Chapter 11:

Chapter 11:

Logistics Relationships and Third-Party Logistics

Chapter 11Management of Business Logistics, 7th

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Learning Objectives - After reading this chapter, you should be able to do the following:

Understand the importance of logistics relationships and the types of relationships that may be formed.

Be knowledgeable of a process model that will facilitate the development and implementation of successful supply chain relationships.

Define what is meant by third-party logistics (3PL), and know what types of firms provide 3PL services.


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Learning Objectives

Know what types of 3PL services are used by client/customer firms, and know what types of 3PL providers are used.

Appreciate the role and relevance of information technology-based services to 3PLs and their client/customers.

Realize the ways in which 3PLs are involved in global supply chain issues.


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Learning Objectives

Know the extent to which customers are satisfied with 3PL services, and understand where improvement may be needed.

Recognize the importance of “collaborative” relationships in the context of supply chain management.


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Logistics Profile: UPS Logistics Group

UPS Logistics Group signed a five-year $150 million deal to manage National Semiconductor’s global supply chain distribution center in Singapore.

The DC uses radio frequency, bar-code scanning, and web-based technology.

Fills >450K orders per year; receives 12 million inbound chips daily; and ships four billion products per year on sales of $2.1 billion.


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Logistics Relationships and Third-Party Logistics: Introduction

With more firms interested in working more closely with their supply chain partners, high priorities are: Developing and implementing

successful supply chain relationships; The need for collaboration to achieve

supply chain objectives; and, Value created by third-party logistics.


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Logistics Relationships: Types of Relationships

Vertical Refer to the traditional links between

supply chain members such as retailers, distributors, manufacturers and suppliers.

Horizontal Firms that have parallel or cooperating

positions in the supply chain such as a transportation firm and a warehousing firm serving the same customer.


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Logistics Relationships: Intensity of Involvement

Vendor relationship shows little or no integration or collaboration.

Strategic alliance shows full integration and collaboration.

Partnership shows a customized relationship that results in better outcomes than could be reached separately.

Examine Figure 11-1 on the next slide.


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Figure 11-1 Relationship Perspectives


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Logistics Relationships: Intensity of Involvement

Regardless of form, there are numerous ways that the relationships may differ: Duration Obligations Expectations

Interaction and Communication

Cooperation Planning Goals Performance

analysis Benefits and

burdens


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Figure 11-2 Effectiveness of Supply Chain Relationships

7% 8%

22% 21%

48%42%

20%23%

2% 4%

0%

10%

20%

30%

40%

50%

Poor Fair Average Good Exceptional

Suppliers Customers

Percentag

e


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Logistics Relationships: Model for Developing and Implementing Successful Supply Chain Relationships

Six step process for forming and sustaining supply chain relationships: Step One – Perform strategic

assessment Step Two – Decision to form relationship Step Three – Evaluate alternatives Step Four – Select partners Step Five – Structure operating model Step Six – Implementation and

continuous improvement


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Figure 11-3 Process Model for Forming Logistics Relationships


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Step One – Perform strategic assessment Manufacturer becomes fully aware of its

logistics and supply chain needs and overall strategies that will guide its operations.

This step is referred to as a Logistics Audit, and will be covered in Chapter 14.

Time spent at the outset is well spent.


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Step Two – Decision to form relationship When using an external supplier, will the

firm’s services be needed. If the firm has core competencies in the

area that external supplier provides, then the firm can provide its own services.

Using channel partners depends on whether there are compelling drivers and facilitators for partnerships are present.


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Figure 11-4 What Does It Take to Have an Area of Core Competency?


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Drivers might include: Asset/Cost efficiency Customer service Marketing advantage Profit stability/growth

Facilitators might include: Corporate compatibility Management philosophy

and techniques Mutuality of commitment Symmetry on key factors

such as relative size, financial strength, etc.


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Step Three – Evaluate alternatives Measure and weigh drivers and

facilitators. Decide on type of relationship. Match manufacturer’s needs with

capabilities of each potential partner. Involve other functional managers in

the overall selection process.


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Step Four – Select partners Made only after close consideration of

the credentials of the most likely candidates.

Interact with and get to know the final candidates on a professionally intimate basis.

Attempt consensus to maximize “buy-in”.


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Step Five – Structure operating model Planning Joint operating controls Communication Risk/Reward sharing Trust and commitment Contract style Scope of the relationship Financial investment


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Step Six – Implementation and continuous improvement Depending upon the complexity of

the relationship, the implementation period may vary in length.

Future successes will be a direct function of the ability of the partners to achieve both breakthrough and continuous improvement.


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Third-Party Logistics: Industry Overview

Firms have directed considerable attention to developing supply chain relationships.

Many companies have been in the process of extending their logistics organizations into those of other supply chain participants and facilitators.

One way of accomplishing this extension is through the use of a supplier of third-party or contract logistics services.5


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Figure 11-5 Implementation and Continuous Improvement


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Third-Party Logistics (3PL): Definitions

3PLs are external suppliers that perform all or part of a company’s logistics functions, including: Transportation Warehousing Distribution Financial services

Terms contract logistics and outsourcing are sometimes used in place of 3PL.


