Paper-8 Third Party Logistics (3pl)

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International Journal of Computational Intelligence and Information Security, November 2011 Vol. 2, No. 11

THIRD PARTY LOGISTICS (3PL)
Group Captain Sanjiv Aggarwal Research Scholar, Singhania University, Rajasthan, India Email: [email protected] Dr. B. S. Hothi Director, Jaipuria Instiute of Management Email: [email protected]

Abstract

The changes in the Indian economy like liberalization and globalization have had an increased impetus on manufacturing and exports, the retail boom and the improved infrastructural support has encouraged the development of Indian 3PLs and also an increased interest of 3PL multinationals in the Indian market. The article covers the status of 3PL Industry, the various growth drivers for the industry and challenges that it faces from various ends. Since agriculture and manufacturing form a large part of Indian economy, the efficiency of supply chain management is critical to the growth of economy. The importance of supply chain being efficient is further supported by the fact that growth in economy is primarily led by exports. The 3PLs are the key actors in the supply chain processes be it exports or manufacturing. Key word: Outsourcing, Logistics Management, 3PL

1. Introduction: A third-party logistics provider (abbreviated 3PL, or sometimes TPL) is a firm that provides outsourced or "third party" logistics services to companies for part, or sometimes all of their supply chain management functions. Third party logistics providers typically specialize in integrated operation, warehousing and transportation services that can be scaled and customized to customer’s needs based on market conditions and the demands and delivery service requirements for their products and materials. 2. Literature Review: Concept of 3PL For Outsourcing: This includes the primary level component of management methods and the company's cutting-edge strategy and its vital strategic objectives that the company will identify and adopt for particular strategic initiatives in key the areas of technology information, operations, manufacturing capabilities, and logistics (secondary level components).
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A third-party logistics provider (abbreviated 3PL) is a firm that provides outsourced or "third party" logistics services to companies for part or sometimes all of their supply chain management function. Third party logistics providers typically specialize in integrated warehousing and transportation services that can be scaled and customized to customer’s needs based on market conditions and the demands and delivery service requirements for their products and materials. 2.1 Indian 3PL industry The 3PL industry in India is at a nascent stage and hasn’t realized its full potential. At present, the size of the 3PL industry in India is $2bn. Going by the trade estimates, the 3PL industry is growing at a pace of 20-25% annually and is estimated to reach $3.5bn by 2012 making it one of the fastest growing 3PL businesses in the world. Presently the 3PL segment is among the top five most targeted sectors for investment, as demand for transportation and ancillary services is growing rapidly, and many firms are looking to cash in on this opportunity. Foreign logistics giants are expected to step up their presence in this expanding market, with many mergers and acquisitions likely to happen in this sector. The industry may undergo consolidation in the next couple of years and foreign firms with well established 3PL models will lead the way. Although, the current market scenario of 3PL services in India can’t be compared with that of developed markets like Japan and the US where the share of 3PL service providers in the overall logistics industry is very high, there is tremendous scope for growth, as logistic functions such as transportation and warehousing are likely to be increasingly outsourced to 3PL firms. The 3PL industry in India will receive a major thrust with increase in the number of manufacturing companies especially those related to Automobile and automobile ancillary products. With India becoming the second most favoured destination for outsourcing for manufacturing companies across the world, the 3PL service providers have a huge growth opportunity on there hand. The use of 3PL services will increase considerably with the expansion of the organized retail industry throughout the country. The huge emphasis laid by the government in developing the countries infrastructure will help the 3PL service providers to be more competitive and meet the global standards. However, there is “no true 3PL” company in India till now with existing players providing only limited services, forcing their clients to contact multiple parties across various locations to meet their logistics needs. In some cases, a handful of...’limited service 3PL’ companies are able to take over a small part of the value chain (e.g.: trucking, warehousing), but there are still multiple vendors that a customer needs to connect with.

