UPS LOGISTICS AND TO MOVE TOWARDS 4PL- OR NOT? INTRODUCTION The fourth party log
ID: 344532 • Letter: U
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UPS LOGISTICS AND TO MOVE TOWARDS 4PL- OR NOT? INTRODUCTION The fourth party logistics service provider (4PL) participates in supply chain coordination instead of just providing operational logistics and fulfillment services, like a traditional third party logistics provider (3PL) would. The implementation of a 4PL model required a major transition for UPS, which has its heritage in express and physical logistics services, towards a more integral involvement in customers supply chains, with a greater impact on customer supply chain performance and strategy. Example UPS customer relations such as with Cisco Systems show how the potential of a 4PL approach for logistics service providers lies in areas such as: increasing value add to customers, strengthening customer relations and escaping the drive towards commoditization of logistics services. The question is however, how feasible this model is in the longer term, especially when factoring in the perspective of the manufacturer and the existence of alternative candidates for outsourcing supply chain coordination, including consultants and contract manufacturers. Further to that the question is how the migration from a 3PL to a 4PL concept impacts the transaction economics and relationship coordination requirements for both the provider and the client. INDUSTRY ENVIRONMENT AND BUSINESS MODEL CONTEXT Logistics service providers have been keen on contributing to innovations in their client's supply chain for some time now and they have been expanding service offerings for example through the creation of 4PL offerings. The 4PL model essentially elevates the 3PL to a coordinator of the flow of goods, not just an operator in the physical movement of goods This is seen by 3PLs as a method for not only increasing revenues but also, more importantly, as a method to contribute to offering higher value added activities in the supply chain than the warehousing and transport services traditionally offered. The market for these traditional services may still be growing, it is however, increasingly crowed with service providers increasingly offering cut-throat rates, an indicator of commoditization of the service. The 3PL model is also asset-intensive which in a price sensitive market further challenges return on investments and financial performance. The 4PL model is far less asset intensive as it focused more on coordination, rather than just operating assets in service of the customer (see also Bumstead and Cannons, 2002)Explanation / Answer
- Moving to 4PL strategy (from 3PL) is particularly lucrative for 3PL companies. The move allows them to transition from a merely execution and operational role to a more strategic partner role. By being a 4PL partner to a manufacturer/client the logistics company bonds a stronger relationship and can be virtually indispensable. On the other hand 3PL partners are constantly in the risk of being replaced by competitors. They have less say in operation of the clients (except for negotiating pricing). The operation is considerably more asset intensive.
- The relationship between the parties are modified upon a 4PL partnership. It moves towards more of a partnership/consulting relationship rather than client/vendor relationship. Of course this means that the client is required to relinquish certain control and decision making on their logistics operation and the vendor acquires that control.
Financially, it may be beneficial for both the parties as the cost for client could reduce and the expertise of logistics could increase by the intervention of 4PL company. At the same time, the 4PL company has additional revenue source through the client.
The case has listed the coordination requirements in four phases (A-D). The first phase is to disintegrate their supply chain model and reinvent a new model. Secondly the 4PL company begins interacting with other internal teams to prepare themselves better and build a new model. Thirdly, the details are laid out and integration plans are made. Lastly (phase D) products and services are created and operation begins. Coordination between both the parties are required during all these phases. In addition, there may be requirement in modifying IT systems, policies, practices as well. All these activities require coordination.
- Some of the criteria a customer may use to evaluate 4PL are
- For the above parameters, a 3PL company could fare well only for the scope and service level. However, a 4PL company with its background in 3PL will do much better. The success criteria for 4PL organizations is not only to have asset driven logistics solution but to have external knowledge of the industry, ability to provide consulting services, making strategic decision on supply chain and add value to the clients.
- In longer run 4PL strategies will bode well for both the parties over 3PL. 4PL is not only about supply chain management but also about taking over certain responsibilities from the client. This makes the client more dependent on the services rendered.
The manufacturers on the other hand may have to look at policies. Due to increased coordination and collaboration, there is a possibility of security related issues and IP related issues. In addition, the new modus operandi of working also warrants policy changes.
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