THIRD PARTY LOGISTIC

COURSE INCHARGE:DR.MASOOD

SUBMITTED BY:

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RABIA RASHEED (8754)SEHRISH HUDA (10482)

TABLE OF CONTENTS

Executive summary ………………………………………………………03

Introduction of Third party logistic……………………………………...04

Origin of 3PL. ……………………………………………………………..06

Factors that affected the usage of 3PL.…………………………..............07

Benefits of a successful 3PL relationship…………………………………08

Risks and Limitations of 3PL.……………………………………………..09

Process of Selecting A 3PL Provider………………………………………10

Types of 3PL Providers……………………………………………………..12

Third Party Contracts………………………………………………………13

Measuring 3PL Performance……………………………………………….15

Summary……………………………………………………………………..17

Case study: Hitachi Consulting Group……………………………………..18

Bibliography…………………………………………………………………..22

Appendix: Power Point Presentation………………………………………...23

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EXECUTIVE SUMMARY

This report is about a third-party logistics provider (abbreviated 3PL) is a firm that provides outsourced or "third party" logistics services to companies for part, or sometimes all of their supply chain management functions. The report has been designed to help us understand better the meaning of 3PL. It also includes a case study of a company which will create a good example of Third party logistics.

The Report will consist of the following major points:

Introduction and Definition of Third party logistics

History and Its origin.

Types of 3PL

How do we select a Third party to provide services to our supply chain functions.

Advantages and disadvantages of 3PL

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INTRODUCTION OF THIRD PARTY LOGISTICS

Organizations have been downsized, right-sized, up-fitted, consolidated, and reengineered in an effort to better market positions in recent years. What more can a company do to improve itself? An organization can improve itself from the inside out by choosing better resources and using them more efficiently.

Companies understand broadly the necessity and purpose of specialization in today’s world. They do not let their sales representatives run their manufacturing processes. Production foremen aren’t in charge of the corporate tax return. Companies have an idea about how to use specialists to maximize their manufacturing capabilities.

Typical outsourced logistics functions are: inbound freight consolidation, public warehousing, contract warehousing, order fulfillment, distribution, and management of outbound freight to the client's customers. Below are several definitions of Third Party Logistics in order to have a definite understanding of the term:

“Third Party Logistics (3PL) is the function by which the owner of goods (The Client Company) outsources various elements of the supply chain to one 3 PL company that can perform the management function of the clients inbound freight, customs, warehousing, order fulfilment, distribution, and outbound freight to the clients customers”. Maxwell

Third Party Logistics is the activity of outsourcing activities related to Logistics and Distribution. The 3PL industry includes Logistics Solution Providers (LSPs) and the shippers whose business processes they support. Logistics Focus

Third Supply of logistics related operations between traders by an independent organization. Eyefortransport

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A 3PL is an outsourced provider that manages all or a significant part of an organization's logistics requirements and performs transportation, locating and sometimes product consolidation activities. Bridgefield Group

On top of this, also Value Added Services can be provided, such as: repackaging, assembling and return logistics. The 3PL Provider manages and executes these particulars logistics functions using its own assets and resources, on behalf of the client company. In essence, 3PL providers sell three commodities: labor, space, and time.

The thoughts behind this are to keep the firm competitive by keeping it lean without owing many assets, allowing it to focus on niche areas and to reduce operational costs. Third Party Logistics is also referred to as Contract Logistics.

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ORIGIN OF THIRD PARTY LOGISTICS

The ideas that drive third party logistics providers are hardly new. A Bible story tells about an Egyptian pharaoh who, haunted by nightmares of plenty and famine, took a servant’s advice to warehouse excesses harvests in years of plenty because years ofscarcity would follow.

In pre-Renaissance Italy used paper documentation known as Lombards receipts for inventory stored in common (3PL) warehouses. Upon a purchase, the customer would take a Lombard from the market to the centrally located warehouse to retrieve the merchandise. This allowed the merchants to keep their stock in a centralized location and avoid the cost of shipping it to the market and/or to customers. This merchandise proxy was the forerunner of paper money. In Latin America, this warehousing practice continues today.

The ships that sailed the oceans were common carriers. They provided both transport and storage of goods so that the manufacturer could again focus its effort to its core enterprise.

In the 1980s, there was increased globalization and an increases use of IT. These trends resulted in increased demands on firms and possibilities for companies to operate more competitive and lean. Some successful 3PL companies emerged, such as DHL/ Excel,

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Kuehne + Nagel, Schemer, UPS, Panalpina, C.H. Robinson, TNT Logistics, Schneider, and NYK Logistic.

