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Third party and fourth party logistics, Cross docking
Syamlal c sThird semester MBA-IB
School Of Management studiesCUSAT, Kochi-22
Abstract
The general idea of logistics is to strategically manage the total flow of goods Thus, logistics optimization is not only accomplished from the viewpoint of one firm, and therefore, total optimization of the flow of goods including firms in the supply chain is required. . A firm, which possesses logistics know-how on coordinating economic resources, may have opportunities to make advises. Such a logistics coordinator also called Third Party Logistics 3PL is a new type of industry where the firm’s logistics activity can be outsourced. It came into existence during the deregulation of freight transport industry in the 1980’s, and has progressed in the 1990’s along with the development of IT.
A Fourth-party logistics provider (abbreviated 4PL), lead logistics provider, or 4th Party Logistics provider, is a consulting firm specialized in logistics, transportation, and supply chain management. Typical fourth-party logistics providers are SCMO, CPCS, BMT, Deloitte, LOC, Capgemini, 3t Europe, Morpheus, GL Noble Denton, Brookes Bell, T&MC,[dead link] Global Maritime, AMA - Andrew Moore & Associates, and Accenture
Cross-docking is a practice in logistics of unloading materials from an incoming semi-trailer truck or railroad car and loading these materials directly into outbound trucks, trailers, or rail cars, with little or no storage in between. This may be done to change type of conveyance, to sort material intended for different destinations, or to combine material from different origins into transport vehicles (or containers) with the same, or similar destination.
Introduction
Logistics has been called the last frontier that even at the present time, the improvement of logistics has been the primary source of firms to make new profits and maintain competitive advantage. There are also several instances where the logistics system has become the cause of bottlenecks in the firm’s overall management. The potential for reducing total cost and for improving the quality of services provided to customers can be increased through the elimination of these bottlenecks. Also, from the social standpoint, an efficient logistics system could offer possibilities to reduce road congestion and environmental pollution, which could result in increased macroscopic economic productivity. Several innovations have been developed to advance the logistics system. These innovations can be classified broadly into innovations to improve individual processes of logistics, and innovations to improve the logistics system totally. The former includes innovative hardware such as new inter-modal terminals with efficient transshipment ability, and innovative software such as truck route planning with ITS (Intelligent Transport System) and GPS (Global Positioning System). These piecemeal innovations can be developed to their full abilities only when they are employed into improving bottlenecks. However, it is unlikely that firms merely have one bottleneck in their business processes. Rather, they have many potential bottlenecks, such that eliminating one bottleneck would usually make another one to emerge. This is why we have to control the business process as a system, and have to develop system-management innovations. Among the innovations which have attracted the people’s attention are Supply Chain Management (SCM) and Third Party Logistics (3PL). 3PL as well as fourth party logistics (4PL) also play an important role in SCM, and SCM and They have positive interactive effects.
The general idea of logistics is to strategically manage the total flow of goods. Thus, logistics optimization is not only accomplished from the viewpoint of one firm, and therefore, total optimization of the flow of goods including firms in the supply chain is required. When trying to optimize the total flows within the supply chain, it must be pointed out that the interests of firms in the supply chain may conflict due to the partial distribution of cost and benefit among the firms. Thus, coordinating the interests of the firms is necessary for logistics management in SCM. They likewise
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have different skills or competencies, which are complementary and require further coordination. For example, coordination is needed between the firms in the areas of production and transportation planning. In fact, it is not easy to coordinate many firms with different profiles. If a parts supplier and a manufacture like to synchronize their production, they have to share their production schedules and coordinate transportation of parts between the factories. In order to realize this, they are required to have IT abilities and to fulfill their responsibilities correctly. A firm, which possesses logistics know-how on coordinating economic resources, may have opportunities to make advises. Such a logistics coordinator, also called Third Party Logistics (3PL), has been gaining attention. 3PL is a new type of industry where the firm’s logistics activity can be outsourced. It came into existence during the deregulation of freight transport industry in the 1980’s, and has progressed in the 1990’s along with the development of IT.
3PLand its functionsOriginally, 3PL means outsourcing logistics activities including transportation and warehousing to outside
firms, which are not a consignor or a consignee. However, it is not common 3PL practice to outsource a single activity of logistics independently, but to outsource multiple activities from the firm's strategic point of view.3PL (or 3PL provider) has the following features at present:
1. integrated (or multi-modal) logistics service provider2. contract-based service provider3. consulting service provider
First, a 3PL provider is regarded as an integrated logistics service provider. IT-related activities for controlling goods flow such as order processing, and inventory management, among others are also included in the function of the 3PL provider.However, the 3PL provider need not provide all the services solely. The 3PL provider can outsource some activities to sub-contractors.
