Outsourced Logistics: 4Ward Momentum
What is the real role of today’s 4PLs? How do they differ from 3PLs? Who’s driving the growth of this outsourced logistics niche? Inbound Logistics picks up the lead and explores the changing dynamics of the 4PL/LLP market.
Outsourced logistics partnerships are taking companies to places they’ve never been before—both in terms of emerging logistics markets as well as the level of supply chain complexity and strategy necessary to meet ever-changing global demands.
As businesses become more inclined to partner with multiple niche logistics providers—maintaining expertise in specific verticals, operating regions, or service capabilities—their supply chains are evolving into multi-tiered networks, stratified by numerous transportation and logistics contracts from raw materials procurement to domestic point of consumption.
The role of the fourth-party logistics provider (4PL) and lead logistics provider (LLP) emerged as this trend toward global outsourcing began to outpace the organizational infrastructure available in-house to handle growing offshore networks.
Now, with secondary and tertiary sourcing strategies becoming commonplace, having a single point of contact to properly integrate and manage myriad outsourcing partnerships is of great value: it allows enterprises to divest transportation and logistics activities and better target growth initiatives specific to their core value proposition.
Andersen Consulting (now Accenture) first defined the 4PL concept in 1997 when acting on behalf of a major chemical company that had winnowed its forwarder base from 30 to three. The company left the consultant with the responsibility of managing its remaining core partners.
“The original 4PL concept was designed for businesses with large undertakings,” says Brooks Bentz, associate partner for Boston-based Accenture Supply Chain Management. “The idea of using a 4PL was slow gaining traction. Now, as a result of globalization, 4PLs are fast gaining momentum.”
One reason for this growing demand is the simple fact that finding a best-in-class service provider capable of managing a global supply chain is challenging.
“Businesses that outsource logistics find it hard to distill their core interests down to two or even three service providers,” says Jim Ritchie, president and CEO of YRC Logistics, a global 3PL based in Overland Park, Kansas.
The 4PL concept has necessarily followed the path of globe-trekking enterprises exploring less expensive and more reliable sourcing and outsourced manufacturing locations—as well as multiple logistics partners.
But equally significant, the concept has not remained static and the very nature of a supply chain “management” partner continues to shift course with prevailing global trends.
4PLs and LLPs: Apples to Apples?
The function of the 4PL is as fickle as the various terms flung around to describe the interface between a customer and its multiple logistics partners—be it a 4PL, LLP, or systems integrator. (Note: we use the terms 4PL and LLP interchangeably in this article.)
Bentz doesn’t see a difference among the terms, comparing the 4PL model to that of a general contractor that administers niche responsibilities to a team of specialized service providers.
“The 4PL concept has been around in a defacto sense for some time. Logistics service providers such as Exel use subcontractors at different levels to manage their operations,” he says.
For others, the 4PL concept is a matter of perspective.
“A 4PL takes the lead on advising or making supply chain decisions on behalf of the customer, but does not execute the result of that decision,” says Jurrie-Jan Tap, global key account manager for CEVA Logistics, a global 3PL headquartered in Hoofddorp, Netherlands.
In other words, a 4PL is a non-asset-based advisor or integrator.
“A 4PL can be paid a management fee or can act as a main contractor. By contrast, an LLP has the same capabilities as a 4PL, but augments that proposition with the ability to use its own assets in concert with subcontracting activities,” Tap adds.
How logistics service providers define and contextualize the 4PL/LLP dynamic is perhaps irrelevant because ultimately, the customer’s perspective dictates protocol.
In fact, the seemingly amorphous parameters within which 3PLs, consultants, and even IT providers act as lead logistics providers is an indication that standard rules for engagement do not apply. If anything, it is the customer, and not the service provider, taking the lead in defining the role.
The 4PL market is still very much a customer-driven phenomenon rather than a market change agent, acknowledges Bentz.
“Logistics and supply chain management is the last part of operations that global companies want to experiment with,” he says.
