LTD Management
Logistics & Supply Chain Management Consulting Global Solutions That Work
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4PL - IMPORTANT ELEMENT TO SUCCESSFULLY MANAGING OUTSOURCING AND 3PLS

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Retailers, distributors and manufacturers look to 3PLs to outsource some part of their supply chain. The choice of 3PLs is broad as are the potential logistics areas to use them are. Yet despite the attention, many client/3PL relationships are not successful. There are many reasons that the relationships do not work. It can turn on expectations by either party, changing requirements, whether the use is strategic or tactical, perceptions of 3PLs, industry involved, position of the buyer in his industry, and the difficulty of the solution sought.

Much of the disappointment arises from needing supply chain solutions to manage the outsourcing of the supply chain process. Most 3PLs are task or functional players and are not process facilitators nor supply chain practitioners. This difference between what is sought and the method employed to achieve it is not subtle or minor. 3PLs are not supply chain service firms. Their primary focus is freight or warehousing with nominal interest in supply chain management to the point that it generates freight or warehousing opportunities. This is not a harsh assessment. It merely establishes the framework as to the 3PLs role, capability, capacity and why using them in supply chain efforts may not achieve the deliverables sought by outsourcing buyers.

The issue exists for both domestic and international supply chains. However it is especially true for international with its greater complexity, longer cycle time, more significant impact on the buyer and his company, extent of understanding and experience within buyer's company, and a variety of risks and their mitigation.

The situation opens the opportunity for 4PLs. 4PLs differ from 3PLs in four points:

  1. Neutral. The 4PL is not part of a larger logistics service provider. This contrasts with 3PLs who are part of a parent company that provides warehouse, forwarding, transport or other services.

    Neutrality means objectivity. The 3PL uses the services of the parent company in his offering to customers, whether it fits the needs. A 4PL is an independent who will work with the buyer to design, implement and manage supply chain solutions that meet the client's needs.
  2. Supply chain management. 4PLs are supply chain management service providers; 3PLs are logistics service providers. Supply chain management includes logistics services, the same ones that 3PLs offer, and how each of these services, including the 3PL, interacts to provide a total supply chain service. 4PLs understand build plans, supplier performance, demand planning, inventory velocity and how all those fit into supply chain management. That bundled capability is about moving products from suppliers to customers, whether that is in stores or to customer warehouses in a timely, accurate, complete and lean manner. Put another way, 4PLs see the forest, not just the trees.
  3. Process. 4PLs understand that supply chain management is a business process. It is crosses departments and functions; it extends beyond the corporate boundaries to customers, suppliers and logistics service providers. They also understand technology as a vital process enhancer.

    3PLs are transaction, not process, driven. They focus on the work of shipments or orders. So it is difficult for 3PLs to create a value propositions with a customer which, in turn, leads to turnover of customers and relationships.
  4. Strategic. 4PLs can work with clients to develop a supply chain strategy. They recognize market, industry, global and technology changes. They know that one approach is not effective to serve different customers and markets. 4PLs understand time-to-market and cycle time in what must be done and how it must be done. And they know that exit strategies may be needed. They do not follow-the-herd.

    A 4PL is both strategic and tactical. They can work with clients on the "big picture" and the day-to-day. 4PLs can manage the details from shipping to order picking to working on weekly buckets for production plans. Because of the strategic and tactical abilities, they recognize risks and can develop risk mitigation tools. This contrasts with 3PLs who are tactical only.

Now comes the "so what". Depending on the outsourcing requirement and desired result of the outsourcing, buyers should look to either 4PLs or 3PLs to work with them. Each brings something different to the requirement. As such, the chance of success by either can vary.

These differences mean both 4PLs and 3PLs can be part of the same buyer's effort, just in different roles. 4PLs can manage 3PLs as part of the outsourcing solution; 3PLs cannot manage 4PLs. Depending on the project and buyer specifications, the buyer or 4PL can develop the Service Level Agreement (SLA) with 3PLs. The SLA should include supply chain metrics that support the deliverables sought from the outsourcing project.

Conclusion. A buyer of outsourcing should understand their project and what is desired from it. He should understand the differences that the 4PL and the 3PL bring to it. The distinctions of each can affect the outsourcing relationship and the longevity of it. As a final comment, a firm cannot offer both 3PL and 4PL services; that is not logical.