The fourth way

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Fourth party logistics (4PL) has been the subject of much debate over recent years and the industry is currently trying to assess whether shippers and providers are ready to embrace this client-driven collaborative solution.

The concept of 4PL was introduced by Accenture in 1996 and over the past decade there has been much speculation as to how the notion could be put into practice and whether potential providers could ever live up to the original definition. Back then, Accenture defined a 4PL provider as a ‘supply chain integrator that assembles and manages the resources, capabilities and technology of its own organisation with those of complementary service providers to deliver a comprehensive supply chain solution’. A strong emphasis was placed on the provider being a single point of contact for the shipper whilst becoming an integrated part of their business to the point of representing their logistics department. Being non-asset based was also regarded as a fundamental feature of a 4PL provider as this would, in theory, ensure its neutrality in selecting partners for the shipper.

But the evolution of the logistics market has led to a widespread feeling that the term 4PL has lost some of its marketing buzz. Accenture itself claims that changing market circumstances have led to an updated version of this concept re-emerging and only now coming to fruition. As a result, 4PL is now sometimes now referred to as ‘managed supply chain operations’.

A deeper understanding
Whilst it is true that a non-asset based company is likely to be more neutral and independent in selecting partners for the customers, the reality is that due to the scope of a 4PL partnership, in many cases a customer who has been working closely with a 3PL provider might decide to deepen this relationship, depending on the provider’s capabilities. The 3PL may then insource capabilities and skills in the areas where these are most needed and it is likely that they will use their own assets at some level. It is of course possible for a 3PL provider to take over the 4PL role completely and thus manage a series of external partners including 3PLs. However, this assumption was validated by specifying that the 3PL is much more likely to spin-off its own 4PL division which, if successful, can become an independent business. The issue of neutrality is still there, but in a reduced form.

There is no standard model for 4PL that exists in the form of a value proposition which then determines the capabilities that must be in place for a specific solution to be delivered. For example, 4PL can also be referred to as ‘transformational outsourcing’, involving as it does radical changes and transformational process enhancements to the customer’s supply chain and internal structure. This model is based on the notion of co-sourcing, which dervives from the best-of-breed approach whereby the best capabilities of various companies are selected and managed by an integrator.

The logistics industry in Europe is being too cautious in its forecasts for the 4PL market. Despite claims that it is a good theoretical concept but not feasible in practical terms, the 4PL market is likely to take off, probably with variations on the original definition. Overall, the rise of 4PL is likely to impact all stakeholders in the industry and is expected to change the face of the European logistics market.

Significant growth
During this decade, the European 4PL market is expected to see significant growth, going from about E5bn (in 2002) to E13bn in 2010, particularly in the high-tech/electronics, automotive and chemical industries. The industry’s structure is likely to be characterised by joint ventures and strategic spin-offs based on 4PL models. Strong consolidation and globalisation trends are likely to result in the market being dominated by larger players.

By 2010, strong sector expertise should ensure in-depth understanding of customers’ business needs and is expected to enable suppliers to provide valuedriven strategic solutions.

The period between 2008 and 2012 will be decisive in determining the success of potential 4PLs. One might assume that a proportion of 4PL providers will go back to focusing on 3PL business or further consolidate, much as is happening at the moment. A small proportion of 3PLs are likely to go out of business due to increasing pressure on margins which, in turn, will reduce the percentage of 4PL penetration.

After 2012, the 4PL market is expected to rise gradually. Once 4PL providers have proved themselves in their own industry they will be able to increase their businesses and customer base.

‘3PL plus’ stage
A large number of candidate 4PL providers are still at the ‘3PL plus’ stage and need to improve their offerings before they can deliver a true 4PL service. However, over the next ten years, 4PL models are likely to be significantly improved and will become closer to the original definition. This will result from the practical assessment of the feasibility of 4PL models and improved practices together with a gradual move to more global, solution-driven and strategic solutions.

