Third-party Logistics

4/12/2003 Richard Zhu/ECT 7030 1

 Services Offered by Third-party Providers
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

2
 Contract Warehousing

Incoming Bulk Distribution Customers

Products Warehouse Center 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

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 Supplier Hub / Regional Fulfillment
Center / Regional Distribution Center

Incoming
Materials Bonded Mfg site/
Or Warehouse Point of Use
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

4/12/2003 Richard Zhu/ECT 7030 4

 Shipment Consolidation and
Transportation

Customs
Incoming Point of Sale/
Materials Consol. De-con
Point of Use/
Or Center Center
Customers
Products
Outsourced

Activities:
Benefits:
Transport arrangement
Shorter cycle time
Customs clearance
Lower freight costs
Freight consolidation
Visibility of pipeline inventory
Shipment visibility
Inventory consolidation
Carrier mgmt / rate mgmt
Merge in transit

4/12/2003 Richard Zhu/ECT 7030 5

 Product Returns / Technical Services

Repair centers
Customers

Product
Return
Center OEM Warranty
Fulfillment
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

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 Critical Parts / Service Parts Logistics

Tier 1
Repair centers
Customers

Tier 2 Tier 2 Tier 2

Tier 3 OEM Warranty

Fulfillment
Outsourced

Activities: Benefits:
Failed parts replacement Centralization of inventory
Warranty program mgmt Lower transportation cost
Inventory ownership Improved visibility of inventory
Warehousing Lower capital investment
Depot repair mgmt Better after-sales service support
Visibility and Track&Trace

4/12/2003 Richard Zhu/ECT 7030 7

 Logistics Financial Services

Customers /
Supplier Manufacturers Distributors Retailers

Activities: Benefits:
Inventory finance (factoring, Reduced cost of capital
LOC) Improved cash flow
Distribution finance (asset based Reduced capital investment
lending, receivable finance)
Payment solutions (COD)
Leasing

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 Total Logistics Management

Incoming Bulk Distribution Customers

Products Warehouse Center Retailers

Outsourced

Activities: Benefits:
Logistics planning Reduced total logistics costs
Network optimization Global visibility
3rd vendor mgmt Single logistics solution and contact
Information technology Focus to the core
Supply chain visibility Reduced investment in logistics

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 Benefits of out-sourcing the logistics function
improve company focus
focus on core functions and core competencies
cash infusion
selling assets to 3PL provider
access to world-class capabilities and new technology
free-up resources
no capital investments in logistics
resource not available internally
accelerated reengineering benefits
reduce and control operating costs
eliminate labor problems
pushes risk to 3PL provider
risk pooling
cost of investment in technology by 3PL provider shared among
clients
achieves economies of scale and provides better service
10
Risks of Out-sourcing Logistics
Co-ordination costs
Loss of internal logistics management capabilities
Biased choice of service providers
Leakage of sensitive data and information
Service degradation
Less reliable? Longer order cycle time?
Emergency response?
Loss of control and representation
Reduced contact with final customer
3PL for outbound logistics interact with your customers, you
become less visible to your customers

11
 Why
Why3PL
3PLcan
canachieve
achieveeconomy
economyofofscale
scale&&provide
providebetter
betterservice?
service?
Consolidation is the key!
Example: 2 independent firms, 2 independent supply chains

Consider 2 scenarios
Scenario 1: The firms performs their own logistics functions

Firm 1 2 warehouses
2 separate distribution networks
Firm 2

Scenario 2: A 3PL takes care of both firms logistics functions

Firm 1 1 warehouse
1 distribution network
Firm 2 3PL
Zhi-Long Chen 12
 Value Propositions of 3PL
Service, Retention &
Revenue
market share
Profit Cost of Goods Sold
Technology & Productivity
Cost Transportation/Warehousing/
Shareholder Materials Handling/Distribution
Value Working Lower Raws & Finished
Capital Goods Inventory
Invested Shorter Order to Cash
cycles
Capital
Fewer physical assets
Fixed
Warehouse, trucks,
Capital Transportation

4/12/2003 Richard Zhu/ECT 7030 13

3PL Business Models
Transactional model
Carriers per shipment, per container unit, per weight /
volume unit
Freight forwarders per shipment, per weight / volume
unit
Public warehouse operators per weight / space area unit
Contract logistics model
Activity-based costing, i.e., Fixed
management fee + variable charges based on
volume
Or, cost plus
Or, gain sharing model
Total logistics management
Fixed management fee + variable charges based on
volume
Or, cost plus
Or, gain sharing model
 CEO Perspectives on 3PL Industry
Industrys most significant revenue generators (ranked in
order)
Transportation management/services
Warehousing management/operations
Value added services
Dedicated contract carriage
Fleet management/operations
Logistics information services
Top 3 most important opportunities in the industry
Further integration of supply chain activities
Transportation management
Further information systems development
Source: Transport Logistics, Vol. 1, No. 1, pp51-66 (1996)

