What are you willing to give up?

March 15, 2005
Would using a fourth-party logistics provider (4PL) give your company a competitive edge? Reed Carr, transportation development manager with chipmaker

Would using a fourth-party logistics provider (4PL) give your company a competitive edge? Reed Carr, transportation development manager with chipmaker giant Intel Corp., thinks so.

Carr thoroughly researched and evaluated the feasibility of using the 4PL model to serve Intel's needs. His team talked to competitors and non-competing companies who were using 4PLs, read trade and industry magazines and case studies, and interviewed university professors studying the model. Intel's team found users who swore by the 4PL model, and they also inevitably found some people who swore at 4PLs due to negative experiences.

Carr interviewed logistics pros that had used 4PLs and backed off when they didn't see the anticipated results. His research found successful 4PL relationships tended to include companies or business units that lacked expertise or assets in-house.

"They didn't have IT or physical infrastructure and didn't want to invest in those areas," Carr notes. "Companies with all that in place and who considered supply chain a competitive asset were less likely to find the 4PL model desirable," he notes.

Another requirement for success in outsourcing to a 4PL is comfortable margins, according to Victor Guzman, director logistics and supply chain planning with aerospace products manufacturer Honeywell International Inc.

"It's easier to justify using the 4PL model in a growth environment where supply chain changes frequently," Guzman says.

Honeywell found a portion of its business where management could justify the 4PL model — a business unit with rapid growth and a dearth of logistics infrastructure. "We never had internal structure in that business," he explains.

The business unit has grown considerably and happily over the three years of the 4PL relationship. To ensure the partnership continues to be a positive one, Guzman added a contract manager to his staff. "That person is a transportation/ logistics manager with a supply chain background," he notes. "Not only is he a modal expert, he understands our customers' business needs as well as our products and product attributes."

In part, Guzman added the contract manager to continually answer the question: How can a 4PL justify itself? "3PLs have much the same capability without additional cost to us," Guzman says.

"For us, the 4PL sitting on top of 3PLs is the entity that ensures coordination in day-to-day execution. They also take a step back and analyze our overall activity, identifying opportunities for improvement in customer service and financial performance."

Honeywell measures day-to-day service and operating costs, Guzman notes. The company offers the 4PL financial incentives to suggest and implement projects that drive improvement in delivery and financial performance. "We pay for returns, not ideas. They benefit from ideas/projects that work," he states.

"From a company perspective, we are happy now with the relationship and the returns and performance. We continually explore where the 4PL might play a role in other parts of our business," he adds.

On an on-going basis, his team analyzes what vendors offer and looks for success stories. They also examine the basic feasibility of the 4PL model — how it will affect various metrics. And the team monitors overall satisfaction with the existing 4PL relationship.

Satisfied to keep supply chain management expertise in-house, Solectron Corp., a provider of electronic manufacturing services, took a somewhat unusual route to improving supply chain performance. Rather than using a 4PL, the high-tech supplier used its internal resources to become, in essence, a 4PL itself to its customers.

According to James Molzon, Solectron's vice president of customer fulfillment and global logistics, "In a real sense, we are a 4PL for our customers. We manage a variety of third-party service providers to bring service to customers of our manufacturing and repair operations."

For customers, Molzon's team works with select service providers and internal resources to offer value-added services such as transportation management, supply chain network design, trade compliance, reverse logistics, postponement/ configure to order, customer fulfillment, service parts management and repair services.

"The focus is on enhancing the experience for customers, optimizing the supply chain, reducing touch points, minimizing inventory and improving overall service," insists Molzon. "Customers may opt in or out."

Solectron has aggressively marketed the service to customers for six months, and is now handling approximately 10% of outbound freight. "It's growing rapidly," notes Molzon, "not necessarily because our rates are better. Rather, it's how we package the service. We look at customer location, supply base and manufacturing location with an eye to optimizing the overall supply chain."

While a few users have not invested in logistics infrastructure and view Solectron's offering as an easy way to gain expertise, the company also attracts companies with deep, sophisticated logistics capabilities, Molzon points out. "For them, it's the link back to manufacturing, for things like postponement strategy and reducing touch points. Like us, these large companies are looking to optimize overall supply chain costs," he says.

Initially, Solectron invested in logistics capability to support its own operations. Now that Molzon's team is building staff to support customers, he's adding slightly different skill sets, such as a greater concentration in supply chain design and network optimization.

