WHICH ENHANCE CUSTOMER VALUE IN SUPPLY CHAIN & LOGISTICS.”
Under The Guidance Of:
Dr. A Nag
Surbhi Khirbat Roll No: 06-S1-142
IN PARTIAL FULFILLMENT OF POST GRADUATE DIPLOMA IN MANAGEMENT (2006-2008)
INSTITUTE OF MARKETING & MANAGEMENT
This work is originally done by me and not copied from other reports. Based on my knowledge, data and information collected during my thesis work, I have prepared this report and I believe it is true and up to the best of my knowledge.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.
EXECUTIVE SUMMARY INTRODUCTION LITERATURE REVIEW CORPORATE OBSERVATIONS RESEARCH OBJECTIVE RESEARCH METHODOLOGY CUSTOMER SERVICE MANAGEMENT DATA ANALYSIS FINDINGS RECOMMENDATIONS LIMITATIONS CONCLUSION BIBLIOGRAPHY APPENDIX QUESTIONNAIRE
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Today India is fast emerging as an economic super power. Advances in technology infrastructural development and its vast resources have placed it in the global arena of growth. The import/export activities have surged to greater heights. So in the present scenario we cannot ignore the importance of shipping companies and the logistics companies who are providing transportation facilities to increase the imports and exports of country and directly contributing in development of country. Logistics involves a wide set of activities dedicated to the transformation and distribution of goods, from raw material sourcing to final market distribution as well as the related information flows. Supply chain management is here. It is not about shipping orders; it is not about making product then pushing it out the door. Supply chain management is about developing a process to respond to the different requirements of each customer. Customers are driving suppliers' practices. Being successful requires logistics effectiveness. Customers, competitors and vendors are global. This is an exciting challenge and opportunity for companies who see the potential and make it happen.
So we see that logistic provider company plays an important role in efficient working of supply chain for any company. The report tells about the importance of third party logistics provider in Supply Chain. Study of business logistics and supply chain management illustrates how supply chain collaboration can create an enabling environment, within which service levels will enhance customer value, whilst shareholder value will also increase. The Thesis involved the study of “factors which enhance customer value in the logistics & supply chain.” The project was carried out by taking appointment from third party operators and meeting them personally and if not able to get appointment then asking question from them through telephone.
Survey was carried out through the help of Questionnaire, which is the primary source of data collection and also secondary data was collected from articles and www.
All the analysis and findings on the basis of questionnaire and secondary data are available in the report. The project report is being concluded by conclusion, recommendations and limitations on the basis of learning and analysis, which I experienced during my Thesis.
In the end annexure is given where sample questionnaire is attached. Bibliography is also given which shows from where I have taken reference while preparing my project report.
A production supply chain refers to the flow of physical goods and associated information from the source to the consumer. Key supply chain activities include production planning, purchasing, materials management, distribution, customer service, and sales forecasting. These processes are critical to the success of any operation whether they’re manufacturers, wholesalers, or service providers.
If you are not in a company being impacted right now by Supply Chain Management or by Continuous Replenishment and do not think that Supply Chain Management affects you, then you are wrong. If it does not impact you now, it will. The concept is appearing in various industries and is moving to smaller companies. Start to understand what it is, and what it means to you. Supply Chain Management is a dynamic paradigm driving through companies. Articles on supply chain management appear in many different publications, national and international, with different target audience. While many of the stories relate to large companies who supply large retailers or grocers, the attention SCM is getting is phenomenal. Add in the global impact of customers, competitors and suppliers; and the magnitude of the supply chain is very significant.
What It Is All About. Supply Chain Management is a reverse of prior practices where manufacturers supplied product to customers and they wanted to. Now customers tell suppliers how and when they want their inventory delivered. The driver behind Supply Chain Management is to remove inefficiencies, excess costs and excess inventories from the supply pipeline which extends from the customer back through his suppliers and through his suppliers' suppliers and so on back. By having the program driven by the customer, it is hoped that inventories, caused by uncertainties and slow response, will be significantly eliminated. While there are sales incentives to major suppliers with the carrot of category management or similar programs, the success of supply chain management rests with logistics. The Five Key Issues of Logistics Effectiveness are core to Supply Chain Management-• • • • •
Movement of Product Movement of Information Time / Service Cost Integration, both internal and external, both organizations and systems
Supply chain management requires a logistics model based on quick order to delivery response. A model which focuses from vendors' doors through to delivery to customers' doors. The model must meet the customers' demanding and specific requirements. It requires
organizational flexibility and responsiveness, internal and external teamwork and demands the use of processes and technology. A common practice which causes inefficiencies, excess inventories and high costs is forward-buying. On the surface, it looked like a way to purchase at a low price. But in reality, this practice is inefficient and results in additional, higher costs and negative impact throughout the supply chain. Forwardbuying strains the capabilities of suppliers to respond and for the distribution department of customers to handle the products. It creates an operational and cost inefficiency for both supplier and customer. By forcing excess sales through the supply chain, then the hidden costs of manufacturing and distribution valleys, after the huge peak caused by the forward-buy can be significant. Supply Chain Management is about what the customer demands. It is not about what the supplier is capable of doing at present.
The customer requirements may vary by customer, but they do have certain consistencies to logistics-•
Quick response to orders from order receipt through shipment to invoicing
• • •
Complete and accurate orders / no backorders Delivery windows or appointments Special shipment preparation as to packaging, marking, labeling, stenciling, slip sheets or pallets, etc.
• • •
Bar coding EDI Carrier selection
Effects of Supply Chain Management: The initial benefits of supply chain management accrue to the customer, the initiator of his supply chain. He earns the reduction in inventories by driving out excesses inventories which he must purchase, store and be responsible for. The impact of supply chain management to the supplier may be more difficult to classify, initially, as benefits. They may vary, but may include:•
Fewer orders initially while the customer draws down excess inventories.
Small and more frequent orders.
• • • • •
Vendor carries inventory, not the customer. Higher warehousing costs for picking smaller and more orders. Higher freight costs for shipping smaller order and more orders. Penalties for not meeting the customer's requirements. Possible loss of business for not meeting the customer's requirements.
Additional capital expenditure to satisfy the need for information and technology to provide the base for SCM responsiveness. Supply chain management success dictates new ways of doing business for suppliers. There is no "standard" practice; no "standard" way of doing business. Instead, there is a practice for each customer. If a company has one hundred customers, he may have one hundred customer practices. Adjusting this way challenges traditional management concepts. Impediments: There are impediments to supply chain success. Emphasis is presently on the initial customer-supplier link. It is not coordinated through the supply chain. Instead as the effects ripple through the supply chain, it is more like a "whisper down the lane" impact, where suppliers are not clear as to their role and what they
must do. Responding to supply chain demands is not easy. There are issues which must be recognized and dealt with, such as-•
Accounting Silos- Supply chain management is a leading-edge technique. Yet the traditional cost measurements used by companies goes back to the Model A. Meeting Generally Accepted Accounting Principles is one thing; measuring the costs and benefits of logistics and supply chain management is something quite different.
Logistics has a difficulty with having its costs properly identified, captured and measured properly. Some costs, such as freight, show on the P&L. Some, such as inventory, show on the balance sheet. And the driver to supply chain management, service, does not appear on any financial document. As a result, suppliers may have difficult seeing the cause-effect of supply chain management to them and the gain-sharing benefits as you progress with it. Activity-Based Costing is the closest approach to measuring the effects of supply chain management on an organization. With ABC, you can develop cost information based on the activities required to the logistics service.
Functional Silos- Supply chain management is a process which requires integrated teamwork. Its goal is customer order-response-
responsibilities and goals, may not be teamwork enhancers. Each function may have its own internal goals which run counter to effective logistics performance necessary for supply chain management success. Look at the underlying driver of supply chain management, the customer. In developing a tailored process to meet the needs of each customer, who is responsible for it? Sales-after all, it is one of their customers. Logistics, since they are on the front-line for making supply chain management work? Manufacturing who must be able to adapt to the dynamics of point-of-sale or other production drivers? Or consider that the company uses tools such as MRP to drive its production planning; yet supply chain management is a pull, not a push approach. How does this shift in a company's practice be absorbed? Who is responsible then for a company's supply chain management? The answer is everyone in the company is responsible; yet the organization has often dictated that one group be responsible.
Reactionary Practices- Since supply chain management is a process it takes time, focus and discipline to make the necessary changes to the way a company does business. It is not reacting to an order; it is
responding to a customer. "Fighting fires" and other reacting events are anti-process and, while it seems like it is customerfocused, it is not. Instead reacting to crises and other emergencies keeps a company for doing what must be done to implement the needed process for supply chain management. At the end of day of crises, the company is often no closer to implementing the necessary integrated process.
Tactical versus Strategic Role for Logistics- Supply chain success depends upon logistics. To develop the necessary programs for supply chain management, the logistics organization must be involved in the planning activity from the beginning. Other groups cannot meet without logistics, decide what logistics must do, give logistics orders and think there will be supply chain success. If that approach is used, then the likelihood of meeting the customer requirements and implementing the technology and teamwork needed, will not be there.
Unclear Mission- Supply chain management requires a rethinking of the company and the logistics mission. Is it customer or is it cost? These can be conflicting goals. Saying the mission is service, and then measuring it by cost can cause organizations to lose focus on what must be done. Supply chain management is a new concept
and requires a reassessment of what the company is doing, where it is going and how it wants to get there.
The planning, scheduling and control of the supply chain, which is the sequence of organizations and functions that mine, make or assemble materials and products from manufacturer to wholesaler to retailer to consumer. The driving force behind supply chain management (SCM) is to reduce inventory Supply chain success just doesn't happen. It takes focus and effort across the entire company organization and with outside suppliers and service providers. Logistics touches every part of a company. So supply chain management must be multidimensional in its approach and scope. And this takes process, people and technology. This is true whether you are a wholesaler, retailer or manufacturer. And it is true if you are lean and need to be agile, flexible and collaborative. Supply chains can be long and complex, stretching between different countries. A firm may have many customers, each with different order and shipment requirements and destinations. There can be many suppliers, sourced from different cities and many countries. Each supplier may require instructions and planning as to lead times. There are internal needs too. These include where warehouses should be located, both in the U.S. and internationally; how inventory is forecast and allocated to each warehouse; how orders
are handled and shipments prepared and how production is assigned among plants and suppliers. PROCESS: Process means a practice, a series of actions, done for a specific purpose, such as satisfying customers. Customers demand and expect more from their suppliers; that is a fact regardless your size or industry. And supply chain management is critical to that customer satisfaction. Supply chain process is a flow of activities with the goal of meeting the requirements of a customer. It includes all internal functions, logistics, distribution, sourcing, customer service, sales, manufacturing and accounting. It includes external companies. The series flows backward--from delivering each customer order each order as demanded back through the performance of suppliers to provide needed finished products, components, parts and assemblies. Process has structure. This compares what some companies call "process" which may be a series of repetitive, standalone transactions. Process has standardization with its understanding of what must be done. With that in place, it also has flexibility to handle exceptions and changes that are a reality of doing business.
PEOPLE: People make organizations and are important to supply chain success. They need to have functional expertise and skills. They need to
know how to manage and operate warehouses, inventory, transportation, purchasing. They need both a tactical view for everyday business and a strategic vision of where and how their function fits in the supply chain and how to make it better. People success is a function also of the corporate culture, how the company sees itself, defines itself and operates, both internally and externally. The culture can be a facilitator of processes or an inhibitor. If the company has myopia, then it negatively impacts its ability to respond in all areas required.
Similarly, organizations, with their hierarchical design, create barriers to supply chain process, which is horizontal. Organization silos can short circuit the supply chain process. Each silo can have its internal goals that can work cross-functionally to the process. Even though the focus of the supply chain process is the customer, merchandising, logistics, finance and others may work to optimize their role, but which may sub optimize the process.
