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Citation preview
“FACTORS WHICH ENHANCE CUSTOMER VALUE IN SUPPLY
CHAIN & LOGISTICS.”
Under The Guidance Of: Submitted By:
Dr. A Nag Surbhi Khirbat Roll No: 06-S1-142
IN PARTIAL FULFILLMENT OF POST GRADUATE DIPLOMA IN MANAGEMENT
(2006-2008)
INSTITUTE OF MARKETING & MANAGEMENT
NEW DELHI
STUDENT UNDERTAKING
This work is originally done by me and not copied from other reports.
Based on my knowledge, data and information collected during my thesis
work, I have prepared this report and I believe it is true and up to the best
of my knowledge.
Surbhi Khirbat
06-S1-142
2
CONTENTS
S. NO TOPIC NAME PAGE NO
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3.
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5.
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14.
EXECUTIVE SUMMARY
INTRODUCTION
LITERATURE REVIEW
CORPORATE OBSERVATIONS
RESEARCH OBJECTIVE
RESEARCH METHODOLOGY
CUSTOMER SERVICE MANAGEMENT
DATA ANALYSIS
FINDINGS
RECOMMENDATIONS
LIMITATIONS
CONCLUSION
BIBLIOGRAPHY
APPENDIX QUESTIONNAIRE
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5
14
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146
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153
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157
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EXECUTIVE SUMMARY
Today India is fast emerging as an economic super power. Advances in
technology infrastructural development and its vast resources have placed
it in the global arena of growth. The import/export activities have surged
to greater heights. So in the present scenario we cannot ignore the
importance of shipping companies and the logistics companies who are
providing transportation facilities to increase the imports and exports of
country and directly contributing in development of country. Logistics
involves a wide set of activities dedicated to the transformation and
distribution of goods, from raw material sourcing to final market
distribution as well as the related information flows. Supply chain
management is here. It is not about shipping orders; it is not about
making product then pushing it out the door. Supply chain management is
about developing a process to respond to the different requirements of
each customer. Customers are driving suppliers' practices. Being
successful requires logistics effectiveness. Customers, competitors and
vendors are global. This is an exciting challenge and opportunity for
companies who see the potential and make it happen.
5
So we see that logistic provider company plays an important role in
efficient working of supply chain for any company. The report tells about
the importance of third party logistics provider in Supply Chain.
Study of business logistics and supply chain management illustrates how
supply chain collaboration can create an enabling environment, within
which service levels will enhance customer value, whilst shareholder
value will also increase.
The Thesis involved the study of “factors which enhance customer value
in the logistics & supply chain.” The project was carried out by taking
appointment from third party operators and meeting them personally and
if not able to get appointment then asking question from them through
telephone.
Survey was carried out through the help of Questionnaire, which is the
primary source of data collection and also secondary data was collected
from articles and www.
All the analysis and findings on the basis of questionnaire and secondary
data are available in the report. The project report is being concluded by
conclusion, recommendations and limitations on the basis of learning and
analysis, which I experienced during my Thesis.
6
In the end annexure is given where sample questionnaire is attached.
Bibliography is also given which shows from where I have taken
reference while preparing my project report.
7
INTRODUCTION
A production supply chain refers to the flow of physical goods and
associated information from the source to the consumer. Key supply
chain activities include production planning, purchasing, materials
management, distribution, customer service, and sales forecasting. These
processes are critical to the success of any operation whether they’re
manufacturers, wholesalers, or service providers.
If you are not in a company being impacted right now by Supply Chain
Management or by Continuous Replenishment and do not think that
Supply Chain Management affects you, then you are wrong. If it does not
impact you now, it will. The concept is appearing in various industries
and is moving to smaller companies. Start to understand what it is, and
what it means to you. Supply Chain Management is a dynamic paradigm
driving through companies. Articles on supply chain management appear
in many different publications, national and international, with different
target audience. While many of the stories relate to large companies who
supply large retailers or grocers, the attention SCM is getting is
phenomenal. Add in the global impact of customers, competitors and
suppliers; and the magnitude of the supply chain is very significant.
9
What It Is All About. Supply Chain Management is a reverse of prior
practices where manufacturers supplied product to customers and they
wanted to. Now customers tell suppliers how and when they want their
inventory delivered. The driver behind Supply Chain Management is to
remove inefficiencies, excess costs and excess inventories from the
supply pipeline which extends from the customer back through his
suppliers and through his suppliers' suppliers and so on back. By having
the program driven by the customer, it is hoped that inventories, caused
by uncertainties and slow response, will be significantly eliminated.
While there are sales incentives to major suppliers with the carrot of
category management or similar programs, the success of supply chain
management rests with logistics.
The Five Key Issues of Logistics Effectiveness are core to Supply Chain
Management--
• Movement of Product
• Movement of Information
• Time / Service
• Cost
• Integration, both internal and external, both organizations and
systems
10
Supply chain management requires a logistics model based on quick
order to delivery response. A model which focuses from vendors' doors
through to delivery to customers' doors. The model must meet the
customers' demanding and specific requirements. It requires
organizational flexibility and responsiveness, internal and external
teamwork and demands the use of processes and technology. A common
practice which causes inefficiencies, excess inventories and high costs is
forward-buying. On the surface, it looked like a way to purchase at a low
price. But in reality, this practice is inefficient and results in additional,
higher costs and negative impact throughout the supply chain. Forward-
buying strains the capabilities of suppliers to respond and for the
distribution department of customers to handle the products. It creates an
operational and cost inefficiency for both supplier and customer. By
forcing excess sales through the supply chain, then the hidden costs of
manufacturing and distribution valleys, after the huge peak caused by the
forward-buy can be significant. Supply Chain Management is about what
the customer demands. It is not about what the supplier is capable of
doing at present.
11
The customer requirements may vary by customer, but they do have
certain consistencies to logistics--
• Quick response to orders from order receipt through shipment to
invoicing
• Complete and accurate orders / no backorders
• Delivery windows or appointments
• Special shipment preparation as to packaging, marking, labeling,
stenciling, slip sheets or pallets, etc.
• Bar coding
• EDI
• Carrier selection
Effects of Supply Chain Management: The initial benefits of supply chain
management accrue to the customer, the initiator of his supply chain. He
earns the reduction in inventories by driving out excesses inventories
which he must purchase, store and be responsible for. The impact of
supply chain management to the supplier may be more difficult to
classify, initially, as benefits. They may vary, but may include:-
• Fewer orders initially while the customer draws down excess
inventories.
• Small and more frequent orders.
12
• Vendor carries inventory, not the customer.
• Higher warehousing costs for picking smaller and more orders.
• Higher freight costs for shipping smaller order and more orders.
• Penalties for not meeting the customer's requirements.
• Possible loss of business for not meeting the customer's
requirements.
• Additional capital expenditure to satisfy the need for information
and technology to provide the base for SCM responsiveness.
Supply chain management success dictates new ways of doing
business for suppliers. There is no "standard" practice; no
"standard" way of doing business. Instead, there is a practice for
each customer.
If a company has one hundred customers, he may have one
hundred customer practices. Adjusting this way challenges
traditional management concepts.
Impediments: There are impediments to supply chain success.
Emphasis is presently on the initial customer-supplier link. It is not
coordinated through the supply chain. Instead as the effects ripple
through the supply chain, it is more like a "whisper down the lane"
impact, where suppliers are not clear as to their role and what they
13
must do. Responding to supply chain demands is not easy. There
are issues which must be recognized and dealt with, such as--
• Accounting Silos- Supply chain management is a leading-edge
technique. Yet the traditional cost measurements used by
companies goes back to the Model A. Meeting Generally Accepted
Accounting Principles is one thing; measuring the costs and
benefits of logistics and supply chain management is something
quite different.
• Logistics has a difficulty with having its costs properly identified,
captured and measured properly. Some costs, such as freight, show
on the P&L. Some, such as inventory, show on the balance sheet.
And the driver to supply chain management, service, does not
appear on any financial document. As a result, suppliers may have
difficult seeing the cause-effect of supply chain management to
them and the gain-sharing benefits as you progress with it.
Activity-Based Costing is the closest approach to measuring the
effects of supply chain management on an organization. With
ABC, you can develop cost information based on the activities
required to the logistics service.
• Functional Silos- Supply chain management is a process which
requires integrated teamwork. Its goal is customer order-response-
14
satisfaction. Yet traditional organizations, with their
responsibilities and goals, may not be teamwork enhancers. Each
function may have its own internal goals which run counter to
effective logistics performance necessary for supply chain
management success. Look at the underlying driver of supply chain
management, the customer. In developing a tailored process to
meet the needs of each customer, who is responsible for it? Sales--
after all, it is one of their customers.
Logistics, since they are on the front-line for making supply chain
management work? Manufacturing who must be able to adapt to
the dynamics of point-of-sale or other production drivers? Or
consider that the company uses tools such as MRP to drive its
production planning; yet supply chain management is a pull, not a
push approach. How does this shift in a company's practice be
absorbed? Who is responsible then for a company's supply chain
management? The answer is everyone in the company is
responsible; yet the organization has often dictated that one group
be responsible.
• Reactionary Practices- Since supply chain management is a process
it takes time, focus and discipline to make the necessary changes to
the way a company does business. It is not reacting to an order; it is
15
responding to a customer. "Fighting fires" and other reacting
events are anti-process and, while it seems like it is customer-
focused, it is not. Instead reacting to crises and other emergencies
keeps a company for doing what must be done to implement the
needed process for supply chain management. At the end of day of
crises, the company is often no closer to implementing the
necessary integrated process.
• Tactical versus Strategic Role for Logistics- Supply chain success
depends upon logistics. To develop the necessary programs for
supply chain management, the logistics organization must be
involved in the planning activity from the beginning. Other groups
cannot meet without logistics, decide what logistics must do, give
logistics orders and think there will be supply chain success. If that
approach is used, then the likelihood of meeting the customer
requirements and implementing the technology and teamwork
needed, will not be there.
• Unclear Mission- Supply chain management requires a rethinking
of the company and the logistics mission. Is it customer or is it
cost? These can be conflicting goals. Saying the mission is service,
and then measuring it by cost can cause organizations to lose focus
on what must be done. Supply chain management is a new concept
16
and requires a reassessment of what the company is doing, where it
is going and how it wants to get there.
17
LITERATURE REVIEW
The planning, scheduling and control of the supply chain, which is the
sequence of organizations and functions that mine, make or assemble
materials and products from manufacturer to wholesaler to retailer to
consumer. The driving force behind supply chain management (SCM) is
to reduce inventory
Supply chain success just doesn't happen. It takes focus and effort across
the entire company organization and with outside suppliers and service
providers. Logistics touches every part of a company. So supply chain
management must be multidimensional in its approach and scope. And
this takes process, people and technology. This is true whether you are a
wholesaler, retailer or manufacturer. And it is true if you are lean and
need to be agile, flexible and collaborative. Supply chains can be long
and complex, stretching between different countries. A firm may have
many customers, each with different order and shipment requirements
and destinations. There can be many suppliers, sourced from different
cities and many countries. Each supplier may require instructions and
planning as to lead times. There are internal needs too. These include
where warehouses should be located, both in the U.S. and internationally;
how inventory is forecast and allocated to each warehouse; how orders
19
are handled and shipments prepared and how production is assigned
among plants and suppliers.
PROCESS: Process means a practice, a series of actions, done for a
specific purpose, such as satisfying customers. Customers demand and
expect more from their suppliers; that is a fact regardless your size or
industry. And supply chain management is critical to that customer
satisfaction. Supply chain process is a flow of activities with the goal of
meeting the requirements of a customer. It includes all internal functions,
logistics, distribution, sourcing, customer service, sales, manufacturing
and accounting. It includes external companies. The series flows
backward--from delivering each customer order each order as demanded
back through the performance of suppliers to provide needed finished
products, components, parts and assemblies. Process has structure. This
compares what some companies call "process" which may be a series of
repetitive, standalone transactions. Process has standardization with its
understanding of what must be done. With that in place, it also has
flexibility to handle exceptions and changes that are a reality of doing
business.
PEOPLE : People make organizations and are important to supply chain
success. They need to have functional expertise and skills. They need to
20
know how to manage and operate warehouses, inventory, transportation,
purchasing. They need both a tactical view for everyday business and a
strategic vision of where and how their function fits in the supply chain
and how to make it better. People success is a function also of the
corporate culture, how the company sees itself, defines itself and
operates, both internally and externally. The culture can be a facilitator of
processes or an inhibitor. If the company has myopia, then it negatively
impacts its ability to respond in all areas required.
