Part I Introduction
5.1 Third-Party Logistics: An Overview
5.1.1 Why 3PLs?
3PLs emerged in the early 1990s when LSPs started offering consolidated services and an increasing number of customers entered into longer business contracts with
5PL
4PL
3PL
2PL
1PL E- business
Management of all parties of the supply chain in conjunction with e-business Management of the whole supply chain Management of complex service chains Operating of logistics by the own buyer Operating of logistics by the producer Supply chain
management Forwarding/contract
logistics
Buyer
Producer Figure 5.1 Types of logistics parties.
the LSPs. The total logistics market in 2003 in the United States was $910 billion, and the 3PL market was around $65 billion. The 3PL market has been increasing for the last 10 years at a rate of more than 20%. A survey of 221 US companies reported that 78% of them are using 3PLs for logistics services and spending 49%
of their logistics expenditure on outsourcing [3].
The 3PL business is developing as a result of the increasing demand of advanced logistics services, including globalization, lead-time reductions, customer orientation, and outsourcing. Therefore, the role of logistics providers is changing both in content and in complexity and brings about the development of new logis- tics providers who offer various services to their customers [4].
The growth rate of 3PL industry and the increasing interest in outsourcing logistics activities illustrates the growing importance of the 3PL role in the industry, thus mak- ing it an interesting research field for further investigation and development.
5.1.2 Definition
Terms such as logistics outsourcing, logistics alliances,third-party logistics,con- tract logistics, and contract distributionhave been used to describe the organiza- tional practice of contracting out part of or all logistics activities that were previously performed in-house [5]. Unfortunately, no single consistent definition for the 3PL concept can be found in the 3PL literature. In some cases, 3PL is used as a label for traditional outsourcing of transportation or warehousing; in other cases, the term is used to account for the outsourcing of a wider logistics process.
In 1992, Lieb defined 3PL in the following sentences: “Third-party logistics are external companies which perform logistics functions that have traditionally been performed within an organization. The functions performed by the third party can encompass the entire logistics process or selected activities within that process”
[6]. This definition suggests that all logistics activities that were previously per- formed in a firm can be performed in an external organization. In such broad defi- nitions, however, some terms and conditions such as the type of logistics activities are not mentioned.
Narrower definitions express functional or interorganizational features of the logistics outsourcing. For example, in 1999, Berglund et al. [7] suggested the fol- lowing definition:
Third-party logistics are activities carried out by a logistics service provider per- forming at least management and execution of transportation and warehousing. In addition, other activities like inventory management, information related activities, value added activities, or supply chain management can be managed by the logis- tics service provider. The contract is also required to include management, analyti- cal or design details, and the length of the cooperation should be at least one year.
Such narrower definitions appear to draw a line between 3PL and the traditional outsourcing of logistics functions, providing more distinctive features for 3PLs including the provision of a broader range of services, a long-term duration, the customization of the logistics solution, and a fair sharing of benefits and risks [8].
5.1.3 Emergence of 3PLs
According to a survey conducted by Berglund et al. in 1999 [7], there are three waves of entrants into the 3PL market. The first wave dates back to the 1980s or even earlier with the emergence of what are called traditional LSPs. Companies such as ASG in Sweden and Frans Maas in the Netherlands are examples of tradi- tional 3PLs. The 3PL activities of these companies have emerged from a tradition- ally strong position in either transportation or warehousing.
The second wave dates from the early 1990s when a number of network players, mainly parcel and express companies such as DHL, TNT, and UPS, started their 3PL activities. Usually, the 3PL activities of these companies are based on their worldwide air-express networks and their experience with expedited freight.
The third wave dates from the late 1990s. Currently, a number of players enter- ing the 3PL market can be seen from areas such as IT, management consultancy, and financial services. These players are working together with players from the first and second waves. In most cases, several shippers and providers are involved.
Whereas the first and second wave entrants base their strength on traditional logistics activities such as transportation, warehousing, or running a scheduled net- work, these new players build on very different skills such as IT, consultancy, or financial expertise. In other words, there is a gradual shift from asset-based players to skill- or systems-based players [7].
5.1.4 Activities of 3PLs
3PLs services can be relatively limited or comprise a fully integrated set of logis- tics activities. A 3PL can perform the following activities: transportation, ware- housing, freight consolidation and distribution, product marking, labeling and packaging, inventory management, traffic management and fleet operations, freight payments and auditing, cross docking, product returns, order management, packag- ing, reverse logistics, carrier selection, rate negotiation, and logistics information systems [9].
Detailed 3PL activities, including global functions, include the following [10]:
G Planning functions Location selection Supplier selection Supplier contracting Scheduling
G Equipment functions Selection Allocation Sequencing Positioning Inventory control Ordering Repair
G Terminal functions Gate checks Location control
G Handling functions Pickup Consolidation Distribution Expediting Diversion Transloading
G Administrative functions Order management Document preparation Customs clearance Invoicing
Inventory management Performance evaluation Information services Communications
G Warehousing functions Receiving
Inventory control Reshipment
G Pre/Post production Sequencing Assorting Packaging Postponement Marking
G Transportation functions Modal coordination Line-haul services Tracking and tracing
According to a survey conducted by Aghazadeh in 2003, users in 2000 relied most heavily on third parties for warehousing management (56%), transportation services (49%), and shipment consolidation (43%). The use of traditional logistics services offered by 3PLs has remained relatively stable in recent years; however, there is an emerging interest from manufacturers for nontraditional applications of 3PLs [1].