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Some of the major 3PL players in India include Gati, Aqua Logistics, All Cargo Logistics, Arshiya International, Transport Corporation of India, and Blue Dart. Foreign players like DHL, FedEx, and D.B. Schenker also have a sizeable presence in the country. 2.2 Types of 3PL providers Hertz, and Alfredsson (2003) describe four categories of 3PL providers: Standard 3PL Provider: This is the most basic form of a 3PL provider. They would perform activities such as, pick and pack, warehousing, and distribution (business) – the most basic functions of logistics. For a majority of these firms, the 3PL function is not their main activity. Service Developer: This type of 3PL provider will offer their customers advanced valueadded services such as: tracking and tracing, cross-docking, specific packaging, or providing a unique security system. A solid IT foundation and a focus on economies of scale and scope will enable this type of 3PL provider to perform these types of tasks. The customer Adapter: This type of 3PL provider comes in at the request of the customer and essentially takes over complete control of the company’s logistics activities. The 3PL provider improves the logistics dramatically, but do not develop a new service. The customer base for this type of 3PL provider is typically quite small. The Customer Developer: This is the highest level that a 3PL provider can attain with respect to its processes and activities. This occurs when the 3PL provider integrates itself with the customer and takes over their entire logistics function. These providers will have few customers, but will perform extensive and detailed tasks for them. Non asset-based logistics providers This 3PL performs duties such as quoting, booking, routing, and auditing, but doesn't need to own warehousing facilities, vehicles, or aircraft. These are often leased on terms equaling those of the 3PL contract minimising liability to capital expenditure. To be useful, this type of provider must show its customers a benefit in financial and operational terms by leveraging exceptional expertise and ability in the areas of operations, negotiations, and customer service in a way that complements its customers' preexisting physical assets.

2.3 Advantages of Third Party Logistics • • Elimination of infrastructure investments Access to world-class processes, products, services or technologies
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Improved ability to react quickly to changes in business environments Risk sharing Better cash-flow Reduction of operating costs Exchange of fixed costs with variable costs Access to resources not available in one’s own organization Can concentrate on core competency

3PL tradeoffs • • • • • Potential Benefits Improved focus on areas of competence More current technology; more technological flexibility More efficient warehousing (economies of scale) Improved customer service More work flexibility Risks • Less control over some aspects of logistics, including overall strategy • Possible disruption of customer relationships; leaks of confidential information • Potential for inefficient service at a price

Table 1 – 3PL Tradeoffs

2.4 Marketing Strategies for 3PL Service Firms Logistics is an important activity of any manufacturing unit. This is especially true today, when logistics has opened new strategic possibilities to deliver value to customers. Justin-time delivery is now an established business practice. Fulfillment is the principal enabler of e-commerce. Today, more and more organizations are outsourcing this important activity so as to focus on their core functional areas and for the purpose of developing a smooth and a faster delivery system to their clients. As the third-party logistics (3PL) market matures, “core or basic services continue to become commodities, while value-added services and relationship management skills are becoming points of differentiation,” according to the 2004 Ninth Annual Third Party Logistics Study sponsored by Capgemini (2004). While 3PL users expect their 3PL providers to offer these advanced services, they also view their providers as “tactical logistics providers”. Logistics outsourcing has become more complicated, as third party providers expand their offerings from basic to advanced services.
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The success of any 3PL service provider rests on: • • • • • • • Understanding the customer expectations and needs Broadening the Service Offering range Building on core competencies or developing as specialists Managing Customer relationships through efficient customer service Availability of Infrastructure Process / Operational Excellence Managing Efficient communication networks and MIS

The growing demand for logistics services does not necessarily mean that the companies can look forward to supernormal profits but what they need is development of innovative ways to offer greater value to serve the complex consumer demands, find advantages in scale, and consolidate intelligently. The customers’ demands are outpacing the logistics providers’ ability to meet them. (Mckinsey, 2003) This thesis will involve an intensive survey on the various third party logistics companies in India and also the response of buying authorities will be analysed in order to compare and evaluate various aspects and components of 3PL marketing. A marketing mix is a combination of various activities to attract customers along with achieving business goals. The four P’s i.e., products/service, promotion, price and place are included in the generic marketing mix and being a service, the 3PL market is also influenced by People, Processes and Physical environment. (Kotler & Keller, 2006) The way towards preparing an effective strategy mix lies in integration of resources committed to these activities into an effort that maximises customer impact. As the 3PL industry matures, 3PL services providers adapt their practices and business models to cater to ever increasing customer expectations and take charge of additional market share. a) Product

