3PL in Supply Chain Management

3PL in Supply Chain Management by Jaishankar K S Page 1

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3PL in Supply Chain Management

Jaishankar K S

([email protected]) Supply Chain Systems Consultant, Solutions Delivery, DHL Customer Solutions & Innovation,

Singapore

Abstract - Supply chain is one of the key trade enabler and is of a connected network of

operations/partners. The 3rd

party logistics (3PL) partners play a key role in gaining the supply

chain efficiency and in optimizing it. More & more organizations are using 3PLs through

outsourced supply chain services. Hence having some of the basic knowledge about 3PL operations

and factors influencing in Supply Chain Management are critical. This short article is trying to

address the supply chain & 3PL service areas briefly, which will help to articulate the current

trends and environments.

Index Terms – Supply Chain Models, Supply Chain Management, SCM, 3PL Services

I. INTRODUCTION

Historically, the Supply Chain Management was dependent on the individual business entity and was

“Point-To-Point”. There was a frequent changing hand in the supply chain that means it was not an End-

To-End connected network, in other words very much disconnected network. This was essentially an

“entity centric” model, which involved higher inventory and the operations are characterized as capital

intensive with long cash-to-cash cycles [1].

The development of applied computing technology and introduction of computers in business was a

paradigm shift. This enhanced & introduced end-to-end view of overall operations of an organization.

With this development, the globalization and initiatives of productivity gain within the global

organizations, increased outsourcing of their supply chain activities. The last two decades saw increased

contract logistics or buying services from 3rd

Party Logistics (3PL) service providers. The globalization,

growth oriented economic development and its market opening further increased the necessity of end-to-

end view of the operations and a special management practice i.e., Supply Chain Management (SCM)

evolved.

The initial involvement of 3PL was on Freight Forwarding and Customs Brokerage. Some of the large

organizations dealt this with directly asset owned carriers (e.g., Ocean/Sea Carriers with Vessels) and

local agents for customs clearance. Others used Freight Forwarders i.e., organizations used Non-Vessel

Operator (NVO) or Non-Vessel Operating Common Carrier (NVOCC). The NVO / NVOCC facilitated

the transportation coordinating with the transporting organization and the Ocean-Carrier / Ocean-Liners.

Similarly for the Air-Freight, Air-Liners, Freight Forwarders & Customs Brokers were involved and this

involved usually Port-To-Port transportation and Export & Import Customs Clearance.

In pre-globalization, limitations in market access, the activities like warehousing and domestic

distribution to the wholesale and/or retail chain are basically managed by the importers in the importing


country. However, the globalization and opening of economy attracted the global organization to have

local offices to gain market share and establish themselves in the growing economy/market. All the above

global economic changes created the need for distribution centers (warehouses) and domestic

transportation services. The importance of tightly connected network with extended/outsourced SCM

models increased. The competition, graining quick access to the market and for efficient supply chain,

organizations looked at 3PL services through contract logistics. The contract logistics extended the scope

of 3PL activities, from international (port-to-port) transportation, customs brokerage to warehousing,

domestic transportation and various other value-added logistics operations.

II. SUPPLY CHAIN MANAGEMENT

The logistics and supply chain professionals increasingly use “Supply Chain” to refer to “the process

and/or effort in producing and delivering the finished product to a given market or customer segment” [2].

It is essentially a “connected network” that involved various parties (e.g., supplier, transporters, logistic

service providers, manufacturers, distributors, retailers, customers, government agencies, commercial

agencies, financial institutions etc.,

Supply chain management evolved focusing on gaining efficiency and synergies within the internal

functional management [3]. Various models aim to have better utilization and coordination of the internal

corporate functions. The globalization/global economy and customer expectations (on product’s quality,

usability/function, cost and services) are 2 key drivers for the increased demand for efficient supply chain

models [4]. The value of supply chain greatly correlated with “Supply Chain Profitability” [5]. SCM

deals with the management of supply chain network to maximize the total supply chain profitability.