Hertz and Alfredsson (2003) describe four categories of 3PL providers:[1]
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 type of 3PL provider will offer their customers advanced value-added services such as: tracking and tracing, cross-docking, specific packaging, or providing a unique security system. A solid IT foundation and a focus on economies of scale and scope will enable this type of 3PL provider to perform these types of tasks.
The customer adapter: this type of 3PL provider comes in at the request of the customer and essentially takes over complete control of the company's logistics activities. The 3PL provider improves the logistics dramatically, but do not develop a new service. The customer base for this type of 3PL provider is typically quite small.
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.[2]
Second, the service of 3PL is contract-based. Recently, a contract was written about the way to share responsibilities assuming various situations in detail. Such strict contract would make reliable relationship between the parties, and strengthen the alliance. Third, offering consulting-services to the firms is an important feature of the 3PL. The 3PL provider can make various advises to answer customers’ requirements concerned with marketing strategy, information system configuration, cooperative transportation,
Advantages and disadvantages of 3PL
One of the advantages of using 3PL results from economies of scale (merits from large truck fleets, warehouses, etc.) and economies of scope, which encourage firms to increase net value by reducing costs. The effects of these economies are obtained depending on the type of 3PL provider (e.g. IT-equipped, marketing-based non-asset-based (and then flexible), etc.) Competent 3PL providers possess high coordination ability, enabling them to search reliable partners or sub-contractors, and to manage efficiently the inter-firm flow of goods. Such ability can be developed through experiences as a 3PL.
Likewise, by outsourcing logistics activities, firms can save on capital investments, and thus reduce financial risks. Investment on logistics assets, such as physical distribution centers or information networks, usually needs large and lump sum costs, which involves financial risks. Furthermore, the 3PL providers can spread the risks by outsourcing to sub-contractors.
Although there are several advantages of using 3PL, some disadvantages also exist. It is not easy to establish a reliable and cost-effective partnership between the firm and the 3PL provider. In order to establish reliable partnership, efforts should be made in two stages; 3PL provider selection and contract signing. First, in the stage of selecting a new 3PL partner, it is important to select the 3PL provider which has the ability to provide better services. If the firms cannot select reliable 3PL providers, they may suffer from economic losses. It is not easy for firms to judge the ability of the 3PL provider during the selection stage owing to the issue of information asymmetry between the firm (principal) and the 3PL provider (agent). To solve this problem, complex selection procedures are necessary to identify their ability. However, the complex selection procedures may involve additional transaction costs.
Second, it is important to establish a system to maintain their reliable partnership once the 3PL partner is selected. Information sharing and apparent risk sharing between the parties is always required. Concerning information sharing, it is needless to say that smoother information exchange will result in a more efficient logistics activity. However, related costs may increase if some information essential to the firm would leak. Therefore, the commitment of each party in information sharing is required, and a scheme to ensure these commitments has to be prepared. However, this would also involve additional transaction costs. Constructing a risk sharing scheme between the firm and the 3PL provider is critical in establishing reliable partnerships. Some of the risks involved in using 3PL are demand risk, inventory risk, and financial risk, among others. The questions are on who will take these risks, and how to compensate the risk holders. "Gain sharing" is a popular example of a rewarding scheme in which the 3PL provider holds part of the risks, andthen is given incentives based on the increase of the firm’s profit. This risk-sharing method is apparently some sort of a division of work between the firm and the 3PL provider. Establishing good risk sharing also involves transaction costs, although the associated costs can be reduced through the cumulative experiences and IT development.
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Non Asset-based Logistics Providers
Advancements in technology and the associated increases in supply chain visibility and inter-company communications have given rise to a relatively new model for third-party logistics operations – the “non-asset based logistics provider.” Non-asset based providers perform functions such as consultation on packaging and transportation, freight quoting, financial settlement, auditing, tracking, customer service and issue resolution. However, they don’t employ any truck drivers or warehouse personnel, and they don’t own any physical freight distribution assets of their own – no trucks, no storage trailers, no pallets, and no warehousing. A non-assets based provider consists of a team of domain experts with accumulated freight industry expertise and information technology assets. They fill a role similar to freight agents or brokers, but maintain a significantly greater degree of “hands on” involvement in the transportation of products.
To be useful, providers must show their customers a benefit in financial and operational terms by leveraging exceptional expertise and ability in the areas of operations, negotiations, and customer service in a way that complements its customers' preexisting physical assets.
