Third Party Logistics Final Report

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Basics Of 3pl

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Third Party Logistics Project Report

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Dhaval Shah Sohil Jiwani Murtuza Bhanpurawala Aamir Ansari 49 41 37 36
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Third Party Logistics Project Report

A C K N O W L E D G E M E N T

On the completion of this Project, I wish to great fully acknowledge, by taking this opportunity to express my sincere gratitude to Prof. Sandeep Narvekar for giving me kind support and co-operation and her guidance and useful suggestions that proved very useful in this Project. Once again thank all the people who have directly or indirectly help in this Project. Lastly, I sincerely thank all my friends who have always given their encouraging support and been a great help all the time at various stage of development of this Project.

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Table of Contents
Third Party Logistics ................................................................................................................................ 4 Introduction ............................................................................................................................................ 4 What is Third Party Logistics ? ............................................................................................................. 4 Origin of 3rd Party Logistics (3PL) ........................................................................................................ 5 Why such a huge growth in 3 party Logistics providers? ......................................................................... 6 Types of Third Party Logistics Providers: ................................................................................................. 8 3 PL Providers can also be classified broadly as .................................................................................. 9 How to select a Third Party Logistics Provider? ..................................................................................... 10 Advantages of Using Third Party Logistics ............................................................................................. 12 Limitations of Third Party Logistics ....................................................................................................... 14 Modern trends in Third Party Logistics ................................................................................................. 15 Bibliography ..18

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Third Party Logistics
Introduction
What is Third Party Logistics ?
3rd Party Logistics (3PL) is the supply chain practice where one or more logistics functions of a firm are outsourced to a 3PL provider. Typically, the logistics function consists of following:
y y y y y y y
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Inbound Freight Customers and freight consolidation Public Warehousing Contract Warehousing Order Fulfillment Distribution Management of outbound freight to the client s customers

Besides that, Value Added Services can be provided. 3PL consists of 1. Repackaging 2. Assembling 3. and Return logistics The 3PL provider manages and executes these particular logistics functions using its own assets and resources, on behalf of the client company. The thoughts and rational behind these are to keep the firm competitive by keeping it lean without owning many assets and allowing the 3PL companies to focus on niche area and to reduce operational costs. 3PL is also referred as Contract Logistics. 3PL companies are evolving from predominately transactional-based to more strategic in nature. At the same time, 3PL is gradually evolving into 4PL (Fourth Party Logistics Provider). 4PL is a supply chain services provider that searches the best logistical solutions for its client, typically without using own assets and resources. Relatively new is the term 5PL or even 7PL, indicating Total Supply Chain Management Outsourcing.

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http://www.logistics4everyone.com/2009/06/what-is-3rd-party-logistics-3pl/

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Third Party Logistics Project Report

Supply Chain having 3PL Service Provider

Origin of 3rd Party Logistics (3PL)

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During 80s, there was an increase in global transactions, hence globalization coupled with an influx use of information technology. These trends resulted in an increased demand on firms and raised the competitiveness among companies and industries. The role of logistics have become (one of the) pivotal role in determining the success of the companies. 3PL has gradually increased in demand and its performance has determined the effectiveness of the logistics company. More logistics companies have emerged and competitiveness has increased. Some of the successful companies that emerged during these periods include: y y y y y y y y y DHL Exel Schenker UPS Panalpina C.H. Robinson TNT Logistics Schneider NYK Logistics

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http://www.logistics4everyone.com/2009/06/origin-of-3rd-party-logistics-3pl/

