occurring. Once identified, we adjust or tweak the machine to return performance to optimum levels. This experience is true across all industries,” Fowler says.
Put simply: the 3PL is the logistics engineer; the 4PL/LLP is the supply chain strategist; and in between, customer demand takes all parties in any number of directions.
From its inception, the 4PL model was meant to control variability. There’s no greater variable than globalization, and as a consequence, multinational businesses have been likely disciples of 4PL and LLP outsourcing strategies.
“For companies with a well-developed logistics organization and proven global processes that have maximized their value in terms of control and scale, the 4PL model provides an opportunity to expand that value by playing on a much larger field, and therefore providing greater economies of scale,” says IBM’s Lewis.
From an organizational perspective, it makes sense to have centralized strategic command over localized day-to-day operations. When you expand this business model globally and across multiple vertical organizations, a horizontal layer of control— driven by technology, geography, or corporate governance— is often compulsory. Different cultural dynamics around the world shade how businesses approach organizational hierarchy.
The 4PL idea has been more widely accepted and adopted in Europe and among global supply chain networks than as a pure-play U.S. solution. Culture, politics, business practices, and geography are primary reasons for this divergence.
“From a cultural perspective, U.S. companies are less willing to give up control over carriers than European companies,” says Rahtz. “In Asia, local companies are less agreeable to outsourced management services. They focus instead on transactional execution.”
Europe and Asia have social structures that are far different than the United States, and these differences sometimes place their definitions of fourth-party logistics at odds.
“In Europe, a 4PL is typically defined as a manager of other service providers. Transportation management, for example, is often considered a 4PL activity,” says Fowler. “In the United States, we view transportation management as a 3PL engagement that is less strategic and more tactical.
“The 4PL may operate parts of a supply chain, but its primary objective is to create and implement a comprehensive strategy based on the continuous flow of value and removal of waste in a supply chain,” he continues.
Lewis agrees there are fundamental distinctions between U.S. and European perspectives, but believes the reason is less cultural and more operational.
“The development of pan-European logistics capabilities has been rapid and largely successful based on business and economic drivers rather than any type of social-driven requirement,” he explains. “The complexity of cross-border logistics in Europe is the perfect microcosm for a global 4PL model, and that is why we see far greater readiness in Europe compared to the United States.
“This was the path of IBM’s 4PL logistics evolution. We tested it in Europe for several years with Geodis, then took it to the global level once the proven capabilities were in place,” adds Lewis.
Operating in multiple countries and managing a supply chain that needs to be much more global is a complicated proposition often not found in the United States. The 4PL concept is more acceptable in Europe because supply chains have to deal with inter-country trading. The European Union has helped standardized currency and Customs policy but there are still inconsistencies— taxation, infrastructure, logistics expertise, and leadership— among the 27 member states and countries outside the trading bloc.
“If we look at overland-based supply chains, the U.S. market is much more homogenous than Europe, and the 4PL holds less value compared with the European distribution model,” says Rahtz. “Most of our 4PL and LLP services growth occurs with global or multi-region supply chains.”
For Fowler, the difference in the United States is mass and concentration. “The sheer flow through the supply chain is greater than other countries, so service providers have to support different types of supply chain dynamics,” he says.
tuning the Supply Chain
What’s remarkable about the 4PL/LLP evolution is that wildfire anticipation and tepid acceptance created a supply chain legend long before it even came of age. As with just-in-time, the 4PL idea grew up as a rarified component of complex, parts-driven industries. It had its merit. Beyond these instances, however, it was viewed as yet another layer of unnecessary bureaucracy. That opinion is swiftly changing— about as quickly as outsourcing companies redefine 4PL and LLP expectations.
Equally significant, these managed supply chain arrangements vary widely. Outsourcers and 3PLs alike are creative in how they spin and execute the concept. This fluidity is appealing to some; to others it is hard to grasp.
For example, Kuehne + Nagel’s lead logistics service portfolio covers three different areas at the two boundaries of outsourcing: on one end, it provides integrated managed services as a 3PL and managed services as an LLP; and, on the other, neutral 4PL services that do not include any 3PL activities.
“What makes it hard to grasp is that there are models in between where customers are looking for an integrated LLP, but also want to keep certain 3PLs or carriers and have those managed in a neutral model,” says Rahtz. “The advantage of this flexibility is that a 4PL/LLP can provide a customized solution that fits specific customer needs and can accommodate cultural or regional differences.”
4PL-managed outsourcing isn’t for every company. But for consumer-facing businesses sensitive to shifts in consumption, and where supply chain decentralization has become a preferred strategy for pulling product to demand and reducing total logistics costs, the 4PL is the logistics model of the future.
“No matter how demand-driven an industry is, a 4PL partnership can help companies better understand, respond to, manage, and measure challenges and changes— then adjust to keep their supply chain in tune by eliminating waste, reducing costs, and operating at the optimum level necessary for the business,” says Fowler. “The 4PL is the conductor of the orchestra, making sure that all the instruments are playing along to the same song sheet.”