The product in logistics is mainly a service, which can be different depending on the customer group. The first step towards building a market strategy is the identification of the customer. Logistics companies have multiple customers, both internal and external to the firm with different needs. Internal customers, is essentially the human resource, senior management, vendors, partners and mainly all the stakeholders except the services users. The focus of the senior management, as an internal customer, is higher profitability with lower logistics costs mainly guided by Market expansion. The external customers are mainly the 3PL user companies and their customers. The 3PL company
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needs to clearly analyse the impact of its involvement on the customer and customer’s customer behaviour and satisfaction. It must clearly understand how logistics influences other functions like marketing and manufacturing as logistics cannot be managed in a vacuum and it should make the effort to thoroughly understand and appreciate the challenges being faced by other functions. The services mainly entail order transportation, order fill, order entries, inventory management, invoicing etc. Better performance in these areas will not be beneficial to the firm‘s business but performing them poorly will lead to loss of market share. As the customers’ demands get further complicated, the logistics products/services also evolve. These services include store built pallets, customer pick-up options and special material handling options. These go beyond the basic logistics product and can actually enhance a firm's market share if they are performed properly but decrease market share if they are done poorly as compared to competitors. Procter & Gamble's Product Supply Group has a "toolbox" that it uses to asses the customer needs and includes prescriptive solution tools to develop responsiveness programmes for customers. Finally, the ultimate logistics product offering can be called "innovation" services. These involve integration of logistics operations of the supplier and the customer into one coordinated logistics effort. Practices like quick response logistics, continuous replenishment, vendor managed replenishment and category management are examples of this product. Doing these well will provide the firm with a long-term competitive advantage; doing them poorly will not usually affect competitive position.

b)

Pricing

Logistics is involved in price decisions, both internal and external to the firm. The price of providing logistics service will have direct impact on the price and profitability of a product. Besides this, the price of logistics investments will also affect the revenue and profitability of the firm. Because of the importance of price in decision making, the logistics executive must understand logistics "price drivers." These cause changes in the cost of providing logistics service, thereby changing the price of logistics service provided. Customer profile, product profile and order profile are examples of logistics price drivers. Some logistics price increases are the direct consequence of logistics investments. Many times, logistics service improvements require investments in resources. This will have a direct impact on internal customers. External customers are also sensitive to the price of logistics service. The 3PL organizations charge for their services. Several different pricing models are common in today's 3PL globally. Some of them are • Transactional Pricing, or Traditional Unit Pricing - The 3PL and the customer agree on a flat fee for each service that's going to be performed. In a distribution
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depot or a warehouse center, these services will include all of the touch points in an operation, from receiving and putting away inventory to loading the truck to ship the product out the door. Labour intensive operations and processes, like reverse logistics might use a variation of transaction-based billing, with a charge by the piece, case or pallet, which incorporates all of the services. • Activity Based Costing (ABC) - In this, usually the customer agrees to pay the 3PL a flat fee to cover the fixed costs of running a dedicated facility. In addition to the fixed costs, the customer also agrees to pay an additional fee that covers the variable costs, like labour, fuel, packaging supplies and lift trucks. Cost plus pricing - In this model, the customer pays the 3PL a fee based on the actual costs for the services provided, plus an agreed upon profit margin based on certain percentage that is prevalent in the market . 3PLs may adopt this model with customers who can not predict the volume of business. Gain Sharing - In this, the 3PL puts their fee on the line by agreeing to be paid based on the improvements they can deliver in key areas that are relevant to the customer. Gain-sharing works best in long term relationships where the goal is to provide significant cost and service improvements.





Based on what the competition has to offer, the process of outsourcing (contractual or transactional) the volume, the products and the terms and condition the pricing is agreed upon by the user and the 3PL company. More important are the components of the 3PL pricing. The pricing not only differs with the services provided or used , with the sector getting more organized players, the pricing will also involve risk sharing costs like insurance, HR training and development, fleet management, asset depreciation and maintenance. All these being the hidden expenses of the 3PL operators, the pricing needs to be carefully calculated and administered. c) Promotion and Physical Evidence of 3PL