Similarly, organizations, with their hierarchical design, create barriers to
supply chain process, which is horizontal. Organization silos can short
circuit the supply chain process. Each silo can have its internal goals that
can work cross-functionally to the process. Even though the focus of the
supply chain process is the customer, merchandising, logistics, finance
and others may work to optimize their role, but which may sub optimize
the process.
TECHNOLOGY : Supply chain management is sometimes define, or
incorrectly defined, in terms of technology. Process can be defined as
technology, with an overemphasis on hardware and software, and not on
the purpose of the process. Software may be "sold" as the answer, the
means, to supply chain nirvana. That can lead to an over expectation by
21
the user, which in turn can lead to disillusion with what is required to set
up and operate the system and with the results actually achieved.
AN EXAMPLE WITH SUPPLIER MANAGEMENT: Every
company has a position in Supplier Management. You are dealing with
suppliers and/or you are a supplier. This is a vital part of the total supply
chain. And it must be aligned with the goal of meeting customer
requirements. Supply chain visibility is a desired means to supply chain
effectiveness. And that visibility need may be greatest with the inbound
part of the supply chain. This part of the total supply chain is very
complex and involves a significant financial obligation. Many purchase
orders with many supplier shipping diverse products from multiple plants
and warehouses, both from the U.S. and various countries and ports or
airports can be a significant management challenge. Add in different
cultures, time zones and business practices the visibility need with a
global supply chain can be daunting. And the pressures in supplier
performance are great for all, wholesalers, manufacturers, retailers and
suppliers. Supplier management as part of inbound supply chain requires
process, people and technology. It demands a process, not a series of
purchase order transactions. It requires people with vision and skills to
manage the complexity and to build the collaboration and deal with the
flexibility needed as sales and other events change the purchasing
22
demands. The people need to be linked. It requires technology to gain the
needed visibility of purchase orders, suppliers and transportation of what
is going on and to use event management and exception management to
deal with all the vagaries that can occur.
23
SUPPLY CHAIN ACTIVITIES
Supply chain management is a cross-functional approach to manage the
movement of raw materials into an organization, certain aspects of the
internal processing of materials into finished goods, and then the
movement of finished goods out of the organization toward the end-
consumer. As organizations strive to focus on core competencies and
becoming more flexible, they have reduced their ownership of raw
materials sources and distribution channels. These functions are
increasingly being outsourced to other entities that can perform the
activities better or more cost effectively. The effect is to increase the
number of organizations involved in satisfying customer demand, while
reducing management control of daily logistics operations. Less control
and more supply chain partners led to the creation of supply chain
management concepts. The purpose of supply chain management is to
improve trust and collaboration among supply chain partners, thus
improving inventory visibility and improving inventory velocity.
Several models have been proposed for understanding the activities
required to manage material movements across organizational and
functional boundaries. SCOR is a supply chain management model
promoted by the Supply Chain Management Council. Another model is
the SCM Model proposed by the Global Supply Chain Forum (GSCF).
24
Supply chain activities can be grouped into strategic, tactical, and
operational levels of activities.
Strategic:
Strategic network optimization, including the number, location,
and size of warehouses, distribution centers and facilities.
[[Strategic partnership] with suppliers, distributors, and customers,
creating communication channels for critical information and
operational improvements such as cross docking, direct shipping,
and third-party logistics.
Product design coordination, so that new and existing products can
be optimally integrated into the supply chain, load management
Information Technology infrastructure, to support supply chain
operations.
Where-to-make and what-to-make-or-buy decisions
Aligning overall organizational strategy with supply strategy.
Tactical:
Sourcing contracts and other purchasing decisions.
Production decisions, including contracting, scheduling, and
planning process definition.
Inventory decisions, including quantity, location, and quality of
inventory.
25
Transportation strategy, including frequency, routes, and
contracting.
Benchmarking of all operations against competitors and
implementation of best practices throughout the enterprise.
Milestone payments
Focus on customer demand.
Operational:
Daily production and distribution planning, including all nodes in
the supply chain.
Production scheduling for each manufacturing facility in the supply
chain (minute by minute).
Demand planning and forecasting, coordinating the demand
forecast of all customers and sharing the forecast with all suppliers.
Sourcing planning, including current inventory and forecast
demand, in collaboration with all suppliers.
Inbound operations, including transportation from suppliers and
receiving inventory.
Production operations, including the consumption of materials and
flow of finished goods.
Outbound operations, including all fulfillment activities and
transportation to customers.
26
Order promising, accounting for all constraints in the supply chain,
including all suppliers, manufacturing facilities, distribution
centers, and other customers.
27
OUTSOURCING SUPPLY CHAIN MANAGEMENT-8 ISSUES
Outsourcing is done for various reasons. The driver can be generating
cost reductions and downsizing; this has been a traditional reason for
outsourcing. But there are others, such as gaining capabilities that are not
available internally, implementing lean programs, streamlining
operations, strategically positioning the company, or improving or adding
capabilities to gain competitive advantage. Regardless of the reason,
outsourcing succeeds when it is well thought out and done properly.
Some key points to identify for all parties involved in outsourcing
are:
*Know and Define Reason for Outsourcing: This may seem obvious,
but it can be tricky. What do you want to accomplish and why? What is it
that you want to do better? What would it take to do it and do it well
inside the company? Why is that option not viable?
For example, the reason may be to reduce freight costs. But freight cost
can be a problem, with high rates or the carriers used or the methods
selected. Or, freight can be a symptom of a problem from use of high cost
shipping methods because of forecasting, inventory or supplier problems.
In these situations, high freight cost is a derivative of another problem. If
29
the real cause of freight is not identified, then the outsourcing will not be
successful, or at least as successful as it could be because the reason for
the outsourcing has not been properly identified.
Freight also has a service factor, whether it is moving inventory from
suppliers, between company operations or to customers. That has to be
understood in order to evaluate the freight cost problem and needs. What
are you buying for transportation? What are you paying? Why are you
dissatisfied? What do you require?
Similar comments can be made about outsourcing to manage inventory.
The problem may seem to be too much inventory or out-of-stock
situations. But the inventory problem could be the result of a larger
problem as to sales forecasting reliability, supplier performance in
delivering purchase orders timely and correctly. It could be a need for
systems or systems integration to provide visibility of all inventories in
the supply chain, whether at warehouses or purchase orders at suppliers
or in-transit.
*Evaluate Outsourcing Business Process versus Function: Knowing
what is being outsourced and why it is being outsourced then drives the
type of logistics service providers to be considered. The reason for
30
outsourcing may also direct whether you are looking to outsource a
function or a process. Outsourcing management of inbound transportation
takes a function and transfers it to an outside party. Outsourcing the
management on the inbound supply chain, including supplier purchase
orders, supplier performance and transportation takes a process and
transfers it to an outside provider.
Outsourcing a function versus a process can change the type of service
provider that should be evaluated. A 3PL is often used with functions,
such as inbound transportation and related activities. Managing a function
requires depth of skills sets from the service provider. A 4PL may be the
better choice with managing a process, which requires breadth of logistics
skill sets.
The point is that outsourcing to optimize a function, without fully
understanding the process, problem and need, can sub optimize the
supply chain effectiveness and costs. Outsourcing may fail, but not for
the right reason. The need was not clearly understood; so the outsourcing
solution was not properly identified. The functional issue overrode the
process; so the proper logistics service provider was not identified and
selected. Of the eight issues, this may be the key one, process versus
function, because without this the outsourcing selection may be skewed,
if not flawed.
31
Also determine if the outsourcing and the desired results require
collaboration with any of the company trading partners. This is important
to defining the needs, identifying partners and designing the needed
program.
*Recognize Seller and Buyer Roles: Each party has a reason to be
involved in the outsourcing action. And they bring different confidences
and expectations into the effort. The company selling its outsource
service wants the business for his reasons. He may want the volume to
build his own leveraging position with the transport carriers or others he
deals with. He may want the volume to increase the throughput and
reduce costs at warehouses or other operations. The point is that the
Seller may be focused on his needs and not focused on the Buyer's needs.
He may not listen to the potential buyer's requirements and instead
present his capabilities as a stand-alone instead of how it meets the
Buyer's requirements. Understanding and satisfying the Buyer's unique
and complete needs can become subordinate to "getting the business".
Also see if the Seller views you as a "client" or as a "customer".
Outsource providers who see the potential buyer as a client will recognize
the unique needs and develop, tailor and manage the relationship
accordingly. Those providers who view a prospective buyer as a
32
"customer" may not pay the attention to the business if and once they
have gained it. A customer is one of many customers; he is not unique.
Laying out a list of "customers" utilizing the service provider is not a
critical as his demonstrating how that provider will manage the client's
needs, both today and as they may change. Such a provider is proactive,
not reactive. Client management differentiates successful outsource
service providers, for both gaining and retaining business.
Also, the company, more exactly, the persons, seeking to outsource can
be very emotional; that should not be underestimated. And the effort can
be in a more in a difficult situation. They may be under internal pressures
that make them feel they are under attack. As a result, they may not be as
open and receptive to the effort as they should be. They may close
themselves off to what the company's seeking the business are offering to
do.
As a result, either or both parties may be talking "at" each other instead of
"with" each other. The result of such communication can lead to bad
decisions by either or by both parties.
*Detail Your Operation. Clearly specify in writing what is done, by
whom, how it done, when and why. Highlight both the strengths and its
weaknesses. Show and understand interfaces between departments and
33
how duties and work is handed off between them. Understand "hidden",
peripheral and "assumed" work that is done and that is beyond the job
descriptions and department purpose and responsibilities that outsiders
may not know about. Define critical points in the function or process.
The function or process should be mapped. Supply chain management
crosses organizational lines; mapping will delineate the cross-functional
roles and interfaces. It will also show gaps or redundancies that may
exist. These gaps or redundancies may highlight key areas for the 3PL or
4PL that are critical for success.
Detail the cost of the operation. What are the components, direct and
indirect, such as labour, space, freight and other? Recognize any
disconnect with some costs, such as transport costs and inventory, in the
financial system. Freight is on the monthly profit and loss; inventory is a
balance sheet item. Yet there is often a cause-effect, a connection,
between them even if it is not readily reflected in the accounting system.
*Set Metrics/Key Performance Indicators and Accountability: The
outsourcing is being done for a specific reason with anticipated results.
Define those expectations clearly. The planned results should be tangible.
The results should be measurable. "Reducing costs", "improving supplier
34
performance" or similar goals are vague and can lead to disputes during
the contract on whether the outsourcing is successful.
The anticipated results should be clearly set early in discussions as part of
the expectations. The Seller needs to know these to see the realities of
accomplishing them, given the requirements and how and when it will be
done.
Benchmark key costs and performance. The two are tied. Even if the
purpose is a cost reduction or service improvement; benchmark both for
the sake of the outsource arrangement and relationship. However do not
develop measure for the sake of measures and do not develop too many
measures. Focus on the key metrics and performance indicators that relate
to outsourcing success.
With insights into the present operation and performance, then mutual
agreement can be established on the results during an agreed time period.
That clearly sets the framework and standard for evaluation of the
outsourcer.
Does the program include incentives, for results beyond the baseline
goals? Then drill down into the costs and results for an understanding of
cause-effects. The mapping work will be of great aid for developing the
changes needed for incentives results.
35
Accountability and responsibility should be understood too, from and for
both parties. Supply chain management has multiple areas of
responsibility and accountability; it is a complex, multifunction process
that spans states and continents. It runs from suppliers’ right through to
customers. The impact of each function on the total process cannot be
overlooked nor assumed away. Key points of decision-making should be
identified.
Problems will occur; successful, quick resolution involves knowing who
is responsible. A single person should be deemed accountable for both
parties. The time to identify and define responsibilities and metrics is
early in the process, before any contract is signed.
*Be Aware of Risks. Outsourcing is change management: It may very
well be business process reengineering. There is no guarantee that the
outsourcing will succeed. "The best-laid plans o' mice an' men gang aft a-
gley, an' lea'e us nought but grief an' pain for promised joy. '', quoting
Robert Burns. Anticipate the various scenarios and the internal and
external factors that can impact the program and results. There are
planned benefits.
