The value a 4PL provider cancontribute to an organisation

Alan WinInstitute of Transport & Logistics Studies, University of Sydney,

Sydney, Australia andInstitute of Food Nutrition & Human Health, College of Science,

Massey University, Auckland, New Zealand

Abstract

Purpose – The purpose of this research is to understand the value a fourth-party logistics provider(4PL) can create within an organisation and to identify an appropriate measure of such value creation.

Design/methodology/approach – The paper presents a conceptual model that is based on researchof 4PL implementations within the alcoholic beverage industry.

Findings – This paper presents a framework by which contribution by 4PL’s to organisations mightbe valued.

Research limitations/implications – Future research may be widened to include financial andservice measures within customers and suppliers thereby considering the wider value chain for agiven commodity where a 4PL is involved in facilitating delivery of the goods or services.

Practical implications – The paper assumes that 4PL providers have the requisite skill set tomanage and deliver added value versus an in-house solution.

Originality/value – This paper offers insights into the pre-requisite conditions for a company toconsider outsourcing to a 4PL provider, the conditions/attributes that contribute to securing a 4PLrelationship, the value that can be created through use of a 4PL and a method by which to assess thecreation of value.

Keywords Value added, Distribution management, Value chain, Supply chain management

Paper type Research paper

IntroductionInterpretation of value will vary depending upon whose perspective it is assessed from.For instance, a manager within a business is looking to increase value to benefit thecompany’s shareholders, while a customer of the business is looking for value from theorganisation in perhaps terms of price, quality or social/environmental contribution.

Walters and Rainbird (2007) discuss at length research into the definition of value andgo onto explain that “value is a term frequently used but infrequently understood and ofwhich numerous interpretations exist”. Their text aptly explores the “New Economy” –New Business Models – New Approaches. Value is discussed from both the perspectiveof the consumer as the principal driver of value, and value in the context of the firm.

To understand value, it is useful to consider Porter’s (1996) suggestion that: acompany can outperform rivals only if it can establish a difference that it can preserve.It must deliver greater value to customers or create comparable value at lower cost ordo both. The arithmetic of superior profitability then follows: delivering greater valueallows a company to charge higher average unit prices; greater efficiency results inlower average costs.

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International Journal of PhysicalDistribution & Logistics ManagementVol. 38 No. 9, 2008pp. 674-684q Emerald Group Publishing Limited0960-0035DOI 10.1108/09600030810925962

Walters and Rainbird (2007) explain a “value chain” approach to value deliveryusing Figure 1.

When considering value in the context of the firm, essentially the primary objectiveof this research, Walters and Rainbird (2007) suggest that a broader perspective isneeded than that of historical accounting measures, and looks at the importance of freecash flow, notions of enterprise value, future value and the balanced scorecard, finallyexamining what role firms have in setting their own goals.

Concurrent with the development of and an appreciation of what value means to,and within an organisation there were changes occurring within the logistics serviceindustry. Primarily, there was “a radical shift from single function to multifunctionaloutsourcing. Integrated service providers began to market a range of logistics services”(Bowersox et al., 2007).

Fourth-party logistics (4PL) has emerged as the ideal solution that allowscompanies around the globe and from a diverse range of industries to have a singlepoint of accountability across both supply and demand chains. Almost 90 per cent ofthe respondents in an end-user study cited the above reason as a key driver forimplementing a 4PL strategy. Companies are gradually realising that it has becomeincreasingly important in the globalised economy to focus not on just core but alsonon-core activities such as management of a long-distance supply chain in order toremain competitive. In addition, they are turning to 4PL’s to build closer relationshipsamongst the participants along the supply chain, support cost cutting initiatives,develop the flexibility to deal with supply and demand uncertainties and ultimately tohave a positive impact on the bottom-line (Frost and Sullivan, 2005). A 4PL is looked tofor the provision of competencies relating to knowledge availability, informationtechnology, and skills in forming and sustaining successful supply chain relationships(Coyle et al., 2003).

Figure 1.

