4PL Digital Business Models in Sea Freight Logistics: The Case of FreightHub

Read this case study of a 4PL model.

Literature Review

Logistics service providers constantly review their business strategies in order to provide high quality, modern services to their customers, whose requirements are becoming more demanding in the dynamic world. Thus, in this section, we firstly review and classify logistics business strategies based on attributes of their operations. Further, we carry out intensive literature analysis on digital business models in general, to apply these elements and the identified impacts of digital technologies on the maritime transportation sector with a specification on a digital FreightHub's business model.

Classification Scheme of Business Models of Logistics Services

In the logistics industry, business models of logistics service providers are categorized by their service range and structure. A popular classification scheme is the 1PL to 5PL scheme. Single service (1PL) providers offer single logistics services, such as freight forwarding or warehousing. Second-party logistics (2PL) service providers carry out all classic logistics operations in transport, handling, and storage. This is a typical business model for freight forwarders, sea freight carriers, and parcel service providers. A 3PL service provider extends classic logistics to include adjacent logistics services, such as cross docking, inventory management, and packaging design. In this respect, 3PL service providers are often companies that operate globally and, therefore, are able to implement advanced strategies, such as decision support systems, to optimize means of transport, routes, and capacity use. With its own assets, a 3PL service provider offers comprehensive solutions for coordinating and integrating all members of the supply chain. In addition to this, 4PL service providers combine resources, capabilities, and technologies to create comprehensive supply chain solutions and provide network-integrated logistics planning and consulting. Thus, 4PL service providers are often specialized consulting companies, which do not conduct any business operations of their own (so-called non-asset owning service providers). Since a 4PL provider does not have any logistics assets of its own (e.g., its own vehicle fleet or storage capacities), the services of other logistics service providers (1PL, 2PL, or 3PL) are combined for customers according to their individual requirements. As the 4PL provider operates exclusively in the areas of planning and coordinating using modern IT solutions, customers expect high quality service at low costs. In contrast, lead logistics (5PL) service providers carry out certain operations by owning or buying physical logistics infrastructures. Since the business model of 4PL/5PL providers is rather theoretical and has, so far, been limited to a niche role in practice, it is precisely here that digitalization offers the potential for a comprehensive digital business model to emerge. To further build on this, Table 1 and Table 2 provide an overview of selected papers on 3PL and 4PL, respectively.

Table 1. Selected papers on third-party logistics (3PL).

Study Summary
Gammelgaard et al.
Gammelgaard et al. empirically study the role of the different parties in logistics. They define three types of 3PL service providers: carriers, logistics service providers, and logistics service intermediaries. The authors create a collaborative logistics management model, which captures the different actors and presents the information and material flows between the actors.
Halldórsson et al.
Halldórsson et al. examine whether environmental issues are a 3PL provider selection criterion. Their study is based on nine cases (three 3PLs and six buyers of 3PL services). The authors conclude that 3PL providers show an increased interest in environmental issues on the one hand, while 3PL buyers' decisions continue to strongly depend on performance targets, such as price, quality, and timely delivery.
Jayaram and Tan
Jayaram and Tan have found that there are differences in the performances of companies that involve logistics providers in their operations and those that do not. Based on survey research, their study shows that 3PL selection criteria and relationship building positively influence company performance.
Lai et al.
Lai et al. collect data from 134 3PL customers to test different hypotheses. After their evaluation, the authors state that relationship quality plays a critical role in logistics outsourcing relationships. They show that, through inter-organizational relationships and integration, customers of 3PL service providers can use their dependency on those providers to effectively improve their financial performance.
Leuschner et al.
Leuschner et al. carry out a meta-analytical approach and conduct a review of empirical literature regarding 3PL. They find that a close and collaborative relationship between the 3PL customer and the 3PL service provider can improve the logistics service and overall business performance. However, they note that there are no conclusive statements in the literature regarding trust and commitment in 3PL-supplier-buyer relationships. Trust, therefore, should be built through safeguarding mechanisms to avoid opportunistic behavior.
Govindan and Chaudhuri
Govindan and Chaudhuri analyze the risks faced by logistics service providers. For this purpose, they used a multi-criteria-decision-making approach called the "Decision Making Trial and Evaluation Laboratory" (DEMATEL). They find that the relationship, at distance, between the logistics provider and the customer is a risk, and call for more collaboration and integration. It is particularly important to build up trust, which leads directly to cooperation and indirectly to the development of commitment.
Hofmann and Osterwalder
Hofmann and Osterwalder particularly look at the impact of digitalization on 3PL business models. By proposing a theoretical framework, they conclude that logistics service providers face significant hardships from new technologies, such as autonomous vehicles and 3D printing, as well as from platform-based business models and the sharing economy. They further see digitalization as an opportunity to enable forward or backward integration between 3PL customers and their suppliers.
Singh et al.
Singh et al.  state that logistics providers have an important role in making cold supply chains for perishable food and pharmaceutical products more efficient. The authors identify ten criteria (e.g., warehousing facilities, customer service, etc.) that are suitable for the 3PL selection process. They state that 3PL providers must work in cold chain under highly uncertain conditions and, therefore, must develop a hybrid fuzzy approach. The results imply that a 3PL provider should focus on continuous process improvement (e.g., by using advanced technologies).

