Part I Introduction
5.2 New Generations of Logistics Parties
Economic volatility: Unpredictable demand is the most difficult challenge to managing and operating a supply chain in an economic downturn, according to 71% of the survey respondents. For example, many consumers turn to private label goods as their confidence declines, but that trend typically reverses itself if analysts report good numbers.
IT capability gap: 3PL respondents report they are increasingly offering their IT platforms on a subscription basis as a part of their service contracts. IT services most likely to be sold this way are transportation management, warehouse and dis- tribution center management, and visibility and customer-order management. An average of 10% of the 3PLs responding indicate that they offer all of these services today on a subscription basis.
Supply-chain orchestration: Nearly 60% of shipper respondents feel this is the time to reevaluate their relationships with their 3PLs and possibly drive these rela- tionships deeper. A significant 19% are unsure, perhaps indicating they are some- what confused by what the current environment means for their businesses and 3PL relationships.
Strategic assessment: Newer concepts and technologies are emerging to help both 3PLs and shippers cope with this new slower-growth world. One of them is to create horizontal, cross-company supply chains refereed by neutral third parties.
This innovation is based on the concept that by clustering specific logistics activi- ties and consolidating supply chains, significant economies of scale can be achieved in terms of efficiency (logistics cost), effectiveness (customer service), and environmental sustainability [12].
technology of its own organization and other organizations to design, build, and run comprehensive supply chain solutions” [3].
Fourth-party logistics is one of the significant evolutions in supply-chain man- agement. The convergence of technology and the rapid acceleration of e-capabilities have heightened the need for an overarching integrator for supply-chain spanning activities. 4PL is the shared sourcing of supply-chain spanning activity with a client and selected teaming partner under the direction of a 4PL integrator [13].
4PL is advertised as a refinement on the concept of 3PL, a firm that provides outsourced or 3PL services to companies for part or sometimes all of their supply- chain management functions. A 4PL uses a 3PL to supply services to customers, owning only computer systems and intellectual capital. The 3PL and 4PL relation can best be described by Figure 5.2.
What Is the Difference?
It has been argued that a 4PL is nothing but a non-assetbased 3PL. In fact, there is confusion in theory and practice about the use of the term 4PL [3]. It has been argued that any LSP that offers multiple services can be categorized under the term 3PLand a new term is not needed for this type of LSPs.
Client
3PL provider
IT service provider
3PL provider 4PL
Client
Client Insourcing
1970–1980 Outsourcing 1980–1990
4PL 1990–2010
Internal logistics operations
Figure 5.2 Evolution in supply-chain outsourcing [13].
To draw a line between 3PL and 4PL, the differences have to be clarified.
According to the Council of Logistics Management, a 4PL differs from a 3PL in the following ways [3]:
1. A 4PL organization is often a separate entity established as a joint venture or long-term contract between a primary client and multiple LSPs.
2. A 4PL organization acts as a single interface between the client and multiple LSPs.
3. All aspects (ideally) of the client’s supply chain are managed by the 4PL organization.
4. It is possible for a major 3PL provider to form a 4PL organization within its existing structure.
Two Key Distinctions of 4PL
Two key distinctions make the concept of 4PL apart from other 3PL outsourcing options:
1. A 4PL presents a comprehensive supply-chain solution.
2. A 4PL delivers value through the ability to have an impact on the entire supply chain.
In the former case, a 4PL has to deliver comprehensive supply-chain solutions focusing on all elements of supply-chain management in order to respond effec- tively to the numerous and complex needs of today’s organizations. In the later case, a 4PL can impact and integrate the entire supply chain through the key dri- vers of shareholder value: increased revenue, operating-cost reduction, working- capital reduction, and fixed-capital reduction [13].
Operating Models of 4PL
Although 4PL solutions are usually customized for the needs of a particular client, the following models show how a 4PL generally works [13].
G 4PL3PL partnership: In this model, a 4PL and 3PL work together to market supply- chain solutions that fulfill the needs of both organizations.
G Solution integrator: In this model, the 4PL operates and manages a comprehensive supply-chain solution for a single client. This type of 4PL provider uses its resources, capabilities, and technology and also the services of other LSPs to provide a comprehen- sive supply-chain solution for a single organization.
G Industry innovator: In this model, a 4PL organization develops and runs a supply-chain solution for multiple industry players with special focus on synchronization and collaboration.
5.2.2 Fifth-Party Logistics
5PL is a new concept in outsourcing. It is the management of all parties of the sup- ply chain in conjunction with e-business. 5PLs uses an e-logistics network focusing on global operations [14].
5PL is the discipline that bridges the gaps left between 3PL providers and 4PL providers. Where 4PLs attempt to provide supply-chain solutions with their own optimization software and the capabilities of 3PL resources, 5PLs use the buyer’s
(first party’s) existing technology and infrastructure to optimize the supply chain by transforming into a virtual organization [15].
