Chapter 12 Third Party Logistics

Chapter 12 Third Party Logistics
Transportation Seventh Edition Coyle, Novack, Gibson & Bardi © 2011 Cengage Learning Chapter 12 Third Party Logistics © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Introduction Outsourcing
Substituting external specialists for in-house capabilities Relatively common today for activities such as: Accounting Payroll and tax preparation Advertising Human resource benefits administration Transportation services Provided by organizations known as third-party logistics service providers or 3PLs © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Introduction Choice of a 3PL should be carefully made
3PL performance impacts financial and customer service performance Chapter addresses process for selecting 3PL Structure of 3PL industry Characteristics of 3PL users Types of 3PL relationships Current and future 3PL industry issues © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Industry Overview Definition of a 3PL
“an external supplier that performs all or a part of a company’s logistics functions.” Services may include: inventory management, warehousing, financial services, transport, distribution Chapter focuses on transportation services, but, Transport services should be integrated with customer’s other logistics activities Transport focused 3PL should be capable of providing solutions to logistics and supply chain challenges © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Industry Overview Types of 3PL Providers
Most 3PLs have their origin in a specific activity, such as transport, IT, etc. These foundation services provide a basis for classifying 3PLs Transportation based Distribution based Forwarder based Financial based Information based © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Transportation based Originally transportation carriers Developed 3PL subsidiaries in response to expanding customer requirements Services now include transport management, dedicated contract carriage, and fulfillment center operation Example providers (with parent company) APL Logistics/Neptune Orient Lines Limited UPS Supply Chain Solutions/UPS of North America © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Distribution based Originally public or contract warehousing services Expanded services into inventory management and order fulfillment. Some have integrated transport services into offerings Wide range of market reach, from local to global Example providers Exel, DSC Logistics, Ozburn-Hessey Logistics Caterpillar Logistics Services © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Forwarder based Originated from intermediaries such as freight forwarders, brokers and agents Arrange transport-related services for less-than-volume shipments and for international shipments Example providers C.H. Robinson Worldwide, Hub Group, Kuehne+Nagel Considerable mergers and acquisitions among this group © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Financial based Helps customers with monetary issues and financial flows in the supply chain Traditional services include freight rating, freight payment, freight bill auditing, accounting services Expanded services include IT systems for freight visibility, electronic payment, carrier compliance reporting, claims management Example providers Cass Information Systems Commercial Traffic Corporation © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Information based Services include online freight brokering and cargo planning, routing, and scheduling Also offer online access to transport and warehouse management systems Avoids purchase of licensed software for these services Example providers Descartes Systems Group, Sterling Commerce, Transplace © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Alternative 3PL classification scheme Asset based providers The 3PL owns the equipment used to provide services Non-asset based providers 3PL arranges for services from other companies that own equipment The 3PL tends to not own equipment (assets) © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Asset based providers Examples include Exel, FedEx, UPS, Menlo Advantages for user of 3PL services 3PL maintains direct control over shipper’s freight 3PL has ready access to capacity Fewer organizations to work through to resolve problems Disadvantages for user of 3PL service Provider may favor using the type of assets it owns, this may be less then optimal for user © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Non-asset based providers Service integrator Build customer-tailored solutions from services offered by transport and logistics service specialists Experts in structuring and negotiating contracts Popular services include freight management and brokerage, routing and scheduling shipments, international freight flow management Examples: CEVA Logistics, C.H. Robinson Advantages: flexibility, unbiased solutions © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Industry Overview 3PL Services and Integration
Wide range of services, from supply chain design to daily operations Within transport, 3PLs provide 4 principal types of services Freight movement Freight management Intermediary services Specialty services © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Figure 12-1: 3PL Primary Transportation Offerings
FREIGHT MOVEMENT For hire carriage Contract carriage Expedited service Time definite service Intermodal service FREIGHT MANAGEMENT Carrier selection, routing, & scheduling Contract compliance Performance analysis Freight bill auditing and payment Transportation management systems INTERMEDIARY SERVICES Surface forwarding Air forwarding Freight brokerage Intermodal marketing Shippers associations SPECIALTY SERVICES Dedicated contract carriage Drayage Pool distribution Merge in transit Household good movement © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Intermediary services Surface freight forwarder Picks up, assembles and consolidates shipments Arranges for carriers to transport and deliver to final destination Serve as shippers and carriers. As carriers, they are liable for loss and damage Air freight forwarder (similar to surface forwarder) Specializes in high value, time sensitive goods © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Freight brokerage Middlemen between shipper and carrier Tries to match carrier’s capacity with shipper’s demand Intermodal marketing companies Consolidators or agents, facilitate intermodal rail service Assume no liability, legal shipping arrangement is between shipper and carrier Shippers associations Non-profit coops, aggregate member cargo for shipment as consolidated load © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Specialty services Dedicated contract carriage 3PL serves as customer’s private fleet Customer gains advantage of private fleet without capitalization, operating and management responsibilities Drayage Short haul trucking, pick up and delivery of containers Typically contracted for by rail or ocean carriers © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Pool distribution Description Large quantity of freight moved as one shipment in bulk to central distribution point Freight unloaded, sorted by customer, delivered to local destination Competes directly with LTL service offered by LTL motor carriers Potential advantages Faster transit time, less handling, lower rates, lower inventory costs © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Merge in transit Unites shipments from multiple suppliers at a merge point near end customer Customer orders of assorted goods assembled at merge facility for delivery to end customer Advantages: lowers total inventory cost, customer avoids capital cost of warehousing facility Household goods movement (HHG or van lines) Operations include local agency with warehouse, pick-up and delivery equipment, centralized dispatch, and specialized vehicles for long distance transport © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Emerging 3PL capabilities Customers desire “one-stop shopping” thus, leading 3PLs developing as integrated service providers Customers desire global reach, thus, leading 3PLs expanding service territories Both capabilities require: Supply chain network design capabilities Process implementation and coordination Day-to-day execution Strong IT tools and multi-modal capabilities © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Approaches to global integration include: Leveraging strengths of express delivery services Visibility, door-to-door, high reliability Acquisitions and partnerships among 3PLs Offering portfolio of transportation, e-commerce supply chain and business services Includes inventory, fulfillment, cold chain solutions, cross docking, brokerage, freight forwarding Strategic investments in transport/distribution facilities © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