36
But, perhaps more importantly, there are potential downsides from the
outsourcing. Be aware of them. No rose-colored glasses are allowed
during the outsource evaluation. Do a risk assessment. Identify real and
perceived risks. Work to mitigate risks. There will likely be a contract;
that is a commitment to the program. Consider contract length as an
option in risk mitigation.
Think through the "what ifs." What if goals are not attained? What if
there are service problems that seriously impact the company as to
customer deliveries or with purchase orders from suppliers? What if there
are inventory difficulties, either stock outs or surges in levels? What if
there are unanticipated, significant cost increases? What options will
there be then?
With outsourcing, there is transference of company knowledge, practices
and resources. If the outsourcing, for whatever reason, is not working,
how do you fix it quickly and well? What if it cannot be remedied? Do
you terminate the agreement and find another service provider? If so, how
do you do it? How do you transfer from one provider to another? How do
you regroup and bring the outsourced service back inside? Can you bring
it back? There may be no calamities with the outsourcing. But recognize
that there could be.
37
*Plan the Change: Outsourcing is not like turning on a light. All parties
should plan the migration. Do not depend on the contract to make the
outsourcing work. There are major tasks to plan and mundane ones that
should be considered. Recognize the outsourcing means that people and
departments in the company are giving up ownership of the function or
process. Build teams among all affected parties and have the teams meet
to detail what must be done. Develop the plan and time lines. Plan tests.
Identify any opposition and how to overcome it. Build the relationship
during the planning phase, before the change is made.
Understand any customization and reengineering that will be made and
how it will be developed and implemented. Look at interfaces and
handoffs of work or information between, within and among the
company, the service provider and trading partners. Provide training.
Make sure that people and systems are ready. Ignore no detail or task.
*Manage the Outsource Operation: Do not assume the contract will
manage the logistics service provider and operation. Use the key
performance indicators continuously. Meet regularly, especially during
the implementation, to review progress, problems and successes. Test
accountability. Assess the relationship.
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1. The Nature of Logistics
The growing flows of freight have been a fundamental component of
contemporary changes in economic systems at the global, regional and
local scales. These changes are not merely quantitative (more freight), but
structural and operational. Structural changes mainly involve
manufacturing systems with their geography of production, while
operational changes mainly concern freight transportation with its
geography of distribution. As such, the fundamental question does not
necessarily reside in the nature, origins and destinations of freight
movements, but how this freight is moving. New modes of production
are concomitant with new modes of distribution, which brings forward
the realm of logistics; the science of physical distribution.
Logistics involves a wide set of activities dedicated to the transformation
and distribution of goods, from raw material sourcing to final market
distribution as well as the related information flows. Derived from Greek
logistikos (to reason logically), the word is polymeric. In the Nineteenth
century the military referred to it as the art of combining all means of
transport, revictualling and sheltering of troops. Today it refers to the set
of operations required for goods to be made available on markets or to
specific destinations.
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Logistics is thus a multidimensional value added activity including
production, location, time and control of the supply chain. Activities
comprising logistics include physical distribution; the derived transport
segment, and materials management; the induced transport segment.
Physical distribution is the collective term for the range of activities
involved in the movement of goods from points of production to final
points of sale and consumption. It must insure that the mobility
requirements of supply chains are entirely met. Physical distribution
includes all the functions of movement and handling of goods,
particularly transportation services (trucking, freight rail, air freight,
inland waterways, marine shipping, and pipelines), transhipment and
warehousing services (e.g. consignment, storage, inventory management),
trade, wholesale and, in principle, retail. Conventionally, all these
activities are assumed to be derived from materials management
demands.
Materials management considers all the activities related in the
manufacturing of commodities in all their stages of production along a
supply chain. It includes production and marketing activities such as
production planning, demand forecasting, purchasing and inventory
management. Materials management must insure that the requirements of
40
supply chains are met by dealing with a wide array of parts for assembly
and raw materials, including packaging (for transport and retailing) and,
ultimately, recycling discarded commodities. All these activities are
assumed to be inducing physical distribution demands.
The close integration of physical distribution and materials management
through logistics is blurring the reciprocal relationship between the
induced transport demand function of physical distribution and the
derived demand function of materials management. This implies that
distribution, as always, is derived from materials management activities
(namely production), but also, that these activities are coordinated within
distribution capabilities. The functions of production, distribution and
consumption are difficult to consider separately, thus recognizing the
integrated transport demand role of logistics.
2. Distribution Systems
The nature and efficiency of distribution systems is strongly related to the
nature of the economy in which they operate. In economies dependent on
the extraction of raw materials, logistical costs are comparatively higher
than for service economies since transport costs account for a larger share
of the total added value of goods. Contemporary logistics was originally
dedicated to the automation of production processes, in order to organize
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manufacturing as efficiently as possible, with the least cost-intensive
combination of production factors. A milestone that marked rapid
changes in the entire distribution system was the invention of the concept
of lean management, primarily in manufacturing. One of the main
premises of lean management is eliminating inventories and organizing
materials supply strictly on demand, replacing the former storage and
stock keeping of inventory. The outcome is a specialization of production
and a greater variety of products.
In a broader sense distribution systems are embedded in a changing
macro- and microeconomic framework, which can be roughly
characterized by the terms of flexibility and globalization:
Flexibility implies a highly differentiated, strongly market- and
customer-driven mode of creating added-value. Contemporary production
and distribution is no longer subject to single-firm activity, but
increasingly practiced in networks of suppliers and subcontractors. The
supply chain bundles together all this by information, communication,
cooperation, and, last but not least, by physical distribution.
Globalization means that the spatial frame for the entire economy has
been expanded, implying the spatial expansion of the economy, more
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complex global economic integration, and an intricate network of global
flows and hubs.
The flow-oriented mode affects almost every single activity within the
entire process of value creation. The core component of materials
management is the supply chain, the time- and space-related arrangement
of the whole goods flow between supply, manufacturing, distribution and
consumption. Its major parts are the supplier, the producer, the distributor
(e.g. a wholesaler, a freight forwarder, a carrier), the retailer, the end
consumer, all of whom represent particular interests. Compared with
traditional freight transport systems, the evolution of supply chain
management and the emergence of the logistics industry are mainly
characterized by four features:
A fundamental restructuring of goods merchandised by establishing
integrated supply chains with integrated freight transport demand.
Whereas transport was traditionally regarded as a tool for overcoming
space, logistics is concerned with reducing time. This was achieved by
shifts towards vertical integration, namely subcontracting and
outsourcing, including the logistical function itself.
According to macro-economic changes, demand-side oriented activities
are becoming predominant. While traditional delivery was primarily
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managed by the supply side, current supply chains are increasingly
managed by demand.
Logistics services are becoming complex and time-sensitive to the point
that many firms are now sub-contracting parts of their supply chain
management to what can be called third-party logistics providers
(3PL). A 3PL is an asset based company that offers logistics and supply
chain management services to its customers (manufacturers and retailers).
It commonly owns distribution centres and transport modes. More
recently, a new category of providers, called fourth-party logistics
providers (4PL) have emerged. A 4PL integrates the resources of
producers, retailers and third-party logistics providers in view to build a
system-wide improvement in supply chain management. They are non-
asset based meaning that they mainly provide organizational expertise.
3PL and 4PL providers benefit from economies of scale and scope by
offering integrated solutions to many freight distribution problems.
3. Geography of Freight Distribution
Logistics has a distinct geographical dimension, which is expressed in
terms of flows, nodes and networks within the supply chain. Space /
time convergence, a well known concept in transport geography where
time was simply considered as the amount of space that could be traded
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with a specific amount of time, including travel and transhipment, is
being transformed by logistics. Activities that were not previously
considered fully in space / time relationships, such as distribution, are
being integrated. This implies an organization and synchronization of
flows through nodes and network strategies:
Flows: The traditional arrangement of goods flow included the
processing of raw materials to manufacturers, with a storage function
usually acting as a buffer. The flow continued via wholesaler and/or
shipper to retailer, ending at the final customer. Delays were very
common on all segments of this chain and accumulated as inventories in
warehouses. There was a limited flow of information from the consumer
to the supply chain, implying the producers were not well informed (often
involving a time lag) about the extent of consumption of their outputs.
This procedure is now changing, mainly by eliminating one or more of
the costly operations in the supply chain organization. Reverse flows are
also part of the supply chain, namely for recycling and product returns.
An important physical outcome of supply chain management is the
concentration of storage or warehousing in one facility, instead of several.
This facility is increasingly being designed as a flow- and throughput-
oriented distribution centre, instead of a warehouse holding cost intensive
large inventories.
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Nodes and Locations: Due to new corporate strategies, a concentration
of logistics functions in certain facilities at strategic locations is
prevalent. Many improvements in freight flows are achieved at terminals.
Facilities are much larger than before, the locations being characterized
by a particular connection of regional and long-distance relations.
Traditionally, freight distribution has been located at major places of
production, for instance in the manufacturing belt at the North American
east coast and in the Midwest, or in the old industrialized regions of
England and continental Europe. Today, particularly the large-scale
goods flows are directed through major gateways and hubs, mainly large
ports and major airports, also highway intersections with access to a
regional market. The changing geography of manufacturing and industrial
production has been accompanied by a changing geography of freight
distribution.
Networks: The spatial structure of contemporary transportation networks
is the expression of the spatial structure of distribution. The setting of
networks leads to a shift towards larger distribution centres, often serving
significant trans-national catchments. However, this does not mean the
demise of national or regional distribution centres, with some goods still
requiring a three-tier distribution system, with regional, national and
international distribution centres. The structure of networks has also
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adapted to fulfil the requirements of an integrated freight transport
demand, which can take many forms and operate at different scales.
Most companies consider the use of a 3rd party to help them with their
supply chain services when they realise how important it is to have
competitive customer service and how costly and difficult it can be to
achieve on their own.
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THIRD-PARTY LOGISTICS PROVIDERS/ LOGISTICS
SERVICE PROVIDERS- A BRIGHT FUTURE
There is a bright future for third-party logistics providers (3PL) and
Logistics Service Providers (LSP), for international and/or domestic
logistics opportunities. The continuing growth of supply chain
management, outsourcing and globalization plus the dynamic effect of e-
commerce are driving and will drive growth.
We distinguish 3PL from LSP. A 3PL is a division of a company, often
asset-based, that provides transport, warehousing, forwarding,
information technology or other logistics or supply chain management
related services. 3PL is seen by the parent organization as a way to
develop more business for the parent focus. The 3PL also provides higher
revenue and higher profit opportunities than the traditional business of
the corporation, which is in a commodity-service arena where price is
often the key differentiator versus competitors. 3PLs generally are
developed to develop profitable business while using the services of the
parent company. That can challenge their ability to develop logistics
solutions for all possible customers. Not all customers need logistics
programs that include the services of the parent company for all or a
significant part of the activity.
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An LSP is a stand-alone endeavour. With no parent company that
provides a transport or other service, the LSP is free to develop and
manage tailored supply chain programs for its customers without having
to use the parent company as part of its service package. It can position
itself to clients as their de facto in-house logistics department.
Growth for 3PLs and LSPs will come more in consumer related industries
that practice supply chain management (SCM). Slower to develop will be
industries that use more traditional traffic and other approaches to
logistics. Non-consumer goods industries will still be outsourcing
opportunities. Their needs and requirements will differ though.
Consumer goods businesses are also more likely to be involved in
international with either sourcing and/or sales. The Asia-U.S. trade lane,
the largest in the world, is a key outsourcing opportunity. Even more, the
dual sword of SCM and globalization creates outsourcing opportunities
for companies who do not view logistics as a core competency.
Supply chain management is driving customer practices, both directly
and indirectly. Asia-US cargoes are very much consumer-goods-type
products. And consumer goods companies are key players of SCM. The
purpose of supply chain management is to drive inefficiencies out of the
system. That means consumers have the products they want and when
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they want them. Inventories, as a buffer for uncertainties, should be
reduced. Logistics cycle times would be reduced.
To drive out inefficiencies and reduce cycle times, an effective supply
chain is built from the customer’s door back through his suppliers. This is
what SCM is about, and suppliers of companies that practice supply chain
management know this. They have to find ways to be both cost and
service responsive. Yet sourcing from Asia, with its ocean transport, is a
problem link in the supply chain and creates its own issues. How can you
be service responsive with a service that could take two weeks or a month
or longer in transit? Shippers will continue to demand faster transits.
