Transport Management & Theory Practices (9)

Management of Transportation

Seventh Edition Coyle, Novack, Gibson & Bardi

© 2011 Cengage Learning

Chapter 9 3PL and Special Service Providers

1© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Introduction

• Outsourcing– Substituting external specialists for in-house

capabilities– Relatively common today for activities such

as:• Accounting• Payroll and tax preparation• Advertising• Human resource benefits administration• Transportation services

– Provided by organizations known as third-party logistics service providers or 3PLs

© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Introduction

• Choice of a 3PL should be carefully made– 3PL performance impacts financial and

customer service performance

• Chapter addresses process for selecting 3PL– Structure of 3PL industry– Characteristics of 3PL users– Types of 3PL relationships– Current and future 3PL industry issues


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Industry Overview

• Definition of a 3PL– “an external supplier that performs all or a part of a

company’s logistics functions.”– Services may include: inventory management,

warehousing, financial services, transport, distribution– Chapter focuses on transportation services, but,

• Transport services should be integrated with customer’s

other logistics activities

• Transport focused 3PL should be capable of providing solutions to logistics and supply chain challenges


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Industry OverviewTypes of 3PL Providers

• Most 3PLs have their origin in a specific activity, such as transport, IT, etc.

• These foundation services provide a basis for classifying 3PLs– Transportation based– Distribution based– Forwarder based– Financial based– Information based


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• Transportation based– Originally transportation carriers– Developed 3PL subsidiaries in response to expanding

customer requirements– Services now include transport management, dedicated

contract carriage, and fulfillment center operation– Example providers (with parent company)

• APL Logistics/Neptune Orient Lines Limited

• UPS Supply Chain Solutions/UPS of North America


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• Distribution based– Originally public or contract warehousing services– Expanded services into inventory management

and order fulfillment. – Some have integrated transport services into offerings– Wide range of market reach, from local to global– Example providers

• Exel, DSC Logistics, Ozburn-Hessey Logistics

• Caterpillar Logistics Services


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• Forwarder based– Originated from intermediaries such as freight

forwarders, brokers and agents– Arrange transport-related services for less-than-

volume shipments and for international shipments– Example providers

• C.H. Robinson Worldwide, Hub Group, Kuehne+Nagel

• Considerable mergers and acquisitions among this group


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• Financial based– Helps customers with monetary issues and

financial flows in the supply chain• Traditional services include freight rating, freight

payment, freight bill auditing, accounting services

• Expanded services include IT systems for freight visibility, electronic payment, carrier compliance reporting, claims management

– Example providers• Cass Information Systems

• Commercial Traffic Corporation© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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• Information based– Services include online freight brokering and cargo

planning, routing, and scheduling– Also offer online access to transport and

warehouse management systems• Avoids purchase of licensed software for these services

– Example providers• Descartes Systems Group, Sterling Commerce,

Transplace© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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• Alternative 3PL classification scheme– Asset based providers

• The 3PL owns the equipment used to provide services

– Non-asset based providers • 3PL arranges for services from other companies that

own equipment

• The 3PL tends to not own equipment (assets)


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• Asset based providers– Examples include Exel, FedEx, UPS, Menlo– Advantages for user of 3PL services

• 3PL maintains direct control over shipper’s freight

• 3PL has ready access to capacity

• Fewer organizations to work through to resolve problems

– Disadvantages for user of 3PL service• Provider may favor using the type of assets it owns,

this may be less then optimal for user © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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• Non-asset based providers– Service integrator

• Build customer-tailored solutions from services offered by transport and logistics service specialists

• Experts in structuring and negotiating contracts

– Popular services include freight management and brokerage, routing and scheduling shipments, international freight flow management

– Examples: CEVA Logistics, C.H. Robinson– Advantages: flexibility, unbiased solutions


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Industry Overview3PL Services and Integration

• Wide range of services, from supply chain design to daily operations

• Within transport, 3PLs provide 4 principal types of services– Freight movement– Freight management– Intermediary services– Specialty services


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Figure 9-1: 3PL Primary Transportation Offerings