As the markets get more competitive, promotion is an imperative element of the 3PL Marketing Mix. Companies have decent budgets cut out for the promotional reasons. Being a cost item , and because of its effect on the pricing structure of the firm, the organizations are devising more innovative measure to get the desired visibility by the customers and the customers’ customers. Some of the industry specific magazines and journals are now gaining popularity in the user segments. Mostly the large 3PL organizations like Gati, Safexpress and AFL have their periodic new-letters that also communicate for the companies to the internal and external customers. In addition, company owned portals, customer portals are also used as promotional tools for these organizations. Industry conferences and exhibitions on supply chains are organized frequently by central bodies like CII Institute of logistics in India

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and internationally companies like Aberdeen Research group and Eye 4 Transport are involved in such activities. Apart from all this the word of mouth plays an important role of promotion in these organizations as any manufacturer or trader would prefer the hassle free services more so if it the first time the service is being outsourced. Hence, customer satisfaction and establishing a rapport in the network of supply chain officers involved in taking the selection decision on outsourcing are the important modes of 3PL promotion. In the recent years, more attention is also being given to the fleet (trucks/aircraft), the delivery staff dress code and the other physical evidence like documentation, packaging etc to further provide visibility and strength to the brand. d) Place and Procedures

With reference to 3PL marketing, place has a different connotation as the 3PLs are the ones involved in attributing the products with the place advantage. The role of place is to facilitate the transaction between the logistics organisation and its customers. In other words, arrangements must be made for facilitating conduct of the business with the logistics organisation. This "hassle free" service has four dimensions. Primarily, the logistics organisation must make its backroom operations near to invisible to the customer. Customers are more concerned with the output than the process. Sometimes it is easier to explain to the customer how the logistics process failed and why the required service was not delivered but this unnecessarily exposes customers to information about the logistics process that is not relevant to them. Bringing the customer into the "backroom" operations processes of logistics complicates the transaction and sometimes puts the responsibility of failure on the customer. Secondly, easy access of information should be provided to the customer. Successful logistics organisations manage three flows between themselves and their customers’ viz., product, information and cash. Information can be either about product availability or cash flows. Regardless of the nature of the request, the logistics organisation should consider providing the information effortlessly and immediately as part of its service mission. Many organizations have employed key account / relationship manager or teams as single point of contact for all customer issues. This means that an individual or a team is responsible for maintaining the relationship with a specific number of customers. This includes not only responding to information requests but also implementing innovative logistics solutions for the customer so that the perception of the logistics value can be increased. Thirdly, it should be made easy for customer to find the location or the contact point and warehouse of the logistics company and contact it. This can also be done by advancing technologically that can aid web interaction. It may involve placing self service pick up

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parcels etc. or any other innovative means that can make it easy for the service user to find the service when required. Also there are possibilities of failure of the operations in services. The service failures can be prevented or minimized by having predefined documented processes and also the service recovery timelines and procedures should be available in the blue print. Most of the processes can thus be standardized so as to minimize the effect of service failures, manpower turn out, etc. e) People

The HR policies of a 3PL and the availability of trained manpower should be a matter of concern and also could be a factor in selecting a 3PL for the reason that the industry is primarily a manpower intensive industry. The HR policies have a definite impact on the morale of the employees which in turn has a direct effect on the operations and profitability of an organization. As per a study done by KPMG-CII (2007) there are major skill gaps in the 3PL industry and the main reasons being: attrition, improper recruitment, insufficient addition of manpower. These are largely due to more attractive career options availability, poor working conditions, poor career growth and poor image of the industry. The report goes on further to elaborate on the roles that various stakeholders in the 3PL system can play in reduction of the skill gaps in the industry. The logical starting point is to understand how logistics competency adds value to the user firms and its customers. Firms guided by market opportunity consider fulfilling the requirements of customers as the motivating factor behind all their functions and activities. Hence it is essential for a 3PL to understand the goals and objectives of it’s customer and align itself to the same. A partnership may be successful only when the two organizations have share the values, align culturally and the 3PL complements the activities of its customer. Once the objectives and the environment in the two organizations go well with each other, it becomes easier for the functional heads and the front liners to execute the expected results. 2.5 Problems in the growth of the 3PL market in India There are some operational and regulatory roadblocks to the growth of the 3PL market in India. The major problems are outlined below. • The Indian firms are still wary of outsourcing their logistics activities due to lack of trust and awareness. The 3PL activity is less than 10% of the total logistics operations in India, whereas the corresponding figures for the U.S., Europe and Japan are 57%, 40% and 80% respectively. According to a TCI-MDI survey of 130 Indian firms, 55.4% respondents indicated that their firms use 3PL services. The mostly used 3PL services are inbound and outbound transportation and customs clearing and forwarding. Outsourcing of other value added services such
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as warehousing, inventory management, distribution and order processing is yet to pick up. • The poor infrastructure of India acts as a deterrent for attracting investments for the logistics sector. The national highways constitute 1.4% of the total road network, but carry 40% of the total freight movement by roadways. Owing to a bad condition of roads and inadequate communications infrastructure, 3PL providers would not be able to provide quality service to their clients, and hence would not be able to attract business from the Indian firms. The unwillingness of the Indian firms to outsource logistics operations due to lack of trust and awareness and the unwillingness of the 3PL providers to bring in more investments due to a poor infrastructure constitute a vicious cycle and act as a major roadblock to the growth of the 3PL market in India. The logistics firms offer limited services. In order to attract more business, they have to offer more value-added services, namely packaging and labeling, order management, order fulfillment, distribution, customer support, fleet management, freight consolidation, reverse logistics and logistics consulting. The 3PL providers in India are caught on the wrong foot because of the differential sales tax policy of the Indian Government. Currently, the 3PL providers have to set up warehousing facilities in a number of states to avoid double taxation, thus losing the advantage of the economies of scale. Outsourcing logistics to a 3PL provider will attract a service tax, which was increased in the last budget from 8% to 10%, thereby increasing the outlay in service taxes should a firm decide to outsource its logistics operations. In the changed scenario, the firm may find it cost effective to keep logistics operations in-house.







