Comparison of 3PL and 4PL Business Model Elements
Digitalization
has a major impact on maritime freight transport. However, while
logistics services in sea freight are only a small part of an intermodal
transport chain, there is a growing trend toward consumer-oriented,
door-to-door transport being managed from a central source. When
comparing the benefits of outsourcing to a 4PL service provider, such as
FreightHub, with the services of a 3PL service provider, the foremost
difference is that 3PL providers do not have a complete overview of the
supply chain network. Since 3PL service providers rely on their own
assets, it is in their interest to primarily use their own resources to
capacity. In contrast, 4PL service providers, like FreightHub, operate
more neutrally, and try to further reduce interfaces in the supply
chain. To compare FreightHub's 4PL business model with those of 3PLs,
Table 6 applies the business model dimensions of value creation, value
delivery, and value capture.
Table 6. Comparison of 3PL and 4PL business models.
Value Dimensions |
3PL Business Models |
4PL Business Models |
Value Creation |
Opportunities |
|
-
Combine resources, capabilities, and technologies to create comprehensive supply chain solutions
-
Provide network-integrated logistics planning and consulting
-
Forge
closer and more strategic relationships, which lead, not only to direct
cost reductions, but also to improvements resulting from optimized
operations through superior analysis and planning functions
|
Risks |
|
-
Have no assets of their own, and, thus, highly depend on 1PL to 3PL business partners for value creation
-
Require a more intensive use of IT to pool resources and higher skilled human capital than 3PL logistics service providers
|
Value Delivery |
Opportunities |
-
Optimize transport, routes, and capacity use
-
Break the transport chain into multiple steps to optimize each step
separately, using their own assets or assets from 1PL and 2PL service
providers
|
-
Use platforms as interfaces to cover the complete process, particularly
to foster effective communication (central point of contact)
-
Facilitate uncomplicated data exchange of real-time information, in
particular allowing for proactive analyses (e.g., intelligent
re-routing)
-
Create digital checklists (algorithms) to deal with complexity
|
Risks |
|
-
Require achieving, developing, and maintaining superior capabilities when combining and managing different resources
-
Places data confidentiality and security at risk
|
Value Capture |
Opportunities |
|
-
Minimize costs of sea freight brokering
-
Effectively manage risk through higher data quality, increased transparency, and real-time monitoring
|
Risks |
-
Make 3PL buyers’ decisions strongly dependent on performance targets,
such as price, quality, and timely delivery, rather than sustainability
performance
-
Run the risk that their missing IT capabilities will make one 3PL
service provider indistinguishable from other 3PLs in the future
|
|
Considering
the opportunities digitalization provides for sea freight services and
maritime transportation in a 4PL business model, the benefits go beyond
purely cutting operational costs. Nonetheless, minimizing the costs of
managing operational processes, such as sea freight brokering, is their
main aim. Additionally, using supply-chain-wide resources through
digital technologies leverages the potential of comprehensive solutions,
which are not achievable when managing sole parts of the maritime
transportation chain. Through advanced IT skills, 4PL business models
can facilitate even closer, strategic relationships with their
customers, as well as higher degrees of supply chain integration and
coordination. This is achieved through enhanced communication, real-time
data exchange and monitoring, and automated planning algorithms.
4PL
service providers offer their customers further benefits beyond
maritime transportation. Non-core competencies in general logistics
management can be delegated to 4PL service providers (e.g., foreign
trade management, hazardous goods transportation, logistics purchasing,
etc.). By leveraging legal possibilities, for example, 4PLs can reduce
the tax burden on companies. They also have the necessary expertise to
advise on certification processes. As different departments in large
companies usually purchase logistics services independently of one
another, there is no transparency regarding the total costs incurred. By
bundling logistics management through a 4PL provider, cost transparency
is regained.
However, outsourcing sea freight logistics to
a 4PL provider also entails certain risks, which might be higher than
those related to 3PLs. Due to its complexity, a 4PL outsourcing project
requires high efforts from the outsourcing company during the planning
phase. The risk of becoming dependent on a 4PL service provider is
accordingly high - driven even further by the longer-term contracts
between the 4PL and its customer. Over time, the contracting company may
lose its logistics competence. If the outsourcing company is
disappointed by the 4PL service provider, whether through a lack of
identification, insufficient flexibility, or diminishing performance,
the decision cannot be swiftly reversed, and such changes are, at the
least, less flexible than with 3PL service providers. 4PL outsourcing
requires a high degree of trust, as the service provider has access to
confidential information. If the 4PL provider works for several
customers, many companies fear that sensitive data could be passed to
competitors or that a competitor may be given preferential treatment.
Ultimately, any failings of the 4PL service provider will affect the
customer.