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FREIGHT MOVEMENT• For hire carriage• Contract carriage• Expedited service• Time definite service • Intermodal service

FREIGHT MANAGEMENT• Carrier selection, routing, & scheduling • Contract compliance• Performance analysis• Freight bill auditing and payment • Transportation management systems

INTERMEDIARY SERVICES • Surface forwarding • Air forwarding• Freight brokerage • Intermodal marketing • Shippers associations

SPECIALTY SERVICES• Dedicated contract carriage • Drayage• Pool distribution• Merge in transit • Household good movement


• Intermediary services– Surface freight forwarder

• Picks up, assembles and consolidates shipments

• Arranges for carriers to transport and deliver to final destination

• Serve as shippers and carriers. As carriers, they are liable for loss and damage

– Air freight forwarder (similar to surface forwarder)• Specializes in high value, time sensitive goods


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– Freight brokerage• Middlemen between shipper and carrier

• Tries to match carrier’s capacity with shipper’s demand

– Intermodal marketing companies• Consolidators or agents, facilitate intermodal rail service

• Assume no liability, legal shipping arrangement is between shipper and carrier

– Shippers associations• Non-profit coops, aggregate member cargo for shipment

as consolidated load


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• Specialty services– Dedicated contract carriage

• 3PL serves as customer’s private fleet

• Customer gains advantage of private fleet without capitalization, operating and management responsibilities

– Drayage• Short haul trucking, pick up and delivery of containers

• Typically contracted for by rail or ocean carriers


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– Pool distribution• Description

– Large quantity of freight moved as one shipment in bulk to central distribution point

– Freight unloaded, sorted by customer, delivered to local destination

• Competes directly with LTL service offered by LTL motor carriers

• Potential advantages– Faster transit time, less handling, lower rates, lower

inventory costs © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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– Merge in transit• Unites shipments from multiple suppliers at a merge point

near end customer

• Customer orders of assorted goods assembled at merge facility for delivery to end customer

• Advantages: lowers total inventory cost, customer avoids capital cost of warehousing facility

– Household goods movement (HHG or van lines)• Operations include local agency with warehouse, pick-up

and delivery equipment, centralized dispatch, and specialized vehicles for long distance transport


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• Emerging 3PL capabilities– Customers desire “one-stop shopping” thus, leading

3PLs developing as integrated service providers– Customers desire global reach, thus, leading 3PLs

expanding service territories– Both capabilities require:

• Supply chain network design capabilities

• Process implementation and coordination

• Day-to-day execution

• Strong IT tools and multi-modal capabilities© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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• Approaches to global integration include:– Leveraging strengths of express delivery services

• Visibility, door-to-door, high reliability

– Acquisitions and partnerships among 3PLs– Offering portfolio of transportation, e-commerce

supply chain and business services• Includes inventory, fulfillment, cold chain solutions,

cross docking, brokerage, freight forwarding

– Strategic investments in transport/distribution facilities


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3PL User Overview

• 3PL growth trends– Spending on 3PL services steadily rising– In U.S. 3PL providers account for 16% of total

logistics spending in 2008• Up from 10% in 2002

– 77% of Fortune 500 outsourced some portion of logistics and supply chain functions in 2008

• Up from 64% in 2005

• Three industries lead use of 3PL services– Technology, automotive, retail


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Figure 9-2: U.S. Spending on 3PL Services


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Source: Armstrong and Associates, Trends in 3PL/Customer Relationships, 2009. Used with permission.

