Supply chain logistics - a discipline that stretches from filling the manufacturing hopper with parts to delivering finished goods to customers - is the last frontier of cost savings.
Compared with the sometimes intangible benefits of e-business, conserving warehouse space, reducing truck rolls, avoiding shipment delays, and the like have an immediate impact on the bottom line.
But squeezing out inefficiencies from logistics is a specialised endeavour that requires a clear overview of every link in the chain. Many companies are looking for outside help in managing a part of their business that frequently falls outside their core competency.
In most cases, enterprises still use regional third-party logistics providers (3PLs) to manage everything from transportation to final assembly of products, while keeping control and co-ordination inside the enterprise. But as companies worldwide outsource even their manufacturing to China and Vietnam, supply chains and distribution channels are more and more dispersed, with many more companies participating.
Enterprises are, increasingly turning to the fourth-party logistics provider (4PL) to manage and run complex logistics operations. Trademarked by Andersen Consulting (now Accenture) in 1996, the term 4PL has come to refer to large integrators that provide full-service logistics solutions - including information management and co-ordination of multiple 3PLs.
According to Accenture, the "radical" view of 4PL can extend as far as outsourcing the entire supply chain.
The rise of 4PLs stems in part from the fact that outsourcing is now a global endeavour. The management and integration of dispersed logistics players - each bound by local variations in language, currency, trade law, and so on - is an enormous undertaking. In hiring a 4PL, an enterprise must find a partner that understands its special logistics needs, one that can share in the risks and rewards of reinventing a significant portion of its business.
The core value offered by 4PLs is in managing and integrating the flow of information between hundreds of outsourced supply chain partners and the enterprises that employ them.
"4PLs manage other 3PLs and transportation carriers to execute the work and oversee the solution design and performance of those entities that work for them," said Tom McKenna, senior vice president of logistics engineering at Penske Logistics.
Like the old game of trust, where one player is willing to fall backward, trusting that his partner will catch him, senior management at the enterprise places its trust in the 4PL. When an enterprise lacks the supply chain expertise to manage a global logistics operation, there may be little choice.
4PLs bring a layer of standardisation to supply chain logistics management. "In the world of logistics, standardisation is not fully evolved because it is based on transactions initiated by many suppliers," said Kushal Dutta, vice president of e-services for Optum, a supply-chain event management software company. "Nobody runs their supply chain the same way, and each has a different way to deal with business processes."
An enterprise customer might sit comfortably in front of a 4PL logistics dashboard that tracks shipments around the world. But typically, much manual labour goes on behind the scenes before a 4PL can give a customer easy insight into the status of material.
"If you are IT savvy like UPS, you can send through XML," Dutta said. "But if you are a freight forwarder in China, you might be using a web browser front end and be sending a flat file."
Integration solutions are still ad hoc and industry specific, according to McKenna, but integration is less a technical issue about the way companies connect with each other than a matter of business process synchronisation.
"Passing the data is easy. It is the synchronisation of the data content, the timing of the data as it relates to what the data means," McKenna said. And managing such complexity is precisely the 4PL value proposition.
Running the trains on time
Lucent Technologies has outsourced much of its manufacturing, going down the 4PL route to reduce its order cycle time along with the number of warehouses and staging areas. It went from in-house management of 1,700 3PLs to a mere two 4PLs.
A Lucent network switch typically consists of dozens of sub-assemblies, the manufacture of which is contracted out. Ultimately, thousands of parts, often from China and Europe, must be brought to a single location at a specific time and assembled into a finished product.
"We did an introspection of our own core competencies and developed a vision of what we do well and don't do well," said Anthony Damelio, director of supply chain logistics at Lucent.
With so many high-end network equipment manufacturers redefining their core value as software and services, it is no surprise that Lucent chose the total logistics outsourcing solution offered by 4PLs.
"We use Ryder in North America and UPS Global Logistics in China and EMEA (Europe Middle East and Asia) to leverage their global resources," he said.
Damelio identified Optum's TradeStream as best-of-breed logistics software and insisted that its 4PLs deploy it before signing on with them. TradeStream's suite is used to assign, track, and trace material from a carrier.
"Our LLPs [4PLs] ensure that the carriers have connectivity into their systems. The LLPs have the responsibility to collect that information, by fax, EDI, HTML, and pull that back up and close the order for us. We know from a visibility perspective that the order was tendered and delivered," said Damelio.
Visibility and the bottom line
Visibility across multiple levels of the logistics chain is a key promise 4PLs make to their customers. According to Optum's Dutta, visibility buys customers time, options, and better fulfilment rates. That translates directly to lower costs, quicker time to market, and more and faster revenues.
Visibility identifies delayed shipments and takes the appropriate corrective action. This can avoid such costly manoeuvres as, say, hiring a second carrier to process an order or buying a duplicate component at a higher price, only to end up with two identical components arriving at the same time in the same location.
Increased visibility has a direct effect on the "financial plumbing" of a company, according to one industry analyst. "It impacts cash flow, order to cash, inventory levels. All the things that a chief financial officer looks at," said Adrian Gonzales, director of the Logistics Executive Council at the ARC Advisory Group.
To ensure that 4PLs work, the hot ticket in contracting with a 4PL is the gain share agreement. In a gain share, the 4PL signs an agreement to save the customer a set percentage of current costs and agrees to forfeit some proportional amount if that percentage is not met. If, on the other hand, the savings are greater, the 4PL earns a higher fee.
Sharing the risks and rewards of increased logistics efficiencies highlights the integral relationship between 4PLs and the enterprises they serve. But even though the job of the 4PL is, in many ways, to make the logistics problem go away, customers should think twice before giving total control to a 4PL provider, Gonzalez advised.
The ultimate responsibility for getting the job done still resides within the enterprise. When a company outsources its logistics, it must retain control over logistics data, which is exactly what Lucent's Damelio had in mind when he insisted that its 4PLs use its TradeStream logistics software solution.
"They [4PLs] are not the saviour on the white horse," he said. "It's a partnership and a collaborative effort. There is no off-the-shelf solution."
Ephraim Schwartz writes for InfoWorld
This was first published in November 2003