Supply Chain Management, 3PL, 4PL, and Logistics Strategy

Why Senior Management Ignores Supply Chain Management

As an organization becomes increasingly profitable, managers perceive a lesser need to address issues in the supply chain (Dutton, 2009). One of the key causes is the company's focus on profit margin. In companies that generate greater profit margins, where transport and logistics represent only a small portion of expenses, managers rarely dedicate time to supply chain management. Instead, they tend to concentrate on what generates the greatest returns. Nonetheless, when an organization is in turmoil and experiencing poor returns, managers begin to acknowledge the need for an effective and efficient supply chain, because every minor expense has an impact. As a result, every probable solution is pursued when profit margins are deteriorating. Supply chain management is one of the ways an organization can boost its profit margin through timely distribution and effective management of inventory — from the point of procurement through to delivery to consumers (Dutton, 2009; Rudski, 2008).

Supply chain management customarily encompasses numerous operations, including procurement, distribution, retail, transportation, and financing. Top-level managers may not fully understand all of these interconnected functions. This lack of understanding can result in supply chain management being overlooked. It is therefore necessary to highlight the significance of supply chain management's role so that top-level managers recognize its decisive impact on company performance (Robert, 2008). The argument is that managers end up ignoring supply chain management because they may not be fully aware of its competitive advantages in resolving pressing organizational issues (Robert, 2008).

According to Robert (2008), another reason senior management consistently ignores logistics is that some executives are not fully cognizant of the benefits it offers. Lack of interest in supply chain management and operations may leave senior management unaware of the importance of this function to the company's overall performance. Conversely, this could result from supply chain managers failing to communicate the potential advantages of logistics to senior leadership. Taking this possibility into account, it can be inferred that a lack of cooperation and communication between senior management and the supply chain division — as well as other supporting divisions — is a contributing factor (Robert, 2008).

It is imperative for senior management to place greater emphasis on supply chain management in order to realize its full potential. One effective approach is to draw a clear connection between supply chain management and the objectives senior management has already committed to achieving (Robert, 2008). These objectives typically include reducing risk and safeguarding revenues, achieving organizational growth year over year, exceeding revenue targets, increasing return on equity for shareholders, and attaining a competitive edge (Robert, 2008). Framing supply chain management within these predetermined goals would prompt management to consider all areas of operations — including SCM — and recognize its potential.

Convincing Senior Management to Prioritize Logistics

Another approach involves direct communication with senior management to build awareness of SCM's potential in achieving their objectives. This would require structured deliberations designed to capture the attention of senior leadership, including furnishing specific data on how supply chain management can advance and help accomplish key objectives, such as maximizing shareholder equity. This can be achieved through the cost savings realizable through supply chain optimization and through increasing revenue via improved customer satisfaction (Dutton, 2009). These two outcomes simultaneously improve the profit margin and reduce expenses, producing a remarkable influence on overall company performance.

Beyond internal communication, other persuasive approaches can be employed — for instance, presenting the experiences of other corporations that have achieved success through judicious deployment of supply chain management. Showing senior management the before-and-after position of such companies can be a highly effective way to demonstrate the role SCM can play in enhancing performance. Another compelling presentation would compare the company's current standing against competitors that have proven track records of supply chain benefits (Dutton, 2009).

The expertise of external logistics and logistics management organizations can be best utilized when promoting supply chain management initiatives to senior management. It is important to involve key stakeholders who play a vital role in supply chain effectiveness, including retailers, suppliers, third party logistics providers (3PLs), and fourth party logistics providers (4PLs). One of the key advantages these external parties offer is their extensive coverage and experience across diverse companies in various commercial sectors (Dutton, 2009). They can help the company avoid costly mistakes by drawing on a wide array of accumulated experience. Furthermore, because they are independent operators with no organizational alignment, they are better positioned to influence and convert those within the company who may be opposed to leveraging supply chain management for performance improvement (Robert, 2008).

Such external influence becomes especially valuable because effective supply chain management requires broad collaboration between the company and stakeholders such as suppliers and retailers. Working closely with them can be a useful mechanism for presenting the concept to senior management through the mediation of participating stakeholders — making it easier to demonstrate that the required resources and partners are accessible (Dutton, 2009). Vendors provide direct insight into market conditions, and working with them raises overall efficiency. Partnering with vendors is therefore essential to supply chain success, and in presentations to senior management, the vendor can play a vital role in demonstrating that productive partnerships are already within reach (Dutton, 2009).

Leveraging External Logistics Expertise

In order to continue succeeding in the global market, organizations face an increasing demand to implement proper strategies alongside timely and effective execution. As markets become more globalized, competition intensifies, and no single organization can succeed without rational, practical plans and strategies. Logistics is one of the key elements in business, encompassing the critical flow of products, services, information, and resources. One particular company that illustrates the consequences of senior management ignoring logistics is Tesco. Tesco is one of the largest retail companies in the world, operating more than 2,400 retail stores with over 350,000 employees and profits exceeding £3 billion per annum. Its largest consumer market is in the United Kingdom, though in recent years Tesco has expanded its operations to the United States, Thailand, and Central Europe. This company was selected because of the significant logistics problems it experienced in 2013.