Service the value

Deliver the value

Communicate the value

Produce the value

Create the value

Identify value expectations

Product/service delivery program.Select & manage a distributornetwork to provide ‘logisticsservice’

- Availability- Frequency- Reliability

Customer advice & product development

- Customer service programInstallationOperator trainingMaintenance

- Product recall program

Reseller/distributorcommunications

- Customer/end-usercommunications

- Internal ‘customer’communications

Identify resource requirements &their ownership & location

- Assets- Processes- Capabilities

Establish stakeholder expectationsSourcing, procurement &manufacturing

Customer & market research- Market/segment volume- Customer/market ‘value’

characteristics- Competitive products- Identify & evaluate competitive

‘value delivery’ systems- Identify ‘value drivers’- Develop

value proposition

Design & development- Product/service specification- Prototype production & testing- Product modification &

development- Customer service

The value process: avalue chain approach to

value delivery

Source: Walters and Rainbird (2007)

Valuecontributed

by 4PL

675

Langley et al. (2005) looked to simplify terminology and avoid some of the confusionwithin the industry through segmenting the various business models into a two-tieredrelationship structure per Figure 2.

There is a current trend toward the involvement of 4PL providers, to help manage anumber of third-party logistics (3PLs) that may be involved with a company’soperations (Coyle et al., 2003). Frost and Sullivan (2004) note, adopting a holisticapproach, 4PL has evolved as a breakthrough supply chain solution, comprehensivelyintegrating the competencies of 3PLs providers, leading edge consulting firms andtechnology providers. Such strategic alliances leverage the skill sets, strategies,technology and global reach, which would have otherwise taken years to duplicate.

In another, more strategic role, the 4PL serves as the integrator that brings togetherthe needs of the client and the resources available through the 3PL providers, the ITproviders, and the elements of business process management (Coyle et al., 2003).

4PL management has become an integral component of many organisations “newgeneration” value chains.

As part of Langley et al.’s (2005) annual survey, they noted there is a generaldissatisfaction and confusion with the terminology. When asked if respondentsunderstood the differences between “3PL” and “4PL” providers, over 78 per cent responded“yes” or “somewhat”. When asked if the 4PL terminology is “confusing” and “ambiguous”76 per cent responded “yes” or “somewhat”. This research in itself suggests that becausethere is an admission of confusion regarding terminology there may indeed be unstatedconfusion regarding understanding of the conflicting business imperatives of a 3PL versusa 4PL which should logically preclude a single organisation offering both types of services.

In Langley et al.’s (2005) survey, respondents were asked to rate the suitability offive types of companies to offer these advanced business models. The results of this arehighlighted in Figure 3.

What is of interest is the perception that asset based 3PL’s are perhaps some of themore suited companies to elevate into providing 4PL services. The organisationobjectives of a 3PL appear contradictory to those that a 4PL might logically have. As anasset based organisation, the 3PL looks to maximise return on those assets for its ownshareholders and as such may not provide the level of independence of decision to

Figure 2.

RelationshipAttributes

RelationshipStructure

Strategic

Tactical

TraditionalOutsourcing Terms

Two-Tiered Relationship Structure

Source: Langley et al. (2005)

Partnership JointVentureValue BasedRisk SharingFew PartnersLong Term (5 + years)Common Core ValuesAlignment and Trust“Coopetition”

ContractualFixed andVariableTransactionOrientedShort Term(1 to 5 years)

Fourth-PartyLogistics Provider(4PL)

Broad supply chain expertiseDeep industry domain and consultative skillsAdvanced technology capabilityBusiness process outsourcing, beyond logisticsProject management and provider coordination3PL technology integrationInnovation and continual improvement

Traditional logistics servicesModular product offeringsFocused cost reduction and serviceimprovementOperating excellenceNiche services

Third-Party LogisticsProvider (3PL)

Logistics ServiceProvider (LSP)

Lead LogisticsProvider (LLP)

Supply ChainManager (SCM)

ServiceAttributes

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maximise value for any 4PL client organisation. 3PL’s that assume a 4PL role areunlikely to select 3PL services from other providers over their own and in commercialreality are also unlikely to be able to obtain competitive quotation from other providerseven if they were to pursue this avenue as direct competitors seldom actively pursuerequest for proposal/request for quotation’s which are managed by a competitor.A 4PL’s role is primarily to deliver value to its client organisations through resourcingwith the most competitive value adding providers at the time. This may be through theuse of a combination of one or more of: their own 4PL resources; in-house resources; asingle 3PL resource; and, or multiple 3PL resources. Indeed, it is unlikely that the 4PLwould provide all resource. Rather, a 4PL’s strength and value adding capacitygenerally lies in their ability to select and co-ordinate a pool of resource from otherfactions that creates value in excess of that which may have been created had the rolebeen managed internally within the client organisation.