TECHNOLOGY: Supply chain management is sometimes define, or incorrectly defined, in terms of technology. Process can be defined as technology, with an overemphasis on hardware and software, and not on the purpose of the process. Software may be "sold" as the answer, the means, to supply chain nirvana. That can lead to an over expectation by
the user, which in turn can lead to disillusion with what is required to set up and operate the system and with the results actually achieved. AN EXAMPLE WITH SUPPLIER MANAGEMENT: Every
company has a position in Supplier Management. You are dealing with suppliers and/or you are a supplier. This is a vital part of the total supply chain. And it must be aligned with the goal of meeting customer requirements. Supply chain visibility is a desired means to supply chain effectiveness. And that visibility need may be greatest with the inbound part of the supply chain. This part of the total supply chain is very complex and involves a significant financial obligation. Many purchase orders with many supplier shipping diverse products from multiple plants and warehouses, both from the U.S. and various countries and ports or airports can be a significant management challenge. Add in different cultures, time zones and business practices the visibility need with a global supply chain can be daunting. And the pressures in supplier performance are great for all, wholesalers, manufacturers, retailers and suppliers. Supplier management as part of inbound supply chain requires process, people and technology. It demands a process, not a series of purchase order transactions. It requires people with vision and skills to manage the complexity and to build the collaboration and deal with the flexibility needed as sales and other events change the purchasing
demands. The people need to be linked. It requires technology to gain the needed visibility of purchase orders, suppliers and transportation of what is going on and to use event management and exception management to deal with all the vagaries that can occur.
SUPPLY CHAIN ACTIVITIES Supply chain management is a cross-functional approach to manage the movement of raw materials into an organization, certain aspects of the internal processing of materials into finished goods, and then the movement of finished goods out of the organization toward the endconsumer. As organizations strive to focus on core competencies and becoming more flexible, they have reduced their ownership of raw materials sources and distribution channels. These functions are increasingly being outsourced to other entities that can perform the activities better or more cost effectively. The effect is to increase the number of organizations involved in satisfying customer demand, while reducing management control of daily logistics operations. Less control and more supply chain partners led to the creation of supply chain management concepts. The purpose of supply chain management is to improve trust and collaboration among supply chain partners, thus improving inventory visibility and improving inventory velocity. Several models have been proposed for understanding the activities required to manage material movements across organizational and functional boundaries. SCOR is a supply chain management model promoted by the Supply Chain Management Council. Another model is the SCM Model proposed by the Global Supply Chain Forum (GSCF).
Supply chain activities can be grouped into strategic, tactical, and operational levels of activities. Strategic:
Strategic network optimization, including the number, location,
and size of warehouses, distribution centers and facilities.
[[Strategic partnership] with suppliers, distributors, and customers,
creating communication channels for critical information and operational improvements such as cross docking, direct shipping, and third-party logistics.
Product design coordination, so that new and existing products can
be optimally integrated into the supply chain, load management
Information Technology infrastructure, to support supply chain
operations. Where-to-make and what-to-make-or-buy decisions Aligning overall organizational strategy with supply strategy. Tactical: Sourcing contracts and other purchasing decisions. Production decisions, including contracting, scheduling, and planning process definition. Inventory decisions, including quantity, location, and quality of inventory.
implementation of best practices throughout the enterprise. Milestone payments Focus on customer demand. Operational: Daily production and distribution planning, including all nodes in the supply chain. Production scheduling for each manufacturing facility in the supply chain (minute by minute). Demand planning and forecasting, coordinating the demand forecast of all customers and sharing the forecast with all suppliers. Sourcing planning, including current inventory and forecast demand, in collaboration with all suppliers. Inbound operations, including transportation from suppliers and receiving inventory. Production operations, including the consumption of materials and flow of finished goods. Outbound operations, including all fulfillment activities and transportation to customers.
Order promising, accounting for all constraints in the supply chain,
including all suppliers, manufacturing facilities, distribution centers, and other customers.
OUTSOURCING SUPPLY CHAIN MANAGEMENT-8 ISSUES
Outsourcing is done for various reasons. The driver can be generating cost reductions and downsizing; this has been a traditional reason for outsourcing. But there are others, such as gaining capabilities that are not available internally, implementing lean programs, streamlining
operations, strategically positioning the company, or improving or adding capabilities to gain competitive advantage. Regardless of the reason, outsourcing succeeds when it is well thought out and done properly. Some key points to identify for all parties involved in outsourcing are: *Know and Define Reason for Outsourcing: This may seem obvious, but it can be tricky. What do you want to accomplish and why? What is it that you want to do better? What would it take to do it and do it well inside the company? Why is that option not viable? For example, the reason may be to reduce freight costs. But freight cost can be a problem, with high rates or the carriers used or the methods selected. Or, freight can be a symptom of a problem from use of high cost shipping methods because of forecasting, inventory or supplier problems. In these situations, high freight cost is a derivative of another problem. If
the real cause of freight is not identified, then the outsourcing will not be successful, or at least as successful as it could be because the reason for the outsourcing has not been properly identified. Freight also has a service factor, whether it is moving inventory from suppliers, between company operations or to customers. That has to be understood in order to evaluate the freight cost problem and needs. What are you buying for transportation? What are you paying? Why are you dissatisfied? What do you require? Similar comments can be made about outsourcing to manage inventory. The problem may seem to be too much inventory or out-of-stock situations. But the inventory problem could be the result of a larger problem as to sales forecasting reliability, supplier performance in delivering purchase orders timely and correctly. It could be a need for systems or systems integration to provide visibility of all inventories in the supply chain, whether at warehouses or purchase orders at suppliers or in-transit.
*Evaluate Outsourcing Business Process versus Function: Knowing what is being outsourced and why it is being outsourced then drives the type of logistics service providers to be considered. The reason for
outsourcing may also direct whether you are looking to outsource a function or a process. Outsourcing management of inbound transportation takes a function and transfers it to an outside party. Outsourcing the management on the inbound supply chain, including supplier purchase orders, supplier performance and transportation takes a process and transfers it to an outside provider. Outsourcing a function versus a process can change the type of service provider that should be evaluated. A 3PL is often used with functions, such as inbound transportation and related activities. Managing a function requires depth of skills sets from the service provider. A 4PL may be the better choice with managing a process, which requires breadth of logistics skill sets. The point is that outsourcing to optimize a function, without fully understanding the process, problem and need, can sub optimize the supply chain effectiveness and costs. Outsourcing may fail, but not for the right reason. The need was not clearly understood; so the outsourcing solution was not properly identified. The functional issue overrode the process; so the proper logistics service provider was not identified and selected. Of the eight issues, this may be the key one, process versus function, because without this the outsourcing selection may be skewed, if not flawed.
Also determine if the outsourcing and the desired results require collaboration with any of the company trading partners. This is important to defining the needs, identifying partners and designing the needed program.
*Recognize Seller and Buyer Roles: Each party has a reason to be involved in the outsourcing action. And they bring different confidences and expectations into the effort. The company selling its outsource service wants the business for his reasons. He may want the volume to build his own leveraging position with the transport carriers or others he deals with. He may want the volume to increase the throughput and reduce costs at warehouses or other operations. The point is that the Seller may be focused on his needs and not focused on the Buyer's needs. He may not listen to the potential buyer's requirements and instead present his capabilities as a stand-alone instead of how it meets the Buyer's requirements. Understanding and satisfying the Buyer's unique and complete needs can become subordinate to "getting the business". Also see if the Seller views you as a "client" or as a "customer". Outsource providers who see the potential buyer as a client will recognize the unique needs and develop, tailor and manage the relationship accordingly. Those providers who view a prospective buyer as a
"customer" may not pay the attention to the business if and once they have gained it. A customer is one of many customers; he is not unique. Laying out a list of "customers" utilizing the service provider is not a critical as his demonstrating how that provider will manage the client's needs, both today and as they may change. Such a provider is proactive, not reactive. Client management differentiates successful outsource service providers, for both gaining and retaining business. Also, the company, more exactly, the persons, seeking to outsource can be very emotional; that should not be underestimated. And the effort can be in a more in a difficult situation. They may be under internal pressures that make them feel they are under attack. As a result, they may not be as open and receptive to the effort as they should be. They may close themselves off to what the company's seeking the business are offering to do. As a result, either or both parties may be talking "at" each other instead of "with" each other. The result of such communication can lead to bad decisions by either or by both parties. *Detail Your Operation. Clearly specify in writing what is done, by whom, how it done, when and why. Highlight both the strengths and its weaknesses. Show and understand interfaces between departments and
how duties and work is handed off between them. Understand "hidden", peripheral and "assumed" work that is done and that is beyond the job descriptions and department purpose and responsibilities that outsiders may not know about. Define critical points in the function or process. The function or process should be mapped. Supply chain management crosses organizational lines; mapping will delineate the cross-functional roles and interfaces. It will also show gaps or redundancies that may exist. These gaps or redundancies may highlight key areas for the 3PL or 4PL that are critical for success. Detail the cost of the operation. What are the components, direct and indirect, such as labour, space, freight and other? Recognize any disconnect with some costs, such as transport costs and inventory, in the financial system. Freight is on the monthly profit and loss; inventory is a balance sheet item. Yet there is often a cause-effect, a connection, between them even if it is not readily reflected in the accounting system.
*Set Metrics/Key Performance Indicators and Accountability: The outsourcing is being done for a specific reason with anticipated results. Define those expectations clearly. The planned results should be tangible. The results should be measurable. "Reducing costs", "improving supplier
performance" or similar goals are vague and can lead to disputes during the contract on whether the outsourcing is successful. The anticipated results should be clearly set early in discussions as part of the expectations. The Seller needs to know these to see the realities of accomplishing them, given the requirements and how and when it will be done. Benchmark key costs and performance. The two are tied. Even if the purpose is a cost reduction or service improvement; benchmark both for the sake of the outsource arrangement and relationship. However do not develop measure for the sake of measures and do not develop too many measures. Focus on the key metrics and performance indicators that relate to outsourcing success. With insights into the present operation and performance, then mutual agreement can be established on the results during an agreed time period. That clearly sets the framework and standard for evaluation of the outsourcer. Does the program include incentives, for results beyond the baseline goals? Then drill down into the costs and results for an understanding of cause-effects. The mapping work will be of great aid for developing the changes needed for incentives results.
Accountability and responsibility should be understood too, from and for both parties. Supply chain management has multiple areas of responsibility and accountability; it is a complex, multifunction process that spans states and continents. It runs from suppliers’ right through to customers. The impact of each function on the total process cannot be overlooked nor assumed away. Key points of decision-making should be identified. Problems will occur; successful, quick resolution involves knowing who is responsible. A single person should be deemed accountable for both parties. The time to identify and define responsibilities and metrics is early in the process, before any contract is signed.
*Be Aware of Risks. Outsourcing is change management: It may very well be business process reengineering. There is no guarantee that the outsourcing will succeed. "The best-laid plans o' mice an' men gang aft agley, an' lea'e us nought but grief an' pain for promised joy. '', quoting Robert Burns. Anticipate the various scenarios and the internal and external factors that can impact the program and results. There are planned benefits.
