LTD Management
Logistics & Supply Chain Management Consulting Global Solutions That Work

4PL VERSUS 3PL-A BUSINESS PROCESS OUTSOURCING OPTION FOR INTERNATIONAL SUPPLY CHAIN MANAGEMENT

World Wide Shipping
December/January 2003
By THOMAS CRAIG
President LTD Management
www.ltdmgmt.com

Outsourcing is a viable option for companies. Businesses outsource for many and varied reasons-increase shareholder value, reduce costs, business transformation, improve operations, overcome lack of internal capabilities, keep up with competitors, gain competitive advantage, improve capabilities, increase sales, improve service, reduce inventory, increase inventory velocity and turns, mitigate capital investment, improve cash flow, turn fixed costs into variable costs and other benefits, both tangible and intangible.

It is used for almost every part of the business-mostly what a company defines as non-core functions-- accounting, legal, human resources, information technology, manufacturing, sales, sourcing and logistics / supply chain management. Note, non-core versus core differs by company and industry. Non-core can be important and critical to a company, but does not define the company and set it apart from competitors. To the maximum, and if done correctly, outsourcing and business process outsourcing can be used to create a viable virtual corporation.

3PLs. 3PLs have led the way in logistics outsourcing. Drawing on its core business, whether it be forwarding, trucking or warehousing, they moved into providing other services for customers. It presented a way for a commodity-service logistics provider to move into higher margin, bundled services.

Customers, anxious to reduce costs, want what 3PLs have to offer. The potential market opportunity for outsourced logistics service providers, whether domestic, international and/or global is huge.

But something has happened on the yellow-brick road. The reasons are varied, but the bottom line is many have failed at their own business transformation. Some 3PLs have not moved past their core commodity service to become true multi-service providers. Or international 3PLs have not understood how to provide domestic services; or domestic ones have not succeeded at venturing into international logistics services.

Others have failed to differentiate themselves against the competition. Certain 3PLs have not done a good job positioning and defining themselves in the marketplace. Or the parent company has not given them the resources, especially sales and sales leads, to penetrate even their existing customers. And, sundry have commoditized their 3PL service, as a result undoing the very purpose of their 3PL. These setbacks have slowed down the growth of some 3PLs in terms of both customer retention, especially, and new customers. Fragmentation of the 3PL sector reflects both the uncertainty of how 3PLs view themselves and the diversity of customer needs.

As a result, customers have had to compare apples and oranges in their RFP replies. Shippers share some accountability with an overemphasis on cost reduction as the key metric and without a clear definition of their requirements for services they need and how it will all work within their company. They looked for silver bullets and quick answers to complex needs.

Business Process Outsourcing and the 4PL. Business process outsourcing is traditional outsourcing and more. Outsourcing is often taking a set of work, tasks, responsibilities or functions and transferring them to an outside service provider. Business Processing Outsourcing (BPO) involves that and more. A BPO service provider brings a different perspective, knowledge, experience and technology to the existing function and can and will work with the firm to reengineer it into an improved or new process. It is an outcome-based result, not just a pure cost reduction issue. The new process will interact or be integrated into the company in a way that can bring value, even bottom line and shareholder benefits, to the client.

Into the service vacuum created by 3PLs, the 4PL has emerged. Using a 4PL, fourth party logistics service provider, is different than the traditional 3PL. The 4PL is a BPO provider. This lead logistics provider will bring value and a reengineered approach to the customer's need. A 4PL is neutral and will manage the logistics process, regardless of what carriers, forwarders or warehouses are used. The 4PL can and will even manage 3PLs that a customer uses.

This new international logistics service provider will develop solutions tailored to meet the unique and special needs of each customer, without regard to a parent company's service offerings and operations. The firm understands the key to success with process, people and technology.

A good 4PL will have the shipper perspective and experience in what he does and offers to prospective customers. That means a better understanding of the complexity of the customer's requirements, present viable solutions and to have customer satisfaction and retention.

The firm sees the relationship, not a chunk of freight. Instead the BPO provider seeks incentives and metrics to define the relationship and collaborates with each customer as to goals and outcomes. A 4PL wants to position itself as an extension of and part of its customer. This BPO provider recognizes the role of and need for information technology in managing the process.

4PL Example for Asia Inbound Supply Chain Management. Asia to the U.S. is the dominant trade lane. One of the more troublesome, complex logistics issues is the inbound supply chain from Asia. How do you manage the critical supply chain and suppliers who are thousands of miles away, in different countries and in different time zones?

Managing this vital part of the supply chain can be frustrating and time consuming. Vendors shipping dates, expediting and changing orders, giving direction to consolidators or 3PLs as to delivery requirement are just some of the challenges dealt with. It is hardly a seamless process. It can be more of dealing with a series of fires rather than a process.

