LOGISTICS RELATIONSHIPS AND THIRD PARTY LOGISTICS

Chapter 11:
Logistics Relationships and
Third-Party Logistics

Learning Objectives - After reading this
chapter, you should be able to do the following:
 Understand the importance of logistics
relationships and the types of relationships
that may be formed.
 Be knowledgeable of a process model that
will facilitate the development and
implementation of successful supply chain
relationships.
 Define what is meant by third-party logistics
(3PL), and know what types of firms provide
3PL services.

Learning Objectives
 Know what types of 3PL services are used by
client/customer firms, and know what types of
3PL providers are used.
 Appreciate the role and relevance of
information technology-based services to
3PLs and their client/customers.
 Realize the ways in which 3PLs are involved
in global supply chain issues.

Learning Objectives
 Know the extent to which customers are
satisfied with 3PL services, and understand
where improvement may be needed.
 Recognize the importance of “collaborative”
relationships in the context of supply chain
management.

Logistics Profile:
UPS Logistics Group
 UPS Logistics Group signed a five-year $150
million deal to manage National
Semiconductor’s global supply chain
distribution center in Singapore.
 The DC uses radio frequency, bar-code
scanning, and web-based technology.
 Fills >450K orders per year; receives 12 million
inbound chips daily; and ships four billion
products per year on sales of $2.1 billion.

Third-Party Logistics:
Introduction
 With more firms interested in working more
closely with their supply chain partners, high
priorities are:
 Developing and implementing successful
supply chain relationships;
 The need for collaboration to achieve
supply chain objectives; and,
 Value created by third-party logistics.

Logistics Relationships:
Types of Relationships
 Vertical
 Refer to the traditional links between
supply chain members such as retailers,
distributors, manufacturers and suppliers.
 Horizontal
 Firms that have parallel or cooperating
positions in the supply chain such as a
transportation firm and a warehousing firm
serving the same customer.

Intensity of Involvement
 Vendor relationship shows little or no
integration or collaboration.
 Strategic alliance shows full integration and
collaboration.
 Partnership shows a customized relationship
that results in better outcomes than could be
reached separately.
 Examine Figure 11-1 on the next slide.

Figure 11-1
Relationship Perspectives

Intensity of Involvement
 Regardless of form,
there are numerous
ways that the
relationships may
differ:
 Duration
 Obligations
 Expectations
 Interaction and
Communication
 Cooperation
 Planning Goals
 Performance
analysis
 Benefits and
burdens

Figure 11-2 Effectiveness of
Supply Chain Relationships
7% 8%
22% 21%
48%
42%
20%
23%
2% 4%
0%
10%
20%
30%
40%
50%
Poor Fair Average Good Except ional
Suppliers Customers
Percentag
e

Model for Developing and Implementing
Successful Supply Chain Relationships
 Six step process for forming and sustaining
supply chain relationships:
 Step One – Perform strategic assessment
 Step Two – Decision to form relationship
 Step Three – Evaluate alternatives
 Step Four – Select partners
 Step Five – Structure operating model
 Step Six – Implementation and continuous
improvement

Figure 11-3 Process Model for
Forming Logistics Relationships

 Step One – Perform strategic assessment
 Manufacturer becomes fully aware of its
logistics and supply chain needs and
overall strategies that will guide its
operations.
 This step is referred to as a Logistics Audit,
and will be covered in Chapter 14.
 Time spent at the outset is well spent.

 Step Two – Decision to form relationship
 When using an external supplier, will the
firm’s services be needed.
 If the firm has core competencies in the
area that external supplier provides, then
the firm can provide its own services.
 Using channel partners depends on
whether there are compelling drivers and
facilitators for partnerships are present.

Figure 11-4 What Does It Take to
Have an Area of Core Competency?

 Drivers might include:
 Asset/Cost efficiency
 Customer service
 Marketing advantage
 Profit stability/growth
 Facilitators might include:
 Corporate compatibility
 Management
philosophy and
techniques
 Mutuality of
commitment
 Symmetry on key
factors such as relative
size, financial strength,
etc.

 Step Three – Evaluate alternatives
 Measure and weigh drivers and facilitators.
 Decide on type of relationship.
 Match manufacturer’s needs with
capabilities of each potential partner.
 Involve other functional managers in the
overall selection process.

 Step Four – Select partners
 Made only after close consideration of the
credentials of the most likely candidates.
 Interact with and get to know the final
candidates on a professionally intimate
basis.
 Attempt consensus to maximize “buy-in”.

 Step Five – Structure operating model
 Planning
 Joint operating controls
 Communication
 Risk/Reward sharing
 Trust and commitment
 Contract style
 Scope of the relationship
 Financial investment

 Step Six – Implementation and continuous
improvement
 Depending upon the complexity of the
relationship, the implementation period
may vary in length.
 Future successes will be a direct function
of the ability of the partners to achieve both
breakthrough and continuous
improvement.

Third-Party Logistics:
Industry Overview
 Firms have directed considerable attention to
developing supply chain relationships.
 Many companies have been in the process of
extending their logistics organizations into
those of other supply chain participants and
facilitators.
 One way of accomplishing this extension is
through the use of a supplier of third-party or
contract logistics services.5

Figure 11-5 Implementation and
Continuous Improvement

Third-Party Logistics (3PL):
Definitions
 3PLs are external suppliers that perform all or
part of a company’s logistics functions,
including:
 Transportation
 Warehousing
 Distribution
 Financial services
 Terms contract logistics and outsourcing are
sometimes used in place of 3PL.