3PLs/LSPs may create the package to put together service and cost
alternatives to meet a shipper’s specific needs.
SCM presents a way for 3PLs, who may have an ocean carrier or
forwarder as their parent, to break out of their commodity service
provider market approach. LSPs can blossom to with being able to meld
different carriers and different forwarders, with different services and
prices into a flexible program that is responsive to a customer's needs.
Being a supply chain partner to shippers will provide a way for
3PLs/LSPs to differentiate them in the marketplace.
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In international, forwarders and carriers struggle with the concept of
supply chain management, with building customer-specific, tailored
logistics programs and with moving away as a traditional, commodity
freight service provider. Plus, there are many forwarders chasing cargo.
How do they distinguish themselves from competitors? They are too
many forwarders in a very highly fractured industry. Consolidation is
inevitable. With such market turmoil, 3PLs/LSPs can seize opportunities.
LSPs/3PLs will become the customers for the steamship lines. This is
creates a dynamic for everyone. And this same dynamic is and will
continue to happen in domestic transportation and warehousing.
3PLs and LSPs will continue to grow and thrive. After all, it could be a
multibillion-dollar global market opportunity. Corporations will look at
outsourcing of their logistics as a way to gain competitive advantage,
realize it is not a core competency, and reduce costs or whatever drives
their decision. A third-party will be the customer.
Carriers must look at the 3PL/LSP market and decide whether they can
compete in it. It has many of the same requirements as the supply chain
management market. If carriers choose to compete, how will they? Will
they develop their own 3PL division with the ability to market it over the
core shipping business? Will they view the 3PL as an extension of their
business or a competitor? Will they be able to work with 3PL’s to
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develop cooperatively the programs needed by the 3PL or 4PL? This does
not mean quoting rates and negotiating volume contracts. It is a much
focused business endeavour, but the size is huge and profitable.
Success means having a viable 3PL/LSP strategy as to market(s) and how
to penetrate it. Inherently that means having the capability to look at each
shipper and his individual requirements and developing a unique solution
logistics program for that particular customer. If the program is not
tailored to each customer, then the 3PL/LSP is not being a true 3PL/LSP.
He is providing a generic commodity service.
3PLs and LSPs must define their strengths and weaknesses, from their
internal view, customers and market view and competitors view.
Perception can be stronger than reality. This is fundamental to knowing
what they can and cannot do presently and what is demanded to change.
They must assess their reason for being or wanting to be a 3PL or LSP. If
they want to move into other arenas, international or domestic, or other
industries, they must understand what practices exist and why. This is
important for assessing and defining market opportunities, from having a
wish list and turning into business.
There are fundamentals to being a third-party. Whether a 3PL or LSP is
established and growing or just beginning, they must understand how
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supply chain management and logistics differ from their traditional
transportation, warehousing or forwarding. 3PLs must understand how
they can and cannot drive business to their parent without compromising
the customer’s specific requirements; how they can tailor to meet a
customer’s needs and support their parent and how they cannot do this.
They must understand a customer’s real issues and behind-the-scenes
issues. Effective 3PLs and LSPs need and have a shipper’s perspective.
Their staff can and does provide the shipper view.
We would be remiss if we did not mention E-commerce. E-commerce is
the "in" word in business. Its growth rate and future development is
unfathomable. E-commerce is here for both B2B (business to business)
and B2C (business to consumer). It redefines the traditional business
model. 3PLs and LSPs must decide on how they will participate in the E-
commerce. They have no option. They must have dynamic web sites, for
booking, tracking, tracing, rates and much, much more. That is the
minimum they must do. E-commerce logistics will be a driver in
outsourcing because effectiveness lies outside the core competency of
shippers. 3PLS/LSPs must also be able to integrate into their customer's
system with management information, not with dumping data files into a
customer's computer. Customers must have integrated information to
manage their business effectively.
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The Internet also opens up a new way to quickly handling information
and managing business. Where EDI (electronic data interchange) never
fulfilled its promise, the Internet will and has. XML and other tools are
being developed for this. The web may be the tool and vehicle to really
develop logistics effectiveness as it is meant to be. Any company who
ignores the Internet should be in a unique business or be prepared for
possible extinction.
In conclusion, the growth of 3PLs and LSPs will be significant. The
market will evolve as competitors come and go. It will evolve as shippers
define and redefine their needs. But they will grow.
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HAVING REVIEWED THE WHOLE PICTURE THEY COME TO
REALIZE THAT THERE IS MORE THAN 1 REASON WHY
ENTRUST YOUR SUPPLY CHAIN WITH SOMEONE ELSE?
Performance
Obtaining best practice performance can be allusive and requires
expertise and focus on the complete supply chain.
Focus
Being able to handle responsibility to "the experts" allows management to
focus on the core business activity
Investment
Why invest in facilities and resources on your own when they can be
better utilised and shared with several others
Economies of scale
Smaller companies don't have the scale or volume to be competitive with
those that do. Out sourcing remedies this problem
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Local presence
Most companies don't have sufficient scale to justify there own regional
facilities. Outsourcing is an economic way to a regional presence
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THIRD PARTY LOGISTICS
Third Party Logistics ( 3 PL), or Managed Warehousing as it is known, 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.
The global trend towards outsourcing elements of the supply chain is to
achieve superior customer service levels. It is recognised the importance
of cost competitiveness, and most organisations focus great efforts on
continuous improvements to efficiency and productivity.
However, an organisation with superior ability to satisfy customers will
be able to command a price premium and still match the competitiveness
of a lower cost organisation. Service based 3 PLs require a change in role
from arms length contractor to business partner. A contractor will do as
they are asked, meet the specifications but understand little about his
clients real business needs, and wins or loses on price alone.
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A business partner, on the other hand has real expertise that the client
organisation lacks, and understands how to meet the clients business
needs better than the client does. 3PL partners are able to add value
through innovation. When considering your options it's important to take
into account all the issues. Supply chain logistics is an essential part of
your business. It’s our total focus and reason for being. Taking this
responsibility on your behalf leaves you to focus on your core activities.
This partnership guarantees out mutual success. Clients have come to use
our services for a variety of proven reasons:
WHY USE 3PL
Customer service performance
Clients verify our delivery reliability and accuracy on a daily basis. 3 pl
provides a simple more cost effective path to economic best practice
customer service reliability that is unattainable "in house"
Cost benefits
Savings arise from better utilisation of shared resources. Additional
benefits from reduced capital investment in facilities and inventory.
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Economies of scale
Few companies in NZ have the scale of operations to go it alone in the
global market place. All 3 pl clients regardless of their size can share the
benefits of scale of activities.
Volume variable
Clients pay only for the resources they consume. Costs fluctuate with
activity. There are no fixed costs to cover in the quiet times nor is there a
performance shortfall if sudden increases in demand occur.
One stop integrated solution
3pl take responsibility for supply chain. 3 pl cultivates strategic partners,
integrated procedures and systems to minimise the risk of service failure.
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History of 3PL
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 of scarcity would follow.
In pre-Renaissance Italy, in the province of Lombardy they used paper
documentation, known as Lombards, as 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 United States, the pioneering
American spirit was constantly seeking new and creative methods to
build wealth. The Interstate Commerce Act of 1887 was passed to ensure
that railroad monopolies practiced fair pricing. Thus, small businesses
had the same access to (and same price for) third party transportation as
large corporations. The use of freight cars and railroad depots as
warehouse storage points and the construction and use of co-op grain
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elevators to store harvests are prime examples of outsourced warehousing
activities. World War II and the resultant number of disrupted households
created a demand for household good storage. The multi-story buildings
erected or modified for such use were quickly converted after the war to
general purpose warehousing. This was the birth of public warehousing
on short-term contracts, as we know it today. The availability of these
public warehouse operations throughout the country provided substantial
areas of warehouse storage on short-term arrangements, allowed
manufacturers, particularly in the food industry, to re evaluate their
philosophy of having to maintain their own proprietary warehouse
operations in each marketplace. Consequently, carriers were needed to
transport the various goods from the factory to the warehouse and from
the warehouse to the point of sale.
In the 1980s and 90s, the need for service-providing specialists was on
the rise, and businesses were competing to provide logistics services.
Federal Express, under CEO Fred Smith, revolutionized the way people
thought about 3PL and the way we have conducted business ever since.
Federal Express became an overnight success because of its overnight
delivery. It became possible (and soon, necessary) to deliver almost
anything almost anywhere overnight. The resulting decrease in cycle time
continues today in business-to-business (B2B) and business-to-consumer
(B2C) transactions.
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The proliferation of the 3PL concept and 3PL providers affected the
grocery industry. Third party warehousing and Just-in-time techniques
assisted in keeping transportation costs down and inventory fully stocked.
This gave rise to the theory and application of efficient-consumer-
response (ECR) techniques, which espoused smaller, more efficient
shipments. This and other new methods spread to other retail markets and
led to the growth of the super chain, such as Wal-Mart.
As the noted business author Peter Drucker remarked in the article “To
Sell the Mailroom,” the trend among many companies today is toward
contracting out their support or accessorial work (e.g., warehousing, and
transportation) to external suppliers and focus on their core business
competencies. Outside contractors, says Drucker, must be efficient
because they compete in an open marketplace. In addition, unlike
warehouse and transportation managers in most corporations, people who
work for third party contractors have a potential to move into senior
management positions. Thus, they have a greater incentive to work hard
at attracting customers and keeping them happy.
Many organizations for which 3PL works want to reduce the number of
direct employees and their associated liabilities. A diminishing work
force, particularly at entry level, and the need for more professionally
managed approaches to logistics helped fuel the growth of third party
service providers.
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Quicker, Faster, and Better
Looming on the horizon during the changes of the 80s and early 90s was
the Internet. The Internet would compel not only retailers and
manufacturers to overhaul their practices, but 3PL providers themselves.
With the advent of the Internet, consumers wanted their products cheaper
and quicker. This process shapes the way we do business today.
In the past decade, third party logistics gained great popularity.
Substantial increases in outsourced logistics activity can be readily noted,
although experts differ on the actual degree of market penetration. Robert
V. Delaney of Cass Information Systems has reported that third parties
currently provide more than 20 percent of the principle logistics
functions, as opposed to less than 10 percent in 1992.
“The outsourcing of logistics has enormous growth potential.
U.S. manufacturers today hire third party companies for only about 12
percent of their logistics. With increased competition in a global
economy, companies will find it more efficient to outsource as much as
25 percent to 30 percent (of their non-core activities),” Delaney has said.
Regardless of the actual numbers, there is no question that there has been
a substantial growth in the use of outsourced logistics services—
particularly third party warehousing and transportation. In automotive,
industrial, small-package-fulfillment, grocery, and building supplies
industries, the movement to outsourcing is significant. This shift has
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substantially increased the demands on the third party providers. These
demands are sometimes not being met, creating a need for change and the
possibility of disappointment, including business and career-damaging
consequences. This continued growth of demand for third party services
has stimulated a significant number of new providers.
Less than a decade ago, only a handful of third party providers offered
any form of national coverage, and the industry was dominated by strong
regional and single-city operators. In the past few years, many of these
have banded together to form the core of today’s national offerings.
Today, there are a number of national third party logistics operators, and
numerous regional operators who are often linked together through
service and marketing affiliations. Presently, we are seeing the emergence
of truly global 3PL companies that provide services across all continents.
One drawback, however, is that the growth of third party providers and
the increase in opportunity has encouraged some organizations to enter a
field in which they may have had minimal background and experience.
The road to 3PL as it stands today has been long, winding, and—at times
—bumpy. Many developments in business and technology have helped
shape the world of outsourcing. It has been an interesting trek to the
present explosion of 3PL services and providers today.
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CHALLENGES IN MANAGING THE 3PL RELATIONSHIP
In the last two decades, increasing numbers of organisations world wide
have recognised the fact that it is necessary to develop products suitable
for global markets in order to widen their market network and at the same
time source material globally to be competitive in the local as well as
overseas market place. Globalisation has opened many lucrative avenues
to the business world and also posed many challenges to be successful in
the global trade. One of the biggest challenges in the Global Trade is
logistics networking and the ability to manage seamless forward and
backward flow of material and information. This is an enormous task and
in order to be successful organisations have developed strategic alliances
with 3PL (Third Party Logistics) companies all over the world to manage
their logistics operations network.
Many commercial establishments world wide have turned to logistics
outsourcing as a way to re-engineer their distribution networks in order to
meet the global market demands and also gain competitive edge.