But, perhaps more importantly, there are potential downsides from the outsourcing. Be aware of them. No rose-colored glasses are allowed during the outsource evaluation. Do a risk assessment. Identify real and perceived risks. Work to mitigate risks. There will likely be a contract; that is a commitment to the program. Consider contract length as an option in risk mitigation. Think through the "what ifs." What if goals are not attained? What if there are service problems that seriously impact the company as to customer deliveries or with purchase orders from suppliers? What if there are inventory difficulties, either stock outs or surges in levels? What if there are unanticipated, significant cost increases? What options will there be then? With outsourcing, there is transference of company knowledge, practices and resources. If the outsourcing, for whatever reason, is not working, how do you fix it quickly and well? What if it cannot be remedied? Do you terminate the agreement and find another service provider? If so, how do you do it? How do you transfer from one provider to another? How do you regroup and bring the outsourced service back inside? Can you bring it back? There may be no calamities with the outsourcing. But recognize that there could be.
*Plan the Change: Outsourcing is not like turning on a light. All parties should plan the migration. Do not depend on the contract to make the outsourcing work. There are major tasks to plan and mundane ones that should be considered. Recognize the outsourcing means that people and departments in the company are giving up ownership of the function or process. Build teams among all affected parties and have the teams meet to detail what must be done. Develop the plan and time lines. Plan tests. Identify any opposition and how to overcome it. Build the relationship during the planning phase, before the change is made. Understand any customization and reengineering that will be made and how it will be developed and implemented. Look at interfaces and handoffs of work or information between, within and among the company, the service provider and trading partners. Provide training. Make sure that people and systems are ready. Ignore no detail or task.
*Manage the Outsource Operation: Do not assume the contract will manage the logistics service provider and operation. Use the key performance indicators continuously. Meet regularly, especially during the implementation, to review progress, problems and successes. Test accountability. Assess the relationship.
1. The Nature of Logistics
The growing flows of freight have been a fundamental component of contemporary changes in economic systems at the global, regional and local scales. These changes are not merely quantitative (more freight), but structural and operational. Structural changes mainly involve
manufacturing systems with their geography of production, while operational changes mainly concern freight transportation with its geography of distribution. As such, the fundamental question does not necessarily reside in the nature, origins and destinations of freight movements, but how this freight is moving. New modes of production are concomitant with new modes of distribution, which brings forward the realm of logistics; the science of physical distribution.
Logistics involves a wide set of activities dedicated to the transformation and distribution of goods, from raw material sourcing to final market distribution as well as the related information flows. Derived from Greek logistikos (to reason logically), the word is polymeric. In the Nineteenth century the military referred to it as the art of combining all means of transport, revictualling and sheltering of troops. Today it refers to the set of operations required for goods to be made available on markets or to specific destinations.
Logistics is thus a multidimensional value added activity including production, location, time and control of the supply chain. Activities comprising logistics include physical distribution; the derived transport segment, and materials management; the induced transport segment.
Physical distribution is the collective term for the range of activities involved in the movement of goods from points of production to final points of sale and consumption. It must insure that the mobility requirements of supply chains are entirely met. Physical distribution includes all the functions of movement and handling of goods, particularly transportation services (trucking, freight rail, air freight, inland waterways, marine shipping, and pipelines), transhipment and warehousing services (e.g. consignment, storage, inventory management), trade, wholesale and, in principle, retail. Conventionally, all these activities are assumed to be derived from materials management demands.
Materials management considers all the activities related in the manufacturing of commodities in all their stages of production along a supply chain. It includes production and marketing activities such as production planning, demand forecasting, purchasing and inventory management. Materials management must insure that the requirements of
supply chains are met by dealing with a wide array of parts for assembly and raw materials, including packaging (for transport and retailing) and, ultimately, recycling discarded commodities. All these activities are assumed to be inducing physical distribution demands. The close integration of physical distribution and materials management through logistics is blurring the reciprocal relationship between the induced transport demand function of physical distribution and the derived demand function of materials management. This implies that distribution, as always, is derived from materials management activities (namely production), but also, that these activities are coordinated within distribution capabilities. The functions of production, distribution and consumption are difficult to consider separately, thus recognizing the integrated transport demand role of logistics.
2. Distribution Systems
The nature and efficiency of distribution systems is strongly related to the nature of the economy in which they operate. In economies dependent on the extraction of raw materials, logistical costs are comparatively higher than for service economies since transport costs account for a larger share of the total added value of goods. Contemporary logistics was originally dedicated to the automation of production processes, in order to organize
manufacturing as efficiently as possible, with the least cost-intensive combination of production factors. A milestone that marked rapid changes in the entire distribution system was the invention of the concept of lean management, primarily in manufacturing. One of the main premises of lean management is eliminating inventories and organizing materials supply strictly on demand, replacing the former storage and stock keeping of inventory. The outcome is a specialization of production and a greater variety of products. In a broader sense distribution systems are embedded in a changing macro- and microeconomic framework, which can be roughly characterized by the terms of flexibility and globalization:
Flexibility implies a highly differentiated, strongly market- and customer-driven mode of creating added-value. Contemporary production and distribution is no longer subject to single-firm activity, but increasingly practiced in networks of suppliers and subcontractors. The supply chain bundles together all this by information, communication, cooperation, and, last but not least, by physical distribution.
Globalization means that the spatial frame for the entire economy has been expanded, implying the spatial expansion of the economy, more
complex global economic integration, and an intricate network of global flows and hubs.
The flow-oriented mode affects almost every single activity within the entire process of value creation. The core component of materials management is the supply chain, the time- and space-related arrangement of the whole goods flow between supply, manufacturing, distribution and consumption. Its major parts are the supplier, the producer, the distributor (e.g. a wholesaler, a freight forwarder, a carrier), the retailer, the end consumer, all of whom represent particular interests. Compared with traditional freight transport systems, the evolution of supply chain management and the emergence of the logistics industry are mainly characterized by four features: A fundamental restructuring of goods merchandised by establishing integrated supply chains with integrated freight transport demand. Whereas transport was traditionally regarded as a tool for overcoming space, logistics is concerned with reducing time. This was achieved by shifts towards vertical integration, namely subcontracting and
outsourcing, including the logistical function itself. According to macro-economic changes, demand-side oriented activities are becoming predominant. While traditional delivery was primarily
managed by the supply side, current supply chains are increasingly managed by demand. Logistics services are becoming complex and time-sensitive to the point that many firms are now sub-contracting parts of their supply chain management to what can be called third-party logistics providers (3PL). A 3PL is an asset based company that offers logistics and supply chain management services to its customers (manufacturers and retailers). It commonly owns distribution centres and transport modes. More recently, a new category of providers, called fourth-party logistics providers (4PL) have emerged. A 4PL integrates the resources of producers, retailers and third-party logistics providers in view to build a system-wide improvement in supply chain management. They are nonasset based meaning that they mainly provide organizational expertise. 3PL and 4PL providers benefit from economies of scale and scope by offering integrated solutions to many freight distribution problems.
3. Geography of Freight Distribution
Logistics has a distinct geographical dimension, which is expressed in terms of flows, nodes and networks within the supply chain. Space / time convergence, a well known concept in transport geography where time was simply considered as the amount of space that could be traded
with a specific amount of time, including travel and transhipment, is being transformed by logistics. Activities that were not previously considered fully in space / time relationships, such as distribution, are being integrated. This implies an organization and synchronization of flows through nodes and network strategies: Flows: The traditional arrangement of goods flow included the
processing of raw materials to manufacturers, with a storage function usually acting as a buffer. The flow continued via wholesaler and/or shipper to retailer, ending at the final customer. Delays were very common on all segments of this chain and accumulated as inventories in warehouses. There was a limited flow of information from the consumer to the supply chain, implying the producers were not well informed (often involving a time lag) about the extent of consumption of their outputs. This procedure is now changing, mainly by eliminating one or more of the costly operations in the supply chain organization. Reverse flows are also part of the supply chain, namely for recycling and product returns. An important physical outcome of supply chain management is the concentration of storage or warehousing in one facility, instead of several. This facility is increasingly being designed as a flow- and throughputoriented distribution centre, instead of a warehouse holding cost intensive large inventories.
Nodes and Locations: Due to new corporate strategies, a concentration of logistics functions in certain facilities at strategic locations is prevalent. Many improvements in freight flows are achieved at terminals. Facilities are much larger than before, the locations being characterized by a particular connection of regional and long-distance relations. Traditionally, freight distribution has been located at major places of production, for instance in the manufacturing belt at the North American east coast and in the Midwest, or in the old industrialized regions of England and continental Europe. Today, particularly the large-scale goods flows are directed through major gateways and hubs, mainly large ports and major airports, also highway intersections with access to a regional market. The changing geography of manufacturing and industrial production has been accompanied by a changing geography of freight distribution.
Networks: The spatial structure of contemporary transportation networks is the expression of the spatial structure of distribution. The setting of networks leads to a shift towards larger distribution centres, often serving significant trans-national catchments. However, this does not mean the demise of national or regional distribution centres, with some goods still requiring a three-tier distribution system, with regional, national and international distribution centres. The structure of networks has also
adapted to fulfil the requirements of an integrated freight transport demand, which can take many forms and operate at different scales.
Most companies consider the use of a 3rd party to help them with their supply chain services when they realise how important it is to have competitive customer service and how costly and difficult it can be to achieve on their own.
THIRD-PARTY LOGISTICS PROVIDERS/ LOGISTICS SERVICE PROVIDERS- A BRIGHT FUTURE There is a bright future for third-party logistics providers (3PL) and Logistics Service Providers (LSP), for international and/or domestic logistics opportunities. The continuing growth of supply chain management, outsourcing and globalization plus the dynamic effect of ecommerce are driving and will drive growth. We distinguish 3PL from LSP. A 3PL is a division of a company, often asset-based, that provides transport, warehousing, forwarding,
information technology or other logistics or supply chain management related services. 3PL is seen by the parent organization as a way to develop more business for the parent focus. The 3PL also provides higher revenue and higher profit opportunities than the traditional business of the corporation, which is in a commodity-service arena where price is often the key differentiator versus competitors. 3PLs generally are developed to develop profitable business while using the services of the parent company. That can challenge their ability to develop logistics solutions for all possible customers. Not all customers need logistics programs that include the services of the parent company for all or a significant part of the activity.
An LSP is a stand-alone endeavour. With no parent company that provides a transport or other service, the LSP is free to develop and manage tailored supply chain programs for its customers without having to use the parent company as part of its service package. It can position itself to clients as their de facto in-house logistics department. Growth for 3PLs and LSPs will come more in consumer related industries that practice supply chain management (SCM). Slower to develop will be industries that use more traditional traffic and other approaches to logistics. Non-consumer goods industries will still be outsourcing opportunities. Their needs and requirements will differ though. Consumer goods businesses are also more likely to be involved in international with either sourcing and/or sales. The Asia-U.S. trade lane, the largest in the world, is a key outsourcing opportunity. Even more, the dual sword of SCM and globalization creates outsourcing opportunities for companies who do not view logistics as a core competency. Supply chain management is driving customer practices, both directly and indirectly. Asia-US cargoes are very much consumer-goods-type products. And consumer goods companies are key players of SCM. The purpose of supply chain management is to drive inefficiencies out of the system. That means consumers have the products they want and when
they want them. Inventories, as a buffer for uncertainties, should be reduced. Logistics cycle times would be reduced. To drive out inefficiencies and reduce cycle times, an effective supply chain is built from the customer’s door back through his suppliers. This is what SCM is about, and suppliers of companies that practice supply chain management know this. They have to find ways to be both cost and service responsive. Yet sourcing from Asia, with its ocean transport, is a problem link in the supply chain and creates its own issues. How can you be service responsive with a service that could take two weeks or a month or longer in transit? Shippers will continue to demand faster transits. 3PLs/LSPs may create the package to put together service and cost alternatives to meet a shipper’s specific needs. SCM presents a way for 3PLs, who may have an ocean carrier or forwarder as their parent, to break out of their commodity service provider market approach. LSPs can blossom to with being able to meld different carriers and different forwarders, with different services and prices into a flexible program that is responsive to a customer's needs. Being a supply chain partner to shippers will provide a way for 3PLs/LSPs to differentiate them in the marketplace.