FACTORS THAT AFFECTED USAGE OF THIRD PARTY LOGISTICS

The use of 3PL services grew by about 15 percent in 1999, according to Industry Week magazine, and a widely quoted analysis by the investment bank of Gerard Klauer Mattison & Co. Inc. in 1998 predicted annual growth on the order of 19 percent a year into this decade. Growth had been 10 percent annually in 1992. The increase in competition brought by the Internet and other factors has increased the desire to outsource. As a result, the areas of service have expanded. Today, practically anything can be outsourced. A Northeastern University report in 2001 stated that 74 percent of CEOs in a survey of Fortune 500 companies used 3PL providers. The factors in the current business environment that have intensified many companies’ interest in 3PL are:

An increase in the number of professionally operated 3PL/distribution firms An emphasis on reducing nonessential overhead and an increasing focus on core

business competencies Intensified evaluation of business strategies and company restructuring due to the

high number of mergers and acquisitions A desire to reduce debt and lower break-even points by restructuring operations

and selling nonessential assets A lack of experience in dealing with global distribution Excessive expense in addressing seasonality and servicing remote Firms with a wide and/or complex distribution network. Example: IBM.

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Firms that do not focus on logistics as one of their core competencies. Example: Chevron Corp or British Petroleum.

In strategic discussions on Core Competence. In the case of the creation of a new product group. When a company is integrating activities of a takeover. Compare Acquisition

Integration Approaches.

BENEFITS OF SUCESSFUL THIRD PARTY LOGISTICS RELATIONSHIPS

The value and cost-effectiveness of a good 3PL partner is tough to beat. Depending on a company’s needs and market, going 3PL can add some or all of the following:

Cost reduction via more efficient operations Product seasonality control (via outsourcing during peak periods) Decreased storage costs through the use of third party warehousing Improved customer service via more timely and frequent deliveries and reverse

logistics Access to global markets via distribution networks and customer service Better asset utilization because capital is no longer bound to unneeded storage

costs or safety-stock Savings through 3PL providers’ use of shipment consolidation (combining

shipments to achieve volume discounts) Decreased labor requirements Ability to focus on core competencies

In the midst of this volatile business climate, organizations face a global economy that is changing rapidly. It is becoming more and more difficult to meet customer demands.

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Today’s customer wants quality products, superior service, expeditious delivery, and better value. 3PL providers may be able to help companies achieve those goals.

RISKS AND LIMITATIONS OF THIRD PARTY LOGISTICS

The efficient distribution of merchandise along the supply chain will be one of the factors that determines who commands the global market, now and in the future. As companies focus on their core competencies and look for others to manage and perform many of their logistics functions, CEOs face even greater challenges. They still must be concerned with their own performance, and they also must be equally concerned with the performance of their 3PL business partners. In a 3PL relationship, they are letting go of direct control of functions, but keeping ultimate responsibility for them. Companies often need the services that 3PLs provide, and the companies often can benefit from the providers’ ability to shift gears faster than the client organization can. There is a great deal to consider, however, in deciding whether to bring a 3PL provider on board.

To implement 3PL successfully, one may need to bear in mind some possible pitfalls:

Loss of control over the logistics function (especially for critical parts)

More distance from clients. Loss of human touch.

Discontinuity of services of 3PL provider.

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Differences of opinion or perception of the service level of the third party provider.

PROCESS OF SELECTING A THIRD PARTY LOGISTICS PROVIDER

To 3PL or not to 3PL is the question. There is no snap answer. If the answer turns out to be “yes,” there are things you need to know in order to find the right service provider. The rewards for selecting the right company can be huge: expansion into previously untapped markets, release of capital for core competency investments, increased customer satisfaction, a better bottom line, and many others.

To understand what a 3PL provider may be able to offer, it is necessary to develop a strategic plan. Strategic planning is the process of deciding the firm’s objectives, changes in the objectives, resources to attain these objectives, and policies that govern the acquisition, use, and disposition of these resources.

The application of 3PL is normally done in a number of phases:

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Awareness. Investigate possibilities, inform employees, SWOT Analysis.

Market Research. Investigate market trends, in particular service demands. See: SERVQUAL, Customer Satisfaction Model, and Quality Function Deployment.

Strategy. Develop and compare logistics concepts.

Make or Buy. Build own competence or outsource. Outsource completely or partly.

Business Plan. Costs, benefits. Phasing. Timing. Risk. Communication and motivation.

Selection. Selecting partner based on market coverage competency, integrity, vision, etc.

