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Supply Chain relationships may vary from one another based on:

Duration

Obligations

Expectations

Interaction / Communication

Cooperation

Planning

Goals

Benefits and burdens

RELATIONSHIPS

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Arms length Strategic

Vendor Strategic Alliance

LOGISTICS RELATIONSHIP SPECTRUM

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The relationship with a vendor is transactional and parties to a

vendor relationship are said to be at arms length.

A

vendor is seen simply as a provider of a product of service, suchthat there is little or no integration or collaboration with the buyer

or purchaser.

There are certain types of transactions for which this option is

desirable.

One-time or even multiple purchases of standard products or

services is appropriate for an arms length relationship.

CHARACTERISTICS OF VENDOR RELATIONSHIPS

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Strategic alliance is one in which two or more business

organizations work together and developlong-term goals and

business objectives jointly.This form of relationship typically benefits the parties by reducing

uncertainty, improving communication, increasing loyalty and help

to enhance the overallperformance.

The challenges in this relationship is that it requires heavy resource

commitments by the participating organizations, significant

opportunity costs and high switching costs.

CHARACTERISTICS OF STRATEGIC ALLIANCE

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3 PL of third-partylogistics is simply the use of an outside

company to perform all or most of the firms materials management

and product distribution functions. Recently there have been significant increases in the number of

firms offering 3 PL services.

Examples of 3 PL companies include Fedex, UPS, DHL, Exel, Intral

Corporation, Kuehne & Nagel, etc

THIRD PARTY LOGISTICS OR 3 PL

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Transportation Based

Included among transportation based 3 PLs are Ryder, Menio,

Fedex, UPS, Schneider Logistics etc.

These companies primarily started as a transportation

companies and have expanded to other areas of logistics.

TYPE OF 3 PL PROVIDERS

Warehouse / Distribution Based

Examples of such firms include DSC Logistics, USCO and Exel.Traditionally, most warehouse / distribution based logistics

suppliers have been in the warehousing business and have

expanded into a broader range of services.

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TYPE OF 3 PL PROVIDERSWarehouse / Distribution Based

These firms have found the transition to integrated services to be

less complex and less difficult than the transportation providers as

they were already involved in inventory management,

warehousing, distribution etc.

Forwarder / Shipping Line Based

This category include companies such as Kuehne & Nagel, Fritz,Hub Group that have extended their roles as forwarders to 3 PL

services.

They are the most preferred 3 PLs for companies involved

extensively in exports and imports

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TYPE OF 3 PL PROVIDERSWarehouse / Distribution Based

These firms have found the transition to integrated services to be

less complex and less difficult than the transportation providers as

they were already involved in inventory management,

warehousing, distribution etc.

Forwarder / Shipping Line Based

This category include companies such as Kuehne & Nagel, Fritz,Hub Group that have extended their roles as forwarders to 3 PL

services.

They are the most preferred 3 PLs for companies involved

extensively in exports and imports

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TYPE OF 3 PL PROVIDERS Financial Based

This category includes firms such as Cass Information Systems,

CTC (CommercialTraffic Corporation). FleetBoston Financial

Corporation.These firms traditionalprovided services like, freight payment

and auditing, cost accounting and control etc.

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71% 73% 71%68%

73%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2003 2004 2005 2006 2007

Outsourced to 3 PL

Not outsourced to 3PL

3 PL USERS AND NON-USERS

Source: C. John Langley Jr.,Gary R. Allen and Gene R. Tyndall, Third-party-Logistics

Services

Level of 3 PL outsourcing has been steady at about 70-72%

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SHIPPERS USING MORE THAN 10 3 PLS

Big companies typically outsource to multiple 3 PLsbased on locations

Shippers No. of 3 PLs Used

General Motors 25

Ford 19

Wal-Mart 15

HP 14

DuPont 14

Chrysler 11

GE 10

Source: Armstrong & Associates,Inc.

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NON-USER RESPONDENTS: RATIONALE FOR NOT USING 3 PLSERVICES

63%

63%

48%

44%

44%

0% 20% 40% 60% 80%

Control would diminish

Costs would not be reduced

Service Commitments would not

be met

Logistics is a core activity

We have expertise

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SOURCE OF SCM TECHNOLOGY

Companies rely heavily on technology provider to obtainSCM technologies and not too much on 3 PLs

20%

69%

11%

0%

10%

20%

30%

40%

50%

60%

70%

3 Technology

ovi e

In e nal

Source: C. John Langley Jr.,Gary R. Allen and Gene R. Tyndall, Third-party-LogisticsServices

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Involvement in Outsourcing : Who is responsible for implementation?

