Fourth Party Logistics Providers

In the future, you may not need any assets to be deeply involved in supply chain management, however, you may need a number of these.

What Is It?

A fourth party logistics provider is primarily coordinator of other supply chain partners through the ownership and maintenance of information systems. This is differentiated from third party logistics providers that provide physical handling and or transportation of goods.

Wave of the Future

There are not many examples of fourth party logistics providers, however the concept is very powerful and is based upon the following truisms:

• Companies that are good at physical goods movement are not necessarily great at IT
• New technologies are developing in terms of monitoring that will allow for information to be passed to a company, that does not actually own the assets
• Web site maintenance for transactions have proven more nuanced than originally thought. That is, some companies — such as Amazon.com, have far superior shopping sites than other companies. The original idea was that every company could develop an effective leading edge shopping site. This is proving not to the case.
• Supply chain management is not improving anywhere near as much as the information technology that they have at their disposal, indicating a misuse or misapplication of information technology dollars.

Service Parts Maintenance and Management

Every limitation listed above is even more true for service parts management. Few companies even use service parts planning software, which is essential to effectively managing service parts, without it becoming an extremely manually intensive and tedious process.

Service Level Planning

If many companies could outsource their supply chain functions and accept service level agreements with third party logistics providers.

See this post for more on service level planning.

http://spplan.wordpress.com/2008/04/05/service-level-planning/

This might encourage the companies to stop interfering with operations. Presently, executive interference in supply chain management and production is causing even the most elementary of production and inventory control formulas to be violated on a regular basis to meet competing internal political and financial objectives that have nothing to do with improving operations and everything to do with short term financial objectives.

Operations require stability and investment, not executives attempting to pull short term gains from them by trying to apply the latest inventory management fad, or by flushing safety stock every quarter to look good for investors. There is a mini-industry which exists to tell executives they can have a free lunch. One such company is APICS. You can read how they undermine operations here.

http://spplan.wordpress.com/2009/05/16/apics-is-not-reality-based/

The Technologies

Without their would be no real opportunity for party logistics providers, although it is debatable as to whether international freight forwarders were the first fourth party logistics providers — and they developed before computerization. (however, their role in supply chain has always been very niche and limited.)

The technologies that are leading the way towards providing information about supply chain activities and assets not controlled by the party monitoring them is SAP SCM Event Management. With this type of software, fourth party logistics providers become very likely. Furthermore, implementing extra enterprise software like this is very challenging, and companies need standard and easy to follow instructions for how partners can send them their data. It is more likely that a company that specializes in doing this will have far more success than a company that is attempting to get some of its suppliers into their collaboration system.

The Pretenders

Fourth party logistics is either already or about to become a buzzword, which means that companies will be looking to associate themselves with the term to pick up business. We recently read an article which called Keuhne and Nagel – the longtime international freight forwarder is a fourth party logistics provider. Maybe they are, but freight forwarders tend to lack the sophistication to really be placed in this classification. 4PL requires significant IT capabilities as well as standardized processes for on-boarding participants.

Doing It Right

A credible company should have ways of doing this online, without the involvement of a lengthy sales process and discussions with account managers that will discuss “meeting their needs.” Many will say they have sophisticated fourth party logistics capability, but to be convincing the company in question should first have an excellent website, and second, should publish and explain their on-boarding procedures in extremely clear terms. The “brochure-ware” websites that have a lot of marketing literature are not very convincing. Those looking to learn how to do it right can visit Amazon.com’s website and view the detailed subcontractor on-boarding documentation.

http://www.amazonservices.com/content/fulfillment-by-amazon.htm

The Contender

In our view Amazon.com is excellently positioned to be a fourth party logistics provider because of their fantastic shopping engine and top ratings as a service company. Amazon performs their own fulfillment on some of the items sold on their site, but their partner subcontractors are responsible for a large percentage of Amazon.com sales. In some cases they do fulfillment for their subcontractors, so Amazon is still very much a third party logistics providers, but when their customers perform the fulfillment they are more of a third party logistics provider.

Amazon has a very easy way to begin using their fulfillment services.

We discuss the subcontracting in Amazon.com vs. SAP SNP and GATP in this post.

http://sapplanning.wordpress.com/2009/05/15/subcontracting-in-snp-and-gatp-vs-amazon-com/

References

http://en.wikipedia.org/wiki/Amazon.com

http://findarticles.com/p/articles/mim0EIN/is2004Feb24/ai_113569792/