LTD Management
Logistics & Supply Chain Management Consulting Solutions That Work
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OUTSOURCING - 4PL VS 3PL

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. 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. Creation of a 3PL 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.

4PLs. 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. Much on 4PLs discusses technology. Technology is not THE answer; it is part of the answer. It is one element of success of process, people and technology. 4PLs see the process and what is required to make it succeed.

4PL's combine process, technology and process to manage. The 4PL is a Business Process Outsourcing, 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.

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.

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.

A successful 4PL should have both the strategic and tactical capabilities. He should have real world logistics experience, especially on the "shipper"/customer side. Experience lets you see real issues and hidden agendas that are present. They also give you the ability to develop the process, people and technology that are needed because they have "been there, done that". They understand meeting the needs of their clients because they have managed and been responsible for logistics.

A 4PL, with real world supply chain experience, can present a way for customers to take control of their supply chains. 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.

3PL vs 4PL. When it comes to outsourcing, there are three questions and underlying issues. One, do you outsource a function versus outsource a process? 3PLs target the function. They want to handle containers/shipments/freight, not the transport management process, for example. The true need is the process, which is what the 4PL targets. Is there really a process in place--or a series of standalone transactions? What is the present process? How does it work? Where does it fail? Where are there gaps? Where are there redundancies? The supply chain process crosses organizational lines. It runs horizontal in a vertical organization.

Two, do you outsource work/tasks or do you outsource managing? Much outsourcing is work related. Handle warehousing. Handle shipments. Not manage them. This matter is part of the next evolution of outsourcing and where the 3PL will have to migrate-and where the 4PL is already positioned.

Three, the outsource service provider, to truly meet the needs of his customer, should be neutral. 4PLs should be neutral if they are to manage the process. 3PLs, especially those which are asset-based struggle to be neutral. 3PLs which seek to push shipments through their transport contracts or through their warehouses are not neutral.

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.

The 4PL opportunity exists because 3PLs failed to meet the real logistics/supply chain requirements of customers. There will not be a "model" (or cookie cutter) for the 4PL. After all, he knows to customize to the needs of each customer.

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.