5.1.5 Advantages and Disadvantages of 3PL
Firms interested in outsourcing their logistics activities should be familiar with the pros and cons of establishing relationships with 3PLs.
The 3PL can effectuate a great degree of efficiency by exploiting economies of scale among others. Capacity can be better utilized because the peaks and drops in transport quantities offered by different clients can be counterbalanced and because backhauls are often available. A 3PL can invest in specific know-how because
logistics management is its core activity. The 3PL can improve the quality and flexibility of service and thus improve customer service [2].
By outsourcing logistics activities, firms can reduce the amount of capital investments. Some firms spend much on physical distribution centers or informa- tion networks, which also involves financial risks. 3PL providers can spread such risks by outsourcing to subcontractors.
Other advantages of partnership with 3PLs include expanded ranges of service, bar- gaining power, faster learning, networking with other providers, knowledge of various kinds, faster implementation of new systems, improved customer satisfaction, restruc- turing of supply chains, reduced investment base, and smoother production [4].
Despite the numerous advantages of using 3PL, there are some disadvantages as well. For instance, it is not easy to establish a reliable and cost-effective partnership between the shipper and the 3PL provider. To establish reliable partnership, efforts should be made in two directions: 3PL provider selection and contract signing [11].
If a manufacturer contracts out logistics activities, it runs the risk of losing expertise in logistics. In addition, manufacturers contracting out their logistics activities are often worried about the protection of company information because they have to share confidential data [2].
In a comprehensive manner, using 3PL services will lead an organization to the following:
G Save time
G Share responsibility
G Reengineer distribution networks
G Focus on core competencies
G Exploit external logistical expertise
G Reduction in inventory levels, order cycle times, and lead times
G Economies of scale and scope
G Improved efficiency, service, and flexibility
The following list, however, shows some possible disadvantages of cooperation with 3PLs:
G Poor searching efforts
G Poor coordination efforts
G Poor information sharing
G Loss of control
G Poor service performance
G Inadequate provider expertise
G Inadequate employee quality
G Loss of customer feedback
5.1.6 Types of 3PLs
Firms have to investigate and choose the compatible and appropriate types of 3PLs before they start a long-term relationship with them. Here a classification for 3PLs is provided.
In terms of customer adaptation, 3PLs are classified as follows [4]:
G Standard 3PL providersare the most basic form of 3PL provider. They perform the most basic functions of logistics such as picking and packing, warehousing, and distribution.
G Service developersoffer advanced value-added services to their customers such as tracking and tracing, cross docking, specific packaging, and providing a unique security system.
G Customer adaptersprovide services at the request of the customer and take thorough con- trol of the company’s logistics activities. The 3PL providers improve logistics services, but do not develop a new service. The customer base for this type of 3PL provider is typi- cally quite small.
G Customer developersare the highest level of 3PL provider, integrating themselves with customers and taking over entire logistics function. These providers will have few customers, but they will perform extensive and detailed tasks for them.
Third-party logistics providers can also be classified to asset-based and non- assetbased 3PLs. Asset-based 3PLs own some assets, especially transport-related assets such as trucks and warehouses; however, non-assetbased 3PLs do not own assets, and they usually work with subcontractors. This type of 3PL may possess only desks, computers, and freight industry expertise [11].
5.1.7 2009 3PLs: Results and Findings of the Fourteenth Annual Study About the Study
The 3PL study has annually documented the growth and evolution of the 3PL industry. The 2009 3PL study includes three directions of research: a web-based survey, workshops with shippers leveraging survey content and the Capgemini Accelerated Solutions Environment (CASE), and interviews with industry execu- tives. Respondents represent a broad range of industries and are predominantly from North America, Europe, Pacific Asia, and Latin America, in addition to other locations throughout the world such as South Africa and the Middle East.
Key Findings
According to the responses from 3PLs and shippers, key factors responsible for the suc- cess of relationships include openness, transparency, good communication, the ability to create personal relationships on an operational level, the flexibility of 3PLs to accom- modate customers’ needs, and the ability to achieve cost and service objectives.
The major findings of 2009’s 3PL study are presented in five tracks: state of the 3PL market, economic volatility, IT capability gap, supply-chain orchestration, and strategic assessment.
Current state of the 3PL market: Relatively small percentages of shipper respon- dents (30%) and 3PL respondents (25%) think of the willingness of 3PLs and ship- pers to share risk as a success factor. However, several of the leaders interviewed and industry executives participating in the workshops and ASE sessions view the willingness to share risk as an important attribute of a successful relationship. In addition, shippers predict that the percentage of logistics budgets they devote to outsourcing will increase in the future.
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].