Chapter 1:

Introduction

As conditions for doing business in a global setting have changed significantly

during the last two decades the importance of logistics and supply chain
management (LSCM) has been recognized universally. As companies realized the
need to adapt to the ever changing conditions in an environment of globalization,
technological innovation, and more sophisticated consumer demand to survive and
flourish they began to incorporate into their systems of operations and focus on a
strong LSCM component (Rushton & Walker, 2007). Superior logistics and supply
chain performance is now a well-recognized strategic dimension for companies to
gain competitive advantage.
The growth of logistics outsourcing in the USA is attributable to better
transportation solutions; greater focus on core businesses; impact on cost
reduction; improvements in services; development of necessary technological
expertise; availability of computerized systems; and the need for more professional

and better prepared logistics services (Sheffi, 1990). The growth of business
dynamics has caused outsourcing of the logistics activities to gain increasingly
greater importance. Companies have been considering various options to manage
their logistics activities including, creating in house dedicated logistics function,
setting up logistics subsidiaries or acquiring a logistics firm. (Sahay & Mohan,
2006).
A 3PL provider is a company which supplies and/or 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),

Figure 1. Main components of 3PL.

A third-party logistics provider is (abbreviated 3PL, or sometimes TPL) is a firm that

provides service to its customers of outsourced (or "third party") logistics services for part, or all
of their supply chain management functions. Third party logistics providers typically specialize
in integrated operation, warehousing and transportation services that can be scaled and
customized to customers' needs based on market conditions and the demands and delivery
service requirements for their products and materials. Often, these services go beyond logistics
and include value-added services related to the production or procurement of goods, i.e., services
that integrate parts of the supply chain. Then the provider is called third-party supply chain
management provider (3PSCM) or supply chain management service provider (SCMSP). Third
Party Logistics System is a process which targets a particular Function in the management. It
may be like warehousing, transportation, raw material provider, etc.

*Advantages and disadvantages of third party logistics

a) Advantages of 3PL
1. Cost and time savings for the client
As logistics is the core competence of third party logistics providers. They possess better know
how and a greater expertise as any producing or selling company could be able. This know how
together with the global networks of the often large company size enables a higher time and cost
efficiency. Another point is, that the equipment and the IT systems of 3PL providers are
constantly updated and adapted to new requirement of their customers, so that they are able to
meet the requirements of their customers suppliers. And that is more than essential to a
companys survival. Producing or selling companies often do not have the time, resources or
expertise to adapt their equipment and systems as quickly as necessary. So in conclusion a 3PL
provider can meet the technical requirements in a faster and more cost efficient way than a
company could do itself.
2. Low capital commitment

Thus the fact that most or all operative functions are outsourced to a 3PL provider there is no
need for the client to hold own warehouses or transport assets. There is very less or no tied up
logistics capital. This is very beneficial if a company has high deviations in warehouse capacity
utilization, because a bad capacity utilization ratio at equal fix cost (for warehouse) is evil for a
companys efficiency and profits.
3. Ability of client to focus on core business
The outsourcing of logistics departments permits the company to focus even more on their real
core business. If logistics is one of the firms core businesses then outsourcing doesnt make
sense. But if logistics is no core competency but rather needed or annoying attachment it should
be outsourced to a logistics provider, because the continuous increasing of business complexity
makes it impossible to be an expert in every division or sector.[4] And if you are no expert in a
division, there is always the opportunity to improve. Often only the core competency is really
adding value to your product. So it is immense important to be best in class or one of the market
leaders to generate profits, because normally the quality of the core product is the main (not the
only, but the main!) reason for the consumer to buy it.
4. 3PLs provide flexibility
Third party logistics provider can provide a much higher flexibility in geographic aspects and
can offer a much larger variety of services than the clients could provider their selves. In addition
to that, the client gets flexibility in resources and workforce size and logistics fix costs turn into
variable costs.
*Possible disadvantage of 3PL
The only big disadvantage (if you see it as one) is the loss of control a client has by working with
third party logistics. Eminently in outbound logistics when the 3PL provider completely assumes
the communication and interacting with a firms customer or supplier. By having a good and
continuous communication with their clients most 3PLs counter and try to charm away such
doubts. Some 3PLs even paint the clients logos on their assets and vest their employees like the
clients ones.