Logistics Relationships and Third-Party Logistics

Objectives

Understand the importance of logistics relationships and the types of relationships that may be formed. Be knowledgeable of a process model that will facilitate the development and implementation of successful supply chain relationships. Define what is meant by third-party logistics (3PL), and know what types of firms provide 3PL services.

Learning Objectives

Know what types of 3PL services are used by client/customer firms, and know what types of 3PL providers are used. Appreciate the role and relevance of information technology-based services to 3PLs and their client/customers. Realize the ways in which 3PLs are involved in global supply chain issues.

Learning Objectives

Know the extent to which customers are satisfied with 3PL services, and understand where improvement may be needed. Recognize the importance of collaborative relationships in the context of supply chain management.

Logistics Profile: UPS Logistics Group

UPS Logistics Group signed a five-year $150 million deal to manage National Semiconductors global supply chain distribution center in Singapore. The DC uses radio frequency, bar-code scanning, and web-based technology. Fills >450K orders per year; receives 12 million inbound chips daily; and ships four billion products per year on sales of $2.1 billion.

Logistics Relationships and Third-Party Logistics: Introduction

With more firms interested in working more closely with their supply chain partners, high priorities are: Developing and implementing successful supply chain relationships; The need for collaboration to achieve supply chain objectives; and, Value created by third-party logistics.

Logistics Relationships: Types of Relationships

Vertical Refer to the traditional links between supply chain members such as retailers, distributors, manufacturers and suppliers. Horizontal Firms that have parallel or cooperating positions in the supply chain such as a transportation firm and a warehousing firm serving the same customer.

Logistics Relationships: Intensity of Involvement

Vendor relationship shows little or no integration or collaboration. Strategic alliance shows full integration and collaboration. Partnership shows a customized relationship that results in better outcomes than could be reached separately. Examine Figure 11-1 on the next slide.

Figure 11-1 Relationship Perspectives

Logistics Relationships: Intensity of Involvement

Regardless of form, there are numerous ways that the relationships may differ: Duration Obligations Expectations

Interaction and Communication Cooperation Planning Goals Performance analysis Benefits and burdens

Figure 11-2 Effectiveness of Supply Chain Relationships

50%
48% 42%

Percentag e

40% 30%
22% 21% 20% 23%

20% 10% 0%
7% 8% 2% 4%

Poor

Fair

Average

Good

Exceptional

Suppliers

Customers

Logistics Relationships: Model for Developing and Implementing Successful Supply Chain Relationships

Six step process for forming and sustaining supply chain relationships: Step One Perform strategic assessment Step Two Decision to form relationship Step Three Evaluate alternatives Step Four Select partners Step Five Structure operating model Step Six Implementation and continuous improvement
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Chapter 11

Figure 11-3 Process Model for Forming Logistics Relationships

Logistics Relationships: Model for Developing and Implementing Successful Supply Chain Relationships

Step One Perform strategic assessment Manufacturer becomes fully aware of its logistics and supply chain needs and overall strategies that will guide its operations. This step is referred to as a Logistics Audit,. Time spent at the outset is well spent.

Chapter 11

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Logistics Relationships: Model for Developing and Implementing Successful Supply Chain Relationships

Step Two Decision to form relationship When using an external supplier, will the firms services be needed. If the firm has core competencies in the area that external supplier provides, then the firm can provide its own services. Using channel partners depends on whether there are compelling drivers and facilitators for partnerships are present.

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Figure 11-4 What Does It Take to Have an Area of Core Competency?

Logistics Relationships: Model for Developing and Implementing Successful Supply Chain Relationships

Drivers might include: Asset/Cost efficiency Customer service Marketing advantage Profit stability/growth

Facilitators might include: Corporate compatibility Management philosophy and techniques Mutuality of commitment Symmetry on key factors such as relative size, financial strength, etc.

Logistics Relationships: Model for Developing and Implementing Successful Supply Chain Relationships

Step Three Evaluate alternatives Measure and weigh drivers and facilitators. Decide on type of relationship. Match manufacturers needs with capabilities of each potential partner. Involve other functional managers in the overall selection process.

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Logistics Relationships: Model for Developing and Implementing Successful Supply Chain Relationships

Step Four Select partners Made only after close consideration of the credentials of the most likely candidates. Interact with and get to know the final candidates on a professionally intimate basis. Attempt consensus to maximize buy-in.

