Seton Hall University EMBA Shanghai Cohort 2011 / 2013

MASTER OF BUSINESS ADMINISTRATION

WHAT FACTORS AFFECTING THE 3rd PARTY LOGISTICTS DISTRIBUTION IN CHINA?

Student: xxx Director: xxx

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ACKNOWLEDGEMENT
I would like to acknowledge the following people for their kindness and support in making this dissertation possible: Firstly, I would like to take the chance to thank my mentors at I.F.C.M for everything that I have learned from them about enterprises business management. Recognizing the concept of Teaching a man to fish instead of giving him a fish, they sponsored this MBA project, providing lots of benefits to more management people in different companies or even managerial major students in the universities. Also, I would like to express my sincere gratitude to Dr. Zhu Mingxia, the thesis advisor and dissertation director, for her support, patience, and encouragement. Her technical and editorial advice was essential to the completion of this dissertation and has taught me innumerable lessons and insights on the workings of academic research in general. Last, but not least, I would like to thank my husband Jeffrey Zhao for his understanding and love during the past few months. His support and encouragement was in the end what made this dissertation possible. And my parents receive my deepest gratitude and love for their dedication and the many years of support during my graduate studies that provided the foundation for this work.

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TABLE OF CONTENTS
1 PREFACE7 2 SIGNIFICANCE AND BENEFITS OF 3PL DISTRIBUTION IN CHINA9 2.1 Logistics Distribution Enterprises Core Competitive Capability..9 2.2 Beginning, Development and Significance of 3PL..11 2.2.1 Current Situation of 3PL in Developed Countries.12 2.2.2 Emerging of 3PL in China.12 2.3 SWOT Analysis of China 3PLs Market...13 2.4 Benefits of 3PL Distribution to Customers...17 3 CURRENT SITUATION AND PROBLEMS IN CHINAS 3PL DISTRIBUTION AND DISTRIBUTION CENTER19 3.1 Types of Enterprises Distribution in China..19 3.2 Prospects and Future of Chinas 3PL Distribution20 3.3 Major Problems Affecting 3PL Distribution Development in China21 3.4 Existing Problems in Chinas 3PL Distribution Center.25 3.4.1 Characteristics of 3PL Distribution Center25 3.4.2 Restraints impacting 3PL Distribution Center Fast Development26 4 RESEARCH OBJECTIVES & METHOD27 4.1 Research Objective27 4.2 Design and Return of Questionnaires27 4.3 Descriptive Statistics Analysis on Research Result...28 4.4 Services Provided by 3PLs in the Research..31 4.5 Aspects to be Improved.33 5 HOW TO DEVELOP CHINAS 3PL DISTRIBUTION AND OPTIMIZE THE OPERATION OF DISTRIBUTION CENTER..35 5.1 Trends of 3PL Distribution..35 5.2 Trends of 3PL Distribution Center..35 5.3 Suggestions and Assumptions of China 3PL Distribution Development and Distribution Center Operation optimization..37 5.3.1 Excellent Customer Service Function..38 5.3.2 Optimized Distribution Network..40 5.3.3 High Information Technology..41 5.3.4 Distribution Costs Reduction...42 5.3.5 Establishment of Excellent Management Team...43 5.3.6 Continuous Distribution Process Monitoring...43 6 FINDINGS...44
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7 8 9 10

CONCLUSION45 TABLE OF ACRONYMS AND ABBREVIATIONS.46 REFERENCE..47 APPENDIX I.49 Social Logistics Expenditure Table49 APPENDIX II.51 3PL Activities in Each Functions...51 APPENDIX III52 3PL Demand Analysis52 APPENDIX IV...53 Drivers for 3PL Logistics Outsourcing..53

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12

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EXECUTIVE SUMMARY

Logistics and Third Party Logistics (3PL) have been the hot topics of economic study in China since late 1990s. Hundreds of researches on 3PL have been published. However, it is pity that some researches only refer to the introduction of 3PL concepts that could not provide valuable insights on the specific area in 3PL industry.

In fact, as 3PL providers and users improve the quality of their business relationships, both parties should think of 3PL providers in three related contexts: as a key resource directly to 3PL user organizations, as a key link between supply chain organizations, and as a key to supply chain integration.