On-Demand Transportation
On-Demand Transportation is a relatively new term coined by 3PL providers to describe their brokerage, ad-hoc, and "flyer" service offerings. On-Demand Transportation has become a mandatory capability for today's successful 3PL providers in offering client specific solutions to supply chain needs.
These shipments do not usually move under the "lowest rate wins" scenario and can be very profitable to the 3PL that wins the business. The cost quoted to customers for On-Demand services are based on specific circumstances and availability and can differ greatly from normal "published" rates. On-Demand Transportation is a niche that continues to grow and evolve within the 3PL industry.
Specific modes of transport that may be subject to the on-demand model include (but are not limited to) the following:
FTL, or Full Truck Load Hotshot (direct, exclusive courier)
Next Flight Out, sometimes also referred to as Best Flight Out (commercial airline shipping)
International Expedited
Fourth-party logistics
The concept of Fourth-Party Logistics (4PL) provider was first defined by Andersen Consulting (Now Accenture) as an integrator that assembles the resources, capabilities and technology of its own organization and other organizations to design, build, and run comprehensive supply chain solutions. Whereas a third party logistics (3PL) service provider targets a function, a 4PL targets management of the entire process. Some have described a 4PL as a general contractor who manages other 3PLs, truckers, forwarders, custom house agents, and others, essentially taking responsibility of a complete process for the customer A Fourth-party logistics provider abbreviated 4PL), lead logistics provider, or 4th Party Logistics provider, is a consulting firm specialized in logistics, transportation, and supply chain management. Typical fourth-party logistics providers are SCMO, CPCS, BMT,
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Deloitte, LOC, Capgemini, 3t Europe, Morpheus, GL Noble Denton, Brookes Bell, T&MC,[dead link] Global Maritime, AMA - Andrew Moore & Associates, and Accenture.
As the 4PL industry is still in its infancy and currently being created throughout the world (Blue Ocean Strategy), its definition and function still leads to a lot of confusion, even for professionals of the transportation industry.
The term 4PL is generally considered to have been introduced by Accenture, which registered it as a trademark in 1996. Accenture described the 4PL as an "integrator that assembles the resources, capabilities, and technology of its own organization and other organizations to design, supply chain solutions".[1]
The trademark was later abandoned, and the term has become a part of the public domain.
Definition
A fourth-party logistics provider is an independent, singularly accountable, non-asset based integrator of a client's supply and demand chains
Examples of 4PL
The best examples of fourth-part logistics providers are "non-asset based" consulting firms exclusively specialized in logistics, transportation, and supply chain management such as SCMO,[5] BMT Limited,[6] MVA Consulting, TTR, Intermodality, CPCS, and 3t-Europe, which offer complete ranges of services, from strategy to implementation.
Others are more generalist consulting firms such as the Big Four auditors,[7] respectively Deloitte, PricewaterhouseCoopers, Capgemini, Ernst & Young, and KPMG, as well as Accenture, Arup, Atkins (company), Mott MacDonald, Parsons Brinckerhoff, and AECOM.
Other firms such as McKinsey & Company, Bain & Company, A.T. Kearney, the Boston Consulting Group, and Booz & Company, may also play the role of 4PL with a different value proposition, and are considered to be "pure strategy" firms only.
3PL vs. 4PL
A 4PL is a consultant, and cannot be an operator.[9] This is to respect the principle of neutrality.
A 3PL is an operator, which specializes in integrated operation, warehousing and transportation services. These services may be 100% outsourced, as in the case of "non-asset based 3PL". It is then a pure 3PL. It may also own part of its operations, such as warehouses, vans, or trucks. It then is both a 3PL and a 2PL, but is usually still called a 3PL. It can also offer genuine supply chain consulting services outside of its usual range of services. It is then both a 3PL and a 4PL, but is usually still called a 3PL.
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It is important to differentiate 3PL, which actually deliver supply chain consulting services outside of their usual range of integrated operations, from 3PL which use the term consulting or 4PL abusively, as a marketing tool only. Some 3PL currently go as far as giving a title of consultant to their sales people, who are only selling their classical 3PL services. These are clearly 3PL only.
In other cases, 2PL logistics operators, or 3PL with advanced logistics and information technology capabilities may call themselves 4PL, or a mix of 3PL/4PL. Their capabilities are so advanced in logistics, wms, and/or communication that they effectively need to customize their operations for each new customer, which requires a lot intellectual capital, similar to the 4PL. Nevertheless, their ownership of logistics assets contradicts the 4PL status, and leads to conflict of interest for real consultancy. They may be called "advanced logistics 2PL/3PL" or "total logistics 2PL/3PL".
