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3PL Practices in India

Dr. B.S. Sahay


Professor of Operations Management
Chairman, Centre for Supply Chain Management

SCM

Centre for Supply Chain Management


Management Development Institute
Gurgaon, India
Agenda for the Session
• Some Facts
• Business Challenges
• Why 3PL in India?
• 3PL Practices in India
• Conclusions and Recommendations
• What should be done?

SCM
Financial Improvements

Percent
Financial Indicator Improvement
Improvement in Sales Revenue 13.5%
Working Capital Improvement 12.3%
Capital Asset Reduction 9.2%
Production Cost Reduction 10.5%
Labor Cost Reduction 10.0%
ROA Improvement 10.0%
Logistics Cost Reduction 15.0%

SCM
Some Facts:

• Annual Plan Outlay : Rs. 1.13 Lakh Crores


• Fiscal Deficit : Rs. 1.35 Lakh Crores
(5.3% of GDP)
• Inventory tied up : Rs. 1.17 Lakh Crores
• Logistics Cost : 13.6% of our GDP
• GDP : Rs. 25.57 Lakh Crores

SCM
Logistics Cost
Country GDP Logistics
(billions) as %
of GDP
Asian region
China 345 14.5
Japan 3363 10.5
Korea 283 12.4
Singapore 40 20.0
Taiwan 148 13.5
European region
France 1200 11.7
Germany 1566 11.8
Italy 1151 12.6
Netherlands 286 12.2
Spain 527 12.1
UK 1015 12.2
Sweden 237 12.7
North American region
Canada 593 11.8
SCM Mexico 208 14.4
US 5673 8.70
International Comparison of Customer Orientation
Parameters Product Product O n - T i m e A fter-Sales M a n a g i n g
Quality Design Delivery Service D istribution

India 41.08 34.05 30.27 41.08 52.43


Brazil 52.39 56.62 36.34 39.15 51.83
Thailand 63.00 58.50 57.00 54.00 66.50
South 60.71 48.57 59.29 47.14 57.14
Korea
Canada 68.13 58.06 62.19 62.50 66.45
USA 59.67 69.84 62.62 57.70 74.43
Japan 92.68 81.46 93.17 89.76 72.20
Germany 92.50 71.39 88.06 78.61 75.83
France 55.94 66.96 44.64 45.56 66.09
Netherla 72.89 63.11 69.78 68.44 74.76
nds
SCM
Note: Companies are r ated 0=poor to 100=excellent
Source: World Competitiveness Report, 2000
Business Challenges
• Customer Expectation
• Shortening of Product Life Cycles
• World Competition
• Shareholder Accountability
• Competing Through Time

• Return on Investment

SCM
Supply Chain Model
Company

Design Market

Supplier’s Suppliers Customers/


Acquire Convert Distribute Customers
Supplier End users

Mgmt Control

Information, product and fund flow (forward and reverse)

SCM
Logistics Management
“Logistics Management is the process of
planning, implementing and controlling
the efficient cost-effective flow and storage of
raw materials, in-process inventory, finished
goods, and related information
from point-of-origin to point-of-consumption
for the purpose of
conforming to customer requirement”.
SCM
Third Party Logistics

• A 3PL provider is a company which supplies


/co-ordinates logistics functions across
multiple links in the supply chain.

• The company acts as a ‘third party’ facilitator


between seller/manufacturer (the ‘first party’)
and buyer/user (the ‘second party’).”

