A Fundament Shift in Supply Chain Management
Until recently, companies have been outsourcing only discrete segments of their supply chains to niche providers that specialized in activities like transportation or warehousing. A single company may have had to use numerous third-party logistics providers (3PLs) depending on how large and complex its supply chain was.
Today, however, there's a "fundamental shift" in supply chain management outsourcing, according to Romala Ravi, Program Manager, BPO Services, IDC, an IT and business research firm. For instance, companies are using suppliers from around the globe and going to offshore manufacturing because of their lower-priced labor pool. Factors like these are making logistics management more complex, and companies are finding that outsourcing single segments to different providers is not really improving their operational efficiencies. Instead, says Ravi, they are looking for providers who can link their discrete logistics segments into more comprehensive solutions that have breadth and depth as well as global reach.
Michael Dominy, Senior Analyst, Business Applications and Commerce, Yankee Group, an IT and business consultancy, explains that fourth-party logistics providers (4PL) manage the different services offered by 3PLs like transportation and warehousing. They become the single point-of-contact management interface between the customer and its 3PLs. That said, 4PLs can sometimes act as 3PLs if they offer the appropriate services, and 3PLs can act as 4PLs if they have sufficient process expertise. 4PLs typically have that process expertise while the 3PLs they manage do the actual work like transportation of goods. But pure 4PLs are rare -- most own some of their resources like warehouses and can do some of the actual work like delivery.
4PLs differentiate themselves from 3PLs, Dominy explains, by using whatever carrier or warehouse provider best meets the customer's cost and service needs -- 3PLs use their own equipment and facilities, even if they're not the most cost-effective.
Unlike 3PLs, 4PLs' professional services include benchmarking customers' current supply chain performance in areas like managing inventory, integrating their IT systems with the customer's, and importing the 4PL's experts into the customer's enterprise.
What to Look For in a 4PL
There are several things any customer should find out about a 4PL before hiring one. Here are some suggestions from Dominy of Yankee Group and Larry Stroud, liaison for National Semiconductor with its 4PL.
- Determine what type of physical assets the provider has. For instance, does it have its own fleet of trucks and airplanes as well as warehouses?
- How will the 4PL use its assets in its relationship with you? Will it use its own assets as well as those of the 3PLs it manages?
- How will the 4PL improve the functioning of your supply chain? What's its specific methodology for achieving better supply chain performance?
- How much expertise does the 4PL have in your vertical industry? Certain vertical industries require specialized expertise -- in the chemical industry, for instance, there's a lot of hazardous material handling.
- Does the 4PL have the financial strength and appropriate level of resources available to address customer issues, meet commitments, and maintain a focus on continuous improvement?
- Does the 4PL have the flexibility and willingness to develop and provide the right solution for the customer while not being limited by its own corporate goals and objectives?
- Is the 4PL able to work together and compromise with the customer when necessary to move toward best processes?
- Does the 4PL have best-in-class processes and systems to support the customer's requirements and does it have the committed resources to maintain the competitive edge?
A 4PL in Action
UPS Supply Chain Solutions (UPS SCS) is a 4PL that manages both the activities of 3PLs it subcontracts to (including UPS) as well as activities it performs itself. When it took over logistics operations from InFocus, a manufacturer of digital projectors and displays, it assumed responsibility for in-bound logistics governing order submission in three regions -- the Americas (from Kentucky), Europe/Middle East/Africa (from the Netherlands) and Asian Pacific (from Singapore). As a result, says George Gomes, Director of Global Logistics, about 95% of its logistics operation flows through Supply Chain Solutions, which gives InFocus a single real-time global view of all supply chain activities from its Oracle 11.i ERP system.
On the outbound logistics side, he says, UPS SCS takes on order fulfillment of all InFocus parts and forward stocking for its repair centers around the world. UPS SCS manages 3PLs -- like transportation company Jabil in Europe. But because it does all technology repairs in its Kentucky center, it acts as a 3PL there. Also for outbound logistics, Gomes says InFocus can leverage the UPS stores it acquired with its purchase of Mailboxes Etc. "Now we have 4,800 brick-and-mortar storefronts around the world that we can leverage as part of our [oubound] logistics for speed in getting repairs back to the customer and return product back to our vendors," he says. Customers and vendors can now pick up repaired equipment and returned product at locations convenient to them. And InFocus has to deal with only UPS SCS as the transportation, so there are fewer handoffs and delays among multiple 3PLs.
For outbound freight, Gomes says UPS SCS facilities give InFocus the "presence and the perfect location." The supplier's distribution centers are located a lot closer to inFocus' customer base and ship-to points because 70% of UPS SCS' ship-to locations are east of the Mississippi, points out Gomes of SCS.
InFocus requires UPS' scalability and flexibility because it will be offering a low-cost large-format display aimed at the retail and consumer channel. That, says Gomes, will drive up volume of shipments that InFocus could never handle on its own in-house. "We don't have that nimbleness given the way we do things in-house today," he says, "and that's one of their main advantages."
What's more, says Gomes, UPS SCS has a consulting arm called Professional Services, Inc. that helped InFocus assess its current flow of transactions and make some recommendations based on best-in-class practices in the industry.
UPS SCS has also benchmarked InFocus' supply chain performance and improved it according to key metrics. It also automated and expedited its inventory tracking.
Think of 4PLs as controlling, and sometimes owning, the tracks on which 3PL trains run. The trains do the lion's share of the storage and transportation, but their performance is simplified and optimized by 4PL employees throwing the switches at critical junctures to send the trains on the quickest routes. Without them, handoffs of cars and navigation of routes would be substantially more cumbersome and inefficient. By these means, customers get faster delivery at less cost and deal with a single vendor instead of dozens. In other words, when you outsource with a 4PL, you keep it simple. What's not to like about that?
Lessons from the Outsourcing Journal:
- 4PLs let you outsource management of supply chain activities like transportation and warehousing to one company. The result is better business processes and lower costs.
- As a single point of contact, 4PLs manage services offered by 3PLs like transportation and warehousing.
- 4PLs can act as 3PLs if they offer the right services, and 3PLs can act as 4PLs if they have the right process expertise.
- 4PLs can also benchmark customers' current supply chain performance and suggest improvements.