Outsourced logistics: the big debate

08 April 2011 15:33  [Source: ICB]

The chemical industry has resisted using independent consultants to manage its logistics needs

The concept of fourth-party logistics (4PL) - where an organization, often without its own assets, will manage all or part of your logistics operations - has never really taken off in chemicals.

Yet use of third-party logistics (3PL) providers, which do own their own assets, has become widespread in our sector. As our listing shows, the 3PL sector has become big business in chemicals. Yet it contains only one pure 4PL: ISC Global.

Many manufacturers in the sector have chosen to reduce the complexity of their operations and supply chain by outsourcing large chunks of their supply chain to an independent third party. This enables producers to improve their balance sheets by reducing the amount of capital tied up in logistics assets such as trucks and warehouses. They can reduce headcount and cut out some of the complexity of running the business, allowing them to focus on production.

The arguments in favor of outsourcing to a 3PL are powerful, but why have so few chemical producers chosen the 4PL route? The 4PL does not usually own assets, but will contract out to a variety of logistics providers to get the best deal for the supplier. One key argument used against 4PL is that it is not suited to the chemical sector, where dangerous products need specialized handling and transporting equipment. 4PLs are said to be better suited to low-hazard goods, where contracting out to general carriers is possible.

The 4PL, however, counters that it has the flexibility to use the best provider for the job, be it a second- or third-party carrier.

Here, we ask two people with opposing views to voice their opinions on the 3PL versus 4PL debate.

THE DEFINITIONS MINEFIELD
Speak to five logistics professionals and you are likely to get five different definitions. For the purposes of this listing, we have agreed the following:

First Party Logistics (1PL) A 1PL is the chemical producer itself

Second Party Logistics (2PL) A 2PL is a transport firm that provides a basic service of one kind, such as road transport, without any integration to other parts of the supply chain, such as warehousing.

Third Party Logistics (3PL) A 3PL is a company that provides multiple logistics services for use by customers. Preferably, these services are integrated, or "bundled" together, by the provider. Among the services they provide are transportation, warehousing, cross-docking, inventory management, packaging, and freight forwarding.**

Fourth Party Logistics (4PL) These are often either specialists or consultants, often without their own assets, which integrate into a producer's supply chain, contracting out to other carriers. The CSCMP Glossary adds: "All aspects (ideally) of the client's supply chain are managed by the 4PL. It is possible for a major 3PL to form a 4PL within its existing structure."

**Taken from the Council of Supply Chain Management Professionals' (CSCMP) glossary

 

Bertschi: very little room in the bulk chemical industry for 4PLs

THE 3PL
HANS BERTSCHI, PRESIDENT AND CEO OF
SWISS HEADQUARTERED 3PL BERTSCHI
A 4PL relies on contracting out to other carriers that may not have the necessary expertise. In the chemical industry, safety is a very important topic, as is technical and product expertise. There is very little room in the chemical industry for 4PLs, as the industry prefers to work with 3PLs.

There are exceptions, such as fine chemicals with packed products, which are not hazardous. But in liquids or dry bulk, we do not, so far, see any 4PL activity being at all successful.

A 3PL has direct control over its assets, and the people it employs to do the handling and transportation. This control over the safety of its operations guarantees, in general, a higher safety level than working with sub-contractors. They do not have the same knowledge of the supply chain processes and safety of operations.

3PLs have a preference to offer services directly to the producing industry and not to have a filter between us and our customers. This makes it very difficult for a 4PL to establish itself.

3PLs want to provide solutions to the chemical industry themselves or by teaming up with other 3PLs in a "lead logistics" provider model. Here, one 3PL takes the lead, but also integrates the services of other 3PLs that are complementary in terms of geography or product groups.

There is definitely a demand from the chemical industry for total solutions. The 4PL is always a potential competitor, but whereas five to six years ago, we were looking very seriously at this area of development, we no longer really see this as a force moving into this market.

In the mainstream, where bulk products are 60-80% of the total moved, the time is not ripe for the 4PL model. Based on this discussion about the emergence of 4PLs, many 2PLs have, in the past six to eight years, changed into 3PLs and can now offer what a 4PL can but with a tighter grip on safety and capacities.

Where 4PLs have operated in the bulk sector, they have run out of equipment once the market tightens and are no longer able to service the customer.

THE 4PL
WOLFGANG PARTSCH, PRESIDENT OF
ISC GLOBAL, A SWISS AND SINGAPORE-HEADQUARTERED 4PL*
We can choose the right transport mode and company for specific regions or destinations. A 3PL cannot be a 4PL, as they would be neither neutral or independent if they owned assets. We can control the total flow [of the supply chain] - everything from procurement of raw materials to information and cash.

We can normally guarantee 10-15% savings. If it is more than that, we share the gain and if it is less then we have to pay.

A 3PL will not want to open his book to his customer, but we will show him all the transactions plus the costs of 3PL or 2PL competitors. We can implant just one or two experts to help in parts of the business. We have 500 people, so we can take our knowledge in and implant it for specific needs.

A lot of companies are rethinking their decision to use 3PLs. They have no control over the logistics processes and can easily become caught in a 3PL's systems, such as IT. Once this happens, it is easy for a 3PL to raise its rates.

Their choice is to take logistics back in-house or outsource to a 4PL. We can take over a producer's whole logistics department. Sometimes 20-30 people could be on our payroll, under the control of our people.

Experts predict that logistics costs will increase by 10-20%, which is dramatic. High energy costs, capacity bottlenecks and higher inflation will be factors. It is not managing the growth that is important - it is managing the cost side.

We are able to make a neutral decision as to which 3PL will be the best in a specific region or country. We are not fixed on a particular one. At first they might think that we are their enemies, but further down the road they will want to team up with us because we will be able to give them the business.

The 4PL is not so well known in chemicals, but it is about timing. Sophisticated and strategic-thinking chemical companies are moving to 4PLs or analyzing whether it is a good concept.

It does not suit everyone, however: if a company's processes are too simple, we cannot do much. But I would say that big players such as [US-headquartered] DuPont will seriously think about this concept.

I predict that 10-20% of the chemical industry will move to 4PLs in the next 10 years. Every company has different challenges. Some may enter a new market or product lines that they are not familiar with.

Companies will feel comfortable with the 4PL concept if we can take away the risk and guarantee savings. We want to preserve and strengthen their strengths. If you outsource, you give everything away, so to give it to a 3PL is much more dangerous as they have complete control.

*Swiss company 4PL Central Station Group owns a 50% stake in ISC Global with Partsch and financiers holding the balance.


By: Will Beacham
+44 20 8652 3214



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