Concept definitionIt is perhaps appropriate at this juncture to attempt to more accurately define what a4PL provider is. In the writer’s view:

A 4PL is an independent, singularly accountable, non asset based integrator of a clientssupply and demand chains. The 4PL’s role is to implement and manage a value creatingbusiness solution through control of time and place utilities and influence on form andpossession utilities within the client organisation. Performance and success of the 4PL’sintervention is measured as a function of value creation within the client organization.

Figure 3.

90%

80%71

2002 Responses2003 Responses2004 Responses2005 Responses

Types of Companies Best Suited to Offer 4PL Servicesa

69

57

47

13

Perc

ent o

f R

espo

nden

ts

9

22 23

16 17

b c

242725

16

41 38

Existin

g 3PL

Provid

ers

Techn

ology

Provid

ers

Web

-Bas

ed

Firms

Consu

ltants

New F

irms W

ith

Former

3PL E

xecs

70%

60%

50%

40%

30%

20%

10%

0%

Source: Langley et al. (2005)

Notes: aAll regions; bThe 2004 and 2005 survey did not have "web-basedfirms" as a category; c"New firms by former 3PL execs" was included as acategory for the first time in the 2004 survey

Valuecontributed

by 4PL

677

Study objectives and methodologyStudy objectives

. Understand the key drivers for outsourcing value chain management within anorganisation to a 4PL.

. Identify an appropriate measure of the value created/destroyed from 4PLprovider intervention.

. Provide a strategic assessment of the value that 4PL’s can contribute to anorganisation.

Methodology and research approachThis study tracks business performance of two medium sized ($100-$200 m turnoverp.a.) alcoholic beverage companies that have and/or currently utilise a 4PL provider(Middlebank Consulting Group, MCG). One company is based in New Zealand and thesecond in Australia. Both companies are part of larger international corporations.

Attributes that contribute to securing a 4PL relationshipThe following attributes were identified as important in the selection process of thesuccessful 4PL when partnering with the respective client organisations:

. Ability to manage activities of multiple 3PL providers.

. Experience in facilitating supply chain integration.

. Cost control, management and reduction.

. Will lead to reduced executive management time and expense.

. Understanding of the specific industry sector businesses which they are lookingto provide 4PL services in.

. Able to operate at operational, tactical and strategic levels.

. Demonstrated ability to coordinate day-to-day logistics and supply chainmanagement execution.

. “Single” accountability.

. Ability to coordinate and foster improved relationships within the value chain.

. Demonstrated ability to manage supply and demand uncertainty.

. Capable of “driving” process change/improvement – notably in the areas offorecasting and sales & operational planning (S&OP).

. Process “rigor”.

. Experience in managing global supply chains.

Notable company events at the time of deciding to outsource to a 4PL provider haveincluded:

. Experiencing significant growth (volume and/or brands).

. Excessive inventory coupled with average customer service levels.

. Increasing demand for supply chain related information.

. A “refocusing” of the business on core values of marketing and sales.

. Poor demand forecast accuracy.

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The need to validate 4PL intervention performanceWhile the use of 4PL continues to grow, as a service provision it never-the-less remains inrelative infancy and, therefore, it is important to validate and substantiate the performanceof such interventions. Validation can be both quantitative and qualitative in nature. As theuse of 4PL is relatively new for many organisations, there will always be both a naturalinterest in understanding, and a need to validate the use of a 4PL provider within eachclient organisation. This is logically best monitored as a function of changed value withinthe specific organisation as a result of the 4PL intervention. Clearly one of the keymanagement challenges is to identify value contribution attributable to the 4PL providerinterventions versus contribution as a result of other business drivers.

