4pl market potential 2002.pdf

4PL: Market Potential

An insight into market characteristics andcustomer perception

Reference Code: BFAU0053

Publication Date: 05/02

4PL: MARKET POTENTIAL

INTRODUCTION

The advent of the 4PL has been one of the most talked about and awaited events inthe last five years. Since Andersen Consulting (as it was then) invented andtrademarked the term in 1995, there has been a frenzy of marketing hype as logisticsproviders sought to increase their brand equity by associating their company with thelatest industry buzz. Now just about every logistics company worth its salt has a 4PLdivision of some sort as they attempt to differentiate their operations from perceivedlower value adding rivals in much the same way as in the early-mid 1990s companiesre-branded themselves logistics suppliers rather than distribution companies.

The term 4PL has now become so over-used, and mis-used, that Accenture (havingre-branded their own company from Andersens), have started to distance themselvesfrom the term and instead use the expression Managed supply-chain operations.

It is now evident that considerable confusion exists in the industry as to what a 4PLactually consists of. Every company seemingly has its own definition, and this has ledto confusion of the customer. Undoubtedly a clear vision is needed if the term is tohold any value over the coming years.

This brief consists of three key elements. Firstly it discusses the role of the 4PL in theEuropean logistics industry.

Secondly, the brief deals with the attitudes of European manufacturers and retailersto the use of 4PL. This draws from primary research conducted by Datamonitor at theend of 2001. Datamonitors European client survey canvassed the views of 650logistics users across 6 sectors and 8 countries. The results of the survey arerevealed.

Thirdly, the brief provides market sizing data for the addressable market for 4PLs.This gives an indication of the size of the opportunity for companies which set up andre-position themselves as 4PLs.


4PL: Market Potential BFAU0053 Datamonitor (Published 05/2002) Page 3This brief is a licensed product and is not to be photocopied

4PL A DEFINITION

The definition of a 4PL (by Accenture, the company which coined the term in the firstplace) is a supply chain integrator that assembles and manages the resource,capabilities and technology of its organisation with those of complimentary serviceproviders to deliver a comprehensive supply chain solution.

The 4PL model marks a departure for many logistics suppliers from their traditionalasset based warehousing and transport operations. It relies more heavily onintellectual resources and information technology, than on the ability to provide theinfrastructure. This is supplied by a wide number of second or third tier providers(hence the name lead logistics provider).

Figure 1: The 4PL Pyramid

Source: Datamonitor/Institute for Systems Research D A T A M O N I T O R

At the highest level of the 4PL solution is Reinvention or consultancy stage. Themost likely source of true enhancements in real time supply chain performancecomes through either synchronisation of supply chain activities across supply chainmembers, or increased collaboration between independent supply chain components.



Reinvention leverages traditional supply chain management consulting skills, alignsbusiness strategy with supply chain strategy, and is facilitated by technology thatintegrates and optimises operations both within and across participating supplychains. This level is not conceptual, it requires the deals to be made, the project planformation, and re-engineering on all levels.

The second level of the 4PL solution is Transformation. Transformation efforts focuson improving specific supply chain functions. These include sales and operationsplanning, distribution management, procurement strategy and customer support. Thisvaries in complexity and depth, dependent on the size and industry sector of thecompany or group. At this level supply chain technology becomes critical to thesuccess of the solution. The high levels of IT system capabilities required have led towould be 4PLs partnering with software houses and systems integrators (SIs).

The third level is Implementation. A 4PL implements recommendations includingbusiness process realignment, systems integration of technology across the clientorganisations and service providers, and transition of operations to the 4PL deliveryteam.

The fourth level is Execution. A 4PL provider takes on operational responsibility formultiple supply chain functions and processes. The scope goes well beyondtraditional third party transportation management and warehouse operations toinclude: manufacturing, procurement, supply chain IT, demand forecasting, networkmanagement, customer service management, inventory management, andadministration.

In reality there is actually fifth level to this model. This level is continuousimprovement of the solution that has been implemented. This critical element is oftenforgotten about both at the planning stage and after the difficulties of implementation.