In international, forwarders and carriers struggle with the concept of supply chain management, with building customer-specific, tailored logistics programs and with moving away as a traditional, commodity freight service provider. Plus, there are many forwarders chasing cargo. How do they distinguish themselves from competitors? They are too many forwarders in a very highly fractured industry. Consolidation is inevitable. With such market turmoil, 3PLs/LSPs can seize opportunities. LSPs/3PLs will become the customers for the steamship lines. This is creates a dynamic for everyone. And this same dynamic is and will continue to happen in domestic transportation and warehousing. 3PLs and LSPs will continue to grow and thrive. After all, it could be a multibillion-dollar global market opportunity. Corporations will look at outsourcing of their logistics as a way to gain competitive advantage, realize it is not a core competency, and reduce costs or whatever drives their decision. A third-party will be the customer. Carriers must look at the 3PL/LSP market and decide whether they can compete in it. It has many of the same requirements as the supply chain management market. If carriers choose to compete, how will they? Will they develop their own 3PL division with the ability to market it over the core shipping business? Will they view the 3PL as an extension of their business or a competitor? Will they be able to work with 3PL’s to
develop cooperatively the programs needed by the 3PL or 4PL? This does not mean quoting rates and negotiating volume contracts. It is a much focused business endeavour, but the size is huge and profitable. Success means having a viable 3PL/LSP strategy as to market(s) and how to penetrate it. Inherently that means having the capability to look at each shipper and his individual requirements and developing a unique solution logistics program for that particular customer. If the program is not tailored to each customer, then the 3PL/LSP is not being a true 3PL/LSP. He is providing a generic commodity service. 3PLs and LSPs must define their strengths and weaknesses, from their internal view, customers and market view and competitors view. Perception can be stronger than reality. This is fundamental to knowing what they can and cannot do presently and what is demanded to change. They must assess their reason for being or wanting to be a 3PL or LSP. If they want to move into other arenas, international or domestic, or other industries, they must understand what practices exist and why. This is important for assessing and defining market opportunities, from having a wish list and turning into business. There are fundamentals to being a third-party. Whether a 3PL or LSP is established and growing or just beginning, they must understand how
supply chain management and logistics differ from their traditional transportation, warehousing or forwarding. 3PLs must understand how they can and cannot drive business to their parent without compromising the customer’s specific requirements; how they can tailor to meet a customer’s needs and support their parent and how they cannot do this. They must understand a customer’s real issues and behind-the-scenes issues. Effective 3PLs and LSPs need and have a shipper’s perspective. Their staff can and does provide the shipper view. We would be remiss if we did not mention E-commerce. E-commerce is the "in" word in business. Its growth rate and future development is unfathomable. E-commerce is here for both B2B (business to business) and B2C (business to consumer). It redefines the traditional business model. 3PLs and LSPs must decide on how they will participate in the Ecommerce. They have no option. They must have dynamic web sites, for booking, tracking, tracing, rates and much, much more. That is the minimum they must do. E-commerce logistics will be a driver in outsourcing because effectiveness lies outside the core competency of shippers. 3PLS/LSPs must also be able to integrate into their customer's system with management information, not with dumping data files into a customer's computer. Customers must have integrated information to manage their business effectively.
The Internet also opens up a new way to quickly handling information and managing business. Where EDI (electronic data interchange) never fulfilled its promise, the Internet will and has. XML and other tools are being developed for this. The web may be the tool and vehicle to really develop logistics effectiveness as it is meant to be. Any company who ignores the Internet should be in a unique business or be prepared for possible extinction. In conclusion, the growth of 3PLs and LSPs will be significant. The market will evolve as competitors come and go. It will evolve as shippers define and redefine their needs. But they will grow.
HAVING REVIEWED THE WHOLE PICTURE THEY COME TO REALIZE THAT THERE IS MORE THAN 1 REASON WHY ENTRUST YOUR SUPPLY CHAIN WITH SOMEONE ELSE?
Performance Obtaining best practice performance can be allusive and requires expertise and focus on the complete supply chain.
Focus Being able to handle responsibility to "the experts" allows management to focus on the core business activity
Why invest in facilities and resources on your own when they can be better utilised and shared with several others
Economies of scale
Smaller companies don't have the scale or volume to be competitive with those that do. Out sourcing remedies this problem
Local presence Most companies don't have sufficient scale to justify there own regional facilities. Outsourcing is an economic way to a regional presence
THIRD PARTY LOGISTICS
Third Party Logistics ( 3 PL), or Managed Warehousing as it is known, is the function by which the owner of goods (The Client Company) outsources various elements of the supply chain to one 3 PL company that can perform the management function of the clients inbound freight, customs, warehousing, order fulfilment, distribution, and outbound freight to the clients customers.
The global trend towards outsourcing elements of the supply chain is to achieve superior customer service levels. It is recognised the importance of cost competitiveness, and most organisations focus great efforts on continuous improvements to efficiency and productivity.
However, an organisation with superior ability to satisfy customers will be able to command a price premium and still match the competitiveness of a lower cost organisation. Service based 3 PLs require a change in role from arms length contractor to business partner. A contractor will do as they are asked, meet the specifications but understand little about his clients real business needs, and wins or loses on price alone.
A business partner, on the other hand has real expertise that the client organisation lacks, and understands how to meet the clients business needs better than the client does. 3PL partners are able to add value through innovation. When considering your options it's important to take into account all the issues. Supply chain logistics is an essential part of your business. It’s our total focus and reason for being. Taking this responsibility on your behalf leaves you to focus on your core activities. This partnership guarantees out mutual success. Clients have come to use our services for a variety of proven reasons:
WHY USE 3PL Customer service performance Clients verify our delivery reliability and accuracy on a daily basis. 3 pl provides a simple more cost effective path to economic best practice customer service reliability that is unattainable "in house"
Cost benefits Savings arise from better utilisation of shared resources. Additional benefits from reduced capital investment in facilities and inventory.
Economies of scale Few companies in NZ have the scale of operations to go it alone in the global market place. All 3 pl clients regardless of their size can share the benefits of scale of activities.
Volume variable Clients pay only for the resources they consume. Costs fluctuate with activity. There are no fixed costs to cover in the quiet times nor is there a performance shortfall if sudden increases in demand occur.
One stop integrated solution 3pl take responsibility for supply chain. 3 pl cultivates strategic partners, integrated procedures and systems to minimise the risk of service failure.
History of 3PL The ideas that drive third party logistics providers are hardly new. A Bible story tells about an Egyptian pharaoh who, haunted by nightmares of plenty and famine, took a servant’s advice to warehouse excesses harvests in years of plenty because years of scarcity would follow. In pre-Renaissance Italy, in the province of Lombardy they used paper documentation, known as Lombards, as receipts for inventory stored in common (3PL) warehouses. Upon a purchase, the customer would take a Lombard from the market to the centrally located warehouse to retrieve the merchandise. This allowed the merchants to keep their stock in a centralized location and avoid the cost of shipping it to the market and/or to customers. This merchandise proxy was the forerunner of paper money. In Latin America, this warehousing practice continues today. The ships that sailed the oceans were common carriers. They provided both transport and storage of goods so that the manufacturer could again focus its effort to its core enterprise. In the United States, the pioneering American spirit was constantly seeking new and creative methods to build wealth. The Interstate Commerce Act of 1887 was passed to ensure that railroad monopolies practiced fair pricing. Thus, small businesses had the same access to (and same price for) third party transportation as large corporations. The use of freight cars and railroad depots as warehouse storage points and the construction and use of co-op grain
elevators to store harvests are prime examples of outsourced warehousing activities. World War II and the resultant number of disrupted households created a demand for household good storage. The multi-story buildings erected or modified for such use were quickly converted after the war to general purpose warehousing. This was the birth of public warehousing on short-term contracts, as we know it today. The availability of these public warehouse operations throughout the country provided substantial areas of warehouse storage on short-term arrangements, allowed manufacturers, particularly in the food industry, to re evaluate their philosophy of having to maintain their own proprietary warehouse operations in each marketplace. Consequently, carriers were needed to transport the various goods from the factory to the warehouse and from the warehouse to the point of sale. In the 1980s and 90s, the need for service-providing specialists was on the rise, and businesses were competing to provide logistics services. Federal Express, under CEO Fred Smith, revolutionized the way people thought about 3PL and the way we have conducted business ever since. Federal Express became an overnight success because of its overnight delivery. It became possible (and soon, necessary) to deliver almost anything almost anywhere overnight. The resulting decrease in cycle time continues today in business-to-business (B2B) and business-to-consumer (B2C) transactions.
The proliferation of the 3PL concept and 3PL providers affected the grocery industry. Third party warehousing and Just-in-time techniques assisted in keeping transportation costs down and inventory fully stocked. This gave rise to the theory and application of efficient-consumerresponse (ECR) techniques, which espoused smaller, more efficient shipments. This and other new methods spread to other retail markets and led to the growth of the super chain, such as Wal-Mart. As the noted business author Peter Drucker remarked in the article “To Sell the Mailroom,” the trend among many companies today is toward contracting out their support or accessorial work (e.g., warehousing, and transportation) to external suppliers and focus on their core business competencies. Outside contractors, says Drucker, must be efficient because they compete in an open marketplace. In addition, unlike warehouse and transportation managers in most corporations, people who work for third party contractors have a potential to move into senior management positions. Thus, they have a greater incentive to work hard at attracting customers and keeping them happy. Many organizations for which 3PL works want to reduce the number of direct employees and their associated liabilities. A diminishing work force, particularly at entry level, and the need for more professionally managed approaches to logistics helped fuel the growth of third party service providers.
Quicker, Faster, and Better Looming on the horizon during the changes of the 80s and early 90s was the Internet. The Internet would compel not only retailers and manufacturers to overhaul their practices, but 3PL providers themselves. With the advent of the Internet, consumers wanted their products cheaper and quicker. This process shapes the way we do business today. In the past decade, third party logistics gained great popularity. Substantial increases in outsourced logistics activity can be readily noted, although experts differ on the actual degree of market penetration. Robert V. Delaney of Cass Information Systems has reported that third parties currently provide more than 20 percent of the principle logistics functions, as opposed to less than 10 percent in 1992. “The outsourcing of logistics has enormous growth potential. U.S. manufacturers today hire third party companies for only about 12 percent of their logistics. With increased competition in a global economy, companies will find it more efficient to outsource as much as 25 percent to 30 percent (of their non-core activities),” Delaney has said. Regardless of the actual numbers, there is no question that there has been a substantial growth in the use of outsourced logistics services— particularly third party warehousing and transportation. In automotive, industrial, small-package-fulfillment, grocery, and building supplies industries, the movement to outsourcing is significant. This shift has
substantially increased the demands on the third party providers. These demands are sometimes not being met, creating a need for change and the possibility of disappointment, including business and career-damaging consequences. This continued growth of demand for third party services has stimulated a significant number of new providers. Less than a decade ago, only a handful of third party providers offered any form of national coverage, and the industry was dominated by strong regional and single-city operators. In the past few years, many of these have banded together to form the core of today’s national offerings. Today, there are a number of national third party logistics operators, and numerous regional operators who are often linked together through service and marketing affiliations. Presently, we are seeing the emergence of truly global 3PL companies that provide services across all continents. One drawback, however, is that the growth of third party providers and the increase in opportunity has encouraged some organizations to enter a field in which they may have had minimal background and experience. The road to 3PL as it stands today has been long, winding, and—at times —bumpy. Many developments in business and technology have helped shape the world of outsourcing. It has been an interesting trek to the present explosion of 3PL services and providers today.
