3PL4PL Report

CHARACTERISTICS, STRATEGIES AND TRENDS FOR 3PL/4PL IN AUSTRALIA

ALPHA Research Consortium30 March, 2004

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Program Contact Details

Professor John Gattorna

Co-chair, ALPHA Research Consortium Sydney Business School, Supply Chain Research Centrea [email protected]

Professor Willem Selen

Co-chair, ALPHA Research Consortium Macquarie Graduate School of Management [email protected]

Robert Ogulin

Program Manager Sydney Business School, a Supply Chain Research Centre [email protected]

a

A Graduate School of the University of Wollongong

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Table of ContentsPROGRAM CONTACT DETAILSTABLE OF CONTENTS FIGURES TABLES ACKNOWLEDGEMENTS GLOSSARY OF TERMS 1 EXECUTIVE SUMMARY 1.1 1.2 1.3 2 Research Outline Key Outcomes Conclusions and Possible Next Steps 2 3 5 6 7 8 11 11 12 13 14 14 15 15

CONTEXT AND MARKET DEFINITIONS 2.1 2.2 2.3 Research Context Methodology Overview Definitions and Terminology

3

CHARACTERISTICS, STRATEGIES AND TRENDS FOR 3PL/4PL IN AUSTRALIA 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 Significance of Logistics Outsourcing to Australia Scope of Logistics Outsourcing Strategic Alliances, Partnerships and Collaboration Cross-Company Integration and Collaboration Client (Shipper) Alignment Geography and Physical Infrastructure Recruiting, Developing and Retaining People Government Involvement Supply Chain Case Study BlueScope Steel

20 20 22 25 31 33 35 37 38 40

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4

APPENDICES 4.1 4.2 4.3 Methodology Top Australian Logistics Service Providers Shipper and LSP Summary Survey Results

49 49 60 65 81

5

REFERENCES

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FiguresFigure 1: Figure 2: Figure 3: Figure 4: Figure 5: Figure 6: Figure 7: Figure 8: Figure 9: Figure 10: Figure 11: Figure 12 Figure 13: Figure 14: Figure 15: Figure 16: Figure 17: Figure 18: Figure 19: Figure 20: Figure 21: Figure 22: Figure23: Figure 24: Figure 25: Figure 26: Figure 27: Evolution from In-house Logistics to Various Outsourcing Models 14 Research Methodology 15 Supply Chain Management Performance /Capability Continuum 16 Freight Logistics Activities in Australia, 2002 21 Shipper Satisfaction with LSP Performance 23 Types and Extent of Outsourced Activities 24 Cost of Logistics Activities Relative to GDP, USA 25 Reasons Given by Shippers for Selecting LSPs 27 Uncertainty about Service Quality, as Perceived by Shippers & LSPs 28 Department Mgrs Involved in Decision to use Contract Logistics Companies 29 Extent of Outsourced IT: Shipper and LSP Perceptions 31 Importance of Customer Service Orientation for Selecting LSPs 34 Importance of LSPs Contribution to Increase.Service 34 Importance of Suppliers Geographical Distance 36 Shipper and LSP Emphasis Over the Next Two Years 38 Queensland COLORBOND Steel Logistics Flow Paths 41 Gattornas Strategic Alignment Model 43 A Typical Array of Behavioural Segments Found in Many Industries 44 Strawman Customer Segmentation, BlueScope Steel 45 Generic Supply Chains 46 Strawman Strategy Response BlueScope Steel 47 ALPHA Research Consortium Team Structure 49 Research Timeline 50 Research Procedure Flowchart 51 Industries Represented by Respondents of Shipper Survey 54 Layered View of Supply Chain Management Systems 56 Supply Chain Software Vendor Revenue Share Forecast, 2003 57

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TablesTable 1: Taxonomy of Supply Chain Outsourcing Solutions Table 2: Leading Supply Chain Software Providers Table 3: Top Australian Logistics Service Providers 15 56 60

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AcknowledgementsIn early 2003, the Logistics Association of Australia (LAA), sought expressions of interest to conduct research into Characteristics, Strategies and Trends of 3PL/4PL in Australia. The LAA felt that there was insufficient information in the Public Domain relating to the development of Third Party Logistics providers and new business models such as 4PL. The ALPHA Research Consortium under the leadership of Sydney Business School (a Graduate School of the University of Wollongong) and Macquarie Graduate School of Management was selected to conduct the study. Since then a number of organisations have provided significant support and an even larger number of individuals have worked hard to produce the research findings that are contained in this report. The leadership of the ALPHA Research Consortium would like to thank members and sponsors (in alphabetical order) who contributed financial support and management time: BlueScope Steel Ltd (formerly BHP Steel Ltd) DHL Linfox Australia Ltd Logistics Bureau Lucis Pty Ltd Manugistics

Of the sponsors listed above, special thanks go to Peter Robertson, Vice President Operations Planning, BlueScope Steel, who was instrumental in securing the seed funding for the research venture. ALPHA thanks: Sydney Business School and Macquarie Graduate School of Management for providing the infrastructure and access to excellent academic resources; and Cranfield School of Management, for sharing previous research on this topic; Program Manager Robert Ogulin, Sydney Business School, Supply Chain Research Centre; Associate Professor John Rodwell, Research Adviser, MGSM; and the team of researchers from Sydney Business School: Mayra Campos, Angel Friscione, Beatriz Friscione, Anastasia Konstantelos; and Macquarie Graduate School of Management: Manni Bojnordi, and Kate Hughes.

Finally, special thanks to those busy executives who freely gave their time to participate in the initial interviews and complete the surveys; without their willing participation we would not have had had data to work with.

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Glossary of Terms

3PL

Third Party Logistics: an external party that performs all or part of the corporate logistics activities on behalf of the Shipper, such as transportation, warehousing, inventory management, etc. Fourth Party Logistics: a new business model, integrating resources, capabilities, and technology of the lead enterprise(s), and other organisations with complementary capabilities, to design, build, and run comprehensive supply chain solutions. Advanced Planning and Scheduling: a tactical and operational planning tool that includes demand planning, inventory management, production planning and scheduling, and transportation planning modules. The concept of Strategic Alignment as applied to the design and organisation of supply chains. Alignment means ensuring that all internal capabilities, processes and technology are aligned with end-customers service expectations at the appropriate cost-to-serve. Alignment principles also apply to Shipper-LSP-outsourcing relationships. A set of functional, managerial, process, and technological skills that are combined to achieve supply chain alignment. The client in this research refers to that party in the supply chain that has outsourced all or part of their logistics functions to a particular LSP. In other words the client is the LSPs customer (Shipper). Synchronisation of different parts of supply chains, and generally involves trusting relationships between customers, suppliers, 3PLs, and internal business units. The customer (or end-customer) in this research refers to that party in the supply chain that is the recipient of the products and services from the Shipper via an LSP. Distribution Centre: a facility that receives inventories from various supplying sources, and re-distributes to other selling or customer locations. Decision Support System: usually a sophisticated network optimisation model with in-built algorithms that support the decision-making process in complex situations. Electronic Data Interchange: a method of electronic interchange for business-to-business transactions developed along specific electronic format standards. Enterprise Resource Planning: an integrated software system that coordinates different modules to perform all

4PLTM a

APS

Alignment

Capability Client

Collaboration

Customer

DC

DSS

EDI

ERP

a

4PL

TM

is a registered trademark of Accenture

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standard business data processing functions (such as financial management, accounting, forecasting, warehouse management, etc.) across the entire business. FMCG Fast Moving Consumer Goods: refers to a company that manufactures and/or distributes consumer goods with stock-turns generally greater than 20 per annum. Any logistics activity owned, managed and executed by an organisations own in-house resources; sometimes referred to as in-sourcing. Lead Logistics Provider: a service provider that combines and utilises advanced capabilities to optimise logistics and supply chain activities across multiple (subordinate) LSPs. The process of planning, implementing and controlling the cost-efficient flow and storage of raw materials, work-inprogress inventory, finished goods, and related information, from point-of-origin to point-of-consumption, for the purpose of meeting agreed customer service levels.1 Logistics Service Provider: any organisation that provides a range of logistics service capabilities to participating members of industry supply chains. This is a generic term that will be used throughout this report when referring to any type of outsourcing provider (3PLs; LLPs; etc.), unless specifically stated otherwise. Joint Services Company: a co-owned, co-managed service company which is one of the new breed of supply chain execution models. It normally involves a small number of equity partners who agree pre-determined incentives and rewards, based on performance. It is infused with an innovative culture and usually has significant financial engineering content to fund initial set-up and ongoing operations. Multinational Corporations: this term generally refers to trans-national companies that operate manufacturing and logistics facilities around the world, but are headquartered mainly in the USA, or Europe. Materials Requirements Planning: a set of logically related procedures, decision rules, and records (or inputs), that are designed to translate a Master Production Schedule (MPS) into time-phased net requirements.2 The first and most fundamental level of supply chain performance, requiring capabilities that specifically focus on cost efficiencies. Refer to Figure 3. Business process and network infrastructure configurations designed to deliver products and/or services to customers for minimum cost at pre-determined service levels. Transferring a firms logistics functions and associated capabilities to specialised external services providers. Any formal or informal relationship between two or more organisations for the purpose of gaining mutual economic benefit. The process of planning and scheduling production based on matching available capacity with demand forecasts.