A 4PL manages the full range of service providers (3PLs, IT providers, contractlogistics providers, call centres, etc.) along with the capabilities of the client and itssupply chain partners. The 4PL is the single point of contact with the clientorganisation and provides the management of multiple service providers through ateaming partnership or an alliance. Figures 2 and 3, shown below, present theevolution and core competencies of the 4PL, and indicates why many 3PLs are nowcoining the phrase, and claiming to be the one stop shop for all logistics needs andmanagement. On paper, they are very similar.



Figure 2: Supply Chain Contractor Evolution

Evolution

Carriers

Key features IT Service Price

3PLs

Key features IT Service Price Infrastructure Global/regional

reach

4PLs

Key features IT Service Global/regional reach Service enhancement Inventory reduction Agility Innovation Supply chain re-

engineering Process & service

management

Low Supply chain managementValue-addCommodity

Evolution

Carriers

Key features IT Service Price

3PLs

Key features IT Service Price Infrastructure Global/regional

reach

4PLs

Key features IT Service Global/regional reach Service enhancement Inventory reduction Agility Innovation Supply chain re-

engineering Process & service

management

Low Supply chain managementValue-addCommodity

Source: Datamonitor/UPS Logistics Group D A T A M O N I T O R

Figure 3: Supplier Core Competencies

Verticallyintegratedmanufacturer

StrategyMarketingR&DFinance

PurchasingITProductionWarehousing &Distribution

StrategyMarketingR&DFinancePurchasingIT

ProductionLogistics

Warehousing &Distribution

First stages of out-sourcing non-coreactivity

StrategyMarketingR&DFinancePurchasing

Supply Chain

IT

Production


Final stage:virtualbusiness model

Carrier 3PL 4PL

Verticallyintegratedmanufacturer

StrategyMarketingR&DFinance

PurchasingITProductionWarehousing &Distribution

StrategyMarketingR&DFinancePurchasingIT

ProductionLogistics


First stages of out-sourcing non-coreactivity


Supply Chain

IT

Production




Supply Chain

IT

Production



Carrier 3PL 4PL

Source: Datamonitor/UPS Logistics Group D A T A M O N I T O R



Clearly, the difference is the supply chain, and its total management. It is one thing tomanage a supply chain function such as warehousing or outbound delivery as many3PLs and carriers do, but to actually manage strategy and company direction iscompletely different. There is a complete partnership between 4PL and customer indeciding who, what and where, how and when to use different operations. There is animpartial third party manager which effectively leaves an outsourced in-houselogistics department, with extensive resource and wide ranging experience.

The 4PL Proposition

Conceivably, there are many benefits to be had from a organisation employing the4PL model. Revenue growth can be increased by improved product availabilitydriven by greater levels of visibility. An experienced network management team,consolidating volumes and managing suppliers, can drive down rates more efficiently.

Working capital reductions can be realised with a one off gain through inventoryreductions and lower order-to-sale cycle time. Asset transfer and enhanced assetutilisation can bring about fixed capital reductions.

The advantage for the 4PL is that it will own a larger piece of a customers business,looking after all their logistics needs rather than one segment. As it is an asset-lightmodel, it is a key driver of EVA, showing large returns on invested capital (ROIC).This is important to shareholders who can get good returns on their investment.However there are risks that it will also lead to the cannibalisation of existing revenue,as 4PLs are forced by clients to prove their independence by using other 3PLs (aswas the case for Exel working for Ford).

So, if the business model is so robust why are the number of 4PL contracts so low?

There are four key reasons:

Firstly, clients have to be convinced that a logistics provider has the requisiteintellectual capital and experience in order to put together a coherent supply chain re-design plan. The logistics industry has a reputation for being under-trained and under-qualified which is confirmed by Eurostat data: only 10% of those employed in theindustry have completed a higher education degree, compared with the marketservice average of 19.3%. When competing against the consultancies, logisticscompanies are at a disadvantage.

Secondly, the 4PL must address the issue of independence. Many 4PL aresubsidiaries of larger, highly asset based companies (e.g. UPS Logistics Group) andthese companies struggle to convince potential clients that they can devise a supply



chain strategy that is impartial and not designed to drive volumes through theirparents operations. Ironically some companies use the opposite argument for notemploying a 4PL from a non-asset based background (e.g. consultancy) due to thefact that they dont have the experience or assets behind them.

