The State of 3PL Industry

Aniruddha Ray

Amitesh Tyagi

Pervinder Singh Chawla

Saurabh Chaudhuri

3PL (Third Party Logistics) – State of the Industry – 2008-2011

Third Party Logistics - Definition “a firm [that] provides multiple logistics services for use by customers. Preferably, these

services are integrated, or bundled together, by the provider. Among the services 3PLs provide are transportation, warehousing, cross-docking, inventory management, packaging, and freight forwarding.”

-- Council of Supply Chain Management Professionals

“Third-party Logistics is simply the use of an outside company to perform all or part of the firm’s materials management and product distribution function.”

-- Simchi-Levi (2000)

“A relationship between a shipper and third party which, compared with the basic services, has more customized offerings, encompasses a broad number of service functions and is characterized by a long-term, more mutually beneficial relationship”

-- Murphy & Poist (1998)

In the "PL" terminology, it is important to differentiate the 3PL from the:

1PL, which are the actual shipper or the consignee,

2PL, which are actual carriers such as YRC Worldwide, UPS, FedEx,

4PL, which are consulting firms such as CPCS, SCMO, BMT, Deloitte, and Accenture.

Categories of 3PL Providers Hertz and Alfredsson (2003) describe four categories of 3PL providers:

Standard 3PL provider - Perform activities such as, pick and pack, warehousing, and distribution (business) – the most basic functions of logistics. For a majority of these firms, the 3PL function is not their main activity.

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

The Customer Adapter - 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 do not develop a new service.

The Customer Developer - The highest level of a 3PL provider with respect to its processes and activities. 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.

Third Party Logistics

Industry Evolution

Third Generation ( 2000 and beyond)

First Generation (1970s - 1980s)

Second Generation (1980s - 1990s)

Broader more integrated services

Transportation / warehousing

Freight forwarders / brokers

Shipper’s agents

Asset-based companies

Increased Service Offerings

Online freight marketplaces

Web-based 3PLs

Increased supply chain integration

Fourth Generation ( 2010 and beyond)

Supply Chain Co-ordination

Process Re-design

Consultant Mode

Global 3PL Market (from 2010 and 2012 3PL Study)

Use of 3PL by industry – 2000 Data

75.9

71.1

61.4

56.2

53.8

82.2

Percentage of 3PL use in different industries Industry

Computer

Consumer

Retail

Chemical

Medical

Auto

Source "What's ahead for 3PLs“ Modern Materials Handling, April, 2000

3PL Survey 2008 - Analysis Agenda

Current State of the Market: Summarize the current use of 3PL services

Examine why customers do/don’t outsource — to 3PL providers

Identify customer needs

How well 3PL providers are responding to those needs

How customers select and manage 3PL providers

Special Topics - Look into key issues relating to 3PL use – Provision of Integrated service offerings

Green supply chain

Supply chain Security

The 3PL Survey 2008 – 13th Edition

3PL – Services Used

Why 3PL - Benefits Save Time Don’t need to invest in: Trucks, Training, Development

Help expand to New markets International

Narrow your focus Allows you to focus on your strengths Don’t get spread too thin

Reach more customers more effectively Can ensure delivery times Can help a company run leaner

Why not 3PL – Risks and Concerns High Co-ordination costs

Loss of internal logistics management capabilities

Biased choice of service providers

Leakage of sensitive data and information - Security

Service degradation Less reliable? Longer order cycle time?

Emergency response?

Loss of control and representation

Collaboration with Competitors – Knowledge Sharing

Reduced contact with final customer 3PL for outbound logistics interact with your customers, you become less

visible to your customers

Service Offerings Basic Service Providers Warehouse management

Order processing , Order fulfilment

Transportation carrier selection

Value-added Service Providers: Shipment/Order consolidation

Import/export Customs

Logistics information systems (EDI, reporting)

Fleet management/operations (e.g. cross-docking)

Product assembly/installation

Logistics Integrators: Full responsibility for key supply chain operations

replenishment/order-filling policies

product returns

customer spare parts inventory replenishment

Rate negotiation

2008 - Customer Experience with 3PL

Trend 1 - Integrated Logistics – The Good and The Bad

Trend 1 - Integrated Logistics with IT

Integrated Logistics – State as of 2008

Trend 2 - Green Supply Chain

Uncertainty about “Green” –

What is it and How to attain it

Will it result in cost savings or cost escalation

Green Action Plan –

Getting Educated (what, how etc)

