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IJPDLM 38,9

The value a 4PL provider can contribute to an organisation


Alan Win
Institute of Transport & Logistics Studies, University of Sydney, Sydney, Australia and Institute of Food Nutrition & Human Health, College of Science, Massey University, Auckland, New Zealand
Abstract
Purpose The purpose of this research is to understand the value a fourth-party logistics provider (4PL) can create within an organisation and to identify an appropriate measure of such value creation. Design/methodology/approach The paper presents a conceptual model that is based on research of 4PL implementations within the alcoholic beverage industry. Findings This paper presents a framework by which contribution by 4PLs to organisations might be valued. Research limitations/implications Future research may be widened to include nancial and service measures within customers and suppliers thereby considering the wider value chain for a given commodity where a 4PL is involved in facilitating delivery of the goods or services. Practical implications The paper assumes that 4PL providers have the requisite skill set to manage and deliver added value versus an in-house solution. Originality/value This paper offers insights into the pre-requisite conditions for a company to consider outsourcing to a 4PL provider, the conditions/attributes that contribute to securing a 4PL relationship, the value that can be created through use of a 4PL and a method by which to assess the creation of value. Keywords Value added, Distribution management, Value chain, Supply chain management Paper type Research paper

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International Journal of Physical Distribution & Logistics Management Vol. 38 No. 9, 2008 pp. 674-684 q Emerald Group Publishing Limited 0960-0035 DOI 10.1108/09600030810925962

Introduction Interpretation of value will vary depending upon whose perspective it is assessed from. For instance, a manager within a business is looking to increase value to benet the companys shareholders, while a customer of the business is looking for value from the organisation in perhaps terms of price, quality or social/environmental contribution. Walters and Rainbird (2007) discuss at length research into the denition of value and go onto explain that value is a term frequently used but infrequently understood and of which numerous interpretations exist. Their text aptly explores the New Economy New Business Models New Approaches. Value is discussed from both the perspective of the consumer as the principal driver of value, and value in the context of the rm. To understand value, it is useful to consider Porters (1996) suggestion that: a company can outperform rivals only if it can establish a difference that it can preserve. It must deliver greater value to customers or create comparable value at lower cost or do both. The arithmetic of superior protability then follows: delivering greater value allows a company to charge higher average unit prices; greater efciency results in lower average costs.

Walters and Rainbird (2007) explain a value chain approach to value delivery using Figure 1. When considering value in the context of the rm, essentially the primary objective of this research, Walters and Rainbird (2007) suggest that a broader perspective is needed than that of historical accounting measures, and looks at the importance of free cash ow, notions of enterprise value, future value and the balanced scorecard, nally examining what role rms have in setting their own goals. Concurrent with the development of and an appreciation of what value means to, and within an organisation there were changes occurring within the logistics service industry. Primarily, there was a radical shift from single function to multifunctional outsourcing. Integrated service providers began to market a range of logistics services (Bowersox et al., 2007). Fourth-party logistics (4PL) has emerged as the ideal solution that allows companies around the globe and from a diverse range of industries to have a single point of accountability across both supply and demand chains. Almost 90 per cent of the respondents in an end-user study cited the above reason as a key driver for implementing a 4PL strategy. Companies are gradually realising that it has become increasingly important in the globalised economy to focus not on just core but also non-core activities such as management of a long-distance supply chain in order to remain competitive. In addition, they are turning to 4PLs to build closer relationships amongst the participants along the supply chain, support cost cutting initiatives, develop the exibility to deal with supply and demand uncertainties and ultimately to have a positive impact on the bottom-line (Frost and Sullivan, 2005). A 4PL is looked to for the provision of competencies relating to knowledge availability, information technology, and skills in forming and sustaining successful supply chain relationships (Coyle et al., 2003).