Thirdly, the client must be willing to trust the 4PL implicitly as it will be out-sourcing astrategic decision-making function that has immediate effect on the profitability of thecompany. Many companies are not ready to make this leap of faith.

Fourthly, who can do it ? There are only a few players and companies in the marketplace who can actually provide the services true to the definition of a 4PL, and only alimited amount of companies who would actually consider the service offering. A 4PLmust have a large resource of trained professionals, possible global reach, strength inthe integration of technologies, multi-provider management skills and up to the minutemarket and strategy thinking.

The figure below gives an indication of companies that can and do provide a 4PLservice. Although not exhaustive, it highlights that there are not a great deal ofplayers in the market place with true 4PL capability.

Figure 4: Operating and Potential 4PL Organisations

Consultancies 3PLs

Accenture ExelCapGemini Ernst &Young Kuehne &Nagel

P&OTrans EuropeanUPSLogisticsGroupTDGPlcWilsonLogisticsGroupSTACICERTGroupMenloDeutsche Post/Lufthansa

Source: Datamonitor D A T A M O N I T O R

There are also a few companies that have set up with the sole intention of operatingas a 4PL. Swiss based Central Station AG, with sites in Basel, Zurich and ZurichAirport is an example of this. Companies such as this do not really meet all the criteriaset out to operate as a 4PL, even on the grounds of both human and financialresource. In essence there is no reason that they could not operate as 4PL given that



it is a non assert based entity, but they must find it difficult to compete with theplayers mentioned in the previous figure.

Example: UPS Logistics, Exel and Ford

Exel and UPS Logistics Group Europe formed an alliance in 2000 to review theeffectiveness of all current inbound logistics processes for production parts andcomponents for Ford Motor Company in Europe. Detailed process specifications werejointly developed by Exel, UPS Logistics Group and Ford of Europe. This alliance wasformed to provide Ford of Europe with market-leading supply-chain support across allits European plants, and its continuous development through varying marketsituations.

The venture was set up due to the success of the strategic alliance of Ford MotorCompany and UPS Logistics Group in the U.S. and because of Exel's 20-yearrelationship with Ford, including established operations in Southern Europe, USA andBrazil. This further highlights that fact that there is a great amount of trust that mustbe established before most companies would embark on a 4PL solution.

Ford's new inbound logistics network in Europe has been designed to achievesignificant improvements in transportation and distribution processes and inventory.



CLIENT USAGE AND PERCEPTION

The 4PL business model appeals to only a small proportion of the manufacturing andretailing industry. This is due primarily to the nature of the business model, whichinvolves considerable investment in IT and intellectual capital and can only beeffective through savings delivered to companies with large logistics spends.

As part of the Datamonitor Client Survey, the latest round of which was conducted inDecember 2001, manufacturers and retailers across Europe were asked about theirattitude towards using a 4PL. Given that the assumption could be made (as detailedbelow) that it would be only in the interests of the largest of these companies to use a4PL, the results of the sample were filtered to reflect this.

Figure 5: Percentage of blue chip manufacturers and retailers that would not consider using a 4PL throughout Europe


Analysing the results, it can be seen that Italian blue chip manufacturers and retailerswere least likely to contract part of their supply chain to a 4PL. This reflects thelargely undeveloped logistics industry as a whole in this country where the capabilitiesfor advanced logistics practices do not exist. At the other end of the scale, Frenchclients were most enthusiastic in claiming that they would adopt this new concept.

0%10%20%30%40%50%60%70%80%90%

100%

Euro

pe Italy

Spain

Swed

en

Belgi

un&N

etherl

ands

Germ

any UK

Franc

e



Figure 6: Percentage of companies that would not consider using a 4PL throughout industry sectors

0%10%20%30%40%50%60%70%80%90%

100%

Euro

pe

Cons

umer

Autom

otive

Chem

ical

Phar

mac

eutic

alRe

tail

Hi-Te

ch


Segmenting the results by industry sector, consumer goods companies were leastlikely to use a 4PL, whereas the hi-tech sector expressed most willingness toconsider the idea. As the 4PL model brings most advantages to clients with highvalue goods (through inventory reduction) this is not surprising.

