One of the key supply chain decisions an organized and at-scale QSR (Quick Service Restaurant) needs to take is whether to work with a single integrated supply chain partner (4 PL) or work with multiple partners for different functions / geographies ( 3PL). In the developed world where QSR industry is close to five-six or more decades old, organized QSR prefers 4 PL solution as it is easier for them to scale their franchise or own outlet operations when they outsource all supply chain activities to one integrated player.
However, in the developing world, where legal framework not robust, supply chain practitioners prefer to keep their “eggs in multiple baskets” to “balance out” decisions. Moreover, a misguided notion is that they can get better commercials if they work with multiple players. Often the important parameters – consistency, reliability, specialization of supply chain partners take a backseat.
This blog will help in understanding the complexities in both the systems and will identify the suitability of each in different scenarios.
Let’s first identify the difference between a 3 PL and 4PL player. A 3 PL provider offers outsourced logistics services, which may involve one or more facets of procurement and fulfillment. A 3PL service may be a single provider, such as transportation or warehouse storage, or it can be a systemwide bundle of services capable of handling the complete supply chain. Whenever we refer to 3 PL services in the context of QSR industry, it often implies that the owner QSR company is using multiple players for similar as well as different activities. For example, it is quite possible that a QSR player may be using 5 different warehouse service providers in the country, 10 different fulfilment vendors for delivery to the store and multiple inbound transporters for lifting raw material and processing food from factories for delivering into the central warehouse. On the other hand, 4 PL or Fourth-party logistics, is an operational model in which a business outsources its entire supply chain management and logistics to one external service provider. Unlike a 3PL provider, which oversees part of supply chain operations for a business, a 4PL provider is usually the single point of contact for supply chain management. This provider has a broader scope of responsibilities that include managing resources, technology and infrastructure and providing strategic insights and management to complete operations of fulfilment. Clearly, the scope of services and deliverables for a 4PL player are broader and strategic in nature. Let’s dive deep into major elements (Procurement and Material Planning, Primary Transportation and fulfilment) to see how the same activity will be done in a 4PL and 3 PL environment:
Procurement and Material Planning : A 4 PL is the single contact between a QSR brand and its vendor. They procure raw materials from all the approved vendors. They need to make sure that quantity is ordered adequately to ensure that stock outs do not happen. They need to issue POs to all the vendors well in time to ensure that the products are ready. 4 PL also must make sure that all the vendors of the brands are paid in time and they in turn is also paid in time by the QSR. In the absence of a 4PL, the QSR company must do this activity in house. They will need a team of planners who will carefully monitor the daily sales and consumptions at the store level and order accordingly. A 4 PL arrangement ensures that the QSR frees itself for this repetitive activity and outsource it.
Primary Transport : It is the responsibility of 4PL provider to ensure that all raw materials are lifted from supplier’s premises in time and stored at warehouses for fulfilment. 4 PL must co-ordinate between suppliers, transporters as well as brand to ensure that the primary transport activity happens efficiently. In absence of 4 PL, the company will need a team of its own logistics buyers who will run their own RFQs and have different transporters for different lanes.
Fulfilment : A 4 PL is responsible for ensuring that stocks get connected on time to all the delivery outlets. They need to ensure zero stock outs, high fill rates (~99% and above) and timely deliveries. They need to do route planning, coordinating with franchisees, transporters and other stakeholders in the chain. In a 3PL environment, the brand has to coordinate separately with warehouse, transporters and franchisees to ensure the desired fill rates are achieved.
The above two activities hint that life for QSR brands will be much easier if there is a one partner who is responsible for all deliverables than having multiple partners. Similar benefits are also seen for other critical activities like warehousing, secondary transportation and fulfilment. However, one of the biggest benefits which is often understated is in terms of vendor management. In a 4 PL scenario, there is a single logistics vendor, and it is even possible to have a single invoice for all the work (Subjected to legal framework in a country). On the other hand, a 3PL environment may have 100+ vendors, their subsequent contracts and so on. It is quite possible that manpower requirements for handling accounts and Finance MIS will require many more hands than at a 4 PL environment.
Now, we have seen the multiple benefits of a 4PL environment. However, we don’t see too many 4 PL set ups other than some MNC QSR brands in developing world. Some of the reasons we have observed are:
Legacy of the past : Most of domestically grown QSRs have started as a single outlet entity where they may have “in sourced” certain activities and outsourcing only activities like transportation. They feel more comfortable in “status quo” and does not appreciate the benefits which a 4PL approach offers. They may have a piecemeal approach towards transportation and warehousing. Often, it is the “control” which drives them towards supply chain decisions.
Much of the Indian cuisines have a very large “fresh component” which either gets prepared at the store itself or at a central kitchen in the city. This may reduce the need for a complete 4 PL solution.
As mentioned above, many practitioners are not confident enough or comfortable in handing over complete operations to one integrated player. They feel that they are hedging their risks by dividing the business into multiple operators as per geographies or functions or both.
Since, the benefits of 4PL have been understood, now let’s look at a 3PL approach and see where all it can be effective:
PL can be an effective mode for start up QSRs where they have yet to figure out a lot of things in terms of product offerings, ingredients and so on. Often, the volumes are small, there is a frequent change in product strategy or product offerings and so on. A 3PL approach may be more amenable in those circumstances.
Another aspect related to above point is the degree of standardization in processes, ingredients, payment systems and operating procedures. Many domestically grown QSRs does not still have stringent controls in place. A lot of discretionary decision making happens geographically as well as at store levels. It is difficult for a 4PL to operate in fuzzy environment like this. Hence, some companies prefer to operate with smaller or “more pliable” 3 PLs.
To sum up, there can “one size fits all” approach. 4 PL has its own benefits for certain businesses where they have reached a certain scale, SOPs are strong and non-negotiable, product standardization is strong, and vendor network is already robust. On the other hand, 3 PL can be suitable for players who are “start-ups” and still trying ideas out, have smaller reach geographically or yet to standardize their products, ingredients and vendor base successfully.