In-house Logistics

LLP

Logistics Management

LSP

JSC

MNC

MRP

Operational Excellence

Optimisation

Outsourcing Partnership

Production Planning

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RFID Shipper

Radio Frequency Identification: a relatively new technology to electronically track products through logistics networks. The owner of products and services being moved through logistics networks, and corresponding supply chains; may be manufacturer, distributor, retailer, etc. A sequence of activities related to transformation of raw materials into saleable products. These activities are typically performed by multiple firms in a chain or network; the interfaces between entities along supply chains is particularly critical. Supply Chain Management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third party service providers, and customers. In essence, Supply Chain Management integrates supply and demand management within and across companies.3 Virtual Network Consortia: a type of execution model with embedded alignment that is similar in many respects to the 4PL and Joint Services Company (JSC) business models, but without the strict equity arrangements binding stakeholder members. In the VNC model, stakeholders are arrayed in loose alliances that allow them to either join or leave the consortia as appropriate. In most other respects this model is similar to the 4PL and JSC models in that a new business model acts beyond traditional boundaries and organises companies as a dynamic capability network to offer a unique service proposition to their customers. All three focus on acquiring the specific capabilities needed at a particular point in time, to provide a particular supply chain solution, at speed and at scale Warehouse Management System: a software system designed to assist in the task of managing inventory in a warehouse, and includes stock location, bar-coding, inventory control, materials-handling, productivity measurement, etc.4 .

Supply Chain(s)

Supply Chain Management

VNCa

WMS

a

Virtual Network Consortia (VNC), is a term first coined by the ALPHA Research Consortium, (2004).

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11.1

Executive SummaryResearch OutlineLogistics Service Providers (LSPsa), mainly in the form of Third Party Logistics Providers (3PLs), have become an integral part of many corporate supply chains. As competitive pressures increase, LSPs are becoming more integrated with their Shipper customers. This is being achieved by creating strategic alliances and partnerships with other complementary service providers that enhance the overall value propositions on offer. Lead Logistics Providers (LLPs) have also emerged, offering integrative services that go beyond basic transportation and warehousing functions. In addition, new business models in supply chain management are also being tried in various configurations; these include Fourth Party Logistics providers (4PLs), and Joint Services Companies (JSC), where the entire set of supply chain processes is outsourced to a separate management entity. We are also seeing a modification of the strict configuration of the above two models emerge as corporations organise into less rigid networks to gain access to capabilities, without long-term equity commitments. We have named this category of new business models Virtual Network Consortia (VNC). To confirm industry developments and bring clarity to the discussion of different business models in logistics and supply chains, the Logistics Association of Australia (LAA), commissioned the ALPHA Research Consortium to conduct a 6-month study into the Characteristics, Strategies and Trends for 3PL/4PL in Australia, commencing August 2003. The study had several aims: to establish a robust foundation for discussion amongst supply chain stakeholders; to provide input to companies and government policies; and to enable industry to deploy innovative supply chain business models in the future. The ALPHA Research Consortium was led by Professor John Gattorna, Supply Chain Research Centre, Sydney Business School, in collaboration with Professor Willem Selen, Macquarie Graduate School of Management, and Professor Martin Christopher, Cranfield School of Management, and sponsored by industry (BlueScope Steel, DHL International, Linfox, and Manugistics), and consulting partners (Logistics Bureau, and Lucis). The following chapters summarise the outcomes of this research, beginning in Section 2.3 by addressing the question of outsourcing definitions and terminology. Section 3 contains the main body of the research findings, and starts with qualification and quantification of industry characteristics and trends in Australia. A combination of secondary research, best practice analysis, and primary surveys provide new insights and forward-looking conclusions in Sections 3.2 to 3.8. A number of Appendices provide further supporting materials, including: a supply chain Case Study BlueScope Steel; supply chain Software Providers in Australia; the major LSPs operating in Australia; a summary of Shipper and LSP Survey results; and supporting References.

Because of the many different terms used to describe service providers in the logistics industry, and the different meanings attached to these terms, ALPHA has chosen to use one generic descriptor throughout this Report when referring to any type of single outsourcing provider. The term selected is: Logistics Service Provider (LSP); see Glossary.

a

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1.2

Key OutcomesThe key outcomes of this research are summarised in the following six (6) themes:a 1. Strategic Alliances, Partnerships and Collaboration

The creation of a partnership/alliance between companies typically reflects the intention to pursue a common objective by improving process coordination through collaboration, better understanding of the partners business, greater information sharing, coordinated investments, and joint planning. In the Shipper survey, 90% of Shippersb were satisfied or very satisfied with LSP services, indicating a match of the needs of Shippers outsourcing requirements by their LSPs. However, further analysis of data, revealed differing priorities and business approaches between Shippers and LSPs. LSPs have significantly increased the range of services offered to Shippers in Australia over the last decade. Commodity-type contractual arrangements between Shippers and LSPs often restrict the development of new LSP capabilities. Shipper-LSP partnerships have to be based on factors other than price alone. Leadership is required from within the ranks of Shippers and LSPs, to introduce innovative new practices throughout supply chains.

2. Cross-company Integration and Collaboration Information technology (IT), has an integral role in the success of a company and its supply chain network. An effective technological environment enables additional value-added services, such as: full visibility; and tracking of products through the supply chain. IT remains the key enabler for achieving benefits in outsourcing, however there is disagreement about exactly what capabilities are needed. Lack of IT capabilities (or lack of access to IT capabilities), are quoted as the main reasons for not achieving full supply chain benefits. Technology is enabling end-to-end supply chain visibility across a variety of platforms.

3. Client (Shipper) Alignment The original measures of value creation were cost reduction, and improved operational efficiency. However, successful outsourcing relies more on an understanding of end-customers and clients (Shippers), business requirements. The main performance criteria in a Shipper-LSP relationship is achieving high levels of satisfaction as perceived by the end-customer. Mis-alignment between Shipper and LSP (observed on several dimensions) results in lower customer service and lost revenue opportunities. Formal contracts are no guarantee of achieving superior supply chain performance in todays dynamic environment.

a b

These six themes will be further explained in Section 4.1 Survey Question: Overall, how satisfied are you with the performance of your Logistics Service Provider? Responses: 4 point Likert-scale: Very Satisfied, Satisfied, Dissatisfied, Very Dissatisfied.

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4. Geography and Physical Infrastructure Until recently, the tyranny of distance seemed to describe a specific geographic reality for companies operating on the Australian continent. Survey results indicate physical distance (away from customers and suppliers), is now of less concern than other issues. Multinationals are leveraging their global skills into the Australian landscape. The geographical disadvantages of Australia are being overcome by better information technology and improved infrastructure.

5. Recruiting, Developing and Retaining People The recruitment and development of high calibre personnel is perhaps the biggest issue facing LSPs as they grow rapidly over the next decade. Some of these people will come from Shippers that have outsourced their business, but this will be far from enough. What will be needed is significant investment by LSPs, in a multi-tiered education program that will deliver the required numbers of human resources at the appropriate capability levels. Based on the results of the ALPHA survey both Shippers and LSPs appear to have missed this important point. Lack of high calibre management and appropriately skilled employees remains a blind spot for the logistics industry in Australia.

6.

Government Involvement

In recent years, the expansion of companies interstate has heightened awareness of the differences in State legislation across Australia, and how these differences contribute to complexity and therefore cost in supply chains. Overlaid upon this issue are Federal Government laws that affect movement of product in and out of Australia, in order to optimise resource allocation and logistics investment. Discrepancies in government policies and legislation, and disparate taxation structures must be addressed sooner rather than later. Any comparative disadvantages Australian logistics currently enjoys via superior infrastructure could diminish as more Asian countries improve their own infrastructure and introduce new streamlined policies and procedures for cross-border logistics. Security will permeate every aspect of logistics and supply chain management in the future. This could be viewed as an impediment or an opportunity in the management of supply chains.

