Technology in the Next Generation of Supply Chain Outsourcing - Leveraging Capabilities of Fourth Party Logistics

Corporations have traditionally attempted to meet increased service requirements through a number of tried and true approaches such as increased inventory, expedited transportation, on site service representatives, and use of third-party service providers. While all of these approaches have succeeded in the past, in today's market place corporations will need to provide substantially increased levels of service that will include e-procurement, configure to order capabilities, complete supply chain visibility, virtual inventory management, as well as the requisite integrating technologies.

The inves^TMent necessary to procure these technologies and develop the skills to meet these new expectations will make most corporations look hard for other possible options before making major investments in capital, yet they must provide the services demanded. As one potential option, many corporations have turned to traditional third-party outsourcing. At times, some corporations find that third party service providers lack the broad set of skills, integrating technologies, strategies and global reach that are now being required to meet their needs.

To rectify that situation, certain third-party service providers are taking steps to enhance their skills through alliances with complimentary service providers. The best positioned of these alliances are with leading edge consulting firms and technology providers.

Comments from third party logistics executives at the 1998 Council Logistics Management Annual Conference session "Business Issues As We Approach the Millennium: A Third Party Provider's Perspective" support this movement towards alliances. When asked "What types of alliances do your companies presently have?", the third party panelists spoke about their alliances with major consultancies and technology providers.

For example, Ray Greer, President, Ryder Integrated Logistics, stated that "We have executed two strategic relationships in the last 12 months. We have in fact leveraged IBM and Accenture to bring the power of their two organizations into our firm. That alone has increased access of two competencies and skill sets that otherwise we would have spent years trying to duplicate. Our second alliance really has also centered around technology, as its core foundation, and that is with i2 Technologies."

As alliances and teaming relationships continue to grow and expand, a new outsourcing alternative is emerging. Corporations are outsourcing their entire set of supply chain processes to a single organization that will assess, design, build, and run integrated comprehensive supply chain solutions. This evolution in supply chain outsourcing is known as Fourth Party Logistics^TM 1 or 4PL.

Figure 1.	The Next Wave

A Fourth Party Logistics^TM provider is a supply chain integrator that assembles and manages the resources, capabilities, and technology of its own organization with those of complementary service providers to deliver a comprehensive supply chain solution.

Central to the 4PL's success is a "best of breed" approach to providing services and technology to a client. The development of 4PL solutions leverages the capabilities of third party logistics providers, technology service providers, and business process managers to deliver a comprehensive supply chain solution through a centralized point of contact. The 4PL will integrate the client's supply chain activities and supporting technologies across these "best of breed" service providers, with the capabilities of its own organization.

The investment required in technology will be minimized in a 4PL relationship. As the 4PL implements and runs supply chain solutions for multiple clients, the inves^TMent in technology is spread across the clients.

In the October 15, 1998 issue of CIO magazine, an article by Forrester Research stated ".... Forrester Research expects a new breed of outsourcer, the virtual logistics outsourcer to emerge in 1999..." We believe this new breed of logistics outsourcer is 4PL.

Comprehensive Supply Chain Solutions
Management consultants have traditionally focused on the strategic end of supply chain solutions ­ reinvention and transformation. These supply chain solutions have leveraged technology to support the strategic imperatives. Third party logistics providers have focused on operational issues- implementation and execution.

Figure 2.	4PL Supply Chain Solutions

As illustrated in the 4PL Supply Chain Solutions (Figure 2 ), a 4PL solution leverages the combined capabilities of both management consulting and third party logistics providers. More importantly, the design, implementation and execution of a leading edge, client optimized, uniform technology plan that will meet the needs of the 4PL client is ensured by leveraging the technology capabilities of consultancies, technology providers and third party logistics providers.

At the highest level of the 4PL solution is Reinvention. The most likely source of true quantum enhancements in supply chain performance comes through either synchronization of supply chain planning and execution activities across supply chain participants, or increased collaboration between independent supply chain participants. Reinvention leverages traditional supply chain management consulting skills, aligns business strategy with supply chain strategy, and is facilitated by technology that integrates and optimizes operations both within and across participating supply chains.

The next level of the 4PL solution is Transformation. Transformation efforts focus on improving specific supply chain functions. These include sales and operations planning, distribution management, procurement strategy and customer support. At this level supply chain technology becomes critical to the success of the solution. Technological leadership and excellence is leveraged with strategic thought, process redesign and organizational change management to improve and integrate these supply chain activities and processes by bringing the best of breed solutions.

The third level is Implementation. A 4PL implements recommendations including business process realignment, systems integration of technology across the client organizations and service providers, and transition of operations to the 4PL delivery team. Careful attention is paid to organizational change, recognizing that the "people" factor is a critical driver of success in the transition to the 4PL arrangement. The goal is to avoid the all too common, ineffective implementation of well designed strategies and business processes that have limited the effectiveness of solutions and the delivery of projected results.

The fourth and final level is Execution. A 4PL provider takes on operational responsibility for multiple supply chain functions and processes. The scope goes well beyond traditional third party transportation management and warehouse operations to include: manufacturing, procurement, supply chain IT, demand forecasting, network management, customer service management, inventory management, and administration. While an organization can outsource the entire range of its supply chain activities to a 4PL provider; a 4PL solution will more likely be a subset of critical path supply chain functions or processes.