Table 2.
Selected papers on fourth-party logistics (4PL).

Study Summary
Krakovics et al.
Krakovics et al. create a robust performance measurement model to evaluate logistics operators. They consider the case of a company, which decided to terminate its direct contract with a 3PL for operating its logistics activities and, instead, contracted a 4PL to handle the entire outsourcing process, and to hire and monitor the necessary 3PL services needed. As a result, efficiency indicators (e.g., for distribution efficiency or internal storage inventory accuracy) were defined to evaluate 3PL performance and determine 4PL goals.
Hsiao et al.
Hsiao et al. provide a framework to analyze the effect outsourcing various business activities has on logistics service performance. They show that outsourcing has no direct impact on service performance (delivery reliability, flexibility, and lead-time). Through network and overall supply chain optimization, however, 4PL providers could step in to deal with this demand complexity, as they generally have superior capabilities for combining and managing different resources.
Hingley et al.
Hingley et al. conduct an exploratory qualitative study with three participating suppliers, three logistics service providers, and one grocery retailer, aiming to determine the general drivers and barriers that can arise when 4PL service providers are introduced to promote horizontal collaboration. The authors find that large 3PL service providers can deliver 4PL services. Despite the performance benefits achieved through 4PL services, 4PL providers negatively impact retailer-supplier collaboration. The grocery retailer would rather keep control of the supply chain than become more cost efficient with a 4PL service.
Saglietto proposes an analysis of the 4PL community based on an empirical study of all logistics service providers operating in France, using information obtained from the DIANE database and selected websites. As a result, the author presents a new taxonomy and definition of the 4PL, and states that 4PLs require more intensive use of information technology, pooling of resources, and skilled human capital than other logistics service providers.
Mehmann and Teuteberg
Mehmann and Teuteberg examine and describe the long-term implementation of 4PL in the agricultural bulk logistics sector. The authors identify and validate 4PL attributes with seven case studies. The key contribution of their study lies in describing the usage, benefit, and organizational structure of the 4PL approach with elements of the work system theory.
Schramm et al.
Schramm et al. analyze the potential future of the 4PL concept based on expert opinions, with a special emphasis on digitalization. Their research follows an explorative mixed methods approach with semi-structured interviews and an online survey questionnaire. The authors find that IT capabilities will be an important differentiator for 4PL providers in the future. Further, relationships between 4PL providers and their clients can become closer and more strategic, which leads to a customer valuing, not only direct cost reductions, but rather improvements resulting from optimized operations through superior analysis and planning functions.

Summarizing the selected papers, it can be stated that the business solutions in the logistics industry have undergone a transformation, starting from the planning of locations and vehicle routing (1PL) towards advanced IT (2PL), cross-docking (3PL), and advanced pooling services (4PL to 5PL). Moreover, analyzing the literature in Table 1 and Table 2, one can conclude that early research on 3PL and 4PL concentrated on the operational and financial performance of outsourcing logistics services. In this line, several studies explored criteria for selecting and evaluating logistics service providers. Just lately, the influence of digital technologies and a focus on specific industry sectors has been fostered. Following a similar pattern, the present study intends to contribute to a more nuanced discussion of 3PL and 4PL services by focusing on digital business models in maritime transportation beyond the still very prominent outsourcing focus.

Innovation Potential of Digital Business Models

Digitalization and digital technologies have great potential for enabling business model innovation. Several studies have analyzed how digitalization changes business models. Three changes appear prevalent: (1) Optimization of the existing business model (e.g., efficiency gains, cost optimization), (2) transformation of the existing business model (e.g., extension of the established business, extended services), and (3) development of new, disruptive business models, driven by entrepreneurial companies (e.g., new products or advanced services based on digital platforms). Digital technologies and applications that innovate business models include: The "Internet of Things" (IoT), artificial intelligence (AI), big data analytics, cloud technology, digital platforms, automation, remote monitoring, and predictive maintenance. Capacities arising from these technologies in the business-to-business (B2B) context are functionality, connectivity, and analytics. Digitalization can also enable a more sustainable industry. Table 3 provides an overview of research and scientific papers discussing digital business models (DBMs).