Types of 3PL Providers
 Transportation-Based
 Warehouse/Distribution-Based
 Forwarder-Based
 Financial-Based
 Information-Based

 Transportation-Based
 Services extend beyond transportation to
offer a comprehensive set of logistics
offerings.
 Leveraged 3PLs use assets of other firms.
 Nonleveraged 3PLs use assets belonging
solely to the parent firm.
 Ryder, Schneider Logistics, FedEx
Logistics, and UPS Logistics are examples
of 3PLs.

 Warehouse/Distribution-Based
 Many, but not all, have former warehouse
and/or distribution experience.
 Transition to integrated logistics has been
less complex than for the transportation
based providers.
 DSC Logistics, USCO, Exel, Caterpillar
Logistics, and IBM are examples of
warehouse/distribution-based 3PLs.

 Forwarder-Based
 Essentially very independent middlemen
extending forwarder roles.
 Non-asset owners that capably provide a
wide range of logistics services.
 AEI, Kuehne & Nagle, Fritz, Circle, C. H.
Robinson, and the Hub Group are
examples of forwarder-based 3PLs.

 Financial-Based
 Provide freight payment and auditing, cost
accounting and control, and tools for
monitoring, booking, tracking, tracing, and
managing inventory.
 Cass Information Systems, CTC, GE
Information Services, and FleetBoston are
examples of financial-based 3PLs.

 Information-Based
 Significant growth and development in this
alternative category of Internet-based,
business-to-business, electronic markets
for transportation and logistics services.
 Transplace and Nistevo are examples of
information-based 3PLs.

On the Line:
Trade Team
 Excel, the largest provider of brewery
distribution services in Great Britain, and Bass,
the industry’s low-cost producer, formed Trade
Team, the UK’s leading independent logistics
provider to the beverage industry.
 Annual sales of $200 million; 280 million gallons
of beer and other beverages to over 27,000
retail customers; 40-50% market share.
 Has capability to move other products.

Third-Party Logistics Research
Study: Industry Details
 Of 93 responding executives, 71 percent
indicate a current or possible use of 3PLs.
 Overall percentage of companies using 3PLs
is steady, but the computer and peripheral
and consumer products industries tend to
exhibit higher use (90 and 85 percent,
respectively).
 Less use in automotive, chemical and retail
(50 to 60 percent usage range).

 Outsourced logistics services include:
 Warehousing (73.7%)
 Outbound transportation (68.4%)
 Freight bill auditing/payment (61.4%)
 Inbound transportation (56.1%)
 Freight consolidation/distribution (40.4%)
 Cross docking (38.6%)

Figure 11-6 3PL User/Nonuser
Experience, 1996-2001

Table 11-1
Shippers Using More than Five 3PLs

Table 11-2 Third-Party
Revenues Estimated at $56.4
Billion in 2000

Table 11-3 Top Six Outsourcing
Logistics Services: 2001

Figure 11-7 Nonuser Respondents:
Rationale for Not Using 3PL Services

Table 11-4 Information Technology-Based
Services: Current Percent versus Future Percent

Figure 11-8
Sources of Information Technology

Figure 11-9 3PL Customer Use of
Industry Vertical Procurement Markets

Figure 11-10 3PL Customer Use of
Transportation/Logistics Electronic Markets

Figure 11-11 3PL Involvement in Outsourcing:
Who Is Responsible for Implementation?

Figure 11-12 3PL Customer Evaluation of
Outsourcing (Yearly Comparisons)

Figure 11-13
3PL Factors for Selecting and Evaluating 3PLs

 Quantifiable measures of 3PL success:
 Logistics costs reduced by 8.2 percent.
 Logistics assets reduced by 15.6 percent.
 Average order cycle length changed from
10.7 to 8.4 days.
 Overall inventories reduced by 5.3 percent.

 Reported problem areas:
 Service level commitments not realized.
 Strategic management skills lacking.
 Cost reduction goals not realized.
 Cost “creep” and price increases occurring.
 Improvements and achievements lacking.
 Control of outsourced functions diminished.
 Consultative, knowledge-based skills lacking.
 Technology capabilities not being delivered.
 Time and effort spent on logistics not reduced.

Figure 11-14
How Respondents View Providers of Third-
Party Logistics Services

A Note on Fourth-Party Logistics
(4PL): The Next Evolution?
 Thought of as supply chain
integrator, a firm that “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.”12
 4PLs manage and direct the activities of
multiple 3PLs, serving as an integrator.

Figure 11-15
Fourth-Party Logistics (Registered Trademark
of Accenture, Inc.)

Need for Collaborative
Relationships13
 Supply chain relationships are most effective
when collaboration occurs.
 Collaboration is facilitated by the ability of the
supply chain partners to readily access and
exchange information over the Internet.
 Table 11-5 lists the “Seven Laws of
Collaborative Logistics” and is a guide to
establishing and maintaining collaborative
logistics networks.

Table 11-5
Seven Laws of Collaborative
Logistics

Chapter 11:
Summary and Review Questions
Students should review their knowledge of the chapter
by checking out the Summary and Study Questions
for Chapter 11.

End of Chapter 11 Slides
Third-Party Logistics

LOGISTICS RELATIONSHIPS AND THIRD PARTY LOGISTICS

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