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Challenges of 3PL
Setting up internal benchmarks and performance
measures before finding a 3PL partner
Development of appropriate and sustainable pricing
systems
Developing an interactive and collaborative partner
relationship
IBM: no more outsourcing, but optimized sourcing

Finding qualified people

Development of systems which are flexible, adoptable
and user-friendly
Development of a global logistics infrastructure
 Ten building blocks for a successful 3PL relationship
1. Carefully develop internal costs
2. Develop key performance indicators
3. Seek broad company inputs at the Request for Proposal (RFP)
stage
4. Solicit multiple RFPs
5. Only select the services you really need
6. Make sure that you understand the technology issues before
you sign a contract
7. Prepare to change your assumptions after the start-up
8. Avoid cost-plus contracts
9. Find out if the cultures are similar
10. Dont give up complete control of your supply chain

Source: Survey of Fortune 500 manufacturers by Accenture and Northeastern University.

17
 European Logistics Market
Market Estimated % of Estimated
Definition Market Size European Annual
GDP 1999 Growth
Transportation Euro 315 4.2% 15-25% for
Warehousing billion the next 3
years
Loading/unloadi
ng
(all above) Euro 450 6% 15-25% for
Order processing billion the next 3
years
Log admin
Inventory cost
Source: Deutsche Bank
4/12/2003 Richard Zhu/ECT 7030 18
 Global Logistics Expenditures
Total Logistics Expenditures ($ Billions)
Region 1992 1996 1999
North America (inc. Canada) 837 941 1,062
Europe 876 941 1040
Pacific Rim 516 652 674
Others 662 916 930
Total $2,891 $3,450 $3,706
Source: Bowersox and Calantone, CSFB Estimates.
11.4% of Global GDP

Size of 3PL Industry

In 1999, around $40-45 Billion 5% of the total logistics expenditures
In US, the growth rate for 3PL market is estimated around 15% annually

4/12/2003 Richard Zhu/ECT 7030 19

From Modern Material Handling, Nov. 2003
 Major 3PLs
Company Revenues
($ million)

Ryder Integrated Logistics $1,300

Penske Logistics 959
Schneider 875
Tibbet & Britten Group 659
Americold 650
North American Logistics 650
Fritz Companies 578
UPS Logistics 488
APL Logistics 420
Federal Express 360
Source: Logistics Magazine (07/00) 21
 Major 3PL Operators in USA
Airborne Maersk Logistics
Americold Menlo Logistics
APL Logistics North American
Arnold Penske Logistics
BAX global Power
Burnham Services Corp. Roadway Logistics Systems
Caterpillar Logistics Services C.H. Robinson Company
Circle International Ryder Dedicated Logistics
Cardinal Schneider Logistics
DSC Logistics Standard
Eagle Global Logistics T& B
EXEL Logistics, Inc. TLC
Expeditors TNT Contract Logistics, Inc.
Federal Express Logistics Services UPS Logistics
J.B. Hunt Logistics, Inc. USF Logistics
HUB Group Logistics Services USCO Distribution Services
Leaseway Logistics Services, Inc. Yellow Logistics Services, Inc.

Source: CSFB Industry Report, Sept. 2000

4/12/2003 Richard Zhu/ECT 7030 22
 How many companies use 3PL?

93 companies
Covering
automotive,
chemical,
computer,
consumer products,
& electronics
52% with sales
revenues over $1B,
10% between
$500M to $1B
From 3PL Study: Results and Findings of 2001 Annual Study
by Cap Gemini Ernst & Young
Zhi-Long Chen 23
 What 3PL functions do companies use?

From 3PL Study: Results and Findings of 2001 Annual Study

Zhi-Long Chen by Cap Gemini Ernst & Young
24
 Benefits of 3PL

From 3PL Study: Results and Findings of 2001 Annual Study

Zhi-Long Chen by Cap Gemini Ernst & Young
25
Ten Top reasons Companies Outsource
1. Improve company focus 55%
2. Reduce and control operating costs 54%
3. Free resources for other purposes 38%
4. Gain access to world-class capabilities 36%
5. Resources not available internally 25%
6. Accelerate engineering benefits 20%
7. Reduce time to market 18%
8. Share risks 12%
9. Take advantage of offshore capabilities 12%
10. Function difficult to manage or out of control 10%
Source: Fifth Annual Outsourcing Index Deloitte Consulting, January 2003
26
 Leading Global Air Freight Forwarders
1998
Company Estimated Global Market Share
Danzas Intercontinental AEI 6.9
Panalpina 4.2
Schenker (a Stinnes company) 4.0
BAX Global 4.0
MSAS 4.0
Kuehne & Nagel 2.9
Fritz Companies 2.1
Expeditors 2.1
Others 69.8