This dissertation focuses on the factors that affect 3PL distribution in China. It gives a comprehensive overview of current situation and an outlook for the 3PL development in China, presents the dynamics and forecasts on 3PL distribution in China. Based on theories, the author concludes that this study should focus on problems existing in 3PL distribution and how to optimize the operation of 3PL Distribution Center (DC) in China.

A survey is conducted to get the first-hand information. And a lot of managerial insights and implications have been generated for local logistics managers. It aims to help logistics people to solve the problems in China 3PL distribution industry and seeks for the best optimized method to operate on the stage of embryonic development of current 3PL distribution service market.

< Key Words: Third Party Logistics (3PL), 3PL Distribution, Distribution Center (DC), Factors >
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PREFACE

With peoples increasing needs of goods production, circulation and consumption. the word of Logistics has drawn more and more attention of many people from different industries. Nowadays, Chinese people pay more attention to the new concepts, such as Logistics Company, Logistics Center(LC), Third Party Logistics (3PL) and so on. And people gradually realize that logistics plays an important role in enterprises core competencies forces. Although the product quality, price and supply are the three main criterions of enterprises performance in market, and each of them plays an important role in enterprises competences, actually these three factors are directly affected by logistics operation. The inevitable trend of logistics industry is the emergency of logistics providers who are closely connected with the production and sales processes of user enterprises. With the changing of modern business modes and external market environment, 3PL appears and arouses the interests of people from all walks of life. 3PL comes from the concept of out-sourcing in managerial study, which involves the use of external companies to perform logistics functions that have traditional been performed within an organization. The functions performed by the third party can encompass the entire logistics process or selected activities within that process. 3PL services are multiple distribution activities provided by an external party, assuming no ownership of inventory, to accomplish related functions that are not desired to be rendered and/or managed by the purchasing organization.1 Enterprise concentrates on its core business and out-sources logistics function to professional logistics company in the form of contract. At the same time, enterprise closely keeps in touch with the logistics company via information system to manage and monitor its logistics operation. Therefore, 3PL is also called Contract Logistics. 3PL providers were formerly in transportation, warehousing, Information System (IT) and other related industries. They communicate with external customers, provide and monitor logistics services. It is only the third party, but as a key to supply chain integration, serves with the whole set of logistics activities. The service function of 3PL has been transformed from the only one simple function, such as warehousing, transportation or IT, to comprehensive logistics services, including coordination and management of logistics activities, design and optimization of logistics solutions, as well as searching and management of logistics information.
(1 Skjoett-Larsen, T., Third party logistics-from an inter organizational point of view)

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Karl Marx says the ultimate objective of capitalists is to get maximal profits2. It is the same principle that is applicable in all kinds of industries. In order to get maximal profits, each company has its own way. Some decrease purchasing costs, some reduce production cost, and some cut down management expenses. In order to increase user enterprise profits and enhance its own competitive capability, 3PL provider must strictly control distribution process, which is the key process of logistics operation, through which not only costs can be reduced, but profits can be created. Hence, distribution is the key profit source in logistics operation.

(2 Liu Fagong, Managerial Economics, 1998)

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2 SIGNIFICANCE AND BENEFITS OF 3PL DISTRIBUTION IN CHINA

2.1 Logistics capability
The important basis of enterprise development is logistics distribution. And the efficiency of logistics distribution determines the efficiency of goods circulation. Thus, logistics distribution has played an important role in enterprises core competitive capability. Normally, the prices of industrial finished goods are determined by logistics expenses that accounts for 10% to 60% of whole price of the goods. If logistics expenses decreases by 20%, the whole expenses will be reduces by 2% to 12%. Under the circumstances, these potential savings will take decisive role in company competitive capability in the market. Dick Hunter, Vice president of Dell said when he talked about Dells successful experience, Because 74% of whole expenditures are spent on the spare parts purchasing, 0.1% reduction of logistics expenses is equal to 10% increase of production efficiency. It is obvious that logistics distribution has great influence on enterprises business.3

Distribution

Enterprises

Core

Competitive

The following detailed overview of the competitive scenario highlights the key opportunities that 3PL service providers can exploit: For example, company ABC produces 60,000 pairs of leather shoes every year. The author assumes its annual demand of raw materials leather is 120 tons, meaning monthly 10 tons leather consumption. In addition, assume the price of raw material leather is RMB10,000 per ton and the bank loan rate is 8% per year. Company ABC will have several choices when it considers the purchasing scenarios. Scenario 1, company ABC asks a loan of RMB1,200,000 from bank at the beginning of year to buy all the raw material leather needed for the whole year, stores them in warehouse and arranges storekeepers to keep them to satisfy its production consumption little by little.
(3 Wang Shuyun, Cost Changes and Distribution)