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Why such a huge growth in 3 party Logistics providers?
A significant reason for the growth in 3 party Logistics is that companies are moving from transaction strategies to relationship based alliances such as partnerships. All types and sizes of companies from small firms to multi-nationals are becoming increasingly aware that they can gain a competitive and economic advantage by outsourcing their supply chain and logistics requirements to specialist companies that offer the resources and expertise to provide a faster, more efficient and cost effective service. 3PL frees up resources - companies now understand that they are not in the business of managing supply chains but in marketing and selling their products. Using a 3PL to manage complex distribution requirements frees up resources to focus on core competencies rather than being tied down with day-to-day operational uncertainty. In addition to saving time, a well run 3PL partnership reduces expensive distribution processes and the need for costly buffer inventories. Despite the growing trend towards outsourcing, some companies still baulk at the prospect of contracting out such a critical aspect of their business, believing that relinquishing control to a logistics provider will result in complex arrangements with inadequate service levels and higher costs. However, those companies now benefiting from using a reputable 3PL provider have stated that they can attribute their increased contribution directly to a solid logistics network. Reduce Costs During Economic Recession- The trend towards adopting a 3PL is even greater during periods of economic downturn as companies turn to it as a way of reducing their logistics costs. Passing on costs savings - the notion that all 3PL organizations have complicated management structures and impersonal call centres has also been attributed as a reason why companies have sometimes been reluctant to contract out their logistics requirements. Some organizations however, such as LinQ Alliance, operate a local management team and are able to pass on cost savings from reduced administration overheads as well as providing efficient decision making in an appropriate reaction time. This approach also allows for synergies between multiple fleets and services to be identified, offering a single, integrated solution. In the last ten years, the logistics industry has undergone a great many changes. These have been especially significant in such areas as company size and makeup, services offered, geographical reach, and IT support. 3PL services have broadened dramatically in response to the users' desire for one-stop shopping. Now a 3PL can provide a variety of distribution and
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logistics services including freight forwarding, home delivery and pallet distribution as well as providing a wide range of warehouse and value added services. Service expansion has been accomplished in several ways. A 3PL may initiate new services or develop operating alliances with other companies to enable it to provide customers with greater geographical cover, specialist warehousing or additional value added services. By integrating competencies successfully, 3PL companies are producing a unique and holistic approach to supply chain management that provides their customers with many key benefits. Foray into Overseas markets - more and more organizations worldwide are developing products for global markets. At the same time they need to source material globally to be competitive. Therefore, it is not surprising that one of the top challenges facing companies is how to handle a progressively more complex global supply chain. As companies look to source and sell in new markets, their supply chains are extending overseas, most commonly China, but also into India and Eastern Europe. In China alone the potential market for such services is 'mind-boggling' with reported increases estimated at 25%. Looking to capture a slice of this market for UK importers and Chinese exporters, many 3PL companies have begun to increase the scope of their services to include IT applications (for ex freight billing), transportation planning and optimization applications. Companies that can provide a diverse range of services to include export shipping, documentation requirements, packaging and labeling considerations, warehousing and inland transit options, legal and governmental restrictions and compliance management, are now sought after for these specialist trade routes. Firms with wide and/or complex distribution network, for whom outsourcing their logistics function is a more feasible and viable option (Example IBM) Firms that do not focus on logistics as their core competency such as Chevron and BP 3rd Party logistics is useful and significant in the case of the creation of a new product group or when a company is integrating activities of a takeover. Any business that refuses to consider outsourcing is at risk of losing its' competitive advantage or the opportunity to create a new competitive differential.

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Types of Third Party Logistics Providers:
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Transportation based: In this type, the third party logistics provider goes on to provide

the transportation services. They also provide a comprehensive set of other services such as tracking and tracing of consignments, cross-docking, specific packaging, or providing a unique security system. They are of two types. Leveraged or non-leveraged. Leveraged 3PLs use the assets of other firms. Non-Leveraged 3PLs use the assets belonging solely to the parent firm. Examples of this would be Ryder, Schneider Logistics, FedEx Logistics, UPS Logistics etc.
y

Warehouse/Distribution based: In this type, the 3PL provides warehousing facilities along

with its distribution facilities. Not all firms have former warehousing and distribution experience. Thus the transition to integrated logistics has been less complex than for the
transportation based providers. Examples of this type would be DSC Logistics, USCO, Exel, Caterpillar Logistics, and IBM.
y

Forwarder based: They are essentially middlemen who extend their roles to provide

logistics services. They are Non-asset owners that capably provide a wide range of logistics services such as warehousing and distribution (to an extent). Examples of this type are AEI, Kuehne & Nagle, Fritz, Circle, C. H. Robinson, and the Hub Group.
y

Financial based: They Provide freight payment and auditing, cost accounting and control,

and tools for monitoring, booking, tracking, tracing, and managing inventory. Examples of this type are Cass Information Systems, CTC, GE Information Services, and FleetBoston.
y

Information based: This is logistics based on Information usage. It is a fast developing

method of providing 3PL services. They are usually Internet-based, business-to-business and electronic markets used for transportation and logistics services. Examples of this type are Transplace and Nistevo.
y

Non Asset Based Service Providers: This class of 3PL performs functions such as

consultation on packaging and transportation, freight quoting, financial settlement, auditing, tracking, customer service and issue resolution. However, they don t employ any truck drivers or warehouse personnel, and they don t own any physical freight distribution assets of their own no trucks, no storage trailers, no pallets, and no warehousing. A non-assets based provider consists of a team of domain experts with accumulated freight industry expertise and information technology assets. They fill a role similar to freight agents or brokers, but maintain a significantly greater degree of hands on involvement in the transportation of products.

