Itl lecture-23 & 24 (global logistics & outsourcing)

07/06/10 1
By :
Prof. Amit Kumar

07/06/10 2
“Logistics has advanced from warehousing and
transportation to boardrooms of the successful leading
companies across the world. Due to increasing
importance of business logistics, it becomes necessary
for the student pursuing management education from
IILM- Graduate School of Management, to understand
logistics, its basic framework and practical utility.”
IILM-GSM
Importance of this course
International Trade Logistics

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Course: International Trade Logistics
1. Logistics - At the Centre of World Trade
2. Supply Chain Management
3. Warehousing: A Role Beyond Storage
4. Material Handling & Storage System
5. Inventory Management
6. Transportation: Backbone of Logistics
7. Logistics Packaging
8. Logistics Information System
9. Global Logistics & Outsourcing
IILM-GSM
International Trade Logistics

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IILM-GSM
International Trade Logistics Global Logistics & Outsourcing

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Contents
• Catalysts for Outsourcing Trends
• Benefits of Logistics Outsourcing
• Evolution of Logistics
• Third Party & Fourth Party Logistics
• Selection of Service Provider
• Value Added Services
• Indian 3PL Service Providers
• Why Global Logistics?
• Global Logistics Challenges
• Strategic Issues & Managing Global Logistics
• Case Study: A Draft Agreement Between the 3PL Service
Provider and the Manufacturing Firm Outsourcing the
Logistics Services
IILM-GSM

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• To survive in today’s competitive markets, companies
are focusing on their core competencies and adopting
outsourcing as a strategic solution to improve quality of
service and reduce cost of important as well as non-core
processes.
• Today, it is an accepted trend in industry to form a
collaborative relationship with the logistics service
provider for knowledge-based supply chain integration
that rests on IT as the backbone.
“Logistics outsourcing is an important driver of
top-line growth and corporate strategy.”
Introduction: Logistics Outsourcing
IILM-GSM

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• Today, business organizations across the world are
struggling not only for the growth but mere survival. The
factors responsible for this are:
 The liberalized economies of the countries across the
world
 Globalization of businesses
 Recessionary trends in the markets
• Moreover, customer has become more demanding and
looking more for value-added services from suppliers.
Catalysts for Outsourcing Trends
IILM-GSM

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• In such situation, organizations are realizing that cost
cutting and differentiation in value delivery system are
solutions to the current problem.
• This can be achieved through outsourcing the non-core
operations to experts in the field and concentrating on
core business areas.
A growing trend observable in the industry today
is a ‘hollowing out’ of corporations.
Catalysts for Outsourcing Trends
IILM-GSM

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• Logistics is one of the operations in which the majority of
Indian business corporations do not have expertise.
• In the developed countries, LO is treated as a strategic
solution to improve quality of service and reduce the cost of
important non-core processes.
• The critical reasons are:
 To focus on core competencies
 Resource constraints
 Cost saving resulting from better management of the
supply chain
 Cross-pollination of better available practices
 Wider geographical coverage
Reasons for Outsourcing Logistics
Activities
IILM-GSM

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1. In highly competitive markets, Logistics Outsourcing
provides the operational flexibility to meet the
changing needs of the customers.
2. Logistics services can also be customized for major
markets or key accounts.
3. The requirement of funds for investment in
transportation fleet, warehouses, handling equipment
and storage arrangement is absolutely eliminated and
the responsibility falls on the service provider.
4. The human resource requirement is minimized and
is limited only to coordinating and monitoring the service
provider’s activities.
Benefits of Logistics Outsourcing (LO)
IILM-GSM

Evolution of Logistics
IILM-GSM
In-house
Logistics
Operations
3PL
4PL
Customer
Preferring
Insourcing
Customer
Option for
Outsourcing
Customer for
Business
Alliance
Warehousing
Transportation
Inventory
Order Processing
IT Firms
3PL Firms
Consultant

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• These firms are external to the company and provide on
stand-alone or an integrated basis.
 The stand-alone operator is called a ‘wholesaler’,
who extends only one type of service in which it has
expertise. It may be any of such services as
warehousing, transportation, inventory management,
packaging or so forth.
 But one who provides the total logistic service and
offers entire logistic solutions to customer problems is
called the ‘integrator’.
• The 1990s witnessed the growth of 3PL firms, when
companies around the world realized that logistics is the
key to the success of supply chain.
Third Party Logistics
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• The most important reason for the rapid acceptance
of 3PL providers has been the quick gains for users of
the service of 3PL firms.
• According to the surveys conducted by the 3PL firms
during 1996 and 1998 in the US, the early users of 3PL
firms reported the following benefits:
 Logistics cost reduced by 7.8 percent
 Logistics assets fell by 21.6 percent
 Order cycle time reduced from 6.3 to 3.5 days
• Soon 3PL firms started providing more services in the
areas of traffic management, multimodal, freight
consolidation, cross-docking and payment collections.
Third Party Logistics
IILM-GSM

