Operations Project On 3PL.
Operations Project On 3PL.
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Introduction & Historical background
Right from the pre-historic times, trade has been the most significant achievement
that mankind has ever got par with and the conquest for excellence still continues.
This even gets justified when we look at the present day structure of the world
economy solely based on trade and commerce. The term trade comes along with the
supply and demand of the goods and commodities being traded. To enable an increase
in sphere of influence of the products, the companies want their product to be
available to their customers and also to search for potential customers by exploring
newer markets. This requires heavy transportation (selection of mode of transport
depends upon the proximity of market to be served and the financial constraints of the
organization) and hence, the term “Logistics”.
“Logistics”, as defined classically, is
the time related positioning of goods, has been
in place ever since warfare existed between
mankind. Tracing on the history and evolution
of logistics, it would be correct to say that
Military logistics is the predecessor of modern
business logistics. It’s in fact appropriate to
take a field of military warfare into modern
day business as the competitive environment
today is no less fierce than the wars fought by
mankind, let alone the weaponry. The basic
military strategy of protecting one’s own supply while attacking those of an enemy
can be rephrased to suit modern day business as follows. The usage “Competitive
advantage” over rivals is very much in vogue in management vocabulary. Various
military practices have been adopted into commercial world to gain this competitive
advantage. The field of operations research also grew out of the military logistics
efforts of WWII.
Through the time, as the competition between firms increased, the focus
shifted to the details of the strategy as to provide the right item in the right quantity at
the right time at the right place for the right price to the right person (very much the
realization of 4 P’s of Marketing). This condition called for the integration of
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information, transportation, inventory, warehousing, material handling and packaging
which further led to the need of highly efficient systems to attain these goals. The
branch of business logistics evolved in the 1950s. The reason for the evolution being
the need for supplying one’s own business with the materials and shipping out the
products in a globalised supply chain. During 80’s, there was increased globalization
and an increased use of IT. These trends resulted in increased demands on firms and
possibilities for companies to operate more competitive and lean. It was during this
time that many successful 3PL companies of today emerged. Some of them are:
DHL/Exel, FedEX, Kuehne-Nagel, Schenker, UPS, Panalpina, C.H. Robinson, TNT
Logistics, Schneider, Maersk Logistics and NYK Logistics.
Third party logistics (3PL) or
contract logistics is thus the supply chain
practice of outsourcing the various logistics
functions of inbound freight, customs
consolidation, ware housing, distribution,
and outbound freight to the client's customers. The 3PL provider executes these
logistics functions on behalf of the client company by using own assets resources.
This provides the service user company to concentrate more on its core competences
while at the same time operating in a leaner fashion without owning many assets,
thereby reducing the overall operational costs. The resources and funds that would
otherwise have been utilized for the performance of the logistics functions can be now
redirected towards improving operational efficiency in other disciplines.
India is not aloof as well, when we talk about the utilization of 3rd Party
logistics by companies in India, it has been 55% when compared to the global index
of 71%. This further testifies the increasing role and understanding of optimal
business practices by the Indian firms. With the relaxation in government policies and
banking on the highly skilled and educated labor force, the industries in India
(specifically; Manufacturing and Services) are in the phase of expansion and with
globalization in its full fray, the companies here too are looking to supply its products
throughout the globe to increase its market presence and this active participation in
the world trade makes India’s position as inevitable in the 3PL usage. Moreover, the
rapidly growing Indian Consumer Market and the increase in consumption
expenditure has made the Indian customer sensitive towards the quality and speed of
the service being provided, due to which the organizations are forced to go for “3rd
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Party Logistics” so that they can concentrate on their competencies i.e. production by
outsourcing the critical processes of the Supply Chain to the experts thereby lowering
their costs. DHL was the first company to begin 3rdParty Airlift Cargo operations in
India in the late 70’s.
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Asset-based Value-Added Warehousing/Distribution (VAWD):3PLs normally providing
long term contract warehousing or distribution centre operations with a host of value-adds.
Warehouse/DistributionBased:
Traditionally, most Warehouse/Distribution
based logistics suppliers have been in the public
or contract warehousing business and have expanded into a broader range of logistics
services. Based on their traditional orientation, these firms are in Inventory Management,
Warehousing, Distribution, etc. Examples of such firms are DSC Logistics, USCO, and
Excel, Caterpillar Logistics Services, IBM.