General Motors Corp. sought supply chain excellence through Vector SCM, a 4PL service provider built as a joint venture between Menlo Logistics and GM. Vector SCM currently manages $5 billion of GM's annual $6 billion logistics spend.

While the handoff of logistics operations to Vector SCM is thorough, GM retains expertise in two areas — high level strategy and sourcing/procurement, explains Greg Humes, president and CEO of Vector SCM.

"We act as the nervous system within supply chain, providing design and engineering and creative solutions tied to order fulfillment, manufacturing, logistics and supply chain, end to end," Humes notes. The success of the four-year relationship may, in part, stem from the organization's hybrid board of directors — a mix of people from Menlo and GM.

Realistically, there are 4PL relationships that don't work. The most frequently heard complaint for Carr's team at Intel is that companies get a good initial return on their investment but, over time, they lose knowledge of their business. One executive interviewed admitted he doesn't have enough people to track and audit to know if the return is still a good deal. Another company interviewed saw transportation costs per unit rise while the 4PL managed that aspect of their business.

"Most companies trade logistics expertise for logistics purchasing expertise," says Carr. "They give up expertise in-house to offset the cost of a 4PL. A company must determine how much expertise to retain. Perhaps you shrink the management team from 100 to 10. You can eliminate part of the management structure but keep the ability to monitor and measure the 4PL. You have to keep a significant foot in the door," Carr insists.

In spite of some potential drawbacks, the number of companies using 4PLs and the depth of use are growing, according to Brian Hancock, general manager and vice president with lead logistics provider Schneider Logistics Inc. Their 4PL business has shown a 17% increase in revenue in the last four years, with 30% of that growth coming from existing customers.

While Hancock admits most of the cost reduction comes in the first two years of a 4PL relationship, he reports Schneider Logistics typically provides customers with 3% to 5% per year of continuing cost reduction over years three to five of the relationship.

"After five years, it's more of a positive balance sheet strategy," he says. "One customer in the automotive industry increased outbound transportation costs but saved $200 million in inventory."

Meanwhile, Carr's team used a cautious approach to adopting the 4PL model. They found only one or two areas of Intel's business where the 4PL model might work — areas with a need for high levels of customer service and data to process or labor-intensive special handling requirements.

"We could possibly outsource these areas to a 4PL, but we have not yet determined if there is a big enough advantage to go that route," concludes Carr.

Intel's team conducted its 4PL study in the first half of 2004. "We'll probably repeat it the second half of 2005," suggests Carr. It pays to keep an eye on all options.

Know the risks

Ashley Hall, global 3PL sourcing manager with Intel Corp., voices the concerns that play into a decision to use a fourthparty logistics service provider (4PL):

Loss of control. "You lose visibility into day-to-day activities. You no longer own the data."

Lack of expertise in house. "Many companies reduce logistics staff to bare bones and cannot properly manage the outsourced relationship."

Head-butting. "In many outsourced relationships, there is constant disagreement over the interpretation of metrics."

Risk associated with long-term partnerships. "It's difficult to change partners or bring the function back in house. Most companies don't begin outsourcing with an exit strategy."

A more complex world

Sixty percent of companies using third-party logistics providers (3PL) report using multiple 3PL providers, according to Robert Lieb, professor of supply chain management with Northeastern University, and co-author (with Accenture's Brooks Bentz) of a recent study, The Use of Third Party Logistics Services by Large American Manufacturers.

In past surveys, 3PL users have clearly indicated their preference for one-stop 3PL shopping. However, as potential buyers have increased in size through sales growth, mergers and acquisitions, and international expansion, the scope of service offerings and geographical coverage involved in many recent 3PL contracts has made it increasingly difficult for one provider to meet those requirements.

This makes the management of 3PL relationships more complex, and it requires effective cross-corporation management skills to realize the potential benefits of such relationships. The eventual outcome may well be the management of 3PL relationships not only across the supply chain, but across the supply chains of multiple trading partners.

Survey respondents identify the most significant development in the 3PL marketplace as the expansion of 4PL services.


General Motors Corp.

Honeywell International Inc.

Intel Corp.

Menlo Logistics

Schneider Logistics Inc. www.schneiderlogistics.com

Solectron Corp.

Vector SCM

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