The 3PL-based model to manage freight in the delivery pipeline – from factory floor to final destination – has failed those it was designed to help: large, global manufacturers.The model, which has been in existence for more than a decade, was designed to take control of freight movement from manufacturers and give it to 3PLs. The idea was that outsourcing would improve service levels and deliver cost savings.

What has actually happened is that the 3PLs have found themselves locked in a competitive spiral, unable to find the time or expertise to provide the service they promised. Desperate to win big deals, they overlook the fine detail, such as production of invoices in the gateway and/or security staff required, that can slash the profit margin when it must eventually be addressed: and addressed it must be if the manufacturer is not to fall out with the 3PL, an all too common occurrence. The 3PL may paint a rosy picture of performance at quarterly reviews, but the manufacturer knows when agreed service levels are not being met and the contract is being broken by the 3PL.

Large manufacturers should look at taking much – or all – of the management of the delivery pipeline activity back in-house.This means becoming a 4PL, a term that has different meaning to different people, but which to the manufacturer means it puts it in control of the freight handlers, include the 3PL. A 4PL is likely to need a 3PL in part of the delivery pipeline, but at least it can be in control of it.

Software that measures where freight is in the pipeline can be leveraged to give control to the 4PL and deliver the benefits that have been so elusive under the 3PL-based model. Control gives them the ability to optimise freight consolidation and choose the shipper of their choice on the most economic legs.The software also allows 4PLs to be much more selective in how they use 3PLs, while enabling the 4PL to improve service levels rapidly and make the improvements sustainable.

Being your own 4PL means cutting the time that freight spends in the delivery pipeline by 33%, and reducing costs in the hub by 75% while gaining five 9s reliability: 99.999%.There will also be an overall business performance improvement. The software is an enabler of change in business processes, allowing process maturity to gain a hold and make the business more effective and profitable.

What the 4PL can do
The only organisations large enough to be a 4PL are the major customers of the 3PLs, manufacturers of high-value goods such as electronics, computers and pharmaceuticals, which have typically transferred manufacture to China, the Far East or Central Europe. It is these manufacturers in particular who, increasingly, need to achieve fast throughput in the delivery pipeline at competitive cost, because most of their product is air freighted – which costs. It is also often built to Just-in-Time orders, which means their customers want it now, as agreed, not tomorrow.

Some of these manufacturers have expressed an interest in becoming a 4PL, but are concerned that they do not have the tools and in-house expertise to allow them to have the confidence to take that step. Lack of expertise – an inevitable consequence of outsourcing in any sector – is not a problem, as the 3PL can be retained to provide it and carry out some tasks in the pipeline.

The role of the 4PL should be to monitor what is going on in the delivery pipeline and have greater control over the 3PL and the quality of service obtainable by that 3PL.The 4PL will have to decide if it wants to accept a variety of inputs from the 3PL systems or to impose a single common input.The typical 3PL will prefer to feed to the 4PL different sets of data rather than one, because most 3PLs have immature business processes and have not invested in a single common data set solution.

Once a manufacturer has decided to go down the 4PL route, it can dictate to the 3PL – and any other party involved in the delivery pipeline – the input system it wants to use. It can also dictate how it is configured. The 3PL makes no decisions: the 4PL does.

As a manufacturer, the 4PL will already be familiar with selective outsourcing and be able to see how it can be applied to global logistics, by, for example, outsourcing functions to a 3PL, while subjecting the 3PL to ongoing performance measures.These measures are made possible by the delivery pipelines software, such as FCS, a major user of which is DHL.The measures cannot be interfered with by the 3PL, as they are objective and in real time and date stamped by the software.

Benefits
The software allows the 4PL to make the best decision for each shipment. FCS makes the decision in each case, optimising the shipment through choosing the carrier and product that are most appropriate to it, delivery time and cost-wise. FCS can select by lane – for example, China to Europe or US to Europe; the 4PL negotiates with the carrier per lane for a 12-month period. Note: the 3PL can be retained by the 4PL for operating the import gateway. The software also allows the 4PL to make cost savings in excess of 10%, which can be millions or tens of millions of pounds a year. By choosing the optimum route, considerable savings can be made on each lane. With the first leg typically being bulk and therefore low cost, there is little scope for making savings there. The second leg or final mile is where the 3PL has traditionally made a profit, because it charges more per kg; it is where the 4PL can take over and return the profit to itself, while enjoying better service levels, if it has used the 3PL and software correctly to optimise performance in the gateway. Note that the 4PL can use the 3PL to manage the final mile but not allow it to make profits at the 4PL’s expense or make decisions. The 4PL decides which carrier delivers on the final mile; the software enforces that decision while giving information that will help to ensure service levels are met.

Different views of 4PL
A 4PL-based model may have to take into account the different views of 4PL, to avoid confusion and keep the business focused.

The pragmatist view, found in 3PLs, is that only the major name 3PLs can take on the role of a 4PL. But they are not independent, so how can they?

The idealist view can be found in the high-value manufacturers, who want to believe the true 4PL is achievable and sees it as the way of taking control away from the 3PL in order to get a better deal on SLAs and cost. This view will not be realised unless gains have been made in process maturity.These gains include the use of tools/software to measure and analyse what is going on in the delivery pipeline.

The independent 4PL thinks it can offer a service to global manufacturers, but in my opinion is too small for that. The independent can be useful regionally – for example, for rationalising logistics within Europe – but on the global stage it lacks the clout to gain good deals from shippers and is hampered by lack of geographical reach.

Recommendations
Having failed its customers, the 3PL-based model should give way to the 4PL model, which is expected to come to the fore as manufacturers insist on a turnaround in performance in the delivery pipeline.

Taking on the role of a 4PL means that companies will need to develop and work to a new model. This 4PL model should include a process for ensuring that the RFQ process is reviewed, with more attention being paid to the detail that is often overlooked by 3PLs for their short-term convenience.

Considerable savings can be made, but my experience at the coalface with high-value, global manufacturers is that they are prioritising quality above cost.

If a manufacturer wants to get close to five nines reliability of service – which is possible when using software that measures everything that happens in the delivery pipeline – it has no option but to realign its relationship with its 3PL, look at implementing a 4PL model, and make major changes to its delivery pipeline.

About the author
David Warrilow is Managing Director, Audax, which produces freight management and transportation logistics software for 3PLs and 4PLs.