Inventory Control Systems (ICS), Bill of Materials (BOM) and Material Requirement Planning (MRP),

MRP II, Enterprise Resource Planning (ERP), Electronic Data Interchange (EDI and standards like ANSI

X.12, EDIFACT, RosettaNet etc.,) and other computing/business solutions have been helping

organizations to better manage the supply chain. Below diagram (Figure-1) shows some of the

developments in this area [1];


Figure-1: Information Technology in Supply Chain (1971-2010)

The ERP deployment alone was not able to fulfill the complex supply chain management in the

interconnected network. Specialized solutions evolved and were applied in Operations/Execution,

Tactical and Strategic management levels. Below diagram (Figure-2) [1] shows the strategic fit of Supply

Chain Systems.

• Communication Technology

• PBX & Virtual PBX

• eFAX, Email

• VoIP, IVR

• Use of Computing Technology

• Internet

• EDI: RosettaNet

• Oracle Fusion, GXS, axway, IBM WebSphere & DataStage TX, webMethods,

SAP NetWeaver. TIBCO

• I2 Technologies, Manugistics, ILOG etc.,

• Seibel, Ariba etc.,

• IBM Cognos, SAP BusinessObjects, etc.,

• TransPro, Class, Optiant, Demantra

• RFID, GPS, Pick to Light/Voice etc.,

• IT Applications

• ERP, SCM, CRM, WMS, TMS, BI Applications• Widely used Fax Technology

• Use of Computing Technology

• EDI: ANSI X.12, EDIFACT etc.,

• SAP R/3, BAAN, JD Edwards, Oracle,

Peoplesoft,

• Barcoding

• FMS / TMS & WMS

1971 To 1990 1991 To 2010

Time

IT

• International Trade Governance and/or Pacts /

Agreements and Trade Associations

• Supply Chain Management:

• MRP II, CIM, ISD

• TQM, ERP

• Freight & Inventory Management

• Globalization: Increased Free Trade Agreements & Trade Associations

• Increased Outsourcing

• Supply Chain Management:

• Outsourced SCM & Business Analytics

• JIT & VMI, MIT, Cross-Dock, Kitting

• Direct Factory Shipments

• Faster Networks (Time-To-Market)

• eCommerce & eProcurements

• Models: I2M, FG, SPL, CLS/Service Logistics, Recalls / Emergency

• Trade Compliance

• Optimization & Integration

• Data Analytics and BPM & BAM Analytics

Bu

sin

ess

Pro

cess

esIn

form

atio

n T

ech

nol

ogy

Dev

elo

pm

ent


Figure-2: SCMs Role in achieving strategic-fit

It is ultimately the efficient operational process that can optimize and make use of the available Supply

Chain Systems at best. The Supply Chain Council’s Supply Chain Operations Reference (SCOR) is of the

model that can be utilized to define and establish best supply chain operations process. The SCOR model

depicts the connected network in a simplified way as below (Figure-3) [6] and provides a framework in

establishing better supply chain operations, thus maximizing the profitability.

Figure-3: SCOR Model – Scope & Structure

The highlighted block (i.e., referring to “Your Company”) in the above diagram (Figure-3) is the

organization wanting to optimize the supply chain operations and avail the Supply Chain & Logistics

Services from 3PLs. A good planning and management of operational process within the supply chain is

highly important, hence real-time collaboration is essential between internal organization, suppliers and

customers. The table below shows Gartner’s research on Top 25 Supply Chain [7] organizations able to

achieve efficiencies through collaborated and responsive connected network.

• SRM – Supplier Relationship Management, PCM – Procurement Contract Management, PLM – Product Life Cycle Management, HRM– Human Resource Management, CFM – Corporate Financial Management, CPM – Corporate Performance Management, CRM– Customer Relationship Management

• OMS – Order Management System, TMS – Transport Management System, FMS – Freight Management System, XDS– Cross-Dock System, WMS – Warehouse

Management System• SCM is supported by the critical supply chain optimization tools

• NO – Network Optimization, IO – Inventory Optimization, WD – Warehouse Design, TO – Transport Optimization

Enterprise Resource Planning (ERP)

SRMSRM PLMPLM HRMHRM CPMCPM CRMCRMCFMCFM

Collaborative Planning, Forecast &

Replenishment (CPFR) / Demand

Chain Management (DCM)