According to Cap Gemini 2005 annual study, North American
organisations are planning to outsource in 2008 – 2009, 56% of their
Logistics expenditure (49% in 2005) where as Western Europe is panning
81% (65% in 2005) and the Asia Pacific intend to outsource 60% of their
logistics spend against 50% in 2005. Further the same report revealed that
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78% of the respondents are outsourcing logistics activities in North
America; 79% in Western Europe and 58% in Asia Pacific Region. One
of the Massey University Post Graduate Student conducted survey in
2005 under the supervision of this author (hereafter called as Massey
University study) indicated that the NZ rate of outsourcing 3PL activities
is around 66.7% in manufacturing environment.
One of the innovative trends used today is the outsourcing of logistics or
third-party logistics to manage complex distribution requirements,
postponement of manufacturing, cross docking, Kitting or Assembly,
Inventory Financing, Vendor Managed Inventories, Reverse and Repair
Logistics etc. This triggered phenomenal growth in 3PL business world
wide. We can classify outsourcing into three categories. The first level of
outsourcing is transactional outsourcing. This is typically based on
transactions and no long term contracts and no bonding between 3PL and
outsourcing company. The second classification is known as Tactical
outsourcing. This kind of outsourcing is on long term basis with
negotiated contacts in place and with integrated IT systems, to facilitate
free flow of information and create supply chain visibility. This is
considered as a stepping stone for strategic alliances/outsourcing which is
the third category.
Strategic outsourcing is based on long term relationships with successful
outcomes. In this category the 3PL companies become partners in supply
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chain management and complete transactional transparency will be
established. Very few 3PL companies are able achieve this status with
their customers by constantly innovating and maintaining operational
integrity. Some even follow open book costing method to demonstrate the
transparency of the system. The Logistics Activities Outsourced and their
classification is given in attached annexure is produced by the author
based on Cap Gemini 3PL 2005 Annual Study and Massey University
Study in order to explain different levels of outsourcing and Logistics
activities outsourced to 3PL companies.
The main reason for the momentous growth in 3PL business is change in
the thinking process of outsourcing community. More and more
organisations are outsourcing their logistics activities and upgrading their
relationships with 3PL companies from transactional to tactical and
strategic relations. According to the survey conducted in 2005 17%
average business growth is envisaged by the CEOs of 3PL Companies
operating in Asia Pacific Region for the next three year period.
One of the biggest enemies in managing any logistics operation is the
time. The Logistics professionals world wide have daunting task of
managing a global supply chains and this includes keeping customers or
stores properly stocked and deliver the perfect order every time. They
must balance the need for low costs, proper inventory levels and
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maximum service. Some of these responsibilities are now shared by 3PL
companies at tactical level as well as strategic level.
Unfortunately these 3PL relationships are always not successful.
According to a recent Warehousing Education and Research Council
(WERC) pamphlet reported that 55% of logistics outsourcing alliances
are terminated after 3-5 years. In some cases it was noticed that the
relationship ended even before completion of the first year of operation.
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3PL LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Sweeping changes continue to redefine the consumer products
marketplace and to deal successfully with these changes many firms are
now investigating and implementing alternate business and logistics
support models. Two such models which have emerged over the last few
years are Third Party Logistics and Co-Distribution. Although these are
individual concepts in their own right, powerful synergies can be
developed and harnessed when both concepts are combined under the
appropriate circumstances. Why would one consider combining these two
concepts? Well unfortunately for many reasons, some firms have been
unable to identify substantial enough benefits to justify moving to
outsourcing or Third Party Logistics (TPL). Benefits generated must not
only exceed the cost of 3PL fees, they must go well beyond this level to
offer savings significant enough to justify such a major business change.
Specifically, this article outlines an approach and methodology for
investigating, defining, implementing and realizing the benefits apparent
in this opportunity. Within this, the critical role and importance of the use
of Outside Facilitation in both planning and implementing a Co-
Distribution network of this type cannot be stressed enough as such
facilitation is the key to ensuring success. As mentioned above, the
involvement of a Third Party Logistics provider is the next key ingredient
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in the sustainable creation of a Third Party Co-Distribution Network
(TPCDN their role in this process will also be discussed in this article.
Co-Distribution represents the partnering of two non-competing firms for
the express purpose of developing a shared supply chain. Obviously for
either party to consider such an undertaking, significant synergies and
potential benefits must be identified. A review of the eight potential
benefit areas such synergies create will then be reviewed in the final
section. As mentioned, there are two facilitation roles required to
successfully create and rollout the Third Party Co-Distribution Network
envisioned within this article and a number of specific steps required. The
first is Outside Facilitation or advisory support services provided to the
two potential partners in a number of key areas. Initially, this party would
conduct a high level feasibility analysis to confirm the existence of
potential benefits in the areas identified. Next, once the general feasibility
hurdle has been cleared this party would carry out a detailed analysis in
conjunction with in-house resources from both firms to fully analyze,
define and prepare the Co-Distribution Network Plan and Design
document. Once this plan is completed and both firms are prepared to
proceed, the search for a Third party entity would then begin. This third
phase would include the preparation of a detailed RFP document,
followed by ongoing management of the RFP Process itself. This would
include issues surrounding contractor performance, contract types,
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duration, renewal, contract incentives and penalties. In addition, items
such as payment timing and methods would also be reviewed which may
have material implications for the firms involved. Finally, the role of the
Outside Facilitator in implementation and ongoing support from direct
involvement from concept development right through planning to actual
execution is an important continuity to maintain consistency, momentum
and stability in the overall relationships surrounding the new network.
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SOME FREQUENTLY ASKED QUESTIONS ABOUT THE
LOGISTICS INDUSTRY AND WHICH WILL AFFIRM GRIP ON
YOUR UNDERSTANDING OF THE INDUSTRY.
What is Logistics?
Logistics is "the process of planning, implementing and controlling the
efficient, effective flow and storage of raw materials, in-process
inventory, finished goods, services and related information right from the
point of origin to the point of consumption (including inbound, out
bound, internal and external movements) in order to satisfy customer's
requirements.
LOGISTICS is also defined as time related positioning of resources. The
whole concept of Logistics is based on 7 R's which are:-
• Right place
• Right time
• Right quantity
• Right quality
• Right price
• Right condition
• Right customer
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What is third party logistics?
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.
Companies opt for Third Party Logistics for the following reasons:
• Focus on core competence
• Resource constraints
• Cost saving / cost optimization
• For large and global coverage
• For more professional and scientific approach to logistical
problems
• For improvement in service levels with improved response time
• Efficient management of inventory resulting in better utilization of
working capital.
What is fourth party logistics (4PL)?
Fourth party logistics provider is a supply chain integrator that assembles
and manages the resources, capabilities, and technology of its own
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organization with those of complementary service providers to deliver a
comprehensive supply chain solution to the client.
A standard 4PL supply chain solution involves four distinct steps:
Step I: Reinvention
At this level, the overall business strategy is aligned with supply chain
strategy to reengineer the supply chain of the participants.
Step II: Transformation
Here the focus is on coordinating specific supply chain functions such as
sales and operations planning, distribution management, procurement
strategy, customer support and supply chain technology, with the aid of
process and organizational changes, T&D, information technology, etc.
as applicable.
Step III: Implementation
The implementation is done on the basis of recommendations made at the
earlier two levels and the transition is put across to the 4PL delivery
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team, taking special care to consider the dimension of human resources
and organizational change.
Step IV: Execution
A 4PL provider's scope of responsibility also includes operational
responsibility for numerous supply chain functions, besides the traditional
transportation management and warehousing operations logistics
outsourcing
How is logistics different from transportation?
Transportation is physical movement of goods (inbound and outbound) as
well as picking up of products as per customers order and delivering it to
the ultimate user whereas Logistics encompasses several activities related
to supply chain management such as planning, implementing and
controlling the efficient, effective flow and storage of raw materials, in-
process inventory, finished goods, services and related information, in
which transportation is a major element in the entire chain.
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What is supply chain?
In simple language at the material level, supply chain may be defined as
"Flow of materials through procurement, manufacture, distribution, sales
and disposal" while at the human level the chain is an "entity of people
organized as structures and systems for delivering the desired value and
goods".
Supply Chain Management may also be defined as "the integrated
management of all linkages and value added activities from the supplier's
supplier to the customer's customer in such a way that enhanced customer
value is achieved at lower costs.
What are the objectives of supply chain management?
A well designed supply chain is expected to support the strategic
objectives of:
• Reduced Costs
• Shorter Lead Time
• Best of Quality
• Flexibility
• Enhanced Service
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• Better Product Availability
• Better Product Reliability
The best configuration of the chain will vary from individual chain to
chain and individual organization to organization. But, in all the case the
architecture of the chain would include the following three elements -
System, Technology, Relations.
How is logistics different from supply chain management?
Logistics forms an important element of supply chain management
whereas supply chain management is interplay of all the functions and
integrates marketing, planning, distribution and purchases with the entire
manufacturing process.
Can a transporter provide logistics solutions?
Yes, provided the transporter has a wide network, fleet, material
handling, human infrastructure and strong IT support.
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What is the pre-requisite infrastructure required to provide logistics
solutions?
The pre-requisite infrastructure required to provide logistics solutions
are:
• Land and Building (Warehouse)
• Trained Manpower
• Material Handling Equipments
• Hardware and Software
• Transport Network
• Vendors
• Consultants
Does one need any software to provide logistics solutions?
Yes
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What does Logistics activities comprise of?
Logistics activities, as a part of Supply Chain Management comprises of
the following:
• Purchase and Supply
• Material Handling
• Production Planning
• Production Control
• Transportation
• Storage
• Distribution
• Product Management
• Installation and Servicing
• Strategic Management
What is the significance of logistics in manufacturing industry?
In a manufacturing industry, Logistics plays a key role in Supply Chain
Management as there is a strong inter-play of activities starting from raw
materials till the finished goods. In all the activities there is a flow of
goods whether it is raw materials or WIP or semi-finished goods or
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finished goods. Logistics plays a significant role in the management of
entire supply chain.
How do logistics solutions help to reduce the inventory cost?
One of the important elements of supply chain management is the
management of warehouse and inventory levels. Efficient management of
inventory helps to keep a tab on:
• Replenishment level
• ABC analysis of stocks
• FSN stocks
• Helps customer to concentrate more on fast moving stocks
What are the legal issues involved?
The legal issues involved are:
• Conforming and non-conforming areas
• Excise Duty
• Local Taxes
• Labour Acts
• Pollution Act
• Industry Act
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• Fire Act
• Sanctions from appropriate bodies
What is Warehousing?
A warehouse is a point in the logistics system where a firm stores or
holds raw materials, semi-finished goods, or finished goods for varying
periods of time. In the macroeconomic sense, warehousing performs a
vital function. It creates time utility for raw materials, industrial goods
and finished products. The proximity of market-oriented warehousing to
the customer allows a firm to serve the customer with shorter lead times.
This warehousing function continues to be increasingly important as
companies and industries use customer services as a dynamic, value-
adding competitive tool.
What is Material Handling?
Material Handling can be defined as "efficient short-distance movement
of goods that usually takes place within the confines of a building such as
a plant or a warehouse or between a building and a transportation
agency."
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Material Handling has four dimensions:
• Movement
• Time
• Quantity
• Space.
Material Handling improves efficiency by making the logistics system
respond quickly and effectively to plant and customer requirements. For
efficient movement of goods into the warehouse, locating stock,
accurately filling orders, and rapidly preparing orders for shipment to
customers, materials handling is very important to outbound logistics. In
inbound logistics terms, materials handling serves company plants in the
same way. Firms need to integrate materials handling requirements not
only for the company's departmental needs, but also for meeting their
customers' needs.
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CHALLENGES TO 3PL IN 21 ST CENTURY
Third party logistics (3PL) has established itself as a significant, growing
segment of the global logistics industry. The 3PL industry includes
Logistics Solution Providers (LSPs) and the shippers whose business
processes they support. Customers of third-party logistics (3PL)
companies want more than just transportation services, they want 3PLs to
provide the technology that drives the supply chain process Trends in
Shippers' Logistics Requirements Shippers are demanding to LSPs to
support their increasingly complex business processes, to enable them to
improve supply chain performance. Shippers are requiring that LSPs
provide:
Enhanced traditional logistics capabilities like enhancing the
reliability
• Smaller, more frequent shipments
• Shipments to a greater number of destinations
• Coordinated flows of materials through crossdock or merge-in-
transit operations shippers.