Value contributed by 4PL 675

Design & development Customer & market research Product/service specification Market/segment volume Prototype production & testing Customer/market value Product modification & characteristics development Competitive products Customer service Identify resource requirements & Identify & evaluate competitive their ownership & location value delivery systems Create the value Assets Identify value drivers Processes Identify value expectations Develop Capabilities Produce the value value proposition Establish stakeholder expectations Sourcing, procurement & The value process: a manufacturing value chain approach to Customer advice & product development Service the value value delivery Customer service program Communicate the value Installation Operator training Reseller/distributor Maintenance Deliver the value communications Product recall program Customer/end-user Product/service delivery program. communications Select & manage a distributor Internal customer network to provide logistics communications service Availability Frequency Reliability

Source: Walters and Rainbird (2007)

Figure 1.

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Langley et al. (2005) looked to simplify terminology and avoid some of the confusion within the industry through segmenting the various business models into a two-tiered relationship structure per Figure 2. There is a current trend toward the involvement of 4PL providers, to help manage a number of third-party logistics (3PLs) that may be involved with a companys operations (Coyle et al., 2003). Frost and Sullivan (2004) note, adopting a holistic approach, 4PL has evolved as a breakthrough supply chain solution, comprehensively integrating the competencies of 3PLs providers, leading edge consulting rms and technology providers. Such strategic alliances leverage the skill sets, strategies, technology and global reach, which would have otherwise taken years to duplicate. In another, more strategic role, the 4PL serves as the integrator that brings together the needs of the client and the resources available through the 3PL providers, the IT providers, and the elements of business process management (Coyle et al., 2003). 4PL management has become an integral component of many organisations new generation value chains. As part of Langley et al.s (2005) annual survey, they noted there is a general dissatisfaction and confusion with the terminology. When asked if respondents understood the differences between 3PL and 4PL providers, over 78 per cent responded yes or somewhat. When asked if the 4PL terminology is confusing and ambiguous 76 per cent responded yes or somewhat. This research in itself suggests that because there is an admission of confusion regarding terminology there may indeed be unstated confusion regarding understanding of the conicting business imperatives of a 3PL versus a 4PL which should logically preclude a single organisation offering both types of services. In Langley et al.s (2005) survey, respondents were asked to rate the suitability of ve types of companies to offer these advanced business models. The results of this are highlighted in Figure 3. What is of interest is the perception that asset based 3PLs are perhaps some of the more suited companies to elevate into providing 4PL services. The organisation objectives of a 3PL appear contradictory to those that a 4PL might logically have. As an asset based organisation, the 3PL looks to maximise return on those assets for its own shareholders and as such may not provide the level of independence of decision to
Two-Tiered Relationship Structure Traditional Outsourcing Terms Fourth-Party Logistics Provider (4PL) Lead Logistics Provider (LLP) Strategic Supply Chain Manager (SCM) Third-Party Logistics Provider (3PL) Tactical Logistics Service Provider (LSP)

Relationship Attributes Partnership Joint Venture Value Based Risk Sharing Few Partners Long Term (5 + years) Common Core Values Alignment and Trust Coopetition Contractual Fixed and Variable Transaction Oriented Short Term (1 to 5 years)

Relationship Structure

Service Attributes Broad supply chain expertise Deep industry domain and consultative skills Advanced technology capability Business process outsourcing, beyond logistics Project management and provider coordination 3PL technology integration Innovation and continual improvement

Traditional logistics services Modular product offerings Focused cost reduction and service improvement Operating excellence Niche services

Figure 2.