1. Aegis Logistics
2. DTDC
3. First Flight
4. AFL Ltd
5. DHL
6. Dynamic Logistics
7. FedEx Ltd.
8. Gati
9. Logistix Ltd
10.Mahindra Logistics
11.Total Logistics
12.TVS
3PL Service Providers in India
IILM-GSM
13.TNT Global Express
14.Blue Dart
15.Safexpress
16.Ashok Leyland
17.Agarwal P & M
18.Essar
19.Tata
20.OM Logistics
21.Miebach Logistics
22. Transport Corporation of India
23.Western Arya
24. Reliance Logistics

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• IT industry is playing a major role in logistics and SCM.
• A new trend has emerged wherein the IT firms are
providing logistics solutions build around domain
knowledge provided by 3PL companies.
• The new breed of companies is the 4PL firms.
4PL- a term is coined by the Anderson Consulting
Company- is the next significant evolution in the
logistics management. It is slowly gaining
ground internationally.
Fourth Party Logistics
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According to the Anderson Consultants,
“4PL assembles and manages the resources, capabilities
and technology of its own organization with those of
complementary service providers to deliver a
comprehensive supply chain solution”.
IILM-GSM

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For example, A 4PL company of FMCG Indian manufacturer
operating in the Indian and overseas markets, which need
to integrate its entire logistics operations handled by
different 3PL firms in different geographical areas assigned
to them, shall design and operate one single central
information system instead of the different systems in
different areas by each 3PL firms.
A 4PL firm fulfils all the different needs of the client
from a single source instead of getting into
multiple 3PL alliances to achieve through multiple
sources objectives.
IILM-GSM

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Recently, Hewlett Packard (HP) has appointed Circle
International (CI) as their 4PL partner in the Asia
Pacific region. CI operates from the central hub
located in Singapore, where it buys and stocks HP’s
inventory requirement in the region.
The network of warehouse hubs, spread across the countries
in the region, takes care of the distribution. The local HP
office in the country draws its inventory requirements by
buying from the CI local hub.
HP does not block its funds in inventory. Thus 4PL provides
logistic services by blocking its own money in someone
else’s products and components.
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Selection of Service Provider
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High Logistics cost
Longer order cycle time
Increased customer complaints
Reverse logistics
Define Logistics Problem
Transportation
Warehousing
Packing, Inventory
Material handling, Storage
Identify Problem Areas
Cost s & Complaints reduction
Performance cycle compression
JIT delivery, Route selection
Freight optimization
Establish Objectives

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Selection of Service Provider
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Establish Objectives
Integrator
Wholesaler
Consultants
Search for Service Provider
& Solicit Proposals
Credentials & Technology Base
Logistics Infrastructure
Experience & Customer Base
Cost of Service
Reliability, Government liaison
Proposal Evaluation &
Service provider Selection
Cost s & Complaints reduction
Performance cycle compression
JIT delivery, Route selection
Freight optimization

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Value-Added Services
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Cross-Docking:
• It means elimination of storage time in the logistics process.
• The material that arrives at the warehouse hub from various
vendors is break-bulk, assorted, consolidated and repacked to
dispatch to the customers.
• The storage time is less than 48 hours.
Customs Clearance:
• This involves the responsibility of complete documentation and
customs clearance for imports and exports of goods.
Reverse Logistics:
• It covers the re-transportation (to the manufacturer) and
documentation of rejected or damaged goods at customer end.
IILM-GSM

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Assembly:
• The manufacturers want service providers to prepare a kit
consisting of the manufactured and bought out items which
will go directly to point of sale or use.
• This is required at the time of joint product offerings by two
companies at the time of promotional campaign.
Special Packing:
• It includes seaworthy packing for sea transportation,
shrinkage packaging or packing for specific markets.
Logistics Audits:
• To conduct regular audits or audits-on-demand by the
customer to identify problems or deficiencies in the logistics
supply chain and suggest logistic solutions.
IILM-GSM