15

49

139

37

13

60

0 50 100 150

P e i e / EO

Fi a ce

S M

Ma ufac u i g

Ma ke i g

I fo a io

Sy e

Nu e of Re o e

Implementation of 3 PL relationship is predominantly doneby SCM and IT team is also involved to a large extent.

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QUANTIFIABLE MEASURES OF 3 PL SUCCESS

SCM costs reduced by 8.2 %

SCM assets reduced by 15.6%

Average Order Cycle length reduced by 25%Overall inventories reduced by 6%


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REPORTED PROBLEM AREAS OF 3 PL OUTSOURCING

Service level commitments have not been realized

Strategic management skills are lacking

Cost reductions have not been realizedPrice increases occur once relationship has commenced

Control over the outsourced function has diminished

Consultative, knowledge-based skills are lacking in 3 PLs

Time and effort spent on SCM activities have not been reduced.


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A third-partylogistics contract is typically a major and complex business decision.

Other than the pros and cons listed above, there are many considerations that are critical in

deciding whether an agreement should be entered into with a particular 3 PL provider:

Knowing ones costs:Among the most basic issues to consider in selecting a 3 PL provider is to know

the companys own costs so they can be compared with the cost of using an

outsourcing firm.

It is necessary to use activity-based costing techniques, which involve tracing

overhead and direct costs back to specific products and services.

Customer orientation of the 3PL:

Apart from costs,many of the advantages of 3 PL are intangibles such as

flexibility.

3 PL ISSUESANDREQUIREMENTS

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Customer orientation of the 3PL:

There should be alignment between the strategic logistics plan of the company

and 3 PL providers fit into this strategy.

The success of the 3PL relationship is directly related to the ability of the provider

to understand the needs of the hiring firm and to adapt its services to the special

requirements of the firm.

Reliability and flexibility to meet the hiring companys business expectations are

the other major factors.

3 PL ISSUESANDREQUIREMENTS

Specialization of the 3PL: It is important the companies should consider 3 PLs whose roots lie in the

particular area of logistics.

Some firms have even more specialized requirements, and these should be

considered carefully when choosing a 3 PL partner.

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3 PL IMPLEMENTATION ISSUES First 6 months to a year is both the most difficult and the most criticalpart of any 3 PL

alliance.

The companypurchasing the services must identify exactly what it needs for the

relationship to be successful.

Effective communication within the company and between the company and the 3PL is

important.

The third party and its service providers must respect the confidentiality of the data.

Specific performance measures must be agreed upon.

Specific criteria regarding subcontractors should be discussed.

Arbitration issues should be considered before entering into a contract.

Exit clauses should be negotiated into the contract.

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Drawbacks of 3PL/Need for 4PL

` N o n Global Reach of 3PLs

` Still requires top management's time to manage relationships

& resources

` Unable to cover full range of SC requirements e.g. logistics

information, technical development

` Lack of shared goals

` Lack of expertise in the Clients industry.

` 3PLs target the function not the process.

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Characteristics of a 4PL

` Non Asset based

` Technology is one of the prime capabilities

` Shipper perspective.

` BPO approach to provide a solution.

` Typically established as a JV or long term contract

` Responsible for management and operation of entire supply

chain

` Continuous flow of information between partners and 4PL

organisation

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The Indian Scenario

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Logistics Outsourcing in India

` The Indian logistics market, valued at around US$130 billionis expected to grow at a compounded annual growth rate ofaround 7% .

` Multinational and National Logistics players present.` The Indian logistics industry suffers from inadequate

infrastructure, complex tax laws and insufficienttechnological aids.

` 75% do not use 3PL services because they are not sure ofproviders capability

` Use of IT in 3PL services is verylow both byuser andprovider

` Although 3PLs provide a whole range of supply chainservices, they are unable to satisfy the corporates totallogistics requirements.

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Contd

` Many Indian players like e-logistics, Apollo Tyre Group, TVS

group expanding their capabilities to 4PL & More

` With improving infrastructure and growing realization of the

benefits of 3PL, this model is going to increase.

Documents

3 PL and 4 PL