Agreement. Agreeing on mutual expectations using a set of performance metrics.

Evaluation and Renewal. Sustain partnership via mutual financial costs and benefits, joined planning, multi-level contacts, open information exchange.

When selecting a 3PL, the request for information (RFI) or quotation (RFQ) should be as detailed as possible. The company that is selected should be able to fulfill all the logistics requirements and that can only be assured if every requirement is communicated to potential companies. The RFI should include a detailed description of the areas to be outsourced.

This will usually include:

The scope of the contract, including locations, facilities, departments. Information on volumes involved; number of deliveries, warehouse sizes, number

of items, etc. The logistics tasks are to be performed, e.g. warehousing, transportation, etc. The level of performance required.

After the bids have been received by a company from the prospective 3PL’s, an evaluation would take place where a multi-discipline team will review each bid based on a pre-defined set of criteria. These will include some of the following.

Does the 3PL provide the services required? Does the 3PL have the technology required to perform the tasks required? Does the company have the required warehouse space, dock capacity, warehouse personnel, etc.? Is the 3PL financially sound?

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Are the 3PL’s geographical locations suitable to cover the network? Does the 3PL have the flexibility to respond to changes? Are the 3PL’s environmental policies compatible? Are the costs of the services detailed enough for comparison to other bids? Are the customer references acceptable? Is the 3PL a good cultural fit?

The selection team will usually review each of the bids based on the criteria and give each bidder a score. Depending on the importance of each criteria, a weighting can be given which gives more importance for one or more criteria in the selection process. Once the selection team has evaluated the bids, management will often select the top two or three companies for site visits, face to face interviews and more detailed reviews of financial records. Once a company has been identified contract negotiations would follow before a final agreement could be reached.

TYPES OF THIRD PARTY LOGISTICS PROVIDER

Deciding to a use a third party logistics company is a decision that depends on a variety of factors that differ from business to business. The decision to outsource certain business functions will depend on the company’s plans; future objectives, product lines, expansion, acquisitions, etc.

Once a decision has been made to outsource certain processes then a company will begin a search for the right 3PL that fits all their requirements at the best possible price. There are three types of Third Party Logistics Company that operate today.

Standard 3PL provider: This is the most basic form of a 3PL provider. They would perform activities such as, pick and pack, warehousing, and distribution (business) – the most basic functions of logistics. For a majority of these firms, the 3PL function is not their main activity.

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Service developer: This is the most basic form of a 3PL provider. They would perform activities such as, pick and pack, warehousing, and distribution (business) – the most basic functions of logistics. For a majority of these firms, the 3PL function is not their main activity.

The customer adapter: this is the most basic form of a 3PL provider. They would perform activities such as, pick and pack, warehousing, and distribution (business) – the most basic functions of logistics. For a majority of these firms, the 3PL function is not their main activity.

The customer developer: This is the highest level that a 3PL provider can attain with respect to its processes and activities. This occurs when the 3PL provider integrates itself with the customer and takes over their entire logistics function. These providers will have few customers, but will perform extensive and detailed tasks for them.

Asset Based: Asset based third party logistics companies’ use their own trucks, warehouses and personnel to operate their business.

Management Based: Management based companies provide the technological and managerial functions to operate the logistics functions of their clients, but do so using the assets of other companies and do not necessarily own any assets.

Integrated Providers: Integrated Providers, can either be asset based or management based companies that supplement their services with whatever services are needed by their clients.

THIRD PARTY CONTRACTS:Developing a Contract for Third Party Logistics

When companies outsource their logistics process, the third party is asked to purchase assets, hire long-term employees, and assume facility leases. These commitments on the part of the 3PL are often expensive and may have a substantial effect on theprovider’s balance sheet. The provider will insist upon a long term contract to shelter it from this risk. Conversely, the company seeking to outsource its logistics processes needs the assurance that if the third party logistics provider fails to perform as expected, the contract can be terminated in favor of another alternative. Two principles must be a part of every logistics contract:

Investment amortization for the provider Without-cause cancellation options for the customer

While the principles of immediate cancellation and complete investment amortization may seem to be a difficult fit, they can be brought together. Any contract will have sections to fit the particular situation. Any company that is considering a contract for 3PL services should, obviously, have legal counsel to make sure the contract represents the

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company’s interests fairly and fully. In that process, it is critical to include a Scope of Work section. Too many third party relationships overlook the importance of this document. The scope is particularly important in first-time ventures between a user and a supplier of logistics services. Without it, the provider may not have a clear definition of what he has quoted to do and you may not know just what you are paying for. Nevertheless, the scope is the most frequently overlooked part of the relationship. It details physical characteristics of all items distributed, all handling and transportation needs, movement patterns, information flow, and every detail of the logistics process. The scope should be jointly developed by the user and provider of logistics services andinvolve representatives from functional areas on both sides of the relationship.One thing to anticipate in a 3PL relationship is that if it succeeds, people from your company may begin to use the third party relationship in ways that were not contemplated during the design phase. The scope should make reference to thiseventuality and suggest a means to handle it.