1.3

Conclusions and Possible Next StepsThis report highlights a number of areas for future development in the logistics industry in Australia, along the six dimensions outlined above. The specific supply chain Case Study undertaken through a series of interviews (and the accompanying workshop involving BlueScope Steel, Linfox and DHL), confirms that the information collected in this research is relevant to the development of supply chain performance improvement. This research is part of an ongoing program, and ALPHA hopes that the benefits for all participants and stakeholders in this work will strengthen over time as these findings, and their implications, are applied more broadly.

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22.1

Context and Market DefinitionsResearch ContextEver increasing competition in todays global markets, introduction of new products with shorter lifecycles, faster dissemination and proliferation of information, and heightened expectations of customers have forced enterprises to invest in, and focus attention on, entire supply chains. Today, some companies are extending their reach outside of traditional supply chain boundaries to engage in activities that go beyond their own sphere of control. To do this, they organise competitive networks of enterprises to develop and access supply chain capabilities for those organisations that are part of such value-adding networks. The scope of this research report covers aspects ranging from in-house logistics, with a focus on productivity, cost-savings and functional excellence, to various outsourcing business models. Figure 1 illustrates how this evolution has progressed over the last 30 years.

Re-engineering

ClientIncentives Principal

Technology

Loose alliance of entities/stakeholders that bring all required capabilities to the table Stakeholders can join and leave the the consortium as appropriate (plug-and-play)

Client

Principal

Consultancy

VNC 2000s +

Client

Op. Expertise

Bank

LSP

CONSULTANCY Client BUSINESS PROCESS MANGEMENT Client4PL

LSPs TECHNOLOGY

4PL 1990s-2000

Client FINANCIAL ENGINEERING

Outsourcing 1980s-1990s

Client

LSPs

Insourcing 1970s-1980s

Client

Internal Logistics Operation

Source: Adapted from Gattorna (1998)

5

Figure 1: Evolution from In-house Logistics to Various Outsourcing Models

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This research aims to provide input for private and public enterprises alike, and to enable the logistics industry to implement innovative supply chain business models to help make Australia Inc. more competitive in the Asian region, and globally.

2.2

Methodology OverviewThe various phases of the research project are outlined in Figure 2. A more detailed description of the research methodology can be found in Section 4.2.

Phases

1 . R e se a rch P re p a ra tio n a n d F o u n d a tio n

2 . F ie ld W o rk a n d In fo rm a tio n G a th e rin g

3 . A n a lysis a n d R e p o rt G e n e ra tio n

C o n firm o b je ctiv e s b a s e d o n sp e c ific a tio n s of te n d e r E s ta b lish te a m

Objectives

S e c o n d a ry re se a rc h u s in g a ca d e m ic a rtic le s, in d u stry w e b site s a n d p a p e rs C la rify a p p ro a ch e s , to o ls & stru ctu re s fo r fie ld re se a rch D e v e lo p in d u stry p o in t-o fv ie w O p e ra tio n a lis e re s e a rc h q u e stio n s C h o o s e su rv e y in stru m e n ts L ist o f h yp o th e se s & iss u e s to b e s tu d ie d w ith in ta rg e t se g m e n ts S u m m a ris e lite ra tu re re v ie w a n d s e c o n d a ry re s e a rch to sh a p e fie ld re s e a rch

G a th e r a c cu ra te s tra te g ic & o p e ra tio n a l in fo rm a tio n fro m le a d in g 3 P L /4 P L m a n a g e rs - C o n v e rg e n t In te rv ie w s - S u rv e ys R e co rd a n d c o d ify d a ta C a se -b a s e d S tu d y - In te rv ie w s - W o rk sh o p

C o n firm o r refu te h yp o th e s e s & in te g ra te fie ld re se a rc h fin d ing s A n a lyse q u a lita tiv e & q u a n tita tiv e d a ta u s in g s ta tis tic a l a n a lysis B e st P ra c tice co m p a ris o n s P ro d u c e re p o rt in co rp o ra tin g s e co n d a ry re s e a rc h , s u rv e y re su lts, w o rk sh o p , & in te rv ie w s P re s e n t fin d in g to L A A P re s e n t fin d in g s to o th e rs & m e d ia , a s a g re e d P ro m o te a w a re n e s s o f stu d y C o n clu s io n s a n d im p lic a tio n s fo r in d u s try a n d s u p p ly ch a in s F u ll re p o rt w ith g ra p h ic s a n d e x e c u tiv e su m m a ry F u rth e r re s e a rc h p e rs p e ctiv es P re s e n ta tio n s

Deliverables

S u m m a ry o f e x e c u tiv e in te rv ie w s a n d s u rv e ys P ilo t su rv e y in stru m e n ts to te s t v a lid ity a n d re lia b ility, in c o rp o ra te fe e d b a c k, a d ju s t s u rv e y, & d istrib u te D o cu m e n te d w o rk sh o p o u tc o m e s D a ta ta b le s

Figure 2: Research Methodology

2.3

Definitions and TerminologyaIn the marketplace there is confusion over the definitions of LSPs, 3PLs, LLPs and 4PLs. This is illustrated by: 3PLs advertising as 4PLs, and some companies promoting themselves as 5PLs! In a global study conducted by Cap Gemini Ernst & Young (CGE&Y) in 20036, 75% of respondents found the term 4PL confusing (a 10% decrease compared to the previous study, in 20027). This section summarises current outsourcing terms in order to satisfy the LAAs original research specification. Logistics and supply chain outsourcing solutions are unique business responses that relate directly to the evolution of the supply chain. Current outsourcing terminology in the industry has changed rapidly as logistics outsourcing has moved from a functional, commodity-based (and often narrowly defined) contractual agreement for one or more functional areas, into more comprehensive logistics services provision. This stage-like

a

Refer to Glossary for clear definitions of all these terms

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development of outsourcing solutions has culminated in the current array of logistics business models in the marketplace. The benefits gained from different outsourcing solutions do not have to be incremental; companies improving their supply chain capabilities have the opportunity to create a performance gap between themselves and their competitors. The first step is to implement procedures to help improve and sustain operational excellence. Next, companies can build capabilities for supply chain integration and collaboration that result in new value-adding offerings for customers and business partners. After achieving proficiency in cross-company supply chain activities, virtual supply chains and new business models can be developed: allowing further revenue and profit generating opportunities.8 Such evolutionary development in supply chain management and logistics outsourcing is depicted in Figure 3.

value

3. Virtual Supply ChainsPerformance Gap

Performance effectiveness

2. Supply Chain Integration and CollaborationPerformance Gap

Networks of Businesses New Business Models: 4PL;MSCO; JSC; VNC *

1. Operational Excellence

Strategic Sourcing Supply Chain Planning Collaborative Design Management of LSPs

Key 4PL

*: Fourth Party Logistics

MSCO : Managed Supply Chain Operations JSC VNC : Joint Services Co. : Virtual Network Consortium

cost

Product Development; Procurement; Materials Handling; Transportation (inbound/outbound);Manufacturing

function

process

collaboration

synchronisation

Breadth and Depth of Supply Chain Capability

Source: Adapted from Gattorna (2003)9

Figure 3: Supply Chain Management Performance/Capability Continuum

Logistics Service Provider (LSP) Table 1 overleaf contains a Taxonomy of Supply Chain Outsourcing Solutions, with strict definitions provided for each specific type of service provider, categorised as either an LSP or New Business Model. More detailed definitions of these three variants are provided below. 1. Prime Asset Provider Prime Asset Providers offer functional capabilities through one-to-one contracts with their clients. These were often the initial choice for companies outsourcing discrete functions such as transportation, warehousing, packaging solutions, and inventory control. This was the forerunner of the 3PL provider.

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Type1. Prime Asset Provider

Key CharacteristicsTransportation asset provider, any mode Warehouse, cross-dock, property facility

ModeSingle Mode Provider

Logistics Service Provider (LSP)

Manufacturing (outsourcing) Packaging products

2. Third Party Logistics Provider (3PL)

Integrated warehousing and distribution IT infrastructure integration and support Localized data tracking Asset owner and asset buyer WMS systems

Combination of Functions

3.

LeadLogistics Provider (LLP)

Experienced logisticians Combines & utilises advanced capabilities to optimise logistics & supply chain activities Manage across multiple (subordinate) 3PLs Decision support Continuous improvement

Several 3PLs Managed by one Super-3PL

4.