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• The globalization has created opportunities for doing
business beyond the national boundaries of a country.
• Due to rapid advancement in ICT during the last decade,
the world has become a global village in real sense.
• As business continues to globalize, attention has
increasingly turned to logistics operation. The speed and
efficiency of the movement of goods across national
boundaries are important issues.
As a consequence of globalization, managing logistics
at the global level poses a challenge of considerable
complexity.
Why Global Logistics?
IILM-GSM

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Global Logistics Challenges
IILM-GSM
Parameters Domestic
Logistics
Global Logistics
Performance
Cycle
Shorter Longer (due to greater distance,
customs clearances, more
intermediaries, more use of slow
sea travel)
Documentation Simple Complex (for customs, banking
and foreign exchange clearance
requirements)
Alliances Few (3PL firms) Multiple (on global front with
logistics service providers,
distributors and manufacturers)
Information
flow
Simple Multiple channels, varied
standards, alternative languages

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• Transportation mode plays a vital role in the movement
of cargo within or between countries.
• Normally, cargo is moved using three modes of
transportation, e.g. road, sea and air, depending on
cost, urgency and the destination.
In Indian subcontinent, the road is an important mode
of cargo movement across India, Pakistan,
Bangladesh and Bhutan.
The railway is the important mode in Europe because
of the availability of a modern and efficient train
system.
Global Logistics
Selection of the Transportation Mode
IILM-GSM

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For selection of the transportation mode, logistical
managers should have the following considerations:
• Location of market
• Speed of cargo movement
• Cost of transportation
• Reliability of mode
Global Logistics
IILM-GSM

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Location of Market:
• Most important factor in deciding the transportation
mode.
• For shipping goods from India to the Middle East
markets, the best and most convenient mode is:
 Sea for bulk cargo (steel, food grains, ores,
minerals and chemicals, automobiles and so on)
 Air for the high-value cargo (jewellery, electronic
goods, office equipment and so forth)
Global Logistics
IILM-GSM

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Speed of Cargo Movement:
• Second important factor is speed, when the cargo is
required urgently or in the shortest delivery time.
• Floricultural and horticultural products, which are
perishable in nature, are directly sent by air to destination.
Obviously, the cost of air transportation is very high and
should be evaluated and justified considering the criticality
of the need in terms of time and opportunity cost.
Roses produced at various farms near Pune, India, are
sent to Mumbai airport in temperature-controlled vans
to be airlifted directly to Holland and the Middle East
in order to reduce the spoilage.
Global Logistics
IILM-GSM

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Cost of Transportation:
• This is directly proportional to the speed of travel.
• Air transportation is costliest. However, air cargo needs
less packaging due to less handling, no exposure to
hazardous storage because of shorter journey period.
• On the other hand, good packaging is required for sea
cargo to withstand the hostile storage, travel and handling
conditions during the long journey.
Global Logistics
IILM-GSM

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Reliability of Mode:
• In India, air accounts for less than 1% of the total cargo
movement, while rail 35%, road 39% and sea 24%.
• Each of the modes is associated with some hazards and
so there is no ideal mode of transportation.
Global Logistics
IILM-GSM
Comparative Hazards of Transportation Modes
Air Sea Road/Rail
Variation in changes
in temperature and
pressure
Water Damage
Corrosive atmosphere
Wave impacts
Hostile storage condition
Shocks
Vibrations
Careless Handling
Impacts due to breaking
Transshipments

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Following are some options for firms to plan their logistics
for truly global operation:
1. The firm may concentrate their manufacturing and
sourcing at a few locations, despite selling their products
across global markets,
For example, BMW and Thomson. The major focus of
these companies is on outbound logistics for
distribution of finished products in global markets.
Global Logistics: Strategic Issues
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2. The next category of firms includes those that
manufacture at one place and sell their products in the
global markets.
These are the companies manufacturing very high
value products such as aircrafts and defence
products. They source their raw material and
components from all over the world. The major focus
is on outbound logistics.
IILM-GSM

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3. Companies in this category manufacture mass-
consumed low-value product such as soft drinks.
Firms like McDonalds, Coca Cola and Pepsi adopt this
strategy of supplying to the market from local
manufacturing plants.
The products are sold within 200 kilometers of the
plants. Beyond a particular distance the logistical
cost makes the finished product uncompetitive.
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4. The fourth category includes companies that source from
and distribute to many locations. They focus on both
inbound and outbound logistics.
Some examples are the Japanese car and consumer
electronics manufacturing companies such as
Honda, Toyota and Sony, and so on.
IILM-GSM

Itl lecture-23 & 24 (global logistics & outsourcing)

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