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Third-party Logistics

Third-party Logistics. Services Offered by Third-party Providers. Basic Service Providers warehouse management order processing order fulfilment transportation carrier selection Value-added Service Providers: shipment/order consolidation import/export customs

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Third-party Logistics

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  1. Third-party Logistics

  2. Services Offered by Third-party Providers • Basic Service Providers • warehouse management • order processing • order fulfilment • transportation carrier selection • Value-added Service Providers: • shipment/order consolidation • import/export customs • logistics information systems (EDI, reporting) • fleet management/operations (e.g. cross-docking) • product assembly/installation • Logistics Integrators: • full responsibility for key supply chain operations • replenishment/order-filling policies • product returns • customer spare parts inventory replenishment • rate negotiation

  3. Contract Warehousing Incoming Products Bulk Warehouse Distribution Center Customers Retailers Outsourced In-house Activities: Labor & supervision Receiving, storage, shipping Value Added Services Traffic/transportation Benefits: Lower capital investment Lower fixed/variable cost ratio Focus to the core Professional service

  4. Supplier Hub / Regional Fulfillment Center / Regional Distribution Center Incoming Materials Or Products Bonded Warehouse Mfg site/ Point of Use Outsourced Activities: Same as contract warehouse Customs clearance Freight consolidation Shipment visibility Inventory ownership Order fulfillment Value Added Services Benefits: Lower capital investment Focus to the core Delayed payment of duties and taxes Pay (for material) on production Visibility of pipeline inventory

  5. Shipment Consolidation and Transportation Customs Incoming Materials Or Products Point of Sale/ Point of Use/ Customers Consol. Center De-con Center Outsourced Activities: Transport arrangement Customs clearance Freight consolidation Shipment visibility Carrier mgmt / rate mgmt Merge in transit Benefits: Shorter cycle time Lower freight costs Visibility of pipeline inventory Inventory consolidation

  6. Product Returns / Technical Services Repair centers Product Return Center Customers OEM Warranty Fulfillment Outsourced Activities: Testing / screening Warranty program mgmt Inventory ownership Warehousing and inv mgmt Fulfillment Depot repair mgmt Benefits: Centralization of inventory Lower capital investment Focus to the core Reduced reverse logistics costs Speedy response to customers

  7. Tier 1 Tier 2 Tier 2 Tier 2 Tier 3 Critical Parts / Service Parts Logistics Repair centers Customers OEM Warranty Fulfillment Outsourced Activities: Failed parts replacement Warranty program mgmt Inventory ownership Warehousing Depot repair mgmt Visibility and Track&Trace Benefits: Centralization of inventory Lower transportation cost Improved visibility of inventory Lower capital investment Better after-sales service support

  8. Logistics Financial Services Customers / Retailers Supplier Manufacturers Distributors Activities: Inventory finance (factoring, LOC) Distribution finance (asset based lending, receivable finance) Payment solutions (COD) Leasing Benefits: Reduced cost of capital Improved cash flow Reduced capital investment

  9. Total Logistics Management Incoming Products Bulk Warehouse Distribution Center Customers Retailers Outsourced Activities: Logistics planning Network optimization 3rd vendor mgmt Information technology Supply chain visibility Benefits: Reduced total logistics costs Global visibility Single logistics solution and contact Focus to the core Reduced investment in logistics

  10. Benefits of out-sourcing the logistics function • improve company focus • focus on core functions and core competencies • cash infusion • selling assets to 3PL provider • access to world-class capabilities and new technology • free-up resources • no capital investments in logistics • resource not available internally • accelerated reengineering benefits • reduce and control operating costs • eliminate labor problems • pushes risk to 3PL provider • risk pooling • cost of investment in technology by 3PL provider shared among clients • achieves economies of scale and provides better service

  11. Risks of Out-sourcing Logistics • Co-ordination costs • Loss of internal logistics management capabilities • Biased choice of service providers • Leakage of sensitive data and information • Service degradation • Less reliable? Longer order cycle time? • Emergency response? • Loss of control and representation • Reduced contact with final customer • 3PL for outbound logistics interact with your customers, you become less visible to your customers

  12. Why 3PL can achieve economy of scale & provide better service? • Consolidation is the key! Example: 2 independent firms, 2 independent supply chains Consider 2 scenarios Scenario 1: The firms performs their own logistics functions Firm 1 2 warehouses 2 separate distribution networks Firm 2 Scenario 2: A 3PL takes care of both firms’ logistics functions Firm 1 1 warehouse 1 distribution network Firm 2 3PL  Zhi-Long Chen