Fourth Party Logistics Provider (4PL)

Supply chain visionary Supply chain planner and optimizer Deal shaper and maker

New Business Models: 4PL; JSC; VNC

Supply chain re-engineer Project management Service, system, and information integrator

New Business Model

(Networks of Businesses)

Continuous innovation Technology as the prime capability 5. Joint Services Company (JSC) Co-owned, co-managed Small number of equity partners Agreed incentives and rewards, performance based Innovative culture Significant financial engineering to fund initial set-up and ongoing operation 6. Virtual Network Consortium (VNC) Dynamic capability network Type of execution model with embedded alignment similar to 4PL & JSC, but without strict equity arrangements Stakeholders arrayed in join/leave as appropriate loose alliances; can

New Business Model

New Business Model

Provides particular supply chain solution at speed and at scale Highly connected processes across companies Shared investment- shared incentives

Source: Adapted from Gattorna (2003)

Table 1: Taxonomy for Supply Chain Outsourcing Solutions

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2. Third Party Logistics Provider (3PL) 3PLs tend to be contractual Logistics Service Providers with a focus on maximising their own assets, with a specific operational focus on logistics and supply chain issues. There is usually a lack of experienced supply chain managers to work with customers, and this coupled with low investment in R&D, information technology, and project management, has restricted the pace of their development. According to Gattorna,10 3PLs can be defined in terms of some combination of the following attributes: owns/leases a vehicle fleet, and may also use a substantial contract fleet; owns/leases and operates a warehouse; employs a large number of blue-collar workers; provides a large range of value-added services around labour or capital intensive tasks; involves a combination of fixed-income and benefits-sharing relationships at or below the level of Supply Chain Director; can manage international movements; has IT mostly in the form of point solutions for Warehouse Management Systems (WMS), and routing and scheduling. An often-expressed complaint about 3PLs by their clients is the significant amount of time they (the Client company) still have to spend managing their outsourced logistics tasks. 11 3. Lead Logistics Provider (LLP) One of the primary roles of 3PLs in the marketplace is managing and outsourcing transportation for Shippers. This industry is highly fragmented, although over the past few years there have been large international consolidations.12 The larger 3PLs enjoy greater economies of scale, which enables them to successfully negotiate contacts across regions, as well as meeting the needs of shipping companies that are working to reduce their number of vendors.13 A recent change in this sector of the logistics industry has been the development of LLPs, that function as supply chain masters for shipping companies; acting as a single point of contact while managing a network of 3PLs. Two predicted consequences of the use of LLPs by Shippers are: increased business for larger 3PLs that meet Shipper demands; and the smaller 3PLs struggling with reduced margins, forced technological compliance, and possibly termination.14 LLPs are primarily the same as 3PL providers, with extra visibility tools, optimisation modelling for decision support purposes, and terms of trade that reward them with a fee linked to some mathematical modelling of costs and corresponding benefits.

New Business Models This category includes: Fourth Party Logistics Provider (4PL); Joint Services Company (JSC); and Virtual Network Consortia (VNC). 4. Fourth Party Logistics Provider (4PL) A 4PL is a business model defined as: an integrator that assembles the resources, capabilities and technology of its own organisation and other organisations to design, build and run comprehensive supply chain solutions, and which have the cultural sensitivity, political and communication skills, and the commercial acumen, not only to find value, but to create motivating and sustainable deals that offer incentives to all the parties involved. 15 4PLs generally develop around a problem or capability deficiency. The solution provided is a unique combination of capabilities that transform the Client (or Clients) business. The primary strength of a 4PL is the management of a variety of services,

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and the delivery of complex solutions on behalf of Clients, who themselves may be part of the joint venture/management company. 4PLs can develop around an emarketplace as well as across industries, providing multi-client synergies. The Client relationship is based on a detailed contractual agreement with a customised solution to a specific supply chain issue(s), and for best results involves equity-based commercial arrangements. 5. Joint Services Company (JSC) The JSC is a new type of execution model designed for large-scale transformations. These transformations usually involve two or more companies working in a strategic partnership, along with several minor complementary partners to cover all capability requirements. The JSC is effectively a separate co-owned, co-managed service company, infused with an innovative culture, where all parties are incentivised according to pre-agree formulae. Another feature is the prominence of financial engineering aspects in funding the set-up and on-going operation of the entity. No such model currently exists in Asia Pacific. 6. Virtual Network Consortia (VNC) VNC are based on an arrangement between enterprises to deliver a unique value proposition for a particular industry requirement. New business models in supply chain management differ from the sequential relationships found in todays approaches,16 and the resulting incremental improvements. Strategic new business solutions are the route to competitive advantage, because the supply chain is less linear and more a series of integrated partnerships enmeshed in multiple simultaneous transactions.17

Companies extend outside their traditional supply chain boundaries and reach beyond their own sphere of control when they are organised into networks. This enables them to develop and access supply chain capabilities not offered by more traditional approaches, resulting in unique value propositions to the end-customer. Such new supply chain business models require companies to move from a functional mind-set to a cross-functional systemic perspective. In these new organisations, companies are no longer viewed as a set of functions, but as a combination of integrated capabilities. VNC include the capabilities of various suppliers of product, technology, and operational expertise. VNC may also include any service related to a consumer offering, for example: services from financial institutions, insurances, legal advisors and the like. The activities and interactions of companies in the VNC are based on dynamic and flexible organisational structures where the traditional supply chain boundaries begin to blur. Performance management systems must be aligned across supply chains and become deeply imbedded in participating organisations in order to be successful. Competition is based upon multi-firm supply chains18 where advanced practices transfer responsibility without the constraints of corporate boundaries. Trust and collaboration hold these new supply chain business models together. A horizontal, customer-focused, and collaborative culture needs to be developed and fully embedded. Process performance and reliability of the extended system are measured, and joint investments in improving system(s) are shared, as are the returns. The new supply chain business models (already referred to in this report) go a long way towards meeting the concerns of government regulatory bodies such as the ACCC in Australia, and the Commerce Commission in the UK. In the years ahead we anticipate the logistics industry and government regulatory bodies working closely together to design and implement a new breed of supply chain business models that achieve a quantum improvement in performance, at both the enterprise and the national levels.

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33.1

Characteristics, Strategies and Trends for 3PL/4PL in AustraliaSignificance of Logistics Outsourcing to AustraliaThis section establishes the magnitude of the logistics services industry and evaluates its impact on the Australian economy. Data from other regions of the world is provided for comparison.

Qualification of Data Sources Quantitative data, specifically relating to logistics activities in Australia, was difficult to source as industry associations, individual operators and academicsdo not collect comprehensive data on these activities.19 Information was available on the logistics sector from the Australian Bureau of Statistics (ABS)20 National Accounts a data. However, there is an inherent limitation of ABS data for estimating the contribution of logistics activities to the GDP. ABS classifies businesses into relevant industry sectors according to their core business activity, and consequently their revenue contribution is fully allocated to that sector, and not allocated to sectors according to activities. This system results in logistics revenue being allocated to nonlogistics sectors when a companys core business is not classified as logistics. For example, revenue from in-house road transportation operations of a business primarily involved in manufacturing, would be allocated to the relevant manufacturing sector,b resulting in an under-estimation of the contribution of logistics to GDP and employment, and an over-estimation of the contribution of manufacturing. Despite this qualification, ABS data was used as the basis for a multi-step procedure to estimate the contribution of logistics activities to GDP and employment. Transportation and Freight Value-Add Classification of logistic activities by ABS is based on the Australian and New Zealand Standard Industrial Classification (ANZSIC). Logistics activities identified by ANZSIC include: transportation and storage (both freight and passenger); postal services; courier services; and waste disposal services. An international study21 of logistics activities found transportation contributing between 40 to 45% of total logistics costs of a business. Another study22 concluded that transportation typically contributes 41% of total logistics costs. Although lower and higher figures have been reported, for the purpose of this research, 40% will be used as the estimate for the contribution of transportation to Australian logistics.c

aa

ABS National Accounts provide a systematic summary of national economic activity. There are three approaches to measurement of GDP - production approach (summing the value-added at each stage of production), income approach (summing incomes generated by production), and expenditure approach (summing final expenditure on goods and services produced). BTRE Report, (2001), Logistics in Australia A Preliminary Analysis, October, www.btre.gov.au/docs/wp49 contents.htm

In some cases, in-house transportation activities may be allocated to the transport classification if they are undertaken through a separate management unit, (e.g., a subsidiary company). The highest estimate for transportation, as a proportion of logistics costs, was 60% (Canada), and the lowest estimate was 25% (OECD). However, only one example was given for each extreme estimate. BTRE Report, (2001), Logistics in Australia - A Preliminary Analysis, October, www.btre.gov.au/docs/wp49 contents.htmc

b

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In this research ALPHA calculated the freight component of transportation in the logistics sector, by combining the Bureau of Transport and Regional Economics (BTRE)23 figure of AUD24 billion (gross value-added into freight transport), and adopting the 40% factor (indicated above), to arrive at an estimate of AUD57 billion as the total cost of logistics in Australia.a This figure is equivalent to 9.2% of Australias GDP for the period of 19992000. The estimate of the proportion of GDP attributable to logistics activities provides only partial information on its economic significance to Australia. The scope of our research also includes activities that go beyond the activities represented by the BTRE definitions. The BTREs estimate of gross value-added in logistics does not incorporate inputs provided by other industries. The flow-on effects to these industries however, are substantial. Logistics activities along the supply chain are also enabled by software applications, consulting services, logistics equipment provision and maintenance. In addition, activities and processes that have traditionally been performed by in-house departments are now being outsourced. e.g., IT, planning and scheduling. BTRE attributes AUD31 billion to in-house logistics operations. The remaining AUD26 billion is from activities performed by the freight logistics industry, which includes firms providing freight services to both private and government customers. Services provided by freight transport logistics account for AUD23 billion, while services provided by non-transport logistics operators total approximately AUD3 billion as shown in Figure 4. This is a broad estimate because it is difficult to determine the scope of increasingly complex freight logistics networks.