Strategic Fit

Upstream Supply Chain Downstream Supply Chain

Operations /

Execution

Tactical

Strategic

PCMPCM

NONO WDWD TOTOIOIO

Supply Chain Management (SCM)

OMSOMS TMSTMS WMSWMSFMSFMS XDSXDS

Supply Chain Visibility

System Integration

SCM Value Analysis


Table-1: The Gartner Supply Chain Top 25 for 2011

Following factors greatly influence the supply chain design and optimization strategy;

Achieving Strategic Fit – when organization’s competitive and supply chain goals are same, strategic

fit arises.

Product Segmentation and Pricing Products

Supply Chain Structure for the efficient and responsive supply chain – Facilities, Inventory,

Transportation and Information

Peer

Opinion1

Gartner

Opinion1

Three-Year

Weighted

ROA2

Inventory

Turns3

Three-Year

Weighted

Revenue

Growth4

(156 Voters) (32 Voters) -25% -15% -10%

-25% -25%

1 Apple 2,950 536 17.90% 49.3 40.90% 8.5

2 Dell 1,909 457 6.60% 38.9 4.10% 5.14

3 P&G 1,726 660 9.60% 5.6 2.40% 5.13

4 Research In Motion (RIM) 550 215 25.10% 17.7 43.90% 5.1

5 Amazon 2,267 402 6.60% 11.2 34.00% 5.07

6 Cisco Systems 1,501 550 10.20% 11.8 5.50% 4.82

7 Wal-Mart Stores 1,755 449 9.00% 8.5 3.60% 4.4

8 McDonald's 711 161 15.30% 141.8 2.60% 4.35

9 PepsiCo 740 445 12.00% 7.8 18.80% 4.11

10 Samsung 857 361 9.80% 16.9 22.50% 3.98

11 The Coca-Cola Company 1,305 265 15.30% 5.3 7.90% 3.96

12 Microsoft 566 128 21.40% 16.6 6.10% 3.72

13 Colgate-Palmolive 560 239 20.00% 5.1 3.00% 3.62

14 IBM 994 238 12.50% 21.1 0.80% 3.6

15 Unilever 449 459 11.50% 5.3 5.20% 3.53

16 Intel 871 247 13.60% 4.5 9.70% 3.37

17 HP 949 331 7.00% 14.3 6.70% 3.28

18 Nestle 389 62 22.60% 5.5 0.80% 3.05

19 Inditex 376 180 16.90% 4.4 10.50% 3.05

20 Nike 781 144 13.00% 4.7 3.30% 2.72

21 Johnson & Johnson 548 121 13.40% 3.6 -0.30% 2.38

22 Starbucks 544 127 10.60% 8.6 5.10% 2.35

23 Tesco 524 190 5.30% 18.3 8.00% 2.34

24 3M 760 7 13.20% 4.6 5.80% 2.25

25 Kraft Foods 471 192 4.40% 5.9 15.60% 2.03

2. Return on Assets (ROA): ((2010 net income / 2010 total assets) * 50%) + ((2009 net income / 2009 total assets) *

30%) + ((2008 net income / 2008 total assets) * 20%)

Notes:

Rank CompanyComposite

Score5

1. Gartner Opinion and Peer Opinion:Based on each panel's forced-rank ordering against the definition of "DDVN

Orchestrator"

3. Inventory Turns: 2010 cost of goods sold / 2010 quarterly average inventory

4. Revenue Growth: ((change in revenue 2010-2009) * 50%) + ((change in revenue 2009-2008) * 30%) + ((change in

revenue 2008-2007) * 20%)

5. Composite Score: (peer opinion * 25%) + (Gartner opinion*25%) + (ROA*25%) + (inventory turns * 15%) + (revenue

growth * 10%)

2010 data was used where available. Where 2010 data was unavailable, latest available full-year data was used. All

raw data was normalized to a 10-point scale prior to composite calculation.