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3 PL Providers can also be classified broadly as

y

Standard 3PL provider: This is the most basic form of a 3PL provider. They perform

activities such as, pick and pack, warehousing, and distribution the most basic functions of logistics. For a majority of these firms, the 3PL function is not their main activity. They mostly cater to the needs of small retailers.

y

Service developer: This type of 3PL provider offers their customers advanced value-added services such as: tracking and tracing of consignments, cross-docking, specific packaging, or providing a unique security system. A solid IT foundation and a focus on economies of scale and scope enable this type of 3PL provider to perform these types of tasks.

y

The customer adapter: This type of 3PL provider comes in at the request of the customer

and essentially takes over complete control of the company s logistics activities. The 3PL provider improves the logistics dramatically, but does not develop a new service. The customer base for this type of 3PL provider is typically quite small.

y

The customer developer: This is the highest level that a 3PL provider can attain with

respect to its processes and activities. The 3PL provider integrates itself with the customer and takes over their entire logistics function. These providers will have few customers, but will perform extensive and detailed tasks for them.

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How to select a Third Party Logistics Provider?
Now that we have seen what exactly a 3PL is , and how it performs its functions, we can discuss on some of the most important parameters that need to be taken into account before an organization can zero in on a 3rd party logistics provider. One should always look for a company that fits into the client organizations scheme of things, and can optimize the former s supply chain.

Demand accountability Master (and own) the forecast Set clear and fair expectations

Know your demand

Selection of 3PL

Measure business impact

As is shown in the diagram, the major features that should be taken care of by an organisation before hiring a 3PL are:

1. Know your demand
Understanding how materials flow through a supply chain is the key to properly defining supply chain requirements. Collecting detailed historical data to document the costs, units, frequencies and modes utilized as raw materials are converted to sellable units, as it is critical to synchronize planning, material requirements planning (MRP), material delivery, conversion to finished goods and outbound product movement. Modeling the past, with appropriate normalization to accommodate projected future 10 | P a g e

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changes, will help manufacturers understand the cost-impacting decisions that drive supply chain requirements and identify which components to outsource or retain. 2. Master (and own) the forecast Developing the demand model described above will typically require input and validation from a variety of stakeholders, including procurement, manufacturing, distribution and commercial. Participation from these stakeholders is critical to establishing an accurate forecast and articulating key constraints, and ultimately can drive the success of the transaction, as the provider s ability to meet a company s needs and targeted cost structure will be largely dependent on the accuracy of the forecast. 3. Demand accountability While 3PL providers must be held accountable for optimizing costs within their span of control, internal stakeholders also must take responsibility for the cost implications of their decisions, many of which may limit a 3PL s ability to truly optimize. 4. Set clear and fair expectations Set clear objectives to drive provider behaviour, such as specific cost savings or reporting, escalation and explanation. Engage the 3PL in discussions prior to finalizing objectives, as its experience and input can provide better visibility into the tradeoffs of supply chain decisions. 5. Measure business impact Outsourced supply chain should provide some combination of increased supply chain effectiveness, reduced cost and overall flexibility can be measured by looking at end-to-end key performance indicators such as inventory turn rates, total cost per unit sold and customer satisfaction.

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Advantages of Using Third Party Logistics
One of the advantages of using 3PL results from economies of scale (merits from large truck fleets, warehouses, etc.) and economies of scope, which encourage firms to increase net value by reducing costs. The effects of these economies are obtained depending on the type of 3PL provider (e.g. ITequipped, marketing-based, non-asset-based (and then flexible), etc.) Competent 3PL providers possess high coordination ability, enabling them to search reliable partners or sub-contractors, and to manage efficiently the inter-firm flow of goods. Such ability can be developed through experiences as a 3PL. Likewise, by outsourcing logistics activities, firms can save on capital investments, and thus reduce financial risks. Investment on logistics assets, such as physical distribution centers or information networks, usually needs large and lump sum costs, which involves financial risks. Furthermore, the 3PL providers can spread the risks by outsourcing to sub-contractors. 3PL allows a firm to gain competitive advantage via: y y y y Allowing firms to focus on developing their Core Competences. Cost competitiveness. Freeing up resources (money). Benefit from the logistics know-how and international distribution networks of specialized 3PL Logistics providers, allowing for superior customer service levels. y 3PLs offer greater booking options and service types. Shippers can take advantage of increased ocean sailings per week since 3PLs contract with numerous carriers to provide a variety of service levels, transit times, etc. y 3PLs generally have greater negotiating leverage with carriers than individual shippers. This translates into more competitive rates, greater free time allocations, reduced demurrage and per diem penalty rates, etc.