CHALLENGES IN MANAGING THE 3PL RELATIONSHIP
In the last two decades, increasing numbers of organisations world wide have recognised the fact that it is necessary to develop products suitable for global markets in order to widen their market network and at the same time source material globally to be competitive in the local as well as overseas market place. Globalisation has opened many lucrative avenues to the business world and also posed many challenges to be successful in the global trade. One of the biggest challenges in the Global Trade is logistics networking and the ability to manage seamless forward and backward flow of material and information. This is an enormous task and in order to be successful organisations have developed strategic alliances with 3PL (Third Party Logistics) companies all over the world to manage their logistics operations network. Many commercial establishments world wide have turned to logistics outsourcing as a way to re-engineer their distribution networks in order to meet the global market demands and also gain competitive edge. According to Cap Gemini 2005 annual study, North American organisations are planning to outsource in 2008 – 2009, 56% of their Logistics expenditure (49% in 2005) where as Western Europe is panning 81% (65% in 2005) and the Asia Pacific intend to outsource 60% of their logistics spend against 50% in 2005. Further the same report revealed that
78% of the respondents are outsourcing logistics activities in North America; 79% in Western Europe and 58% in Asia Pacific Region. One of the Massey University Post Graduate Student conducted survey in 2005 under the supervision of this author (hereafter called as Massey University study) indicated that the NZ rate of outsourcing 3PL activities is around 66.7% in manufacturing environment. One of the innovative trends used today is the outsourcing of logistics or third-party logistics to manage complex distribution requirements, postponement of manufacturing, cross docking, Kitting or Assembly, Inventory Financing, Vendor Managed Inventories, Reverse and Repair Logistics etc. This triggered phenomenal growth in 3PL business world wide. We can classify outsourcing into three categories. The first level of outsourcing is transactional outsourcing. This is typically based on transactions and no long term contracts and no bonding between 3PL and outsourcing company. The second classification is known as Tactical outsourcing. This kind of outsourcing is on long term basis with negotiated contacts in place and with integrated IT systems, to facilitate free flow of information and create supply chain visibility. This is considered as a stepping stone for strategic alliances/outsourcing which is the third category. Strategic outsourcing is based on long term relationships with successful outcomes. In this category the 3PL companies become partners in supply
chain management and complete transactional transparency will be established. Very few 3PL companies are able achieve this status with their customers by constantly innovating and maintaining operational integrity. Some even follow open book costing method to demonstrate the transparency of the system. The Logistics Activities Outsourced and their classification is given in attached annexure is produced by the author based on Cap Gemini 3PL 2005 Annual Study and Massey University Study in order to explain different levels of outsourcing and Logistics activities outsourced to 3PL companies. The main reason for the momentous growth in 3PL business is change in the thinking process of outsourcing community. More and more organisations are outsourcing their logistics activities and upgrading their relationships with 3PL companies from transactional to tactical and strategic relations. According to the survey conducted in 2005 17% average business growth is envisaged by the CEOs of 3PL Companies operating in Asia Pacific Region for the next three year period. One of the biggest enemies in managing any logistics operation is the time. The Logistics professionals world wide have daunting task of managing a global supply chains and this includes keeping customers or stores properly stocked and deliver the perfect order every time. They must balance the need for low costs, proper inventory levels and
maximum service. Some of these responsibilities are now shared by 3PL companies at tactical level as well as strategic level. Unfortunately these 3PL relationships are always not successful. According to a recent Warehousing Education and Research Council (WERC) pamphlet reported that 55% of logistics outsourcing alliances are terminated after 3-5 years. In some cases it was noticed that the relationship ended even before completion of the first year of operation.
3PL LOGISTICS AND SUPPLY CHAIN MANAGEMENT
Sweeping changes continue to redefine the consumer products marketplace and to deal successfully with these changes many firms are now investigating and implementing alternate business and logistics support models. Two such models which have emerged over the last few years are Third Party Logistics and Co-Distribution. Although these are individual concepts in their own right, powerful synergies can be developed and harnessed when both concepts are combined under the appropriate circumstances. Why would one consider combining these two concepts? Well unfortunately for many reasons, some firms have been unable to identify substantial enough benefits to justify moving to outsourcing or Third Party Logistics (TPL). Benefits generated must not only exceed the cost of 3PL fees, they must go well beyond this level to offer savings significant enough to justify such a major business change. Specifically, this article outlines an approach and methodology for investigating, defining, implementing and realizing the benefits apparent in this opportunity. Within this, the critical role and importance of the use of Outside Facilitation in both planning and implementing a CoDistribution network of this type cannot be stressed enough as such facilitation is the key to ensuring success. As mentioned above, the involvement of a Third Party Logistics provider is the next key ingredient
in the sustainable creation of a Third Party Co-Distribution Network (TPCDN their role in this process will also be discussed in this article. Co-Distribution represents the partnering of two non-competing firms for the express purpose of developing a shared supply chain. Obviously for either party to consider such an undertaking, significant synergies and potential benefits must be identified. A review of the eight potential benefit areas such synergies create will then be reviewed in the final section. As mentioned, there are two facilitation roles required to successfully create and rollout the Third Party Co-Distribution Network envisioned within this article and a number of specific steps required. The first is Outside Facilitation or advisory support services provided to the two potential partners in a number of key areas. Initially, this party would conduct a high level feasibility analysis to confirm the existence of potential benefits in the areas identified. Next, once the general feasibility hurdle has been cleared this party would carry out a detailed analysis in conjunction with in-house resources from both firms to fully analyze, define and prepare the Co-Distribution Network Plan and Design document. Once this plan is completed and both firms are prepared to proceed, the search for a Third party entity would then begin. This third phase would include the preparation of a detailed RFP document, followed by ongoing management of the RFP Process itself. This would include issues surrounding contractor performance, contract types,
duration, renewal, contract incentives and penalties. In addition, items such as payment timing and methods would also be reviewed which may have material implications for the firms involved. Finally, the role of the Outside Facilitator in implementation and ongoing support from direct involvement from concept development right through planning to actual execution is an important continuity to maintain consistency, momentum and stability in the overall relationships surrounding the new network.
SOME FREQUENTLY ASKED QUESTIONS ABOUT THE LOGISTICS INDUSTRY AND WHICH WILL AFFIRM GRIP ON YOUR UNDERSTANDING OF THE INDUSTRY.
What is Logistics?
Logistics is "the process of planning, implementing and controlling the efficient, effective flow and storage of raw materials, in-process inventory, finished goods, services and related information right from the point of origin to the point of consumption (including inbound, out bound, internal and external movements) in order to satisfy customer's requirements.
LOGISTICS is also defined as time related positioning of resources. The whole concept of Logistics is based on 7 R's which are:• • • • • • • Right place Right time Right quantity Right quality Right price Right condition Right customer
What is third party logistics?
Third party logistics is the activity of outsourcing activities related to Logistics and Distribution. The 3PL industry includes Logistics Solution Providers (LSPs) and the shippers whose business processes they support. Companies opt for Third Party Logistics for the following reasons:
• • • • •
Focus on core competence Resource constraints Cost saving / cost optimization For large and global coverage For more professional and scientific approach to logistical problems
For improvement in service levels with improved response time Efficient management of inventory resulting in better utilization of working capital.
What is fourth party logistics (4PL)?
Fourth party logistics provider is a supply chain integrator 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 to the client.
A standard 4PL supply chain solution involves four distinct steps:
Step I: Reinvention
At this level, the overall business strategy is aligned with supply chain strategy to reengineer the supply chain of the participants.
Step II: Transformation
Here the focus is on coordinating specific supply chain functions such as sales and operations planning, distribution management, procurement strategy, customer support and supply chain technology, with the aid of process and organizational changes, T&D, information technology, etc. as applicable.
Step III: Implementation
The implementation is done on the basis of recommendations made at the earlier two levels and the transition is put across to the 4PL delivery
team, taking special care to consider the dimension of human resources and organizational change.
Step IV: Execution
A 4PL provider's scope of responsibility also includes operational responsibility for numerous supply chain functions, besides the traditional transportation management and warehousing operations logistics outsourcing
How is logistics different from transportation?
Transportation is physical movement of goods (inbound and outbound) as well as picking up of products as per customers order and delivering it to the ultimate user whereas Logistics encompasses several activities related to supply chain management such as planning, implementing and controlling the efficient, effective flow and storage of raw materials, inprocess inventory, finished goods, services and related information, in which transportation is a major element in the entire chain.
What is supply chain?
In simple language at the material level, supply chain may be defined as "Flow of materials through procurement, manufacture, distribution, sales and disposal" while at the human level the chain is an "entity of people organized as structures and systems for delivering the desired value and goods".
Supply Chain Management may also be defined as "the integrated management of all linkages and value added activities from the supplier's supplier to the customer's customer in such a way that enhanced customer value is achieved at lower costs.
What are the objectives of supply chain management?
A well designed supply chain is expected to support the strategic objectives of: • • • • • Reduced Costs Shorter Lead Time Best of Quality Flexibility Enhanced Service
The best configuration of the chain will vary from individual chain to chain and individual organization to organization. But, in all the case the architecture of the chain would include the following three elements System, Technology, Relations.
How is logistics different from supply chain management?
Logistics forms an important element of supply chain management whereas supply chain management is interplay of all the functions and integrates marketing, planning, distribution and purchases with the entire manufacturing process.
Can a transporter provide logistics solutions?
Yes, provided the transporter has a wide network, fleet, material handling, human infrastructure and strong IT support.
What is the pre-requisite infrastructure required to provide logistics solutions?
The pre-requisite infrastructure required to provide logistics solutions are: • • • • • • • Land and Building (Warehouse) Trained Manpower Material Handling Equipments Hardware and Software Transport Network Vendors Consultants
Does one need any software to provide logistics solutions?
What does Logistics activities comprise of?
Logistics activities, as a part of Supply Chain Management comprises of the following: • • • • • • • • • • Purchase and Supply Material Handling Production Planning Production Control Transportation Storage Distribution Product Management Installation and Servicing Strategic Management
What is the significance of logistics in manufacturing industry?
In a manufacturing industry, Logistics plays a key role in Supply Chain Management as there is a strong inter-play of activities starting from raw materials till the finished goods. In all the activities there is a flow of goods whether it is raw materials or WIP or semi-finished goods or
finished goods. Logistics plays a significant role in the management of entire supply chain.
How do logistics solutions help to reduce the inventory cost?
One of the important elements of supply chain management is the management of warehouse and inventory levels. Efficient management of inventory helps to keep a tab on:
• • • •
Replenishment level ABC analysis of stocks FSN stocks Helps customer to concentrate more on fast moving stocks
What are the legal issues involved? The legal issues involved are: • • • • • • Conforming and non-conforming areas Excise Duty Local Taxes Labour Acts Pollution Act Industry Act
Fire Act Sanctions from appropriate bodies
What is Warehousing?
A warehouse is a point in the logistics system where a firm stores or holds raw materials, semi-finished goods, or finished goods for varying periods of time. In the macroeconomic sense, warehousing performs a vital function. It creates time utility for raw materials, industrial goods and finished products. The proximity of market-oriented warehousing to the customer allows a firm to serve the customer with shorter lead times. This warehousing function continues to be increasingly important as companies and industries use customer services as a dynamic, valueadding competitive tool.
What is Material Handling?
Material Handling can be defined as "efficient short-distance movement of goods that usually takes place within the confines of a building such as a plant or a warehouse or between a building and a transportation agency."
Material Handling has four dimensions: • • • • Movement Time Quantity Space.
