In the Press

"Leap of Faith"
Logistics Issue 11, February 2006

The original 4PL concept would require a radical change in the way businesses operate on an on-going basis, reports Anna Game-Lopata

THE TERM 4PL IS STILL MISUNDERSTOOD WITHIN THE LOGISTICS industry. Devised as a new approach to business structure based on joint venture, shared resources and equity based rather than contractual relationships, it's not difficult to see why the idea hasn't been embraced in its entirety. One only has to witness rapid consolidation in the logistics industry to realise that most prefer the perceived control achieved by acquisitions and mergers to the nebulous benefits of mutual risk and reward.

The 4PL concept was initially a response to problems arising between shippers and 3PLs. While shippers make ruthless, cost-based outsourcing decisions, they are dissatisfied if a 3PL fails to provide value added services. Meanwhile 3PLs, operating to these tightly closed contracts, are struggling to maintain narrowing margins let alone finding time to optimise and develop creative solutions. Competition is leaving no room for change.

Leading supply chain thinker, speaker and author John Gattorna was one of a team from Andersen Consultants (now Accenture) who jotted the initial 4PL idea on the back of a napkin in 1995. The 4PL was intended to do away with contracts, replacing them with a more collaborative, equity based relationship.

"You can't tender for a 4PL in the original concept. There's no such thing as a 4PL provider," Gattorna says. "A company that still has contractual relationships can't function like a true 4PL, because if difficulties arise, finger-pointing begins rather than an attempt to pull together."

According to Gattorna the true 4PL, or Joint Services Company (JSC) as he prefers to call it, is a joint venture between a group of companies, initiated by two or more shippers as the owners and ultimately controllers of the business. The shippers might be competitors or have dissimilar markets, but they must share a compatible culture and vision.

"The 4PL is like a control tower or brain with all the information systems. The businesses form a consortium by joint venture where 3PLs continue to do the work such as warehousing, but the 4PL is the vehicle that manages them," Gattorna says. "As well as 3PLs, junior equity partners might include consultants and finance companies."

Along with equity in the vehicle, the relationship requires a "pre-nuptial" exit agreement stating how long the parties must commit before choosing to roll over or buy back capabilities to an agreed formula. Such an agreement would also contain incentives and rewards to encourage a strong working relationship. Companies place key staff with the business acumen, experience and know how into the vehicle to ensure proper functioning of the businesses. Gattorna believes that once working properly, parties would make returns on their capabilities and assets along with fees and dividends according to their equity in the management company. In an ideal form, companies would allow the vehicle to manage their assets and infrastructure until such time as they wished to buy back their capabilities.

The fundamental reasoning behind such a structure is to allow shippers to acquire instant capabilities. If capabilities are well chosen, including shared infrastructure and assets, shippers could substantially cut costs and improve the bottom line brought about by increased volumes.

"We've gone as far as we can go with operational excellence. Australia holds brilliant opportunities for such consortia to pool huge volume across industries and it may be the only way we can build scale to compete with the bigger companies overseas," Gattorna says.

Early 4PL attempts

It's clearly difficult to imagine businesses in the current Australian climate (or elsewhere) forming such alliances without the desire to guard perceived competitive advantages. No such structure exists in this country and worldwide examples are few and far between. Early attempts at the 4PL structure managed to absorb elements of the concept but ultimately fell down in various ways.

Gattorna points to Connect 20 20 in the UK, an alliance between the UK water utility Thames Water Supply, Accenture and other service providers. While the consortium still exists, it was unable to pull in other utilities that feared their value would be extracted for little benefit. Another example, German agricultural machinery company New Holland created with Accenture in an 80-20 structure was bought back by New Holland. UK retailer J Sainsbury has approximated the structure, developing an alliance with Accenture, a bank and 3PL companies to form an off line company to address their logistics needs.

"The dozen or so 4PLs that I've seen around the world over the last ten years including GE Medical Systems, Ford Espania in Spain, AT&T Wireless and others are prototypes that we've learned from. Now is the time to take on a whole new approach," says Gattorna.

3PLs opt for operational excellence

Whatever the reason, the 4PL concept has developed its own life. Gattorna suggests that 3PLs and consultants, fearing they might be sidelined by the rise of 4PLs, have responded by extending their services, many on a global level. TNT Logistics senior vice president of business development Mark Morrison, based in the US believes the 4PL must be understood in the context of the global marketplace where "Internet-based services and applications such as ASPs, eCIs, SCEM and ISMs seek to exploit supply chain cost efficiencies through real-time Web-based connections and outsourced logistics creates more of a partnership critical to success than a supplier/customer relationship".

"The need for global supply chain management has grown rapidly over the past few years. Already one-third of the world's traffic flow is global and best guess estimates of total logistics costs run in excess of $2 trillion annually. Of that, a mere 3.5 percent is outsourced," Morrison says.

