INDUSTRIES IN TRANSTION: FREIGHT TRANSPORTATION INTERMEDIARIES IN THE INFORMATION AGE

Jiong Song and Amelia C. Regan

Metrans 2nd Annual Transportation Conference Feb. 2, 2001
ITS, UC Irvine

Outline
Section I Section II Section III Section IV Section V

Traditional Freight Transportation Intermediary Current State and Evolution of the Industry Niche Markets -- Online Logistics Providers Research Needs / Opportunities Predictions / Conclusions

ITS, UC Irvine

Section I Section II Section III Section IV Section V

Traditional Freight Transportation Intermediary Current State and Evolution of the Industry Niche Market -- Online Logistics Providers Research Needs / Opportunities Predictions / Conclusions

ITS, UC Irvine

Third Party Logistics

Third-party Logistics is simply the use of an outside company to perform all or part of the firms 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)
ITS, UC Irvine

Third Party Logistics

Outsourced Operation Shipper Shipper Shipper In-house Operation

Transportation

3PL

Warehousing IT support SC integration

Shipper
In-house Logistics Department IT support Transportation Warehousing Others Others

Characteristics of 3PL

Perform outsourced logistics activities Process management / Multiple activities More customized services Mutually beneficial and risk-sharing relationship Long-term commitments (1~ 3 years)

ITS, UC Irvine

Why is it needed?

Advantages
o o o o

Cost reduction Focus on core competency Improved efficiency, service and flexibility Industry-specific application build-to-order systems and e-merchants

Disadvantages
o o

Loss of control Impact on in-house workforce

ITS, UC Irvine

Section I Section II Section III Section IV Section V

Traditional Freight Transportation Intermediary Current State and Evolution of the Industry Niche Markets -- Online Logistics Providers Research Needs / Opportunities Predictions / Conclusions

ITS, UC Irvine

Industry Evolution
Third Generation ( 2000 and beyond)
Online freight marketplaces Web-based 3PLs Increasing supply chain integration Second Generation (1980s - 1990s)

Non asset-based companies

Asset-based companies increased service offerings

Transportation / warehousing
First Generation (1970s - 1980s) Freight forwarders / brokers Shippers agents

Broader more integrated services

Current State -- Service Offerings

Dedicated Contract Transportation / Transportation Procurement

Inventory Management Logistics Management and Consulting Freight Audit and Bill Payment Customs Services Shipment Tracking and Tracing Reverse Logistics and Value-added Services

ITS, UC Irvine

Current State -- Market Size

3PL market is growing
( $ Billions )

54.0 46.0 39.6

34.2

1997

1998

1999
ITS, UC Irvine

2000

Market Structure
Annual Revenue
$20 - 100 million < $20 million > $100 million

Orange Courier Regal Logistics

Cass Information System California Distribution

Bax Global Logistics Menlo Logistics

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Current use of 3PL by industry

Industry
Computer

Percentage of 3PL use in different industries

82.2 75.9 71.1 61.4 56.2 53.8

Consumer
Retail Chemical Medical Auto

ITS, UC Irvine

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

Current Industry Status

No commonly accepted terminology

Technologies increase visibility, efficiency and integration

The service menu is rapidly changing

New breed of companies are emerging

ITS, UC Irvine

Section I Section II Section III Section IV Section V

Traditional Freight Transportation Intermediary Current State and Evolution of the Industry Niche Markets -- Online Logistics Providers Research Needs / Opportunities Predictions / Conclusions

ITS, UC Irvine

Niche Markets Online Logistics Providers

Online Freight Marketplaces

Spot market Auction and RFQ

Exchange
Meta-marketplaces

Application Service Providers (ASPs)

Purchasing Consolidation Market

Infomediaries
ITS, UC Irvine

Online Logistics Providers-Opportunity

The Freight Transportation Industry is Ideally Suited e-commerce

High Fragmentation of Shippers and Carriers

Many Intermediaries
Complex Supply Chains High Search Costs

Significant Opportunities for Economies of Scale

Several Models Emerging

ITS, UC Irvine

Niche Markets Online Service Providers

Spot market Auction and RFQ Exchange Meta-marketplaces Application Service Providers (ASPs)