Asian suppliers often look for cheap freight rates without necessarily understanding the supply chain and order-to-delivery time demands of customers. This is a difficult situation for U.S. companies with such a critical, complex and dynamic part of their business. The time difference limits communications to emails, faxes and brief phone calls made at night by one of the two parties.

Easily pulling inventory, managing purchase orders, managing suppliers far off, managing ocean carriers or freight forwarders of 3PLs far off, the domestic movement of the containers in the U.S. and tracking the entire movement of each purchase order can be difficult. Emails and faxes are awkward ways to manage and to track purchase orders, to manage suppliers and to manage a vital part of the total supply chain. Delays and supply chain failures can create chaos for U.S. companies.

The international logistics BPO provider will work with the customer to understand his specific issues and needs, from the broad scope of all suppliers to key ones. Critical points will be defined. The 4PL will redesign the process. Focus can be put on specific suppliers or carriers/forwarders to understand and correct service deficiencies. They will develop performance metrics. The collaborative effort will solve problems and provide measures, and exception reporting, for on-time, complete, accurate supplier and shipping performance. The process is now proactive, not reactive.

A 4PL, with real world experience dealing in Asia, can present a way for customers to take control of their inbound supply chains. This BPO firm will provide each customer with the technology, the people and the process to manage purchase orders, suppliers and shipments in Asia. They can structure the relationship and the process in a way that best meets the requirements of the customer, rather than the customer having to accept what the outsourcing provider has to offer.

Carriers and some forwarders and 3PLs offer online portals to track shipments. Portals are nice, but they require that the shipper know the container number or bill of lading number. The shipper is trying to manage the purchase order; that is what must be tracked and the status and progress known. The logistics or sourcing person does not want to flip-flop and deal with container or bill of lading numbers. Besides, dealing with containers is an after fact. It is a result of managing the order and the supplier; it is the effect, not the cause.

Portals or similar do not meet the specific needs of customers; they meet the needs of the carriers or forwarders/3PLs. Carriers and forwarders focus on the shipment, the container. Filling vessels, fulfilling service contracts and revenue maximization are what carriers and forwarders look at. None of those help the customer to manage purchase orders. Now there is an unsatisfied customer need for a 4PL to meet.

This international supply chain service provider has the tools, an online, state-of-the art purchase order system--leading-edge information technology. It is used to fill out purchase orders online and send them to suppliers. The orders will have the full details as to items, color, size, style, SKU and whatever else delineates what is being purchased. The purchase order system will have multilanguage screens for the supplier. Suppliers are communicated with using the online system for updates, changes and other needs. All of this is done through the system rather than dealing with separate emails, spreadsheets and other methods that can have process disconnects.
With existing systems, ERP, WMS and others, including legacy systems, the 4PL's IT can work with various technologies. That permits interface and integration between the many trading partners involved. Data can be exchanged in different ways, from direct input to screens on the Internet, EDI, XML or flat files.

The lead logistics provider will also have logistics personnel in Asia, in the same time zone and speaking the same language as the customer's suppliers. They will work to see that each supplier understands the delivery, shipping and supply chain requirements of the customer. They will work with suppliers to timely meet the specific needs of each customer. That is a complete capability with both online connectivity and people in Asia.

This international logistics BPO firm will work with the ocean carriers, consolidators, forwarders and airfreight forwarders or 3PL that the customer uses. A customer does not have to change carriers or forwarders to use the 4PLs capabilities and services. This is a key distinguisher of a 4PL from a 3PL. The BPO logistics service provider will manage the entire Asia inbound supply chain, including the present transport firms presently used. This is part of the 4PLs ability to tailor and to manage to meet the needs of each customer.

The 4PL will, in turn, give the customer visibility to purchase orders, even at the item level detail. As the orders progress into becoming shipments, that information is updated for the customer to access online. The customer can track shipments, still needing only the purchase order numbers, not bill of lading or container numbers. The online tracking capability would include EDI updates as the container travels from the U.S. port to the final destination.

The new international logistics provider has developed and provided a way to manage orders, manage inventory, manage suppliers, manage shipments and manage international logistics. By using information technology and logistics persons in Asia, the 4PL has a unique way to manage the Asia inbound supply chain. That approach creates real shareholder value and real bottom line benefit for the 4PL's customers. It has transformed the need into a solution. And it does it because it is tailored to meet the requirements of the 4PL's customer, as compared to the 3PL who is meeting the needs of the 3PL's parent.

Conclusion. Some 3PLs have not fully stepped up to meet the exact needs of customers. Some have become too focused on "managing" tasks, not processes and on serving the parent company's core business, and have missed opportunities to present value. As a result, 4PLs have become alternatives for business process outsourcing. These new BPO logistics service providers enable firms to manage a critical part of their supply chain by providing visibility and integration across multiple enterprises. They manage with the three key elements of process, people and technology. Users of a 4PL can focus on core competencies and better manage and utilize company assets and resources, as to inventory and personnel.