In-house Operations AUD31 billion Outsource to Logistics Companies AUD23 billion Outsource to Non-Transport Logistics Operations AUD3 billion

Source: DOTARS (2002)

24

Figure 4: Freight Logistics Activities in Australia, 2002

The gross value-added figures in this section are not directly comparable with the revenue figures in the BTRE Reports Table 4.1. Relationships between value-added and revenue in the BTREs Port Impact Studies suggest that the total revenue of AUD16.1 billion for the 36 operators in Table 4.1 represents valueadded of around AUD10.1 billion. Removal of the figure for Australia Post (probably included in postal services by the ABS) reduces total revenue to AUD12.4 billion. This figure mainly covers transport and storage, and represents around AUD7.8 billion of value-added - equivalent to 34% of the BTREs estimate of AUD22.8 billion for freight transport. BTRE Report, (2001), Logistics in Australia - A Preliminary Analysis, October, www.btre.gov.au/docs/wp49 contents.htm

a

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The results of the BTREs analysis indicate that logistics activities comprise a significant proportion of economic activity in Australia. The estimate of around 9% of the Australias GDP for logistics in comparable with figures of: 11% for wholesale and retail trade; 12% for manufacturing; and 12% for mining, construction and utilities combined. The importance of this industry is highlighted when compared to other industries, e.g., construction 5.9%; retail 5.2%; education 4.4%; and tourism 4.5%.25

The value of logistics activities is a significant component of national economies, globally.Comparative data from the USA confirms similar relationships to those found in Australia, albeit 10 times the value. The GDP of the USA was about USD10.21 trillion in 2001. Logistics costs have decreased from USD1.003 trillion in 2000 to USD970 billion in 2001, and account for 9.5% of the GDP. A total of 63% of the logistics costs are related to transportation, 25% to inventory carrying cost; and 8% to warehousing; and the remainder is related to logistics administration. The European logistics market is worth an estimated EUR710 billion, or 8% of Europes GDP. Of this, EUR320 billion, or 45% is currently outsourced.26 Employment A similar (but more approximate), approach can be used to estimate employment in logistics activities in Australia. At the end of 1999-2000, 418,700 people were employed in the transport and storage sector.27 BTRE analysis indicates that gross value-added in logistics was 1.65 times gross value-added in the transport and storage sector in 1999-2000. Applying this ratio to employment in transport and storage provides a very rough estimate of around 690,000 employed on a full-time equivalent basis in logistics. The estimate of the contribution of logistics to GDP, and employment, is very approximate, as it is based on limited data and indirect calculations. The reliability of this estimate is also affected by the ABS National Accounts data, which become less reliable the more it is disaggregated.

3.2

Scope of Logistics OutsourcingIn this section information from secondary research, and data from survey responses, are combined to give: an overview of the activities being outsourced in Australia; and a summary the type(s) of capabilities involved. Taken together this provides a quantified estimate of the financial benefits of outsourcing.

Type of Activities In the ALPHA survey, both Shippers and LSPs confirmed the value of outsourcing, and indicated their intent to increase the scale and scope of outsourcing in the foreseeable future. Over two thirds of Shippersa surveyed indicated they are likely, or very likely to increase the use of outsourced logistics services over the next two

a

Survey question: How likely is it that your company is going to increase the use of logistics provider services over the next two years? Responses: 4 point Likert-scale: Very Likely, Likely, Unlikely, Very Unlikely.

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years, while 75% of LSPsa surveyed indicated their intent to improve the scope of their services offered to the market. This trend is consistent with reports from other regions of the world e.g., China.28

Logistics outsourcing is here to stay. Outsourcing scale and scope will increase in Australia in the foreseeable future.LSPs are generally increasing the scope of their offerings at a faster rate than Shippers are taking them up. This is possibly due to the greater exposure they have to outsourcing relationships, which in turn is giving them a better understanding of the potential benefits available. On the other hand, Shippers tend to keep operating as islands of excellence, focusing on achieving efficiencies within their organisations. This will yield limited returns over time as already illustrated in Figure 3. A comparison with a survey conducted in the Singaporean logistics industry29 found that over three-quarters (76.3%) of the users indicated that their firm's commitment to the contract services concept was moderate or extensive, while the remaining users indicated that their firms' commitment was limited or very limited. A global logistics study conducted by CGE&Y30 in 2003, found a similar trend, with Shippers responding positively when questioned as to their intention to increase use of LSPs over the next 5 years. In Europe, businesses outsource USD31 billion of logistics activities to LSPs, contributing 25% of the logistics services market revenue.31 Over the past few years there has been an increasing preference by leading European manufacturing companies to separate sales function(s) from physical fulfilment, creating new opportunities for LSPs.

Very Satisfied

Very Dissatisfied Dissatisfied 14.9%

75.7%

Satisfied

Source: ALPHA Survey (2003)

Figure 5: Shipper Satisfaction with LSP Performance In the ALPHA survey, approximately 90% of Shippers,a were satisfied or very satisfied, with the services provided by LSPs, illustrated in Figure 5. This is a major

Survey question: How likely is it that your company is going to increase the scope of logistics services offered to customers over the next two years? Responses: 4 point Likert-scale: Very Likely, Likely, Unlikely, Very Unlikely.

a

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shift from a decade ago when the majority of Shippers were not satisfied with the performance of their LSPs.32 This shift in perception by Shippers indicates that LSPs have improved their service offerings significantly, and that their performance is now meeting (or exceeding) the expectations of Shippers.

90% of Shippers were satisfied or very satisfied with LSP services.In 2003, 90% of USA businesses currently outsourcing some activities, considered the relationship successful; in Europe 77% (4% decrease compared to the previous years survey); and 79% in Asia33 Companies outsource activities with the aim of achieving improved logistics performance, and reduction of costs. The focus of outsourcing continues to be physical and transactional functions across transportation, warehousing and inventory management as indicated in Figure 6. Only a few Shippers seem to partner with LSPs to fully integrate their services, and obtain the corresponding benefits. The response from Shippersb in Australia (ALPHA survey), is very similar to research findings in the USA in 1999, where businesses indicated different levels of outsourcing activities compared to LSPs.345.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5Sh y bl em ss e tA m uc ing sh ni s od s Pr hou ple art P e Re ar re W tory pa S en r nv me to IT s us C tics turn t n s gi Re e Lo ct gem u a od n on Pr Ma iati t t ee go nt Fl Ne me e ay n at R ht P ctio tati g ele or t ei p Fr er S ns rta ri Tra spo ar C nd ran u T t bo d i In oun en dat b lfilm oli ut O Fu ons er C rd nt e m O ip

Mean


Figure 6: Types and Extent of Outsourced Capabilities c

Survey question: Overall, how satisfied are you with the performance of your logistics service provider(s)? Responses: 4 point Likert-scale: Very Satisfied, Satisfied, Dissatisfied, Very Dissatisfied.b

a

Survey Question: To what extent does your company outsource the following logistics activities? Responses: 5-point Likert-scale 1, Not at all or Low to 5 Very Extensive or High.

Total number of Shipper survey responses N= 97, Responses range from 1, Not at All or Low to 5 Very Extensive or High. Mean values near 5 indicate Very Extensive outsourcing of specified logistics activity.

c

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Benefits of Outsourcing International data35 indicates logistics costs (as a percentage of GDP) are steadily declining, as illustrated in Figure 7. In the USA the proportion of logistics cost of GDP fell from 16% to less than 10% over the past 20 years. 36 The outsourcing of logistics activities is one of the drivers of this trend. The CGE&Y37 study in 2003, showed a decline in logistics fixed costs by 16% in North America; and a 5% decrease in Europe largely due to the outsourcing.