Value Creation, Delivery, and Capture in Sea Freight Logistics
This
study informs digital business model conceptualizations by examining
the empirical case of FreightHub, a 4PL service provider for maritime
transportation, and applying the business model value dimensions of
value creation, value delivery, and value capture. This section will
elaborate on those dimensions for digital business models in sea freight
and discuss the contribution of the study, while its limitations, and
potential options for future research are concluded in the next section.
Value Creation
In
line with Parida et al., value creation refers to what is offered
to the customer. Digitalization radically changes how value can be
created. The physical product or service is no longer the main value
driver but, rather, its digital components or even only the data
produced. Moreover, digital technologies offer to move from
conventional asset-ownership to product-as-a-service models. This
development can already be seen in 3PL business models, in which the
ownership of physical assets, such as warehouses or trucks, is less
important for offering the service. Configuring advanced services based
on digital platforms can provide significant opportunities for value
creation. Digitalization also enables customization and
tailor-made solutions for customers. In the FreightHub case, the
integration of supply-chain-wide resources is particularly facilitated
by the digital platform. DBMs also establish new customer relations.
Customers' roles in the value creation process become even more
important - e.g., via self-service or as a data source. Customer
relations is becoming more continuous and open-ended because, for
example, contracts focus on the use of the product or because smart
products that are purchased are still updated and keep sending data
relevant for value creation long after they are bought. In 4PL
service providers, customer relationships can be seen as strategic,
whereas, in 3PL, these relationships may be easily replaced by customers
switching to another service provider. Digitalization offers
possibilities to even go even further and drive collaborative value
creation, where value is created beyond company boundaries and across
networks into new ecosystems. Evaluating customer needs is,
therefore, crucial so that companies will not offer unwanted solutions,
which are technically doable, but for which customers are not willing to
pay. In this line, using a 4PL provider enables cross-company
supply chain optimization. This particularly enables small- and
medium-sized companies to save great amounts on their freight costs.
Value Delivery
Value
delivery describes how activities and processes are employed to deliver
the value promised to the customer, including resources and
capabilities. Digitalization also critically changes how value is
delivered to the customer. Digital technologies improve
information flow and the integration of service activities, while
allowing for remote centralized process monitoring. In the
FreightHub case, the central platform enables uncomplicated data
exchange of real-time information, creating generally higher data
quality. This results in greater transparency, as well as fewer
delays and more responsive customer service. Bressanelli et al. further outline how digitalization can contribute to more
sustainability - e.g., by increasing resource efficiency or extending
product lifespan. Although not directly mentioned in the FreightHub
case, 4PL business models may better leverage their sustainability
opportunities, as price and performance competition is less fierce.
As
with value creation, digitalization drives collaboration in value
delivery through storing and sharing data. On one hand, this leads to
more intensified relationships and higher interdependencies. On
the other hand, data sharing increases security and privacy risks. Another important risk can arise from insufficient
organizational capacity in digital capabilities, and skills necessary to
deliver the value promised. Those risks must, therefore, be
tackled in 4PL business models through sophisticated (digital) risk
management.
Value Capture
The value capture dimension
describes how a firm transforms the value delivered to customers into
revenue streams and maintains financial viability. Digitalization
offers the potential for new pricing models, higher or new revenue
streams, and cost reduction. In the FreightHub case, it has
lowered the costs of sea freight brokering. Digitalization can enable
higher and new revenue streams via, for example, advanced services,
leasing, renting, maintenance and repair, predictive modelling, process
optimization, etc.. Ehret and Wirtz outline how
non-ownership models can productively share uncertainties in
manufacturing and service networks. In this line, outcome-based service
contracts connect pricing more closely to the real value created, and
allow for more flexible and customized pricing, which can be adjusted
based on operational data. Digital technologies can also offer cost
efficiency benefits. Lower operational costs, for instance, can be
achieved through process optimization and monitoring for cost-efficient
resource allocation and enhanced capacities. In addition to
lower planning costs, the ability to more easily monitor delays in the
schedule is one of the main benefits of FreightHub's 4PL business model.
However,
developing the IT infrastructure is a substantial upfront investment,
and updating it over time incurs further costs. Despite this,
many DBMs seem to put more emphasis on aspects other than value capture
(e.g., growing the customer base) and seem to struggle with capturing
value from their digital investments. Data sharing and the higher
level of collaboration between different business partners require
thoughtful design, as well as continuous adaptation of the roles and
contracts in these collaborations, to avoid imbalanced risks and revenue
sharing. This is especially true in performance-based contracts,
which should offer flexible mechanisms allowing for continuous
re-negotiation of costs structures and revenue models. Nonetheless,
4PL service providers enable small- and medium-sized companies to use
their own resources in a competence-oriented manner. Because 4PL service
providers bundle physical, human, and technological resources, they
offer small- and medium-sized companies the flexibility necessary to
handle peak and highly volatile demands. Small- and medium-sized
companies can also convert their fixed costs into variable costs because
4PL service providers reduce the burden their customers face to provide
the resources necessary for capacity peaks.