Keeping the supply chain in tune is a shared objective at IBM. “Our 4PL model is analogous to a symphony conductor,” notes Lewis. “Geodis stands at the global podium and orchestrates function across all the various logistics service providers in a way that balances customer and supply chain requirements and results in satisfied clients and repeat business for IBM.”
However industry or media attempts to spin the 4PL model, there’s no getting around the fact that logistics service providers of all sizes are playing to a growing audience. Precision and harmony go hand-in-hand with visibility and control.
In time, there will be different flight patterns for global outsourcing and new entrants will shake up the establishment. But receptive shippers will always expect another encore from their 4PLs.
3PL vs. LLP vs. 4PL
Learning the difference between a 3PL, LLP, and 4PL can be confusing. Here’s a simple definition of each, according to Carl Fowler, senior director of operations and leader of Menlo Logistics’ 4PL practice.
A 3PL operates or manages a specific node of the supply chain, such as a warehouse.
An LLP executes and/or manages multiple nodes or networks.
A 4PL sits on top of these networks and acts as the overarching entity. It identifies what nodes and networks should look like and who should manage them, then establishes the processes and governance for each supply chain node.
4 Steps to Making a 4PL Work for You
Companies look to fourth-party logistics (4PL) providers for a broad set of supply chain capabilities —from providing leading-edge technology and management expertise to unique specialization such as disposal of controlled materials. When it comes to high-level, value-added services, seamless integration without business disruption is key.
But how do you find the 4PL that’s best for your organization? Joe Fantasia, Bob Boehm, Jim Harms, and Eugene Long, all directors in supply chain transformation for Deloitte Consulting, recommend following these four steps to get the outsourcing model right and help ensure a successful partnership.
Step 1: Seek out providers specializing in your industry. Many providers don’t have the expertise or resources to be all things to all companies. But you need a provider with knowledge of your business, products, processes, and markets from day one. Increasingly, 4PLs offer specializations that extend far beyond standard 3PL responsibilities of fulfillment, warehousing, and/or distribution activities.
For example, some highly specialized automotive 4PLs offer detailing and finalization of options as a standard part of their car delivery services. And logistics providers that serve the food industry are taking on other responsibilities, such as becoming ingredient and food suppliers.
Find a provider with functional specialization in your vertical and ask what high-value, cost-effective services it can offer to help improve your margins. Depending on your industry, keeping an open mind can help; in some sub sectors, distributors, group purchasing organizations, and even original equipment manufacturers are emerging as 4PLs.
Step 2: Ask for true plug-and-play technology. Today, there’s no reason to buy and implement your own supply chain systems. Ask a 4PL for more than the detailed traffic reports you may be accustomed to. True plug-and-play technology from 4PLs can support sophisticated planning and forecasting, inventory management, customer relationship management, and more.
A good 4PL can help you easily and seamlessly integrate plug-and-play software into your operational systems and processes, enabling your management to get its own extension team out of a provider that understands and acts on critical information —rather than simply reporting on it.
Step 3: Make sure your provider can shift with market dynamics. As globalization continues to shape the competitive landscape, your provider must be able to change directions as quickly as your markets and individual customers do.
Further, you need a provider able to open up new markets and opportunities for you, as quickly as your company identifies them.
Your 4PL should be agile enough to move swiftly from low-cost offshore markets to near-shore sources and back again.
Step 4: Look for a provider with demonstrated supply chain competence. Directing transportation well and running an efficient warehouse do not always indicate skill in managing an end-to-end logistics operation. Your provider should add value to your core business in a way that boosts margins.
Outsourcing companies that are most successful as 4PLs typically have a strong management team that commands credibility, possesses demonstrated experience, and has a proven record of delivering on service commitments.
Management competence is a two-way street. Evaluate potential providers against your own corporate culture to be sure they have a complementary operational mindset. Make sure your company has people dedicated to working with the provider to ensure seamless integration. Be sure you can manage your 4PL with metrics and program alignment to relinquish control of logistics to them.
And, have realistic expectations; you can’t expect your provider to deliver both the lowest cost and premium service —find the right balance between the two.
4 Reasons Why You Might Need a 4PL
1. Higher order-to-delivery cycle times, and order-to-cash cycles that are increasing in length. Order-to-cash cycles affect other areas of the company and can be one big area where improvement can free up cash for important enterprise initiatives such as research and development.
2. The need and demand for IT resources. Lack of IT infrastructure to support an expanding global supply chain can inhibit growth. And in many companies, supply chain operations IT investment is a low priority.
3. Global growth, more inventory in more places, and a shifting revenue recognition point. Companies often lack the ability to generate substantive supply chain performance improvement on their own. There’s lack of leverage in the supply chain.
4. Global expansion. Companies wanting to get into markets they have not been in before need flexible, effective supply chain processes to be successful. If you struggle with your supply chain in the United States, you will really struggle when you try to go global.
SOURCE: Carl Fowler, senior director of operations, and leader of Menlo Logistics’ 4PL practice