17 16 15 14 Percentage 13 12 11 10 9 8 Further cost reduction and new revenue 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 opportunities through Value Network Year Consortia. Do nothing, use existing models and approaches Logistics % of GDPUSA

Source: Prologis (2004)

38

Figure 7: Cost of Logistics Activities Relative to GDP, USA Figure 7 illustrates the benefits of improved logistics management since 1981. However, in the last decade, the rate of reduction of logistics costs have slowed, demonstrating the reduced benefits flowing from an over-emphasis on operational excellence (refer Figure 3). Further reduction in logistics costs will only be achievable through new approaches to logistics and supply chain management, e.g., by utilising capability-based outsourcing solutions such as 4PLs, JSCs and VNC that will yield benefits in the form of both cost reduction and increased revenues.

3.3

Strategic Alliances, Partnerships and CollaborationIncreasing globalisation, use of new information technologies, and a series of acquisitions, alliances and mergers, are transforming the logistics services industry in Australia. Business models that supported arms-length relationships with suppliers, and customers, are being replaced by supply chain collaboration. New companies and business networks have evolved, developing entirely new business models that are based on capabilities geared towards improved customer service, and competitiveness in the marketplace ALPHA has defines a partnership or alliance as a formal or informal collaborative arrangement between two or more businesses, with the aim of facilitating the achievement of each ones objective(s). This alliance may involve equity holdings (e.g., 4PLs), or be a loose network arrangement (e.g., VNC). Typically, partnerships between two businesses are influenced by other working relationships such as: arrangements between Shippers; the users of services (e.g., computer company); providers of logistics services (e.g., carriers, integrated logistics providers; local and overseas freight forwarders; packaging firms; and storage/distribution firms); and major consultants or information technology specialists.39

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The creation of a partnership/alliance reflects the intention to pursue a common objective by improving coordination of business activities through mechanisms such as collaboration, i.e. better understanding of the partners business; greater information sharing; coordinated investments and joint planning. In the ALPHA survey, Shippers rated the responsibility of LSPs to help them focus on their core business a (mean 3.8, ranked 6), as a lower priority than LSPs b (mean 4.07, ranked 2). The results of the ALPHA survey compared to figures from the 1990s40 demonstrate an increased range of services offered by LSPs in Australia.

LSPs have significantly increased the range of services offered to Shippers in Australia over the last decade.Shippers, mostly being the more powerful in their partnership with LSPs, tend to determine the extent of the relationship and the level of information sharing. Typical contractual arrangements between Shippers and LSPs result in an environment that restricts development of the latters capabilities. The cost squeeze during negotiations and the lack of room to add-value during the ensuing contract period, contribute to this situation. Shippersc and LSPsd both use adversarial (means of 4.16, and 4.18 respectively), and collaborative relationships (means of 3.9, and 4.11 respectively), in their logistics relationships. Shippers may apply adversarial approaches for cost and productivityenhancement. There is evidence from current literature and comments made in the convergent interviews conducted by the ALPHA that the selection of LSPs is initially based on price, however the final negotiations are largely based on non price factors.

Commodity-type contractual arrangements between Shippers and LSPs often restrict the development of new LSP capabilities.Shippers continue to be driven by cost considerations. This mindset is reflected in the contractual system (and related sanctioning mechanisms), that govern past and existing business relationships between the two parties. Shippers appear to lack sophistication in their selection of LSPs. One way forward is for Shippers to start selecting LSPs on factors other than price, as shown in Figure 8.

Shipper-LSP partnerships have to be based on factors other than price alone.

Survey Question: How important are the contributions of your logistics services provider(s) to the benefit categories below? Responses: 5-point Likert-scale 1, Not Important or Low to 5 Very Important or High.b

a

Survey Question: To what extent can the logistics services your company offers help improve your customers overall logistics performance? Responses: 5-point Likert-scale 1, Not Important or Low to 5 Very Important or High.

Survey Question: If you work with more than one logistics services provider, to what extent do the following descriptions apply? Responses: 5-point Likert-scale 1, Not Important or Low to 5 Very Important or High. Survey Question: In working with your customers, to what extent do the following descriptions apply? Responses: 5-point Likert-scale 1, Not Important or Low to 5 Very Important or High.d

c

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4.6

4.4

4.2

4.0

3.8

3.6

Mean

3.4fit ne i Be os ic tP om ke ar on M Ec es s U ov to pr Im ed itt gy m er r om Syn Se C l er ia m nt to te us Po n tC io or at pp ut Su ep R ng ro s St y es lit in bi us ia el rB R ou s ow Kn ity gr te y In th or tw us Tr

Figure 8: Reasons Given by Shippers for Selecting LSPs (other than Price)a LSPsb have the view that Shippersc are hiding behind other factors: uncertainty about LSP service provision (Shippers rate this 4.53, and LSPs 2.74 out of 5); cost of outsourcing (Shippers: 3.97 and LSPs: 3.26); and uncertainty about service capability of LSPs (Shippers: 3.66 and LSPs 2.71); refer Figure 9, overleaf. Shippers have the power balance, and own the business being transacted so they should be leading development activities and setting up the business environment to enable and encourage LSPs to innovate. The lack of capability argument was current 10 years ago, but no longer applies because LSPs have improved and now have significantly better capabilities. However, they need an environment to work in which is more conducive to innovation and strategic thinking, and only Shippers can provide, because they own the business. Shippersd have indicated that flexibility is important, however there is no way to legislate creativity - other than by creating the conditions to allow it to flourish, e.g., by determining mutually agreed milestones and equitable distribution of benefits. LSPse ranked flexibility as a reason for outsourcing, lower than Shippers. This misalignment of priorities and meaning seems to indicate an innovation mis-alignment. Initiatives are needed on both sides to close this gap.


a

Total number of Shipper survey responses N= 97, Responses range from 1, Not Important or Low to 5, Very Important or High. Mean values near 5 indicate strong reason(s) for selecting logistics partner(s).

Survey Question: Rate the importance of the following concerns in relation to outsourced logistics services provision? Responses: 5-point Likert-scale 1 (Not Important) to 5 (Very Important).c

b

Survey Question: Rate the importance of the following concerns in relation to outsourced logistics services provision? Responses: 5-point Likert-scale 1 (Not Important) to 5 (Very Important).

Survey Question: How important to your company were the following reasons for outsourcing activities to a Logistics Service Provider? Responses: 5-point Likert-scale 1 (Not Important) to 5 (Very Important). Survey Question: How important to your customers were the following reasons for outsourcing logistics activities? Responses: 5-point Likert-scale 1 (Not Important) to 5 (Very Important).e

d

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CHARACTERISTICS, STRATEGIES AND TRENDS FOR 3PL/4PL IN AUSTRALIAConcerns about service quality

.70 60 50 40 30 20

perceived by shippers vs LSP

Percent

10 0 Not Important Important Very Important Moderately Important Substantially Import

Shippe LSP


Figure 9: Uncertainty about Service Quality, as Perceived by Shippers and LSPs

A recent CGE&Y41 study found that LSPs in the USA, are not expanding their capabilities quickly enough to satisfy Shipper expectations; this is contrary to ALPHA results where LSPs have developed new capabilities, although the majority of Shippers are primarily still only outsourcing relatively few functions One of the biggest challenges facing the logistics industry is the need to establish a united view on issues of mutual interest, and this cannot be done without strong leadership. Businesses must understand that only by working together and through mutual trust can issues affecting the logistics sector be addressed adequately. This is particularly true in industries where the power in the supply chain is unevenly distributed between LSPs and Shippers. A supply chain leader may attempt to improve logistics activities in an industry for competitive reasons, (e.g., Wal-Mart in FMCG), or promote restructuring of fragmented industries via strategies that encourage consolidation of smaller players, (e.g., GM in the automotive industry). A study in the USA42 has highlighted the question of which party will orchestrate the roles and responsibilities of supply chain members. Shippers were seen as less able to fill the leadership role due to lack of vision and commitment to the advantages delivered through supply chain management.43 The latest CGE&Y (2003)44 survey found that 68% of logistics and supply chain executives in North America (Canada and the USA) feel that 3PL providers facilitate supply chain improvement, while the corresponding result for Europe was only 47%.

Leadership is required from within the ranks of Shippers and LSPs, to introduce innovative new practices throughout the supply chain.

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Shippersa and LSPsb responded that lack of cooperation (means of 2.74, and 2.75 respectively), and lack of interest to participate in the supply chain (means of 2.66, and 2.54, respectively) are factors preventing development of the full potential of logistics services. This indicates Shippers are still acting as islands of excellence, focusing on optimising their own operations, rather than collaborating with their supply chain partners, including LSPs. Interestingly, the issue of trust was ranked low by both groups (ranked 7 out of 9, with a mean 2.41 by Shippers, and ranked 6 out of 10, with mean 2.46 by the LSPs). ALPHA survey results demonstrated that in selecting LSPs, Shippersc often included other departments in the decision to outsource activities, see Figure 10. Almost 50% (sample size of 97)d of the respondents indicated that the Finance and Operations Managers were involved on the decision to outsource. This may be an indicator of the increased perception of the level of integration involved in logistics functions in the business.