So far, examples of 4PL partnerships or organisations have mainly derived from joint ventures and spin-offs from existing logistics-based and consultancy businesses, particularly 3PLs. In many cases a large proportion of staff working in the 4PL company have been recruited from within the customer’s organisation, specifically from the logistics department. This type of set-up can be a useful way to involve customers more closely in the partnership and avoid them feeling alienated or even threatened by the 4PL entity.

The 4PL market will continue to be based on strategic alliances and collaboration between key organisations. Strong competition is also expected to come from the customers themselves, in particular the ones operating 4PL type models internally and who may even decide to spin-off a separate division. Polarisation will no doubt come about between assetbased and non-asset-based organisations which will both have potential to become 4PL providers. It is expected that more specialised services will still be required over the next decade, so niche operations will also continue to grow, particularly in transportation and warehousing.

Proactive role
Research shows that a majority of customers are aware that the concept of 4PL rests on a consultative approach and that a successful partnership is, therefore, able to offer higher and greater value. There is still concern about cost and, of course, a lack of evidence proving the model’s feasibility. At the same time, as with suppliers, many customers feel that the very term ‘4PL’ has lost its buzz and this may add to misconceptions. In general, customers expect their suppliers to be proactive in putting forward 4PL solutions and even though they themselves may be ready for them, they can be disappointed at suppliers’ lack of initiative and have doubts about their capabilities. Finally, due to the complexity and involvement of a 4PL partnership, potential customers are more likely to select suppliers that have similarities to themselves in scope and long-term goals.

For customers considering 4PL as an option, price is one criterion used to select partners. However, it does not represent a key deterrent. Research has shown that a large number of shippers are considering the option of either choosing an external partner or operating 4PL internally. Not all suppliers regard 4PL as a business option and nor do all customers. The pressure is on for potential providers to come forward and introduce customerdriven 4PL solutions.

4PL providers can either come from consulting backgrounds or logistics-based businesses, depending on the customer’s needs. As a result, leadership can come from a number of directions and over the next decade this is likely to be established by multiple types of participants. Moreover, current trends have shown that a lot of the services and solutions offered by providers, for example 3PLs, is likely to overlap into what is offered by supply chain consultancies or IT consultancies.

The European market for 4PL currently still contains only a limited number of organisations. Some of these position themselves in the market as fully operating 4PL providers but the greater number offer tailored solutions that come under a 4PL banner and are part of their business portfolio.

At present, this market is dominated by joint ventures such as Vector SCM or spin-offs from existing logistics providers such as Kuehne & Nagel Lead Logistics Solutions. There are currently less than 10 key market participants and this number is expected to rise to around 15 over the next decade.

Shippers are likely to be among the main competitors with the 4PL providers, particularly in the retail sector and OEMs. Due to an historic unwillingness to outsource their logistics activities, these industries have been judged most likely to spin-off 4PL divisions from activities previously done inhouse, which is likely to create incremental revenue and represent separate businesses.

The rise of 4PL offers suppliers access to a higher margin and value-added business. As with most emerging sectors, current 4PL providers have so far stimulated the market with specific solutions. It is likely that in the future there will be no standard model for 4PL; however, the latter is likely to come about in the form of a value proposition supported by a number of capabilities designed to provide ultimate benefit to the customer.

Trust and credibility
Over the next few years, 4PL partnerships will be based on the further development of existing relationships between customers and preferred suppliers. This is because the foundations of trust and credibility between the parties involved are likely to already be in place and working together will be easier. A 4PL relationship is inadvisable as a first option at this point. Until such a relationship has become acceptable to both parties and its benefits have been proved, suppliers should pursue their original mode of contact with customers.

A number of 4PL contracts are currently under discussion and now is the ideal time for potential providers to take the initiative and introduce 4PLdriven solutions. Although the real test for many providers is likely to be in the long-term, the time is right to gain awareness of market trends and take advantage of the opportunities that are arising.

Cecilia Cabodi is an analyst with Frost & Sullivan specialising in the 4pl sector.

To receive more information about the areas covered in the study email [email protected]

Frost & Sullivan is organising a 4PL Theme Based Workshop on the 22nd and 23rd of April in London. The theme of this event will be ‘Opportunities in fourth party logistics’.

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