5.2.3 Future Trends
Since the enhancement of the new generations of logistics parties, organizations are looking forward to shape their logistics departments into a virtual format.
Therefore, in a more developed way, they would use the disciplines of zero-party logistics.
Zero-party logistics is the elimination of 3PL and 4PL organizations using 5PL disciplines to transform a company into a virtual organization. In other words, the traditional logistics departments become nothing more than an integrated informa- tion chain between buyers and carriers; all planning is performed using either a company’s own resources or 5PL services [15].
More recently, the concept of seventh-party logistics (7PL) has emerged, result- ing from hybridizing the 3PL domain with the concept of 4PL. In fact, it is the effective fusion of physical and process expertise of 3PLs with the enhanced knowledge-based macrostrategic consulting and IT capabilities of 4PLs [16].
Although newer versions of logistics parties are not yet deeply investigated and applied, they are expected to grow and be familiarized in the near future. Of course, it requires that organizations, which are interested in outsourcing their logistics activities, get more familiar with the concept of logistics parties, espe- cially third and fourth parties, so that they establish a well-organized framework for application of more recent and complex types of LSPs.
5.2.4 Logistics Vendors
In this section, some of the successful LSPs are introduced. These vendors are shown to have considerable global market share and high annual revenue. The selected vendors for this detailed study are United Parcel Service, Penske Logistics, and Deloitte. The selection was based on the extent of services provided by each vendor.
United Parcel Service
United Parcel Service (UPS) was found in 1907 in Seattle, WA, USA. It is now one of the world’s largest package-delivery companies, delivering more than 15 million packages a day to 6.1 million customers in more than 200 countries and ter- ritories around the world. Growing into a $49.7-billion corporation, UPS employs approximately 425,300 staff, with 358,400 in the United States and 67,300 in other parts of the world.
UPS’s network is based on a hub-and-spoke model. UPS uses centers that are the point of entry for parcels and send the parcels to one or more to hubs where parcels are sorted and forwarded to their destinations.
Major domestic competitors include the US Postal Service (USPS) and Federal Express (FedEx). In addition, UPS competes with a variety of international opera- tors, including DHL, TNT NV, Royal Mail, Japan Post, and many other regional carriers, national postal services, and air-cargo handlers.
UPS has expanded its operations to include logistics and other transportation- related activities. UPS’s key supply-chain solution includes logistics and dis- tribution, transportation and freight, freight forwarding, consulting services, and industry solutions [17].
Penske Logistics
Penske Logistics is a wholly owned subsidiary of Penske Truck Leasing, which was founded in 1969. In 1988, General Electric became a limited partner in Penske Truck Leasing with Penske Corporation. Penske Logistics became a division of Penske Truck Leasing in 1995 with the acquisition of Lease Way Logistics.
As a 3PL, Penske Logistics provides the following solutions:
G Supply-chain management
G Transportation
G Distribution center management
G International transportation management
Case Study: Ford Motor Company
Ford Motor Company has worked with Penske on several Six Sigma initiatives.
Penske’s team of associates worked closely with Ford to organize operations and create a more centralized logistics network. In addition, Penske implemented accountability procedures and advanced logistics management technologies to gain more visibility of the overall supply network [18].
Deloitte
Deloitte Touche Tohmatsu (also branded as Deloitte) is one of the largest profes- sional service organizations in the world. According to the organization’s 2008 information, Deloitte has approximately 165,000 staff at work in 140 countries, delivering several services through its member firms.
Deloitte member firms offer services in the following functions:
G Audit and enterprise risk services
G Consulting in the areas of enterprise applications, technology integration, strategy and operations, human capital, and short-term outsourcing
G Financial advisory in the areas of dispute, personal and commercial bankruptcy, forensics, and valuation
G Tax and other services
As a 4PL organization, Deloitte serves various clients in financial services, con- sumer and industrial products, energy and resources, health care and life sciences, public sector, technology, telecommunications, and other industries [19].
5.3 3PLs: Theories and Conceptualizations
This section provides an in-depth investigation on the main issues of 3PLs. Some of the issues are common for other parties as well. Most of the research was descriptive in nature, simply describing trends in the industry.
5.3.1 Outsourcing Decision
The decision to outsource (or not) logistics activities depends on a multitude of variables [5]. When making an outsourcing decision, the following four categories of considerations can be distinguished [2].
1. Economic considerations. When a company keeps its logistics activities in-house, invest- ments have to be made. If outsourcing logistics activities yield a higher return on invest- ment than the investment mentioned earlier and if finance means are scarce, it can be advisable to contract out logistics management activities.
