Fourth Party Logistics Transforms Logistics From A Cost Proposition To A Value Proposition | Automation.com

Fourth Party Logistics Transforms Logistics From A Cost Proposition To A Value Proposition

February 242004
Adopting a holistic approach, fourth party logistics (4PL) has evolved as a breakthrough supply chain solution comprehensively integrating the competencies of third party logistics (3PL) providers, leading edge consulting firms and technology providers. Such strategic alliances leverage the skill sets, strategies, technology and global reach, which would have otherwise taken years to duplicate.

Globalisation is expected to strengthen demand for 4PL due to the substantial lifting of market barriers and import tariffs. Suppliers require a vast network of genuine pan-European and global logistic providers that can successfully integrate processes and information across geographical boundaries.

A more connected world results in universal access to sophisticated technology that allow 4PLs to efficiently manage complex supply chains and even modify supply chain networks and processes. For instance, technology advances in wireless networking and Radio Frequency Identification significantly increases productivity, customer satisfaction and ultimately profitability.

Buoyed by these trends, the 4PL market as a whole is expected to witness considerable revenue growth from approximately EUR 4.7 billion in 2002 to about EUR 13 billion by 2010. The 4PL market in western Europe is set to make its presence strongly felt in the chemicals, electronics/high-tech and automotive sectors.

With conventional service enhancement approaches such as expedited transportation, managed warehousing and distribution yielding only limited results, 4PL has thrown open new avenues in logistics that are being actively explored.

Explains Frost & Sullivan (www.frost.com) Research Analyst Cecilia Cabodi: "Due to 4PL, supply chain outsourcing has undergone a paradigm shift from a cost centre to a revenue generating opportunity. It has leveraged logistics to improve service level to customers, accelerate the speed of launching new products and stimulate market penetration."

However, 4PL providers need to emphasise their unique value proposition to differentiate themselves from traditional 3PL providers. For instance, 4PLs have made a quantum leap from providing basic third party logistic services to being a centralised point of contact for the customer with the unique responsibility of monitoring supply chain performance. Simultaneously, they have provided solid cost reductions coupled with measurable and sustainable shareholder value.

The high investments required for 4PL remains a significant financial barrier to the entry of risk averse and low margin third party providers. A wider client base does signify greater economies of scale, however, 3PLs are unwilling to invest in risk-reward schemes with the customers.

Similarly, most customers may be hesitant to outsource their core logistic activities to 4PL providers and prefer to keep the intellectual capital and control of certain supply chain components in-house. Conversely, non-core activities requiring end-to-end outsourcing offer immense potential to 4PL providers.

Since the 4PL concept is in a relatively nascent stage of development, ambiguity surrounding its definition has hindered quick consumer acceptance and support. A change in customer perception may be key in addressing this problem, reiterating its ability to deliver value-added and cost-effective solutions.

The ultimate testimony of success will lie in the 4PL's competency in sustaining long-term investment and generating continuous benefits once initial cost savings are achieved. According to Frost & Sullivan's analysis, 95 percent of customers consider steady annual ROI integral to the supply chain agreement and, hence, 4PLs must ensure that the risk-reward scheme creates value for both parties.

"Logistic service providers adopting a consultative collaborative approach to strengthen customer relationship have a distinct advantage over their competitors," notes Ms.Cabodi. "They must transition from a "cost plus" based approach to involving customers right from the start even prior to the bidding stage and chalk out realistic long-term objectives."

At the same time, complex customer requirements necessitates focused niche operations. While catering to a diverse customer group, expertise in that particular industry or sector enables 4PLs to furnish supply chain solutions tailored to meet customer-specific needs. Once they gain acceptance with an initial set of customers, they can augment their revenue and customer bases within that particular sector.

Frost & Sullivan, an international growth consultancy, has been supporting clients' expansion for more than four decades. Our market expertise covers a broad spectrum of industries, while our portfolio of advisory competencies includes custom strategic consulting, market intelligence, and management training. Our mission is to forge partnerships with our clients' management teams to deliver market insights and to create value and drive growth through innovative approaches. Frost & Sullivan's network of consultants, industry experts, corporate trainers, and support staff spans the globe with offices in every major country.

For further information, please contact:

EMEA
Kristina Menzefricke
P: +44 (0) 20 7343 8376
F: +44 (0) 20 7730 3343
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