To Morrison, the 4PL arises from the development of Lead Logistics Providers (LLP), 3PLs who manage other 3PL companies.

"As logistics services continue consolidating as evidenced by the Ocean Group/Exel, TNT Post Group/CTI Logistix and APL/GATX mergers," he says, "the pressure (for such development) will increase. Only those companies with an authentic global footprint and the technology to bind a growing number of disparate trading partners together will emerge with an international nomenclature and the global supply chain solutions now demanded by the worldwide economy."

US based Infoworld journalist and Logistics specialist Ephraim Schwartz agrees the key to the 4PL is that managing the supply chain is now a global endeavour. "The management and integration of dispersed logistics players - each bound by local variations in language, currency, trade law, and so on - is an enormous undertaking. In hiring a 4PL, an enterprise must find a partner that understands its special logistics needs, one that can share in the risks and rewards of reinventing a significant portion of its business."

Schwartz points out that senior management at the enterprises must place its trust in the 4PL and that there may be little choice but to do so when the enterprise lacks the supply chain expertise to manage a global logistics operation. According to SSA Global regional solutions manager Trevor Barrows, assisting companies to create distinct 4PLs or Lead Logistics Providers (LLPs) is a path to greater competitive advantage. A successful LLP, he argues, is founded on principles of shared risk and shared reward.

"Each of the disciplines of the supply chain must be evaluated. If one is not best of breed, then a way must be found to align, source, acquire or venture with a best of breed capability. Having established well defined objectives and associated metrics, the LLP entity has the authority to act," Burrows says.

Trust a sticking point

Deploying such trust has been the basis of current criticism of the 4PL concept in Australia. Jens Euringer, managing director of the recently founded Australian branch of international Logistics consultancy Do Logistics, is highly sceptical of the concept.

"It is not that I do not see the potential (of 4PLs) but I doubt that many companies are willing to outsource more control over their supply chain. Supply Chain Management is a cross-function that is difficult enough from inside a company; I do not think it becomes easier from outside," he says.

Global consultant CapGemini vice president and logistics expert Eric Van Dort, who recently visited Australia, says company research reflects this view, pointing to a shift in the discussion about whether a 4PL should be 'assetless'.

"It was originally put forward that consultants would be the 4PLs of the future because of the need for highly trained people with planning and technological skills," he says. "There is definitely a role for consultants like CapGemini to develop strategies, enable IT or train people, but consultants will never run 4PLs. There's a real suspicion from clients who perceive their provider as a 'control tower' without execution experience."

Van Dort describes an evolution towards 4PL rather than a revolution as 3PLs begin to optimise, use smarter concepts to make their supply chain work and make clear advancements in levels of service. As they are not yet technically 4PLs, clients understandably express insecurity that such 3PLs won't be able to fulfil requirements and are reluctant to hand over control.

"Clients must evolve in to a relationship with a trusted 3PL so that discussions can take place about taking the next step (towards 4PL). It might be a joint step as that of 'Vector', shared ownership between General Motors and Menlo, who transferred staff in to a new vehicle to increase the security of the partnership," Van Dort says.

4PL concept still evolving

Ultimately, like many, Erik Van Dort sees the development of 4PL structure approximating the original concept through partnerships and joint ventures - companies joining forces to meet requirements in an 'ecosystem' style rather than a pure play that claims the whole ground.

"In the end you need the execution experience which is normally held by the 3PLs," he says. "4PLs are much more likely to grow from 3PLs or the creation of new companies as independent or related subsidiaries or in a collaborative way."

Most agree it will be several years before 4PLs are established in Australia. Capgemini's director of supply chain practice for the Asia Pacific, Sebastian Bather believes constraints include Australia's enormous geography, massive population dispersion and the concentration of specific major sectors. "That's not to say Australia isn't mature enough to make it work. I think many providers are watching closely to see what can be developed elsewhere. That is not radically different from what's occurring in Europe and the US. 4PL is still an evolving concept," he says.

Gattorna admits the idea requires a leap of faith from a CEO willing to break the mould. He says it will take increasing pressure on the bottom line before companies are willing to change, giving the example of a Japanese electronics company who loved the concept but declined to be the first to try it.

Gattorna's own business cases in Australia, carried out some years ago, show that if two oil companies shared their downstream distribution from the refinery gate through terminals and service stations, a 36 per cent improvement to operation costs could be achieved on an on-going basis, plus the ability to retire many underutilised terminals. But they couldn't get their heads around it.

"Some say, 'prove it to me', but you can't prove it until you try it out. It will take a couple of visionary CEOs to say 'We've done all the business cases and the numbers are there'."

Dr John Gattorna's book, Living Supply Chains, published by FT Pearson, will be out in May.

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