Introduction

Third party logistics (3PL) companies are a becoming an important part of today’s supply chain. These companies offer services that can allow businesses to
outsource part of all of their supply chain management function. Many 3PL companies offer a wide range of services including; inbound freight, freight
consolidation, warehousing, distribution, order fulfillment and outbound freight. The growth of 3PL companies has been driven by the need for businesses to
become leaner, reducing assets and allowing focus on core business processes.

Rise Of Third Party Logistics Providers

The growth of 3PL companies began back in the 1980’s when businesses began to look for new ways in which they could
outsource logistics functions and concentrate on their core business. One company that has been associated with the 3PL
revolution is FedEx. The company’s overnight delivery service changed the way in which business to business and business
to customer transactions operated. This offered businesses the opportunity of using just-in-time techniques, which saved
warehousing space and reduced overall costs. The introduction of efficient-consumer-response (ECR) techniques led to
smaller and more efficient shipment sizes, which in turn further reduced costs.

As companies saw the benefits of outsourcing delivery and warehousing functions, the number of third party logistics
companies began to rise offering an ever increasing number of services. The increasing numbers of 3PL’s inevitably led to
increased competition between these firms, which led to greater savings for the companies who employed them. The last
decade has seen the 3PL provider transitioning from a local or regional business to one that offers national or global
coverage. In US, the 3PL market has been growing at a compound annual rate of 14.2 percent since 1996 and in 2006; 3PL’s
in the United States reported $89.4 billion in gross revenue.

Selecting A 3PL

Deciding to a use a third party logistics company is a decision that depends on a variety of factors that differ from business
to business. The decision to outsource certain business functions will depend on the company’s plans; future objectives,
product lines, expansion, acquisitions, etc.

Once a decision has been made to outsource certain processes then a company will begin a search for the right 3PL that fits
all their requirements at the best possible price. There are three types of Third Party Logistics Company that operate today.

 Asset Based
 Management Based
 Integrated Providers

Asset based third party logistics companies use their own trucks, warehouses and personnel to operate their business.
Management based companies provide the technological and managerial functions to operate the logistics functions of their
clients, but do so using the assets of other companies and do not necessarily own any assets. The third category, Integrated
Providers, can either be asset based or management based companies that supplement their services with whatever services
are needed by their clients.

When selecting a 3PL, the request for information (RFI) or quotation (RFQ) should be as detailed as possible. The company
that is selected should be able to fulfill all the logistics requirements and that can only be assured if every requirement is
communicated to potential companies. The RFI should include a detailed description of the areas to be outsourced. This will
usually include:

 The scope of the contract, including locations, facilities, departments.

 Information on volumes involved; number of deliveries, warehouse sizes, number of items, etc.
 The logistics tasks are to be performed, e.g. warehousing, transportation, etc.
 The level of performance required.

After the bids have been received by a company from the prospective 3PL’s, an evaluation would take place where a multi-
discipline team will review each bid based on a pre-defined set of criteria. These will include some of the following.

 Does the 3PL provide the services required?

 Does the 3PL have the technology required to perform the tasks required?
 Does the company have the required warehouse space, dock capacity, warehouse personnel, etc.?
 Is the 3PL financially sound?
 Are the 3PL’s geographical locations suitable to cover the network?
 Does the 3PL have the flexibility to respond to changes?
 Are the 3PL’s environmental policies compatible?
 Are the costs of the services detailed enough for comparison to other bids?
 Are the customer references acceptable?
 Is the 3PL a good cultural fit?

The selection team will usually review each of the bids based on the criteria and give each bidder a score. Depending on the
importance of each criteria, a weighting can be given which gives more importance for one or more criteria in the selection
process. Once the selection team has evaluated the bids, management will often select the top two or three companies for site
visits, face to face interviews and more detailed reviews of financial records. Once a company has been identified contract
negotiations would follow before a final agreement could be reached.

Outsourcing is a viable option for companies. Businesses outsource for many and varied reasons-
increase shareholder value, reduce costs, business transformation, improve operations, overcome lack of
internal capabilities, keep up with competitors, gain competitive advantage, improve capabilities,
increase sales, improve service, reduce inventory, increase inventory velocity and turns, mitigate capital
investment, improve cash flow, turn fixed costs into variable costs and other benefits, both tangible and
intangible. To the maximum, and if done correctly, outsourcing and business process outsourcing can be
used to create a viable virtual corporation.

3PLs. 3PLs have led the way in logistics outsourcing. Drawing on its core business, whether it be
forwarding, trucking or warehousing, they moved into providing other services for customers. Creation
of a 3PL presented a way for a commodity-service logistics provider to move into higher margin, bundled
services.

