THIRD PARTY LOGISTICS (TPL /3PL) Third party logistics refers to the concept of outsourcing the logistics and distribution of a manufacturing or service firm to a logistics service provider so that the manufacturing company can focus on its core competencies of new product development, manufacturing them and marketing the products Companies opt for 3PL Improved strategic focus : Using 3PL‟s companies can concentrate on their core tasks and improve customer satisfaction Resource constraints Lowered costs: According to research reports companies can reduce their inventory management costs by around 15-30 percent. Also 3PL service providers invest large sums of money in developing processes that aim to achieve logistical excellence, which are unavailable to other companies Expansion of Market: Outsourcing logistical activities to 3PL‟s allow companies to get into new businesses, new markets or a new channel of distribution quickly and with a limited outlay of cash For more professional and scientific approach to logistical problems For improvement in service levels with improved response time For efficient management of inventory resulting in better utilization of working capital Increased flexibility: A 3PL contract provides for relatively short term commitments as compared to building and maintaining the same resources by the company itself, thus freeing up resource for other uses Infrastructure required for a 3PL Warehousing Fleet of Vehicle Hardware and Software to take care of information needs Advanced material handling capabilities Good team of consultants Trained manpower Reach in terms of geography Steps while considering a 3PL service provider Knowing where to go: Companies should define their logistics management goals and attempt to visualize their organization status after they have outsourced their logistics activities. Knowing the needs and objectives: The manufacturing company should clearly know its objectives for outsourcing their logistical activities. Objectives of the outsourcing function should be a cross functional activity with participation of key personnel from all critical departments of the company such as information systems, finance, marketing, production, field staff, HR and SCM Calling for proposal or request for quotes from the short listed LSP ( logistics service provider) 3PL implementation – all the parties involved in the transaction are integrated and coordinated properly for effective implementation.
Implementation Process - Comprehensive plan and periodic check should be conducted to ensure that the implementation is on track FOURTH PARTY LOGISTICS ( 4PL) Fourth Party Logistics was a term coined by Accenture Consulting in the mid 90‟s. Extensive survey and feed back from organization on customer satisfaction, indicated that 3PL service providers were not up to the mark Accenture coined the term 4PL with the following definition “An integrator that assembles the capabilities, technology and resources of its own organization and other organizations to design, build and run comprehensive supply chain solutions” 4PL must have exhaustive skills in investing and maintaining the infrastructure and resources that makes it the manager of multiple 3PL service providers crucial to the client organization
The concept of Fourth-Party Logistics (4PL) provider was first defined by Andersen Consulting (Now Accenture) as an integrator that assembles the resources, capabilities and technology of its own organization and other organizations to design, build, and run comprehensive supply chain solutions. Whereas a third party logistics (3PL) service provider targets a function, a 4PL targets management of the entire process. Some have described a 4PL as a general contractor who manages other 3PLs, truckers, forwarders, custom house agents, and others, essentially taking responsibility of a complete process for the customer.
