Logistics and Business Strategies Comentary
Views of the Logistics Integrator
Major topics at the recent Council of Logistics Management (CLM) annual meeting included the role, positioning, and trends within the logistics service provider industry. While the sessions used various terms, Third Party Provider (3PL), Lead Logistics Provider (LLP), Fourth Party Provider (4PL), and Logistics Integrator, the question concerning the differences and similarities remains. The sessions of interest ranged from the keynote by Mike Eskew, CEO of United Parcel Service to a number of sessions on tracks. The sessions described the types of business models being used, industry trends, and an outlook from the financial markets as well. These sessions offered a number of perspectives regarding the future of the service providers. This review attempts to synthesize observations from these sessions in terms of definitions, requirements, trends, and ongoing issues.
Definitions
It continues to be apparent that there is no consistent definition regarding the capabilities and services provided particularly for LLP, 4PL, and logistics integrators. The presentation by Benjamin Gordon segments the industry by: 1) Air/Ocean; 2) Asset-based transportation; 3) Value-added Warehouse; 4) Non-asset-based surface transportation; and 5) Software. While this perspective demonstrated some interesting ownership trends, it doesn’t offer much direction in terms of service integration. A more institutional perspective was offered by Peter Magill of KPMG Transportation & Distribution. He identified three types of 4PL arrangements. The first arrangement is centered on single shipper with a strategic partnership between it and a logistics service provider at the core. The initial conceptualization of Vector SCM by General Motors illustrates this model. The second is a more expansive relationship as the 4PL entity becomes an industry platform and competes for other supply chain management business within a sector. The industry exchange portals created by the automotive, chemical, and electronic industries illustrate this concept. The third type involves a wider array of service providers establishing partnerships such maintenance firms with transport companies and finance institutions that want to fund the industry. It appears that the Transplace.com collaboration fits into this category. Another perspective evident at CLM were the consulting and software providers positioning themselves to analyze and coordinate supply chain design and flow. While this capability was often offered as a one-time service, supply chain refinements are dynamic so it requires an ongoing coordinating relationship. Such a service offering would provide consulting and software providers with an ongoing stream of revenue.
It remains clear that there is no common definition as many service and information providers are maneuvering to make sure that they can be included. It is also clear that managers continue to be confused about the 4PL, LLP, and Logistics Integrator terminology as well as the potential benefits from these relationships. While the historical focus has been on the management of assets such as facilities, vehicles, and inventory, the shift for 4PL and Logistics Integrators is gradually toward the collection, coordination, and management of information leaving asset management for the 3PLs.
Requirements
Just as the definition is not clear, determining the service requirements for a 4PL or Logistics Integrator is not clear either. A pattern is beginning to emerge, however, based on the Seventh Annual 3PL Study provided by John Langley et al. They summarized the role of the 3PL to include: 1) Resource provider; 2) Resource manager; 3) Problem solver; 4) Transportation Strategist; 5) Distribution Strategist; 6) Supply Chain Strategist; and 7) Orchestrator. While the first two will likely remain the role of 3PL and service providers, the later five will migrate somewhat toward the 4PL or Logistics Integrator. On a limited scale, the Problem Solver and Transportation Strategist roles will also remain with the 3PL providers.
To operationalize these roles, 4PL and Logistics Integrators generally have five characteristics. First, while the differentiation is not absolute, it appears that there is a preference for non-asset based Logistics Integrators. This is a trend continued from the concern regarding the independence of 3PLs controlled by asset-based providers. The desire of 4PL to coordinate a larger percentage of firm volume makes asset independence more desirable. Second, a pre-requisite capability of the 4PL or Logistics Integrator is the multi-firm data warehouse tracking order and shipment history and anticipating future requirements. The ability to effectively collect and synthesize the data from multiple shippers or clients represents a critical asset for the Logistics Integrator. While this requirement is not conceptually difficult to achieve, the practical issues of collecting, cleaning, and synthesizing requirements and shipment data from multiple sources is substantial. Third, 4PL and Logistics Integrators must have access to sophisticated analysis and decision support tools. The focus in the past has been toward logistics and supply chain network analysis tools. This requirement will continue but the new differentiator will be the capability for dynamic supply chain analysis. Dynamic analysis considers the week-to-week or month-to-month changes in requirements and capacity and suggests supply chain refinements to efficiently respond to the changes. Fourth, 4PL and Logistics Integrators must develop and maintain relationships with logistics service providers. This includes the ability to effectively exchange data and develop common consistent performance measures across a wide range of service suppliers. Finally, a major differentiator between 3PLs and Logistics Integrators will be the nature of the expertise. Logistics Integrators will require individuals with expertise closer to consultants than operations managers and service providers. Like consultants, Integrators must be able to complete thorough analyses and conceptualize new strategic alternatives. Unlike consultants, however, Integrators must be able to coordinate the implementation and operationalization of the strategy. The development and maintenance of this unique combination of skills with enough critical mass will continue to be one of the major challenges of Logistics Integrators.