Material Handling improves efficiency by making the logistics system respond quickly and effectively to plant and customer requirements. For efficient movement of goods into the warehouse, locating stock, accurately filling orders, and rapidly preparing orders for shipment to customers, materials handling is very important to outbound logistics. In inbound logistics terms, materials handling serves company plants in the same way. Firms need to integrate materials handling requirements not only for the company's departmental needs, but also for meeting their customers' needs.
CHALLENGES TO 3PL IN 21ST CENTURY
Third party logistics (3PL) has established itself as a significant, growing segment of the global logistics industry. The 3PL industry includes Logistics Solution Providers (LSPs) and the shippers whose business processes they support. Customers of third-party logistics (3PL) companies want more than just transportation services, they want 3PLs to provide the technology that drives the supply chain process Trends in Shippers' Logistics Requirements Shippers are demanding to LSPs to support their increasingly complex business processes, to enable them to improve supply chain performance. Shippers are requiring that LSPs provide:
Enhanced traditional logistics capabilities like enhancing the reliability • Smaller, more frequent shipments • Shipments to a greater number of destinations • Coordinated flows of materials through crossdock or merge-intransit operations shippers. • Cost-effective flow of goods and information
Additional activities that support complete solutions tailored to particular industries and customers • Shippers are asking LSPs to co-locate their activities at the shipper's site • Additional activities at their sites or at new sites outsourced warehouses and/or sorting points • Activities at supplier or customer sites. This may include, for example, delivery, installation and removal activities. at ports,
Additional Information: • Shippers are asking for "pipeline visibility" of information visibility of the status of goods in the pipeline from suppliers through intermediary companies and organizations to a factory, retailer or customer
Decision-Making Responsibilities: • Mode selection, routing and re-ordering and replenishment decisions, to LSPs. They may be asked to take on some parts of financial processes, such as invoicing, credit checks, and collection
e.g. Customized Transportation Inc. (CTI), 3PL to General Motors' plant in Kansas City, Mo., provides automobile interior doorpanel modules at the exact moment they are needed on the production line. Although GM selects the materials vendors, CTI issues the purchase orders and buys the material from those vendors. The 3PL then receives the material, assembles the modules, puts them in racks, and delivers them to the production line. GM receives an invoice from CTI that includes all operating costs, the cost of goods sold, and a profit margin
Integration and coordination of activities performed by many entities in support of local and global solutions
Many LSPs are working to position themselves as lead logistics providers who have the relationship and operations management skills, as well as the ICT capabilities, to oversee the implementation and execution of complex supply chain solutions. Coordinating traditional and value-added activities performed by several LSPs who either have the required functional expertise (e.g., warehousing or some form of transportation) or geographic presence
FOURTH PARTY LOGISTICS
Fourth Party Logistics (4PL): 4PL is a new concept in supply chain outsourcing. It is emerging as a path to achieve more than the one time operating cost and asset transfers of a traditional outsourcing arrangement. Through alliances between best-of-breed third party service providers, technology providers management consultants, 4PL
organizations can create unique and comprehensive supply chain solutions that cannot be achieved by any single provider.
Next wave of RTSCM
While outsourcing third-party logistics is a now accepted business practices, Fourth Party Logistics is emerging as a breakthrough solution to modern supply chain challenges to provide maximum overall benefit. A Fourth Party Logistics provider is a supply chain integrator 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.
Central to the 4PL's success is a "best of breed" approach to providing services and technology to a client. The development of 4PL solutions leverages the capabilities of third party logistics providers, technology service providers, and business process managers to deliver a comprehensive supply chain solution through a centralized point of contact. The 4PL will integrate the client's supply chain activities and
supporting technologies across these "best of breed" service providers, with the capabilities of its own organization.
4PL Supply Chain Solutions
Management consultants have traditionally focused on the strategic end of supply chain solutions reinvention and transformation. These supply chain solutions have leveraged technology to support the strategic imperatives. Third party logistics providers have focused on operational issues- implementation and execution. As illustrated in the 4PL Supply Chain Solutions (Figure 8.2), a 4PL solution leverages the combined capabilities of both management consulting and third party logistics providers to get the true essence of a RTSC. More importantly, the design, implementation and execution of a leading edge, client optimized, uniform technology plan that will meet the needs of the 4PL client is ensured by leveraging the technology
capabilities of consultancies, technology providers and third party logistics providers. At the highest level of the 4PL solution is Reinvention. The most likely source of true quantum enhancements in Real Time supply chain performance comes through either synchronization of supply chain planning and execution activities across supply chain participants, or increased collaboration between independent supply chain participants. Reinvention leverages traditional supply chain management consulting skills, aligns business strategy with supply chain strategy, and is facilitated by technology that integrates and optimizes operations both within and across participating supply chains. The second level of the 4PL solution is Transformation. Transformation efforts focus on improving specific supply chain functions. These include sales and operations planning, distribution management, procurement strategy and customer support. At this level supply chain technology becomes critical to the success of the solution. The third level is Implementation. A 4PL implements recommendations including business process realignment, systems integration of
technology across the client organizations and service providers, and transition of operations to the 4PL delivery team. Careful attention is paid to organizational change, recognizing that the "people" factor is a critical driver of success in the transition to the 4PL arrangement. The goal is to
avoid the all too common, ineffective implementation of well-designed strategies and business processes that have limited the effectiveness of solutions and the delivery of projected results. The fourth and final level is Execution. A 4PL provider takes on operational responsibility for multiple supply chain functions and processes. The scope goes well beyond traditional third party transportation management and warehouse operations to include: manufacturing, procurement, supply chain IT, demand forecasting, network management, customer service management, inventory
management, and administration. While an organization can outsource the entire range of its supply chain activities to a 4PL provider, a 4PL solution will more likely be a subset of critical path supply chain functions or processes. In summary, a 4PL responds effectively to the broad, complicated needs of today's organizations by delivering a comprehensive supply chain solution. This solution is focused on all elements of supply chain management, provides continuously updated and optimized technologies, and is tailored to specific client needs.
What is the difference between a 3rd party logistics provider and a 4th party logistics provider?
The term "fourth-party logistics provider" is a trademarked term owned by Andersen Consulting. It refers to the evolution in logistics from suppliers focused on warehousing and transportation (third-party logistics providers) to suppliers offering a more integrated solution. Among other services, fourth-party logistics providers include supply chain
management and solutions, change management capabilities, and value added services in their offering. These companies are basically third-party logistics providers that either add these capabilities to their services or form alliances to provide the services.
“STUDY THE FACTORS THAT CAN ENHANCE CUSTOMER VALUE IN THE SUPPLY CHAIN WITH RESPECT TO SHIPPING.”
1. To study the supply chain activities in the international business. 2. To determine the scope of activities this can be efficiently handled by third party operators.
CORPORATE OBSERVATIO NS
The Indian logistics industry is estimated at US$50 billion per annum and has good growth potential. Contributing 13% of India's GDP, India's transport & logistics sector is still in its infancy and is highly fragmented. Key sectors with significant contribution to the logistics market include the automotive, manufacturing, fast-moving consumer goods (FMCG), retail and healthcare sectors. Overall India's 3rd-Party Logistics (3PL) market is worth S$16billion and it’s expected to grow to S$ 33 billion by 2008.
With Indian corporate houses increasingly outsourcing their logistics requirements to specialised operators, the domestic logistics market is beginning to attract new logistics services providers, particularly foreign players. Industry analysts say the time is not far off when corporate houses would be demanding more non-traditional services that go beyond the usual inbound/outbound transportation and Customs clearing and forwarding to
spill over to services such as reverse logistics, inventory management, packaging, labelling and even order processing. This is encouraging both foreign and Indian players to broaden the syntax of logistics services. The latest to join the bandwagon of foreign logistics services providers was Swift, a subsidiary of Swift Freight LLC of UAE, which launched its Indian operations in Mumbai last week. Rhenus AG, a subsidiary of the $2.4 billion German Major Rethmann Group, is also setting up shop in India, by tying up with Hyderabad-based Seaways Shipping Ltd. The joint venture, Seaways Rhenus Logistics Ltd, will launch its Indian operations in Mumbai on January 27. While foreign players like APL Logistics, Panalpina and Maersk Logistics have been operating in India for quite some time, a clutch of Indian players, which until recently were providing minimum logistics services, are also planning to broaden their areas of operation. "We see exciting opportunities in India, as corporates are realising that outsourcing of their logistics requirements to specialised service providers can result in substantial savings," says Mr Mark D'Souza, Managing Director of Swift. Each of these players is trying to consolidate their presence in their own core areas of strengths. For example, Swift will be focussing on logistics services covering the Indo-African trade, as the company has a strong presence in the African market. Seaways Rhenus Logistics will similarly
be focussing on the Indo-European trade route, covering sectors such as automotive, healthcare, chemicals and consumer goods. A recent study by Transport Corporation of India Ltd, a major Indian player in the logistics market, and the Management Development Institute (MDI) has shown that the benefits that outsourcing of logistics requirements had brought to corporate houses range from improvement in delivery schedules and reduction in operation cost to enhancement of their geographic reach and improvement in operational flexibility. The study has also shown that less than 55 per cent of the Indian companies subscribe to 3PL (third party logistic) Services, as compared to over 75 per cent globally, meaning that the market will be growing at a brisk pace. Present trends indicate that the cement sector has reaped the maximum benefits by outsourcing logistics requirements to 3PL service providers, especially as logistics constitute between 10 and 15 per cent of their operating costs. Likewise for the automobile and engineering sectors, logistics account for 5 to 10 per cent of their operations costs, while that for FMCG ranges between 3 and 7 per cent, as it gets the benefit of volumes, analysts point out. The future trend seems to be towards fourth party logistics (4PL) service providers, which would act as a single interface between the client and
multiple logistics services providers so as to manage all the aspects of the supply chain.
The Indian logistics industry is poised for a significant growth in the coming years as new companies, especially in the automotive, pharmaceutical, manufacturing and FMCG sectors, are increasingly opting to outsource their logistic requirements to specialised service providers. Industry analysts say that the key drivers for logistics outsourcing are the corporate trend of focus on core operations, competitive pressure, increasing global trade and MNCs investments in India. Third party logistics service providers in India are gearing up to meet the growth demand, incorporating value-addition in their services and customising their supply chain management solutions. Says Mr Manoj Agarwal, Head (Retail) of Gati, India's leading logistics service provider: "We see a lot of growth from the FMCG sector. We are in talks with companies such as Emami Ltd, Rupa and Wrigley's chewing gum for handling their entire supply chain management." Gati is planning to add new services in its portfolio, such as transportation of clinical samples for pathological labs and medical institutions and reverse logistics that involve movement of defective products from the dealers back to the factory.
Echoing similar sentiments, Mr Chris Callen, country manager of DHL, told Business Line that "the global air express industry is also expected to undergo huge transformation in the years to come as a result of increasing spread of e-commerce and the need for vendors to match the speed of electronic ordering with physical delivery of critical inputs for the industry. In fact, we feel that by 2020, this industry is expected to represent almost 30 per cent of the global air cargo with an average annual growth rate of 10 per cent." Indeed, a recent study on the logistics market by Frost & Sullivan has estimated that the revenue of the logistics industry from the manufacturing sector alone was $15.46 billion in 2005, with the market likely to grow at a CAGR of 6.2 per cent during the next five years. Chemicals, metal, FMCG, cement and textiles were identified as the top five contributors to the revenues of the logistics industry. In fact, the trend in the industry is towards the third party logistics (3PL) concept — the market size for this category of service was estimated at $280 million in 2006. "The market for 3PL services is likely to grow at a CAGR of 20.4 per cent during the next five years, with the growth being fuelled by the entry of MNCs and export focus of Indian companies. At present, the automotive, IT hardware and FMCG companies are the major users of 3PL services," says Mr Ganesh Ralekar of Frost & Sullivan.