Source: Langley et al. (2005)

Types of Companies Best Suited to Offer 4PL Servicesa 90% 80% Percent of Respondents 70% 60% 50% 40% 30% 20% 10% 0%
Ex i Pr stin ov g id 3P er L s Te Pr chn ov ol id og er y s W eb Fi -Ba rm se s d

69

71 57

2002 Responses 2003 Responses 2004 Responses 2005 Responses 41 38 22 23 13 16 17 9 b


ns ul

Value contributed by 4PL 677

47

24

27 25 16 c
ta nt s N Fo ew rm F er irm 3P s L Wi Ex th ec s

Notes: aAll regions; bThe 2004 and 2005 survey did not have "web-based firms" as a category; c"New firms by former 3PL execs" was included as a category for the first time in the 2004 survey Source: Langley et al. (2005)

Co

Figure 3.

maximise value for any 4PL client organisation. 3PLs that assume a 4PL role are unlikely to select 3PL services from other providers over their own and in commercial reality are also unlikely to be able to obtain competitive quotation from other providers even if they were to pursue this avenue as direct competitors seldom actively pursue request for proposal/request for quotations which are managed by a competitor. A 4PLs role is primarily to deliver value to its client organisations through resourcing with the most competitive value adding providers at the time. This may be through the use of a combination of one or more of: their own 4PL resources; in-house resources; a single 3PL resource; and, or multiple 3PL resources. Indeed, it is unlikely that the 4PL would provide all resource. Rather, a 4PLs strength and value adding capacity generally lies in their ability to select and co-ordinate a pool of resource from other factions that creates value in excess of that which may have been created had the role been managed internally within the client organisation. Concept denition It is perhaps appropriate at this juncture to attempt to more accurately dene what a 4PL provider is. In the writers view:
A 4PL is an independent, singularly accountable, non asset based integrator of a clients supply and demand chains. The 4PLs role is to implement and manage a value creating business solution through control of time and place utilities and inuence on form and possession utilities within the client organisation. Performance and success of the 4PLs intervention is measured as a function of value creation within the client organization.

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Study objectives and methodology Study objectives . Understand the key drivers for outsourcing value chain management within an organisation to a 4PL. . Identify an appropriate measure of the value created/destroyed from 4PL provider intervention. . Provide a strategic assessment of the value that 4PLs can contribute to an organisation. Methodology and research approach This study tracks business performance of two medium sized ($100-$200 m turnover p.a.) alcoholic beverage companies that have and/or currently utilise a 4PL provider (Middlebank Consulting Group, MCG). One company is based in New Zealand and the second in Australia. Both companies are part of larger international corporations. Attributes that contribute to securing a 4PL relationship The following attributes were identied as important in the selection process of the successful 4PL when partnering with the respective client organisations: . Ability to manage activities of multiple 3PL providers. . Experience in facilitating supply chain integration. . Cost control, management and reduction. . Will lead to reduced executive management time and expense. . Understanding of the specic industry sector businesses which they are looking to provide 4PL services in. . Able to operate at operational, tactical and strategic levels. . Demonstrated ability to coordinate day-to-day logistics and supply chain management execution. . Single accountability. . Ability to coordinate and foster improved relationships within the value chain. . Demonstrated ability to manage supply and demand uncertainty. . Capable of driving process change/improvement notably in the areas of forecasting and sales & operational planning (S&OP). . Process rigor. . Experience in managing global supply chains. Notable company events at the time of deciding to outsource to a 4PL provider have included: . Experiencing signicant growth (volume and/or brands). . Excessive inventory coupled with average customer service levels. . Increasing demand for supply chain related information. . A refocusing of the business on core values of marketing and sales. . Poor demand forecast accuracy.

The need to validate 4PL intervention performance While the use of 4PL continues to grow, as a service provision it never-the-less remains in relative infancy and, therefore, it is important to validate and substantiate the performance of such interventions. Validation can be both quantitative and qualitative in nature. As the use of 4PL is relatively new for many organisations, there will always be both a natural interest in understanding, and a need to validate the use of a 4PL provider within each client organisation. This is logically best monitored as a function of changed value within the specic organisation as a result of the 4PL intervention. Clearly one of the key management challenges is to identify value contribution attributable to the 4PL provider interventions versus contribution as a result of other business drivers. Performance measurement Performance can be assessed by a combination of both nancial and non-nancial indicators. It is useful to consider: . Inventory investment and stock turn. . Lost sales. . Days out of stock. . Service level by inventory classication. . Inventory aging. . Customer service perception. . Customer complaints. . Cost of supply chain operation. . Amount and cost of expediting. . Effectiveness of demand forecast management. . Noise within the supply chain. Cases studies Case 1 In the rst organisation, an alcoholic beverage sales & marketing organisation that distributed both imported and locally sourced product, the 4PL role had autonomy to: . Design the organisations route-to-market model. . Structure retail pricing. . Negotiate procurement arrangements. . Establish and manage a forecasting process. . Purchase product. . Negotiate and manage 3PL relationships including international freight forwarding, warehousing & physical distribution/transport. . Manage for Customs compliance. . Manage inventory levels. . Service customers. The senior 4PL executive reported directly to the Managing Director and sat as part of the executive management team of the organisation. Further, because of the 4PLs