Eaton Eyes LLPs for SC Redesign
Eaton Corporation began rethinking its global supply chain network three years ago with an LLP model in mind.
“The cornerstone of our strategy was outsourcing to 4PLs so we could gain better control of our transportation management systems, capture data, and drive efficiencies,” says Mario Hegewald, director of global logistics for the Cleveland, Ohio-based company.
At the time, the $12-billion diversified industrial manufacturer was using more than 20 3PLs and hundreds of freight carriers to manage its global network. It relied on these partners to keep track of shipment and inventory visibility, which inevitably presented a fragmented and inefficient approach to supply chain operations.
Eaton started its journey toward a new supply chain model by setting the strategy. “We debated whether we should build a robust transportation management group and system in-house or outsource. We chose to outsource,” explains Hegewald.
Currently, LLPs manage all Eaton’s freight, collecting data on its shipping profile. Eaton then uses this data to continuously optimize its network—locally, regionally, and globally.
Eaton began the LLP bidding process in North America, then moved to Europe, and most recently Asia Pacific, where it partnered with CEVA Logistics to manage its regional supply chain.
“Our goal from the beginning was to make the 4PL strategy work in North America, then move on to other areas. We don’t want to be in the business of owning transportation infrastructure because that takes away from our core competency,” explains Hegewald.
When bidding, Eaton undertook an extensive RFP/RFQ process, polling prospective service providers about their penetration in specific markets and the types of customers they worked with in those regions.
Currently the company uses five primary LLP partners: three 3PLs—Penske Logistics, FedEx Supply Chain Services, and CEVA Logistics—to manage supply chain activities in North America, Europe, and Asia; and two forwarders—Expeditors and UPS—to manage transcontinental freight moves.
With five operating LLPs, Eaton faces an element of fragmentation when it comes to supply chain visibility. Moving product from region to region means handoffs between multiple service providers.
“When handoffs occur, we have to identify the LLP operating in that location to drill down on shipment information,” Hegewald acknowledges.
The manufacturer also relies on its service providers to maintain data and provide analysis and alerting. But Eaton has plans in place to link up its service providers’ data systems with its own data warehouse.
“Currently, customers contact us to get status information and our customer service department taps into our individual providers’ systems to get the necessary information. When we manage visibility through a single interface, we will be able to direct customers to that system,” notes Hegewald.
The organizational evolution of Eaton’s supply chain network in just three years is impressive. Management and control continue to float upward through Eaton’s supply chain, as the progression from a loosely aggregated group of 3PLs and service providers to its current interface of five primary LLPs matures.
“We would prefer to have one LLP oversee our entire global operations; we just haven’t found one with the right capabilities yet,” notes Hegewald. “But we are moving in that direction.”
From Tactical to Strategic
Not all businesses have the vision or wherewithal that Eaton demonstrated in redesigning its supply chain network. Often they are more concerned with putting out tactical fires than sparking strategic initiatives—which is why businesses turn to 3PLs in the first place.
“Outsourcing has traditionally served as a means for companies to unload a non-core activity, managing a commodity-type service—for example, reducing freight spend or inventory carrying costs,” says Tom Craig, president of LTD Supply Chain, a Glenmoore, Pa.-based logistics solutions provider that specializes in 4PL services.
Not all outsourced logistics partnerships are alike, of course. Some are purely tactical, relying on asset-based resources; others are more strategic, requiring a thorough and systematic consultative approach. Partnerships generally fall somewhere in between.
But as businesses migrate toward more complex levels of outsourcing, the scope and detail of their supply chain has to change, Craig notes. As such, supply chain initiatives require a different approach.
“A 4PL’s job is not merely to move freight inbound into the United States, for example; it’s to manage offshore suppliers and make sure they meet appropriate targets. Providers serve a more strategic purpose,” he says.
These types of challenges are exacerbated as businesses grow globally, making it more difficult to drive visibility across disparate supply chain links.