Customers, anxious to reduce costs, want what 3PLs have to offer. The potential market opportunity for
outsourced logistics service providers, whether domestic, international and/or global is huge.

But something has happened on the yellow-brick road. The reasons are varied, but the bottom line is
many have failed at their own business transformation. Some 3PLs have not moved past their core
commodity service to become true multi-service providers. Or international 3PLs have not understood
how to provide domestic services; or domestic ones have not succeeded at venturing into international
logistics services.

Others have failed to differentiate themselves against the competition. Certain 3PLs have not done a
good job positioning and defining themselves in the marketplace. Or the parent company has not given
them the resources, especially sales and sales leads, to penetrate even their existing customers. And,
sundry have commoditized their 3PL service, as a result undoing the very purpose of their 3PL. These
setbacks have slowed down the growth of some 3PLs in terms of both customer retention, especially,
and new customers. Fragmentation of the 3PL sector reflects both the uncertainty of how 3PLs view
themselves and the diversity of customer needs.

As a result, customers have had to compare apples and oranges in their RFP replies. Shippers share
some accountability with an overemphasis on cost reduction as the key metric and without a clear
definition of their requirements for services they need and how it will all work within their company.
They looked for silver bullets and quick answers to complex needs.

4PLs. Into the service vacuum created by 3PLs, the 4PL has emerged. Using a 4PL, fourth party logistics
service provider, is different than the traditional 3PL. Much on 4PLs discusses technology. Technology is
not THE answer; it is part of the answer. It is one element of success of process, people and technology.
4PLs see the process and what is required to make it succeed.

4PL's combine process, technology and process to manage. The 4PL is a Business Process Outsourcing,
BPO, provider. This lead logistics provider will bring value and a reengineered approach to the
customer's need. A 4PL is neutral and will manage the logistics process, regardless of what carriers,
forwarders or warehouses are used. The 4PL can and will even manage 3PLs that a customer uses.

Business process outsourcing is traditional outsourcing and more. Outsourcing is often taking a set of
work, tasks, responsibilities or functions and transferring them to an outside service provider. Business
Processing Outsourcing (BPO) involves that and more. A BPO service provider brings a different
perspective, knowledge, experience and technology to the existing function and can and will work with
the firm to reengineer it into an improved or new process. It is an outcome-based result, not just a pure
cost reduction issue. The new process will interact or be integrated into the company in a way that can
bring value, even bottom line and shareholder benefits, to the client.

A good 4PL will have the shipper perspective and experience in what he does and offers to prospective
customers. That means a better understanding of the complexity of the customer's requirements,
present viable solutions and to have customer satisfaction and retention.

The firm sees the relationship, not a chunk of freight. Instead the BPO provider seeks incentives and
metrics to define the relationship and collaborates with each customer as to goals and outcomes. A 4PL
wants to position itself as an extension of and part of its customer. This BPO provider recognizes the role
of and need for information technology in managing the process.

A successful 4PL should have both the strategic and tactical capabilities. He should have real world
logistics experience, especially on the "shipper"/customer side. Experience lets you see real issues and
hidden agendas that are present. They also give you the ability to develop the process, people and
technology that are needed because they have "been there, done that". They understand meeting the
needs of their clients because they have managed and been responsible for logistics.

A 4PL, with real world supply chain experience, can present a way for customers to take control of their
supply chains. They can structure the relationship and the process in a way that best meets the
requirements of the customer, rather than the customer having to accept what the outsourcing provider
has to offer.

3PL vs 4PL. When it comes to outsourcing, there are three questions and underlying issues. One, do you
outsource a function versus outsource a process? 3PLs target the function. They want to handle
containers/shipments/freight, not the transport management process, for example. The true need is the
process, which is what the 4PL targets. Is there really a process in place--or a series of standalone
transactions? What is the present process? How does it work? Where does it fail? Where are there gaps?
Where are there redundancies? The supply chain process crosses organizational lines. It runs horizontal
in a vertical organization.

Two, do you outsource work/tasks or do you outsource managing? Much outsourcing is work related.
Handle warehousing. Handle shipments. Not manage them. This matter is part of the next evolution of
outsourcing and where the 3PL will have to migrate-and where the 4PL is already positioned.

Three, the outsource service provider, to truly meet the needs of his customer, should be neutral. 4PLs
should be neutral if they are to manage the process. 3PLs, especially those which are asset-based
struggle to be neutral. 3PLs which seek to push shipments through their transport contracts or through
their warehouses are not neutral.