SCM
Research Objectives
• To know the scenario of 3PL Practices in Indian
Industry
• To identify Critical Factors for evaluation,
selection and relationship management with 3PL
providers
• To provide a benchmark for Indian firms looking
to optimise their logistics operations
• To project the future trends of 3PL services in
India
SCM
Research Methodology
Consultation Available World-wide Surveys Indian Economic Scenario

Design of Survey Questionnaire

Pilot Survey
Academic Study Identification
– Companies
India’s Administration Data Analysis
competitiveness, of Questionnaire
Global Supply Questionnaire Modification
Chain/logistics/
3PL scenario
Administration of Questionnaire (by Post & Personal Visits)

Data Sorting & Evaluation


Interaction with
Respondent
Non response bias & Data Analysis

Tabulation of Survey Findings

SCM Research Conclusion


Participation by Ownership
126 valid responses, 112 Users, 14 3PL providers

Public Sector
3%

Private
34%

Public Limited
63%

SCM
Participation by Turnover

> 1000 cr < 50 cr


18% 22%

500 to 1000 cr
11%
50 to 100 cr
13%

100 to 500 cr
36%

SCM
Participation by Industry
Automotive 27.5

Engineering 22.9

Others 21

Chemicals/ Fertilisers 7.3

Metals 4.6

FMCG 4.6

Textiles/ Apparel 3.7

Services 3.7

Telecommunications 2.8

Transportation 1.8

SCM 0 5 10 15 20 25 30

Percentage of Respondents
Themes
• 3PL as a Strategic Tool for Corporate Growth
• 3PL: A Critical Link to Supply Chain
• Logistics Activities Outsourced
• Logistics Cost
• Selection of 3PL provider
• Implementation Issues
• Evaluation of 3PL Providers
• Performance Measurement
• e-Logistics
• Future Trends in 3PL
SCM
Theme 1: 3PL for Corporate Growth
• Corporate Focus
– Higher Profitability
– Increased Sales and Market Share
– Enhanced Customer Service
– Reduced Costs

• Highly Competitive Situation


– Focus more on Core Activities

SCM
Theme 1: 3PL for Corporate Growth
Reasons for Outsourcing
Logistics cost reduction 80.6

Focus on core competencies 76.0

Improved customer services 71.3

Improve return on assets 68.2

To increase inventory turn 60.6

Productivity improvement 56.5

Imbibe more flexibility in operations 46.1

Access to emerging technology 45.3

Access/ Expansion to unfamiliar market 35.9

Diverting capital investment 24.5

SCM 0 20 40 60 80 100

Percentage of Respondents
Theme 1: 3PL for Corporate Growth
Improvement in Business Objectives by using 3PL

Improve on time delivery 86.7

More specialized logistics expertise 85.3

Reduced cycle time 79.8

Improve focus on core activities 79.7

Operational cost reduction 76.4

Enhance geographic reach 61.3

Differentiation from competitors 56.7

Facilitate growth 56.1

Strategic/ operational flexibility 54.0

SCM 0 20 40 60 80 100
Percentage of Respondents
Theme 2: 3PL A Critical Link to SC
Improvement of the Functions in Selection of 3PL

Customer service 65.8

Sales 64.3

Purchasing 60.9

Finance 50.6

Marketing 50.6

Manufacturing 44.0

Information systems 37.5

0 20 40 60 80 100
SCM Percentage of Respondents
Theme 2: 3PL A Critical Link to SC

Unimportant
Minimally 2%
important
5% Very important
19%
Indifferent
26%

Important
48%

SCM
Theme 2: 3PL A Critical Link to SC
Role of 3PL Services Providers as in Supply Chain Integration

Less than No benefit


expected 3% More than
6% expected
10%
Indifferent
15%

Expected
66%

SCM
Theme 3: Logistics Activities Outsourced

Reduce
Costs
Increase
Globalize
Market
Business
Coverage
Operations
Why to
Outsourcing
Logistics?

