Options for Business Process Outsourcing in the Logistics Industry – 3PL vs. Logistics Services Integrators (a.k.a. 4PL)

Business Process Outsourcing can be a practical and beneficial option for most companies. Organizations outsource for many reasons, with the desired outcome being reduced costs, improved operations, overcoming a lack of internal capabilities, gaining competitive advantage, and other benefits that are both tangible and intangible.

Outsourcing can be used in many parts of a business, but most often for what a company defines as non core functions; accounting, legal, human resources, information technology, manufacturing, sales, sourcing and logistics /supply chain management. Of course “non core” and “core” differ by company and industry. Non core can be important and critical to a company, but does not define the company and set it apart from competitors.

When it comes to logistics and supply chain management, there are two primary methods to take advantage of business process outsourcing – 3PL and Logistics Service Integrators (also known as 4PL or 4th Party Logistics).
3PL (3rd Party Logistics provider).

For about the last 20 years, 3PL’s have led the way in logistics outsourcing. Drawing on its core business, whether it be trucking, order fulfillment, warehousing, etc. - 3PL’s have expanded their offering with new or additional services. It presents a way for essentially a commodity type service logistics provider to move into higher margin, bundled services and further develop and leverage their customer relationships.
Customers, seeing value in the concept of the 3PL and always looking to reduce costs, have recognized value in the concept. The result is the market opportunity for outsourced logistics service providers, whether domestic or international became and remains sizable.

Unfortunately the reality has not lived up to the promise. The reasons are varied, but the bottom line is many 3PL’s have failed at their own business transformation beyond adding the “Logistics” moniker to their company name. Often 3PLs have not successfully moved past their core commodity service to become true multi-service providers – the trucking company is still just providing trucking services, not providing value or improving the customer’s logistics network. Others have failed to differentiate themselves against the competition. Many 3PL’s have done a poor job positioning and defining themselves in the marketplace while others have commoditized their 3PL service, as a result undoing the very purpose of their 3PL.

The complicated and varied methods for how 3PL’s look to be paid for services has added to the challenge. Shared savings, contingency and transaction based fee structures are among the many ways 3PL’s are compensated. The very method for how a 3PL is paid can be in direct conflict with the best interests of the customer whether it be a consideration of cost or service. Customers can still find they have no understanding of their true costs and service performance with all the shipping data and information moving through a 3PL.

These setbacks have prevented the growth of some 3PLs in terms of both retention and new customers. Broad fragmentation of the sector reflects both the uncertainty of how 3PLs view themselves and the diversity of customer needs. With the involvement of multiple 3PL’s customers are often forced to deal with proposals or solutions that cannot be measured against one another.

Business Process Outsourcing and the Logistics Service Integrator (LSI).

First, note that Business Process Outsourcing (BPO) is not traditional outsourcing. Traditional outsourcing is typically taking a set of tasks or functions and simply moving them to an outside service provider. A BPO provider, or in the case of the supply chain/ logistics industry, a Logistics Service Integrator (LSI), brings an expert perspective, specific knowledge and experience as well as technology to an organization. The LSI works with the company to develop a solution to improve an existing or new process through independent and unbiased analysis and recommendations.

From the service vacuum created by 3PLs, the LSI has emerged. Using a Logistics Service Integrator is much different than the traditional 3PL. The LSI is a BPO provider, is neutral, and will manage the logistics process correctly, regardless of what resources need to be used. This includes carriers, fulfillment vendors, freight payment providers, 3PL’s, or any other logistics service providers that are part of the company’s network.

The goal of the LSI is to represent the interests of the customer by bringing their specific expertise into the qualification and management of the logistics service providers. An LSI wants to position itself as an extension of and as part of its customer.

Conclusion. Although born out of good intentions, in general 3PL’s have not fully served the purpose for which they were conceived. The reality is 3PL’s have remained too focused on managing tasks and transactions in a very short sited way, and not on the important broad focus and processes of their customers. The results are missed opportunities to present real value to the organization being serviced. Logistics Services Integrators have become a good alternative for business process outsourcing. The value lies in the LSI being positioned as an extension of the organization itself. Processes are analyzed, logistics technology evaluated, and vendors qualified independently based on the unique needs of the business, with no preconceived ideas or over-riding commitment to a 3PL’s own interests. LSI’s are compensated based on the value they add, with complete transparency of costs for the business they have partnered with.

Ken is founder of two logistics supply chain management companies in the ecommerce order fulfillment and transportation management system markets.