• Cost-effective flow of goods and information
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Additional activities that support complete solutions tailored to
particular industries and customers
• Shippers are asking LSPs to co-locate their activities at the
shipper's site
• Additional activities at their sites or at new sites at ports,
outsourced warehouses and/or sorting points
• Activities at supplier or customer sites. This may include, for
example, delivery, installation and removal activities.
Additional Information:
• Shippers are asking for "pipeline visibility" of information
visibility of the status of goods in the pipeline from suppliers
through intermediary companies and organizations to a factory,
retailer or customer
Decision-Making Responsibilities :
• Mode selection, routing and re-ordering and replenishment
decisions, to LSPs. They may be asked to take on some parts of
financial processes, such as invoicing, credit checks, and collection
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e.g. Customized Transportation Inc. (CTI), 3PL to General
Motors' plant in Kansas City, Mo., provides automobile interior door-
panel modules at the exact moment they are needed on the production
line. Although GM selects the materials vendors, CTI issues the purchase
orders and buys the material from those vendors. The 3PL then receives
the material, assembles the modules, puts them in racks, and delivers
them to the production line. GM receives an invoice from CTI that
includes all operating costs, the cost of goods sold, and a profit margin
Integration and coordination of activities performed by many entities
in support of local and global solutions
• Many LSPs are working to position themselves as lead logistics
providers who have the relationship and operations management
skills, as well as the ICT capabilities, to oversee the
implementation and execution of complex supply chain solutions.
Coordinating traditional and value-added activities performed by
several LSPs who either have the required functional expertise
(e.g., warehousing or some form of transportation) or geographic
presence
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FOURTH PARTY LOGISTICS
Fourth Party Logistics (4PL): 4PL is a new concept in supply chain
outsourcing. It is emerging as a path to achieve more than the one time
operating cost and asset transfers of a traditional outsourcing
arrangement. Through alliances between best-of-breed third party service
providers, technology providers management consultants, 4PL
organizations can create unique and comprehensive supply chain
solutions that cannot be achieved by any single provider.
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Next wave of RTSCM
While outsourcing third-party logistics is a now accepted business
practices, Fourth Party Logistics is emerging as a breakthrough solution
to modern supply chain challenges to provide maximum overall benefit.
A Fourth Party Logistics provider is a supply chain integrator 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.
Central to the 4PL's success is a "best of breed" approach to providing
services and technology to a client. The development of 4PL solutions
leverages the capabilities of third party logistics providers, technology
service providers, and business process managers to deliver a
comprehensive supply chain solution through a centralized point of
contact. The 4PL will integrate the client's supply chain activities and
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supporting technologies across these "best of breed" service providers,
with the capabilities of its own organization.
4PL Supply Chain Solutions
Management consultants have traditionally focused on the strategic end
of supply chain solutions reinvention and transformation. These supply
chain solutions have leveraged technology to support the strategic
imperatives. Third party logistics providers have focused on operational
issues- implementation and execution.
As illustrated in the 4PL Supply Chain Solutions (Figure 8.2), a 4PL
solution leverages the combined capabilities of both management
consulting and third party logistics providers to get the true essence of a
RTSC. More importantly, the design, implementation and execution of a
leading edge, client optimized, uniform technology plan that will meet
the needs of the 4PL client is ensured by leveraging the technology
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capabilities of consultancies, technology providers and third party
logistics providers.
At the highest level of the 4PL solution is Reinvention. The most likely
source of true quantum enhancements in Real Time supply chain
performance comes through either synchronization of supply chain
planning and execution activities across supply chain participants, or
increased collaboration between independent supply chain participants.
Reinvention leverages traditional supply chain management consulting
skills, aligns business strategy with supply chain strategy, and is
facilitated by technology that integrates and optimizes operations both
within and across participating supply chains.
The second level of the 4PL solution is Transformation. Transformation
efforts focus on improving specific supply chain functions. These include
sales and operations planning, distribution management, procurement
strategy and customer support. At this level supply chain technology
becomes critical to the success of the solution.
The third level is Implementation. A 4PL implements recommendations
including business process realignment, systems integration of
technology across the client organizations and service providers, and
transition of operations to the 4PL delivery team. Careful attention is paid
to organizational change, recognizing that the "people" factor is a critical
driver of success in the transition to the 4PL arrangement. The goal is to
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avoid the all too common, ineffective implementation of well-designed
strategies and business processes that have limited the effectiveness of
solutions and the delivery of projected results.
The fourth and final level is Execution. A 4PL provider takes on
operational responsibility for multiple supply chain functions and
processes. The scope goes well beyond traditional third party
transportation management and warehouse operations to include:
manufacturing, procurement, supply chain IT, demand forecasting,
network management, customer service management, inventory
management, and administration. While an organization can outsource
the entire range of its supply chain activities to a 4PL provider, a 4PL
solution will more likely be a subset of critical path supply chain
functions or processes.
In summary, a 4PL responds effectively to the broad, complicated needs
of today's organizations by delivering a comprehensive supply chain
solution. This solution is focused on all elements of supply chain
management, provides continuously updated and optimized technologies,
and is tailored to specific client needs.
What is the difference between a 3rd party logistics provider and a
4th party logistics provider?
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The term "fourth-party logistics provider" is a trademarked term owned
by Andersen Consulting. It refers to the evolution in logistics from
suppliers focused on warehousing and transportation (third-party logistics
providers) to suppliers offering a more integrated solution. Among other
services, fourth-party logistics providers include supply chain
management and solutions, change management capabilities, and value
added services in their offering. These companies are basically third-party
logistics providers that either add these capabilities to their services or
form alliances to provide the services.
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RESEARCH OBJECTIVE
“STUDY THE FACTORS THAT CAN ENHANCE CUSTOMER VALUE IN THE SUPPLY CHAIN WITH RESPECT TO
SHIPPING.”
OBJECTIVE
1. To study the supply chain activities in the international business.
2. To determine the scope of activities this can be efficiently handled by third party operators.
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CORPORATE OBSERVATIONS
The Indian logistics industry is estimated at US$50 billion per annum and
has good growth potential. Contributing 13% of India's GDP, India's
transport & logistics sector is still in its infancy and is highly fragmented.
Key sectors with significant contribution to the logistics market include
the automotive, manufacturing, fast-moving consumer goods (FMCG),
retail and healthcare sectors. Overall India's 3rd-Party Logistics (3PL)
market is worth S$16billion and it’s expected to grow to S$ 33 billion by
2008.
With Indian corporate houses increasingly outsourcing their logistics
requirements to specialised operators, the domestic logistics market is
beginning to attract new logistics services providers, particularly foreign
players.
Industry analysts say the time is not far off when corporate houses would
be demanding more non-traditional services that go beyond the usual
inbound/outbound transportation and Customs clearing and forwarding to
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spill over to services such as reverse logistics, inventory management,
packaging, labelling and even order processing. This is encouraging both
foreign and Indian players to broaden the syntax of logistics services.
The latest to join the bandwagon of foreign logistics services providers
was Swift, a subsidiary of Swift Freight LLC of UAE, which launched its
Indian operations in Mumbai last week.
Rhenus AG, a subsidiary of the $2.4 billion German Major Rethmann
Group, is also setting up shop in India, by tying up with Hyderabad-based
Seaways Shipping Ltd. The joint venture, Seaways Rhenus Logistics Ltd,
will launch its Indian operations in Mumbai on January 27.
While foreign players like APL Logistics, Panalpina and Maersk
Logistics have been operating in India for quite some time, a clutch of
Indian players, which until recently were providing minimum logistics
services, are also planning to broaden their areas of operation.
"We see exciting opportunities in India, as corporates are realising that
outsourcing of their logistics requirements to specialised service
providers can result in substantial savings," says Mr Mark D'Souza,
Managing Director of Swift.
Each of these players is trying to consolidate their presence in their own
core areas of strengths. For example, Swift will be focussing on logistics
services covering the Indo-African trade, as the company has a strong
presence in the African market. Seaways Rhenus Logistics will similarly
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be focussing on the Indo-European trade route, covering sectors such as
automotive, healthcare, chemicals and consumer goods.
A recent study by Transport Corporation of India Ltd, a major Indian
player in the logistics market, and the Management Development
Institute (MDI) has shown that the benefits that outsourcing of logistics
requirements had brought to corporate houses range from improvement in
delivery schedules and reduction in operation cost to enhancement of
their geographic reach and improvement in operational flexibility. The
study has also shown that less than 55 per cent of the Indian companies
subscribe to 3PL (third party logistic) Services, as compared to over 75
per cent globally, meaning that the market will be growing at a brisk
pace.
Present trends indicate that the cement sector has reaped the maximum
benefits by outsourcing logistics requirements to 3PL service providers,
especially as logistics constitute between 10 and 15 per cent of their
operating costs. Likewise for the automobile and engineering sectors,
logistics account for 5 to 10 per cent of their operations costs, while that
for FMCG ranges between 3 and 7 per cent, as it gets the benefit of
volumes, analysts point out.
The future trend seems to be towards fourth party logistics (4PL) service
providers, which would act as a single interface between the client and
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multiple logistics services providers so as to manage all the aspects of the
supply chain.
The Indian logistics industry is poised for a significant growth in the
coming years as new companies, especially in the automotive,
pharmaceutical, manufacturing and FMCG sectors, are increasingly
opting to outsource their logistic requirements to specialised service
providers.
Industry analysts say that the key drivers for logistics outsourcing are the
corporate trend of focus on core operations, competitive pressure,
increasing global trade and MNCs investments in India.
Third party logistics service providers in India are gearing up to meet the
growth demand, incorporating value-addition in their services and
customising their supply chain management solutions.
Says Mr Manoj Agarwal, Head (Retail) of Gati, India's leading logistics
service provider: "We see a lot of growth from the FMCG sector. We are
in talks with companies such as Emami Ltd, Rupa and Wrigley's chewing
gum for handling their entire supply chain management."
Gati is planning to add new services in its portfolio, such as
transportation of clinical samples for pathological labs and medical
institutions and reverse logistics that involve movement of defective
products from the dealers back to the factory.
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Echoing similar sentiments, Mr Chris Callen, country manager of DHL,
told Business Line that "the global air express industry is also expected to
undergo huge transformation in the years to come as a result of increasing
spread of e-commerce and the need for vendors to match the speed of
electronic ordering with physical delivery of critical inputs for the
industry. In fact, we feel that by 2020, this industry is expected to
represent almost 30 per cent of the global air cargo with an average
annual growth rate of 10 per cent."
Indeed, a recent study on the logistics market by Frost & Sullivan has
estimated that the revenue of the logistics industry from the
manufacturing sector alone was $15.46 billion in 2005, with the market
likely to grow at a CAGR of 6.2 per cent during the next five years.
Chemicals, metal, FMCG, cement and textiles were identified as the top
five contributors to the revenues of the logistics industry.
In fact, the trend in the industry is towards the third party logistics (3PL)
concept — the market size for this category of service was estimated at
$280 million in 2006. "The market for 3PL services is likely to grow at a
CAGR of 20.4 per cent during the next five years, with the growth being
fuelled by the entry of MNCs and export focus of Indian companies. At
present, the automotive, IT hardware and FMCG companies are the major
users of 3PL services," says Mr Ganesh Ralekar of Frost & Sullivan.
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In India the logistics costs are still higher than in the developed markets
— it is estimated to be around 13 per cent of GDP, against 9 per cent of
GDP in the US. The transportation cost accounts for nearly 40 per cent of
the cost of production, with more than half the goods in India being
moved by road.
One sector that is increasingly looking for outsourcing logistics is
textiles, especially as it is facing the challenges of exacting delivery
requirements and multiple export markets.
Analysts say that with large retailers such as Wal-Mart and Target
seriously evaluating new suppliers for textiles in India, this sector is
bound to outsource logistics in the coming years. Also, the retail industry
is expected to jump into the 3PL bandwagon, with such large retailers as
Shoppers Stop and RPG expanding to smaller cities.
Realising the potential in the outsourced logistics market, 3PL service
providers are expanding their basket of services as companies are now
looking for more than just transportation of their products and raw
materials. The logistics firms are also focussing on related services such
as customer clearing and forwarding, inbound warehousing, labelling and
packaging, fleet management, order picking and inventory management.