Logistics Relationships: Model for Developing and Implementing Successful Supply Chain Relationships

Step Five Structure operating model

Planning Joint operating controls Communication Risk/Reward sharing Trust and commitment Contract style Scope of the relationship Financial investment

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Logistics Relationships: Model for Developing and Implementing Successful Supply Chain Relationships

Step Six Implementation and continuous improvement Depending upon the complexity of the relationship, the implementation period may vary in length. Future successes will be a direct function of the ability of the partners to achieve both breakthrough and continuous improvement.

Third-Party Logistics: Industry Overview

Firms have directed considerable attention to developing supply chain relationships. Many companies have been in the process of extending their logistics organizations into those of other supply chain participants and facilitators. One way of accomplishing this extension is through the use of a supplier of third-party or contract logistics services.5

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Figure 11-5 Implementation and Continuous Improvement

Third-Party Logistics (3PL): Definitions

3PLs are external suppliers that perform all or part of a companys logistics functions, including: Transportation Warehousing Distribution Financial services Terms contract logistics and outsourcing are sometimes used in place of 3PL.

Third-Party Logistics (3PL): Types of 3PL Providers

Transportation-Based Warehouse/Distribution-Based Forwarder-Based Financial-Based Information-Based

Third-Party Logistics (3PL): Types of 3PL Providers

Transportation-Based Services extend beyond transportation to offer a comprehensive set of logistics offerings. Leveraged 3PLs use assets of other firms. Nonleveraged 3PLs use assets belonging solely to the parent firm. Ryder, Schneider Logistics, FedEx Logistics, and UPS Logistics are examples of 3PLs.

Third-Party Logistics (3PL): Types of 3PL Providers

Warehouse/Distribution-Based Many, but not all, have former warehouse and/or distribution experience. Transition to integrated logistics has been less complex than for the transportation based providers. DSC Logistics, USCO, Exel, Caterpillar Logistics, and IBM are examples of warehouse/distribution-based 3PLs.

Third-Party Logistics (3PL): Types of 3PL Providers

Forwarder-Based Essentially very independent middlemen extending forwarder roles. Non-asset owners that capably provide a wide range of logistics services. AEI, Kuehne & Nagle, Fritz, Circle, C. H. Robinson, and the Hub Group are examples of forwarder-based 3PLs.

Third-Party Logistics (3PL): Types of 3PL Providers

Financial-Based Provide freight payment and auditing, cost accounting and control, and tools for monitoring, booking, tracking, tracing, and managing inventory. Cass Information Systems, CTC, GE Information Services, and FleetBoston are examples of financial-based 3PLs.

Third-Party Logistics (3PL): Types of 3PL Providers

Information-Based Significant growth and development in this alternative category of Internet-based, business-to-business, electronic markets for transportation and logistics services. Transplace and Nistevo are examples of information-based 3PLs.

Third-Party Logistics Research Study: Industry Details

Outsourced logistics services include: Warehousing (73.7%) Outbound transportation (68.4%) Freight bill auditing/payment (61.4%) Inbound transportation (56.1%) Freight consolidation/distribution (40.4%) Cross docking (38.6%)

Figure 11-7 Nonuser Respondents: Rationale for Not Using 3PL Services

Figure 11-11 3PL Involvement in Outsourcing: Who Is Responsible for Implementation?

Figure 11-13 3PL Factors for Selecting and Evaluating 3PLs

Third-Party Logistics Research Study: Industry Details

Quantifiable measures of 3PL success: Logistics costs reduced by 8.2 percent. Logistics assets reduced by 15.6 percent. Average order cycle length changed from 10.7 to 8.4 days. Overall inventories reduced by 5.3 percent.

Third-Party Logistics Research Study: Industry Details

Reported problem areas:

Service level commitments not realized. Strategic management skills lacking. Cost reduction goals not realized. Cost creep and price increases occurring. Improvements and achievements lacking. Control of outsourced functions diminished. Consultative, knowledge-based skills lacking. Technology capabilities not being delivered. Time and effort spent on logistics not reduced.

Figure 11-14 How Respondents View Providers of ThirdParty Logistics Services

A Note on Fourth-Party Logistics (4PL): The Next Evolution?

Thought of as supply chain integrator, a firm 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.12 4PLs manage and direct the activities of multiple 3PLs, serving as an integrator.

Figure 11-15 Fourth-Party Logistics (Registered Trademark of Accenture, Inc.)

Need for Collaborative Relationships13

Supply chain relationships are most effective when collaboration occurs. Collaboration is facilitated by the ability of the supply chain partners to readily access and exchange information over the Internet. Table 11-5 lists the Seven Laws of Collaborative Logistics and is a guide to establishing and maintaining collaborative logistics networks.

Table 11-5 Seven Laws of Collaborative Logistics