“When companies lack supply chain visibility, excess safety stock and the need for expedited shipments are inevitable. An LLP can help overcome these issues by creating total visibility, thus allowing the shipper to optimize flows by consolidating shipments,” says CEVA’s Tap.
When companies consult logistics providers for assistance, it is rare that they have a specific 4PL requirement in mind. “Typically they need specific solutions,” says Ritchie of YRC.
While some logistics providers try to be all things to all customers—a difficult, perhaps impossible, task in today’s increasingly diversified 3PL mix—providers create greater value by offering the best possible solution.
Sometimes this solution requires a collaborative approach among multiple service providers—this process is what evolves into the 4PL dynamic, says Ritchie.
But not all logistics providers are capable of taking a step back and seeing the forest (the outsourcing market) for the trees (customer needs).
In the 3PL industry at large, some logistics providers become caught up in driving continuous improvement in day-to-day operations, Ritchie concedes, and do not address strategic ways to properly meet clients’ changing needs.
“The value of a 4PL relationship is that it allows for more strategic angling,” he explains.
“4PLs aim to create a strategic value proposition—they reinvent the wheel, they don’t only provide a commodity service,” says LTD’s Craig. “Companies have tactical problems and 4PLs offer strategic solutions.”
One company LTD works with, for example, wanted to build a large warehouse to meet distribution needs.
After analyzing its network, LTD showed the company that by better managing its supplier base and reducing inventory it could scale back the size of the facility, thereby saving money on capital expenditure while also building more efficiency into the supply chain.
This example further exposes a common misconception about 4PLs: that they simply manage 3PL providers. While this is often true, such contrived definitions fail to address what lead logistics providers are truly capable of accomplishing, Craig suggests.
“Reducing freight costs by 10 percent is not a value proposition, or at best is a weak one. Improving inventory turns by 30 percent or increasing market share by three points are strong value propositions,” he says.
The 4PL process, therefore, thrives on taking businesses to the next level of supply chain complexity, or even to emerging offshore logistics markets.
Eaton’s 4PL network design has served to accomplish both. While the industrial manufacturer outlined specific roles and expectations for its LLPs, it has similarly let them take the lead where appropriate and necessary.
For example, leveraging CEVA’s resources helped Eaton generate synergies between existing operations within Asia, and facilitate further growth in the region—which is exponentially more difficult in countries such as China that present considerable cultural and business differences.
“A lead logistics provider with local experience knows how to find the right providers and deal with customs requirements,” says Tap.
Targeting Growth Opportunities
Eaton’s partnership with CEVA also facilitates developing connections with the 3PL’s partners in Asia, which enables Eaton to more easily target, then integrate, business growth opportunities.
“We are just getting started by gathering data in Asia. We want to build our Asian network correctly from the outset,” says Hegewald. “Assimilation has been easier because we work with partners. More importantly, we find efficiencies that help us meet our business acquisition strategy when we connect our LLPs with new acquisitions.”
CEVA’s resources and capabilities in Asia—predominantly in China—were important considerations during Eaton’s due diligence process.
So was CEVA’s ability to create end-to-end visibility through its Matrix IT system and related control tower functionality in Singapore, which serves as the nerve center for CEVA’s operations.
Companies often seek a 4PL partner to push logistics targets down the chain. “By appointing a lead provider, the responsibility to achieve savings or improve quality shifts to that provider,” explains Tap.
But as with any outsourcing initiative, the stakes are equally high when relinquishing control to a third party—especially when the responsibility amounts to managing a company’s entire global supply chain.
The notion of a 4PL arrangement can be troublesome for companies, especially when analyzing costs, says Ritchie. The layering of profit for multiple providers may seem ominous for the outsourcer; and for the service provider, it stresses the importance of bird-dogging strategic value to mitigate these concerns.
“We need to ensure the services we offer and the service providers we manage are right for the present and the future,” says Ritchie.
