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Transport Management & Theory Practices (9)

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  • 1. 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.
  • 2. 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. 2
  • 3. 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 © 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. 3
  • 4. 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 © 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. 4
  • 5. Industry Overview Types 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 © 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. 5
  • 6. Industry Overview Types of 3PL Providers • 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 © 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. 6
  • 7. Industry Overview Types of 3PL Providers • 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 © 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. 7
  • 8. Industry Overview Types of 3PL Providers • 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 © 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. 8
  • 9. Industry Overview Types of 3PL Providers • 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. 9
  • 10. Industry Overview Types of 3PL Providers • 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. 10
  • 11. Industry Overview Types of 3PL Providers • 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) © 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. 11
  • 12. Industry Overview Types of 3PL Providers • 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. 12
  • 13. Industry Overview Types of 3PL Providers • 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 © 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. 13
  • 14. Industry Overview 3PL 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 © 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. 14
  • 15. Figure 9-1: 3PL Primary Transportation Offerings © 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. 15 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
  • 16. Industry Overview 3PL Services and Integration • 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 © 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. 16
  • 17. Industry Overview 3PL Services and Integration – 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 © 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. 17
  • 18. Industry Overview 3PL Services and Integration • 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 © 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. 18
  • 19. Industry Overview 3PL Services and Integration – 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. 19
  • 20. Industry Overview 3PL Services and Integration – 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 © 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. 20
  • 21. Industry Overview 3PL Services and Integration • 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. 21
  • 22. Industry Overview 3PL Services and Integration • 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 © 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. 22
  • 23. 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 © 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. 23
  • 24. Figure 9-2: U.S. Spending on 3PL Services © 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. 24 Source: Armstrong and Associates, Trends in 3PL/Customer Relationships, 2009. Used with permission. $Billions
  • 25. © 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
  • 26. 3PL User Overview Reasons 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 © 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. 26
  • 27. 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 © 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. 27 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.
  • 28. 3PL User Overview Primary 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 © 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. 28
  • 29. 3PL User Overview Results 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. 29
  • 30. 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. PercentofRespondents 30 © 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.
  • 31. 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. 31
  • 32. Figure 9-4: 3PL Relationship Development Process Source: Copyright © 2001 C. John Langley Jr., Ph.D. and Capgemini U.S. LLC. All rights reserved. Reprinted by permission. 32© 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.
  • 33. Establishing and Managing 3PL Relationships • 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 © 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. 33
  • 34. Establishing and Managing 3PL Relationships • 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 © 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. 34
  • 35. Establishing and Managing 3PL Relationships • 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 © 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. 35
  • 36. Establishing and Managing 3PL Relationships • 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. 36
  • 37. Establishing and Managing 3PL Relationships • 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 © 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. 37
  • 38. Establishing and Managing 3PL Relationships • 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 © 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. 38
  • 39. Strategic Challenges for 3PL Users Service 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 © 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. 39
  • 40. Strategic Challenges for 3PL Users Coordination 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 © 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. 40
  • 41. Strategic Challenges for 3PL Users Coordination 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) © 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. 41
  • 42. Figure 9-7: 3PL Coordination Capabilities Limited InsourcingInsourcing Basic Services (Logistics Service Providers) Value-Added Services (Third Party Logistics) Lead Logistics (4PL) Advanced Services 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. 42© 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.
  • 43. Strategic Challenges for 3PL Users Technology 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. 43
  • 44. Strategic Challenges for 3PL Users Goal 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 © 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. 44
  • 45. Strategic Challenges for 3PL Users Supply 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 © 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. 45
  • 46. Strategic Challenges for 3PL Users Future 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 © 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. 46