Who's in charge around here?

To achieve maximum benefits from logistics outsourcing, someone has to manage the relationship with the third-party provider. But who should be in the manager's seat: the shipper, the third party, or consultants?

By Thomas A Foster -- Logistics Management, 6/1/1999

Many companies that use third-party providers to help manage their logistics operations are well satisfied with the results. Daimler-Chrysler's Mopar Division, for example, found that using a third-party provider allowed it to gain control of volumes while cutting costs during a period of extraordinary sales growth.

"Our supply chain was severely tested in 1994 and 1995, when a 60-percent sales increase pushed our forecasting and logistics abilities to the limit," says Materials Manager Ann Tomlanovich. "We were ready for growth, but it was coming so fast that it was difficult to forecast. Caliber Logistics came through with solutions to deal with the surges in volume, and at the same time, they saved us money on the inbound transportation," she recalls. "In those moments, all of the meetings and all of the management efforts to integrate that 3PL with our operations paid off."

Tomlanovich is not alone in her upbeat assessment of 3PLs' capabilities. Based on financial results for a number of third parties, it appears that other major companies are feeling good enough about 3PLs to increase their use of outsourcing. For example, Ryder Integrated Logistics, the largest 3PL, has seen its revenues grow from $1 billion to $1.8 billion in less than five years. Another industry leader, GATX Logistics, now has more than 600 clients and boasts annual revenues of $300 million and an annual growth rate of between 5 and 10 percent.

Despite these favorable indicators, there are doubters who think that the 3PLs have nearly reached the limit of what they can do to improve shippers' logistics and supply chain performance. A new model for managing third-party logistics services--one that involves yet another party to the relationship--is beginning to take shape. It is being welcomed by some and roundly rejected by others.

Supply Chain Integrators Needed?

The leading proponent of this new model is Andersen Consulting, whose consultants believe it is time for a radically different approach to managing 3PLs. Andersen has developed a concept that it calls "Fourth Party Logistics" (4PL) to respond to this perceived need. The consulting firm has gone so far as to trademark this term, which it defines as "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."

Although Andersen owns the term 4PL, other consultants are starting to provide similar services under such names as "lead logistics provider (LLP)" or general contractor. Regardless of what it calls itself, this kind of provider can deliver comprehensive supply chain solutions and value through its ability to affect the entire supply chain, says Douglas Bade, until recently an associate partner in Andersen Consulting's Supply Chain Practice and now a partner at Deloitte Consulting.

Bade says the 4PL concept is developing because traditional approaches to managing 3PLs are not meeting an important marketplace need. "3PLs lack the strategic expertise and technologies required to operate across the entire supply chain and to truly integrate supply chain processes," he insists. "The 3PLs' strengths are transportation and warehousing, and their outsourcing operations can provide one-time reductions. They cannot deliver continuous, ongoing savings."

To support his contention that 4PLs can provide greater value for their clients, Bade points to the expertise major consultants have in implementing technology. "When a company thinks about new technology, we are always brought in at the very beginning, either to provide our own solutions or to integrate solutions from another provider [into the client's operations]," he says. "3PLs simply are not players in this part of the industry."

He also believes that a 3PL is unlikely to offer the best combination of technology, warehousing, and transportation services, either on its own or through subcontractors with which it has a close relationship. The 4PL, on the other hand, is free to find the "best of breed" provider in each category and can integrate these different logistics services to produce an optimal approach, he says.

Not All Theory

The 4PL provider that Bade describes is no longer just a theoretical concept: Andersen Consulting is involved in two successful 4PL operations in Europe. For seven years, Andersen and Fiat's farm-implement subsidiary, New Holland, have operated a joint venture for managing service-parts logistics in Europe. Called New Holland Logistics S.P.A., the joint venture is 20 percent owned by Andersen and 80 percent owned by New Holland. New Holland contributes depots in six countries, 775 employees, capital investments, and operations-management responsibilities. Andersen, for its part, contributes management staff, information technology, and expertise in operations management and re-engineering.

The spare-parts management operation includes planning, purchasing, inventory, distribution, transportation, and customer support. Payback over the seven years has been $67 million. About two-thirds of the savings have come from operating-cost reductions, while 20 percent have come from inventory management and 15 percent from freight costs. New Holland Logistics has a 90-percent or better order-fulfillment accuracy rate.

Another 4PL operation in which Andersen plays a management role is called Connect 2020, a subsidiary of $2 billion Thames Water Utilities Ltd., which is the largest water utility in the United Kingdom. Connect 2020 was formed to provide logistics and procurement services to the utilities industry. The Thames subsidiary outsourced all of its services to ACTV, an operation that is managed and staffed by Andersen Consulting. ACTV runs the $15 million per-year operations, including procurement, order management, inventory management, and distribution management. Results to date include a 10-percent reduction in supply chain costs, a 40-percent inventory-cost reduction, and a 70-percent reduction in back orders.