  13. Value Propositions of 3PL Service, Retention & market share Revenue Profit Cost of Goods Sold Technology & Productivity Transportation/Warehousing/ Materials Handling/Distribution Cost Shareholder Value Working Capital Lower Raws & Finished Goods Inventory Shorter “Order to Cash” cycles Invested Capital Fewer physical assets Warehouse, trucks, Transportation Fixed Capital

  14. 3PL Business Models • Transactional model • Carriers – per shipment, per container unit, per weight / volume unit • Freight forwarders – per shipment, per weight / volume unit • Public warehouse operators – per weight / space area unit • Contract logistics model • Activity-based costing, i.e., Fixed management fee + variable charges based on volume • Or, cost plus • Or, gain sharing model • Total logistics management • Fixed management fee + variable charges based on volume • Or, cost plus • Or, gain sharing model

  15. CEO Perspectives on 3PL Industry • Industry’s most significant revenue generators (ranked in order) • Transportation management/services • Warehousing management/operations • Value added services • Dedicated contract carriage • Fleet management/operations • Logistics information services • Top 3 most important opportunities in the industry • Further integration of supply chain activities • Transportation management • Further information systems development Globalisation 4-th Party Logistics Source: Transport Logistics, Vol. 1, No. 1, pp51-66 (1996)

  16. Challenges of 3PL • Setting up internal benchmarks and performance measures before finding a 3PL partner • Development of appropriate and sustainable pricing systems • Developing an interactive and collaborative partner relationship • IBM: no more outsourcing, but “optimized sourcing” • Finding qualified people • Development of systems which are flexible, adoptable and user-friendly • Development of a global logistics infrastructure

  17. Ten building blocks for a successful 3PL relationship • Carefully develop internal costs • Develop key performance indicators • Seek broad company inputs at the Request for Proposal (RFP) stage • Solicit multiple RFPs • Only select the services you really need • Make sure that you understand the technology issues before you sign a contract • Prepare to change your assumptions after the start-up • Avoid cost-plus contracts • Find out if the cultures are similar • Don’t give up complete control of your supply chain Source: Survey of Fortune 500 manufacturers by Accenture and Northeastern University.

  18. European Logistics Market Source: Deutsche Bank

  19. Global Logistics Expenditures Source:Bowersox and Calantone, CSFB Estimates. Size of 3PL Industry • In 1999, around $40-45 Billion – 5% of the total logistics expenditures • In US, the growth rate for 3PL market is estimated around 15% annually 11.4% of Global GDP

  20. From Modern Material Handling, Nov. 2003

  21. Company Revenues ($ million) Ryder Integrated Logistics $1,300 Penske Logistics 959 Schneider 875 Tibbet & Britten Group 659 Americold 650 North American Logistics 650 Fritz Companies 578 UPS Logistics 488 APL Logistics 420 Federal Express 360 Major 3PLs Source: Logistics Magazine (07/00)

  22. Airborne Americold APL Logistics Arnold BAX global Burnham Services Corp. Caterpillar Logistics Services Circle International Cardinal DSC Logistics Eagle Global Logistics EXEL Logistics, Inc. Expeditors Federal Express Logistics Services J.B. Hunt Logistics, Inc. HUB Group Logistics Services Leaseway Logistics Services, Inc. Maersk Logistics Menlo Logistics North American Penske Logistics Power Roadway Logistics Systems C.H. Robinson Company Ryder Dedicated Logistics Schneider Logistics Standard T& B TLC TNT Contract Logistics, Inc. UPS Logistics USF Logistics USCO Distribution Services Yellow Logistics Services, Inc. Major 3PL Operators in USA Source: CSFB Industry Report, Sept. 2000

  23. How many companies use 3PL? • 93 companies • Covering automotive, chemical, computer, consumer products, & electronics • 52% with sales revenues over $1B, 10% between $500M to $1B From “3PL Study: Results and Findings of 2001 Annual Study” by Cap Gemini Ernst & Young

  24. What 3PL functions do companies use? From “3PL Study: Results and Findings of 2001 Annual Study” by Cap Gemini Ernst & Young