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specic skill set, several of the team were subsequently contracted to provide support to the global organisation as it blue printed process design for a new ERP platform. This progressed to project managing the subsequent material management and order to cash functionality rollout in 3 countries plus managing the global material master creation for 35 countries. Further projects involving identication and negotiation of new brand partners were also undertaken as part of the services provided. The additional services formed part of the value added services that the 4PL was able to provide for this client. Case 2 The second alcoholic beverage company, while having a small relative volume and value of locally produced product depended heavily on distributing imported product. The majority of product is sourced on Ex Works or Free on Board terms meaning inventory is taken up in the companies books at the time of shipment which in many instances can add up to six weeks stock to the local inventory values. Here, the 4PL was retained to provide a solution, which is a combination of supply of specialised procurement & purchasing resource plus management of third party service providers and in-house customer services and warehouse resources. Reporting to the General Manager Finance & Operations this function was specically responsible for managing: . A forecasting process. . Product purchasing. . Negotiation and management of 3PL relationships including international freight forwarding, contract warehousing and domestic transport. . Customs & Australian Quarantine Inspection Service (AQIS) compliance. . In-house warehouse. . Inventory management. . Customer services. Key impact areas targeted for improvement by a 4PL Given inventory is generally one of the larger areas of investment and company asset for most beverage companies, as 4PLs integrate within an organisation there is inevitably a clear desire and drive to reduce or more appropriately balance the companys investment in this area. This, coupled with targeting improved customer service levels, is likely to be the primary focus of a 4PL when rst commencing with the client organisation. Indeed, the philosophy of MCG (a non-asset based consultancy providing 4PL services) with its two alcoholic beverage 4PL contracts was to focus on managing inventory by risk based principles rather than the more common error based logic in so doing, inventory reduction was achieved while service levels were enhanced. A second key area of focus was found to be that the 4PL created the strategic development of the companies supply chain with a view to extending/applying wider value chain principles. This more holistic approach involved educating and adapting the business to the benets of an integrated cross functional approach (rather than the silo culture displayed in many organisations) recognising that the objective is two fold, both to deliver value to the organisation and also to position the organisation as a value creator within the greater value chain between point of product conception to product

consumption. In positioning the organisation as a value creator within the greater value chain the reward by default is increased customer loyalty and patronage. A further key area of focus was found to be the development of improved process control. Value is created and rewarded as a result of consistency and reliability of product or service delivery. Consistency and reliability are the result of clearly dened and tightly managed processes. Research results Case 1 As a result of global restructuring this organisation moved away from a 4PL model and took management of the supply chain back in-house utilising a regional cluster model. It is, therefore, possible to quantitatively access the impact of change one year later on performance aspects such as inventory turn. To ensure like comparisons and remove exchange variations inventory quantities for both the years preceding termination of the 4PL contract and the rst year of in-house operation were valued at a standard value, as was cost of sales for each of these periods. Table I shows the results reect a 1.3 stock turn deterioration or 16 per cent poorer performance in-house, one year later than the average achieved using the services of a 4PL during the preceding three years. This reduction in inventory turn resulted in the funding of approximately a further $1.5 m in inventory and a consequential increase in storage costs assuming like sales in the 2004/2005 period when compared with 2003/2004. Days out of stock and lost sales displayed little variance between the before and after situation change. Further, as it has transpired, the cost of managing the supply chain function in-house for this organisation one year later was 39 per cent more expensive than had they continued to utilise the 4PL. This appears to be a combination of resource costs in Australia being higher than were the equivalent resource employed in New Zealand, higher travel costs as a result of remote management, and no longer beneting from the 4PLs ability to provide part resources for peak or specialized requirements and,
Quarter Actual 2001/2002 at Budget rate 2004/2005 4PL September December March June September December March June September December March June September December March June Stk turn 9.8 9.4 9.8 8.9 7.2 7.5 8.2 6.0 7.1 10.0 6.3 7.2 6.2 7.0 7.2 6.9 Ave S/T