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© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25

Table 9-2

3PL User OverviewReasons for Outsourcing

• Lack of internal expertise

• Supplement internal expertise

• Opportunity to reduce costs, improve financial performance

• Opportunity to increase resource capacity or improve asset productivity


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Table 9-3: Reasons For and Against 3PL Use

Reasons for Using 3PL Services• Opportunity for cost reductions

• Ability to focus on core competencies

• Opportunity to improve customer service

• Improve return on assets

• Increase in inventory turns

• Productivity improvement opportunities

• Imbibe more flexibility into logistics processes

• Access to emerging technology

• Expansion to unfamiliar markets

• Ability to divert capital investments

Reasons Against Using 3PL Services• Logistics is a core competency of company

• Cost reductions would not be experienced

• Control over outsourced function would diminish

• Service level commitments would not be realized

• Company has more expertise than 3PL providers

• Logistics is too important to consider outsourcing

• Outsourcing is not a corporate philosophy

• Global capabilities of 3PL need improvement

• Inability of 3PLs to form meaningful relationships

• Issues related to security of shipments


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Sources: B.S. Sahay and Ramneesh Mohan, “3PL practices: an Indian perspective, International Journal of Physical Distribution & Logistics Management, Vol .36, No. 9, 2006; and, Georgia Tech and CapGemini LLC, Eleventh Annual 3PL Study, 2006.

3PL User OverviewPrimary Activities Outsourced

• Most relationships with 3PLs are tactical, meaning 3PLs are used for a specific task– Transportation is the most often used service– Customs clearing, freight forwarding and

shipment consolidation also widely used

• About 18% of 3PL relationships are strategic– 3PLs fully manage customer’s supply chain

• However, many users look to 3PLs for help in integrating global service capabilities


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3PL User OverviewResults Achieved

• 3PL users satisfied with outsourcing results– Logistics cost reductions in 12%-15% range– Fixed logistics assets reduced 20% or more– Order cycle time reductions of 20%-30%– 3PLs provide more flexibility to fluctuating demand– 3PLs help customers increase service reliability

• But, most 3PL relationships have some problems – Most common: unrealized service-levels or cost

reductions, lack of continuous improvement © 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Figure 9-3: 3PL Relationship Evaluation

Source: Georgia Tech and Capemini LLC, The State of Logistics Outsourcing: 13th Annual 3PL Study, 2008, Fig. 4, p. 11 Copyright © 2008 C. John Langley, Jr., Ph.D, and Capgemini U.S. LLC. All rights reserved. Reprinted by permission.

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Establishing and Managing 3PL Relationships

• Six step process for establishing 3PL relationship

• Step 1: Perform strategic assessment– Perform a logistics/supply chain audit

• Identifies current state, needs, and strategy alignment

– Info to be collected in audit includes• Goals/objectives at corporate, division, supply chain levels

• Requirements of customers, suppliers, key logistics providers

• ID/analyze strategic environmental factors, industry trends

• Profile current logistics network, firm’s positioning

• Benchmark logistics costs and key performance indicators

• Gap analysis between current and desired performance© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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• Step 2: Decision to form relationship– Which service provider’s capabilities are needed?

• Does the company appear to have core competency (expertise, strategic fit, and ability to invest)?

– Lambert, Emmelhainz, and Gardner Partnership Model• Key parts: drivers and facilitators of a relationship

• Drivers: the compelling reasons to partner– Synergy from the partnership that cannot otherwise be attained

• Facilitators: corporate environmental factors that enhance partnership development and growth

– Compatible cultures, mgmt. philosophy, relationship commitment


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• Step 3: Evaluate alternatives– Guiding principles

• If neither drivers or facilitators are present, then the relationship should be transactional or arm’s length

• If all parties in the relationship share common drivers and facilitating factors are present, then a more structured, formal relationship is justified

– Evaluation should include comparison of firm’s needs with capabilities of potential 3PL partner

– Evaluation should include cross-functional perspectives


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• Step 4: Select partners– Step 3 identifies 3PLs that have credentials to be

partners

– Next, given the strategic nature of the pending relationship, the firm’s executives should interact professionally with candidate 3PLs

– The final outcome should be• Consensus on “best fit” 3PL• Consistent understanding of the decision made• Consistent expectation of what to expect from the 3PL


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• Step 5: Structure operating model– Structure refers to activities, processes, and

priorities of the relationship– Components of the operating model include

• Joint planning processes and operating controls

• Communication protocols

• Risk/reward sharing

• Trust and commitment

• Contract style

• Scope of the relationship

• Financial investment© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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• Step 6: Implementation and continuous improvement– Implementation time varies depending on scope

and complexity of relationship– Continuous improvement process

• Aim for breakthrough improvements that strengthen the market position of the partners