50

40

30

Number of cases

20

10

0e ic rv Se er m to us C ns tio ra pe O s le Sa ng si ha rc Pu s y em or st nt Sy ve n In io es at rc rm ou fo In es R an g um rin H tu ac uf an M e nc na Fi g tin ke ar M

.Source: ALPHA Survey (2003)

Figure 10: Department Managers Involved in Decision to Use Contract Logistics Companies

Businesses are realising the need for outsourcing the management of entire logistics processes to a single entity, for greater visibility and optimisation across supply chains. This has led directly to the emergence of Lead Logistics Providers (LLPs) and

Survey Question: To what extent do each of these issues prevent your company from achieving the full potential of supply chain management? Responses: 5-point Likert-scale 1, Not at all or Low to 5 Very Extensive or High. Survey Question: How much do each of these issues prevent your company from delivering the full potential of your logistics services? Response: 5-point Likert-scale 1, Not at all or Low to 5 Very Extensive or High. Survey Question: Were managers from other functional area actively involved in the decision to use contract logistics companies? Responses: Marketing; Finance; Manufacturing; Human Resources; Information Systems; Inventory Planning/Control; Purchasing; Sales; Operations; Customer Services; Other.d c b

a

Total number of Shipper survey responses N= 97, Responses Yes = 1 (Involved), or No = 0, (Not Involved).

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new business models such as 4PLs. There is a shift from asset-based models to new business models that address customer demands with integrated logistics solutions. DHL and Sydney Airport Corporation Limited, announced the launch of a new DHL Sydney Airport Development, designed to enable DHL Express to operate its Sydney facilities as a hub for Australia and Oceania regions. The purpose-built facility will involve an initial investment by DHL in excess of AUD9 million, with significant ongoing investment in the next few years.45 In the United States the increased trend towards mergers and acquisitions and alliances between various companies is resulting in greater synergies. Yellows acquisition of Roadway, known as Yellow-Roadway Corporation, is the largest USbased transportation service provider. The new combined entity holds nearly 60% market share in selected markets.46 Examples of partnerships/alliances in Australian logistics include: Australian airExpress, a joint venture between Qantas Airways and Australia Post; a strategic alliance between Grainco Australia and AusBulk; a partnership between Bluegum Group (electronics manufacturer) and Danzas AEI; a joint venture between four Statebased operators (Russell TLC Services, Westchem, Chemwest, and Scotts Transport Industries) to provide a national service for dangerous goods; and a partnership between TDG Logistics and Qenos.47 In China, a joint venture between Japans i-Logistics and Chinas Shandong International Transportation Corporation, will open a large newly completed refrigerated warehouse in the hinterland of Chinas Qingdao Port.48 The warehouse will act as an integrated logistics hub, primarily handling trade in consumables between China and Japan.49 In Asia, the economic climate favours large LSPs, and some multinationals are buying up mid-sized service providers or establishing joint ventures with indigenous LSPs. When asked about their future emphasis to improve overall logistics performance, both Shippersa and LSPsb indicated a reduction of product/service cost as important, but for Shippers it was very important. Shippers ranked the importance of cost as 2 out of 8, with a mean of 4.16; LSPs ranked the same issue 7 out of 8, with a mean of 3.58. This indicates that more Shippers continue to see the future as cost-driven, whereas LSPs are looking for value-add solutions. Most logistics service companies recognise the necessity of building strategic alliances or partnerships to remain competitive in the marketplace, e.g., the alliance between Qantas Airways and Australia Post,50 formed to provide Australia Post with dedicated, cost-effective, overnight national line-haulage utilising Qantas passenger aircraft belly space. Shippers seem to be looking for LSPs that can provide all their service requirements (one-stop-shopping), rather than co-ordinating multiple LSPs themselves, hence the notion of an LLP. As a general trend, Shippers want to reduce the number of LSPs they have to deal with across all geographic boundaries. Survey results in the USA reveal that the percentage of companies utilising more than one contract logistics company decreased from 70% in 1995 to 40% in 1998.51 A similar trend is expected in Australia over the next few years. ALPHA survey found that Shippers and LSPs have contrasting views about ceding responsibility to a single LLP to coordinate other LSPs. In particular, Shippersc rate this low importance (rank 8 of

Survey Question: Indicate your companys emphasis over the next two years to improve overall logistics performance: Responses: 5-point Likert-scale 1 (Insufficiently - Low) to 6 (Very Well High). Survey Question: Indicate your companys emphasis over the next two years to improve overall logistics performance: Responses: 5-point Likert-scale 1 (Insufficiently - Low) to 6 (Very Well High). (Both Shippers and LSPs were asked the same question.) Survey Question: If you work with more than one Logistics Service Provider, to what extent do the following apply? Responses: 5-point Likert-scale 1 (Not Important or Low) to 5 (Very Important or High).c b

a

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8, with a mean of 2.05), whereas LSPsa rated this as medium to high importance, (with a rank 5 of 9, and 3.53). Some of the recent acquisitions and strategic alliances formed within the Australian sector seem to support the argument that LSPs are responding to the challenge of combining capabilities under one roof, albeit using a range of different models, e.g., LLPs, 4PLs, JSCs, and VNC.

3.4

Cross-Company Integration and CollaborationInformation systems and technology are an integral part of supply chains, and essential to their effective management. Indeed, supply chains cannot function properly without the visibility that good IT provides. An effective technological environment also enables additional value-added services to be offered to Shippers, should these be required. Results from the ALPHA survey indicated Shippersb and LSPsc ranked the importance of LSPs contributing to Shippers access to up-to-date techniques lower than factors such as; contribution to reliable and consistent service; reduced costs; flexibility; etc. Shippers ranked access to up-to-date techniques as 10 (out of 12, mean of 3.22), which is a lower ranking than LSPs gave this factor (ranked 7 out of 12, mean 3.84). This difference is illustrated graphically in Figure 11.Extent of outsourced Logistics IT Shipper vs LSP interpretation 50

40

30

20

10

Percent

Shippe 0 Low ... ... ... High LSP


Figure 11: Extent of Outsourced IT: Shipper and LSP Perceptions

Survey Question: In working with your customers, to what extent do the following descriptions apply? Responses: 5-point Likert-scale 1 (Not Important or Low) to 5 (Very Important or High).b

a

Survey Question: How important are the contributions of your Logistics Service Provider(s) to the benefit categories below? Responses: 5-point Likert-scale 1, Not Important or Low to 5 Very Important or High.

Survey Question: To what extent can the logistics services your company offers help improve your customers overall logistics performance? Responses: 5-point Likert-scale 1, Not Important or Low to 5 Very Important or High.

c

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IT remains the key enabler for achieving benefits in outsourcing, however there is disagreement about exactly what capabilities are needed.CGE&Ys 200352 global study in logistics reported Shippers having high expectations of the services offered by LSPs; this has been the case for the last two decades. However, on the specific issue of IT capabilities, Shippers still appear to be dissatisfied with LSPs. It is clear therefore that the future success of LSPs is closely tied to their ability to offer integrated, end-to-end solutions that deliver significant financial and operational performance improvements to Shippers. The problem is that most LSPs (being locked into short-term contracts with low profit margins), do not have the financial resources to develop a whole array of value-added IT capabilities. In Australia, some LSPs are attempting to provide more advanced IT capabilities; as evidenced by the Toll Logistics announcement in March 2000, of the formation of Toll Technologies to support their core operations through development of electronic communications and e-business solutions for customers.53 In the ALPHA survey Shippersa and LSPsb were asked to determine the extent to which they used logistics information and communication technologies. Responses for all listed technologies (e.g., EDI, internet, stand-alone) for both parties were between a mean of 2.5 and 3.5 (maximum of 5, for Heavy Use or High). However, the standard deviation (range of responses) were + or - 1.5, (indicating that the extremes of the range lay between the values of 1 and 5). The reason for the responses ranging effectively from low to high is due to the type of question these systems are alternatives to each other and it would be expected if a company has installed one type of information technology, they would score a high response, and a very low one for others. However, the results indicate a wide range of IT systems being used by both Shippers and LSPs, with no one type of system (stand-alone or integrated), being a strong leader in the industry.