Source: Stinnes, MergeGlobal, IATA figures and Deutsche Bank

4/12/2003 Richard Zhu/ECT 7030 27

 Leading Global Sea Freight Forwarders
1998
Company Estimated Global Market Share
Kuehne & Nagel 6.3
Schenker (a Stinnes company) 5.0
Danzas Intercontinental AEI 4.6
Panalpina 3.5
Fritz Companies 3.1
MSAS 2.5
BAX Global 1.0
Expeditors 1.0
Others 73.0

Source: Stinnes and Drewry

4/12/2003 Richard Zhu/ECT 7030 28

 Growth of 3PL Industry
In US, the growth rate for 3PL market is estimated around 15-
20% annually.
In Asia and the rest of the world, the growth rate is estimated
to be even higher in the range of 20-30% annually.
China:
2001 Transport and logistics expenditure is US$230 billion
(20 % of GDP), with only $4.7 billion on outsourcing.
Key factors for stimulating growth:
Increased operations of multi-national firms in China
Cost pressures
Government support in establishing national logistics centres
Reduced regulations; Chinas entry to WTO

29
 Mercers 3PL Survey in China (2002)
20 logistics providers and 50 shippers in 8 sectors
85% of providers revenue comes from basic services such as
transportation, management and warehousing
Nearly 70% of providers believe clients are not ready for
outsourcing, while almost half of the shippers surveyed cite
obstacles for outsourcing, especially 3PL service quality
The market is very fragmented: No 3PL provider interviewed
has a market share over 2%. About 80% of providers revenues
come from the Yangtse River and Pearl River Delta regions
MNC shippers prefer MNC providers for their IT systems,
industry/operational expertise, and standardized operations
Chinese shippers prefer Chinese providers for their lower
prices, local knowledge and national network coverage

30
 Hong Kong Logistics Industry and Major
Local Players
Container throughput in 2001: 17.9 million TEUs
Air cargo throughput in 2001: 2.1 million tonnes

Major Local 3PL Players Some Major Chinese 3PL

OOCL and Cargo Systems Players
Kerry Logistics COSCO
Jardine Logistics China Shipping
IDS Logistics SinoTrans
Seapower Resources Intl EAS
SUN Logistics China Merchant
LINE
Power Logistics
TradePort

4/12/2003 Richard Zhu/ECT 7030 35

 Course Review Topics Covered

06/05/17 36
 Topics Covered
Introduction to logistics management
what is logistics management
importance of logistics management
Supply Chain Structures
Modularization, postponement
Strategic orientation: market, product or process focussed
Site competence vs. process technology complexity
Transportation strategy
Transport modes and cost components
Tradeoffs in transportation design
Transportation costs vs. inventory
Transportation costs vs. responsiveness and service
Transportation Network Design
Pros and Cons of Direct Ship, centralized DC, etc.

37
 Vehicle routing and scheduling
Shortest path
Dijkstras algorithm
Travelling salesman problem
Heuristics
Vehicle routing
Clarke-Wright savings methods
Gillette & Millers Sweep Method
Generalized Assignment Model for Vehicle Routing
Set Partitioning Model for Vehicle Routing
Optimization-based heuristics techniques

Full truckload vs. LTL

38
 Location strategy
factors to consider
quantitative models for analysis
Center of Gravity Method
Heuristics
p-median problem, p-center problem
network optimization models
Location-allocation models
supply chain network design: selective evaluation heuristic, guided linear
programming, multi-echelon multi-product networks
Covering models
other approaches
Regression analysis
Factor rating system, Delphi method
AHP
dynamic location models

39
 Process Choice and Facility layout strategy
Process flow analysis
Critical Path method
Process types: project, job, batch, line
Layout planning
Product vs. process layout
Assembly line balancing
CRAFT (Computerised Relative Allocation of Facilities
Technique)
Systematic Layout Planning
Matching products and processes
Storage and Material Handling
Order picking
Warehouse layout and stock location
Cross docking

40
 Global logistics
Drivers and challenges
How leading edge companies manage logistics
New organizational paradigm for the supply chain of the future
E-logistics
Internet impact on logistics
E-logistics services; market opportunities
Achieving Strategic Fit
Competitive dimensions: cost, quality, speed, flexibility
Order qualifiers and order winners
Efficient vs. responsive supply chains
Benchmarking the supply chain
Supply chain mapping and throughput efficiency
Supplier and distributor benchmarking
Supply Chain Operations Reference Model (SCOR)

41
 E-fulfilment
Online retailing
Bricks-&-mortar stores vs. e-tailers
Acceptance Sampling (not covered in the final)
E-procurement
On-line auctions and exchanges
Quick response logistics
Apparel industry and Quick Response
Grocery industry and Efficient Consumer Response
Automotive industry and Lean Manufacturing
Reverse logistics
3rd party logistics
Services offered
Benefits and risks, Growth and challenges
3PLs in China
42