  25. Benefits of 3PL From “3PL Study: Results and Findings of 2001 Annual Study” by Cap Gemini Ernst & Young

  26. Ten Top reasons Companies Outsource Source: Fifth Annual Outsourcing Index – Deloitte Consulting, January 2003

  27. Leading Global Air Freight Forwarders 1998 Source: Stinnes, MergeGlobal, IATA figures and Deutsche Bank

  28. Leading Global Sea Freight Forwarders 1998 Source: Stinnes and Drewry

  29. Growth of 3PL Industry • In US, the growth rate for 3PL market is estimated around 15-20% annually. • In Asia and the rest of the world, the growth rate is estimated to be even higher in the range of 20-30% annually. China: • 2001 Transport and logistics expenditure is US$230 billion (20 % of GDP), with only $4.7 billion on outsourcing. • Key factors for stimulating growth: • Increased operations of multi-national firms in China • Cost pressures • Government support in establishing national logistics centres • Reduced regulations; China’s entry to WTO

  30. Mercer’s 3PL Survey in China (2002) • 20 logistics providers and 50 shippers in 8 sectors • 85% of providers’ revenue comes from basic services such as transportation, management and warehousing • Nearly 70% of providers believe clients are not ready for outsourcing, while almost half of the shippers surveyed cite obstacles for outsourcing, especially 3PL service quality • The market is very fragmented: No 3PL provider interviewed has a market share over 2%. About 80% of providers’ revenues come from the Yangtse River and Pearl River Delta regions • MNC shippers prefer MNC providers for their IT systems, industry/operational expertise, and standardized operations • Chinese shippers prefer Chinese providers for their lower prices, local knowledge and national network coverage

  31. Hong Kong Logistics Industry and Major Local Players • Container throughput in 2001: 17.9 million TEUs • Air cargo throughput in 2001: 2.1 million tonnes Major Local 3PL Players • OOCL and Cargo Systems • Kerry Logistics • Jardine Logistics • IDS Logistics • Seapower Resources Int’l • SUN Logistics • LINE • Power Logistics • TradePort Some Major Chinese 3PL Players • COSCO • China Shipping • SinoTrans • EAS • China Merchant

  32. Course Review – Topics Covered

  33. Topics Covered • Introduction to logistics management • what is logistics management • importance of logistics management • Supply Chain Structures • Modularization, postponement • Strategic orientation: market, product or process focussed • Site competence vs. process technology complexity • Transportation strategy • Transport modes and cost components • Tradeoffs in transportation design • Transportation costs vs. inventory • Transportation costs vs. responsiveness and service • Transportation Network Design • Pros and Cons of Direct Ship, centralized DC, etc.

  34. Vehicle routing and scheduling • Shortest path • Dijkstra’s algorithm • Travelling salesman problem • Heuristics • Vehicle routing • Clarke-Wright savings methods • Gillette & Miller’s Sweep Method • Generalized Assignment Model for Vehicle Routing • Set Partitioning Model for Vehicle Routing • Optimization-based heuristics techniques • Full truckload vs. LTL

  35. Location strategy • factors to consider • quantitative models for analysis • Center of Gravity Method • Heuristics • p-median problem, p-center problem • network optimization models • Location-allocation models • supply chain network design: selective evaluation heuristic, guided linear programming, multi-echelon multi-product networks • Covering models • other approaches • Regression analysis • Factor rating system, Delphi method • AHP • dynamic location models

  36. Process Choice and Facility layout strategy • Process flow analysis • Critical Path method • Process types: project, job, batch, line • Layout planning • Product vs. process layout • Assembly line balancing • CRAFT (Computerised Relative Allocation of Facilities Technique) • Systematic Layout Planning • Matching products and processes • Storage and Material Handling • Order picking • Warehouse layout and stock location • Cross docking

  37. Global logistics • Drivers and challenges • How leading edge companies manage logistics • New organizational paradigm for the supply chain of the future • E-logistics • Internet impact on logistics • E-logistics services; market opportunities • Achieving Strategic Fit • Competitive dimensions: cost, quality, speed, flexibility • Order qualifiers and order winners • Efficient vs. responsive supply chains • Benchmarking the supply chain • Supply chain mapping and throughput efficiency • Supplier and distributor benchmarking • Supply Chain Operations Reference Model (SCOR)

  38. E-fulfilment • Online retailing • Bricks-&-mortar stores vs. e-tailers • Acceptance Sampling (not covered in the final) • E-procurement • On-line auctions and exchanges • Quick response logistics • Apparel industry and Quick Response • Grocery industry and Efficient Consumer Response • Automotive industry and Lean Manufacturing • Reverse logistics • 3rd party logistics • Services offered • Benefits and risks, Growth and challenges • 3PLs in China

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