Table 1: County Specific Client Survey Results

Would not considerusing 4PL

Would considerusing 4PL

AlreadyImplemented Don't Know

Europe 69.66% 21.91% 3.93% 4.49%France 64.29% 28.57% 7.14% 0.00%Germany 68.29% 26.83% 4.88% 0.00%Spain 72.73% 22.73% 4.55% 0.00%Belgium &Netherlands 71.43% 14.29% 3.57% 10.71%Sweden 72.73% 18.18% 0.00% 9.09%UK 65.71% 28.57% 5.71% 0.00%Italy 88.46% 11.54% 0.00% 0.00%


Examining the responses tabulated in Table 1 it can be seen that Frenchmanufacturers are the highest users of 4PL solutions which have already been



implemented. UK was also quite advanced whereas Belgium, Netherlands, Italy andSweden were all below the sample average.

Table 2: Industry Specific Client Survey Results

Would not considerusing 4PL

Would considerusing 4PL

AlreadyImplemented Don't Know

Europe 69.66% 21.91% 3.93% 4.49%Hi-Tech 56.00% 28.00% 12.00% 4.00%Chemical 70.59% 29.41% 0.00% 0.00%Consumer 79.31% 20.69% 0.00% 0.00%Pharmaceutical 64.29% 21.43% 0.00% 14.29%Automotive 76.67% 15.00% 5.00% 3.33%Retail 62.50% 25.00% 3.13% 9.38%


As far as European vertical sectors are concerned 12% of the high tech samplequestioned claimed to have already implemented a 4PL solution. However, showingthe very immature nature of this particular logistics sector, no companies in theconsumer, pharmaceutical and chemical verticals had implemented such a solution.



4PL ADDRESSABLE MARKET SIZE

Definitions

The following section attempts to quantify the addressable market for 4PL services inEurope. It looks at different European industry sectors based on the Eurostatcategorization, NACE Rev.1.

Automotive: DM34

Retail: G52

High tech: DL30 DL335

Chemical and rubber: DG241 246 (excluding DG 244), DH

Consumer: DA (manufacture of food products), DE211 (manufacture of paper goods),DK297 (manufacture of household appliances), DN (manufacturing not elsewhereclassified), DG 245 (soap and cleaning products)

Pharmaceuticals: DG244

Industrials: DK (machinery and equipment), DI 261 (glass)

Textiles: DB

Methodology

To estimate the addressable market size relevant to the nascent 4PL industry anumber of key assumptions have been made. The most important of these are asfollows:

There is a threshold below which 4PL is not an option for clients as thepotential savings are not outweighed by the costs of implementation and on-going management.



Likewise a 4PL provider will only target clients which have a substantiallogistics budget due to major investment involved.

For the purpose of this exercise Datamonitor has estimated the costs of set up andimplementation of a 4PL to require a yearly minimum contract value of 1.6m. This iscalculated by approximating average costs as follows (based on analysis of existing4PL contracts):

IT systems 0.4m

Staff costs 0.7m

Sales, general and administration 0.2m

Other 0.3m

Total 1.6m

If the assumption is made that a 4PL provider would expect to achieve a net marginof at least 14% on this contract, it is possible to gross up this figure to achieve the netrevenue figure of 1.6m.

Making a further assumption that this net revenue figure represents 6.25% of the totaltransportation and warehousing spend of a company (this is also based on theanalysis of existing 4PL contracts), it is possible to set a lower threshold for the totallogistics spend required by a manufacturer/retailer to qualify them as a constituent ofthe target market. This works out to the notional value of 30.4m.

The final assumption in this initial company filter is that logistics costs account for, onaverage 9.25%. This figure is drawn from Datamonitor research as well as fromindustry associations and other sources. If this is the case then the threshold ofenterprise size above which the 4PL concept is relevant, and hence a target companyfor 4PL providers, is in the region of 328m.

The assumptions, it can be readily admitted, are arbitrary. However they are essentialin pre-qualifying companies before moving on to the next stage of the market sizingmethodology.

