4PLs: The next generation for supply chain outsourcing?

By Tom Foster -- Logistics Management, 4/1/1999

Just when we were getting used to that ungainly term, third-party logistics, and its equally awkward acronym, 3PL, the consultants have coined a new tongue twister for us--fourth-party logistics, or 4PL. The consultants haven't just introduced this new term. The consultants are the 4PLs. Basically, a number of big consulting firms are saying that neither shippers nor their 3PLs are capable of making supply chain management work on their own. Only consultants, acting as 4PLs, have the expertise to manage the resources, the technology, and the processes.

The 4PLs allow that the 3PLs have superior expertise in transportation and warehousing. But, they argue, these operational tasks only provide one-time reductions. According to the 4PLs, their 3PL cousins cannot deliver ongoing supply chain savings and efficiencies because they lack the optimal combination of technology, warehousing capabilities, and transportation service. The 4PL, on the other hand, is free to find the best of breed in each category. Therefore, the 4PL is in the best position to integrate the various logistics services across the entire supply chain.

Many 3PLs and some shippers have derided this notion as unworkable. The fact is, however, the consultants already have established a major role in logistics outsourcing that comes close to what they now are calling fourth-party logistics. Large shippers, for example, frequently hire consultants to review proposals from 3PLs, handle bids, and ultimately select the 3PLs. Consultants are brought in to help align business processes with supply chain plans. They usually are the parties that select supply chain technology, as well as implement it. The only role that consultants have not assumed already is actually managing the logistics providers and operating the supply chain itself. The question then becomes, who can better manage 3PLs and the supply chain function: consultants or managers at the shipper organization?

The knee-jerk reaction from most shippers would be that their managers have to be in control. After all, the shipper should know the most about its own suppliers, customers, and business needs. The shipper--not the 4PL--has the internal controls to implement new plans and technologies, as well as the authority to direct its logistics providers. The shipper, therefore, has to run the supply chain.

Yet in truth, most logistics outsourcing has not really delivered the sizable improvements in customer service, inventory levels, and profitability that were promised when the third-party revolution started. The improvements that have been delivered are measured in terms of reduced operating costs, not in terms of major strategic advantage.

So if shippers and 3PLs have not demonstrated impressive results with logistics outsourcing, are they the ones that should manage an entire supply chain? Similarly, do shippers or 3PLs have enough expertise in information technology, which supports all supply chain systems?

These are questions that are going to be addressed over the next few years, and there most certainly will be more than one correct answer. Many shippers will conclude that they lack the skills necessary to operate a supply chain, and they will gladly turn over the function to a 4PL. Other shippers will not even entertain the notion of outsourcing such a key management role.

Whether or not 4PLs ever become the dominant management force in the supply chain and logistics industries will depend on two factors: 1) Whether consultants can successfully make the transition from strategic planners to managers and implementers, and 2) Whether shippers, with their 3PL allies, can develop a wider range of technological and management skills to run a supply chain more effectively.

What is at stake is the future job content for today's logistics managers. Will the profession grow into a higher-level supply chain management role? Or will tomorrow's logistics managers end up reporting to the consultants who used to work for them?

Tom Foster, the former editorial director of Distribution Magazine, has been involved with the logistics industry for 25 years. Today, he is president of Logistics International, a consulting and communications firm based in Westtown, Pa. He can be reached at (610) 399-1728. His e-mail address is trafoster@earthlink.net.