3PL User Overview 3PL growth trends
Spending on 3PL services steadily rising In U.S. 3PL providers account for 16% of total logistics spending in 2008 Up from 10% in 2002 77% of Fortune 500 outsourced some portion of logistics and supply chain functions in 2008 Up from 64% in 2005 Three industries lead use of 3PL services Technology, automotive, retail © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Figure 12-2: U.S. Spending on 3PL Services
$ Billions Source: Armstrong and Associates, Trends in 3PL/Customer Relationships, Used with permission. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

© 2011 Cengage Learning. All Rights Reserved
© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25

3PL User Overview Reasons for Outsourcing
Lack of internal expertise Supplement internal expertise Opportunity to reduce costs, improve financial performance Opportunity to increase resource capacity or improve asset productivity © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Table 12-3: Reasons For and Against 3PL Use
Reasons for Using 3PL Services Reasons Against Using 3PL Services Opportunity for cost reductions Ability to focus on core competencies Opportunity to improve customer service Improve return on assets Increase in inventory turns Productivity improvement opportunities Imbibe more flexibility into logistics processes Access to emerging technology Expansion to unfamiliar markets Ability to divert capital investments Logistics is a core competency of company Cost reductions would not be experienced Control over outsourced function would diminish Service level commitments would not be realized Company has more expertise than 3PL providers Logistics is too important to consider outsourcing Outsourcing is not a corporate philosophy Global capabilities of 3PL need improvement Inability of 3PLs to form meaningful relationships Issues related to security of shipments Sources: B.S. Sahay and Ramneesh Mohan, “3PL practices: an Indian perspective, International Journal of Physical Distribution & Logistics Management, Vol .36, No. 9, 2006; and, Georgia Tech and CapGemini LLC, Eleventh Annual 3PL Study, 2006. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

3PL User Overview Primary Activities Outsourced
Most relationships with 3PLs are tactical, meaning 3PLs are used for a specific task Transportation is the most often used service Customs clearing, freight forwarding and shipment consolidation also widely used About 18% of 3PL relationships are strategic 3PLs fully manage customer’s supply chain However, many users look to 3PLs for help in integrating global service capabilities © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