Performance measurementPerformance can be assessed by a combination of both financial and non-financialindicators. It is useful to consider:

. Inventory investment and stock turn.

. Lost sales.

. Days out of stock.

. Service level by inventory classification.

. Inventory aging.

. Customer service perception.

. Customer complaints.

. Cost of supply chain operation.

. Amount and cost of expediting.

. Effectiveness of demand forecast management.

. “Noise” within the supply chain.

Cases studiesCase 1In the first organisation, an alcoholic beverage sales & marketing organisation thatdistributed both imported and locally sourced product, the 4PL role had autonomy to:

. Design the organisations route-to-market model.

. Structure retail pricing.

. Negotiate procurement arrangements.

. Establish and manage a forecasting process.

. Purchase product.

. Negotiate and manage 3PL relationships including international freightforwarding, warehousing & physical distribution/transport.

. Manage for Customs compliance.

. Manage inventory levels.

. Service customers.

The senior 4PL executive reported directly to the Managing Director and sat as part ofthe executive management team of the organisation. Further, because of the 4PL’s

Valuecontributed

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specific skill set, several of the team were subsequently contracted to provide supportto the global organisation as it “blue printed” process design for a new ERP platform.This progressed to project managing the subsequent material management and orderto cash functionality rollout in 3 countries plus managing the global material mastercreation for 35 countries. Further projects involving identification and negotiation ofnew brand partners were also undertaken as part of the services provided. Theadditional services formed part of the value added services that the 4PL was able toprovide for this client.

Case 2The second alcoholic beverage company, while having a small relative volume and valueof locally produced product depended heavily on distributing imported product. Themajority of product is sourced on Ex Works or Free on Board terms meaning inventory istaken up in the companies books at the time of shipment which in many instances canadd up to six weeks stock to the local inventory values. Here, the 4PL was retained toprovide a solution, which is a combination of supply of specialised procurement &purchasing resource plus management of third party service providers and in-housecustomer services and warehouse resources. Reporting to the General Manager Finance& Operations this function was specifically responsible for managing:

. A forecasting process.

. Product purchasing.

. Negotiation and management of 3PL relationships including internationalfreight forwarding, contract warehousing and domestic transport.

. Customs & Australian Quarantine Inspection Service (AQIS) compliance.

. In-house warehouse.

. Inventory management.

. Customer services.

Key impact areas targeted for improvement by a 4PLGiven inventory is generally one of the larger areas of investment and company asset formost beverage companies, as 4PL’s integrate within an organisation there is inevitably aclear desire and drive to reduce or more appropriately balance the company’s investmentin this area. This, coupled with targeting improved customer service levels, is likely to bethe primary focus of a 4PL when first commencing with the client organisation. Indeed,the philosophy of MCG (a non-asset based consultancy providing 4PL services) with itstwo alcoholic beverage 4PL contracts was to focus on managing inventory by risk basedprinciples rather than the more common error based logic – in so doing, inventoryreduction was achieved while service levels were enhanced.

A second key area of focus was found to be that the 4PL created the strategicdevelopment of the companies supply chain with a view to extending/applying widervalue chain principles. This more holistic approach involved educating and adaptingthe business to the benefits of an integrated cross functional approach (rather than thesilo culture displayed in many organisations) recognising that the objective is two fold,both to deliver value to the organisation and also to position the organisation as a valuecreator within the greater value chain between point of product conception to product

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consumption. In positioning the organisation as a value creator within the greatervalue chain the reward by default is increased customer loyalty and patronage.

A further key area of focus was found to be the development of improved processcontrol. Value is created and rewarded as a result of consistency and reliability ofproduct or service delivery. Consistency and reliability are the result of clearly definedand tightly managed processes.

Research resultsCase 1As a result of global restructuring this organisation moved away from a 4PL modeland took management of the supply chain back in-house utilising a regional clustermodel. It is, therefore, possible to quantitatively access the impact of change one yearlater on performance aspects such as inventory turn. To ensure like comparisons andremove exchange variations inventory quantities for both the years precedingtermination of the 4PL contract and the first year of in-house operation were valued ata standard value, as was cost of sales for each of these periods.