Customer Focus on Core


Satisfaction Flexibility in Competency
Operations
SCM
Theme 3: Logistics Activities Outsourced
Logistics Activities Outsourced

Outbound transportation 55.7

Inbound transportation 52.2

Customer clearing & forwarding 51.5

Import/ Export management 34.5

Outbound warehousing 33.9

Inbound warehousing 29.5

Labelling & Packaging 29.0

Fleet management & Consolidation 28.6

Order picking 27.0

Inventory management 23.5

0 10 20 30 40 50 60
SCM
Percentage of Respondents
Theme 3: Logistics Activities Outsourced
Major Reasons for not using 3PL Services
Inability to respond to changing needs 84.6

Poor infrastructure of providers company 84.0

Lack of grasp of business goals 82.3

Unreliable promises from providers 81.3

Concerns about capability of providers 77.4

Fear of leakage of important information 76.1

Difficulty in gauging cost saving with 3PL 75.9

Lack of confidence in provider 75.4

Non compatibility of IT systems 68.6

Difficulty to manage and change provider 68.5

Fear of loss of control 68.5

Fear of retrenchment 26.4


SCM 0 10 20 30 40 50 60 70 80 90
Percentage of Respondents
Theme 4: Logistics Cost

• Transportation costs
• Inventory Carrying Costs
• Order-Processing
• Losses
• Packaging
• Handling & Warehousing Costs
• Customers’ Shopping

SCM
Theme 4: Logistics Cost
Major Components while measuring the Logistics Cost

Transportation management 72.9

Inventory management 62.6

Warehousing and distribution centre


37.4
management

Customer services cost 33.6

Order management and processing 25.2

Packaging 25.2

Production scheduling 23.4

Purchasing (excluding raw material cost) 20.6

SCM
0 10 20 30 40 50 60 70 80
Percentage of Respondents
Theme 4: Logistics Cost
Logistics Cost as Percentage of Gross Sales

>50%
20-50%
3%
2%
10-20%
17%
0-5%
39%

5-10%
39%

SCM
Theme 4: Logistics Cost
Percentage of Logistics Outsourced to 3PL providers

>80%
60-80% 7%
8%

40-60%
14%

20-40% 0-20%
7% 64%
Theme 5: Factors for 3PL Selection
• Core Competencies of 3PL Provider
• Cost of 3PL Services
• Information Handling Capability / Compatibility
• Breadth of Services Provided
• Past Experience of your Industry
• Technological Competencies of the Provider
• System Flexibility & Capacity
• Safety & Insurance Cover / Programs
• Geographical Location & Spread
• Company Reputation
• Responsiveness & Service Quality
SCM • Management Structure & Quality of Workforce
Theme 5: Factors for 3PL Selection
Cost of 3PL services 63.1

Reliability 62.2

Core competencies of 3PL provider 61.0

Responsiveness and service quality 45.8

Service capability of provider 37.9

Technological competencies of provider 25.4

Breadth of services provided 23.9

Geographical location 20.0

0 20 40 60 80 100
SCM
Percentage of Respondents
Theme 5: Factors for 3PL Selection
3PL Contract / Agreement

• Expectations of both parties


• Penalties for non-performance
• Roles & Responsibilities
• Cost Structure
• Quality requirements
• Service Levels
• Performance Measures
• Periodical reviews
• Issue resolution mechanism
• Information exchange procedures
SCM • Profit / gain sharing provision
Theme 5: Factors for 3PL Selection
Parameters used in 3PL contracts

Penalties for non performance 63.7


Performance measures 62.6
Roles and responsibilities 61.5
Expectations of both parties 61.5
Service level 59.3
Service costs 59.3
Quality requirements 49.5
Periodical review of agreement 48.4
Flat rate pricing 40.7
Information exchange procedures 31.9
Transaction based pricing 29.7
Issue resolution mechanism 28.9
Percent gain-sharing provision 6.6

0 10 20 30 40 50 60 70
Percentage of Respondents
Theme 6: Implementation Issues
Critical Success Factors in Implementing 3PL Services

• Well defined requirements


• Close working relationship
• Top management involvement
• Clear demarcation of responsibilities
• Joint (cross-functional) team for management
• Well laid down system
• Strong performance review

