Third-party Logistics

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Third-party Logistics
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• Third-party logistics (3PL) service providers are
  companies who provide a range of logistics
  activities for their clients. These are companies
  independent from the buyers and sellers but takes
  over some of their logistics function.
• Benefits?
• Concerns? Challenges?
• Future?

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Services Offered by Third-party Providers

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

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Contract Warehousing
Bulk Warehouse
Distribution Center
Incoming Products
Customers Retailers
Outsourced
In-house

• Activities
• Labor supervision
• Receiving, storage, shipping
• Value Added Services
• Traffic/transportation

• Benefits
• Lower capital investment
• Lower fixed/variable cost ratio
• Focus to the core
• Professional service

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Supplier Hub / Regional Fulfillment Center /
Regional Distribution Center
Incoming Materials Or Products
Bonded Warehouse
Mfg site/ Point of Use
Outsourced

• Activities
• Same as contract warehouse
• Customs clearance
• Freight consolidation
• Shipment visibility
• Inventory ownership
• Order fulfillment
• Value Added Services

• Benefits
• Lower capital investment
• Focus to the core
• Delayed payment of duties and taxes
• Pay (for material) on production
• Visibility of pipeline inventory

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Shipment Consolidation and Transportation
Customs
Incoming Materials Or Products
Point of Sale/ Point of Use/ Customers
Consol. Center
De-con Center
Outsourced

• Activities
• Transport arrangement
• Customs clearance
• Freight consolidation
• Shipment visibility
• Carrier mgmt / rate mgmt
• Merge in transit

• Benefits
• Shorter cycle time
• Lower freight costs
• Visibility of pipeline inventory
• Inventory consolidation

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Product Returns / Technical Services
Repair centers
Product Return Center
Customers
OEM Warranty Fulfillment
Outsourced

• Activities
• Testing / screening
• Warranty program mgmt
• Inventory ownership
• Warehousing and inv mgmt
• Fulfillment
• Depot repair mgmt

• Benefits
• Centralization of inventory
• Lower capital investment
• Focus to the core
• Reduced reverse logistics costs
• Speedy response to customers

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Critical Parts / Service Parts Logistics
Repair centers
Customers
OEM Warranty Fulfillment
Outsourced

• Activities
• Failed parts replacement
• Warranty program mgmt
• Inventory ownership
• Warehousing
• Depot repair mgmt
• Visibility and TrackTrace

• Benefits
• Centralization of inventory
• Lower transportation cost
• Improved visibility of inventory
• Lower capital investment
• Better after-sales service support

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Logistics Financial Services
Customers / Retailers
Manufacturers
Distributors
Supplier

• Activities
• Inventory finance (factoring, LOC)
• Distribution finance (asset based
• lending, receivable finance)
• Payment solutions (COD)
• Leasing

• Benefits
• Reduced cost of capital
• Improved cash flow
• Reduced capital investment

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Total Logistics Management
Bulk Warehouse
Distribution Center
Incoming Products
Customers Retailers
Outsourced

• Activities
• Logistics planning
• Network optimization
• 3rd vendor mgmt
• Information technology
• Supply chain visibility

• Benefits
• Reduced total logistics costs
• Global visibility
• Single logistics solution and contact
• Focus to the core
• Reduced investment in logistics

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Benefits of out-sourcing the logistics function

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

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Risks of Out-sourcing Logistics

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

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Why 3PL can achieve economy of scale provide
better service?

• Consolidation is the key!

Example 2 independent firms, 2 independent
supply chains
Consider 2 scenarios
Scenario 1 The firms performs their own
logistics functions
Firm 1
2 warehouses 2 separate distribution networks
Firm 2
Scenario 2 A 3PL takes care of both firms
logistics functions
Firm 1
1 warehouse 1 distribution network
Firm 2
3PL
? Zhi-Long Chen
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Value Propositions of 3PL
Service, Retention market share
Revenue
Profit
Cost of Goods Sold Technology
Productivity Transportation/Warehousing/ Materials
Handling/Distribution
Cost
Shareholder Value
Working Capital
Lower Raws Finished Goods Inventory Shorter
Order to Cash cycles
Invested Capital
Fewer physical assets Warehouse, trucks,
Transportation
Fixed Capital
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3PL Business Models

• Transactional model
• Carriers per shipment, per container unit, per
  weight / volume unit
• Freight forwarders per shipment, per weight /
  volume unit
• Public warehouse operators per weight / space
  area unit
• Contract logistics model
• Activity-based costing, i.e., Fixed
  management fee variable charges based on
  volume
• Or, cost plus
• Or, gain sharing model
• Total logistics management
• As for contract logistics
• Risk/reward sharing
• Partnership
• Cost/gain measurement?
• Savings distribution?