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Third Party Logistics Project Report

y

3PLs offer significant, measurable administrative savings. By utilizing a 3PL, shippers outsource the administrative component of their logistics program. This saves time and money! Shippers not utilizing a 3PL must develop these competencies in-house to book and track containers, which adds costs.

y

By utilizing a 3PL, the shipper has someone to hold ultimately accountable for all shipments along various legs of the supply chain.

y

3PLs offer superior information services. By their very nature of being the coordinator for all supply chain processes and transportation modes, 3PLs are best positioned to combine and report disparate data through value added information services.

y

3PLs offer greater shipment control through vendor relationship management and P.O. monitoring at origin. 3PLs proactively contact and work with overseas suppliers ensuring shipments flow according to plan. Vendor performance reports are also available.

y

3PLs offer an integrated solution and various value added services including:

 Multi-vendor and country consolidation  Cargo management services  Expedited delivery team trucking  Customs brokerage, bonds and compliance  Document collection and forwarding  Warehousing and distribution  Cargo insurance and claims processing  Lead logistics provider and 4PL service

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Limitations of Third Party Logistics
To implement 3PL successfully, one may need to bear in mind some possible pitfalls: y y y y Loss of control over the logistics function (especially for critical parts). More distance from clients. Loss of human touch. Discontinuity of services of 3PL provider. Differences of opinion or perception of the service level of the third party provider.

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Modern trends in Third Party Logistics
A study in 2006 by Capgemini discusses the growing satisfaction with the IT Skills of third-Party Logistics Providers.3 It mentions that now clients want 3PL companies to leverage upon IT services and new technology. Visibility tools and web-enabled communications are the top two technologies that currently 3PL companies want to leverage upon. RFID is also expected to be the technology with the largest future potential. The following table shows the specific logistics services outsourced by 3PL customers in 2004. The current activities of 3PL firms are mainly concentrated in warehousing, outbound transportation, and customs brokerage and customs clearance, all over the world. 4

Source: Growing Satisfaction with the IT Skills of Third-Party Logistics Providers , Capgemini, http://www.capgemini.com/resources/news/growing-satisfaction-with-the-it-skills-of-thirdparty-logisticsproviders/ 4 Source: Third-Party Logistics Study Results and Findings of the 2004 Ninth Annual Study, Capgemini, http://www.us.capgemini.com/DownloadLibrary/requestfile.asp?ID=429

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Specialized services

To compete against global logistics giants, small and midsize 3PL companies are catering to niche markets by providing specialized services instead of providing the whole gamut of services provided by a large 3PL company. Such services cater to very specific industries and clients prefer to hire only specialist firms for these activities. These services are very often unattractive for larger firms. Nonetheless for specialized small 3PL firms specialized services offer a dedicated clientele. Examples of such services are: Reverse Logistics: It is the process of planning, implementing, and controlling the efficient, cost effective flow of raw materials, in-process inventory, finished goods and related information from the point of consumption to the point of origin for the purpose of recapturing value or proper disposal. More precisely, reverse logistics is the process of moving goods from their typical final destination for the purpose of capturing value, or proper disposal. Remanufacturing and refurbishing activities also may be included in the definition of reverse logistics.5 Reverse logistics is a big headache for mass merchandisers e.g. hypermarkets, so they prefer employing third party logistic companies for the same. Temperature controlled logistics: Perishable items require controlled storage conditions. Food and grocery industry requires services of cold storage, blast freezing and distribution of products with a maintained temperature range of 0 to -18 degree Celsius. Modern 3PL companies are now catering to such needs through temperature controlled logistics. Dangerous Goods Warehouses: Dangerous goods are goods like chemicals, inflammables, weaponry etc. The handling of dangerous goods needs special storage facilities which must be in distinct locations and with advanced safety facilities. Such facilities are now taken care of by niche 3PL companies. Service Parts Logistics: In any service business, the need for dynamic and real time coordination and control of the full logistics pipeline of parts, sub-assemblies, and items of supply holds immense importance. Proper management of this pipeline can long way in contributing to the bottom-line of the organization. For high-technology companies e.g. telecom companies, service parts logistics has thus become a major area to be leveraged. Rapid fulfillment of high-value parts, with large number of SKUs, low inventory turns; high distribution costs and extended supply chain visibility are important aspects of this industry. (See figure for a block diagram of service parts logistics supply chain).

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Source: http://www.rlmagazine.com/edition01p12.php

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Service Parts Logistics Overview

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Bibliography
1. http://www.logistics4everyone.com/2009/06/origin-of-3rd-party-logistics-3pl/ 2. www.industryweek.com 3. http://en.wikipedia.org/wiki/Third-party_logistics 4. http://mix.jokesprank.com/the-four-types-of-third-party-logistics-providers-explained/

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