SCM
Theme 6: Implementation Issues
Critical Success Factors in Implementing 3PL Services

Well defined system 73.4

Close working relationship 73.3

Strong performance review 67.8

Clear demarcation of responsibility 64.7

Well defined requirements 62.4

Top management involvement 52.3

Cross functional team 43.6

Joint team for management 36.6

Tiered structure 24.6

0 10 20 30 40 50 60 70 80
Percentage of Respondents
Theme 6: Implementation Issues
Major Challenges in Implementing 3PL Services

Controlling cost 54.3

Maintaining customer service level 53.9

Communication 34.8

IT integration 32.9

Demarcation of responsibility 30.7

Information sharing 28.8

Monitoring performance 28.0

Reaching service definition 17.3

Convincing internal personnel 16.0

0 10 20 30 40 50 60
Percentage of Respondents
Theme 6: Implementation Issues
Users & Providers Perception
Controlling costs
5
Customer Service
Information Sharing
4

Reaching Service Definition 3 Gain Sharing

Convincing Internal Personnel Communication

Demarcation of Responsibility IT Integration

Monitoring Performance

SCM User Provider


Theme 6: Implementation Issues
Users & Providers Perception

Mean score (5 very


Major Challenges in implementation important)
of contract User Provider
Perception Perception
Controlling costs 4.26 4.60
Maintaining customer service level 4.16 4.30
Gain sharing mgmt 3.20 3.13
Communication 3.89 4.10
IT integration 3.67 3.56
Monitoring performance 3.70 4.00
Demarcation of responsibility 3.65 3.89
Convincing internal personnel 3.28 4.22
Reaching service definition 3.47 3.44
Information sharing 3.74 4.30
SCM
Theme 7: Management & Partnerships
Management Involvement in Partnerships

40.6
Top management 62.9

Middle 38.0
management 35.6

35.6
Lower management
18.3

28.8
Divisional level 39.3

41.0
Corporate level 47.9

40.3
CEOs 49.2

0 10 20 30 40 50 60 70

At partnership As of now
Percentage of Respondents
Theme 7: Management & Partnerships
Perception of Top Management Performance of 3PL Providers

Ineffective
Indifferent
1% Very effective
13%
17%

Effective
69%
Theme 7: Management & Partnerships
How Companies perceive 3PL Services

Collaborative
14%

Non contractual
9%

Contractual
77%
Theme 7: Management & Partnerships
Perception of Relationship with 3PL Providers
6.8
Willing to make long term relations 93.2

Possess high level of integrity 14.4


85.6
15.1
Committed to us 84.9

Do not make false promises 16.2


83.8
20.7
Concerned about us 79.3
23.8
Loyal to us 76.2
30.6
Share risks and rewards 69.4

Alter facts slightly to get advantage 45.2


54.8

Breach agreement to their benefit 69.5


30.5

0 20 40 60 80 100

Agree Disagree

Percentage of Respondents
Theme 7: Management & Partnerships
User & Provider perceptions of their relationships

Mean score (1 - strongly


agree)
User Provider
Relationship Perception Perception Perception
Do not make false promises 2.76 2.33
Share risks and rewards 3.09 2.33
Concerned 2.80 1.92
Committed 2.51 2.00
Loyal 2.71 2.33
Willing to make long term relations 2.31 1.50
Alter facts slightly to get advantage 3.22 2.82
Breach agreement to their benefit 3.82 3.55

SCM
Theme 8: 3PL Performance Evaluation
Performance Measures commonly used

• On time shipment
• Inventory accuracy
• Customer complaints
• Shipping errors
• Backorders
• Warehouse cycle time
• Total order cycle time
• Stock outs
• Fill rates

SCM
Theme 8: 3PL Performance Evaluation

Use of Joint Teams and Partnership Levels

55.0
Non-contractual
45.0

55.0
Contractual
45.0

15.4
Collaborative
84.6

0 10 20 30 40 50 60 70 80 90

Have joint teams Do not have joint teams

Percentage of Respondents
Theme 8: 3PL Performance Evaluation
User Perceptions of Performance measures

