1/15/03
Finding
a Place for Logistics Management
Compiled
by:
Erik Kruse, SCRC
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What
are 3PLs and 4PLs? Why are companies outsourcing
logistics management to them?
The acronyms for Third Party Logistics (3PL) and
Fourth Party Logistics (4PL) are commonly used
to describe providers of outsourced logistics
management functions. ‘3PL’ is a term
that has been around for a while. ‘4PL’
is a newer term that has come about more recently.
What is 3PL
Third Party Logistics (3PL) is the management
of logistic services beyond transportation. These
logistic services may include storage, transshipment
and value added services. 3PL may also involve
the use of subcontractors (1). Some examples of
3PL providers include Menlo Worldwide, Ryder Logistics,
Fed Ex Supply Chain, UPS Supply Chain Solutions,
GATX Logistics, Exel and Schneider Logistics.
Click to see Inbound
Logistics’ Top 100 3PL Providers.
Why Has the 3PL Market Grown
The 3PL segment has exhibited market growth. Because
the nation has been experiencing a down economy,
some have said the growth of 3PLs is countercyclical.
But to jump to the conclusion that the 3PL segment
automatically grows when the overall economy shrinks,
or vice versa, is to oversimplify the cause of
the growth. Some other factors may have played
a role in the growth of the 3PL market (2):
| • |
A greater complexity in logistics management
functions resulting from increased acceptance
of inbound logistics practices |
| • |
Improved 3PL performance - especially at examining
relationships prior to contract, leading to
a higher success rate and increased willingness
to outsource |
| • |
A
phenomenon labeled “why buy the cow if
the milk is free?” - describes the idea
that many companies are turning to the 3PLs
to get the latest logistics technology instead
of purchasing it themselves, receiving it
as part of a package, or paying a usage fee |
| • |
A phenomenon labeled “scope creep”
- describes the idea that customers gradually
reshape the 3PL’s mission. If handled
correctly, this can lead to a high level of
organic growth within the market segment |
| • |
Branching
out into short-term consulting jobs |
| • |
Reselling
logistics IT solutions without having 3PL
contracts |
What is 4PL
Fourth Party Logistics (4PL) are sometimes called
“lead logistics providers.” It is the
integration of all companies involved along the
supply chain. It is the planning, steering and controlling
of all logistic procedures by one service provider
with long-term strategic objectives. In other words,
the goal of 4PL is to achieve benefits beyond the
one-time operating cost reductions and asset transfers
that are gained from a traditional outsourcing relationship.
4PLs manage other 3PLs and sometimes the 3PLs owned
by their parent companies. Examples of 4PLs include
Kuchne & Nagel, Schneider Logistics, UPS Logistics,
Ryder Logistics, and Vector SCM (3)
Vector SCM is a joint venture between GM and CNF,
Inc. in which GM owns 20 percent. It was formed
in December of 2000 and is the largest 4PL to date.
CNF is compensated for its 80 percent share through
a privately negotiated gain sharing formula. Vector
presents GM with case studies outlining expected
savings and receives their share once GM has audited
and quantified the results.
Why
Has the 4PL Market Grown
Factors contributing to 3PL segment growth are
related to growth of the 4PL. By definition, the
success of the 4PL depends on the existence of
the 3PL. In order for 4PLs to exist, they must
perform better than the 3PLs and their benefits
must exceed any inefficiency caused by adding
another level of management. However, a 4PL has
a distinct advantage over a 3PL.
According to Dr. John H. Langley, University
of Tennessee, the areas where 4PLs are generally
expected to be more competent than 3PLs are as
follows:
| • |
Managing
the activities of more than one 3PL - There
are both operational and strategic elements
to this |
| • |
Managing
the availability and utilization of knowledge
- This is similar to the way a legal counsel
would make a business person aware of the
latest legal developments impacting the business |
| • |
Managing
information technology |
3PL’s success factor no. 4, labeled “scope
creep phenomenon,” has paved the way for the
4PL. The breadth of the 4PL’s scope is such
that Biondo’s idea should be rephrased to reflect
the fact that the expectations companies have of
the provider are now more in-line with the capabilities
of the 4PL.
References:
(1)
Hoffman, Kurt. August, 2000. Just
What is 4PL Anyway? SupplyChainBrain.com
(2) Biondo, Keith. July, 2002. Strange
But True. Inbound Logistics.com.
(3) Ambruster, William. June, 2002. 4PL. JoC WEEK.
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