Value contributed by 4PL 681

Actual 2002/2003 at Budget rate 2004/2005 4PL

Actual 2003/2004 at Budget rate 2004/2005 4PL

8.1

Actual 2004/2005 at Budget rate 2004/2005 in-house

6.8

Table I.

IJPDLM 38,9

therefore, the client organization would only bare that portion of cost truly attributable to the service provided. Case 2 This organisation chooses to measure inventory as a function of forward days cover and compare on a moving annual total (MAT) basis. This approach levels anomalies (good and bad) and relies on a consistent performance over numerous periods to reect a change in stock turn values. In the year preceding the change to utilising a 4PL, this organisation achieved a stock turn of 4.15 when measured on a MAT basis. The year following implementation of a 4PL model, stock turn had improved slightly to 4.41, a 6.3 per cent improvement or approximately $0.75 m reduction in relative inventory value. While perhaps not as striking difference as Case 1, in this latter year there were further mitigating reasons that adversely affected performance, such as the organisation being contracted to purchase a specic minimum volume of a key brand regardless of the depressed local market demand thereby inating inventory and negatively impacting stock turn. To date there has be no signicant change in both, days out of stock or lost sales between the two operating models. With this organisation one of the primary advantages of moving to the 4PL model has been the ability to integrate functions under a single value chain management focus and reporting structure, an aspect that the business had not achieved prior to the change. EVA as an overall measure of value contribution by a 4PL While the nancial and non nancial measures such as those already discussed may be constructively used to evaluate the performance of a 4PL intervention it never-the-less remains preferable to link performance to overall value creation for the organisation. Walters and Halliday (2005) discuss a number of nancial performance measures noting that:
[. . .] performance measurement is comprised of a range of topics. Essentially, we are considering the effectiveness and efciency of management decisions. Effectiveness when measured for nancial performance includes, returns earned on total capital employed (ROCE) and shareholders equity (ROE). Financial efciency measures the utilisation of corporate resources and these are represented by xed assets and working capital items. Investment performance usually reects value generated by the business. Measures may be the conventional earnings per share (EPS) or by price earnings ration (PER). Other ratios include the markettobook ratio (shares issued multiplied by current share price divided by the value of the companys assets). A positive value indicates that the market values the shares of the rm at a greater value than its assets and consequently the business is seen as adding value for the shareholders. The market value added (MVA) measure does much the same. It is calculated by adding the market value of the companys shares to existing debt and subtracting the capital invested in the business. Again a positive value will indicate a value generating business. MVA is arguably more future orientated as the shares rise; theoretically, this reects investors views of future prospects for the rm.

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The aspect worth note is, these latter two measures, in many aspects are subjective, driven by market perception which can be signicantly inuenced both positively and

negatively by timing and nature of media releases coupled with the general economic climate. While of interest, these measures are not sufciently absolute to be an effective or efcient monitoring of 4PL performance within an organisation. Further, Walters and Halliday (2005) discuss:
[. . .] economic value added (EVA) which subtracts the cost of capital from the after-tax operating prot for the period (cost of capital being calculated by multiplying capital employed by a relevant weighted cost of capital usually adjusted for industry sector risk). A positive value indicates value has been added during the period. EVA is more orientated toward the current period or recent past.