The European operations are examples of what Bade calls a "solution integrator," one of three possible 4PL models Andersen has identified. These are:

- "Synergy Plus," in which the 4PL works for the 3PL and provides technologies and strategic skills that the 3PL lacks;

- "Solution Integrator," in which the 4PL works for the shipper and is the central point of contact with all of the 3PLs and other providers; and

- "Industry Innovator," in which the 4PL runs the supply chains for multiple industry players with a focus on synchronization and collaboration.

According to Bade, there are no "Industry Innovator" models in operation today, but many industries could benefit from such a solution. One of those is the pharmaceutical industry, in which manufacturers often market products through the same distributors and sales channels. Competing products usually are included in shipments to pharmacies or hospitals, so there is no competitive advantage to be found in the outbound logistics. "An industrywide 4PL approach makes sense where the physical movement of goods in the supply chain is not where the organizations expect to find competitive advantage," says Bade. Instead, the 4PL would provide greater value to all of the manufacturers' end customers, and the market-share advantage would go to companies with the best products, pricing, and marketing.

Bade expects that it will be some time before the 4PL concept gains broad acceptance, either from customers or logistics-service providers. He believes, though, that the gradual melding of the consulting and 3PL businesses already has begun and that many 3PLs are beginning to accept the 4PL concept because they see the need to form alliances that add breadth and depth to their capabilities.

An example of this alliance approach, Bade says, is the recently formed relationship between Andersen, Ryder Integrated Logistics, i2 Technologies, and IBM. "These alliances are how the third-party logistics industry is going to develop in the future. It all has to be managed, and the entity that will oversee the total supply chain solution will be a 4PL," he says.

That view is not necessarily shared by Andersen's alliance partners, though. A representative for Ryder Integrated Logistics acknowledges that such an alliance exists among these companies and that it offers a broad supply chain solution to its customers. But the representative does not consider Andersen to be the alliance's manager. "Andersen provides important strategic thinking that meshes nicely with the contributions of our technology partners, but we have always viewed ourselves as the lead logistics provider in our relationships with customers."

Who Will Own the Relationship?

Provider alliances that fit the 4PL mold may be starting to take hold in the United States, but opposition to them is likely to remain strong for some time to come. Robert Auray, president and CEO of USCO Logistics, a major third-party logistics firm, sees little reason to introduce a new entity between the customer and the 3PL. "Our management model is based on developing as much customer contact as possible," he says. "We don't need anyone getting in the way."

GATX Logistics President and CEO Joseph Nicosia takes umbrage at Bade's suggestion that 3PLs cannot be strategic partners. "Our job is not just to be a competent operational partner for our customers," says Nicosia. "We work closely with our customer to meet strategic goals." He cites a recent example, in which a customer was expanding into a new market. "The project was so secret, only a few people at the company even knew that the expansion plan existed. We were brought in by the confidential team to provide a complete supply chain strategy to make the market expansion work," he says.

Nicosia believes the 4PL trend is an attempt by consultants to extend their involvement in the 3PL market. "The consultants have done an excellent job of improving the metrics needed to manage 3PL relationships," he says. "Now they would like to be more than one-time advisors. They want to build a sustained business in the 3PL arena."

Bade acknowledges that consultants do indeed want to expand their business beyond the typical time-and-materials model of consulting services. "Ideally, we want to earn revenues from a stake in the enterprise such as the joint ventures Andersen is involved with in Europe," says Bade. "We believe so strongly in our ability to bring value to the supply chain that this sharing of the profits is how we think the relationship can work."

But Nicosia sees problems in that approach. First and foremost is cost. "The goal of third-party logistics is to take cost out of the supply chain. By adding another layer of management, that task gets harder," he says. "There is a limit to how much management you need and how much you can afford." He also questions whether consultants can offer the kind of management continuity that a third party can provide. "When we put a manager in charge of a customer relationship, that person is usually in place for the length of that relationship, which is often many years," Nicosia says. "It is vital that this manager know the customer's business as well as the customer, maybe better. The younger consultant employees who would be put in this role rarely stay with their company for more than two years. What happens to the continuity of management?"

For Auray, the issue is simply, who will own the relationship? "We see ourselves as the integrated logistics service provider, and that is how our customer views us," he says. "Our customers want to be directly involved in managing the relationship. I don't think very many customers would want a consultant in the middle of that relationship."

What do the shippers themselves think? The 4PL concept is so new in this country that few shippers have had much exposure to the idea, let alone any direct experience. Daimler-Chrysler's Ann Tomlanovich, for one, says that she is very happy with her current 3PL relationships but she will not close the door on the 4PL concept, mainly because of the growing importance of technology and communications in her company's supply chain.

"Even though we have spent a lot on re-engineering processes and new systems, we are still not linking well enough to downstream suppliers and upstream dealers," she says. "We are looking for more data visibility that goes well beyond sending forecasts and reports.

"Maybe my 3PLs can provide that efficiency," she says. "I will give them a crack at this, but maybe there is more expertise needed. Sometimes the customer wants to be dazzled. The consultants are pretty good at that."

Thomas A. Foster is a freelancer who specializes in logistics-management and supply chain issues.