Forwarder Based: This category includes companies like Kuehne & Nagel, Fritz, C.H
Robinson and Hub Group. They have expanded their middleman roles as forwarders and/or
brokers into the broader range of 3PL services. Essentially, these firms are non-asset owners,
are very independent and deal with a wide variety of suppliers in logistics services.
Financial Based: This category of firms provide freight payment and auditing, cost
accounting and control, and tools for monitoring, booking, tracking, tracing, and managing
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inventory. Examples: Cass Information Systems, CTC, GE Information Services,
FleetBoston.
Informational Based: There has been a significant growth and development in this
category of Internet-based, business-to-business, electronic markets for transportation and
logistics services. Examples: Transplace, Nistevo are popular companies in this type of 3PL
services.
3PL services are very important for organization to gain effectiveness in many of
their activities. A few such activities which lay the very foundation in ensuring the
effectiveness of the offering by the company are:
Save time and cost: Organizations are not required to invest in both time and money and
they save a lot in both these factors if they take up the services of the3PL companies. They
would save themselves of the time and cost involved in buying trucks and providing for the
training and development required in these services.
Expansion: Accessing 3PL services help the organizations in expanding their business to a
wider range of new, unexplored markets. Apart from providing services in the domestic
sectors, 3PL provides international services as well. This will help the organizations to
expand to international markets. This, at times, may be a major problem for organizations
which are taken care of by the 3PL service providers.
Narrow Focus on Core activities: 3PL services help the organizations to narrow their focus
to their important functions and more of their strengths and leave the job of logistics on the
3PL providers. Basically an organization is saved of the trouble of focusing on this aspect and
not spread their functions so wide.
Effectively reach their customers: Providing finished products to actual customers can be
hindered with many problems from the organizational point of view. This is a affecting the
organizations around the globe. 3PL services providers reduces this trouble of the
organizations. They take up this job of reaching the customers and delivering the products on
time and effectively.
Increased sales and market share: With expansion in newer markets, organizations benefits
a lot in increasing their sales as well as their market share in the fiercely competitive global
economy. Thus 3PL services contribute a lot in the profitability of the organizations.
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Flexibility in operations: Access to 3PL services brings in a lot of flexibility in the overall
operations of the organizations. They take up an important part of their activities which helps
in improving their other important operations of the organization.
Federal Express:
FedEx provides transportation, e-commerce and business services. The company offers
integrated business applications through its operating companies. The company's subsidiary,
FedEx Express, is the world's largest express transportation company.FedEx has a host of
services to cater to all segments starting from the personal consumer to the complicated
supply chain solutions for today’s global business environment.
The list of global 3PL service providers can be very lengthy and way beyond the
scope of this report. Therefore we shall list a few more of these firms by name,
United Parcel Services ( UPS )
NYK Logistics
Mearsk Logistics
Nerbert Dentressangle ( Previously Christian Salvesen)
ABX Logistics Worldwide SA
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Schneider Logistics
3PL Services
With the increasing number of 3PL service providers, the service users have to distinguish
the best provider suitable for their purpose. Various mathematical models considering a
variety of factors have been proposed by researchers world over in this regard. Since
requirements are unique, solutions also need to be unique and there is no readymade solution
to all logistical problems. With the market growing competitive the 3PL service providers
also try to differentiate their service offerings by unique services and benefits for the
customer in order to gain an upper market share. We’ll now have a look at few of the services
provided and technology used by 3PL providers.
Inbound and Outbound Logistics: Movement of raw materials into the organization and
finished goods to the destination. The basic service provided by all 3PL providers.
Inventory and Warehouse management services: The 3PL service might provide to manage
the entire inventory of the customer according to stated specifications and contract
conditions. This option may be accepted by the customer weighing all the pros and cons of
complete outsourcing of inventory and warehouse management activities.
Shipment Tracking and tracing: Most of the global 3PL services provide with this facility
where one can track his consignment using the bill of lading details to know the status of the
shipment and trace the real time position as well. Services like DHL and UPS provide facility
for customers to track. This is offered by extensive back office processing work done by the
service and hence comes at cost. So it’s up to the customer as to whether he needs this kind of
a facility for his purpose.