Table 3. Selected papers on digital business models (DBMs).

Study Summary
Porter and Heppelmann
Porter and Heppelmann examine how smart, connected products reshape competition in industries and can expand industry boundaries. These products consist of three elements: physical components, smart components (IT as an integral part of the product), and connectivity components (additional functions in the product's cloud and its interaction with other devices). Smart, connected products require companies to build and support a new technology infrastructure ("technology stack"). The authors discuss ten strategic choices through which companies may gain competitive advantage. These include choosing between building functionalities into the product or into the cloud, between internal development and outsourcing of smart capabilities and infrastructures, and between the product portfolio itself and disintermediate distribution channels and service networks. The authors also identify pitfalls to avoid, such as adding functionalities for which customers will not pay, underestimating security and privacy risk, or failing to anticipate new, competitive threats with superior technology.
Porter and Heppelmann
Porter and Heppelmann focus on the internal perspective and explore how smart, connected products affect functions within companies. Core functions - such as product development, IT, manufacturing, logistics, and marketing and sales - are affected, and new functions - such as data organization or customer success management - emerge. Concerning logistics, the authors state that the roots of smart, connected products are in logistics, and, today, these allow for continuous tracking of products, their conditions, and their surrounding environments, which bears the potential for transformation. Smart, connected products allow companies to move from traditional ownership models to new business models, such as the product-as-a-service model, in which customers pay for the use of a product rather than buying the product itself. To support this new model, companies must learn to track customer usage and satisfaction to adapt marketing and service activities accordingly.
Ehret and Wirtz
Ehret and Wirtz use entrepreneurship and transaction cost theories to examine conditions for designing non-ownership business models for the Industrial Internet of Things (IIoT). Entrepreneurship theory, thereby, focuses on the positive form of uncertainty upsides, and outlines opportunities for machine owners to offer assets and outputs as a service. Transaction Cost Theory, on the other hand, stresses that IIoT opportunities enable companies to better manage uncertainty downsides, and encourage users of machines to give up ownership and only purchase the output. The authors identify three types of IIoT-enabled business models: business models for asset-driven IIoT opportunities, business models for service innovation aiding manufacturing, and service-driven business models targeted at end users. Research gaps with respect to IIoT business models are seen in empirical research, revealing evidence about the role of infrastructures, how best to orchestrate human actors and machines, and how best to design the architecture of ownership for the diverse assets needed to provide services.
Bressanelli et al.
Bressanelli et al. examine the role of digital technologies (IoT, big data, analytics) as enablers of the Circular Economy (CE) in usage-focused business models. They develop a research framework to describe how eight functionalities of digital technologies affect value drivers for CE. The eight enabling functionalities are: improving product design, attracting target customers, monitoring and tracking product activity, providing technical support, providing preventive and predictive maintenance, optimizing product usage, upgrading the product, and enhancing renovation and end-of-life activities. The research then uses a case study to analyze how these functionalities affect the three CE value drivers: increasing resource efficiency, extending product lifespan, and closing the loop. The findings show that companies need to couple IoT with big data analytics to move to CE. Moreover, four of the functionalities increase resource efficiency and extend product lifespan in the use phase, but do not effect closing the loop. Therefore, to close the loop, companies should focus on functionalities at the start and the end of product life. Research gaps still exist with respect to product-focused and result-focused business models, as well as other digital technologies.
Rachinger et al.
Rachinger et al. state that a research gap exists in examining how digitalization impacts business model innovation insofar as empirical insights in this field are still limited. Therefore, they carry out a qualitative investigation, collecting data from 12 informants working in two industries: the media and the automotive industry. In their results, they outline the influences of digitalization on business model elements (value proposition, value creation, value capture) and the associations with dynamic capabilities for both industries. The findings show that digitalization is generally considered important. It is the value proposition itself, as well as the position in the value network, that determine the perceived available options for business model innovation when it comes to digitalization. The study identifies organizational capacities and employee competences as future challenges.
Annarelli et al.
Annarelli et al. discuss Product Service Systems (PSS) as a business model focused on providing a marketable set of sustainable products and services to fulfill customer needs. They analyze PSS using the Business Model Canvas and Business Model Innovation Process. Six key elements of a PSS business models are introduced: design of the offering, value co-creation, functional integration with partners, degree of servitization, pre-sale and after-sale value communication, short-term and long-term commitment, and customer retention. Digitalization can make the transition to PSS more scalable, offering gradual servitization of value chains.
Parida et al.
Parida et al. propose a research agenda on leveraging digitalization for business model innovation. Their literature review identifies five theoretical perspectives regarding digital business models in the B2B context: resource-based view and dynamic capabilities, transition theory, entrepreneurship, transaction cost theory, and platform theory. They also discuss how digitalization can enable innovation across the three business model elements of value creation, value delivery, and value capture.
Pflaum and Klötzer
Pflaum and Klötzer discuss strategic approaches for transforming from product-oriented business models to data-oriented business models. They differentiate two pathways for this transition. First, companies may digitalize their own products and services, turning them into smart products and services. Second, companies may use digital solutions from third parties to make corporate processes more effective, efficient, and agile. A key consequence of transitioning toward a digital business model is that the data produced by the smart product becomes the key asset instead of the physical product itself. Furthermore pipeline-shaped supply-chains are replaced by data-driven and platform-based ecosystems with multiple corporate actors.

