COMMENT: The future belongs to 4PLs
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Access to market knowledge, cost optimisation and increased efficiency of logistics operations are just three of the benefits companies can expect with the integration of logistics processes, but while 4PL has been around for some time, many Middle East companies are yet to understand the advantages and differences between this model and 3PL services.
Getting to grips with 4PL
To begin at the beginning, a 2PL operator would be a carrier that transports goods for a client without offering integrated logistics solutions. 3PL solutions are a little more comprehensive, where the supplier selects the modes of transport and takes care of administrative supervision, but the actual planning of the supply chain is the responsibility of the client’s logistics department. 4PL models are characterised by much greater integration, and the client need only indicate what they want transported where. The operator is responsible for designing and managing the entire process. Essentially, 4PL means outsourcing logistics services, so the client does not usually have their own transportation and logistics departments. Importantly, operations are highly personalised, having been designed from start to finish for each individual company.
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“We can explain the difference between 3PL and 4PL with the example of building a house. If the client comes with a ready-made architectural design, divides the work between the teams and oversees purchases and construction themselves, we can draw a comparison with 3PL services. On the other hand, if the client describes their expectations in terms of the style of the house, its functionality, their budget and delivery criteria, and the company is responsible for designing and realising the construction using qualified, supervised subcontractors, this comprehensive solution is an analogy for the activities of 4PL integrators in the logistics sector,” explains Stefano Pollotti, Managing Director, GEFCO Middle East.
The difference between 3PL and 4PL can also be demonstrated using the example of the tender process. In the first case, the client, having designed the logistics solutions themselves, sends out enquiries to their known suppliers. This process, although repetitive, usually takes place every few years and involves the investment of substantial resources over a short period. On the other hand, with 4PL services, developing the process architecture and finding the best 3PL providers in terms of quality and price to oversee the various stages of the chain is the role of the logistics company. “It is not the case that integration at the 4PL level is always better than 3PL. When choosing an integration model, you need to consider the size and scale of the company, the complexity of your logistics needs, available resources, qualifications and knowledge of the market. 4PL is simply a transition to a higher level, delving deeper into the client's logistics structures and processes, leaving the client to focus on their core business,” adds Pollotti.
Who is 4PL for?
4PL solutions work well for companies of all sizes. They are especially useful in companies with undeveloped logistics departments, where there is a lack of resources and experience in designing logistics processes and insufficient knowledge of the field – again, we see many examples of this in our local and even GCC organisations. Logistics departments with few staff members often have difficulty managing extensive logistics and planning. Fast-changing management structures and the related shifts in logistical requirements make it increasingly difficult for logistics departments to maintain the required efficiency, particularly in terms of designing solutions and sourcing suitable logistics operators specialised in particular markets and services. This leads managers to restructure logistics departments in order to reduce costs, save time and streamline processes. Other types of companies that could benefit from 4PL solutions are large entities which are building their position by concentrating on their core business, such as production. They invest their resources in the market and the product, leaving process design, synergies and logistics to an external entity, whose work they control with service agreements.
Outsourcing logistics to an external company is a difficult decision but the associated profits make it worthwhile. One of the companies that benefits from GEFCO 4PL comprehensive services, for example is PSA Group, the owner of brands such as Citroen, Peugeot and the American corporation General Motors. 4PL solutions allow clients to access the deeper layers of the market. Straight after signing a contract, companies opting for the GEFCO 4PL service obtain knowledge about which 3PL operators offer the best solutions and prices. They also receive extremely well-developed tools, including ready-to-use processes for supplier acquisition and purchasing. Furthermore, they save money, because the high fixed costs of using their own logistics team are spread over several companies with 4PL.
Benefits of 4PL also include outsourcing management of part of the staff, and splitting administrative costs between a number of companies. 4PL is a facilitator in markets where specialists are hard to find or when additional and costly training is needed. Companies using 4PL also have the advantage of outsourcing accounting, ranging from checking the accuracy of invoices, through tax matters to reports. A 4PL integrator can also offer companies ready-made IT solutions which improve the efficiency of purchasing and accounting operations.
According to Pollotti, companies that adopt the 4PL model rarely go back to 3PL and their own, full logistics department, which becomes less and less economically justified as a model. “4PL offers savings, access to knowledge about the market and trends, and transfers responsibility for service quality to the operator. Self-management of logistics rarely offers such potential because companies navigating the market only have knowledge about their own flows. As a result of cooperating with several 4PL clients, they simply get a better understanding of the market,” he explains.
Transparent selection of subcontractors
Another advantage of 4PL is the way that tenders are organised on behalf of the client. This means the client avoids having to involve their employees and undertake arduous procedures. The selection process for 3PL providers is transparent and based solely on the indicated tender criteria, because once the purchasing department have prepared their enquiry, they are detached from the operational teams.
Sometimes, 3PL service providers wonder why they are working on so few jobs or not receiving new contracts. “This can sometimes be due solely to their lack of competitiveness. Winning jobs is determined by favourable circumstances where, for example, a 3PL operator’s existing flows can be used to handle a new order,” says Pollotti. As an example: an operator is transporting finished vehicles from the UAE to another part of the GCC. When a tender occurs for transport in the opposite direction, a carrier with empty cars or wagons can offer GEFCO 4PL a very attractive price. “Thanks to the professionalism of the purchasing process, it is easy to audit the work of the 4PL integrator. We have developed procedures to eliminate the risk of irregularities and to do business based on relationships,” stresses Pollotti.
Concerns remain, but the future belongs to 4PL
One of the barriers to the popularisation of 4PL is the lack of market awareness of the service in the Middle East, meaning that companies do not see the measurable benefits of placing the bulk of their logistics department’s responsibilities in the hands of a 4PL integrator. The decision-making processes in international companies also pose an obstacle. “Business leaders are often afraid of big changes. They prefer to keep logistics in-house. Let’s not forget that companies used to think this way about transport. They wanted their own cars and they didn’t trust carriers. Then 2PL appeared, followed by 3PL. Now we’re at the stage of 4PL services becoming the way forward. I am hopeful that regional companies will increasingly come to see 4PL operators as strategic partners without whom good business results are hard to achieve,” says the UAE’s GEFCO Managing Director.
It looks like 4PL is here to stay. As usual, the pace of change will dictate the market, and organisations within the wider MENA region must focus increasingly on their core businesses and leave logistics in the capable hands of a 4PL integrator – the ultimate in logistics delegation.