Freight Consolidation, Forwarding and Customs Clearance : Transportation across the globe
often calls for more than one mode of transport, air, sea and road. The 3PL provider will
provide consolidated solution by picking up the consignment from the consumer’s place
delivering till the final destination, not requiring the customer to take the pains of co
ordinating with the various transport service providers otherwise. Furthermore, the
consignments will be cleared off from customs formalities at various intermediate points
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using local agents. This is very essential service which otherwise would make it impossible
for the cargo to be transported across the globe.
Reverse Logistics: This refers to the process of moving the goods from the final user in the
reverse direction, either as part of a rejection, or for recycling for capturing the value or for
proper disposal.
Cross Docking: This refers to the direct transfer of goods from one mode of transport to
another with minimal or no warehousing. An efficient container handling system, wherein the
containers from the ships are straightaway unloaded to the queuing trailers can be an example
of cross docking. This reduces the inventory costs as well as provides a higher shelf presence
to the products benefitting both the retailer as well as the manufacturer. Wal-Mart runs 85%
of it’s goods through cross docking amounting to 2-3% reduction in the cost of sales of their
products.
Bar coding :These are data representation in optical machine readable format which can
store the details of a particular material and can be read using optical scanners. The system
has been extensively used in the logistics industry for identification of materials
RFID Tags : These are programmable re recordable labels, capable of storing data that can
be read without contact. RFID tags can be active, which emits radio waves or passive which
just stores the information and can be read in using a radio frequency reader. The tag can be
read from several meters and even out of line of sight. This has been extensively used in
inventory management and material tracking.
Electronic Data Interchange (EDI) : EDI is the transfer of structured data, by agreed
message standards, from one computer system to another without human intervention. This
facility offered by the service reduces the paperwork and human labour required in large
documentations including bills of lading etc.
From the host of offerings provided, the customer might not need all of them at every
time. Since the value added services come at an added cost, the customer has to choose the
best option available for him. The differentiation at the service provider’s has to go to the
level of service being customizable to meet the requirements of the customer at all times and
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providing the best value as perceived by the customer. At all times it might not be the
cheapest option that is the viable solution. For instance, DHL has a special service wherein
one can send medicines along with proper prescriptions to foreign countries, from India. The
cost may be as high as Rs. 3500/- for a pack of 500 gms., but then there are not many options
available for this purpose.
In the industrial sector, once the decision to outsource is made, the company has decided
to do away with the function as a whole. Now comes the question of choosing the best 3PL
service from the various ones available. With large amounts of money involved in the
logistics functions, company executives often labour hard to come out with the best solution
for the problem. Extensive research is done on this issue and various mathematical models
have also been proposed by many studies incorporating many factors to be considered in the
selection process. “Ganesh Vaidyanathan” while discussing a “Framework for Evaluating
3PL”, argued that companies undergoing strategic alliances with the 3PL providers face
reduced conflict, increased efficiency and stability, and establish marketplace legitimacy. In
another very important very interesting study on supply chain competition by Peter
McCullen et al. of Brighton Business School, the supply chain performance has been
compared with the performance of an F1 race car on ciruit. The paper unwinds the degree of
competition in the field and attention to detail required synonymous to the tuning of a race
car, where fractions of second decides the winner. Summing it up, the key word for the
customer is “customization” whereas that for the service provider will be “differentiation”.
Before going further with discussing the pros and cons of using the contract logistics
industry, one should understand that, rather than a matter of choice, 3PL has grown to the
stature of a necessary service in today’s business environment. Most companies cannot
feasibly own all the physical assets, nor doesn’t have the expertise needed to execute the
logistics function in today’s global environment. Having understood the various services
provided by the 3PL providers, let’s analyse the Pros and Cons in contracting the logistics
activity.
PROS:
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Experience: The 3PL provider owning the assets to perform the logistics operations
contracted has the expertise to operate them and is more familiar with the work than the
customer himself.
Technology: Improved technology in the respective segment will be adopted by the
provider to provide better service and hence to stay competitive in the market.
Scalability: The 3PL service with it’s vast fleet of transportation and warehousing
facilities will be able to provide service scaleability with more ease than an inhouse logistics
system. This will be very useful in case of seasonal demand fluctuations.
CONS:
Lack of Control: The customer company effectively has very less control over the freight,
once it leaves their premises except for the tracking service offered by the the service
providers. This lack of control raises the question of security as well for goods in transit.
3PL Service Optimisatddion: The asset based 3PL firm which in itself is a separate business
will look for the optimum utility of the asseststhey own. The 3PLs often attain this goal of
best utility of resources by routing the consignments through existing networks or alternative
routes in case of non availability of space in the best route. Delayed deliveries finally might
affect the parent company in lost business opportunities.
