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Outsourcing is the buzzword today. It has become a readily accepted means of increasing performance of non-core supply chain activities. Outsourcing allows organizations to focus on their core competencies, to provide a differentiated level of customer service, and to take advantage of greater operational flexibility.
While outsourcing often provides solid one-time cost reductions, it does not deliver the continuous ongoing savings that businesses desire.
The next significant evolution outsourcing in the context of supply chain management has emerged, and it is called Fourth Party Logistics or 4PL.
Getting to Know….
The Fourth Party Logistics provider is a supply chain integrator that assembles and manages the resources, capabilities, and technology of its own organization with those of complementary service providers to deliver a comprehensive supply chain solution.
Central to the 4PLs' success is the "best of breed" approach to providing services to a client. The development of 4PL solutions leverages the capabilities of 3PLs, technology service providers, and business process managers to provide the client organization with greater cross-functional integration and broader operational autonomy.
For example, AFL, which was till now focusing on 3PL, has now diversified into 4PL solution segment positioning itself as a company that will manage the 3PL service provides.
Providing Comprehensive Supply Chain Solutions…
First key distinction between 4PL and current approaches to supply chain is that former should be considered in the broader context of improvements across the entire supply chain, which includes three phases of work: Reinvention, Transformation, and Execution.
- At the highest level of the 4PL solution is Reinvention. This leverages traditional supply chain management consulting skills, aligning business strategy with supply chain strategy, to creatively redesign and integrate the supply chains of the participants.
- Reinvention, however, requires Transformation. Transformation efforts focus on specific supply chain functions, including sales and operations planning, distribution management, procurement strategy, customer support, and supply chain technology. Transformation leverages strategic thought, deep analysis, process redesign, organizational change management, and technology to integrate the client's supply chain activities and processes.
- At the tactical level is Execution. A 4PL provider takes on operational responsibility for multiple supply chain functions and processes. The scope goes well beyond traditional transportation management and warehouse operations logistics outsourcing.
To be successful, a 4PL leverages a full range of service providers (3PLs, IT providers, contract logistics providers, call centres, etc.) along with the capabilities of the client and its supply chain partners. The 4PL acts as a single point of interface with the client organization and provides the management of multiple service providers through a teaming partnership or an alliance.
Creating Value Across the Supply Chain …
The second key distinction between 4PL and current approaches to supply chain outsourcing is 4PL's unique ability to deliver value to client organizations across the entire supply chain.
The 4PL approaches the concept of supply chain integration through four key drivers of value:
- Increased revenue,
- Operating cost reduction,
- Working capital reduction, and
- Fixed capital reduction.
Revenue growth is driven by enhanced product quality, product availability and improved customer service. Experience has shown that customer service measures, such as stockouts can be improved in excess of 100%.
Operating-cost reductions of up to 15% are driven through operational efficiencies, process enhancements and procurement savings. Savings are achieved through the complete outsourcing of the supply chain function - not just components - and economies of scale. Synchronization of supply chain activities by supply chain participants leads to operating-cost reductions and a lower cost of goods sold, due to integration of processes, and improved planning and execution of supply chain activities.
Working-capital reductions of up to 30% can be realized through inventory reductions and reduced "order to cash" cycle times. The proactive use of technology to manage order and SKU movement throughout the pipeline minimizes the amount of inventory required, and increases item availability to reduce cycle times.
Fixed-capital reductions result from capital asset transfer and enhanced asset utilization. The 4PL's logistics service providers can take ownership of physical assets, thus freeing up assets of the customer. This allows the client organization to invest in its core competencies (i.e., research and design, product development, sales and marketing), rather than in bricks and mortar.
Behind the Scenes…
Although 4PL solutions are likely to be customized to suit the needs of a particular client or situation, the following operating models conceptually portray how 4PL relationships are configured.
- A Synergy Plus operating model: This relies on a working relationship between the 4PL organization and a third-party service provider. In this model, a 4PL and 3PL form a partnership to market supply chain solutions that capitalize on the capabilities and market reach of both organizations.
- The Solution Integrator model: This is the core 4PL model. In this operating model, the 4PL operates and manages a comprehensive supply chain solution for a single client. The Solution Integrator arrangement encompasses the resources, capabilities, and technology of the 4PL and complementary service providers to provide a comprehensive integrated supply chain solution.
- The Industry Innovator model: This is the most complex operating model. Within this model, a 4PL organization develops and runs a supply chain solution for multiple industry players with a focus on synchronization and collaboration.
The Future…
Fourth Party Logistics is the next generation of supply chain outsourcing. Supply chain activities are information-rich, complex and increasingly global. At the same time, technology and e-enabled capabilities are racing ahead. To enable a firm to capture all the benefits of supply chain collaboration and synchronization, a new generation of integration must be deployed, which is currently beyond the capabilities of traditional sourcing methods.
A 4PL arrangement has the potential to provide an organization with breakthrough supply chain performance. It is distinct from current approaches to supply chain outsourcing, because it delivers measurable, sustainable value across the full breadth of the supply chain. Getting into this relationship with a 4PL begins a journey in which a firm and the 4PL will come together to create an evolving, mutually beneficial, long-term relationship.
As more and more companies outsource their logistics operations from HP to Compaq, from Mc Donald's to Walwart, and as more and more players enter the market from Ferdal Express to Geologistics and close home from Gati and Bluedart, the 4PL services are here to stay. With the consultants like McKinsey and Company and Andersen Consultancy also joining the bandwagon by setting up their own supply-chain practice cells, the market is poised to grow, and as with the current rate of growth of 50% over the last few years, it is expected to become a Rs 500 cr. industry in two years from current level of Rs 300 cr.
Given such a scenario the need for an integrated solution provider is indispensable and this is what will make the 4PL provider a winner in the evolving business paradigms.
*Contributed by -
'Spectrum' - Research & Consultancy Group (Team: Ashish, Deepak, Lalit, Mohit, Pankaj)
MBA (IB) - II Year Students
Indian Institute Of Foreign Trade, New Delhi.
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