In summary, a 4PL responds effectively to the broad, complicated needs of today's organizations by delivering a comprehensive supply chain solution. This solution is focused on all elements of supply chain management, provides continuously updated and optimized technologies, and is tailored to specific client needs.

Leveraging Technology in a 4PL Solution
As the management of information becomes increasingly critical, shippers need to develop a strategy for addressing information technology. To be truly effective, the IT strategy must encompass systems at all levels -- ERP, Decision Support, Transactional, and Functional ­ if it is to enhance supply chain performance.

Recent advances in supply chain technology can provide a supply chain participant with a comprehensive real-time "god's eye view" of the entire supply chain. Technology has expanded to include product flow visibility, event management, and performance management, all of which enhance the corporation's competitive position.

This technology provides real time information allowing a corporation to redirect product flow, if necessary, and forecasting inbound and outbound volumes. It also allows the user to quantify performance data and track performance accountability at all levels within the supply chain, while monitoring continuous performance improvement opportunities.

According to Forrester Research, "..... Virtual businesses can be supported by entire end-to-end supply chain systems that will operated by virtual logistics outsourcers2 ..." These new technologies will enable a 4PL to provide an integrated solution across its service providers, as well as the client and its supply chain partners.

4PL ­ The Value Proposition
A key distinction between 4PL and current approaches to supply chain outsourcing is a unique ability to improve shareholder value in multiple ways. The 4PL provider maintains primary accountability and quality within the arrangement. As the centralized point of contact with the client, the 4PL has overarching responsibility for supply chain performance. Traditional outsourcing arrangements have been plagued by an inability to deliver benefits beyond one-time operating cost reductions and asset transfers. With the ability to impact the entire supply chain, 4PL approaches the concept of supply chain integration through improvements across all four key drivers of shareholder value to include: increased revenue, operating cost reductions, working capital reductions, and fixed capital reductions (see Figure 3).

Revenue growth will be achieved by enhanced product quality, product availability and improved customer service, all facilitated by the application of leading technologies. Experience has shown that customer service measures, such as stockouts and ship complete, can be improved in excess of 100%. With the 4PL provider focusing on the entire supply chain -- not just warehousing efficiencies or lowest cost transportation -- dramatic customer service improvements can be attained. With higher customer satisfaction come more customers and revenue.

Figure 3.	4PL Approaches Increase Shareholder Value

Operating cost reductions of 15% can be achieved through operational efficiencies, process enhancements and procurement savings. Savings will be achieved through the complete outsourcing of the supply chain function -- not just select components -- and economies of scale. Synchronization of supply chain information flows, technologies and activities across supply chain participants will lead to operating cost reductions and a lower costs of goods sold due to integration of processes, improved planning and execution of supply chain activities. Additionally, the substantial operating costs of enabling supply chain technologies can be spread across multiple 4PL clients.

Working capital reductions of 30% are possible through inventory reductions and reduced "order to cash" cycle times. The use of technology to manage order and SKU movement throughout the pipeline will minimize the amount of inventory required, as well as increase item availability to reduce the cycle times.

Fixed capital reductions will result from capital asset transfer and enhanced asset utilization. The 4PL's logistics service providers will own physical assets, thus freeing up the client organization to invest in its core competencies, i.e., research and design, product development, sales, marketing -- not in bricks and mortar -- impacting the balance sheet and initiating broad level change. The inves^TMent required to support the technologies will also be reduced, as the inves^TMent will be allocated to multiple clients.

4PL ­ Is it Right for my Organization?
In determining whether your organization should further investigate a 4PL arrangement, consider the following key questions:

• Do you have the technology capabilities to optimize and integrate across your supply chain processes or your logistics service providers?
• Do you consider the supply chain critical to your organization's success but every supply chain process is not a core competency?
• Does your organization struggle to manage increasing levels of supply chain complexity? Do your customers' supply chain-related service demands exceed your organization's capability to deliver?
• Can you make better use of your capital currently dedicated to supply chain assets?

CONCLUSION
The emergence of Fourth Party Logistics^TM is a new concept in supply chain outsourcing. The delivery of broad based leading edge supply chain technologies will be key to 4PL success. As with all new concepts, 4PL will continue to develop over time. Prominent sources believe that 4PL is the future of supply chain outsourcing based on a vision that it will provide competitive advantage to the supply chain participants who engage in a 4PL relationship to deliver a comprehensive supply chain solution.

About The Authors
James Mueller, Douglas Bade and Bryan Youd are in the Accenture Supply Chain Practice. They have been instrumental in developing Accenture's leadership position in the emerging field of Fourth Party Logistics^TM.

Mr. Mueller is a Partner based in New York who has focused on global supply chain integration across a number of industries.

Mr. Bade is an Associate Partner based in Chicago where he has established his leadership in supply chain strategy, transportation management strategy, distribution network analysis, strategic sourcing and third party logistics outsourcing.

Mr. Youd is a Senior Manager based in Cleveland with his most recent work focused in advanced outsourcing across supply chain functions, transportation management strategy, strategic sourcing and third party logistics outsourcing.

Footnotes

1. Fourth Party Logistics^TM is a Trademark of Accenture LLP.
2. CIO magazine, article by Forrester Research, October 15, 1998.