Layers of expertise

From automotive to aerospace, from textiles to food, manufacturers from all sectors all have grown increasingly reliant on a slick, sharply managed supply chain. Logistics is now a business-critical element that can make or break any manufacturing operation. The UK Warehousing Association (UKWA) represents 700 third party logistics service operators. Its chief exec Roger Williams says supply chain management is now an issue no company can afford to ignore. "Because most businesses have a major percentage of their costs tied in their supply chains, supply chain management – once seen as something of an add on, with no real bearing on the company's ultimate success – has been elevated to a key board level discipline," he says. Supply chain optimisation has traditionally focused on one piece of the puzzle at a time, such as sourcing goods and services strategically to strike a balance between lowest material and transportation costs, maintaining the right mix and location of factories and warehouses to serve customer markets, or using traditional logistics techniques to maximise distribution efficiency. Since the 1980s, however, that has changed: "There's been a sharp upturn in the number of companies that choose to outsource logistics and supply chain management functions to third party logistics service providers (3PLs)." Williams lists several advantages that we should expect from outsourcing to a 3PL, including a healthier balance sheet, operational flexibility, freedom to focus on core activities, and the all-important cost savings. This rapid increase in the take-up of 3PL services has spawned another offer – the fourth party logistics provider (4PL). The term 4PL was coined by Accenture (then Andersen Consulting) in 1996 and was even trademarked by the consulting group. "The idea was that 4PLs would be free of assets so they could go to a company, offer to design its distribution network from scratch, put in all the third party service operators to execute that, and manage it from thereon in," says Mike Bernon, senior lecturer at Cranfield School of Management's Centre for Logistics and Supply Chain Management. "Their promise was to do it quicker, faster, cheaper, better than you could do it for yourself." There's a level of complexity to this additional layer that should not be underestimated. There is a clear distinction between 4PL and 3PL, as some have found out to their cost. When the 3PLs spotted the consultancy firms homing in on their patch, some decided to act: "They thought they could increase their thin margins by starting up network service groups to offer end-to-end management. But many did not have the scope and could not deliver on their promises – they just didn't have the required IT skills, scope or capability to do it," says Bernon. As he points out, some companies will only ever be box movers not end-to-end supply chain managers. So, as a rule of thumb, the definition of a 4PL is an organisation that manages 3PL contracts for the customer, but which has no assets of its own. If, however, that controlling role is taken by one of the larger 3PLs, then the company is known as a lead logistics provider, or LLP – more of which below. "There is still confusion in the marketplace about what the term 4PL really means," Bernon says. To explain the potential breadth of a 4PL's role, he cites the example of Li & Fung. This organisation, headquartered in Hong Kong, started as a traditional east-west trading company. Today, it manages a network of 7,000 factories around the world, but owns none itself. "Li & Fung is what I'd term a real 4PL," he says. "They provide services for other companies and use their network to design and manufacture goods. Take one of their customers Levi, for instance: if they want a price and lead time for 100,000 pairs of jeans, Li & Fung will look at its network and decide where best to make the order and where to source the material based on circumstances at that time." This network of 7,000 independent manufacturers must all conform to Li & Fung's standards and working methods, including using its IT system. "It's undoubtedly a complex web, but what it means for companies like Levi is every time they give an order to Li & Fung, that order could be manufactured in a different location and they secure benefits of economies of scale that an organisation like this can bring them." Back on home soil, and back to logistics, even a fairly small UK manufacturer can benefit from this extra layer of supply chain management – whether it is the traditional 4PL or lead logistics role. "Many companies find they build up a whole range of third party logistics contracts over time. As a UK manufacturer, I might have 20 or more 3PLs that I use across the globe for warehousing and transport, freight forwarding, and maybe value-added services like packaging," says Bernon. "It's very complex to manage and potentially disastrous if things go wrong. A lead logistics provider or 4PL will be able to stitch it all together. They might do some of the work themselves [if LLP] but they will also manage the other contractors. They could move goods more quickly and cheaply, and might even take some inventory out because of the better overall control. These are pretty good reasons for any manufacturer to consider introducing this extra party." The reason they can do it better comes down to a host of aspects: their network capability, IT capability, supply chain skills, geographic scope, and more. They should be able to look at your own network and find opportunities to remove cost and improve service levels. If this all sounds too good to be true, Bernon sounds a note of caution. "Remember there is a dangerous flipside. If you hand over your operations to a 4PL and they don't deliver on their