By using the classification system and financial taxonomy of vertical sectors providedby the EC statistics organisation, Eurostat, it is possible to filter out the majormanufacturing/retailing enterprises from the smaller companies which would not bepart of the addressable market.



By applying the proportion of average industry logistics spend to these sectors, thegross logistics spend by the larger manufacturers and retailers can be calculated. Apercentage of this addressable spend would be available to a 4PL, typically as amanagement fee and this proportion has been estimated (by examining existing 4PLcontracts) as between 6-7%.

In this way it has been possible to estimate the addressable 4PL market acrossindustry sector and by individual European country.

Industrial sector

The opportunity for 4PLs in the industrial goods sector is greatest in Germany wherethere are a large number of major manufacturing companies. The opportunitiesoutside of the four major European economies are very limited.

Figure 9: Industrials Market Sizing

0.00

50.00

100.00

150.00

200.00

250.00

300.00

350.00

Germ

any

Italy

Franc

e UK

Swed

en

Finlan

d

Nethe

rland

s

Belgi

um

Denm

ark

Spain




Table 3: Industrials Market Sizing

Germany 336.61Italy 93.25France 90.70UK 66.06Sweden 34.49Finland 16.86Netherlands 15.73Belgium 15.59Denmark 13.90Spain 12.67

Euro total 695.86


Textile sector

This is one sector in which the Italian market offers the most possibilities for 4PLs.The UK also offers opportunities, however in most countries the industry is highlyfragmented, limiting scope for penetration.

Figure 10: Textiles Market Sizing

0.00

5.00

10.00

15.00

20.00

25.00

Italy UK

Germ

any

Franc

e

Belgi

umSp

ain

Austr

ia




Table 4: Textiles Market Sizing

Italy 20.84UK 20.47Germany 16.09France 11.71Belgium 8.40Spain 4.85Austria 1.91

Euro total 84.27


Pharmaceutical sector

In this sector, the highly consolidated French pharmaceutical industry offers thegreatest scope for 4PLs. According to the Datamonitor estimates, this market is worthjust under 100 m.

Figure 11: Pharmaceutical Market Sizing

0.0010.0020.0030.0040.0050.0060.0070.0080.0090.00

100.00

Franc

e

Germ

any UK Ita

ly

Nethe

rland

s

Belgi

um




Table 5: Pharmaceutical Market Sizing

France 96.65Germany 94.69UK 66.78Italy 63.09Netherlands 21.82Belgium 14.81

Euro total 357.83


Chemical sector

The German market holds the largest potential for 4PLs in the chemical industry by alarge margin. An increasing number of logistics companies are becoming involvedwith re-engineering chemical companies supply chains throughout Europe, andmanaging the out-sourcing of key elements of the manufacturing process.

Figure 12: Chemical Market Sizing

0.00

50.00100.00

150.00

200.00

250.00

300.00

350.00

400.00

450.00

Germ

any

Franc

eIta

ly UK

Nethe

rland

s

Belgi

umSp

ain

Norw

ay




Table 6: Chemical Market Sizing

Germany 418.24France 128.32Italy 70.96UK 54.95Netherlands 48.48Belgium 37.57Spain 17.56Norway 5.57

Euro total 781.67


High tech sector

Due to the high number of large electronics companies present in many countriesthroughout Europe, this sector offers some of the greatest possibilities for 4PLs,especially as the business model offers the greatest savings in industries with highvalue inventory holdings. Germany has the highest potential market.

Figure 13: High Tech Market Sizing

0.0050.00

100.00150.00200.00250.00300.00350.00400.00450.00500.00

Germ

any

Franc

e UK Italy

Swed

en

Nethe

rland

s

Finlan

d

Austr

iaSp

ain

Irelan

d

Belgi

um

Norw

ay

Denm

ark




Table 7: High Tech Market Sizing

Germany 474.86France 209.39UK 180.11Italy 81.39Sweden 81.37Netherlands 68.27Finland 45.10Austria 41.73Spain 33.33Ireland 27.75Belgium 19.98Norway 4.85Denmark 4.75

Euro total 1272.90


Automotive sector

The automotive sector is one of the most advanced in adopting the 4PL model, asdemonstrated by the Ford/UPS/Exel joint venture. From the estimates, Germany hasthe highest addressable market for 4PLs.