Measure the environmental impact of current SCM

Identify Change Levers

Embark on Business Case supported initiatives

Green SCM – Solutions Suggested

SUGGESTIONS

Improve Transportation Efficiency

Improve Equipment

Change Packaging

Shift Modes

Optimize Networks

Retrain Drivers

Move towards Greener Buildings

Trend 3 - Security – Collaboration and Importance

Security – Concerns and Way Ahead

Security - Suggestions

3PL Study 2012 – Key Trends Now

3PLs Value Creation Increase but so does InSourcing - 64% report increase in 3PL Usage, 24% are returning to InSourcing.

Consolidation of 3PL Providers – 58% users are consolidating 3PL partners (based on value-add)

Logistics Spending is Consistent – 12% of Revenue and 48% on Outsourcing.

Transportation Spend Dominates - 56% on transportation and 39% on warehouse

The Success Rating Perception Gap Remains – 88% users and 94% 3PL providers are happy with performance. But 33% users feel there is scope of more innovation.

The IT Gap Remains - 54% of shippers are satisfied with 3PL IT capabilities. 93% indicate that ITcapabilities are a necessary element of 3PL expertise.

New 3PL Selection Criteria - Fuel efficiency and carbon emissions are becoming more important.

Thank You

Contract Warehousing

Bulk Warehouse

Distribution Center

Incoming Products

Customers Retailers

Outsourced In-house

Activities:

Labor & supervision Receiving, storage, shipping Value Added Services Traffic/transportation

Benefits:

Lower capital investment Lower fixed/variable cost ratio Focus to the core Professional service

Supplier Hub / Regional Fulfillment Center / Regional Distribution Center

Bonded Warehouse

Mfg site/ Point of Use

Incoming Materials Or Products

Outsourced

Activities:

Same as contract warehouse Customs clearance Freight consolidation Shipment visibility Inventory ownership Order fulfillment Value Added Services

Benefits:

Lower capital investment Focus to the core Delayed payment of duties and taxes Pay (for material) on production Visibility of pipeline inventory

Shipment Consolidation and Transportation

Consol. Center

Point of Sale/ Point of Use/ Customers

Incoming Materials Or Products

Outsourced

Activities:

Transport arrangement Customs clearance Freight consolidation Shipment visibility Carrier mgmt / rate mgmt Merge in transit

Benefits:

Shorter cycle time Lower freight costs Visibility of pipeline inventory Inventory consolidation

De-con Center

Customs

Product Returns / Technical Services

Product Return Center

Repair centers

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Outsourced

Activities:

Testing / screening Warranty program mgmt Inventory ownership Warehousing and inv mgmt Fulfillment Depot repair mgmt

Benefits:

Centralization of inventory Lower capital investment Focus to the core Reduced reverse logistics costs Speedy response to customers

OEM Warranty Fulfillment

Critical Parts / Service Parts Logistics

Repair centers

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Outsourced

Activities:

Failed parts replacement Warranty program mgmt Inventory ownership Warehousing Depot repair mgmt Visibility and Track&Trace

Benefits:

Centralization of inventory Lower transportation cost Improved visibility of inventory Lower capital investment Better after-sales service support

OEM Warranty Fulfillment

Tier 1

Tier 3

Tier 2 Tier 2 Tier 2

Logistics Financial Services

Manufacturers Distributors Supplier Customers / Retailers

Activities:

Inventory finance (factoring, LOC) Distribution finance (asset based lending, receivable finance) Payment solutions (COD) Leasing

Benefits:

Reduced cost of capital Improved cash flow Reduced capital investment

Total Logistics Management

Bulk Warehouse

Distribution Center

Incoming Products

Customers Retailers

Outsourced

Activities:

Logistics planning Network optimization 3rd vendor mgmt Information technology Supply chain visibility

Benefits:

Reduced total logistics costs Global visibility Single logistics solution and contact Focus to the core Reduced investment in logistics