Purchasing Consolidation market

Infomediaries
ITS, UC Irvine

ITS, UC Irvine

ITS, UC Irvine

Niche Markets Online Service Providers

Spot market Auction and RFQ Exchange Meta-marketplaces Application Service Providers (ASPs)

Purchasing Consolidation market

Infomediaries
ITS, UC Irvine

ITS, UC Irvine

ITS, UC Irvine

Niche Markets Online Service Providers

Spot market Auction and RFQ Exchange Meta-marketplaces Application Service Providers (ASPs)

Purchasing Consolidation market

Infomediaries
ITS, UC Irvine

ITS, UC Irvine

ITS, UC Irvine

ITS, UC Irvine

Niche Markets Online Service Providers

Spot market Auction and RFQ Exchange Meta-marketplaces Application Service Providers (ASPs)

Purchasing Consolidation market

Infomediaries
ITS, UC Irvine

ITS, UC Irvine

Niche Markets Online Service Providers

Spot market Auction and RFQ Exchange Meta-marketplaces Application Service Providers (ASPs)

Purchasing Consolidation market

Infomediaries
ITS, UC Irvine

ITS, UC Irvine

ITS, UC Irvine

Niche Markets Online Service Providers

Spot market Auction and RFQ Exchange Application Service Providers (ASPs) Purchasing Consolidation market

Infomediaries

ITS, UC Irvine

ITS, UC Irvine

Niche Markets Online Service Providers

Spot market Auction and RFQ Exchange Application Service Providers (ASPs) Co-ops

Infomediaries

ITS, UC Irvine

ITS, UC Irvine

Section I Section II Section III Section IV Section V

Traditional Freight Transportation Intermediary Current State and Evolution of the Industry Niche Markets -- Online Logistics Providers Research Needs / Opportunities Predictions / Conclusions

ITS, UC Irvine

Recent Research

General market examination

o o

Lieb and Randal (1999) Lieb and Peluso (2000a, 2000b)

Contracts and relationships

o o

Leahy, Murphy & Poist (1995) Sankaran & Charman (2000)

Decision-making processes
o o

Menon, McGinnis & Ackerman (1998) Lim (2000)

ITS, UC Irvine

Behavioral Models

Carrier and Shipper behavior models

o o o

Carrier selection Contract design Contract negotiation

3PL providers behavior

o o o o

Service offerings Carrier selection Contract design Contract negotiation

ITS, UC Irvine

Online Freight Marketplaces

Integrated and Time Sensitive Optimization Problems

o o o o o o

Dynamic and stochastic routing and scheduling systems Dynamic inventory management systems Combined inventory-routing models Real-time bidding and freight matching algorithms Optimal pricing strategies for intermediaries and carriers Optimal bidding strategies for shippers

Simulation-based analysis of costs and benefits to shippers, carriers and 3PLs under competing business models
o

Is it a zero sum game? Who wins? Who loses? How much?

ITS, UC Irvine

Section I Section II Section III Section IV Section V

Traditional Freight Transportation Intermediary Evolution and Current State of the Industry Niche Markets -- Online Logistics Providers Research Needs / Opportunities Predictions / Conclusions

ITS, UC Irvine

Predictions and Conclusions

The total market for freight transportation intermediaries is still growing with the boom of e-commerce; The conventional 3PLs will not fade, but will face with the competition from the online logistics providers; The companies have to combine the logistics expertise with advanced technology to evolve; Strategic alliance and merge/acquisition will be important to obtain comprehensive and intergrated supply chain solution capability; Small carriers and niche carriers will benefit from increased access to shippers and reduced search costs Medium sized and Large carriers may resist and try to continue business as usual or simply become e-commerce enabled using current business models The 120+ on-line freight marketplaces will be reduced to less than 10 leaders and a few successful niche players in near future.
ITS, UC Irvine

Predictions and Conclusions

The freight transportation industry has historically been slow to change Personal relationships will continue to be important despite a growing acceptance of web based interactions The potential benefits of IT are huge Major industry changes will come the question is how soon

ITS, UC Irvine

End

ITS, UC Irvine