Lack of IT capabilities (or lack of access to IT capabilities), are quoted as the main reasons for not achieving full supply chain benefits.The ALPHA survey revealed both Shippersc and LSPsd ranked 1, the issues preventing your company from achieving full potential of supply chain management / delivering the full potential of logistics services. The mean response for Shippers was 3.48, but for LSPs it was lower at 2.82 (both with a standard deviation of more than 1.2), indicating the LSPs rated this as less of a problem than Shippers. Cranfield-NorthWestern University survey in 2000,54 demonstrated the importance executives placed on information technology and e-commerce related capabilities.

Technology is enabling end-to-end supply chain visibility across a variety of platforms.

a

Survey Question: To what extent are you using any of the following logistics information and communication technologies listed below? Responses: 5-point Likert-scale 1, Not Use or Low to 5 Heavy Use or High.

Survey Question: To what extent are you using any of the logistics information and communication technologies listed below? Responses: 5-point Likert-scale 1, Not Use or Low to 5 Heavy Use or High. Survey Question: How much do each of these issues preventing your company from achieving full potential of supply chain management? Responses: 5-point Likert-scale 1, Not At All or Low to 5 Very Important or High. Survey Question: How much do each of these issues preventing your company from delivering the full potential of your logistics services? Responses: 5-point Likert-scale 1, Not At All or Low to 5 Very Important or High.d c

b

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Technology improves end-to-end visibility across the entire supply chain, allowing for proactive management of logistics and supply chain events, to further improve process efficiencies and customer service. In small to medium enterprises (SMEs), the internet is providing relatively inexpensive, yet effective alternatives for information sharing. Unfortunately, these businesses are often unable to afford to buy and implement the more expensive software solutions. This could be one motivator for SMEs to join with larger companies to benefit from improved access to superior IT capabilities. This might be achieved either through an alliance, or membership of one of the new business models described in this report. Dell55 is a well-known example of a company using technology to power its supply chains, by embedding IT into all appropriate activities. FedEx56 is another example that has raised barriers-to-entry for competitors in the express logistics sector, by utilising IT to facilitate its business processes. For further information on the different integration technology architectures, software applications and vendors, see Section 4.2.

3.5

Client (Shipper) AlignmentShippers seek improved and reliable integration of services, greater access to relevant skills and capabilities, better service, with reduced operating costs, and enhanced revenue opportunities. This can only be achieved through better alignment of LSP services with their Shippers logistics and supply chain buying behaviours which are not always evident.

The main performance criteria in a Shipper-LSP relationship is achieving high levels of satisfaction as perceived by the end-customer.Originally, the conventional measures for value creation as perceived by Shippers were primarily cost reduction and improved operational efficiency. However, successful provision of outsourcing solutions rely on a number of factors including: understanding the type of outsourcing required by the business, and the corresponding type of contract; appropriate processes, procedures, and KPIs; qualified personnel; communication lines; early identification of possible cultural conflicts; and demarcation of responsibilities. Once these factors are defined appropriately for each end-customer the outsourcing relationship will be mutually beneficial. ALPHA survey results showed Shippersa rated the importance of the support of LSPsb to help them achieve customer service objectives, significantly higher than LSPs rated the same issue (rank 1 with mean 4.49, compared with rank 8, mean 4.05, respectively). This indicates a significant mis-alignment on this issue between the two parties. So called collaboration and partnering strategies by Shippers all seem to driven by cost reduction motives, sometimes at the expense of end-customer satisfaction. This seems to further confirm ALPHA findings that supply chain partners still do not share a common vision, or act on the same performance metrics and priorities. See Figure 12.

a

Survey Question: To what extent do the statements below reflect your reasons for selecting your logistics partner(s)? Responses: 5-point Likert-scale 1, Not Important or Low to 5 Very Important or High.

Survey Question: In your opinion, to what extent do the statements below reflect your customers reasons for selecting your company as their logistics partner? Responses: 5-point Likert-scale 1, Not Important or Low to 5 Very Important or High.

b

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Perception that customer service isa selection criteria for LSP Comparison of perceptions of Shippers vs LSP 60

50

40

30

20

Percent

10 Shippe 0 ... ... ... High LSP


Figure 12: Importance of Customer Service Orientation for Selecting LSPs Shippersa and LSPsb agree that the support of Shippers to achieve customer service objectives is very important (means 4.35 and 4.10, respectively). Both ranked this factor as 1 (out of 12), showing alignment in this aspect. However, Shippers placed a much higher emphasis on cost and productivity (rank 2 out of 8 items, and an average mean of 4.14) compared to LSPs (rank 7, and a mean of 3.58) indicating a misalignment on other contributions of LSPs to Shippers business, see Figure 13. Concerns about service qualityperceived by shippers vs LSP 70 60 50 40 30 20

Percent

10 0 Not Important Important Very Important Moderately Important Substantially Import

Shippe LSP


Figure 13: Importance of LSPs Contribution to Increase reliable and consistent service

a

Survey Question: How important are the contributions of your Logistics Service Provider(s) to the benefit categories below? Responses: 5-point Likert-scale 1, Not Important or Low to 5, Very Important or High. Survey Question: To what extent can the logistics services your company offers help improve your customers overall logistics performance? Responses: 5-point Likert-scale 1, Not Important or Low to 5, Very Important or High.

b

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Mis-alignment between Shipper and LSP (observed on several dimensions) results in lower customer service and lost revenue opportunities.ALPHA results revealed the top three partnership and relationship management issues for LSPsa were: integrity, trustworthiness, and reputation. All rated high, with average scores of 4.34, 4.29 and 4.26 respectively. The corresponding response by Shippersb ranked these issues lower, although mean scores were similar to the LSPs. It is evident that LSPs are emphasising the characteristics of true partnership, but the Shippers at this stage are not placing the same importance on these qualities, and are not responding along the same dimensions. This indicates that LSPs are either not successfully communicating their desired emphasis to the Shippers, or the uptake by the Shippers is simply slow.

Formal contracts are no guarantee for achieving superior supply chain performance in todays dynamic environment.ALPHA survey results indicated that Shippers with no formal contracts are collaborating with LSPs on long-term supply chain performance improvement initiatives. Only true alignment between the parties, and a joint vision, will get Shippers and LSPs to realise benefits attributed to advanced supply chain management as illustrated previously in Figure 3. Shippers often control the access LSPs have to the end-customer and due to their power in the supply chain, tend to set the operational performance standards. LSPs, however, seem to be aiming at more collaborative approaches. A study of 22 supply chains in the Americas and Europe57 confirm these findings. Shippers were quoted as reluctant players and far more sceptical in regard to the benefits of closer integration, than LSPs. Shippers consistently viewed the cost-saving aspects of supply chain management as more important than the revenue-enhancing benefits. This is the case even though they generally understood the importance of customer-driven supply chains; the need to focus on core competencies; and the importance of leveraging the skills and capabilities of their suppliers.

3.6

Geography and Physical Infrastructure

The geographical disadvantages of Australia are being overcome by better information technology and improved infrastructure.Previously, the relatively large distances between Australian cities were perceived as an impediment to business. However, ALPHA survey results revealed that both Shippersc and LSPsd regard suppliers geographical distance as low importance (mean 2.33 and 1.98 respectively), and customers geographical distance of even lower importance. Refer Figure 14.

Survey Question: In your opinion, to what extent do the statements below reflect your customers reasons for selecting your company as their logistics partner? Responses: 5-point Likert-scale 1, Not Important or Low to 5 Very Important or High.b

a

Survey Question: To what extent do the statements below reflect your reasons for selecting your logistics partner(s)? Responses: 5-point Likert-scale 1, Not Important or Low to 5 Very Important or High.

Survey Question: How much do each of these issues prevent your company from achieving full potential of supply chain management? Responses: 5-point Likert-scale 1, Not At All or Low to 5 Very Important or High. Survey Question: How much do each of these issues preventing your company from delivering the full potential of your logistics services? Responses: 5-point Likert-scale 1, Not At All or Low to 5 Very Important or High.d

c

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5

4

3

Average Score (1-5)

2

1 LSP 0 Not at all ... ... ... Very much Shipper


Figure 14: Importance of Suppliers Geographical Distance

Multinationals are leveraging their global capabilities into the Australian landscape.Another trend that will impact the flow of product in Australia, is that multinational corporations (MNCs) are moving manufacturing offshore to lower cost locations. In the future some MNCs may be capable of fully integrated logistics solutions, and in a position to realise scale and scope efficiencies that national service providers would struggle to achieve. Toll Holdings has acquired some of the strongest logistics companies within Australia over the past decade. Other companies such as Exel Logistics and DHL International appear to be acquiring companies to enter new markets, including Australia, and to provide more services to their customers.58 CEOs surveyed by Cranfield in 2000,59 highlighted a number of significant opportunities for LSPs. While Europe remains an impo

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