Customers' complaints
On time shipment
Shipping errors
Inventory accuracy
Total order cycle time
Stock outs
Backorders
Fill rates
Warehouse cycle time
Volume of Rs. Shipped

0 20 40 60 80 100
SCM Percentage of respondents
Theme 8: 3PL Performance Evaluation
User - Provider Perceptions for Performance Measures

On time shipment
5

Volume of Rs. Shipped 4.5


Customers' complaints
4

3.5

3
Fill rates Inventory accuracy
2.5

Backorders Shipping erors

Total order cycle time Stock outs

SCM
User Perception Provider Perception
Theme 8: 3PL Performance Evaluation

• About 40% have ranked customer service amongst


the top 3 as a reason for using 3PL services
• Close to 30% of customer service personnel are
involved in selection of 3PL providers
• More than 80% of respondents use on time
shipment and customer complaints as a significant
performance measure

SCM
Theme 9: Performance Measurement
Impact of use of 3PL on Firms

Negative Very negative


2% 1%

Very positive
14%
Average
29%

Positive
54%
Theme 9: Performance Measurement
Use Perception of Performance Measures

Customer complaints 85.7

On time shipment 80.7

Shipping errors 80.0

Inventory accuracy 75.6

Total order cycle time 56.7

Stock outs 55.9

Backorders 52.4

Fill rates 49.1

Warehouse cycle time 45.4

Volume of Rs shipped 42.1

0 20 40 60 80 100
Percentage of Respondents
Theme 10: E-Logistics
Improvement of IT Integration when evaluating and selecting

the 3PL service provider

Not important
Very important 11%
21%
Less important
13%

Moderately
important Important
29% 26%
Theme 10: E-Logistics
IT based services important for 3PL contract implementation

Shipment tracking/ tracing 66.2


Warehouse management system 62.2
Transportation management system 57.3
Supply chain planning system 53.3
International documentation 48.5
Supplier management system 48.3
Freight payment/ accounting 40.9
Company website 38.7
EDI 38.4
Import/ Export applications 36.9
Internet order management 34.8
B2B e-market/ trading exchange 32.3

0 10 20 30 40 50 60 70
Percentage of Respondents
Theme 10: E-Logistics
Companies with e-commerce system in place or plan to have it

Plan to have Yes


25% 23%

No
52%
Theme 10: Future Trends in 3PL
Activities planned to be outsourced

Reverse logistics 57.4

Inbound warehousing 55.8

Inventory management 54.4

Distribution 54.3

Order processing 53.7

Information technology 53.2

Order picking 52.4

Outbound warehousing 48.2

Labelling & Packaging 46.8

0 10 20 30 40 50 60 70

Percentage of Respondents
Financial Improvements

Percent
Financial Indicator Improvement
Improvement in Sales Revenue 13.5%
Working Capital Improvement 12.3%
Capital Asset Reduction 9.2%
Production Cost Reduction 10.5%
Labor Cost Reduction 10.0%
ROA Improvement 10.0%
Logistics Cost Reduction 15.0%

SCM
Comparative Analysis
Parameter USA India

Usage of 3PL 71% 55%

Common activities outsourced Warehousing (73.7%) Outbond Transportation (55%)

Outbound Transportation (68.4%) Inbound Transportation (52%)

Freight bill payment (61.4%) Custom clearing and forwarding (51%)

Inbound warehousing (56.1%)

Reasons for not outsourcing Control would diminish (63%) Poor infrastructure of provider (81%)

Costs would be reduced (63%) Inability to respond to changing needs (81%)

Service commitment would not be met (48%) Unreliable promised from providers (80%)

Logistics is a core competency (44%) Concerns about capability of providers (77%)