Recent Developments
3PL has already evolved beyond the conventional boundaries of being an outsourcing
contractor providing warehousing and transportation solutions with it’s storage space and
transportation fleets. Information technology has played a major role in the development of
this field and the developments happening in this sector has been often compared with the
rates at which the IT sector itself grows.
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assets or resources for executing the outsourced activities. Further they
take the role of a consultant, understanding the logistics functions of the
client company utilising their intellectual and computer systems and to
select the best 3PL service that can fit into the scenario. 4PL has often
been confused with non asset based 3PL, which can be just an agent
acting on behalf of the 3PL provider with no consulting capabilities to offer
for the customer.Arguments as to whether the approach is a right one is
still going on. Accenture was the company that coined out the term as
well as the idea of 4PL.
4PL relations are often found successful with businesses which do not have
the IT and physical assets infrastructure and does not want to invest in those areas.
Organisations having these in place might not benefit much out of the 4PL provider rather
would complicate the situation. 4PLs acting as an intermediary between the organization and
the 3PL provider ensures co ordination of day to day activity while at the same time
providing inputs to the parent organization regarding improvement of their own overall
activity inlinewith the consumer needs of the time. Thus in times of highly dynamic supply
chain requirements, the adoption of 4PL service can be justified. These services are often
contracted on a financial incentive basis, wherein the service provider gets a financial
incentive for the implementation of a project which results in the improvement of delivery
and financial results. "We pay for returns, not ideas. They benefit from ideas/projects that
work," says Victor Guzman about 4PL service providers, director logistics and supply chain
planning with aerospace products manufacturer Honeywell International Inc.
Though not as common as the term and idea of 4PL is the idea of fifth party logistics
or 5PL. 5PL is attributed to Logistics Service Providers who plan, organize and implement
logistics solutions on behalf of a contracting party.
The latest in the development arena of the contract logistics industry is a hybrid formed out of
a combination of 3PL and 4PL and aptly christened as 7PL (7PL = 3PL + 4PL). 7PL, is the
effective fusion of physical and process expertise of 3PLs, with the enhanced knowledge-
based macro-strategic consulting and IT capabilities of 4PLs. 3PL providers often promise to
provide the total logistics solutions, but many a time fail in doing that. But they are very
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competent at the operational level and understanding the needs at bare supply chain level.
4PL on the other hand addresses the strategic management perspective of the organisation,
thereby raising the question of actual operation and implementation expertise they have. 7PL
combines these two elements to provide a holistic approach to bridge the gap between
strategy and implementation.
With 3PL playing such a major part in the modern day structure of the industries
and its operational advantage over the existing or the conventional logistics system has made
it very much acceptable and to an extent an integral part of today’s manufacturing firm. The
future in India looks bright as the strong and rising consumer market is forcing the industries’
to mend their long rendering ways and focus on exceeding the customer’s expectations rather
than merely meeting them. To successfully implement 3PL services, organizations need to do
the following:
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and weaknesses which ultimately helps in identifying most effective and appropriate 3PL
service provider. Organizations can make a site visit to the 3PL providers and talk with its
existing customer and get a feedback about their performance and operations to help in
their decision-making.
• Performance measurement and review: Organizations need to have an efficient and
accurate measurement system to measure the performance of their 3PL services. They can
go for qualitative measures that focus on effectiveness and quantitative measures that
focus on efficient utilization. Then they can review the measurement with the pre-decided
benchmark and take effective decisions. They should have an efficient costing system to
understand the costs involved in outsourcing. This will help them calculate their actual
profits earned engaging in 3PL services and take appropriate decisions to implement the
services which will earn them more profits.
• Create an Implementation Strategy: organizations need to create a project plan and
a road map to be clear about what to be done and who is the best to do the job. They need
to create a project management team with members from both organizations i.e. the 3PL
firm and themselves and review the progress with planned milestones. This will make the
implementation process successful for the organization.
• Nurture the Relationship: Both the organization using 3PL services and the service
provider must nurture their relationship to make outsourcing successful. There should be
mutual trust, respect and a sense of integrity to make their association successful.
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References:
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2009.
• Peter McCullen,Richard Saw, Martin Christopher, Denis Towill. (2006). The F1
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Management. V , 54-68.
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