Source: Gartner (June 2011) - http://www.gartner.com/DisplayDocument?doc_cd=213740


Supply Chain Strategies – Distribution Network, Direct Ship, Postponement (e.g., downstream

assembly/merge and/or cross-docking), Customer pickup distance, Managing Inventories (avoiding

“Bullwhip” effect) and Service Commitments

Obstacles – Short Product Life Cycle, Demanding Customers, Supply Chain Ownership,

Globalization and Country’s Regulatory and Trade environment

Based on the characteristics and operational differences, there are 3 major & specialized supply chains

exists as shown below;

Figure-4: Supply Chain Models

There are many organizations use combination of the above supply chain models to optimize and increase

efficiency to have variety supply chain models. This increased the complexity in supporting the supply

chain operations through a common standardized information technology tools.

III. 3PL SERVICES

Today 3PL service providers are playing bigger role in enhancing and improving the supply chain

efficiencies for the given organization. Looking at the SCOR Model and its five distinct Process Areas

(i.e., Plan, Source, Make, Deliver and Return), the major involvement of 3PLs in supply chain can be

visualized. Generally, in-sourced and out-sourced activities on the supply chain can be visualized from

the diagram below (Figure-5)

Figure-5: SCOR Model based In-Sourced and Out-Sourced Activities

The 3PL Study [8] provides exhaustive list shown below (Table-2) of services which can be availed from

Global/Local 3PL Service providers.

Inbound-To-Manufacturing (I2M)

Finished Goods Distribution (FGD)

After Market Services (AMS)

Supply ChainSuppliers

Manufacturers Repair/

ReturnPlan Source DeliverMake

Customer

Channels

Stores

Distribution Centers

• Unique and aligned to

the specific organization

• Few 3PLs offering this services and Limited Supply Chain

Systems Solution

• Extensive use of

ERP/MRP Solutions

• Inbound To

Manufacturing

(I2M) Supply

Chain

• Transportation

• Warehousing

• Value Added

Services

• VMI

Highly In-Sourced Activities Highly Competitive Outsourced Activities

• Finished Goods

Distribution

(FGD) Supply

Chain

• Transportation

• Warehousing

• Distribution

Channel (B2B)

• Direct Delivery

Model (B2C)

• Merge-In-Transit

• Customer

Assigned

Inventory

• Project Based

Logistics

• After Market

Services (AMS)

Supply Chain

• Transportation

• Warehousing

• Multi-Leg & Multi-

Type Order

Management

• Sophisticated

Stocking

Approach

• Stringent SLA

• VMI

LLP / 4PL / Control Tower

I2M FGD AMS

Flows: Product, Process, Information, Cash & Capital


Table-1: Wide Variety of Logistics Services from 3PLs

Below diagram (Figure-6) shows the 3PL (Forwarders) share on the Ocean Freight

Transportation as one of the services listed on the Table-1 above.

Figure-6: Ocean-Freight Shipment (in TEUs) for 2011

The wide variety of logistics services from 3PLs and increased outsourcing also increased

expectation of information flow and/or management within the connected network. A good near-

real-time information flow / exchange improve the communication for better operational

planning. The 3PL Study provides highlights of the IT expectation from 3PLs and 3PLs IT

2,900,000.00

2,800,000.00

1,600,000.00

1,500,000.00

1,200,000.00

880,000.00 710,000.00 710,000.00

705,000.00

700,000.00

672,000.00

610,000.00

576,000.00

550,000.00

500,000.00

500,000.00

500,000.00

476,000.00

465,000.00

440,000.00

430,000.00 408,000.00

400,000.00 385,000.00

331,000.00 315,000.00

300,000.00 259,000.00

Kuehne + Nagel International

DHL Global Forwarding

DB Schenker

Pantos Logistics Co.

Panalpina World Transport

Expeditors International of Washington

DSV Air & Sea

Sankyu Inc.

Bollore Group/SDV Logistics

UPS Supply Chain Solutions

Ceva Logistics

Damco International

Kerry Logistics

Agility Logistics

APL Logistics

China Resources Logistics Group

Mallory Alexander International Logistics

UTi Worldwide

Kintetsu World Express

Yusen Logistics

Logwin AG

Hellmann Worldwide Logistics

China Container Line Limited

Geodis Group

Nippon Express Co.