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CEO Perspectives on 3PL Industry
Source Transport Logistics, Vol. 1, No. 1,
pp51-66 (1996)

• Industrys most significant revenue generators
  (ranked in order)
• Transportation management/services
• Warehousing management/operations
• Value added services
• Dedicated contract carriage
• Fleet management/operations
• Logistics information services
• Challenges for 3PL users
• Setting up internal benchmarks and performance
  measures before finding a 3PL partner
• Development of appropriate and sustainable
  pricing systems
• Developing an interactive and collaborative
  partner relationship
• Challenges for 3PL service providers
• Finding qualified people
• Development of systems which are flexible,
  adoptable and user-friendly
• Development of a global logistics infrastructure

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Ten building blocks for a successful 3PL
relationship

• Carefully develop internal costs
• Develop key performance indicators
• Seek broad company inputs at the Request for
  Proposal (RFP) stage
• Solicit multiple RFPs
• Only select the services you really need
• Make sure that you understand the technology
  issues before you sign a contract
• Prepare to change your assumptions after the
  start-up
• Avoid cost-plus contracts
• Find out if the cultures are similar
• Dont give up complete control of your supply
  chain

Source Survey of Fortune 500 manufacturers by
Accenture and Northeastern University (2003).
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USA Logistics Market (2003)

• 936 billion
• 8.5 of GDP (lowest in 15 years)
• Inventory
• Inventory-to-sales ratio decline to 1.32 months
• Transportation
• Trucking services increase by 20 billion
• 7.5 increase for intercity
• 3 for local

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Global Logistics Expenditures
Source Bowersox and Calantone, CSFB Estimates.
11.4 of Global GDP

• Size of 3PL Industry (USA, 2003)
• Companies spend 76.9 billion on logistics
  outsourcing
• 8 of the total logistics expenditures
• Up 8.2 from 2002
• Key revenue growth areas dedicated contract
  carriage, domestic transportation management,
  warehouse-based services

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From Modern Material Handling, Nov. 2003
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Major 3PL Operators in USA

• Airborne
• Americold
• APL Logistics
• Arnold
• BAX global
• Burnham Services Corp.
• Caterpillar Logistics Services
• Circle International
• Cardinal
• DSC Logistics
• Eagle Global Logistics
• EXEL Logistics, Inc.
• Expeditors
• Federal Express Logistics Services
• Fritz Companies
• J.B. Hunt Logistics, Inc.
• HUB Group Logistics Services
• Leaseway Logistics Services, Inc.

• Maersk Logistics
• Menlo Logistics
• North American Logistics
• Penske Logistics
• Power
• Roadway Logistics Systems
• C.H. Robinson Company
• Ryder Dedicated Logistics
• Schneider Logistics
• Standard
• Tibbett Britten
• TLC
• TNT Contract Logistics, Inc.
• UPS Logistics
• USF Logistics
• USCO Distribution Services
• Yellow Logistics Services, Inc.

Source CSFB Industry Report, Sept. 2000
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How many companies use 3PL?

• 657 companies
• Automotive, Consumer products, Food beverage,
  Hi-Tech electronics, Pharmaceutical Medical,
  Retail apparel
• with sales revenues over 1 billion
• 58 in North America, 57 in Western Europe, 33
  in Asia-Pacific, 11 in Latin America

From 3PL Study Results and Findings of 2004 9th
Annual Study
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Out-sourced Logistics Activities

• US Logistics Expenditures
• Transportation 55
• Distribution 32
• Value-added services 13
• In Europe, Asia-Pacific and Latin America,
  companies spend less percentage on transportation
  and more on the other two categories.