Architect/ Integrator Change Leader Supply Chain Visionary Multiple customer relationship Deal shaper and maker Supply Chain re-engineers Project Management Services, systems and information integrator Continuous innovation Control Room ( Intelligence ) Decision Makers Experienced Logisticians Optimization engines and decision support Neutral positioning Manage multiple 3PL‟s Continuous improvement Supply Chain Infomediary Information - Nervous System IT system integration IT infrastructure provision
Real-time data tracking Convert data to information Provide info to a point of need Technical support
Resource Providers Assets Transportation asset provider Warehouse, cross-dock, property facility Manufacturing – outsourcing Procurement service Co- packing service Measuring and Evaluating Logistics Transportation On – time shipment : Percentage of shipments that leave on the designated time/ date as against the total number of deliveries On – time deliver : Percentage of shipments that reach the customer location on the designated date as against the total number of shipments Transportation cost per mile : How much it cost to transport unit per mile against the previous in-house process or against industry standards Warehousing Percentage of orders that the 3PL ships in exact quantity as against specified on the shipping order Per unit cost of warehousing Cost of warehousing including the overheads Ability of moving the goods from one dock to another within specified time period Number of cases handled per hour or per employees Picking accuracy : Percentage of line with errors vs total number of lines. Order Fulfillment Inventory accuracy : Number of errors in reporting inventory in warehouses Loss and Damage : Loss and damage resulting from contractor negligence Cost Service costs: The number of times the service provider meets the targeted reduction in costs Cost reduction : Service provider initiatives to cut costs quarter to quarter Quality Reports : Ability of service provider to supply reports to manufacturing firm with the requirement information Process improvement: Initiatives jointly developed by the manufacturing firm and the 3PL to improve process performance Availability Customer Satisfaction: Customer satisfaction surveys for the customers serviced by the 3PL Handling routing: Excess/ shortage of inventory in the warehouse indicating improper warehousing
Some of the other factors Flexibility : Ability of the 3PL to make changes in the processes according to the requirement of the manufacturing company Support of Top management The top management of the service provider plays a crucial role in making a commitment to a long term relationship Investment in infrastructure The 3PL should also make considerable investment on the IT and communication front Financial Stability A 3PL contract calls for a major investment s by the service providers in the initial years for warehouses, fleet etc., and hence may not realize any gains in the first one or two years. Hence, the financial stability of the service provider is also crucial to the success of the alliance Sales are forecasted in their replenishment (refill/renew -supply) systems using the historical sales data. The retailers/ customers tracks sales information and inventory information (usually on-hand and available quantities) and forecast the orders. The corporate buyers keep watch on the ordered data and perform order pushes for the items they are responsible for The created purchase orders will be communicated to the vendor using the EDI 850 document Vendor looks at the inventory and decides on the order fulfillment If product available, the product is shipped to the retailer‟s warehouse or store and an “ Advance Shipment Notice” is sent to the retailer Vendor sends invoice to the retailer Upon receiving the product, the retailer does the invoice matching and payments are made through their account payable systems
A 3PL Paradigm Change
The evolution of the third party logistics (3PL) company dates back to the 1970‟s and 80‟s, through deregulation, as manufacturers and retailers began outsourcing logistics services to third party entities. Since then, the industry has seen continual change and expansion of services to cover specific geographic regions, modes of transport, and commodities. I consider myself privileged to have served the logistics community for many years, participating in what I consider one of the greatest service industries in America. As a logistics provider, we are fortunate to work with the very individuals who drive the economic engine of our country, and the people who make this country great. Those entrepreneurs, operations managers, freight carriers, technology companies, CFO‟s and the mainstay of America‟s workforce that drive efficiencies and production while moving goods both domestically and internationally. As always, our responsibility as a 3PL is to streamline processes, provide efficiencies, and increase savings to our customers and providers through the culmination of experience, expertise, technology, high integrity, and most importantly, relationships.
The relationships nurtured by a 3PL company are a vital lifeline for the successes or failures we see, and instrumental in providing the best possible support to each and every customer. None more so than the relationship with Less Than Truckload (LTL) carriers, who 3PL companies depend on daily. Unfortunately, with the gradual evolution of the 3PL industry, this relationship has become damaged and counterproductive for all parties involved. Numerous factors have fostered the inefficient and ineffective relationship between many 3PL companies and LTL carriers: Low Barrier to Entry. There is minimal regulation and low barrier to entry into the 3PL marketplace, which allows many unqualified individuals to create a business with very little capital and a limited vision beyond simply making money for themselves. Their start-up business is often funded by customers‟ freight they bring with them from a previous logistics job. This low barrier to entry also allows individuals with minimal respect for the business process to become a “legitimate” player in the 3PL industry. Auction House. 