OOCL Logistics Limited

Dascher GmbH & Co.

CH. Robinson WorldwideTop 25 Ocean Freight Forwarders for 2011 (Ocean Freight - Volume in TEUs)Source: http://www.allbusiness.com/transportation/transportation-support-services/16731089-1.html, By Daniel P. BearthTEU - Twenty Foot Equivalent Unit


capabilities (Figure-7). Although the year-on-year study shows there is improvement in bridging

the gap, there is an opportunity to improve.

Figure-7: 3PL – IT Gap

It is not only Information Management or IT Gap, there is also concerns in outsourcing some of

the supply chain activities. The complexity of the supply chain operations, knowledge transfer in

those activities outsourced and project management, added additional risks in defining the

requirements and training & skill level issues (Figure-8) [9]. The lack of detailed & clear

requirements and the global/local generic contract agreements complicated overcoming the

issues in outsourcing.

Figure-8: Issues in Outsourcing

There are also other market forces impacting the supply chain which weakens [10] the overall

supply chain efficiency (Figure-9);


Figure-9: Supply Chain – Weak Links

These challenges and market forces will have to be overcome with good operational plan and

risk management. Well planned and closely collaborated supply chain operations proved to be

successful, whether being in-sourced or out-sourced.

The supply chain operations is not only looking at transportation and storage activities but more

value-added services e.g., Promotional Packaging, Technical Services (Equipment Faulty

Screening) etc., Hence with the wide variety of services including specific value-added services

from 3PL, availing & utilizing 3PL’s is expected to grow.

IV. CONCLUSION

As the 3PLs are able to provide more and more value-added services, bringing efficiencies to the

supply chain operations, it is expected to see growing trend in utilizing 3PL service providers.

Whether new to 3PL services or re-using/extending the services with 3PLs, it is important to

establish the clear requirements and evaluation criteria (e.g., not just alone price points, although

it is important) along with the risk mitigation, the efficiency could be increased in supply chain

operations thus achieving profitability.

REFERENCES

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Krishnan Nair & Dr.B.Venkatachalam, Proceedings of the International Conference on Computer Applications 2010, Management


Category, Techno Forum Research and Development Center, Pondicherry - 605 008, India, www.icca10.in, ISBN: 978-981-08-7303-5,

Published By Research Publishing Services, No:83 Genting Lane, #08-01, Genting Building, S349568 Singapore [2] Rhonda R. Lummus and Robert J. Vokurka, Defining supply chain management: a historical perspective and practical guidelines, Industrial

Management and Data Systems, 99/1 [1999] 11–17

[3] Hokey Min and Gengui Zhou, Supply chain modeling: past, present and future, Computers and Industrial Engineering 43 (2002) 231-249, www.elsevier.com/locate/dsw (accessed on 04-Oct-2010)

[4] Jayashankar M. Swaminathan, Stephen F. Smith and Norman M. Sadeh, Modeling Supply Chain Dynamics: A Multiagent Approach,

Decision Sciences, Volume 29, Issue 3, pages 607–632, July 1998, http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.43.6908andrep=rep1andtype=pdf (accessed on 11-Oct-2010)

[5] Sunil Chopra and Peter Meindl, Supply Chain Management, Strategy, Planning and Operations, Second Edition, Pearson Prentice Hall,

2004, ISBN: 0-13-121745-3 [6] Supply Chain Operations Reference (SCOR) Overview, Version 9.0, Supply Chain Council, www.supply-chain.org

[7] The Gartner Supply Chain Top 25 for 2011, Debra Hofman, Vice President, Supply Chain Research, Gartner (June 2011),

http://www.gartner.com/DisplayDocument?doc_cd=213740 [8] 2012 THIRD-PARTY LOGISTICS STUDY, The State of Logistics Outsourcing, Results and Findings of the 16th Annual Study,

www.3plstudy.com [9] Metrics, PM Network, September 2010, www.PMI.org

[10] Metrics, PM Network, November 2008, www.PMI.org

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3PL in Supply Chain Management