The needs and expectations of manufacturers and retailers for their logistics partners have changed significantly over the years, and confusion and misconceptions remain in the marketplace concerning what third-party logistics providers (3PLs) and fourth party logistics providers (4PLs) are and the services they offer. What are some of those misconceptions? What defines a successful 4PL-customer relationship today? Is going the 4PL route a one-way street?
What is a 4PL?
I started our discussion by asking Matt to cut through some of the confusing notions about 4PLs and define what they are and what they do for their customers. Matt explained that, “Third party logistics providers originally came about because shippers were frustrated dealing with hundreds or even thousands of suppliers. 3PLs bundled those relationships and consolidated logistics into one provider. 4PLs are an extension of that model going beyond physical logistics to add the elements of Procurement, IT and Finance.”
Matt says there are four disciplines that 4PLs typically provide that used to be done internally by customers. These include:
- Procurement: establishing relationships with suppliers and holding the contracts on behalf of the customer.
- IT: setting a single backbone for the customer to replace disparate feeds with often non-standard data formats into a single view of the data.
- Operations: while scheduling still takes place at the 3PL level, alerting is used by the 4PL to uncover issues and take proactive action to resolve them in real time.
- Finance: freight bill validation, audit, and payment.
Why Choose the 4PL Model?
Matt notes that most companies look to outsource to a logistics provider because they do not view logistics as a core competency; their core competencies are product development, manufacturing, or other discipline that defines their value proposition. Outsourcing to a partner whose core competency is logistics therefore makes sense.
More recently IT services have risen to the forefront as companies look for a single view of their logistics operations through centralized Business Intelligence, Predictive Analytics, and Visibility applications. For example, if a shipment doesn’t clear customs by a specific time or a shipment doesn’t arrive at a cross-dock by a specified time, alerts are generated so someone can take immediate action.
Over time, as this information accumulates, you can start forecasting how the logistics operations should run. “Now you know reliably which aspects of the supply chain are working well and which ones aren’t,” says Matt. “That leads to areas such as asset management — where should my inventory be and how much should I have because I know I have reliability in that lane? Or what size should my warehouse be and where should it be located? Eventually that can lead to optimization of the whole network.”
No Two 4PL Relationships Are Alike
One thing that keeps some companies from pursuing a 4PL relationship is the fear that doing so is like turning over the keys to the kingdom. Companies fear they will lose all control of their operations. Matt says nothing could be further from the truth. He says companies should approach a 4PL relationship as a menu of services. Each company will select from a long list of services based on what best complements their core competencies, goals, and objectives. And these relationships tend to evolve over time as circumstances, requirements, and objectives change. This includes reversibility so companies can bring certain processes back in house as appropriate.
What Do Customers Look for in a 4PL Partner?
As discussed earlier, companies choose to go the 4PL route because logistics is not their core competency. But what specifically are they looking for a 4PL to do for them? Matt provides six main areas where 4PLs offer real advantages. I encourage you to watch the episode for all the details, where Matt also discusses how the need for innovation might lead companies to outsource certain functions to a 4PL, and some of the underlying commitments companies should make in order to produce successful 4PL partnerships and the questions they should ask to uncover the potential value a 4PL can bring them.