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

Read this case study of a 4PL model.

Conceptualization of a 4PL Digital Business Model in Sea Freight Logistics

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
  • Offer comprehensive solutions for coordinating and integrating all supply chain members
  • Organize transportation and logistics activities
  • 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
  • Depend highly on other supply chain members and engage in fiercer competition than 4PL service providers
  • 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
  • Risk data silos and silo thinking
  • Could foster opportunistic behavior through missing trust
  • Require achieving, developing, and maintaining superior capabilities when combining and managing different resources
  • Places data confidentiality and security at risk
Value Capture Opportunities
  • Build close and collaborative relationships between the 3PL customer and the 3PL service provider, which can improve the logistics service and overall business performance
  • Minimize costs of sea freight brokering
  • Effectively manage risk through higher data quality, increased transparency, and real-time monitoring
  • 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
  • Cause buyers to be highly dependent on the 4PL service provider itself
  • Necessitate high degrees of trust to safeguard against opportunistic behavior

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.