Table I shows the results reflect a 1.3 stock turn deterioration or 16 per cent poorerperformance in-house, one year later than the average achieved using the services of a 4PLduring the preceding three years. This reduction in inventory turn resulted in the fundingof approximately a further $1.5 m in inventory and a consequential increase in storagecosts assuming like sales in the 2004/2005 period when compared with 2003/2004.

Days out of stock and lost sales displayed little variance between the before andafter situation change.

Further, as it has transpired, the cost of managing the supply chain functionin-house for this organisation one year later was 39 per cent more expensive than hadthey continued to utilise the 4PL. This appears to be a combination of resource costs inAustralia being higher than were the equivalent resource employed in New Zealand,higher travel costs as a result of remote management, and no longer benefiting fromthe 4PL’s ability to provide “part” resources for peak or specialized requirements and,

Quarter Stk turn Ave S/T

Actual 2001/2002 at Budget rate 2004/2005 – 4PL September 9.8December 9.4March 9.8June 8.9

Actual 2002/2003 at Budget rate 2004/2005 – 4PL September 7.2December 7.5March 8.2June 6.0

Actual 2003/2004 at Budget rate 2004/2005 – 4PL September 7.1December 10.0March 6.3June 7.2 8.1

Actual 2004/2005 at Budget rate 2004/2005 – September 6.2in-house December 7.0

March 7.2June 6.9 6.8 Table I.

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therefore, the client organization would only bare that portion of cost truly attributableto the service provided.

Case 2This organisation chooses to measure inventory as a function of “forward days cover”and compare on a moving annual total (MAT) basis. This approach levels anomalies(good and bad) and relies on a consistent performance over numerous periods to reflecta change in stock turn values.

In the year preceding the change to utilising a 4PL, this organisation achieved astock turn of 4.15 when measured on a MAT basis. The year followingimplementation of a 4PL model, stock turn had improved slightly to 4.41, a 6.3per cent improvement or approximately $0.75 m reduction in relative inventory value.While perhaps not as striking difference as Case 1, in this latter year there werefurther mitigating reasons that adversely affected performance, such as theorganisation being contracted to purchase a specific minimum volume of a keybrand regardless of the depressed local market demand thereby inflating inventoryand negatively impacting stock turn.

To date there has be no significant change in both, days out of stock or lost salesbetween the two operating models.

With this organisation one of the primary advantages of moving to the 4PL modelhas been the ability to integrate functions under a single value chain managementfocus and reporting structure, an aspect that the business had not achieved prior to thechange.

EVA as an “overall” measure of value contribution by a 4PLWhile the financial and non financial measures such as those already discussedmay be constructively used to evaluate the performance of a 4PL intervention itnever-the-less remains preferable to link performance to overall value creation for theorganisation.

Walters and Halliday (2005) discuss a number of financial performance measuresnoting that:

[. . .] performance measurement is comprised of a range of topics. Essentially, we are consideringthe effectiveness and efficiency of management decisions. Effectiveness when measured forfinancial performance includes, returns earned on total capital employed (ROCE) andshareholders’ equity (ROE). Financial efficiency measures the utilisation of corporate resourcesand these are represented by fixed assets and working capital items. Investment performanceusually reflects value generated by the business. Measures may be the conventional earnings pershare (EPS) or by price earnings ration (PER). Other ratios include the markettobook ratio (sharesissued multiplied by current share price divided by the value of the company’s assets). A positivevalue indicates that the market values the shares of the firm at a greater value than its assets andconsequently the business is seen as adding value for the shareholders. The market value added(MVA) measure does much the same. It is calculated by adding the market value of thecompany’s shares to existing debt and subtracting the capital invested in the business. Again apositive value will indicate a value generating business. MVA is arguably more future orientatedas the shares rise; theoretically, this reflects investors’ views of future prospects for the firm.

The aspect worth note is, these latter two measures, in many aspects are subjective,driven by market perception which can be significantly influenced both positively and

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negatively by timing and nature of media releases coupled with the general economicclimate. While of interest, these measures are not sufficiently absolute to be an effectiveor efficient monitoring of 4PL performance within an organisation.