• Tools include– Customer value research

– Flowcharting and statistical process control

– Activity-based costing, benchmarking, process reengineering


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• Keys to successful relationships– Both organizations invest time and money in

development and sustainment– Information sharing– Culture of trust– Openness to new ideas and methods– Collaboration on a regular basis– Team approach to problem solving– Leveraging of each partner’s capabilities


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Strategic Challenges for 3PL UsersService Requirements

• Initial questions prior to forming relationship– What are the types of services required?– Tactical or strategic approach to attaining services?

• Tactical: outsource individual services as needed– Relationship is transactional, collaboration is tactical

– Wal-Mart’s use of Greatwide Transportation for refrigerated product delivery rather than own fleet is an example

• Strategic: establish extensive set of integrated service capabilities with 3PL

– High consequences, 3PL heavily impacts service performance

– Example: Goodyear uses Exel for transportation load planning, private fleet operations and order fulfillment


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Strategic Challenges for 3PL UsersCoordination Role

• Where should the role of coordinating key logistics activities reside?– Resides internally if firm does not outsource– Resides internally if firm outsources tactically,

largely to reduce cost of key activities, such as transportation

• Firm uses 3PLs specializing in limited number of services, i.e. logistics service providers


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Strategic Challenges for 3PL UsersCoordination Role

– Coordination role shared with 3PL if firm outsources to achieve value added services

• Firm uses 3PL integrated service providers

– Coordination role largely lies with service provider if they have lead responsibility for regional supply chain integration

• Provider known as lead logistics provider or 4PL

– Coordination totally assumed by advance service providers (global integrators)


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Figure 9-7: 3PL Coordination Capabilities

Limited

InsourcingInsourcing

Basic Services(Logistics Service Providers)

Value-Added Services(Third Party Logistics)

Lead Logistics (4PL)

AdvancedServices

Global Supply Chain Integrators

Pan-Regional Integrators

Shared across activities and locations

• Project Management• Single Point of Contact

• Enhanced Capabilities• Broader Service Offerings

• Speed of Implementation• Knowledge Transfer• Shared Risk & Reward• Comprehensive Solution

• Resident Client Knowledge

• Focused Cost Reduction

3PL Coordination RoleKey Attributes

None

Source: Georgia Tech and Capgemini LLC, The State of Logistics Outsourcing: 10th Annual 3PL Study, 2005. Copyright © 2005 C. John Langley, Jr., Ph.D., and Capgemini U.S. LLC. All rights reserved. Reprinted by permission.


Strategic Challenges for 3PL UsersTechnology Integration

• State of the art IT: critical capability for 3PLs. Necessary for– Advanced communications– Shipment visibility and event management– Management of daily operations

• Gap between expectations and 3PL capabilities– Lack of sufficient shipment visibility – Lack of 3PL internal systems integration– Impedes seamless info flow and activity integration© 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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Strategic Challenges for 3PL UsersGoal Cohesion

• Incongruent goals create potential conflicts

• Keys to creation of consistent goals– Strong personal relationships at both operating

and executive levels– Contracts with detailed requirements and

performance verification capabilities– Attainable performance targets– Monitoring of key performance indicators


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Strategic Challenges for 3PL UsersSupply Chain Security

• Principal concern is theft. Keys for avoiding:– Providing better physical security for goods– Develop security procedures collaboratively with

customers– Provide proactive reports and alerts when shipments

deviate from plan– Monitor key freight transfer points, avoid high risk

transport routes, i.e., Gulf of Aden– Obtain C-TPAT, and other certifications


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Strategic Challenges for 3PL UsersFuture Issues and Challenges

• Economic forces– Volatile fuel costs– Economic instability– Shifting demand and production patterns

• Increasing capability expectations– Services integration– Managing worldwide services– Rising demand for strategic capabilities


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Transport Management & Theory Practices (9)

Business

Transcript of Transport Management & Theory Practices (9)