In India the logistics costs are still higher than in the developed markets — it is estimated to be around 13 per cent of GDP, against 9 per cent of GDP in the US. The transportation cost accounts for nearly 40 per cent of the cost of production, with more than half the goods in India being moved by road. One sector that is increasingly looking for outsourcing logistics is textiles, especially as it is facing the challenges of exacting delivery requirements and multiple export markets. Analysts say that with large retailers such as Wal-Mart and Target seriously evaluating new suppliers for textiles in India, this sector is bound to outsource logistics in the coming years. Also, the retail industry is expected to jump into the 3PL bandwagon, with such large retailers as Shoppers Stop and RPG expanding to smaller cities. Realising the potential in the outsourced logistics market, 3PL service providers are expanding their basket of services as companies are now looking for more than just transportation of their products and raw materials. The logistics firms are also focussing on related services such as customer clearing and forwarding, inbound warehousing, labelling and packaging, fleet management, order picking and inventory management. Says Mr Agarwal: "We at Gati are constantly re-inventing the company. We are designing customised supply chain management packages, with a guarantee of cost savings to our clients." Similarly, at DHL, the thrust is
on expansion, with the company recently inaugurating its first exclusive express handling unit in India at the Delhi airport and acquiring a new fleet of 300 vehicles from Mahindra and Mahindra, Maruti Suzuki and Tata Motors. "We are also making significant investments in IT so that customers can know what is happening with their shipments. Our express agents are being equipped with new generation GSM scanners, which facilitate realtime information in shipments within 15 minutes of pick-up or delivery," Mr Callen pointed out.
RESEARCH METHODOLO GY
I had used both descriptive and exploratory type of research design. Descriptive research means deliberate pattern in collecting information to try and solve the problem. In this I am using survey method. Whereas exploratory research means the focus is on discovery of new ideas.
There are two types of data collection source that is primary and secondary. In case of primary source of data collection there was questionnaire to be filled by 3pl operator. I am also required to visit the three PL operator and try to find out information related to their business operation. In case I am not able to take appointments from them then I can also collect data through telephone. So far secondary data is concerned i got addresses of three pl operator from the company personnel and gathered information about concept of three pl from
internet and also gathered information about my first two objective from internet and news articles. QUESTIONNAIRE TYPE
I am going to use structured disguised questionnaire. A structured disguised questionnaire is one where the listing of questions is in a prearranged order and where the object of enquiry is not revealed to the respondent.
SAMPLE SIZE AND TECHNIQUE
I am given the area of Delhi and NCR where I have to go to three pl operators and try to take information from them about their businesses. The sample size for my survey is 31 and I used area sampling.
The above thing can be summarized as follows: A. Sampling B. Data source C. Research design D. Research approach E. Research instruments F. Mode of collecting data Area sampling. Sampling size-31 Primary-questionnaire Secondary-www and articles. Descriptive and exploratory. Survey method. Questionnaires. Personal interview, Telephonic interview.
CUSTOMER SERVICE MANAGEMEN T
FACTORS THAT ENHANCE CUSTOMER VALUE
PRODUCT AND/OR SERVICE QUALITY:
It hinges around whether customer requirements are being exceeded. The days of conformance to standards winning orders are long gone. The fundamental principle at stake here is that non-conformance will lead to a product or business being disqualified from a certain market or market segment. Exceeding customer requirements can lead to winning orders. Therefore, continuously exceeding customer expectations will lead to a sustainable competitive advantage.
Key performance areas for measuring customer quality are in line with
many lean manufacturing and being world-class principles. These parameters include meeting customer requirements, fitness for purpose, process integrity supported by statistical process control, continuous improvement and elimination of waste.
Meeting customer requirements is about so-called perfect orders. A perfect order is achieved when customer requirements are met in full, and must conform to the following criteria; namely on-time delivery, orders filled completely, and error free delivery documentation and invoicing. In the eyes of the customer, there are only two types of service levels namely 100% or 0%. On time delivery refers to the number of deliveries that meet the customer’s original request in relation to the number of orders received during the same period. Order fill also known as in-full delivery, refers to the percentage of orders shipped complete on the first shipment. Line fill refers to the percentage of ordered lines, which are shipped complete with the first shipment. A supply chain either delights a customer or it does not.
Fitness for purpose in essence refers to conformance to specification. Here, one must differentiate between technical specifications and functional specifications. In a supply chain, it makes sense to rather specify the functional specification as a customer in the supply chain,
detailing expected outcomes of the product or service. It follows that collaborating with the upstream supply chain partne, more customer value can be added by making use of the upstream supply chain partner’s specialist knowledge to design the technical specification that will better meet the expected outcome.
An example of a technical specification is when a customer orders a chair and issues fully detailed technical drawings to the supplier. If the supplier delivers this chair, and the chair does not functionally conform to the customer’s requirements, the customer has no option but to accept it, because the chair conforms to all the technical requirements. Alternatively, if the customer specified the required functions that the chair must perform during its operational installation, then the chair manufacturing specialist could have designed a more suited solution, using superior specialist knowledge, and added customer value in the process.
Process integrity supported by statistical process control refers to the continuous on line monitoring of quality. This process supports the proverb that quality cannot be inspected in, but must be built in. Statistical process control (SPC) monitors conformance to process parameters on line, and records are kept for later reference. For example,
the Perishable Product Export Control Board (PPECB) approves all refrigerated vehicles that carry products for export purposes. When these carriers transport products for export, temperature graphs of the cargo temperature throughout the time in transit are recorded and kept to ensure product quality and integrity, thus adding customer value.
Supply chain partners expect or even demand of their upstream partners to have SPC in place thereby ensuring process integrity. To quote another example, Ford Motor Company has embarked on a world wide campaign called the Q1 supplier approval scheme. Built into this scheme is SPC. If suppliers do not conform, they will simply not be part of the Ford supply chain.
Continuous improvement is about a continuous urge to improve quality and a climate of willingness to do something about opportunities. This is in keeping with the ‘Kaizen’ principles listed below:
• Personal discipline; • Teamwork; • Improved morale; • Quality circles; and • Suggestions for improvement.
These incremental improvements support the notion of total quality management, and focus on changing to become better in all aspects of the organisation. Organisations must embrace speed of change, especially at the operational level. The sustainability of changes at the operational level is key to the organisations long-term success. It is here that the Kaizen philosophy could potentially make its greatest contribution, due to its simplicity and ease of implementation.
All five the Kaizen principles work together to create a positive spiral that result in improved business processes. A culture of high levels of self-discipline also contributes towards continuous improvement
programs being maintained on a sustainable basis. Although the focus of continuous improvement programs such as Kaizen are mainly on the operational level, teamwork amongst all levels is a key building block. Cooperation and teamwork is required to evaluate and implement suggestions for improvement. These suggestions for improvement are mainly received at the operational level through quality circles. Suggestions are often a result of a positive business culture or climate, as well as high levels of morale. However, if suggestions are not managed, this will result in a rapid decline in morale and a negative spiral that will result in lower levels of quality.
Part of total quality management supported by the philosophy of continuous improvement, is the continued upward escalation of customer expectations regarding supplier capabilities. Performance which meets customer expectations one year, may result in extreme dissatisfaction the next year, as customers increase their expectations regarding acceptable performance levels.
The last key performance area for measuring customer quality, namely the Elimination of Waste is focused mainly on the reduction in business waste in the operational environment as a result of overproduction, waiting time especially at capacity constraints, excess inventory, rejected products, excessive movement and double handling.
In recent years, some firms have discovered that there is another commitment that can be made to gain true competitive advantage through logistical performance. This commitment is based on recognising that a firm’s ability to grow and expand market share depends on its ability to attract and hold the industry’s most successful customers.
The real key to customer-focused marketing lies in the organisation’s ability to use its performance capabilities to enhance the success of those customers. This focus on customer success represents major commitment toward accommodating customers. Key performance areas that are vitally important for service excellence are customer support, product support, flexibility to meet customer demands, and flexibility to meet market changes. The customer satisfaction platform, in particular customer support, is built on the recognition that customers have expectations regarding performance and the only way to ensure that customers are satisfied is to assess their perception of performance relative to their expectation levels.
Customer support shifts the focus from expectations to the customers’ real requirements. Requirements are frequently downgraded into expectations due to perceptions of previous performance, word-of-mouth, or communications from the enterprise itself. This explains why simply meeting expectations may not result in happy customers. For example, a customer may be satisfied with a 98 percent fill rate, but for the customer to be successful in executing his/her own strategy, a 100 percent fill rate on certain stock-keeping units may be necessary.
Product support is another key performance area vitally important to service levels. Technical product support is critical, especially taking into account the potential value of the ‘augmented product’. For example, a leading automotive glass supplier Shatterprufe, has recently developed on-line technical support to glass fitment centres, for installation and other technical related queries, thereby enhancing their value proposition to both their customers, being the fitment centres as well as for their customer’s customers, the motorist being the end user of automotive glass. Claim analysis and procedures is another aspect of product support that adds value to customers. Claims must be analysed in order to determine trends, their causes, how long it takes to resolve them, and how an enterprise makes it up to a disappointed customer. The next aspect of product support is the commitment and involvement by suppliers in the development of end technology. Flexibility to meet customer demands is the next parameter to be examined. Clearly, a customer success program involves a thorough understanding of individual customer requirements and a commitment to focus on long-term business relationships having high potential for growth and profitability. Such commitment cannot be made to all potential customers. It requires that firms work intensively with
customers to understand requirements, internal processes, competitive environment, and whatever else it takes for the customer to be successful
in his/her own competitive arena. Furthermore, it requires that an organisation develop an understanding of how it can utilise its own capabilities to enhance customer performance.
The last parameter supporting service differentiation is Flexibility to Meet Market Changes. Market changes are imposed onto both business enterprises and their customers alike. The response to these imposed market changes is important. in many ways a customer success program requires a comprehensive supply chain perspective on the part of logistics executives. The typical focus in basic service and satisfaction programs is that the firm attempts to meet standards and expectations of nextdestination customers, whether they are consumers, industrial end users, intermediate or even internal customers. How those customers deal with their customers is typically not considered to be a problem. From a supply chain perspective, a customer success program explicitly recognizes that logistics executives must alter this focus. They must understand the entire supply chain, the different levels of customers within that supply chain, and develop programs to ensure that nextdestination customers are successful in meeting the requirements of customers down the supply chain. If all supply chain members adopt this perspective, then all members share in the success.
TOTAL LOGISTICS COST: Total logistics cost consists of many aspects, but for the purposes of this study, a trade-off between the following cost aspects namely design and engineering, conversion, quality, distribution, inventory and total cost of ownership will be discussed. Using technical specifications when only functional specifications are required can potentially erode much customer value. It must be encouraged at all times to use the skills of the upstream value adding partner in a supply chain to take ownership of the detailed technical specifications. This is a value-adding service that is offered by upstream supply chain partners.
Another important point to take into account is the effect of Design and Engineering changes on costs. The cost of a design change is dependent on when the change is implemented during the life cycle of the product. The earlier the changes are made known, the more possibilities can be accommodated, and the lower the cost when making the change. The later the changes, the fewer the opportunities and the more expensive it becomes to effect changes. This is particularly applicable in the development of new products or services, or during the redesign or reintroduction of existing products or services. For example, if a motorcar
manufacturer plans to launch a new model, they obviously need to stock up their dealer network. It will be very costly to change anything, even something as insignificant as the wiper blades, because of all the re-work and inventory redundancy cost.
Conversion cost is where the form utility is created. Form utility is created when material changes in form and / or function. The material is worth more once it has changed its form. For example, individual ingredients used during the production of cold drinks are not worth much to a potential consumer of Coca Cola. However, this conversion process must be aligned with the rest of the supply chain in order to add maximum customer value. Aspects that are critical to take into account are demand alignment, location of the value adding facility, lot quantities, specifications, and process capability, to mention a few.