3PL companies have held carriers hostage for years by developing relationships with key people in the customer‟s organization, then becoming an auction house for their freight. Once the auction is complete, the 3PL company keeps a portion of the savings, which often results in more earnings to the 3PL company than the carrier who has acquired 100% of the risk involved. Many 3PL companies offer very limited services beyond this cost reduction process to justify their payment, which leaves carriers and customers disenfranchised. No True Partnership. Programs between carriers and 3PL companies are rarely, if ever, truly formalized. There is a hesitancy by 3PL companies to make a carrier their primary carrier and truly develop a mutually beneficial relationship. This avoidance of any meaningful program and relationship hinges on the fact that it would limit the 3PL company‟s ability to do business with any prospective client or provide any carrier in the marketplace. There are many 3PL companies that avoid vested carrier relationships because it is simply easier to earn a profit by making the easiest sell ever (… “Client X, I can get you a lower rate with the exact same carrier you are using.”) This type of sell bears nothing but distrust and apathy. The culmination of those select low integrity operations and general distrust between 3PL companies and LTL carriers has created unnecessary obstacles for quality 3PL companies (which there are many of) in the marketplace. LTL carriers have been taken advantage of and 3PL companies find it difficult to navigate the LTL future due to the actions of some of their counterparts. Worst of all, customers feel the strain in this relationship and are left caught in the middle, with little support or faith in the system. It is for these reasons that a paradigm shift must occur in this industry. Its continual evolvement is paramount for the health and longevity of this industry. It is possible to provide both carriers and customers value as a 3PL company. We must initiate open dialogue on this topic to repair and protect the relationship between 3PL companies, LTL carriers, and customers. Changes to the industry will not happen overnight. They are evolutionary, not revolutionary changes. The following three topics are just a few of many ideas that could be discussed and acted upon to draw out the discourse and inefficiencies all parties are encountering: Make a Choice. Carriers should select a limited amount of 3PL companies with which to work. Carriers are going to have to decide who fits and who doesn‟t, and feel comfortable with the others walking away. Standardize and Enforce. Carriers have the ability to set the terms of the engagement. Why not standardize terms and pricing with the 3PL companies the carrier selects as their partners? Let the best value provider and sales team as a 3PL
company win. Enforce breaches in rules of engagement. Back solicitation and late payment could be enforced much stronger in our industry. Limit the Carriers. 3PL companies should limit the carriers in their portfolio. Do 3PL companies really need eight national carriers and 40 regional carriers with whom they work? Why not limit the carriers and deepen the relationship that exists? The carrier, 3PL company, and customer would all benefit from the carrier and 3PL company working closer together. The best carriers should partner with the best 3PL companies and drive the best solutions. Examples of true collaboration: 3PL companies and carriers reviewing together the freight characteristics in detail to understand the best fits for the carrier and customer. Taking into account the length of the agreement, type of freight, lane fit, etc. With a partnership, there will be a much higher ratio of „win‟ to bid for the carrier which also greatly reduces the cost of doing business. This will eliminate trolling for pricing with the carriers. Holding joint sales calls with 3PL company prospects in order to help secure the business for both parties and project a unified front to the customer with joint support. Carriers assisting in training the 3PL operations and sales teams on their unique and specific product lines. Enhancing electronic communication between the carrier, 3PL company, and customer. Automating pick-ups, tracking interfaces, and payment processes to drive down costs. Bottom line, it‟s time to start the discussion. These are but a few suggestions to open the dialogue. Both carriers and 3PL companies can offer much value to one another. However, without a paradigm change, both parties are limiting the potential of the relationship and reinforcing the negative divide and atmosphere currently clouding our industry. Let‟s continue the evolution.
Transportation is one of the most visible elements of logistic operations. Def: - Transportation in a simple language can be defined as a means through which goods are transferred from one place to another. Given the facility and information capabilities, transportation is the operational area of logistics that geographically positions inventory. Functionality Two basic functions 1. Product Movement 2. Product Storage 1. Product movement – It is a primary transportation function. It moves the product up and down the value chain. Whether the product is in the form of materials, components, assemblies, work-in-progress or finished goods, transportation is necessary to move into the next stage of manufacturing process or physically closer to the ultimate customer. 2. Product Storage – This is a less common function of transportation. This is because vehicles make rather expensive storage facilities. However, it makes sense to use it as a storage facility in the following instances:
Where the in-transit products require to be moved shortly and the cost of unloading and reloading the goods will be more than the charge of storage in the vehicle. Where the origin and destination warehouse space is limited. In such circumstances where warehouses space is limited a circuitous route is taken to increase the transit time that is greater than it would be in case of direct route.