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Third-Party Logistics (3PL): Types of 3PL Providers

Transportation-Based Warehouse/Distribution-Based Forwarder-Based Financial-Based Information-Based


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Third-Party Logistics (3PL): Types of 3PL Providers Transportation-Based

Services extend beyond transportation to offer a comprehensive set of logistics offerings.

Leveraged 3PLs use assets of other firms. Nonleveraged 3PLs use assets belonging

solely to the parent firm. Ryder, Schneider Logistics, FedEx

Logistics, and UPS Logistics are examples of 3PLs.


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Warehouse/Distribution-Based Many, but not all, have former

warehouse and/or distribution experience.

Transition to integrated logistics has been less complex than for the transportation based providers.

DSC Logistics, USCO, Exel, Caterpillar Logistics, and IBM are examples of warehouse/distribution-based 3PLs.


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Forwarder-Based Essentially very independent

middlemen extending forwarder roles. Non-asset owners that capably

provide a wide range of logistics services.

AEI, Kuehne & Nagle, Fritz, Circle, C. H. Robinson, and the Hub Group are examples of forwarder-based 3PLs.


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Financial-Based Provide freight payment and auditing,

cost accounting and control, and tools for monitoring, booking, tracking, tracing, and managing inventory.

Cass Information Systems, CTC, GE Information Services, and FleetBoston are examples of financial-based 3PLs.


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Information-Based Significant growth and development

in this alternative category of Internet-based, business-to-business, electronic markets for transportation and logistics services.

Transplace and Nistevo are examples of information-based 3PLs.


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On the Line: Trade Team

Excel, the largest provider of brewery distribution services in Great Britain, and Bass, the industry’s low-cost producer, formed Trade Team, the UK’s leading independent logistics provider to the beverage industry.

Annual sales of $200 million; 280 million gallons of beer and other beverages to over 27,000 retail customers; 40-50% market share.

Has capability to move other products.


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Third-Party Logistics Research Study: Industry Details

Of 93 responding executives, 71 percent indicate a current or possible use of 3PLs.

Overall percentage of companies using 3PLs is steady, but the computer and peripheral and consumer products industries tend to exhibit higher use (90 and 85 percent, respectively).

Less use in automotive, chemical and retail (50 to 60 percent usage range).


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Outsourced logistics services include: Warehousing (73.7%) Outbound transportation (68.4%) Freight bill auditing/payment (61.4%) Inbound transportation (56.1%) Freight consolidation/distribution

(40.4%) Cross docking (38.6%)


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Figure 11-6 3PL User/Nonuser Experience, 1996-2001


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Table 11-1 Shippers Using More than Five 3PLs


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Table 11-2 Third-Party Revenues Estimated at $56.4 Billion in 2000


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Table 11-3 Top Six Outsourcing Logistics Services: 2001


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Figure 11-7 Nonuser Respondents: Rationale for Not Using 3PL Services


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Table 11-4 Information Technology-Based Services: Current Percent versus Future Percent


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Figure 11-8 Sources of Information Technology


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Figure 11-9 3PL Customer Use of Industry Vertical Procurement Markets


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Figure 11-10 3PL Customer Use of Transportation/Logistics Electronic Markets


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Figure 11-11 3PL Involvement in Outsourcing: Who Is Responsible for Implementation?


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Figure 11-12 3PL Customer Evaluation of Outsourcing (Yearly Comparisons)


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Figure 11-13 3PL Factors for Selecting and Evaluating 3PLs


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Quantifiable measures of 3PL success: Logistics costs reduced by 8.2 percent. Logistics assets reduced by 15.6

percent. Average order cycle length changed

from 10.7 to 8.4 days. Overall inventories reduced by 5.3

percent.


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Reported problem areas: Service level commitments not realized. Strategic management skills lacking. Cost reduction goals not realized. Cost “creep” and price increases occurring. Improvements and achievements lacking. Control of outsourced functions diminished. Consultative, knowledge-based skills lacking. Technology capabilities not being delivered. Time and effort spent on logistics not reduced.


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Figure 11-14 How Respondents View Providers of Third-Party Logistics Services


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A Note on Fourth-Party Logistics (4PL): The Next Evolution?

Thought of as supply chain integrator, a firm that “assembles and manages the resources, capabilities, and technology of its own organization with those of complementary service providers to deliver a comprehensive supply chain solution.”12

4PLs manage and direct the activities of multiple 3PLs, serving as an integrator.


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Figure 11-15 Fourth-Party Logistics (Registered Trademark of Accenture, Inc.)


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Need for Collaborative Relationships13

Supply chain relationships are most effective when collaboration occurs.

Collaboration is facilitated by the ability of the supply chain partners to readily access and exchange information over the Internet.

Table 11-5 lists the “Seven Laws of Collaborative Logistics” and is a guide to establishing and maintaining collaborative logistics networks.


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Table 11-5 Seven Laws of Collaborative Logistics

Chapter 11: Summary and Review Questions

Students should review their knowledge of the chapter by checking out the Summary and

Study Questions for Chapter 11.

Documents

Chapter 11: