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Chapter 11:

Logistics Relationships and


Third-Party Logistics

Learning Objectives -

After
reading this chapter, you should be able to
do the following:

Understand the importance of logistics


relationships and the types of
relationships that may be formed.
Be knowledgeable of a process model
that will facilitate the development and
implementation of successful supply
chain relationships.
Define what is meant by third-party
logistics (3PL), and know what types of
firms provide 3PL services.
Chapter 11

Management of Business
Logistics, 7th Ed.

Learning Objectives

Know what types of 3PL services are


used by client/customer firms, and know
what types of 3PL providers are used.
Appreciate the role and relevance of
information technology-based services
to 3PLs and their client/customers.
Realize the ways in which 3PLs are
involved in global supply chain issues.
Chapter 11

Management of Business
Logistics, 7th Ed.

Learning Objectives

Know the extent to which customers are


satisfied with 3PL services, and
understand where improvement may be
needed.
Recognize the importance of
collaborative relationships in the
context of supply chain management.

Chapter 11

Management of Business
Logistics, 7th Ed.

Logistics Profile:
UPS Logistics Group

UPS Logistics Group signed a five-year $150


million deal to manage National
Semiconductors global supply chain
distribution center in Singapore.
The DC uses radio frequency, bar-code
scanning, and web-based technology.
Fills >450K orders per year; receives 12
million inbound chips daily; and ships four
billion products per year on sales of $2.1
billion.
Chapter 11

Management of Business
Logistics, 7th Ed.

Logistics Relationships and


Third-Party Logistics:
Introduction

With more firms interested in working


more closely with their supply chain
partners, high priorities are:
Developing and implementing
successful supply chain relationships;
The need for collaboration to achieve
supply chain objectives; and,
Value created by third-party logistics.
Chapter 11

Management of Business
Logistics, 7th Ed.

Logistics Relationships:
Types of Relationships

Vertical
Refer to the traditional links between
supply chain members such as retailers,
distributors, manufacturers and
suppliers.
Horizontal
Firms that have parallel or cooperating
positions in the supply chain such as a
transportation firm and a warehousing
firm serving the same customer.
Chapter 11

Management of Business
Logistics, 7th Ed.

Logistics Relationships:
Intensity of Involvement

Vendor relationship shows little or no


integration or collaboration.
Strategic alliance shows full integration
and collaboration.
Partnership shows a customized
relationship that results in better
outcomes than could be reached
separately.
Examine Figure 11-1 on the next slide.
Chapter 11

Management of Business
Logistics, 7th Ed.

Figure 11-1
Relationship Perspectives

Chapter 11

Management of Business
Logistics, 7th Ed.

Logistics Relationships:
Intensity of Involvement

Regardless of
form, there are
numerous ways
that the
relationships may
differ:
Duration
Obligations
Expectations
Chapter 11

Interaction and
Communication
Cooperation
Planning Goals
Performance
analysis
Benefits and
burdens

Management of Business
Logistics, 7th Ed.

10

Percentag
e

Figure 11-2 Effectiveness of


Supply Chain Relationships

Chapter 11

Management of Business
Logistics, 7th Ed.

11

Logistics Relationships:
Model for Developing and
Implementing Successful Supply Chain
Relationships

Six step process for forming and sustaining


supply chain relationships:
Step One Perform strategic assessment
Step Two Decision to form relationship
Step Three Evaluate alternatives
Step Four Select partners
Step Five Structure operating model
Step Six Implementation and
continuous improvement
Chapter 11

Management of Business
Logistics, 7th Ed.

12

Figure 11-3 Process Model for


Forming Logistics
Relationships

Chapter 11

Management of Business
Logistics, 7th Ed.

13

Logistics Relationships:
Model for Developing and
Implementing Successful Supply Chain
Relationships

Step One Perform strategic assessment


Manufacturer becomes fully aware of its
logistics and supply chain needs and
overall strategies that will guide its
operations.
This step is referred to as a Logistics
Audit, and will be covered in Chapter 14.
Time spent at the outset is well spent.

Chapter 11

Management of Business
Logistics, 7th Ed.

14

Logistics Relationships:
Model for Developing and
Implementing Successful Supply Chain
Relationships

Step Two Decision to form relationship


When using an external supplier, will the
firms services be needed.
If the firm has core competencies in the
area that external supplier provides, then
the firm can provide its own services.
Using channel partners depends on
whether there are compelling drivers and
facilitators for partnerships are present.

Chapter 11

Management of Business
Logistics, 7th Ed.

15

Figure 11-4 What Does It Take to


Have an Area of Core
Competency?

Chapter 11

Management of Business
Logistics, 7th Ed.

16

Logistics Relationships:
Model for Developing and
Implementing Successful Supply Chain
Relationships

Drivers might include: Facilitators might include:


Corporate compatibility
Asset/Cost efficiency
Management philosophy
Customer service
and techniques
Mutuality of commitment
Marketing advantage
Symmetry on key factors
Profit stability/growth
such as relative size,
financial strength, etc.