Example of "advanced logistics 3PL"
There are more and more such "advanced logistics 3PL" or "total logistics 3PL" on the market. It is mostly because logistics services stabilize customers longer than the simple delivery of freight services.
While the list of "advanced logistics 3PL" ranges in the thousands, some of the most famous in the market are DHL, Kuehne + Nagel,[10] Schenker, Panalpina, UPS,[11] 4PL, Theodore Wille Intertrade (TWI), Rollins 3PL, WS Logistics, Procurus, JSI Logistics,[9] C.H. Robinson Worldwide, Nissin UK LTD,[12], Geodis and Corporate Traffic.,[13]
Cross-docking
Cross-docking is a practice in logistics of unloading materials from an incoming semi-trailer truck or railroad car and loading these materials directly into outbound trucks, trailers, or rail cars, with little or no storage in between. This may be done to change type of conveyance, to sort material intended for different destinations, or to combine material from different origins into transport vehicles (or containers) with the same, or similar destination.
Cross-Dock operations were first pioneered in the US trucking industry in the 1930s, and have been in continuous use in LTL (less than truckload) operations ever since. The US Military began utilizing cross-dock operations in the 1950s. Wal-Mart began utilizing cross-docking in the retail sector in the late 1980s.
In the LTL trucking industry, cross-docking is done by moving cargo from one transport vehicle directly into another, with minimal or no warehousing. In retail practice, cross-docking operations may utilize
staging areas where inbound materials are sorted, consolidated, and stored until the outbound shipment is complete and ready to ship.
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Types of Crossdocking1. Preallocated supplier consolidation2. Preallocated crossdocking operator (CDO) consolidation3. Postallocated CDO consolidationPreallocated: Destination is determined at the supplierPostallocated: Destination is determined at the crossdock facilitySupplier consolidation: The supplier builds the final (possibly multi SKU) pallets that will be shipped to
the final destinations. CDO consolidation: The final pallets are built by the CDO at the crossdock facility
Advantages of Retail Cross-Docking
Streamlines the supply chain from point of origin to point of sale Reduces handling costs, operating costs, and the storage of inventory
Products get to the distributor and consequently to the customer faster
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Reduces, or eliminates warehousing costs
May increase available retail sales space
Disadvantages of Cross-Docking
Potential partners don't have necessary storage-capacities or an adequate transport fleet to operate Cross-Docking
Need of adequate IT-Systems
Possibility of violation of secrecy
Typical applications
"Hub and spoke" arrangements, where materials are brought in to one central location and then sorted for delivery to a variety of destinations
Consolidation arrangements, where a variety of smaller shipments are combined into one larger shipment for economy of transport
Deconsolidation arrangements, where large shipments (e.g. railcar lots) are broken down into smaller lots for ease of delivery.
Retail cross-dock example: Using the cross-dock technique, Wal-Mart was able to effectively leverage their logistical volume into a core strategic competency.
Wal Mart operates an extensive satellite network of distribution centers serviced by company owned trucks
Wal Mart’s satellite network sends point of sale (POS) data directly to 4,000 vendors.
Each register is directly connected to a satellite system sending sales information to Wal Mart’s headquarters and distribution centers.
Factors influencing the use of retail crossdocks
Cross-docking is dependent on continuous communication between suppliers, distribution centers, and all points of sale.
Customer and supplier geography—particularly when a single corporate customer has many multiple branches or using points
Freight costs for the commodities being transported
Cost of inventory in transit
Complexity of loads
Handling methods
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Logistics software integration between supplier(s), vendor, and shipper
Tracking of inventory in transit
Crossdock facility design
Cross-docks in practice are generally designed in an "I" configuration, which is an elongated rectangle. The goal in using this shape is to maximize the number of inbound and outbound doors that can be added to the facility while the amount of floor space inside the facility to a minimum. In 2004, Bartholdi &Gue demonstrated that this shape is indeed ideal for facilities with 150 doors or less. For facilities with 150-200 doors a "T" shape is more cost effective. Finally, for facilities with 200 or more doors the cost minimizing shape will be an "X".[1]
Conclusion
It is recommended that joint usage of SCM and 3PL should be promoted because of their positive interactive effects. when firms are intent on introducing SCM, it would be beneficial to outsource logistics activities and utilize a 3PL provider or a 4Pl provider accordingly .
References
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12. ̂ Selecting a Third Party Logistics (3PL) Provider Martin Murray, about.com
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