The scope of work is a key ingredient in the third party contract. Experience has shown that the greater the detail in the scope of work, the greater the chance the venture will succeed. If the contract involves physical space such as a warehouse, many third party contracts make separate facility and operating agreements. They often are dictated by the lease or ownership of the facility involved. Most parties look at agreements that extend three to five years. If the contractor is securing new space dedicated for you oris customizing technology, a longer-term agreement is needed to recoup the investment. Usually, profit margins are lower in a dedicated arrangement, reflecting the more secure, long-term relationship. If the parties establish separate facility and operating agreements,

their start and stop dates should coincide. The length of the contract should also coincide with the life of special equipment and other assets used in the operation. Also, contractlengths may reflect the time it will take to “normalize” the operation. Every contract should include consequences for early termination. It should address the conditions of termination with or without cause. In most contracts, termination without cause can occur when either party gives the other party written notice.

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MEASURING 3PL PERFORMANCE

Measuring 3PL performance is an integral part of achieving continuous improvement. To take that measure, however, requires identifying the most appropriate approach. Traditionally, companies have tied supply chain performance measures to financial results. However, these methods tend to be historically based and have little focus on the future. Traditional supply chain measures devised in the past generally do not relate to non financial performance and cannot directly tie to the 3PL’s operational effectiveness.

When a company is working to develop excellence within each of its operating units, metrics will need to focus on individual functional departments. Historically, this is where most companies have focused. When a company is working to develop excellence in its cross-functional processes rather than within its individual departments, the metrics will, logically, focus on cross-functional processes. As a company advances and strives for excellence in inter-enterprise processes, the metrics will look at those areas.

To establish performance measures, start with an understanding of the company’s strategic supply chain objectives. The purpose is well-served by developing Key Performance Indicators (KPIs) that are tightly related to the company’s business and give it readily understood signals of when it is succeeding and when it needs improvement.

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For example, what can the company measure that will tell it if it is achieving intracompany or extra-enterprise integration excellence? Typically, 3PL measures tend to be more detailed, tracking both tactical and operational activities. These measures must be aligned to the strategic supply chain measures and goals. KPIs for a distributioncenter, for example, might include measured customer satisfaction, on-time delivery performance, vehicle down time, or health and safety incidents. While most companies tend to focus their performance measurement on achieving functional excellence, integration with other members of the supply chain requires objectives within theenterprise as well as ones for the extended enterprise. These measurement areas fall into three major categories:

Function-based measures Process-based measures Cross-enterprise measures

Function-based measures tend to drive operations toward improving their own area of performance, thus creating conflicting organizational goals and too often coming at theexpense of performance in other functional areas. For example, measuring only transportation and warehousing costs will encourage logistics personnel to keep inventories low and hold customer orders to ensure trucks are shipped full and picking isminimized. In addition, performance improvement initiatives often get focused on a single objective that frequently compromises the goal of increasing the efficiency of the total supply chain.

Organizing functional-based measures around process-based measures assists in placing the focus on the performance of an overall process. In other words, integrating the 3PL performance to cross-functional teams will leverage function-based measures of the 3PL as diagnostic tools in assessing overall supply chain performance. Measures of this sort include order fulfillment (order-to-cash), total cycle time (from materials purchase tocustomer payment), and the perfect order concept. All of these measures include, but are not limited to, the 3PL. Integrating the hierarchical relationship of process-based measures with their diagnostic, function-based measures provides more visibility tostrategic aspects of supply chain performance, while the functionbased measures—as a stand-alone—are more diagnostic in nature. To ensure the effectiveness of cross-enterprise processes, a company should measure the performance of parts of its supply chain that lie outside its own enterprise and direct contractors— for example, measuring the freight operations of downstream customers who pay for their own transportation or pick up at the 3PL facility. In other words, measures should be in place where performance directly or indirectly impacts either the availability or cost of products at the point of consumption. These measures allow for initiatives to take control of upstream and downstream supply chain activities and emphasize the role of the 3PL in programs such as:

Vendor-managed inventory

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Continuous replenishment Quick-response initiatives Forecast-sharing programs Production scheduling programs Category management programs

SUMMARY

Changes in the global marketplace have increased interest in third party logistics. Companies are deverticalizing, demassifying, focusing on a few core competencies, and looking outward for other companies to manage and perform many of their logistics functions. Without a real understanding of what your logistics functions are costing you now and how well you are performing them, it is difficult to tell if a 3PL provider is right for you. Baseline data is extremely important. You will need to do your homework.