Quality costs are made up of prevention cost also know as quality assurance cost, inspection costs or sometimes quoted as quality control costs, and the cost of non-conformance which often results in corrective action costs. Quality costs are normally expressed as a percentage of sales, and can become significant, especially when the full cost of nonconformance is taken into account.
Distribution costs are made up of warehousing costs, inventory carrying costs, information systems costs, picking costs, material handling costs, transportation costs, and the cost of reverse distribution especially when recycling the product. Reverse distribution of non-conforming products will form part of non-conformance costs.
Inventory is the life-blood of any supply chain. Measuring inventory levels can therefore be compared to measuring the blood pressure of a supply chain. Most of the companies that produce commodities carry inventory, and it is common belief that most of them carry too much inventory. From inventory analysis one can learn that for some stockkeeping units one could have many years of inventory cover, whilst other items run out-of-stock regularly.
The last aspect of total logistics costs is Total Cost of Ownership. Often, the focus falls on the acquisition price, and the total cost of ownership is ignored.
Figure below is a diagrammatic presentation that shows the total cost of ownership depicts an iceberg. The acquisition cost is visible, but there are many hidden costs that will influence the total cost.
LEAD TIME: Product availability is critical if an organisation is to compete in an ever more demanding environment. the key performance areas that need to be managed regarding lead-time management are time to market, response to market forces, and inventory management throughout the supply chain.
The first key performance area namely Time to Market can be spilt into two construct, from concept to delivery and from order entry to delivery.
Concept to delivery time deals with the lead-time to develop a product and /or service from inception until the end user can benefit from it. The key aspects that directly influence the time from concept to delivery are design time, engineering time, conversion time and delivery time.
Figure illustrates three phases namely the investigation phase, development phase and delivery phase. The investigation phase overlaps with the design stage, engineering stage and the conversion stage. The development stage straddles from the design stage to the development of delivery concepts. The delivery phase focuses mainly on the integration of the converted service offering to the end user.
There are many possibilities to investigate during the design stage, and the cost to change during the design stage is relatively low. During the design stage of product or service development, all concepts are developed in concept only with the view to test their respective compatibility with the conversion and delivery processes, as well as to determine their respective contributions to the business objectives.
During the engineering stage, the number of concepts is reduced to only a few viable options, and the focus is on detailed product and / or process design with the view to gain maximum compatibility with the other business processes and maximum competitive advantage from the product or service.
The conversion stage focuses on aspects such as prototype developments, advanced development models, pre-production samples, and pilot or trial runs. Products and / or service offerings are tested under realistic operating conditions in order to test their compatibility with business processes and their respective contribution to customer value.
The last stage in the development process is the delivery stage. This stage focuses on launching the product or service, ensuring high product availability and awareness, and customer support training aspects.
It is clear that time to market from concept to delivery is a very complex process, and could lead to a substantial competitive advantage, if it is done well.
The other component of time to market, namely from order entry to delivery, is less complex and easier to manage. Diagrammatic representation of a customer’s perspective of the total order cycle is given below. All these steps are largely under the control of the business enterprise, and can therefore be managed.
Response to Market Forces is essentially a philosophy, but must be supported by competent people and adequate business processes, capable of responding to market needs. Shorter product life cycles make response
time critical. Thus, Late entrants or slow responders to market opportunities run the risk of including obsolete inventory in their supply chains, because the market demand might have dropped off by the time that their product reaches the market. Therefore, strategic Inventory Management is critical to lead time management. Having inventory available at the right place in the supply chain is the key. An enterprise’s demand and supply parameter defines their logistics concept, and these business parameters influence the extended enterprise’s macro inventory strategy.
Under conditions where the market is predictable and long lead times are acceptable, one would adopt a lean manufacturing approach. In lean manufacturing, one would eliminate waste as much as possible, and optimise one’s manufacturing economies of scale by minimising set-up cost and maximising economic run lengths. One would typically not carry any finished goods inventory, but rather accept a logistics concept of ‘purchase and make to order’.
Under conditions where the market is unpredictable but relatively long lead times are acceptable, one would adopt a strategy of postponement.
Postponement is when one delays the decision to integrate the assembly into its final form, thereby reducing the risk of obsolete inventory. One would not carry finished goods inventory, but rather carry sub-assemblies or component parts, so that these can be assembled into the right configuration as required by the customer. Many of the leading automotive manufacturers make subassemblies like body-, engine-and, interior parts and then paint the body, assemble the right engine and interior trim commensurate with the customer requirements. This logistics concept is called ‘assemble to order’ and can accommodate mass customisation as experienced in the automotive industry of late, whilst maintaining very low levels of finished goods inventory.
Under conditions where the market is unpredictable but the market also demands relatively short lead times, one would adopt a strategy of agile replenishment. Agile replenishment is associated with a logistics concept of ‘make to central stock’ and is used for example in the ‘white goods industry’ where demonstration models are being displayed at the sales centres, but the finished goods inventory is kept centrally. Once the sales centres conclude a sale, they will then notify central distribution who will deliver. With this logistics concept, responsiveness is high, whilst finished good inventory is centralised and relatively low.
Under conditions where the market is predictable and demands relatively short lead times, one would adopt a strategy of continuous replenishment. Under these market conditions, one typically follows an inventory strategy such as this in the fast moving consumer goods (FMCG) industry where product must always be available at arms length, otherwise customers might switch to competing brands. This inventory strategy is complimented by a ‘make and ship to stock’ logistics concept, and the results are that inventory is normally kept at decentralised inventory control locations, thereby guaranteeing availability. The trade off is made between the inventory carrying cost and the cost of lost sales due to nonavailability.
FUNCTION PERFORMED AS 3PL PROVIDER All of Above Transportation & Distribution, Prod. planning 7 Transportation, Distribution, Material handling, Storage 12 Transportation, Distribution, Material handling, Installing, storage Total 7 31 5
Functions Preformed by 3PL provider All of Above 23% 16% Transportation & Distribution, Prod. planning 23% Transportation,Distribution, Material handling,storage Transportation,Distribution, Mat handlg,Installing, storage
Auto Oil Auto & Oil Auto & Retail Garment & Auto
13 1 2 4 11
Auto 35% 43% Oil Auto & Oil Auto & Retail 13% 6% 3% Garment & Auto
ADVANTAGES OF THIRD PARTY LOGISTICS TO CLIENTS
Customer Service Performance
very important important Average
less important not important
very important important Average 32% 23% less important not im portant
Economies of Scale very important
Average less important
Average less important
One Stop integreted solution
6% 23% 13%
less important not important
INFRASTRUCTURE REQUIRED TO START 3 PL L&B,Trained Manpower,MHE,Transport,Vendors
5 L&B,Trained Manpower,MHE,Transport Network 12 L&B,MHE,Transport Network All of them L&B,Trained Manpower,MHE,Transport,Consultants Total 3 31 7 4
Infrastucture required for 3PL
L&B,Trained M anpower,M HE,Transport, Vendors L&B,Trained M anpower,M HE,Transport Network L&B,M HE,Transport Network All of them
38% L&B,Trained M anpower,M HE,Transport, Consultants
REVENUE MODEL Brokerage Commission Depends upon customer all of them Brokerage & commission Total
Frequency 4 14 3 2
Brokerage 13% 26% Commission Depends upon customer 6% 10% 45% Brokerage & commission all of them
• The Five Key Issues of Logistics Effectiveness are core to Supply Chain Management-• Movement of Product • Movement of Information • Time / Service • Cost • Integration, both internal and external, both organizations and systems
• The most important supply chain activities in business are:
Transportation, Distribution, Material handling, storage are the major function which are performed by third party operators, in sample of 31 operators 12 told that they basically perform these four major functions.
The third party operator basically caters to auto industry in my survey it was found that 43% operators serve the auto industry.
The important infrastructure required to start the third party logistic business are land and building(warehouse),trained manpower, material handling equipment, transport network.
• The revenue model used by third party logistic operator is either commission or brokerage and many of them basically use commission as their revenue model.
The main advantage to clients or the customer is one stop integrated solution and cost benefits which they get from third party operators.
The way third party logistics operator business is growing, the time is not far away when all the supply chain works will outsourced to them. As from my survey I had found that they basically perform four process of supply chain i.e. Transportation, Distribution, Material handling, storage but the time is not far away when they will look into other process like Purchase orders. There is immense opportunity for third party operators not only in shipping industries but they can also provide there services to other industries like FedEx and DHL are doing
Thesis has helped me a lot in going in to the deep of the subject matter; while I was going through my Thesis I came to know about many things of which I was not aware earlier. In particular it has really enhanced my knowledge of shipping industry and the different activities and process performed in that industry. Also while I was conducting interviews, I came to meet many peoples who had given me much useful information which have helped me in developing my knowledge base.
I had a very good experience of learning both the things that is exposure of the fieldwork that is through research work and the other of in-house
job that is collecting data through secondary sources. Both of them taught me how to handle situations outside as well as inside.
There is business opportunity for SPG shipping in third party logistic business as there are many big shipping lines operating in this field like MAERSK and P&O. The company can generate a lot of revenue from entering into third party logistics business.
As there is availability of manpower, capital, and technology with SPG shipping so it will be easy for company to enter into this field. Only company has to make arrangement for warehouse.
Company should first try to go for sectors like auto and garments as these are the major sector which uses third party logistic service.
Generally a company goes to third party to increase its efficiency and concentrate on core business activities and to minimize fixed cost. So, if SPG shipping wants to establish him in this field then it has to concentrate on above things.
SPG shipping can also look forward for 4 pl business as this is a new concept and it can be exploited by the company
• Working on Thesis is a good experience because you have to go in deep of the subject matter; I came to know about many things which I didn’t know earlier.
• I learnt a lot about practical aspects of life as my project was live project, like how we behave in corporate world, how we talk to executives, how to put forward our point in front of them, etc. but there are various problems being faced by us while going through all these things.
• As I was required to do survey by going to the third party operators and collecting information related to their business. The first problem I faced was difficulty in taking appointment. By listening that we have come for the survey the gatekeeper does not allow us to enter the company. If we are able to convince the gatekeeper the next problem comes with the receptionist, who does not allow meeting the concerned person, even I was facing lots of difficulty in taking appointment through telephone.
• If all the barriers are over then comes the main problem that is the concerned person himself. He/she might be in the meeting, gone out of the city, is busy and would not be able to meet, etc. If are able to meet them then they are reluctant to give information by saying they do not have authority to tell these entire thing about company or they are very busy that they cannot answer all the questions. Before we ask anything they start asking questions from us like why are you collecting this information, what is the purpose, etc?
Kotler Philip \Marketing Management \prentice hall of India
QUESTIONAIRE Company name1) What are the functions you perform as third party logistics provider?(tick) a. Purchase and Supply b. Material Handling c. Production Planning d. Production Control e. Transportation f. Storage g. Distribution h. Product Management i. Installation and Servicing j. Strategic Management
2) Which specific industry you serve? (tick) a. Garment b. Auto
c. Oil d. Retail
3) What are the advantages of third party logistics to clients? (Rate them on the scale of one to five) a. Customer service performance b. Cost benefits c. Economies of scale d. Volume variable e. One stop integrated solution
4) What are the infrastructures required for third party logistics?
(tick) a. Land and Building (Warehouse) b. Trained Manpower c. Material Handling Equipments d. Hardware and Software e. Transport Network f. Vendors g. Consultants
5) What is the revenue model for you? (tick) a. Brokerage
b. Commission c. Part of profit
d. Depends upon customer