Supply Chain Perpective: What's in a Word? It Matters if its 3PL

Many of you know that I have volunteered to develop and maintain the Council of Supply Chain Management Professionals Glossary of Supply Chain Terms since its inception over 5 years ago (find it at www.cscmp.org). As the official keeper of definitions, I try to stay on top of the various terms in the profession so practitioners and disciples of supply chain management have a free place to go to learn the basic terms of the trade.

But are supply chain terms and definitions really important? Well – they are to the CSCMP and its members because the Glossary is the single most popular item on their website – with close to 200,000 downloads a year. It’s also listed on the FORBES website and has been adopted by the US Post Office as well as many other organizations. CSCMP launched a revised version of the glossary last month. What was new? Of the 199 new words and 75 revisions this year, one little word that is likely to get a lot of attention is “3PL” (Third Party Logistics Provider). Why? On August 14th, the President signed into law HR 4040 legisation. Most of the industry probably didn’t even blink, but hidden in HR 4040 is a tiny, 27-word definition which marks a watershed for the logistics industry because it provides an official definition of the term third party logistics provider (3PL). So why can officially defining this small little word have such a big impact on the profession? I’ll start with a quick review of the history of the term 3PL - and I’ll end with how this revised definition may begin to create a shift in the way the profession views 3PL and outsourcing.

First, I would like you to be aware of the history of the term 3PL. The term was registered by Accenture as a trademark in 1996 and defined as "A supply chain integrator that assembles and manages the resources, capabilities, and technology of its own organization with those of complementary service providers to deliver a comprehensive supply chain solution.”

The term is no longer registered. The official CSCMP Definition up until now was: “A firm which provides multiple logistics services for use by customers. Preferably, these services are integrated, or "bundled" together by the provider. These firms facilitate the movement of parts and materials from suppliers to manufacturers, and finished products from manufacturers to distributors and retailers. Among the services which they provide are transportation, warehousing, cross-docking, inventory management, packaging, and freight forwarding.”

With the passage of HR 4040, the legal definition is now defined as, “a person who solely receives, holds, or otherwise transports a consumer product in the ordinary course of business but who does not take title to the product.”

The fact that the term “Third Party Logistics Provider” has been recognized by Congress and defined in legislation signed into law by the President, sheds some interesting light on not only the term – but also the profession. To say that something related to good old logistics is getting on the president’s desk is pretty powerful.

It’s important to understand that the legislation, HR 4040, is an update to the Consumer Product Safety Act. It defines penalties and lays the foundation for legal remedies associated with faulty products marketed to children such as the toys which have been highly publicized recently.  Lastly - while the definition is contained in product safety legislation focused on children’s products, I fully expect it to be referenced elsewhere.

So what does this mean to the profession?  This definition puts the 3PL in a position apart from manufacturers and distributors, and one which is not to be considered during product recalls and legal actions. In our highly litigious society, anything that exempts a party from legal action has to be considered “landmark legislation” from their perspective. However, many supply chain partners may not welcome this so warmly, as it does not allow them to “spread the pain” associated with these actions to the 3PL.

This new definition may also be problematic for progressive companies that WANT to move up the value curve and start to take on more responsibility under Performance-Based approaches.  It is not uncommon for a 3PL to own and control inventory/ obsolescence management under a performance-based approach.  Today – the term 3PL is so broad that most outsourcing relationships fall under 3PL. With this definition – some companies may not want to associate themselves with the term 3PL. Others who are risk averse might love it.

And how does the new 3PL definition relates to 4Ps? The recent announcements do not spell out the definition of a 4PL.  However the common definition of 4PL (and the one that is listed in the Council of Supply Chain Management Professionals Glossary of Supply Chain Terms) is:

“Fourth-Party Logistics (4PL): Differs from third party logistics in the following ways; 1) 4PL organization is often a separate entity established as a joint venture or long-term contract between a primary client and one or more partners; 2) 4PL organization acts as a single interface between the client and multiple logistics service providers; 3) All aspects (ideally) of the client’s supply chain are managed by the 4PL organization; and, 4) It is possible for a major third-party logistics provider to form a 4PL organization within its existing structure.”

If 3PLs can’t be held liable – how does that relate to 4PLs? Can they? I could see this being interpreted in funny ways….such as Joe Logistics guy tells his boss who wants to potentially outsource “those 3PLs are those lazy warehouses that won’t take responsibility……we shouldn’t outsource."

I want to end this blog by thinking about this as an evolutional step in the history of our profession as it relates to the warehousing profession. In the past – there were simply warehouses that a company paid to do warehousing services. Then along came 3PLs who wanted to be more “value added” in an effort to charge higher prices and get better margins. They seemed to separate themselves from the traditional “public warehouses” in their imaging and marketing efforts. Then along came the 4PLs who wanted to be more “strategic” and separate themselves from the 3PLs – once again trying to chase higher margins through a more prestigious image of what they do. I wonder how this formal definition will evolve the industry further.

I could easily see that the higher end 3PLs will want to pitch themselves as “responsible” entities so they can charge higher premiums – and as such start rebranding themselves as NOT being “your typical 3PL." If they do this – will we end up with a new term? Or will the 3PLs we know today shift to 4PLs? Or will all of the 3PLs jump up and down and claim victory because they are immune from responsibility? 

And of course HR 4040 is U.S. law only, how will the rest of the world view the legal position of the 3PL?

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