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Christopher, M 1998: Logistics and Supply Chain Management; second edition. London: Financial Times/Pitman Publishing. Greaver II, MF 1999: Strategic Outsourcing. New York: AMA Publications. Lambert, DM; Stock, JR & Ellram, LM 1998: Fundamentals of Logistics Management. Boston: McGraw-Hill International Editions. Lambert, DM; Stock, JR ,2001: Strategic Logistics Management; fourth edition. Boston: McGraw-Hill International Editions. Langley, CJ; Allen, GR, & Colombo, MJ 2003: Third-Party Logistics Study: Results and Findings of the 2003 Eighth Annual Study. Georgia Institute of Technology, Cap Gemini Ernest & Young, and FedEx Corporate Services. 2003 Lynch, CF 2000: Logistics Outsourcing - A Management Guide. Oak Brook: Council of Logistics Management. Murphy, PR & Poist, RF 2000: Third-Party Logistics: Some User Versus Provider Perspectives. Journal of Business Logistics, 21(1) 2000: 121-133. Kotler Keller, 2006, Marketing Management 12th Edn, Prentice Hall India Sahay and Mohan 2002-2003: ‘Third Party Logistics Practices – An Indian Perspective’. Subrata Mitra Jun 2006,’ A Survey of Third Party Logistics(3PL) Service Providers in India’ IIMB Management Review , Vol 18, No.2, p 159-173 Lieb and Bentz, 2004 ‘The use of Third Party Logistics by Large American Manufacturers’ Foster, Thomas A. View from the top: How third-party CEOs view their industry. Logistics Management & Distribution Report. August 1, 1999. Reebei Associates inc.,’Business Logistics- From push to pull logistics’ Scott Collins, Clayton Gillespie, Megan McCreith, Kaley McNay, and Edgar Mercado ‘Third Party Logistics’ The Hindu Business Line ‘Third party logistics New movers on the block’ May 13, 2002 Sheffi, Y. (1990) Third Party Logistics: Present and Future Prospects. Journal of Business Logistics, 11, 2, 27-39. Boyson, Sandor, Corsi, Thomas, Dresner, Martin, Rabinovich, Elliot,1999 ; ‘Managing effective third party logistics relationships: What does it take?’ ;Journal of Business Logistics Business Standard, August 17, 2006 ‘ Logistics Smoother Ride Ahead’ Bagchi PK, Virum H. Logistical alliances: trends and prospects in integrated Europe. Journal of Business Logistics 1998;19(1):191–213. Capgemini, Georgia Institute of Logistics, FedEx Supply Chain Services, 2004; Third Party Logistics, Ninth Annual Study Report. Available at Capgemini.com
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KPMG report; 2007; Skill Gaps in Indian logistics sector

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