promise, then you are in trouble. If they have priced their offer low to win the deal, will they be able to continuously improve and take cost out in the future? To a great extent, at the moment this is still an unproven format." Driving up savings When DHL won a contract early last year to manage the inbound supply chain operation for Jaguar LandRover, the company was doubtless delighted. A few weeks later, however, that delight may well have been tinged with despair as the recession began to bite and many car plants slowed or even stopped production. Nonetheless, DHL is extremely positive about the contract and eager to share information on the potential benefits, both for Jaguar Land Rover (JLR) and other manufacturers which may tap into this type of service. Laurie Cogger is DHL's vice president for the lead logistics service at Jaguar Land Rover. Based at the Solihull factory, his team began life as the planning division for JLR's UK collections, before taking over the European service element in March 2009. Acting as the lead logistics provider (LLP) rather than 4PL, the deal sees DHL managing the inbound supply chain from 500 component suppliers in 17 countries and managing numerous third party logistics service providers on behalf of JLR. This service is one of the largest of its kind in the UK, with almost a thousand full and partial load collections every week to JLR sites in Castle Bromwich, Solihull and Halewood. DHL says it secured supply chain efficiency improvements of 10% within a few weeks of the contract start, and anticipates more enhancements in the coming months. Scope is a vital enabler for any LLP and DHL's global capabilities are proving to be a hit for JLR. Many of the car maker's component suppliers are located in Spain. "When we started as LLP, we put the Spanish collections out to bid to various carriers, but we have a DHL operation there which is already going to many of the same vendors on behalf of Nissan," explains Cogger. "So there are clearly economies of scale straight away – we can do it for less cost because we're already going to those suppliers and we already have a cross dock with capacity to enable us to bid for that traffic." Further efficiencies can come via the UK supply chain. Its collection service for JLR's 350 suppliers in the UK, says Cogger, enables DHL to be "very competitive" within other areas of its business which collect from similar vendors on behalf of Ford and BMW. "As the LLP, we can offer combined planning on those activities and get as many synergies as possible. If a vehicle is going to a firm in Portsmouth for JLR parts, it might as well pick up volume for Ford at the same time." The parts arrive at the DHL cross dock at JLR's Solihull factory before onward shipment to the final OEM. Cogger believes other manufacturers can learn a lot from the maturity displayed by these OEMs in terms of sharing resources and collaboration. "We run a shared cross dock here at Solihull. Most car manufacturers – or any other OEM for that matter – operate at less than full capacity. That means they usually have some space in their manufacturing sites. Why would you pay a third party for external warehousing space if you can use space in your plant to store materials?" JLR and DHL have gone one step further, he points out. "We use the space here to store JLR parts, but also to cross dock Ford and BMW materials – all subject to rigorous process management to ensure product is properly routed to final destination. It's not an issue for JLR because they reap the savings. It's a collaborative approach that they're all happy with, because they all receive more competitive rates." On a day-to-day basis, Cogger's team focuses on optimising planning. The contractual requirement is to re-plan each month, once production forecasts are provided by JLR. "That may require designing new services for model launches, or making arrangements for different holiday dates around Europe, for example. Our service is both strategic and tactical planning," says Cogger. "Strategic looks to take cost out over the long term; tactical takes it out of daily operations depending on volume call offs." As well as the planning requirements, DHL's role as LLP sees it running a container team for JLR to support reverse logistics, making sure there are sufficient stillages in the loop for all suppliers. There is also a vendor management team to look after suppliers and make last-minute alterations to schedules if needed. There clearly is a significant amount of trust required. When DHL reports figures, it cannot make any distinction between those spokes of the collection network carried out by its own group companies or by any other third party. The same applies for bids on new collections or routes: "When we put out bids, we evaluate costs from several suppliers and we make the selection based on service and price. It would be more than my job's worth to shoehorn DHL in, it just wouldn't be worth it," says Cogger. "We offer a transparent supply chain management service where we're not frightened of showing our costs to the customer. It builds trust. And the closer the relationship, the more everyone will get from it." He says this type of LLP model could work for many other organisations. He cites the example of a first-tier supplier he used to work with, which had 35 plants across Europe. "Each factory was fairly small and procuring its own transport locally, which made no sense. That was nowhere near the size of JLR's set-up, but still lent itself to LLP because of the need for an overseeing position." Even manufacturers with as few as two or three sites can benefit, he says. "The key thing is synergy and we can offer that. There's no one size fits all – our services are based on the customer's need, not a predetermined offer."