Review your logistics network design. Remember cost is half the battle, and service is the other. Benchmark performance and make continuous improvement mandatory. Only after you have explored your own capabilities and costs will you know if a 3PL provider is the right choice to make. There is no question that companies must invest the time and energy necessary to choose the right provider if they have decided to “go 3PL.” They also must realize that a 3PL relationship is also an ongoing and infinite process that requires continued review. Once they make these investments and commit themselves to continuous improvement and benchmarking, they will gain competitive advantage in today’s connected and global economy.

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BUSINESS CHALLENGE

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As global competition increases, more businesses are collaborating with logistics companies to meet their special transportation needs. To take advantage of that trend, the client, a third party logistics (3PL) arm of a large food service distributor, needed to revamp their business processes and better position the company.

Customers expected higher service levels and lower costs than the company's current business processes and tools could provide. The company needed new ways to ensure on-time deliveries while optimizing use of partner carries, especially in the refrigerated trucking market, where capacity is always problematic, especially during the peak summer and holiday seasons. In addition, the 3PL company wanted to improve their transportation planning to avoid expensive partial loads and out-of-route and deadhead miles. They needed a new transportation management system (TMS), one that would not constrain, but support their new business model.

THE SOLUTION

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The client engaged Hitachi Consulting because of their depth of knowledge and experience in the Food and Beverage industry, as well as logistics and transportation matters.

The first step involved examining their existing business processes and :

Modeling significant improvement. Identifying unique requirement that would drive the selection the selection of a

new TMS system.

Determining the areas most in need of change that should drive the change process.

Hitachi Consulting concluded that the client:

Engaged many carries and numerous customers, each with unique needs. Lacked a process for maintaining carries rates and charges with multiple fuel

surcharge schemes

Needed to maintain both buy-side and sell-side freight rates.

With Hitachi Consultant’s guidance, the 3PL company chose the oracle TMS system (OTM). Working together, they then addressed several factors that complicated the TMS system configuration, including:

A simultaneous switch to ( and integration with) JD Edward order management and financials

Carries capacity issues

Damage and challenges from Hurricane Katrina

A primary customer with an 'Assured Supply' requirement with zero tolerance for service failures

The need to integrate with their parent company's and other customers order management system

Hitachi Consulting implements a comprehensive rollout and training program for the third party logistics provider. It addressed the new TMS system as well as significant business process changes. For example , since the new TMS system featured optimization and shipment planning, the staff needed to learn how to track all activities as shipment passed from origin to destination. They also needed to know how to track various costs associated with planned and unplanned activities.

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Finally, the solution integrated their financial processes. Since the goal was to track both costs and revenues associated with each shipment, the information generated in the new TMS system had to be integrated into their current financial management systems and schemas.

BUSINESS BENEFITSThe company has achieved measurable results, such as a completely transformed transportation function. Shipments palnned per planner day have increased 250 percent and service levels have remained steady despite an unplanned staff reduction.

The 3PL company has been able to achieve scale economies and more efficiently plan their transportation. Also, with the help of Hitachi Consulting, they have reorganized their staff into a well-trained, highly-performing team.

With this momentum, the company should double the number of loads they plan everyday and assume a position to negotiate better rates for the carries that serve them. They are now poised to become a dominant player in the food and beverage specialty 3PL market space.

Most important, the successful implementation has empowered the client to meet the demands of a changing market and be positioned for the future.

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Bibliography

1. www.wikipedia .com

2. www.12manage.com/methods_3rd_ party _ logistics .

3. www.hitachiconsulting.com/downloadPdf.cfm ?

4. l ogistics .about.com/od/strategicsupplychain/a/select_ 3PL .htm

5. www.google.com

6. Hertz, Susanne; Monica Alfredsson (February 2003). "Strategic development of third party logistics providers". Industrial Marketing Management (Elsevier Science) 32 (2): pp. 139–149

7. Helen (2005). "What are you willing to give up?". Logistics Today (Penton Media, Inc). http://www.logisticstoday.com/displayStory.asp?S=1&sNO=7028.

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APPENDIX

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