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What 3PL functions do companies use?
From 3PL Study Results and Findings of 2004 9th
Annual Study
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Why consider out-sourcing?
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Ten Top reasons Companies Outsource
Source Fifth Annual Outsourcing Index Deloitte
Consulting, January 2003
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Benefits of 3PL
From 3PL Study Results and Findings of 2004 9th
Annual Study by Cap Gemini
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Users Concerns about 3PLs
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Growth of 3PL Industry in China

• Transport and logistics expenditure is US230
  billion (20 of GDP) in 2001,
• with only 4.7 billion on outsourcing.
• Key factors for stimulating growth
• Increased operations of multi-national firms in
  China
• Cost pressures
• Government support in establishing national
  logistics centres
• Reduced regulations Chinas entry to WTO

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Mercers 3PL Survey in China (2002)

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

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Hong Kong Logistics Industry and Major Local
Players

• Container throughput in 2004 22 million TEUs
• Air cargo throughput in 2004 3.1 million tonnes
• Major Local 3PL Players
• OOCL and Cargo Systems
• Kerry Logistics
• Jardine Logistics
• IDS Logistics (Li Fung)
• SUN Logistics
• LINE
• Power Logistics
• TradePort

• Some Major Chinese 3PL Players
• COSCO
• China Shipping
• SinoTrans
• EAS
• China Merchant

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Growth of 3PL Industry

• In US, the growth rate for 3PL market is
  estimated around 15-20 annually.
• In Asia and the rest of the world, the growth
  rate is estimated to be even higher in the range
  of 20-30 annually.
• Future Trends?
• Keys to Success?

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Selection of 3PL providers

• According to the 3PL 2004 9th Annual Study,
  users
• Expect 3PL can execute on a set of core
  capabilities
• Selection based on more unique value-added
  services
• Customer service/order entry
• Reporting
• Metrics
• Industry expertise
• Regional coverage
• Consulting
• Postponement
• Information management
• Global capabilities
• Strategic management skills

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3PL Technologies Capabilities

• We expect our 3PL provider to be able to provide
  the right technology solution for our needs.

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Globalisation

• State of Logistics Report
• In 2003, world merchandise trade was 4.5 above
  that of 2002, global GDP rose by 2.5
• Eastbound Pacific cargo increased by 6,
  straining ocean shipping capacity, prices for
  Pacific (US-bound) container service increased by
  40, another increase of 20 expected for 2004.
• China imports expanded by 40 and exports grew by
  35 in value shipments to and from China account
  for more than one-quarter of all containerised
  cargo worldwide.
• World Trade Organisation predicts growth of world
  trade of 7.5, and world GDP to increase by 3.7

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Keys to Success for Users
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Evolving 3PL relationships
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What is 4th Party Logistics (4PL)?

• 3PL 2004 9th Annual Study
• Q Is 4PL terminology confusing and ambiguous?
• 70 respondents yes or somewhat !
• Fourth Party Logistics supply chain
  co-ordination and management by an entity that
  does not supply (operate) underlying logistical
  services.
• Accenture Modern supply networks are global and
  complex, there is a need for an independent
  organisation, who has the knowledge of supply
  chains and specialist 3-party service providers,
  to manage and integrate the complete end-to-end
  supply chain.

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• The ability to respond faster to changing
  customer need, combined with the flexibility to
  adjust manufacturing and delivery cycles, will
  provide the competitive edge in todays global
  environment
• Rosalyn A. Wilson, State of Logistics Report
• The 3PL providers that are going to win at the
  end game are those that have the ability to
  connect seamlessly, rapidly, and at low cost.
• - Focus group participant for 3PL 2004 9th Annual
  Study

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References

• Third-party Logistics 2004 9th Annual Study, C.
  J. Langley, G.R. Allen and T.A. Dale, Georgia
  Institute of Technology, 2004.
• The two faces of Globalization, J. A. Cooke,
  Logistics Management, July, 2004.
• Third-party Logistics in China Still a Tough
  Market, D. Huang and M. Kadar, Mercer on Travel
  and Transport, Fall 2002.
• Third-Party Relationships. Third-Party
  Solutions, Modern Materials Handling, November,
  2003.