Value contributed by 4PL 683

It is not only the protability of a company that matters, but also the capital needed to obtain that protability, and its cost. Thus, obtaining a good Prot & Loss result is not good enough. The capital necessary to achieve these results needs also to be measured. Implicit is the need to monitor the cost of capital and assess performance versus that cost. EVA is thus an objective measure that has a start point from which to make a comparison of performance within a relevant nancial period (the current position). Because inventory in most organisations forms a signicant portion of total asset value, EVA can be considered a good indicator when evaluating 4PL contribution to an organisation. The simplied formula is: EVA Operating prot 2 Taxes-(Total capital employed Companys cost of capital) It should be noted that this is but a single viewpoint. Value contribution can come from non nancial sources also.

Conclusions and future research In both cases studied the use of a 4PL has added value to the client organisations. This value has primarily been in the form of improved inventory turn and reduced inventory investment relative to annual sales. In both organisations enhanced value chain integration was a further key benet from application of the 4PL model. Given the signicance of inventory as an asset within most organisations it is logical to extend any value assessment of a supply chain model, be it in-house or out-sourced to include consideration of impact on EVA. While EVA is a useful measurement at total company level, it needs to be noted that this is measuring performance drivers from more than just the area of supply chain management and as such cannot be used in isolation as an exclusive indicator of supply chain model performance. The trend to identify 3PLs as potentially leading providers of 4PL services is of some concern. As asset based service providers, 3PLs are essentially looking to maximise the use of their own assets so decisions on-behalf of a client organisation may at times be self serving and not necessarily always in the best interests of the client organisation. Further research into understanding whether 3PLs can provide the true level of independence needed to deliver 4PL value to an organisation is warranted coupled with research into the level of understanding within potential client organisations of what value 4PLs can create for their organisations. It is important to differentiate between a 3PL and a 4PL some of the key factors are reected in Table II.

IJPDLM 38,9

Factor Asset basis Accountability

3PL Asset based (e.g. warehouse/transport) Part (in conjunction with internal resources &/or other 3PLs) Logistics (typically) Inuences time & place utilities Cost

4PL Non asset based (except perhaps information technology systems) Total singular accountability (as if internal) Logistics, supply & demand chain integration Controls time & place utilities while also inuencing form & possession utilities Value creation within client organisation

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Role Business impact Performance/success measurement

Table II.

References Bowersox, D.J., Closs, D.J. and Cooper, M.B. (2007), Supply Chain Logistics Management, 2nd ed., McGraw-Hill, New York, NY. Coyle, J.J., Bardi, E.J. and Langley, C.J. Jr (2003), The Management Of Business Logistics: A Supply Chain Perspective, 7th ed., South-Western Publishing, Mason, OH. Frost and Sullivan (2004), Fourth-Party Logistics: Turning A Cost Into A Value Proposition, Supply Chain Management, pp. 1-2. Frost and Sullivan (2005), Next Generation Supply Chain Strategies in Europe: End-user Attitudes & Perceptions Toward Fourth Party Logistics Engagements & Opportunity Assessment for a Business Case, available at: www.researchandmarkets.com Langley, C.J. Jr, van Dort, E., Ang, A. and Sykes, S.R. (2005), 2005 Third Party Logistics, Results and ndings of the 10th annual study, pp. 1-46. Porter, M. (1996), What is strategy?, Harvard Business Review, December. Walters, D. and Halliday, M. (2005), Marketing and Financial Management: New Economy New Interfaces, Palgrave Macmillian, Houndmills, pp. 1-408. Walters, D. and Rainbird, M. (2007), Strategic Operations Management: A Value Chain Approach, Palgrave Macmillian, Houndmills. Corresponding author Alan Win can be contacted at: alanw@itls.usyd.edu.au; a.g.win@massey.ac.nz

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