Necessity of e-commerce 72% 67%

Collaborative relationship 82% 14%

Gain sharing is important for relationship 80% 6.60%

SCM
Conclusions & Recommendations
• 55% companies use 3PL services in India one
form or the other compared to 75% globally
• 3PL is the future, should be seen as a support to
corporate growth
• Close to 60 % of 55% uses transportation and
custom clearing & forwarding
• Of the rest 45%, 75% do not use 3PL services
because they are not sure of provider’s
capability
SCM
Conclusions & Recommendations
• Selection of proper 3PL provider is a must
where top management should be involved at
contract stage to avoid conflicts later on.
• Contracts are used more to avoid risks rather
than to develop relationship
• 3PL providers feel that
– Users are unwilling to share information
– Do not show commitment towards the relationship
– Do not want to share rewards
SCM – Do not show interest in continuing the relationship
Conclusions & Recommendations
• View 3PL as an equal partner
• Collaborative relation is a foundation for
success for 3PL services
• Gain sharing between Users and providers
• Use of IT in 3PL services is very low both by
user and provider
• Lower involvement of junior management staff
during implementation process (only 18%
showing high involvement)
SCM
Conclusions & Recommendations
• Company should focus on outsourcing 3PL
services like inventory management, order
processing, labeling & packaging and reverse
logistics

SCM
Drawbacks of 3PL
• Still requires top management's time to manage
relationships & resources
• Unable to cover full range of SC requirements e.g.
logistics information, tech development...
• Lack of shared goals...

SCM
Fourth Party Logistics : 4PL

The Fourth Party Logistics organization


is one of the intermediate stages along the
logistics sourcing spectrum
that combines the benefit of
outsourcing and insourcing.

SCM
Logistics Sourcing Spectrum
100% insourced
All logistics functions
Client
conducted in-house

Logistics operations

Part of SC outsourced to
3PL an external provider
Client

3PL
Client
4PL: long term
4PL 3PL contract, equity or
JV

3PL
SCM 100% outsourced
4PL : differs from 3PL...
• The 4PL organization is often separate entity
established as a joint venture or long term contract
between a primarily client and one or more partners.
• It acts as single interface between the client and
multiple logistics service providers.
• All aspects of the client’s supply chain are managed by
the 4PL organisation.
• It is also possible for a major 3PL provider to form a
4PL organisation within existing structure.

SCM
4PL Set-up
Primary Client 3PL Providers Partners
Contribution: Contribution: Contribution:

• Start-up equity • Transportation Services • Set-up equity


• Assets • WH facilities • Logistics strategy
• Working capital • IT development
• Operational expertise • Customer service
• Operational staff • management
• Supplier management
• Logistics consultancy
• Best practices

Primary 4PL
Client(s) Organisation Partner(s)

SCM
4PL : Key Characteristics
• Hybrid organisation formed from a number of different
entities
• Typically established as a JV or long term contract
• Responsible for management and operation of entire
supply chain
• Continuous flow of information between partners and
4PL organisation
• Potential for revenue generation

SCM
4PL : Primary Client Model
Client limited in numbers

Client
Primary Client
Client

4PL
Organisation

Service Service
provider Service provider
provider

SCM
External service provider
4PL : Industry Solution Model
Product manufacturers Service provider

Company 1
Distribution
service manager

Client
4PL
Company 2 Organisation

3PL
Provider
Company 3

SCM Pharmaceutical Industry


4PL : SC Partners Model
Suppliers

Aluminium can Glass Mfr.


Mfr.

Service
providers
Manufacturers

Primary 4PL 3PL


Client Organisation provider

Soft drink Logistics


mfr. manager

SCM Beverage Manufacturing Industry


Participation
• A total of 163 responses consisting 142 Users and 21
providers

Participation by Equity Stake Participation by Ownership

MNC stake Private


44% Public 33%
Domestic Limited
56% 64%

Public Sector
3%

SCM