Chapter 11

Management of Business
Logistics, 7th Ed.

17

Logistics Relationships:
Model for Developing and
Implementing Successful Supply Chain
Relationships

Step Three Evaluate alternatives


Measure and weigh drivers and
facilitators.
Decide on type of relationship.
Match manufacturers needs with
capabilities of each potential partner.
Involve other functional managers in
the overall selection process.
Chapter 11

Management of Business
Logistics, 7th Ed.

18

Logistics Relationships:
Model for Developing and
Implementing Successful Supply Chain
Relationships

Step Four Select partners


Made only after close consideration of
the credentials of the most likely
candidates.
Interact with and get to know the final
candidates on a professionally intimate
basis.
Attempt consensus to maximize buyin.
Chapter 11

Management of Business
Logistics, 7th Ed.

19

Logistics Relationships:
Model for Developing and
Implementing Successful Supply Chain
Relationships

Step Five Structure operating model

Planning
Joint operating controls
Communication
Risk/Reward sharing
Trust and commitment
Contract style
Scope of the relationship
Financial investment
Chapter 11

Management of Business
Logistics, 7th Ed.

20

Logistics Relationships:
Model for Developing and
Implementing Successful Supply Chain
Relationships

Step Six Implementation and


continuous improvement
Depending upon the complexity of the
relationship, the implementation
period may vary in length.
Future successes will be a direct
function of the ability of the partners
to achieve both breakthrough and
continuous improvement.
Chapter 11

Management of Business
Logistics, 7th Ed.

21

Third-Party Logistics:
Industry Overview

Firms have directed considerable attention


to developing supply chain relationships.
Many companies have been in the process
of extending their logistics organizations
into those of other supply chain
participants and facilitators.
One way of accomplishing this extension is
through the use of a supplier of third-party
or contract logistics services.5
Chapter 11

Management of Business
Logistics, 7th Ed.

22

Figure 11-5 Implementation


and Continuous Improvement

Chapter 11

Management of Business
Logistics, 7th Ed.

23

Third-Party Logistics (3PL):


Definitions

3PLs are external suppliers that perform


all or part of a companys logistics
functions, including:
Transportation
Warehousing
Distribution
Financial services
Terms contract logistics and outsourcing
are sometimes used in place of 3PL.
Chapter 11

Management of Business
Logistics, 7th Ed.

24

Third-Party Logistics (3PL):


Types of 3PL Providers

Transportation-Based
Warehouse/Distribution-Based
Forwarder-Based
Financial-Based
Information-Based

Chapter 11

Management of Business
Logistics, 7th Ed.

25

Third-Party Logistics (3PL):


Types of 3PL Providers

Transportation-Based
Services extend beyond transportation to
offer a comprehensive set of logistics
offerings.
Leveraged 3PLs use assets of other firms.
Nonleveraged 3PLs use assets belonging
solely to the parent firm.
Ryder, Schneider Logistics, FedEx
Logistics, and UPS Logistics are examples
of 3PLs.
Chapter 11

Management of Business
Logistics, 7th Ed.

26

Third-Party Logistics (3PL):


Types of 3PL Providers

Warehouse/Distribution-Based
Many, but not all, have former
warehouse and/or distribution
experience.
Transition to integrated logistics has
been less complex than for the
transportation based providers.
DSC Logistics, USCO, Exel, Caterpillar
Logistics, and IBM are examples of
warehouse/distribution-based 3PLs.
Chapter 11

Management of Business
Logistics, 7th Ed.

27

Third-Party Logistics (3PL):


Types of 3PL Providers

Forwarder-Based
Essentially very independent
middlemen extending forwarder roles.
Non-asset owners that capably provide
a wide range of logistics services.
AEI, Kuehne & Nagle, Fritz, Circle, C. H.
Robinson, and the Hub Group are
examples of forwarder-based 3PLs.
Chapter 11

Management of Business
Logistics, 7th Ed.

28

Third-Party Logistics (3PL):


Types of 3PL Providers

Financial-Based
Provide freight payment and auditing,
cost accounting and control, and tools
for monitoring, booking, tracking,
tracing, and managing inventory.
Cass Information Systems, CTC, GE
Information Services, and FleetBoston
are examples of financial-based 3PLs.
Chapter 11

Management of Business
Logistics, 7th Ed.

29

Third-Party Logistics (3PL):


Types of 3PL Providers

Information-Based
Significant growth and development
in this alternative category of
Internet-based, business-to-business,
electronic markets for transportation
and logistics services.
Transplace and Nistevo are examples
of information-based 3PLs.
Chapter 11

Management of Business
Logistics, 7th Ed.

30

On the Line:
Trade Team

Excel, the largest provider of brewery


distribution services in Great Britain, and
Bass, the industrys low-cost producer, formed
Trade Team, the UKs leading independent
logistics provider to the beverage industry.
Annual sales of $200 million; 280 million
gallons of beer and other beverages to over
27,000 retail customers; 40-50% market
share.
Has capability to move other products.
Chapter 11

Management of Business
Logistics, 7th Ed.