Vlachos (2014) notes that improper and ineffective execution of logistics approaches — such as reverse logistics — can result in serious legal complications and financial consequences. This was precisely the case with Tesco in 2013. As one of the largest retail supermarkets in the United Kingdom, Tesco was compelled to remove all of its fresh and frozen meat products from shelves after food authorities in Ireland discovered that the supplied meats contained horse meat (Vlachos, 2014). Beyond the immediate requirement to recall all distributed products, Tesco suffered a significant decline in its stock market value. This episode illustrates one of the most damaging outcomes of senior management ignoring logistics — it affected not only the company's financial position but also its consumer loyalty. The company had failed to concentrate on its logistics and supply chains, leading it to the erroneous belief that its products remained trusted in the marketplace (Vlachos, 2014).

According to Ahmed (2015), Tesco also faced investigation over its treatment of suppliers. The company was accused of violating the Groceries Supply Code of Practice. Specific charges included delayed payments to suppliers, invoicing discrepancies, consumer complaints, short deliveries, and unauthorized deductions. This is a further consequence of senior management's policy of neglecting logistics while concentrating on profit-generating activities. Complaints were made that Tesco's supply chain in the United Kingdom was managed by incompetent individuals, the aim being to cut expenses and place excessive pressure on suppliers — or even to exploit them (Ahmed, 2015).

Tesco as a Supply Chain Case Study

Tesco holds an impressive thirteen percent share of the United Kingdom retail market. As the company increases its focus on food and expands its participation in hypermarkets, it is imperative for Tesco's senior management to also focus on logistics in order to attain optimum supply chain efficiency and eliminate the problems previously experienced. For instance, operations within its logistics department should be benchmarked against those of competitors — including whether suppliers are treated more fairly than those of rival companies. The company can also implement real-time, daily monitoring of its prevailing stock, centered on the inventory in place (Fernie and Sparks, 2009). Furthermore, orders should be processed in a centralized manner to prevent flaws regarding inventory distributed to different retail outlets.

By adopting reverse logistics approaches, Tesco would be better positioned to make effective decisions concerning the eventual destination of its products and how those products can be reintroduced into its supply chain. This would enable the company to become more competitive in its markets, increase its profit margin, and grow its market share in target regions (Fernie and Sparks, 2009).

Tesco has not had prior experience with virtual logistics service providers — that is, fourth party logistics (4PL) providers. According to Rushton and Walker (2007), corporations in some industries have no desire to outsource their supply chains, either because they perceive the supply chain as a separate, independent entity, or because their scale of operations gives them the capacity to match the capabilities of a 4PL provider. Tesco exemplifies this position, believing it has both the scale and the proficiency to manage its own supply chains effectively. Such corporations tend to focus on reducing logistics and operating costs and on outsourcing particular logistics activities as commodity services (Rushton and Walker, 2007).

Another reason Tesco has not engaged with virtual logistics service providers is its reluctance to cede control. The company is unwilling to allow external entities to manage its supply chains or, more importantly, to access its supply chain data — both of which it regards as highly valuable and in need of protection from external influence (Rushton and Walker, 2007).

There are significant advantages and disadvantages to using a virtual logistics service provider. The capital required to transform a supply chain can be considerable, and the possibility that tens of millions invested in such a project may prove ineffective cannot be ruled out. Additionally, the cost savings generated by the project may not be proportionally significant relative to the expense of engaging a 4PL provider. Tesco is a conglomerate with numerous subsidiaries, and shifting to a 4PL model would require the company to relinquish direct control of its supply chain operations and to forgo established relationships with 3PLs and other providers — relationships built through substantial investment of time, effort, and capital (Rushton and Walker, 2007). A further disadvantage is that once a 4PL structure is established, it becomes exceedingly difficult to withdraw from it, as all procedures and structures will have been developed by the 4PL provider, which will hold the commercial affiliations with 3PLs and other carriers (Rushton and Walker, 2007). In general, incorporating a 4PL is a costly, long-term investment, and if it does not produce substantial results, the company bears a major loss.

Nevertheless, Tesco would stand to benefit from a 4PL relationship. Unlike 3PLs, which concentrate on specific logistics tasks, 4PLs seek to address issues across all procedures that influence the supply chain. A 4PL strives to improve cost, service, and speed across the supply chain, encompassing suppliers, inventory, the physical network, and carriers (Rushton and Walker, 2007). As Tesco continues expanding overseas, the management of overseas suppliers, procurement orders via ocean shippers or 3PL freight forwarders, and the integration of these processes with downstream logistics activities become extremely complex. A 4PL can help resolve this complexity and improve overall supply chain functionality (Rushton and Walker, 2007). Additionally, a 4PL can develop performance metrics to measure and supervise the entire supply chain and all its contributing stakeholders — enabling Tesco to resolve issues, monitor prevailing conditions, and improve the performance of service providers and transporters across the chain (Rushton and Walker, 2007).

In recent years, the integration of supply chain management ideas has transformed the role of logistics service providers. This includes third party logistics (3PL) providers, which now play a more widespread and integrated role with their clients. Following this trend, new structures have emerged — such as logistics integrators in the form of fourth party logistics (4PL) providers — which combine the management and operation of supply chain logistics (Rudski, 2008). The table below compares and contrasts the functions typically associated with 3PLs and 4PLs.