Regarding the previous research, DBMs are mostly described by Business Model Canvas or business model value dimensions. The latter is used in the present study. A business model, therefore, can be described by the design of its mechanisms for (1) value creation, (2) value delivery, and (3) value capture. Digitalization can drive innovation and broaden the options in all three value dimensions.

Table 4 provides an overview of these three value dimensions for DBMs and outlines the opportunities and risks for each dimension. Since the opportunities and risks arising from digitalization for the different value dimensions are manifold, key aspects were selected and grouped with a specific focus on digital B2B platform models, so they could later be applied to the FreightHub case.

Table 4. Opportunities and risks in each value dimension for digital business models.

Value Dimensions Selected Opportunities and Risks for DBMs
Value Creation: What is offered to the customer? Opportunities
  • New value drivers (instead of physical assets): Digital components, data produced, data sharing, advanced services
  • Customization and tailor-made solutions
  • Changes in customer relations, e.g., continuous relationship through data sharing, co-creation
  • Adding unnecessary functionalities, for which customers are not willing to pay
  • Clinging to a company-centric perspective rather than adopting an ecosystem perspective
Value Delivery: How is the promised value delivered to the customer? Opportunities
  • Greater transparency and information flow through real-time data
  • Remote monitoring and service; early warnings as well as predictive maintenance∙
  • Increased sustainability
  • Security and privacy risks due to shared data
  • Higher interdependencies between business actors
  • Insufficient digital capabilities and skills for delivering value
Value Capture: How is the value delivered to the customer, transformed into revenues and profits for the firm? Opportunities
  • Non-ownership business models and new pricing models (e.g., subscription, pay per use)
  • Higher or new revenue streams
  • Cost efficiency and more effective risk management
  • IT infrastructure driving costs through upfront investment and continuous updating
  • Inability to capture value from digital investments by not focusing enough on value capture and focusing more on other aspects, such as growing the customer base
  • Inflexible mechanisms in performance-based contracts, which do not offer continuous re-negotiation of cost structures and revenue models
  • Imbalanced risk and revenue sharing in new collaborative models

Digitalization in Maritime Freight Transportation

In maritime freight transportation, finding ideal container spaces on a vessel is a costly business for shippers/charterers. Charterers, who are unfamiliar with the shipping market, often use so-called shipping brokers, who know the market well and, therefore, can find a suitable ship with appropriate cargo space or container sites for the charterer. Accordingly, the broker mediates transport supply and demand. The services of brokers are, however, correspondingly expensive. Table 5 presents a summary of the parties involved in maritime freight transportation, their responsibilities, and the documents to be handled. Due to the large number of different actors with their various documents and contracts, managing the documents is quite a complex process. Ensuring a continuous and seamless flow of information in the transport chain is challenging. Often, documents are not immediately available, and if, for example, the customs or customs clearance documents must be presented to third parties for any reason, it can take some time for the documents to be available or to be submitted. Additionally, if customers have questions about their shipments, some of the necessary documents are often in the hands of an employee from another department. If this employee is also located in a different time zone, this makes coordination all the more difficult.

Table 5. Actors in maritime freight transportation.

Actors Responsibilities Documents
Freight forwarder Appointing the freight carrier Forwarding contract
Carrier Carrying out shipment via road, rail, or inland waterway Contract of carriage
Seaport forwarder Determining the seaports, terminal operator, and shipping company Issue of bill of lading
Terminal operator Handling at the port or terminal (clearance of the freight carrier, temporary storage of goods)
Shipping company Carrying out sea transport, crewing, maintenance, and ship repair; if applicable, drawing up stowage plans for container ships, ship financing Sea freight contract, presentation of bill of lading
Shipping broker Brokering charterer and shipping company (or cargo space and charterer) Charter parties (BIMCO)
Port clearance agent Registering and de-registering ships with the port authorities, handling customs clearance, procuring necessary equipment and provisions, etc. Various documents for port authorities, customs, and shipping company