Trends
The CLM sessions suggested four trends that will direct and promote the growth of the 4PL and Logistics Integrator market. The first is a continued movement toward outsourcing non-core activities. Many firms, including some the Fortune 500, have determined that supply chain analysis and coordination is outside their core competency. They do, however, maintain supply chain strategy expertise. Developing and maintaining the data warehouse, tools, and expertise is difficult for a firm when operational experience is critical for advancement. Obtaining the broad range of operational experience required for promotion means individuals must move from analytical to operational positions rapidly so it is difficult for firms to maintain expertise in these non-core areas such as supply chain design and coordination.
| The CLM sessions suggested four trends that will direct and promote the growth of the 4PL and Logistics Integrator market. |
The second is substantial consolidation in the logistics service provider industry. The recent acquisitions across modes and geographies by firms such as Danzas, Exel, and UPS Logistics creates logistics service providers with broader scope and capabilities. Benjamin Gordon reported that in the long-term, most logistics services providers will face the following choices:
While the consolidate trends are apparent, the plans for integration are not. While consolidation brings the corporate and physical resources of the 3PLs together, there is still much work to develop integrated information and analysis systems. It is here that the firms with comprehensive information architectures or substantial information resources will continue to have an advantage. In an era of increasingly consolidated service suppliers, 4PLs or Logistics Integrators may provide an effective means of service supplier management and coordination.
The third is the trend by some Fortune 50 organizations to not wait and develop their own 4PL or Logistics Integrator. The recent creation of Vector SCM by General Motors and a similar move by Nortel establishes carrier and 3PL independent 4PLs with substantial volume and resulting clout. In the case of Vector SCM, GM has delegated the responsibility for the design, coordination, and management for all inbound and outbound logistics. It is anticipated that Vector will control (U.S.) $6 billion of GM’s logistics spend which represents 10 percent of the entire outsourced logistics industry to date. While the arrangement has demonstrated significant benefits, there are still concerns regarding the independence and transferability of the concept. However, since such arrangements with organizations the size of GM and Nortel facilitate a higher degree of collaboration and motivation, they will be interesting to watch to determine the potential of the Logistics Integrator.
The fourth trend is in response to client firm globalization. As firms extend to global marketing and operations, they are increasingly demanding service providers and coordinators who operate globally as well. Shippers want service providers and coordinators capable of providing visibility and coordination for global movements. The CLM presentations reviewed some of the recent acquisitions and suggested that there will be many more to provide modal and geographic scope.
The sessions continue to predict substantial growth in the 3PL and Logistics Integrator industry with increasing consolidation by major players.
Ongoing Issues
While the trends are reasonably apparent, there were still two issues that merit additional discussion and documentation. Specifically, there was limited material describing the value proposition behind 4PL or Logistics Integrators and few examples of its effective application. The value proposition of the Logistics Integrator is difficult to describe and communicate as the benefits are typically longer term and difficult to document. While the 3PL firms typically sell their benefits in terms of expertise and economies of scale and scope, the Logistics Integrator has to sell the benefits of inter-firm information synthesis and coordination of operations. The benefits are typically achieved only when looking at aggregate movement for a number of organizations. The actual benefits may even only be available through collaboration with other firms including competitors. While shipments of competitors often ride on the same equipment at random, there is still some concern when it is done by design. Individual organizations can only see their benefits indirectly through rebates or end-of-year dividends but is difficult to observe or comprehend the extent in the short-term.
The second and related issue is the relatively few examples of successful application of the Logistics Integrator concept. Since the concept is not easy to communicate and sell, there are few firms that are willing to risk its application. The limited number of exceptions are the Logistics Integrators created by General Motors and Nortel where the firm is both large enough to benefit and can motivate its use. These applications are beginning to demonstrate results but there has been limited documentation and presentation. It is likely that the result will provide the basis for future CLM presentations.
The CLM Conference substantially broadened the exposure of the 4PL and Logistics Integrator concept through a wide variety of presentations. While these presentations provide some foundation in terms of definitions and requirements, a more thorough discussion of the successes are still needed.