2. Market issues
Demand fluctuations. Most of the time, decreasing demand for one product cannot be compensated by rising demand for another product; the result is instabilities in logis- tics activities (i.e., capacity utilization of transport). If the peaks cannot be dealt with deploying flexible manpower, then it may be advisable to contract out logistics activi- ties. A service provider usually serves several clients, enabling the counterbalance of a drop in one client’s business with a peak in another’s, particularly if the clients come from different trades.
Commerce and flexibility. In many cases, companies keep their logistics management in- house in order to maintain direct customer contact and to be able to respond to changing customer desires in a flexible manner, whereas a service provider, for reasons of efficiency, wishes to minimize deviations from schedule. Therefore, before a do-or-buy decision, the company has to select a priority between flexibility and efficiency.
3. Availability of personnel and equipment. A company carrying out logistics activities in- house bears the responsibility for personnel matters such as recruitment, selection, and training. Furthermore, sufficient equipment must be available to make any necessary repairs. Outsourcing logistics management can be quite a relief for a company and allows one to cut overhead, however, at the cost of loss of control on personnel and equipment.
4. Supplier dependence. If a company carries out logistics activities in-house, it can take action rapidly in cases of wrong deliveries and damage. If logistics has been contracted out, rapid reactions could be obstructed by the necessary consultations with the service provider and by any agreements made.
Rao and Young (1994) provided five key factors as interacting drivers in the decision of shippers to either utilize logistics parties or retain logistics activities in-house [10]:
1. Centrality of the logistics functions to core competency 2. Risk liability and control
3. Operating cost/service trade-offs 4. Information and communications systems 5. Market relationships
Figure 5.3 is one example of an appropriate climate for outsourcing.
While considering outsourcing logistics activities, companies have to proceed systematically to make a straightforward decision. By describing and prioritizing activities, products, markets, and conditions, it can be decided which activities can be or must be outsourced for which product and market combinations and under which conditions [2].
5.3.2 Selecting the Right 3PL
Before purchasing 3PL services, the client has to select from existing 3PL provi- ders. As a result, it should first assign a selection criterion in order to choose the appropriate 3PL. Some of the criteria can be expressed as follows [2]:
G A service provider’s quality could be judged based on experiences using it as a 3PL. In most cases, the service quality is even more important for the shipper than the service cost.
G The throughput rate and delivery reliability of the goods can be decisive. The 3PL must have a high degree of flexibility in place, time, volume, quantity, and product.
G The 3PL’s willingness and skillfulness at having discussions with the shipper on the regu- lar basis is of great importance. These discussions include agreements about liability, sup- plementary to standard transport liability for errors, negligence, and carelessness.
G A 3PL must also have a cost-control system with a clearly and logically composed tariff structure. It must be prepared to clearly state which performances and actions are covered in the tariff. The financial strength of the 3PL is an important factor for selecting the appropriate 3PL.
For the initial screening of candidate service providers, qualitative factors such as supplier reputation, references from clients, and response to information requests can be useful [20].
Function is not central Centrality
Information technology
Cost and service Market
relations
Risk and control
Poor capability Critical need Large benefits No unique risk
Favorable climate for outsourcing
Figure 5.3 Key factors influencing outsourcing of logistics functions [10].
IT, services, performance metrics, and intangibles are other factors that can be used to evaluate a 3PL provider. The intangible factors include questions on the business growth of the prospective 3PL to make sure it will be conducting business for some time, including financial stability, strong profitability, experience with similar compa- nies, and global scope [9]. Table 5.1 provides the factors to consider when selecting a 3PL and their relative considerations from the customers of 3PL services.
There are also models for 3PL selection that are further introduced in Section 5.3.5.
5.3.3 Purchasing 3PL Services
The previous section identified criteria for selecting a suitable 3PL. This comple- mentary section provides a framework for the purchasing process of 3PL services.
In general, a buying process contains the following steps [20]:
1. Identification of the need to outsource logistics 2. Development of feasible alternatives
3. Evaluation of candidates and selection of the supplier 4. Implementation of services
5. Ongoing service evaluation
Purchasing Framework
Andersson and Norrman (2002) provided an extensive framework for the purchas- ing process. The proposed framework is composed of the following phases [22]:
G Define or specify the service: Identify what to define, who to define, and the nature of the factor.
G Understand the volume of services bought.
Table 5.1 Factors Considered in 3PL Provider Selection [21]
Factors Consideration (%)
Price of 3PL services 87
Quality of tactical, operational services 87
Expected capability to improve service levels 67
Range of available, value-added services 62
Capable ITs 61
Expected ease of doing business 57
Availability of strategic logistics services 54
Global capabilities 51
Knowledge and advice on supply-chain innovations and improvements 44
Cultural and strategic fit with 3PL provider 42
Ability to deliver end-to-end solutions across supply-chain processes and regions
40
Coverage and experience in emerging markets 35
3PL vision and investment strategy 33
G Simplify and standardize: It is important for purchasing strategies such as reducing sup- plier base or buying a more standardized service.