Cost of storage in vehicle + Cost of unloading + Cost of reloading + Cost of warehouse Participants in Transportation The shipper (originating party), the consignee (destination party or the receiver), the courier, the government and the public. Transportation Formats Private Fleets Contract Carrier Common Carriage Dominos Pizza Delivery ABT Parcel Services Public transportation (Indian railways)
Modes of Transportation There are 5 modes of transportation 1. Railways 2. Roadways 3. airways 4. Waterways 5. Pipelines Modes of Transpotation in Logistics In order to transport material from one place to another Logistics Managers are using Rail, Road, Air, Water & Pipe Line as the modes of Transportation. A logistics expert needs to understand these modes based on priorities, product type. lead time etc. to decide the appropriate mode of Transportation. Rail : Used for delivery of a wide range of goods including coal, iron ore, cement, food grains, fertilizers, steel, petroleum products and other heavy goods. Road : Used by suppliers to deliver goods in a cost effective manner and best suited for short distances. Many transport companies have expertise for fast delivery, packaging etc. for making scheduled delivery. Air : Used mostly for delivery of high value and tow volume goods from distant suppliers, usually not connected by any other mode of Transportation. It is also suitable for emergent item to be imported for some specific requirement. Water : Used by firms for delivery of goods from distant suppliers, mostly conducted in containers of varied size. This mode is ideal for transportation of heavy and bulky goods and suitable for products with long lead times. Pipe Line : Used by oil sector companies for mass movement of Petroleum products including gases. Due to quite low operating cost it is one of the preferred mode of transportation.
Each mode is used depending upon the geographical location and product to be transported. The relative importance of each mode can be measured in terms of system mileage, traffic volume, revenue and nature of traffic composition. Decision Factors 3 Fundamental factors to transportation performance are COST, SPEED & CONSISTENCY Other factors Distance – Distance is the major difference on transportation work since it directly constitutes to the variable cost such as labor, fuel and maintenance. It dose not begin at origin because of fixed cost associated with the shipment pickup and delivery regardless of the distance upward moving at a decreasing rate. Greater the distance more efficient is the utilization of fuel and labor and hence there is lower cost per unit distance even if the total cost increases. Volume – Greater the load lesser will be the cost per unit of weight. Density – Weight and space consideration, transportation cost is usually quoted (in terms of rupees per unit of weight) once the vehicle is full, it is not possible to increase the amount carried even if the weight of the product is light. An increased density product allows more units of the product to be loaded into a fixed cube of the vehicle. Storability – It It refers to the product dimensions and how they effect the vehicle space utilization. Odd sizes and shapes, excessive length and weight consume more space. Handling – Some material are fragile which require maximum handling. Roadways would be better in such product or materials.
TRANSPORTATION DOCUMENTS Bill of Landing – It is a basic document for using transportation services. It serves as a receipt and documents the commodities and quantities that we shipped. Accurate description and count are essential. In case of loss, damage or delay, the bill of landing is the basis for damage claim. The designated buyer in the bill of landing is the only bonafide receiver of the goods. Freight Bill - Freight Bill represents a carriers method of charging for transportation services performed. It is developed using information contained in the bill of landing. The freight bill may be either pre paid or collect. Shipping Manifest – The shipping manifest lists individual consignees where multiple shipments are placed on a single vehicle. Each shipment requires a bill of landing. The manifest lists the stop, bill of landing, weight and case count for each shipment. The digest of the manifest is to provide a single document that defines the contracts of the total load without requiring a review of each individual bill of landing. For single top shipments, the manifest is the same as the bill of landing.