Says Mr Agarwal: "We at Gati are constantly re-inventing the company.
We are designing customised supply chain management packages, with a
guarantee of cost savings to our clients." Similarly, at DHL, the thrust is
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on expansion, with the company recently inaugurating its first exclusive
express handling unit in India at the Delhi airport and acquiring a new
fleet of 300 vehicles from Mahindra and Mahindra, Maruti Suzuki and
Tata Motors.
"We are also making significant investments in IT so that customers can
know what is happening with their shipments. Our express agents are
being equipped with new generation GSM scanners, which facilitate real-
time information in shipments within 15 minutes of pick-up or delivery,"
Mr Callen pointed out.
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RESEARCH METHODOLOGY
RESEARCH DESIGN
I had used both descriptive and exploratory type of research design.
Descriptive research means deliberate pattern in collecting information to
try and solve the problem. In this I am using survey method. Whereas
exploratory research means the focus is on discovery of new ideas.
DATA COLLECTION
There are two types of data collection source that is primary and
secondary. In case of primary source of data collection there was
questionnaire to be filled by 3pl operator. I am also required to visit the
three PL operator and try to find out information related to their business
operation. In case I am not able to take appointments from them then I
can also collect data through telephone. So far secondary data is
concerned i got addresses of three pl operator from the company
personnel and gathered information about concept of three pl from
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internet and also gathered information about my first two objective from
internet and news articles.
QUESTIONNAIRE TYPE
I am going to use structured disguised questionnaire. A structured
disguised questionnaire is one where the listing of questions is in a
prearranged order and where the object of enquiry is not revealed to the
respondent.
SAMPLE SIZE AND TECHNIQUE
I am given the area of Delhi and NCR where I have to go to three pl
operators and try to take information from them about their businesses.
The sample size for my survey is 31 and I used area sampling.
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The above thing can be summarized as follows:
A. Sampling - Area sampling. Sampling size-31 B. Data source - Primary-questionnaire Secondary-www and articles.
C. Research design - Descriptive and exploratory.
D. Research approach - Survey method.
E. Research instruments - Questionnaires.
F. Mode of collecting data - Personal interview, Telephonic interview.
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FACTORS THAT ENHANCE CUSTOMER VALUE
PRODUCT AND/OR SERVICE QUALITY:
It hinges around whether customer requirements are being exceeded. The
days of conformance to standards winning orders are long gone. The
fundamental principle at stake here is that non-conformance will lead to a
product or business being disqualified from a certain market or market
segment. Exceeding customer requirements can lead to winning orders.
Therefore, continuously exceeding customer expectations will lead to a
sustainable competitive advantage.
Key performance areas for measuring customer quality are in line with
many lean manufacturing and being world-class principles. These
parameters include meeting customer requirements, fitness for purpose,
process integrity supported by statistical process control, continuous
improvement and elimination of waste.
Meeting customer requirements is about so-called perfect orders. A
perfect order is achieved when customer requirements are met in full, and
must conform to the following criteria; namely on-time delivery, orders
filled completely, and error free delivery documentation and invoicing. In
the eyes of the customer, there are only two types of service levels
namely 100% or 0%. On time delivery refers to the number of deliveries
that meet the customer’s original request in relation to the number of
orders received during the same period. Order fill also known as in-full
delivery, refers to the percentage of orders shipped complete on the first
shipment. Line fill refers to the percentage of ordered lines, which are
shipped complete with the first shipment. A supply chain either delights a
customer or it does not.
Fitness for purpose in essence refers to conformance to specification.
Here, one must differentiate between technical specifications and
functional specifications. In a supply chain, it makes sense to rather
specify the functional specification as a customer in the supply chain,
detailing expected outcomes of the product or service. It follows that
collaborating with the upstream supply chain partne, more customer
value can be added by making use of the upstream supply chain partner’s
specialist knowledge to design the technical specification that will better
meet the expected outcome.
An example of a technical specification is when a customer orders a chair
and issues fully detailed technical drawings to the supplier. If the supplier
delivers this chair, and the chair does not functionally conform to the
customer’s requirements, the customer has no option but to accept it,
because the chair conforms to all the technical requirements.
Alternatively, if the customer specified the required functions that the
chair must perform during its operational installation, then the chair
manufacturing specialist could have designed a more suited solution,
using superior specialist knowledge, and added customer value in the
process.
Process integrity supported by statistical process control refers to the
continuous on line monitoring of quality. This process supports the
proverb that quality cannot be inspected in, but must be built in.
Statistical process control (SPC) monitors conformance to process
parameters on line, and records are kept for later reference. For example,
the Perishable Product Export Control Board (PPECB) approves all
refrigerated vehicles that carry products for export purposes. When these
carriers transport products for export, temperature graphs of the cargo
temperature throughout the time in transit are recorded and kept to ensure
product quality and integrity, thus adding customer value.
Supply chain partners expect or even demand of their upstream partners
to have SPC in place thereby ensuring process integrity. To quote another
example, Ford Motor Company has embarked on a world wide campaign
called the Q1 supplier approval scheme. Built into this scheme is SPC. If
suppliers do not conform, they will simply not be part of the Ford supply
chain.
Continuous improvement is about a continuous urge to improve quality
and a climate of willingness to do something about opportunities. This is
in keeping with the ‘Kaizen’ principles listed below:
• Personal discipline;
• Teamwork;
• Improved morale;
• Quality circles; and
• Suggestions for improvement.
These incremental improvements support the notion of total quality
management, and focus on changing to become better in all aspects of the
organisation. Organisations must embrace speed of change, especially at
the operational level. The sustainability of changes at the operational
level is key to the organisations long-term success. It is here that the
Kaizen philosophy could potentially make its greatest contribution, due to
its simplicity and ease of implementation.
All five the Kaizen principles work together to create a positive spiral
that result in improved business processes. A culture of high levels of
self-discipline also contributes towards continuous improvement
programs being maintained on a sustainable basis. Although the focus of
continuous improvement programs such as Kaizen are mainly on the
operational level, teamwork amongst all levels is a key building block.
Cooperation and teamwork is required to evaluate and implement
suggestions for improvement. These suggestions for improvement are
mainly received at the operational level through quality circles.
Suggestions are often a result of a positive business culture or climate, as
well as high levels of morale. However, if suggestions are not managed,
this will result in a rapid decline in morale and a negative spiral that will
result in lower levels of quality.
Part of total quality management supported by the philosophy of
continuous improvement, is the continued upward escalation of customer
expectations regarding supplier capabilities. Performance which meets
customer expectations one year, may result in extreme dissatisfaction the
next year, as customers increase their expectations regarding acceptable
performance levels.
The last key performance area for measuring customer quality, namely
the E limination of Waste is focused mainly on the reduction in business
waste in the operational environment as a result of overproduction,
waiting time especially at capacity constraints, excess inventory, rejected
products, excessive movement and double handling.
SERVICE DIFFERENTIATION:
In recent years, some firms have discovered that there is another
commitment that can be made to gain true competitive advantage through
logistical performance. This commitment is based on recognising that a
firm’s ability to grow and expand market share depends on its ability to
attract and hold the industry’s most successful customers.
The real key to customer-focused marketing lies in the organisation’s
ability to use its performance capabilities to enhance the success of those
customers. This focus on customer success represents major commitment
toward accommodating customers.
Key performance areas that are vitally important for service excellence
are customer support, product support, flexibility to meet customer
demands, and flexibility to meet market changes.
The customer satisfaction platform, in particular customer support, is
built on the recognition that customers have expectations regarding
performance and the only way to ensure that customers are satisfied is to
assess their perception of performance relative to their expectation levels.
Customer support shifts the focus from expectations to the customers’
real requirements. Requirements are frequently downgraded into
expectations due to perceptions of previous performance, word-of-mouth,
or communications from the enterprise itself. This explains why simply
meeting expectations may not result in happy customers. For example, a
customer may be satisfied with a 98 percent fill rate, but for the customer
to be successful in executing his/her own strategy, a 100 percent fill rate
on certain stock-keeping units may be necessary.
Product support is another key performance area vitally important to
service levels. Technical product support is critical, especially taking into
account the potential value of the ‘augmented product’. For example, a
leading automotive glass supplier Shatterprufe, has recently developed
on-line technical support to glass fitment centres, for installation and
other technical related queries, thereby enhancing their value proposition
to both their customers, being the fitment centres as well as for their
customer’s customers, the motorist being the end user of automotive
glass. Claim analysis and procedures is another aspect of product support
that adds value to customers. Claims must be analysed in order to
determine trends, their causes, how long it takes to resolve them, and how
an enterprise makes it up to a disappointed customer.
The next aspect of product support is the commitment and involvement
by suppliers in the development of end technology.
Flexibility to meet customer demands is the next parameter to be
examined. Clearly, a customer success program involves a thorough
understanding of individual customer requirements and a commitment to
focus on long-term business relationships having high potential for
growth and profitability. Such commitment cannot be made to all
potential customers. It requires that firms work intensively with
customers to understand requirements, internal processes, competitive
environment, and whatever else it takes for the customer to be successful
in his/her own competitive arena. Furthermore, it requires that an
organisation develop an understanding of how it can utilise its own
capabilities to enhance customer performance.
The last parameter supporting service differentiation is Flexibility to Meet
Market Changes. Market changes are imposed onto both business
enterprises and their customers alike. The response to these imposed
market changes is important. in many ways a customer success program
requires a comprehensive supply chain perspective on the part of logistics
executives. The typical focus in basic service and satisfaction programs is
that the firm attempts to meet standards and expectations of next-
destination customers, whether they are consumers, industrial end users,
intermediate or even internal customers. How those customers deal with
their customers is typically not considered to be a problem. From a
supply chain perspective, a customer success program explicitly
recognizes that logistics executives must alter this focus. They must
understand the entire supply chain, the different levels of customers
within that supply chain, and develop programs to ensure that next-
destination customers are successful in meeting the requirements of
customers down the supply chain. If all supply chain members adopt this
perspective, then all members share in the success.
TOTAL LOGISTICS COST:
Total logistics cost consists of many aspects, but for the purposes of this
study, a trade-off between the following cost aspects namely design and
engineering, conversion, quality, distribution, inventory and total cost of
ownership will be discussed. Using technical specifications when only
functional specifications are required can potentially erode much
customer value. It must be encouraged at all times to use the skills of the
upstream value adding partner in a supply chain to take ownership of the
detailed technical specifications. This is a value-adding service that is
offered by upstream supply chain partners.
Another important point to take into account is the effect of Design and
Engineering changes on costs. The cost of a design change is dependent
on when the change is implemented during the life cycle of the product.
The earlier the changes are made known, the more possibilities can be
accommodated, and the lower the cost when making the change. The later
the changes, the fewer the opportunities and the more expensive it
becomes to effect changes. This is particularly applicable in the
development of new products or services, or during the redesign or re-
introduction of existing products or services. For example, if a motorcar
manufacturer plans to launch a new model, they obviously need to stock
up their dealer network. It will be very costly to change anything, even
something as insignificant as the wiper blades, because of all the re-work
and inventory redundancy cost.
Conversion cost is where the form utility is created. Form utility is
created when material changes in form and / or function. The material is
worth more once it has changed its form. For example, individual
ingredients used during the production of cold drinks are not worth much
to a potential consumer of Coca Cola. However, this conversion process
must be aligned with the rest of the supply chain in order to add
maximum customer value. Aspects that are critical to take into account
are demand alignment, location of the value adding facility, lot quantities,
specifications, and process capability, to mention a few.
Quality costs are made up of prevention cost also know as quality
assurance cost, inspection costs or sometimes quoted as quality control
costs, and the cost of non-conformance which often results in corrective
action costs. Quality costs are normally expressed as a percentage of
sales, and can become significant, especially when the full cost of non-
conformance is taken into account.
Distribution costs are made up of warehousing costs, inventory carrying
costs, information systems costs, picking costs, material handling costs,
transportation costs, and the cost of reverse distribution especially when
recycling the product. Reverse distribution of non-conforming products
will form part of non-conformance costs.
Inventory is the life-blood of any supply chain. Measuring inventory
levels can therefore be compared to measuring the blood pressure of a
supply chain. Most of the companies that produce commodities carry
inventory, and it is common belief that most of them carry too much
inventory. From inventory analysis one can learn that for some stock-
keeping units one could have many years of inventory cover, whilst other
items run out-of-stock regularly.