Further, Walters and Halliday (2005) discuss:

[. . .] economic value added (EVA) which subtracts the cost of capital from the after-taxoperating profit for the period (cost of capital being calculated by multiplying capitalemployed by a relevant weighted cost of capital usually adjusted for industry sector risk).A positive value indicates value has been added during the period. EVA is more orientatedtoward the current period or recent past.

It is not only the profitability of a company that matters, but also the capital needed toobtain that profitability, and its cost. Thus, obtaining a good Profit & Loss result is notgood enough. The capital necessary to achieve these results needs also to be measured.Implicit is the need to monitor the cost of capital and assess performance versus thatcost. EVA is thus an objective measure that has a start point from which to make acomparison of performance within a relevant financial period (the current position).Because inventory in most organisations forms a significant portion of total assetvalue, EVA can be considered a good indicator when evaluating 4PL contribution to anorganisation.

The simplified formula is:

EVA ¼ Operating profit 2 Taxes-(Total capital employed £ Company’s cost ofcapital)

It should be noted that this is but a single viewpoint. Value contribution can come fromnon financial sources also.

Conclusions and future researchIn both cases studied the use of a 4PL has added value to the client organisations. Thisvalue has primarily been in the form of improved inventory turn and reducedinventory investment relative to annual sales. In both organisations enhanced valuechain integration was a further key benefit from application of the 4PL model.

Given the significance of inventory as an asset within most organisations it is logicalto extend any value assessment of a supply chain model, be it in-house or out-sourced toinclude consideration of impact on EVA. While EVA is a useful measurement at totalcompany level, it needs to be noted that this is measuring performance drivers frommore than just the area of supply chain management and as such cannot be used inisolation as an exclusive indicator of supply chain model performance.

The trend to identify 3PL’s as potentially leading providers of 4PL services is of someconcern. As asset based service providers, 3PL’s are essentially looking to maximise theuse of their own assets so decisions on-behalf of a client organisation may at times be selfserving and not necessarily always in the best interests of the client organisation. Furtherresearch into understanding whether 3PL’s can provide the true level of independenceneeded to deliver 4PL value to an organisation is warranted coupled with research intothe level of understanding within potential client organisations of what value 4PL’s cancreate for their organisations. It is important to differentiate between a 3PL and a 4PL –some of the key factors are reflected in Table II.

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References

Bowersox, D.J., Closs, D.J. and Cooper, M.B. (2007), Supply Chain Logistics Management, 2nd ed.,McGraw-Hill, New York, NY.

Coyle, J.J., Bardi, E.J. and Langley, C.J. Jr (2003), The Management Of Business Logistics:A Supply Chain Perspective, 7th ed., South-Western Publishing, Mason, OH.

Frost and Sullivan (2004), “Fourth-Party Logistics: Turning A Cost Into A Value Proposition”,Supply Chain Management, pp. 1-2.

Frost and Sullivan (2005), “Next Generation Supply Chain Strategies in Europe: End-userAttitudes & Perceptions Toward Fourth Party Logistics Engagements & OpportunityAssessment for a Business Case”, available at: www.researchandmarkets.com

Langley, C.J. Jr, van Dort, E., Ang, A. and Sykes, S.R. (2005), 2005 Third Party Logistics, Resultsand findings of the 10th annual study, pp. 1-46.

Porter, M. (1996), “What is strategy?”, Harvard Business Review, December.

Walters, D. and Halliday, M. (2005), Marketing and Financial Management: New Economy – NewInterfaces, Palgrave Macmillian, Houndmills, pp. 1-408.

Walters, D. and Rainbird, M. (2007), Strategic Operations Management: A Value ChainApproach, Palgrave Macmillian, Houndmills.

Corresponding authorAlan Win can be contacted at: alanw@itls.usyd.edu.au; a.g.win@massey.ac.nz

Factor 3PL 4PL

Asset basis Asset based (e.g.warehouse/transport)

Non asset based (exceptperhaps informationtechnology systems)

Accountability Part (in conjunction withinternal resources &/or other3PL’s)

Total singular accountability(as if internal)

Role Logistics (typically) Logistics, supply & demandchain integration

Business impact Influences time & place utilities Controls time & place utilitieswhile also influencing form &possession utilities

Performance/successmeasurement

Cost Value creation within clientorganisationTable II.

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