Fourth-Party Logistics

Postgraduate

Abstract

The business environment has changed tremendously in the last two decades. Corporations have been forced to realign their global strategies and in order to cut costs, they started to transfer activities which were previously performed in-house to the market (e.g. IT, manufacturing or logistics) focusing instead on their core competencies. Nowadays companies outsource several of their logistics activities to so-called third-party logistics (3PL) companies and thus from being centralized, vertically integrated and with single-sited manufacturing facilities, enterprises have their network of resources globally dispersed. 

As a result corporate management has realized that the competitive vehicle is no longer the individual firm, with its own resources and competencies. Instead, in order to cope with shorter product life cycles and ever more demanding customers, both on industrial and consumer markets, individual firms need to strategically become part of ‘extended enterprises’; that is, networks of specialist providers of resources and competencies. 

However, because the capabilities to manage the entire network do not exist in any one organization, a new business organization was needed to provide the strategic knowledge and competence that will enable the complete integration of the supply chain. This new sort of firm, with core competencies on logistics processes and supply chain IT integration, besides offering consulting services on implementation and development of logistics and supply chain solutions, manages through the use of logistics control towers “the best of breed” 3PL specialists, integrating the end-to-end supply chain so that superior customer value is delivered in the most cost effective way.

But how does the use of a supply chain integrator help the supply chain as a whole to achieve competitive advantages that enhance end-customer service? 

This paper aims to answer the above question. I felt that in order to be able to do that the most appropriate research strategy would be a qualitative study. Hence, a multi-case study was performed on three Swedish companies which differentiate themselves from the more traditional third-party logistics providers. The study was conducted by performing a set of semi-structured interviews with these companies. In order to give the study some sort of structure, I used an interview guide which was divided into three different themes; a) Organizational Design, b) Enterprise Logistics Integration and c) Logistics and Competitive advantages.

Once the interviews were transcribed and summarized, the empirical findings were then analyzed in light of a theoretical framework chosen previously. These theories, which in general terms relate to organizational design, supply chain management and finance, were also divided in the same themes as above.

Finally, conclusions were drawn by linking the results of the interviews with the theoretical framework. It became evident that the supply chain integrator can help the supply chain as a whole not only to reduce costs related to inventory holding but also to help its client to improve end-customer service.


Problem Background

It is a broadly recognized fact that the business environment has changed tremendously in the last two decades.  The political and the financial changes that have occurred in several of the world’s economies (Allen, 2005), allied to sound technological advances, in particular the development of the Internet and applications using the internet (Ericsson, 2000) are having a major impact on the market and thus on logistics operations, my area of research.

Until the late 1970s, the corporate rationale paradigm was “bigger is better”. Organizations grew by expanding their boundaries vertically. This, besides enabling economies of scale (through high volume strategy), gave the opportunity to secure suppliers and distribution channels (Harbhajan, 2006). However, during the early 1980s, increasing oil prices affected manufacturing companies forcing these to reduce costs in order to stay afloat. The world’s largest economies, i.e., US, UK and Japan were facing severe economical recessions, showing a combination of low productivity, high unemployment and high inflation (stagflation). The above factors, led to the privatization revolution; first in US and UK and later spreading itself globally (Allen, 2005). The liberalization process brought the de-regulation of market sectors such as telecommunication, energy and financial services, which were previously dominated by single firms enjoying natural monopolies. With the fall of regulatory barriers new business opportunities were created motivating creative entrepreneurs and companies alike  to seek for new business models, through restructuring and reshaping of their boundaries. The changes in the financial systems, on the other hand, besides establishing new legal requirements, leading to increased disclosure and transparency, it also accelerated the development of global financial markets and new ways for company financing (Weiss, 2007).

 Moving towards a new organizational paradigm

The above factors created a radical u-turn in the way of thinking. Hence, in mid 1980s, academics and management gurus started to believe that the key to competiveness is “small size and high value”. The organizational paradigm shifted towards smaller and agile organizational forms capable of rapidly changing their cost structures (Harbhajan, 2006).

According to Stock et al. (1998) the changes in the business environment forced large-scale enterprises not only to realign their global strategies and manufacturing activities, but also to flatten their hierarchies in order to speed up information flows. Moreover, in order to cut costs, corporations started to use outsourcing to streamline operations, moving from being centralized, vertically integrated and with single-sited manufacturing facilities, to having their network of resources globally dispersed, thus creating the concept of “new manufacturing enterprise”. 

Currently, companies outsource everything from their data centers, payroll or receivables departments (Corbett, 2004), to subcomponents of their products, or even large parts of their logistics processes (Remko, 2002). When it concerns logistics, companies today outsource much more than the inbound (purchasing) and outbound (distribution) transport of goods. This logistics outsourcing trend has developed into what today is identified as third-party logistics (3PL). The 3PL service providers are firms that offer a wide range of logistic services; varying from inbound consolidation services (pick-up of material and components from suppliers using central hubs or cross-docking facilities for re-sorting and consolidating for final delivery), to other value adding activities such as, quality control and just-in-time deliveries to production lines, which implies the delivery of the required quantity at the right time (Aronsson et al., 2006). Furthermore, companies operating globally may outsource their logistics operations to several different 3PL service providers, who are specialized in different geographical markets (continents) or industries. 

Naturally, the technological progress, in particular the World Wide Web (Internet) which created a standard global communication and information system, now present in nearly every city or village around the world, has enabled enterprises to completely new collaboration structures (Duening, 2005). From a logistics perspective, the development of the Internet and the applications using it, also implied a shift from supplier oriented (push) to customer oriented strategies (pull), causing this additional pressure on the need for an effective management of the supply chain (Ericsson, 2002). In fact, in order to frame this new concept, the author uses the term “demand chain management” to describe the concept of managing a truly market or customer driven supply chain.

  Research Question 

How does a supply chain integrator help the supply chain as a whole to achieve competitive advantages that enhance end-customer service

  Research Purpose

In the conclusion of their study, Stock et al (1998) suggest that their conceptual framework should be used as basis for further empirical research. The authors recognize that the competitive environment forms a firm’s organizational design and thus affect its strategy and structure. Stock et al. connect a firm’s strategy, its structure and its logistics capacity with how the firm will perform, hence recognizing the increasing importance that logistics/supply chain management is having in being the link between new manufacturing strategies and organizational structures, which have emerged as a result of changes in the competitive environment. According to these authors, “enterprise-wide logistics integration” (both internal and external) is the key that provides the proper balance between strategy and structure within the supply chain.

The purpose of my study is to explore and understand if this recent business concept is here to satisfy the needs for enterprise-wide logistics integration mentioned by Stock et al. on their study, and if so how are these integrations bringing competitive advantages to the different partners within the supply chain.