G Market survey: It is normal when developing a bigger supplier base, especially if the strategy is to find the best price.
G Request for information (RFI).
G Request for proposal (RFP): This is sent to providers qualified from the screening pro- cess. An RFP for 3PLs, in addition to price issues and various performance factors, may include other provider characteristics such as cultural compatibility, financial issues, flex- ibility in meeting new requirements, and information-system capabilities.
G Negotiations.
G Contracting.
Contracting
Contracting is one of the challenging issues in the purchasing process. Contract could be used as a safeguard to minimize risks of building the cooperation; it is also regarded as an encyclopedia to describe how a logistics system is developed—
i.e., include definitions of processes, activities, roles and responsibilities, incen- tives, and penalties [22]. Typical 3PL contract includes typical contract terms (e.g., cooperation length), costs per activity, service description, bonus payment for the best performance, penalty clauses for service failures, risks and insurance costs and contract-termination clauses [5].
There are two fundamentally opposing views on the existence of contracts: (1) Signing formal contracts is essential for defining and managing 3PL roles and rela- tions; (2) detailed contracts can be regarded as an indication of lack of trust [5].
According to a survey carried out by Van Laarhoven et al. in 2000, written con- tracts, formalizing the partnership between shipper and provider, are found in almost 75% of partnerships. In addition, in just more than half the cases, the activi- ties that are part of the partnership are specified in details. This percentage is down from 63%, meaning that providers have more flexibility in shaping the logistics activities. The inclusion of penalty clauses for providers can be seen in 40% of the contracts, up from 27% [23].
There are also a few models for the calculation and analysis of main contract features. For example, Chen et al. (2001) provided a framework for analyzing three forms of third-party warehousing contracts with space commitments and adjust- ment options [24].
5.3.4 Strategic Behavior of 3PLs
A survey conducted by Berglund et al. in 1999 indicates that a reasonably clear dif- ferentiation of strategies in the TPL industry exists. This strategic segmentation is found by segmenting the providers along the following two dimensions [7].
1. Providers that offer a specific service—e.g., distribution of spare parts (service providers)—
versus providers that cover a complete range of services and offer their customers logistics solutions (solution providers).
2. Providers that carry out traditional transportation and warehousing activities only versus providers that offer additional activities such as value-added services.
From the survey results, it can be implied that a provider should be aware of two major issues in terms of strategic positioning. The first strategic choice that has to be made is the step from the forwarder, provider of transportation services, and so on to the provider of logistics services or solutions. The second choice is what type of logistics provider one aspires to be.
The choice of the strategy to be either service or solution has important conse- quences for TPL providers. For example, service providers should focus their IT efforts on developing a high-quality focused system that supports their services, whereas solution providers should have more versatile systems that can be adapted flexibly to meet the requirements of their customers’ information systems. Also, when approaching their customers, providers should take notice of the fact that shippers will choose service providers when they consider logistics to be a core activity and solution providers when they do not. Finally, there are differences in skills sets required; for example, solution providers will need to develop subcontracting skills, as well as ana- lytical and logistics design skills, to a much larger extent than service providers [7].
In 2005, Carbone and Stone investigated the strategic behavior of 20 leading European 3PLs between 1998 and 2004. The survey results show that the changing business environment caused 3PLs to alter their strategic behavior by offering dif- ferent portfolios of services. The strategic behavior reveals substantial convergence, with the major 3PLs moving toward horizontal integration and business diversifica- tion, mostly by mergers and acquisitions (M&A). In addition, vertical strategic alli- ances between customer and logistics provider, as well as horizontal strategic alliances between logistics providers, have also been adopted [25].
5.3.5 Theoretical Models
Most of the 3PL research falls into the empirical category, suggesting an empirical and more practitioner-oriented focus on 3PL. In the 3PL literature, a few theoretical and quantitative models focus on the operational optimization and evaluation of 3PL performance. Here some of these models are presented.
There are several models for selection of the right 3PL. Jharkharia and Shankar (2007) provided an analytic network process (ANP) decision model for the selec- tion of LSPs [26]. A similar vein for the selection of third-party reverse logistics providers is presented in the work by Meade and Sarkis (2006) [27]. Bottani and Rizzi (2006) used a multi-attribute approach based on the technique for order pref- erence by similarity to ideal solution (TOPSIS) technique and the fuzzy set theory for the selection and ranking of the most suitable 3PL service provider [28].
The analytic hierarchy process (AHP) is also a popular technique for selecting appropriate 3PLs. For instance, Gol and Catay (2007) provided an empirical instance using AHP approach for the selection of a 3PL provider to restructure an automotive company’s supply chain for export parts. In this case, several criteria were considered with respect to the general company considerations, quality,