Figure 14: Automotive Market Sizing

0.00

200.00

400.00

600.00

800.00

1000.00

1200.00

Germ

any

Fran

ce UK Italy

Spain

Swed

en

Belgi

um

Nethe

rland

s


Table 8: Automotive Market Sizing

Germany 1060.84France 440.93UK 246.42Italy 193.48Spain 174.02Sweden 116.29Belgium 83.38Netherlands 18.88

Euro total 2231.99




Retail

The retail sector has one of the highest addressable markets for 4PLs. Although therehas been some industry comment that retailers would not want an external 4PL togain control of such an important part of their business, it should be remembered thatretailers were at the forefront of logistics out-sourcing. The German addressablemarket for 4PLs is almost 1bn.

Figure 15: Retail Market Sizing

0.00100.00200.00300.00400.00500.00600.00700.00800.00900.00

1000.00

Germ

any

Franc

e UK

Nethe

rland

sSp

ain

Belgi

um

Austr

ia

Denm

ark




Table 9: Retail Market Sizing

Germany 922.88France 684.38UK 388.88Netherlands 259.88Spain 129.33Belgium 94.50Austria 50.35Denmark 44.46

Euro total 2574.63


Consumer

The four largest manufacturing economies in Europe, unsurprisingly, have the largestaddressable markets in this sector.

Figure 16: Consumer Market Sizing

0.00

100.00

200.00

300.00

400.00

500.00

600.00

700.00

Germ

any UK

Franc

eIta

ly

Swed

enSp

ain

Denm

ark

Nethe

rland

s

Belgi

um

Norw

ay

Finlan

d

Irelan

d




Table 10: Consumer Market Sizing

Germany 631.47UK 564.22France 382.21Italy 222.05Sweden 104.76Spain 84.94Denmark 75.08Netherlands 47.00Belgium 34.10Norway 33.36Finland 26.94Ireland 19.04

Euro total 2225.18


Overall

It can be seen from the figure below the retail, automotive and consumer verticalshave the largest addressable markets. This is due to a combination of industry sizeand consolidation within these industries which have created a high number of largecompanies with complex supply chains.



Figure 17: Total Sector Market Sizing

0.00

500.00

1000.00

1500.00

2000.00

2500.00

3000.00

Retai

lAu

to

Cons

umer

High t

ech

Chem

Indus

trials

Pharm

a

Texti

les


Table 11: Total Sector Market Sizing

Retail 2574.63Automotive 2334.24Consumer 2225.18High tech 1272.90Chemical 781.66Industrials 695.87Pharmaceutical 357.83Textiles 84.27

European total 10326.58




Overall countries

Germany is by far the largest market which 4PLs should be targeting. At just under4bn it is over twice the size of French or UK markets.

Figure 18: Total Country Market Sizing

0.00

500.00

1000.00

1500.00

2000.00

2500.00

3000.00

3500.00

4000.00

Germ

any

Franc

e UK Italy

Nethe

rland

sSp

ain

Swed

en

Belgi

um

Denm

ark

Austr

ia

Finlan

d

Irelan

d

Norw

ay


Table 12: Total Country Market Sizing

Germany 3955.67France 2044.29UK 1587.89Italy 745.07Netherlands 480.04Spain 456.70Sweden 336.92Belgium 308.33Denmark 138.19Austria 93.99Finland 88.90Ireland 46.79Norway 43.79

European total 10326.58




CONCLUSION

The 4PL business model has finally come of age after years of development. Anincreasing number of contracts are being awarded as clients gain more confidencethat the concept can be put into practice. However although the headline figures forcontract size are huge, the reality is that the market is probably smaller than mostbelieved. The overwhelming majority of the contract size is pass through revenue forservices undertaken by the 3PLs contracted to the out-sourced 4PL. The 4PLtypically only receives a management fee and a fee for any IT which it introduces ordevelops on the clients behalf. There is also usually the opportunity to share some ofthe savings it creates. Although, as cost savings are notorious difficult to quantify, thiscan become a contentious point between client and 4PL if the basis for measuringthe savings is not agreed in detail before the contract begins.

4pl market potential 2002.pdf

Documents