3PL User Overview Results Achieved
3PL users satisfied with outsourcing results Logistics cost reductions in 12%-15% range Fixed logistics assets reduced 20% or more Order cycle time reductions of 20%-30% 3PLs provide more flexibility to fluctuating demand 3PLs help customers increase service reliability But, most 3PL relationships have some problems Most common: unrealized service-levels or cost reductions, lack of continuous improvement © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Figure 12-3: 3PL Relationship Evaluation
Percent of Respondents Source: Georgia Tech and Capemini LLC, The State of Logistics Outsourcing: 13th Annual 3PL Study, 2008, Fig. 4, p. 11 Copyright © 2008 C. John Langley, Jr., Ph.D, and Capgemini U.S. LLC. All rights reserved. Reprinted by permission. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Establishing and Managing 3PL Relationships
Six step process for establishing 3PL relationship Step 1: Perform strategic assessment Perform a logistics/supply chain audit Identifies current state, needs, and strategy alignment Info to be collected in audit includes Goals/objectives at corporate, division, supply chain levels Requirements of customers, suppliers, key logistics providers ID/analyze strategic environmental factors, industry trends Profile current logistics network, firm’s positioning Benchmark logistics costs and key performance indicators Gap analysis between current and desired performance © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Figure 12-4: 3PL Relationship Development Process
Source: Copyright © 2001 C. John Langley Jr., Ph.D. and Capgemini U.S. LLC. All rights reserved. Reprinted by permission. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Step 2: Decision to form relationship Which service provider’s capabilities are needed? Does the company appear to have core competency (expertise, strategic fit, and ability to invest)? Lambert, Emmelhainz, and Gardner Partnership Model Key parts: drivers and facilitators of a relationship Drivers: the compelling reasons to partner Synergy from the partnership that cannot otherwise be attained Facilitators: corporate environmental factors that enhance partnership development and growth Compatible cultures, mgmt. philosophy, relationship commitment © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Step 3: Evaluate alternatives Guiding principles If neither drivers or facilitators are present, then the relationship should be transactional or arm’s length If all parties in the relationship share common drivers and facilitating factors are present, then a more structured, formal relationship is justified Evaluation should include comparison of firm’s needs with capabilities of potential 3PL partner Evaluation should include cross-functional perspectives © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Step 4: Select partners Step 3 identifies 3PLs that have credentials to be partners Next, given the strategic nature of the pending relationship, the firm’s executives should interact professionally with candidate 3PLs The final outcome should be Consensus on “best fit” 3PL Consistent understanding of the decision made Consistent expectation of what to expect from the 3PL © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Step 5: Structure operating model Structure refers to activities, processes, and priorities of the relationship Components of the operating model include Joint planning processes and operating controls Communication protocols Risk/reward sharing Trust and commitment Contract style Scope of the relationship Financial investment © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Step 6: Implementation and continuous improvement Implementation time varies depending on scope and complexity of relationship Continuous improvement process Aim for breakthrough improvements that strengthen the market position of the partners Tools include Customer value research Flowcharting and statistical process control Activity-based costing, benchmarking, process reengineering © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Keys to successful relationships Both organizations invest time and money in development and sustainment Information sharing Culture of trust Openness to new ideas and methods Collaboration on a regular basis Team approach to problem solving Leveraging of each partner’s capabilities © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Strategic Challenges for 3PL Users Service Requirements
Initial questions prior to forming relationship What are the types of services required? Tactical or strategic approach to attaining services? Tactical: outsource individual services as needed Relationship is transactional, collaboration is tactical Wal-Mart’s use of Greatwide Transportation for refrigerated product delivery rather than own fleet is an example Strategic: establish extensive set of integrated service capabilities with 3PL High consequences, 3PL heavily impacts service performance Example: Goodyear uses Exel for transportation load planning, private fleet operations and order fulfillment © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Strategic Challenges for 3PL Users Coordination Role
Where should the role of coordinating key logistics activities reside? Resides internally if firm does not outsource Resides internally if firm outsources tactically, largely to reduce cost of key activities, such as transportation Firm uses 3PLs specializing in limited number of services, i.e. logistics service providers © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Strategic Challenges for 3PL Users Coordination Role
Coordination role shared with 3PL if firm outsources to achieve value added services Firm uses 3PL integrated service providers Coordination role largely lies with service provider if they have lead responsibility for regional supply chain integration Provider known as lead logistics provider or 4PL Coordination totally assumed by advance service providers (global integrators) © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Figure 12-7: 3PL Coordination Capabilities
Key Attributes 3PL Coordination Role Speed of Implementation Knowledge Transfer Shared Risk & Reward Comprehensive Solution Global Supply Chain Integrators Advanced Services Project Management Single Point of Contact Lead Logistics (4PL) Pan-Regional Integrators Value-Added Services (Third Party Logistics) Enhanced Capabilities Broader Service Offerings Shared across activities and locations Focused Cost Reduction Basic Services (Logistics Service Providers) Limited Resident Client Knowledge Insourcing None Source: Georgia Tech and Capgemini LLC, The State of Logistics Outsourcing: 10th Annual 3PL Study, Copyright © 2005 C. John Langley, Jr., Ph.D., and Capgemini U.S. LLC. All rights reserved. Reprinted by permission. © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Strategic Challenges for 3PL Users Technology Integration
State of the art IT: critical capability for 3PLs. Necessary for Advanced communications Shipment visibility and event management Management of daily operations Gap between expectations and 3PL capabilities Lack of sufficient shipment visibility Lack of 3PL internal systems integration Impedes seamless info flow and activity integration © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Strategic Challenges for 3PL Users Goal Cohesion
Incongruent goals create potential conflicts Keys to creation of consistent goals Strong personal relationships at both operating and executive levels Contracts with detailed requirements and performance verification capabilities Attainable performance targets Monitoring of key performance indicators © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Strategic Challenges for 3PL Users Supply Chain Security
Principal concern is theft. Keys for avoiding: Providing better physical security for goods Develop security procedures collaboratively with customers Provide proactive reports and alerts when shipments deviate from plan Monitor key freight transfer points, avoid high risk transport routes, i.e., Gulf of Aden Obtain C-TPAT, and other certifications © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Strategic Challenges for 3PL Users Future Issues and Challenges
Economic forces Volatile fuel costs Economic instability Shifting demand and production patterns Increasing capability expectations Services integration Managing worldwide services Rising demand for strategic capabilities © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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