VENDOR MANAGED INVENTORY (VMI) It is a streamlined approach to inventory and order fulfillment. With it, the supplier and not the retailers is responsible for managing and replenishing inventory using an integral part of VMI, ie., EDI, by electronic transfer of data over a network. It can be seen as a mechanism where suppliers creates the purchase orders based on the demand information exchanged by the retailer/ customer VMI can provide the benefits of smoother demand, increased sales, lower inventories and still reduced costs of lost sales to the other industries VMI activities is forecasting and creating the purchase order and are performed by vendor/supplier and not by the retailer. EDI ( Electronic data interchange) is an integral part of VMI process and takes a vital role in the process of data communication The retailer sends the sales and inventory data to the vendor via EDI or other B2B and the supplier creates the PO based on the established inventory levels and fill rates In VMI process, the retailer is free of forecasting and creating the orders as the vendor generates the orders The vendor is responsible for creating and maintaining the stock plan for the retailer. The vendor sends the shipment notices before shipping the product to the retailer‟s store/ warehouse. The vendor sends the invoice to the retailer Upon receiving the product, the retailer does the invoice matching and handles payment through their account payable systems VMI is a backward replenishment model where the supplier does the demand creation and demand fulfillment It‟s a methodical way to transfer the ownership of the inventory to the vendors but still ascertaining the smooth material flow as and when required Dual Benefits Data entry errors are reduced due to computer-to-computer communications. Speed of the processing is also improved Both parties are interested in giving better services to the end customer. Having the correct item in stock when the end customer needs it, benefits all parties involved A true partnership is formed between the manufacturer and the distributor. They work close together and strengthen their ties Supplier Benefits Reduced inventory : 1. Reduced stockouts The supplier keeps track of inventory movement and takes over responsibility of product availability resulting in a reduction of stockouts, thereby increasing end-customer satisfaction 2. Reduced forecasting and purchasing activities : As the supplier does the forecasting and creating orders based on the demand information sent by the retailers, the retailer can reduce the costs on forecasting and purchasing activities
3. Increase in sales : Due to less stockout situations, customers will find the right product at right time. Customers will come to the store again, thereby reflecting an increase in sales 4. Planning and ordering cost will decrease due to the responsibility being shifted to the manufacturer 5.The overall service level is improved by having the right product at the right time 6.The manufacturer is more focused than ever in providing great services Purchasing Speeds transactions Streamlines communication between customer and supplier Eliminates paper-to-computer data entry Improves data accuracy Frees up staff to work on more productive activities Inventory Management Delivery as needed cuts storage Helps you reduce inventory levels Reduces inventory obsolescence Improve inventory turns Improve fill rates Decreases lost sales Receiving Advance Ship Notice speeds up receiving Bar coding cuts warehousing costs Error Reduction Data entry mistakes are avoided Information flow is continuous Manufacturers Benefits 1. Improved visibility results in better forecasting: VMI process, the retailer sends the POS data directly to the vendor, which improves the visibility and results in better forecasting 2. Reduces PO errors and potential returns: Supplier creates the order, mistakes, can be avoided and can come down 3. Vendor can see the potential need for the item before it is actually ordered and right product is supplied to retailer at right time improving service level agreements between retailer and supplier 4. Encourages supply chain co-operation: Partnerships and collaborations are formed that smooth the supply chain pipeline 5. Promotions can be more easily incorporated into the inventory plan 6.A reduction in distributor ordering errors ( which in the past would probably lead to a return) 7. Visibility to stock levels helps to identify priorities Challenges and Limitations of VMI Manufacturing stocks without leveraging customer specific data effectively for production planning
In order to provide priority service to VMI partners, some vendors reserve inventory resulting in shortages to other customers Insufficient level of system integration results in incomplete visibility High expectation from retailers Resistance from sales forces due to concerns of loosing control, affecting sales based incentive programs Lack of trust and skepticism from employees The overall level of collaboration is limited The level of detail for planning is still generally high Lack of integration of systems, particularly for store level VMI, creates operational challenges due to limited visibility into inventory and orders Another disadvantage is that retailers have higher expectations of VMI because the pipeline is more visible and the manufacturer has more control Overcoming the limitations Redefining incentives programs based on partnership building instead of sales volume Build strong partnerships with management‟s commitment to effective communication, active sharing of information, commitments to problem solving and continued support Conduct simulations and pilots before actual implementation Organize training sessions before launching VMI program Set reasonable targets for benefits of VMI Establish agreements on service levels and process to handle exceptions