31

Third-Party Logistics
Research Study: Industry
Details

Of 93 responding executives, 71 percent


indicate a current or possible use of 3PLs.
Overall percentage of companies using
3PLs is steady, but the computer and
peripheral and consumer products
industries tend to exhibit higher use (90
and 85 percent, respectively).
Less use in automotive, chemical and
retail (50 to 60 percent usage range).
Chapter 11

Management of Business
Logistics, 7th Ed.

32

Third-Party Logistics
Research Study: Industry
Details

Outsourced logistics services include:


Warehousing (73.7%)
Outbound transportation (68.4%)
Freight bill auditing/payment (61.4%)
Inbound transportation (56.1%)
Freight consolidation/distribution
(40.4%)
Cross docking (38.6%)
Chapter 11

Management of Business
Logistics, 7th Ed.

33

Figure 11-6 3PL User/Nonuser


Experience, 1996-2001

Chapter 11

Management of Business
Logistics, 7th Ed.

34

Table 11-1
Shippers Using More than Five
3PLs

Chapter 11

Management of Business
Logistics, 7th Ed.

35

Table 11-2 Third-Party


Revenues Estimated at $56.4
Billion in 2000

Chapter 11

Management of Business
Logistics, 7th Ed.

36

Table 11-3 Top Six


Outsourcing Logistics
Services: 2001

Chapter 11

Management of Business
Logistics, 7th Ed.

37

Figure 11-7 Nonuser


Respondents: Rationale for Not
Using 3PL Services

Chapter 11

Management of Business
Logistics, 7th Ed.

38

Table 11-4 Information Technology-Based


Services: Current Percent versus Future
Percent

Chapter 11

Management of Business
Logistics, 7th Ed.

39

Figure 11-8
Sources of Information
Technology

Chapter 11

Management of Business
Logistics, 7th Ed.

40

Figure 11-9 3PL Customer Use of


Industry Vertical Procurement
Markets

Chapter 11

Management of Business
Logistics, 7th Ed.

41

Figure 11-10 3PL Customer Use of


Transportation/Logistics Electronic
Markets

Chapter 11

Management of Business
Logistics, 7th Ed.

42

Figure 11-11 3PL Involvement in


Outsourcing: Who Is Responsible for
Implementation?

Chapter 11

Management of Business
Logistics, 7th Ed.

43

Figure 11-12 3PL Customer Evaluation of


Outsourcing (Yearly Comparisons)

Chapter 11

Management of Business
Logistics, 7th Ed.

44

Figure 11-13
3PL Factors for Selecting and Evaluating
3PLs

Chapter 11

Management of Business
Logistics, 7th Ed.

45

Third-Party Logistics
Research Study: Industry
Details

Quantifiable measures of 3PL success:


Logistics costs reduced by 8.2 percent.
Logistics assets reduced by 15.6
percent.
Average order cycle length changed
from 10.7 to 8.4 days.
Overall inventories reduced by 5.3
percent.
Chapter 11

Management of Business
Logistics, 7th Ed.

46

Third-Party Logistics
Research Study: Industry
Details

Reported problem areas:

Service level commitments not realized.


Strategic management skills lacking.
Cost reduction goals not realized.
Cost creep and price increases occurring.
Improvements and achievements lacking.
Control of outsourced functions diminished.
Consultative, knowledge-based skills lacking.
Technology capabilities not being delivered.
Time and effort spent on logistics not reduced.
Chapter 11

Management of Business
Logistics, 7th Ed.

47

Figure 11-14
How Respondents View Providers of ThirdParty Logistics Services

Chapter 11

Management of Business
Logistics, 7th Ed.

48

A Note on Fourth-Party
Logistics (4PL): The Next
Evolution?

Thought of as supply chain


integrator, a firm 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.12
4PLs manage and direct the activities of
multiple 3PLs, serving as an integrator.
Chapter 11

Management of Business
Logistics, 7th Ed.

49

Figure 11-15
Fourth-Party Logistics (Registered
Trademark of Accenture, Inc.)

Chapter 11

Management of Business
Logistics, 7th Ed.

50

Need for Collaborative


Relationships13

Supply chain relationships are most


effective when collaboration occurs.
Collaboration is facilitated by the ability of
the supply chain partners to readily access
and exchange information over the Internet.
Table 11-5 lists the Seven Laws of
Collaborative Logistics and is a guide to
establishing and maintaining collaborative
logistics networks.
Chapter 11

Management of Business
Logistics, 7th Ed.

51

Table 11-5
Seven Laws of Collaborative
Logistics

Chapter 11

Management of Business
Logistics, 7th Ed.

52

Chapter 11:
Summary and Review Questions
Students should review their knowledge of the
chapter by checking out the Summary and
Study Questions for Chapter 11.

End of Chapter 11 Slides


Logistics Relationships and
Third-Party Logistics