Chapter 4 Supply Chain Relationships Learning Objectives After reading this chapter, you should be able to do the following:  Understand the types of supply chain relationships and their importance.  Describe a process model that will facilitate the development and implementation of successful supply chain relationships.  Recognize the importance of “collaborative” supply chain relationships.  Define what is meant by third-party logistics (3PL) and know what types of firms provide 3PL services.

Learning Objectives After reading this chapter, you should be able to do the following:  Know what types of 3PL services are used by client/customer firms and what types of 3PL providers are used.  Discuss the role and relevance of information technology-based services to 3PLs and their clients/customers.  Know the extent to which customers are satisfied with 3PL services and identify where improvement may be needed.  Understand some of the likely future directions for outsourced logistics services.

Logistics Relationships  Types of Relationships vertical relationships:  these refer to the traditional linkages between firms in the supply chain such as retailers, distributors, manufacturers, and parts and materials suppliers horizontal relationships:  includes those business agreements between firms that have “parallel” or cooperating positions in the logistics process.

Range of relationship types  Transactional: Both parties in a vendor relationship are said to be at “arm’s length”  Collaborative: the relationship suggested by a strategic alliance is one in which two or more business organizations cooperate and willingly modify their business objectives and practices to help achieve long-term goals and objectives  Strategic: represents an alternative that may imply even greater involvement than the partnership or strategic alliance.

Figure 4-1 Relationship Perspectives Transactional Vendor Partner Strategic Alliance R e l a t i o n a l

Regardless of form, relationships may differ in numerous ways. A partial list of these differences follows:  Duration  Obligations  Expectations  Interaction/Communication  Cooperation  Planning  Goals  Performance analysis  Benefits and burdens

Source: Copyright 2001, C. John Langley PhD Used with permission

Figure 4-3 What Does It Take to Have an Area of Core Competency?

Drivers defined as “compelling reasons to partner”; all parties “must believe that they will receive significant benefits in one or more areas and that these benefits would not be possible without a partnership” Facilitators are defined as “supportive corporate environmental factors that enhance partnership growth and development”; As such, they are the factors that, if present, can help to ensure the success of the relationship

Figure 4-4 Implementation and Continuous Improvement Ray A. Mundy, C. John Langley Jr., and Brian J. Gibson, Continuous Improvement in Third Party Logistics, (2001).

Collaboration:  Collaboration occurs when companies work together for mutual benefit.  Collaboration goes well beyond vague expressions of partnership and aligned interests.  Companies leverage each other on an operational basis and creates a synergistic business environment in which the sum of the parts is greater than the whole.

Seven Immutable Laws of Collaborative Logistics Collaborative Logistics Networks Must Support:  Real and recognized benefits to all members  Dynamic creation, measurement, and evolution of collaborative partnerships  Co-buyer and co-seller relationships  Flexibility and security  Collaboration across all stages of business process integration  Open integration with other services  Collaboration around essential logistics flows

Definition of Third-Party Logistics  Essentially, a third-party-logistics firm may be defined as an external supplier that performs all or part of a company’s logistics functions.  Among these, multiple logistics activities are included, those that are included are “integrated” or managed together, and they pro- vide “solutions” to logistics/supply chain problems.

Types of 3PL Providers  transportation-based  warehouse/distribution-based  forwarder-based  shipper/management-based  financial-based  information-based firms

Figure 4-6 3PL Logistics Market Turnover Growth (US $Billion) $100 $80 $60 $40 $20 $0

Source: 2005 Tenth Annual 3PL Study, Georgia Tech and Cap Gemini LLC. Used with permission

Figure 4-11Fourth-PartyTM TM Logistics* + Greater Functional Integration + Broader Operational Autonomy Source: Accenture, Inc. Used with permission. *TM Registered trademark of Accenture, Inc.

Figure 4-12 Current vs. Projected Logistics Expenditures Directed to Outsourcing

Table 4-9 Future 3PL Industry Trends Continued expansion, acquisition and consolidation of 3PL industry Expansion of global markets and needed services Continued broadening of service offerings across supply chain and broad-based business process outsourcing Two-tiered relationship models (strategic and tactical) Growing range of “strategic” services offered by 3PLs and 4PLs IT Capabilities to become an even greater differentiator Increased efforts to update, enhance, and improve 3PL provider-user relationships Emphasis on relationship reinvention, mechanisms for continual improvement, and solution innovation

Summary The two most basic types of supply chain relationships are “vertical” (e.g., buyer-seller) and “horizontal” (e.g., parallel or cooperating). In terms of intensity of involvement, interfirm relationships may span from transactional to relational and may take the form of vendor, partner, and strategic alliances. There are six steps in the development and implementation of successful relationships. These six steps are critical to the formation and success of supply chain relationships. Collaborative relationships, both vertical and horizontal, have been identified as highly useful to the achievement of long-term supply chain objectives. The “Seven Immutable Laws of Collaborative Logistics” provide a framework for the development of effective supply chain relationships.

Summary (cont.) Third-party logistics providers may be thought of as an “external supplier that performs all or part of a company’s logistics functions.” It is desirable that these suppliers provide multiple services, and that these services are integrated in the way they are managed and delivered. The several types of 3PLs are transportation-based, warehouse/distribution- based, forwarder-based, financial-based, and information-based suppliers. Based on the results of a comprehensive study of users of 3PL services in the United States, over 70 percent of the firms studied are, to some extent, users of 3PL services. User experience suggests a broad range of 3PL services utilized; the most prevalent are warehousing, outbound transportation, and freight bill payment and auditing.

Summary (cont.) While nonusers of 3PL services have their reasons to justify their decision, these same reasons are sometimes cited by users as justification for using a 3PL. Customers have significant IT-based requirements of their 3PL providers, and they feel that the 3PLs are attaching a priority to respond to these requirements. Approximately two-thirds of the customers suggest 3PL involvement in their global supply chain activities. Although most customers indicate satisfaction with existing 3PL services, there is no shortage of suggestions for improvement.

Summary (cont.) Customers generally have high aspirations for their strategic use of 3PLs and consider their 3PLs as keys to their supply chain success. There is a growing need for fourth-party logistics relationships that provide a wide range of integrative supply chain services.