Companies also worry that once they partner with an LLP they inexorably lose leverage over their operations. For Eaton, however, this has not been the case. The company maintains robust relationship management processes to communicate needs and make sure LLPs are compliant, and uses both qualitative and quantitative metrics to ensure its LLPs are acting in its best interests.
This also allows Eaton to facilitate bi-directional communication between and among its partners to share best practices and streamline its network.
It also has the flexibility to manage and dictate protocol where necessary.
“In North America, for example, Eaton maintains important, long-standing relationships with LTL carriers, and we have assigned these contracts to our LLPs. This is not the case for our truckload, rail, and ocean freight. But if we have volume, and decide to hang on to a contract, we can,” says Hegewald.
Third-party logistics providers are not without their own concerns about 4PL relationships, especially if a competitor is managing their operations for a customer.
4PLs can hold 3PLs accountable for their performance, and theoretically, businesses can use this oversight to benchmark their outsourcing partnerships. In this way, 4PLs may very well drive and dictate a 3PL’s value proposition—perhaps more so than logistics service providers want to admit.
As a result, the new, emerging 4PL dynamic requires 3PLs to develop closer, more collaborative partnerships with both their customers and their peers.
“Some 3PLs see this as a positive shift, because they understand how the services they provide fit into the buyer’s strategic and tactical activities. Others view the change negatively because they only focus on containers, truckloads, and pallets,” says LTD’s Craig.
Market demands inevitably compel 3PLs to reevaluate and reconsider strategies that can push their value proposition forward to meet the needs of cost-conscious customers. Many companies in the transportation, warehousing, and IT sectors have developed value-added services that go well beyond the scope of their core business platforms to attract and secure long-term customer contracts.
But for a growing number of 3PLs, “value-added service” is the value proposition; these providers have to look elsewhere to create opportunities for shippers to grow their businesses and streamline their supply chains.
“Moving forward, I hope to see continued focus on the shipper rather than the 4PL,” says Ritchie. “We have to continually create economic value for shippers. If that means introducing other service providers into the mix, then that’s what we need to do.”
If Ritchie’s forecast is accurate, then customer expectations of 3PL capabilities may very well fill the 4PL niche in the future—a reality that is certainly true in some cases today.
But companies have also voiced concern about conflicting interests between 3PLs acting as LLPs among their own competitors and logistics service providers opting to leverage their own assets and connections to serve a customer’s needs.
Some of these doubts have opened the door for non-asset-based consulting firms to capitalize on this market. But Tap doesn’t see this as a major impediment down the road.
“Mechanisms exist to protect the interest of customers. Also, providers are often faced with situations where they act as a main contractor, as well as subcontractor on certain projects. It is in the best interest of all market parties to act professionally in these situations because we’re likely to meet again,” he advises.
Others are less optimistic that 3PLs and consultants have the objectivity or resources necessary to handle companies’ evolving LLP demands.
“It is not clear where the new LLPs/4PLs will come from,” says Craig. “Large consulting firms do not always possess real-world operating experience managing global supply chains; many 3PLs do not offer the breadth of e-SCM experience from the buyer’s side.
“It is uncertain where shippers will turn—to the ‘usual suspects’ or by building relationships with a new type of provider.”
Craig’s critique and prediction may be partial. But it does raise the question of whether the 4PL niche holds potential for a special type of non-asset-based service provider, or whether market growth creates a schism between 4PL and LLP expectations—and perhaps new definitions and roles for each.
“4PL providers need to add a lot of value to justify the extra costs,” notes Tap. “Companies that carefully select one or a few lead providers and make the right contractual arrangements to protect their interests—including gain share programs and continuous benchmarking—will get the best value for their money.”
While these questions are probing, their answers lie in the decisions global companies make as they push their supply chains to new extremes.
“Most companies ultimately define relationships with their LLPs on their business models and what they want to accomplish with their supply chain strategies,” says Hegewald.
In other words, observes Ritchie, “it’s not about the 4PL.”