The last aspect of total logistics costs is Total Cost of Ownership. Often,
the focus falls on the acquisition price, and the total cost of ownership is
ignored.
Figure below is a diagrammatic presentation that shows the total cost of
ownership depicts an iceberg. The acquisition cost is visible, but there are
many hidden costs that will influence the total cost.
LEAD TIME:
Product availability is critical if an organisation is to compete in an ever
more demanding environment. the key performance areas that need to be
managed regarding lead-time management are time to market, response
to market forces, and inventory management throughout the supply
chain.
The first key performance area namely T ime to Market can be spilt into
two construct, from concept to delivery and from order entry to delivery.
Concept to delivery time deals with the lead-time to develop a product
and /or service from inception until the end user can benefit from it. The
key aspects that directly influence the time from concept to delivery are
design time, engineering time, conversion time and delivery time.
Figure illustrates three phases namely the investigation phase,
development phase and delivery phase. The investigation phase overlaps
with the design stage, engineering stage and the conversion stage. The
development stage straddles from the design stage to the development of
delivery concepts. The delivery phase focuses mainly on the integration
of the converted service offering to the end user.
There are many possibilities to investigate during the design stage, and
the cost to change during the design stage is relatively low. During the
design stage of product or service development, all concepts are
developed in concept only with the view to test their respective
compatibility with the conversion and delivery processes, as well as to
determine their respective contributions to the business objectives.
During the engineering stage, the number of concepts is reduced to only a
few viable options, and the focus is on detailed product and / or process
design with the view to gain maximum compatibility with the other
business processes and maximum competitive advantage from the
product or service.
The conversion stage focuses on aspects such as prototype developments,
advanced development models, pre-production samples, and pilot or trial
runs. Products and / or service offerings are tested under realistic
operating conditions in order to test their compatibility with business
processes and their respective contribution to customer value.
The last stage in the development process is the delivery stage. This stage
focuses on launching the product or service, ensuring high product
availability and awareness, and customer support training aspects.
It is clear that time to market from concept to delivery is a very complex
process, and could lead to a substantial competitive advantage, if it is
done well.
The other component of time to market, namely from order entry to
delivery, is less complex and easier to manage. Diagrammatic
representation of a customer’s perspective of the total order cycle is given
below. All these steps are largely under the control of the business
enterprise, and can therefore be managed.
Response to Market Forces is essentially a philosophy, but must be
supported by competent people and adequate business processes, capable
of responding to market needs. Shorter product life cycles make response
time critical. Thus, Late entrants or slow responders to market
opportunities run the risk of including obsolete inventory in their supply
chains, because the market demand might have dropped off by the time
that their product reaches the market.
Therefore, strategic Inventory Management is critical to lead time
management. Having inventory available at the right place in the supply
chain is the key. An enterprise’s demand and supply parameter defines
their logistics concept, and these business parameters influence the
extended enterprise’s macro inventory strategy.
Under conditions where the market is predictable and long lead times are
acceptable, one would adopt a lean manufacturing approach. In lean
manufacturing, one would eliminate waste as much as possible, and
optimise one’s manufacturing economies of scale by minimising set-up
cost and maximising economic run lengths. One would typically not carry
any finished goods inventory, but rather accept a logistics concept of
‘purchase and make to order’.
Under conditions where the market is unpredictable but relatively long
lead times are acceptable, one would adopt a strategy of postponement.
Postponement is when one delays the decision to integrate the assembly
into its final form, thereby reducing the risk of obsolete inventory. One
would not carry finished goods inventory, but rather carry sub-assemblies
or component parts, so that these can be assembled into the right
configuration as required by the customer. Many of the leading
automotive manufacturers make subassemblies like body-, engine-and,
interior parts and then paint the body, assemble the right engine and
interior trim commensurate with the customer requirements. This
logistics concept is called ‘assemble to order’ and can accommodate mass
customisation as experienced in the automotive industry of late, whilst
maintaining very low levels of finished goods inventory.
Under conditions where the market is unpredictable but the market also
demands relatively short lead times, one would adopt a strategy of agile
replenishment. Agile replenishment is associated with a logistics concept
of ‘make to central stock’ and is used for example in the ‘white goods
industry’ where demonstration models are being displayed at the sales
centres, but the finished goods inventory is kept centrally. Once the sales
centres conclude a sale, they will then notify central distribution who will
deliver. With this logistics concept, responsiveness is high, whilst
finished good inventory is centralised and relatively low.
Under conditions where the market is predictable and demands relatively
short lead times, one would adopt a strategy of continuous replenishment.
Under these market conditions, one typically follows an inventory
strategy such as this in the fast moving consumer goods (FMCG) industry
where product must always be available at arms length, otherwise
customers might switch to competing brands. This inventory strategy is
complimented by a ‘make and ship to stock’ logistics concept, and the
results are that inventory is normally kept at decentralised inventory
control locations, thereby guaranteeing availability. The trade off is made
between the inventory carrying cost and the cost of lost sales due to non-
availability.
DATA ANALYSIS
FUNCTION PERFORMED AS 3PL PROVIDER
All of Above 5
Transportation & Distribution, Prod. planning7
Transportation, Distribution, Material handling, Storage
12
Transportation, Distribution, Material handling, Installing, storage
7Total 31
Functions Preformed by 3PL provider
16%
23%
38%
23%
All of Above
Transportation &Distribution, Prod. planning
Transportation,Distribution,Material handling,storage
Transportation,Distribution,Mat handlg,Installing,storage
INDUSTRY SERVED
Auto 13
Oil 1
Auto & Oil 2
Auto & Retail4
Garment & Auto11
Industry Served
43%
3%6%13%
35%
Auto
Oil
Auto & Oil
Auto & Retail
Garment & Auto
ADVANTAGES OF THIRD PARTY LOGISTICS TO CLIENTS
Customer Service Performance
23%
19%
36%
6%
16% very important
important
Average
less important
not important
Cost Benefits
16%
32%
23%
16%
13%veryimportantimportant
Average
lessimportantnot important
Economies of Scale
16%
19%
26%
16%
23%
very important
important
Average
less important
not important
Volume Variable
13%
23%
6%39%
19%
very important
important
Average
less important
not important
One Stop integreted solution
29%
6%
13%23%
29%
very important
important
Average
less important
not important
INFRASTRUCTURE REQUIRED TO START 3 PL Frequency
L&B,Trained Manpower,MHE,Transport,Vendors
5
L&B,Trained Manpower,MHE,Transport Network
12
L&B,MHE,Transport Network7
All of them 4
L&B,Trained Manpower,MHE,Transport,Consultants
3Total 31
Infrastucture required for 3PL
16%
38%23%
13%
10%
L&B,TrainedManpower,MHE,Transport,Vendors
L&B,TrainedManpower,MHE,TransportNetwork
L&B,MHE,TransportNetwork
All of them
L&B,TrainedManpower,MHE,Transport,Consultants
REVENUE MODELFrequency
Brokerage 4
Commission 14
Depends upon customer3
all of them 2
Brokerage & commission8
Total 31
Revenue Model
13%
45%10%
6%
26%
Brokerage
Commission
Depends uponcustomer
all of them
Brokerage &commission
FINDINGS
• The Five Key Issues of Logistics Effectiveness are core to Supply
Chain Management--
• Movement of Product
• Movement of Information
• Time / Service
• Cost
• Integration, both internal and external, both organizations
and systems
• The most important supply chain activities in business are:
• Material Handling
• Transportation
• Stock management
• Purchase orders
• Processing
• Warehousing
• Distribution
• Transportation, Distribution, Material handling, storage are the
major function which are performed by third party operators, in
sample of 31 operators 12 told that they basically perform these
four major functions.
• The third party operator basically caters to auto industry in my
survey it was found that 43% operators serve the auto industry.
• The important infrastructure required to start the third party logistic
business are land and building(warehouse),trained manpower,
material handling equipment, transport network.
• The revenue model used by third party logistic operator is either
commission or brokerage and many of them basically use
commission as their revenue model.
• The main advantage to clients or the customer is one stop
integrated solution and cost benefits which they get from third
party operators.
CONCLUSION
The way third party logistics operator business is growing, the time is not
far away when all the supply chain works will outsourced to them. As
from my survey I had found that they basically perform four process of
supply chain i.e. Transportation, Distribution, Material handling, storage
but the time is not far away when they will look into other process like
Purchase orders. There is immense opportunity for third party operators
not only in shipping industries but they can also provide there services to
other industries like FedEx and DHL are doing
Thesis has helped me a lot in going in to the deep of the subject matter;
while I was going through my Thesis I came to know about many things
of which I was not aware earlier. In particular it has really enhanced my
knowledge of shipping industry and the different activities and process
performed in that industry. Also while I was conducting interviews, I
came to meet many peoples who had given me much useful information
which have helped me in developing my knowledge base.
I had a very good experience of learning both the things that is exposure
of the fieldwork that is through research work and the other of in-house
job that is collecting data through secondary sources. Both of them taught
me how to handle situations outside as well as inside.
RECOMMENDATIONS
There is business opportunity for SPG shipping in third party
logistic business as there are many big shipping lines operating in
this field like MAERSK and P&O. The company can generate a lot
of revenue from entering into third party logistics business.
As there is availability of manpower, capital, and technology with
SPG shipping so it will be easy for company to enter into this field.
Only company has to make arrangement for warehouse.
Company should first try to go for sectors like auto and garments
as these are the major sector which uses third party logistic service.
Generally a company goes to third party to increase its efficiency
and concentrate on core business activities and to minimize fixed
cost. So, if SPG shipping wants to establish him in this field then it
has to concentrate on above things.
SPG shipping can also look forward for 4 pl business as this is a
new concept and it can be exploited by the company
LIMITATIONS
• Working on Thesis is a good experience because you have to go in
deep of the subject matter; I came to know about many things
which I didn’t know earlier.
• I learnt a lot about practical aspects of life as my project was live
project, like how we behave in corporate world, how we talk to
executives, how to put forward our point in front of them, etc. but
there are various problems being faced by us while going through
all these things.
• As I was required to do survey by going to the third party operators
and collecting information related to their business. The first
problem I faced was difficulty in taking appointment. By listening
that we have come for the survey the gatekeeper does not allow us
to enter the company. If we are able to convince the gatekeeper the
next problem comes with the receptionist, who does not allow
meeting the concerned person, even I was facing lots of difficulty
in taking appointment through telephone.
• If all the barriers are over then comes the main problem that is the
concerned person himself. He/she might be in the meeting, gone
out of the city, is busy and would not be able to meet, etc. If are
able to meet them then they are reluctant to give information by
saying they do not have authority to tell these entire thing about
company or they are very busy that they cannot answer all the
questions. Before we ask anything they start asking questions from
us like why are you collecting this information, what is the
purpose, etc?
BIBLIOGRAPHY
Kotler Philip \Marketing Management \prentice hall of India
private limited \ eleventh edition \identifying the market segment \
278 page number.
G.C Beri \ Marketing search \ Tata McGraw-hill publishing
company limited \ 2000 edition \ secondary data, collecting
primary data, sampling design 79,92,138 page numbers
respectively.
Website:
• http://www.etstrategicmarketing.com
• http://www.logisticsfocus.com
• http://www.indiainfoline.com
• http://www.financialexpress.com
• http://www.findarticles.com
• http://www.keepmedia.com
• http://www.maxwell.co.nz
• http://www.redprairie.com
• http://www.tata.com
• http://www.tcil.com
• http://www.ltdmgmt.com
•
Reference from research work in the library.
APPENDIX
QUESTIONAIRE
Company name-
1) What are the functions you perform as third party logistics
provider?(tick)
a. Purchase and Supply
b. Material Handling
c. Production Planning
d. Production Control
e. Transportation
f. Storage
g. Distribution
h. Product Management
i. Installation and Servicing
j. Strategic Management
2) Which specific industry you serve? (tick)
a. Garment
b. Auto
c. Oil
d. Retail
3) What are the advantages of third party logistics to clients?
(Rate them on the scale of one to five)
a. Customer service performance
b. Cost benefits
c. Economies of scale
d. Volume variable
e. One stop integrated solution
4) What are the infrastructures required for third party logistics?
(tick)
a. Land and Building (Warehouse)
b. Trained Manpower
c. Material Handling Equipments
d. Hardware and Software
e. Transport Network
f. Vendors
g. Consultants
5) What is the revenue model for you? (tick)
a. Brokerage