Conclusion. Some 3PLs have not fully stepped up to meet the exact needs of customers. Some have
become too focused on "managing" tasks, not processes and on serving the parent company's core
business, and have missed opportunities to present value.

The 4PL opportunity exists because 3PLs failed to meet the real logistics/supply chain requirements of
customers. There will not be a "model" (or cookie cutter) for the 4PL. After all, he knows to customize to
the needs of each customer.

As a result, 4PLs have become alternatives for business process outsourcing. These new BPO logistics
service providers enable firms to manage a critical part of their supply chain by providing visibility and
integration across multiple enterprises. They manage with the three key elements of process, people
and technology. Users of a 4PL can focus on core competencies and better manage and utilize company
assets and resources, as to inventory and personnel.

The term "4PL" was actually coined by the consulting group Accenture. In fact, they also hold the trademark to
the name 4PL. 

Accenture defines a 4PL in the following manner: 

"A 4PL is an integrator that assembles the resources, capabilities, and technology of its own organization and
other organizations to design, build and run comprehensive supply chain solutions."

The term 4PL is something that every organization has their own interpretation of and ideas on what exactly a
4PL should offer. To add more complexity to the interpretation, the following groups of service providers actually
provide "4PL type" services: 

- Consultants 
- IT Service Providers 
- "E" Marketplaces 
- Financial institutions 
- Private Organizations 
- Logistics Service Providers (traditionally only known for 3PL activities) 

A true 4PL organization would then build a set of activities focused around a specific set of supply chain
initiatives and goals, generally with the following attributes: 
- 4PL Common Services (invoice management, call centers, warehouse/distribution facilities, etc. 
- Implementation Center (the business process analysis/scoping, and development of all activities into an open
systems framework) 
- Product/Skill Centers (supply chain engineering) 
- IT System Center (the pure IT selection for design and implementation/connectivity) 
- 4PL Back Office (administration, quality, finance, legal, etc.) 

Sitting above these functions would be a Controlling Interface, monitored by the hired 4PL party. This group
would manage all the "blocking & tackling issues" related to daily business. The Controlling Interface would
provide the customer-facing visibility, control, KPI/Metrics management, reporting, daily problem solving, etc. 

Additonally, surrounding these activity sets would be the following: 

+ Knowledge Transfer 
+ Business Development 
+ Functional Support 

So, to give you a visual field, picture a dartboard. From the center outward, there would be a series of concentric
circles. In the center would be the 4PL. The next outer circle would be the strategic partners. The next outer
circle would be the preferred service providers, following by the larges outward circle which covers the project
partners. 

The Business Ethics of a 4PL would contain the following ethos: 

- The 4PL organizaton focuses on the customer supply chain 
- All 4PL organization decisions are made towards managing the myriad of service providers, which are based on
business rules. 
- All service providers are measured on a master single set of KPI's. 

Lastly, a recap of a 4PL Products, Services & Capabilities (visualize a triangle): 

Relationship: CRM 
Know-How: Knowledge Management industry/supply chain 
Consulting: Supply chain reengineering, Process consulting (3PL), IT analysis/implementation 
Visibility: Supply chain visibility, communication and IT integration 
Operational: Accounting/invoice management, Event monitoring/exception 
management, RFP/RFQ management/execution, Carrier/3PL management. 

Disclaimer: Contents are not reviewed for correctness and are not endorsed or recommended by Toolbox.com or
any vendor.

Popular Q&A contents include summarized information from SCM Vendor Selection discussion unless otherwise
noted.
A third-party logistics (3PL) provider performs

one or more of the logistics activities relating to the

flow of product, information, and funds that could

be performed by the firm itself

– First party logistics provider (1PL)

– Second party logistics provider (2PL)

– Third party logistics provider (3PL) (sometimes LSP)

Service Category

Basic Service

Transportation

Some specific value added

services

Track/trace, mode conversion

Warehousing

Information

technology
Reverse logistics

Inbound, outbound by ship,

truck, rail, air

Storage, facilities

management

Provide and maintain

advanced information

systems

Handle reverse flows

Other 3PL services

Cross-dock, in-transit merge,

inventory control

Transportation management

systems, warehousing

management

Recycling, customer returns,

repair/refurbish
Customs brokering, hazardous

material, order taking,

consulting, port services, etc.

How has globalization impacted sourcing decisions?

• A fourth-party logistics (4PL) provider

manages other 3PLs. Whereas a 3PL targets a

function, a 4PL targets management of an entire

process

– Fourth party logistics provider (4PL)