The Evolution of the 5PL

As supply chain management experts argue the growing importance of the information flow over the physical flow, academics are proposing the concept of 5PL, which integrates the benefits of both 3PL (third party) and 4PL (fourth party) logistics providers

THE LEAD UP TO 5PLS Trends to outsourcing supply chain management (SCM) to 4PL service providers are likely to continue to drive more effective and efficient business practices in the 21st century. Distribution and transportation, like purchasing and customer service, are critical functions of SCM that have greatly impacted on economic systems in recent years. With the more aggressive competitive global environment, SCM portrays a great deal of potential to provide a competitive edge by its tailor-made customer service. A question still remains as to who would be most appropriate to have intrinsic knowledge of the customer’s requirement, and while maintaining the accountability, responsibility. This entails capability to not just strategize, but also to possess the necessary competencies to execute the operational aspects of the firm. In this respect, it can be clearly seen, even through the many cases that have occurred in the last couple of years, that in order for a 5PL to emerge, the entity must be built and grown from ground up, and not top down.

PROBLEMS OF 4PL INTERFIRM NETWORKS Consequently, managers dealing with SCM functions within firms will have to develop heightened collaborative skills in their interactions with 3PL and 4PL interfirm network partners. Despite the proliferation of interfirm network partners, however, interfirm networks are problematic. This is rather disturbing for those firms considering outsourcing the SCM function, because of the close strategic link between the organisation and the 4PL service provider, and the necessity to share sensitive information.

Managers also need to be aware of the risks of outsourcing 4PL services, including:

• Loss of control: sensitive information must be shared.
• Lack of performance measurement: what should be measured, and what incentives should be put in place?
• Lack of internal expertise: the 4PL relationship must be effectively managed. Mangers often do not fully comprehend the nature of the interfirm linkage.
• Lock-in or dependancy: difficult to change partners should the interfirm linkage prove unsuccessful.

There is a tendency of 4PL service providers to be borne out of 3PL providers. For example, FedEx, UPS, TNT, and DHL are all players in both 3PL and 4PL. Despite 4PL service providers being portrayed as ostensibly ‘neutral’, it does raise a serious conflict of interest dilemma, in that a 4PL service provider will most likely form partnerships with its 3PL divisions. Overall, the system may be more effectively managed than the in-sourced option, but may not necessarily be optimised. These risks highlight the need for managers intending to outsource SCM to have sufficient trust in the service provider to accept the sharing of sensitive information must effectively manage cross-corporation and crosscultural relationship; and have an exit strategy if the partnership does not prove successful. The implications of the changing dynamic in SCM is that there will be an increasing need for strong interfirm networks connecting firms with their 4PL service providers.

Celestino reported that firms may save between 15 and 25 per cent in the cost of logistics by outsourcing to 3PL service providers, depending on industry and country. Outsourcing to 4PL service providers also offers similar cost reductions, but the exponential decay over time is more pronounced, with most savings coming in the first two years of implementation. Figure 1 graphically displays the cost reductions evident with the sequential introduction of 3PL and 4PL philosophies.

THE COST OF LOGISTICS In the constant search for global competitiveness, Figure 1 begs the question of what lies ahead, as 4PL cost reductions run their
natural course. Clearly, the necessary technology is available to deliver more advanced logistics systems. The question is will the cost involved in deploying
such a solution be justified given that the gains in productivity for 5PL systems are unlikely to be of the order of magnitude achieved by 3PL and 4PL systems? While productivity gains are likely to be somewhat less, they may well be enough to ensure a competitive edge is maintained. Incremental gains in cost reductions and efficiencies may well be enough to justify the investment in such systems.

As such, the next significant strategic initiative in SCM may be the ‘5PL’ service provision. This would entail the ‘transaction cost analysis’ approach applied to 4PL systems, requiring extensive evaluation and analysis of the performance of 3PL and 4PL service providers, and consequential optimisation of the entire system. There is a need to circumvent the often incestuous relationships that have become apparent in the 3PL and 4PL systems, as well as alleviate the lack of ‘comparative’ financial examination and performance metric evaluation currently evident.

Several of the factors that have determined the uptake and success of 3PL and 4PL are also likely to drive the adoption of 5PL. Frost and Sullivan identified the need for an even greater emphasis to be given to customers whose requirements will become far more demanding. Shippers who enter a logistics outsourcing project want a single-point contact with one firm and supply chain visibility. Customers will increasingly demand more strategic, solution-driven, global results. Many of the issues identified with the implementation of 4PL may well continue to mitigate against the successful development and adoption by firms of potential 5PL services. One of the problems with introducing 5PL services has been the adoption of sophisticated and complex services without regard to established business strategies. According to a recurring problem with the move to 4PL business is the need to maintain a ‘neutral’ position compared to traditional business modes of operation. Another issue associated with the internationalisation of 5PL service is the need to develop different patterns and networks.

TRUST MATTERS Cost considerations are a very important aspect of the control mechanism in interfirm relationships. An increasing dissatisfaction with the scope of 3PL and 4PL services, coupled with the greater complexity of supply chains, are likely to increase the demand for 5PL ‘metaproviders’, who are capable of being a trusted partner and taking on a substantial strategic role by sharing the associated commercial risk and rewards. This increases the need to build and maintain trust between the mutually dependent parties.

Issues around the business arrangements and performance expectations for 4PL service providers will need to be solved by 5PL aspirants. As with 4PLs, 5PLs will need to have a high degree of adaptability in meeting customers’ needs. The quality of the relationship between the 5PL service suppliers and their clients will determine how effectively the two parties are able to combine to aggregate available ‘inside’ and ‘outside’ resources.

Greater competitiveness in the transport industry has created higher quality value added services, further supply chain integration, and strategic partnerships. Alliances, mergers and acquisitions between 5PL provider and between customers are set to continue apace. When combined with continued global competition among firms this will force the speed and intensity of innovation and exert downward pressures on costs leading to further efficiencies. Thus, a congruence of goals and effective communication between both the supplier and customer are critical to generating real value in such partnerships. A continuing challenge for prospective 5PL providers will be balancing the capacity to be flexible to individual customers with the systems to coordinate and serve the needs of multiple customers.

CONCLUSION Any notion of 5PL will depend on providing a service capacity to develop and implement a networked, flexible supply chain capable of seamlessly integrating and meeting the demands of all partners, including manufacturers, suppliers, carriers, and vendors. Such productivity gains will probably result from breakout technologies capable of fully integrating and mobilising all the business aspects of SCM. One critical aspect of the soft skills required is the capacity to develop and maintain a sense of trust on commercial, operational and personal level.

Thus, it would appear that future 5PL service providers will need to demonstrably gain and maintain a holistic and fully integrated SCM to achieve a competitive advantage for their clients.

The above is an excerpt from the paper ‘Drivers of Fifth Party Logistics (5PL) Service Providers for Supply Chain Management’ published in the Conradi Research Review 2/07 by Peter Hosie, Albert Tan and Ying Li, University of Wollongong, Dubai, and Victor Egan, Curtin Business School, Curtin University of Technology, Perth, Australia.