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Scenario 2, company ABC only asks a loan of RMB100,000 from bank at the beginning of year to buy 10 tons of raw material leather which is only needed for one month production. Then the sales earning of the first month of leather shoes can be used to buy the raw material leather in the second month. At the same time, 3PL company assists company ABC to transport 450KG leather to the factory every day and distribute its finished leather shoes to its dealers every Friday and Saturday. In this scenario, company ABC adopts the way of goods delivery to break up the whole into the parts. In scenario 1, company ABC has to establish its own warehouse because of big amount of raw materials purchased at the beginning of the year and leather shoes produced in workshop little by little. This is the manufacturing business model. In this way, company ABC must invest lots of fixed assets that cost a lot. However, if company ABC adopts the second scenario, professional 3PL company helps to directly transport the raw material leather to the workshop in small batches and distribute finished shoes to dealers at fixed time. No investments are needed for inventory management and other processes, which cuts down the company ABCs expenditures and saves its energy. That is the charm of 3PL distribution. Similarly, considering the bank loan company ABC has to pay, the interest of scenario 2 is only RMB 8,000, but that of scenario 1 is RMB 96,000. It is obvious that scenario 2 is also much better than scenario 1 in this respect. Professional 3PL company adopts optimized logistics solution to deliver goods twice per day. It delivers 225 tons of raw material leather to the workshop at 7am in the morning, and takes away the finished shoes produced in the previous day to transport them to the dealers at noon. Analyzing from the above example, business model and production essentials allocation of company ABC have changed because of logistics outsourcing to the 3PL company. Now company ABC has no storks, fixed assets, bank loans and inventory management. Instead, the efficiency is increased a lot. That is capital optimization. Considering from the aspect of professional 3PL company, if it provides service to many customers instead of one customer, it helps customers decrease costs, at the same time, it helps heavily reduces 3PLs own costs. Moreover, considering from the aspect of regional business development, economic resources allocation is more reasonable, and business operation is more efficient. 3PL has gained prominence as it offers a total gamut of solutions at a single
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stop that can help user companies reduce their overall costs. Evidently, logistics ability has become the key part of enterprises competitive capability. And people begin to realize that sometimes it can be constituted by the professional 3PL company, not enterprise itself necessarily.

2.2

Beginning, Development and Significance of 3PL

Figure 1: Reason of 3PLs Emerging

Increase Efficiency

World Economic Integration

3PL appears in the market because of the result of social work specialization and division. Influenced by new managerial theories, enterprise invests most of their capital, human resources, material resources into its core business to enhance its market competence and to seek for earning maximum return on investments. Social work specialization leads to some none-core business functions separation from business activities, which includes logistics function. With the increasing number of world-renowned 3PL participants in the world, companies are more forthcoming about handing over their logistics requirements to these 3PL service providers. This move allows the manufacturing companies to concentrate solely on their core competencies, eventually bringing down their operational costs, reducing lead time for raw materials and finished products, and vastly improving their process efficiency,2 says the analyst of research service of 3PL markets in U.S. Further, outsourcing to 3PL companies saves a great deal of time, and expenses otherwise incurred in maintenance and training the personnel.4

(4 Sink, H. L., Langley, C. J., & Gibson, B. J., Buyer observations of the US third-party logistics market)
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Specification

Enterprise Strengthen Core Competence 3PL

Logistics Out-sourcing

Economic Development

2.2.1

Current Situation of 3PL in Developed Countries

3PL market in Europe is in the mature period, and it accounts for 76% of total logistics services, which is more mature than that of 58% in America. And it is continually increasing. According to the statistics, the turnover of American 3PL market is 35 billion US dollars in 1992, which accounts for 2% to 3% of total logistics market turnover. It mounts up to 50 billion US dollars in 2000, which accounts 5% to 6% of total logistics market turnover.5 In Japan, some large-scaled retailers have their own distribution centers. Besides, around 1.6 millions of medium and small-sized enterprises rely on the social distribution centers,6 such as Mitsubishi logistics Center. 3PL in Japan mainly serves medium and small-sized enterprises. Advanced information technology in 3PL industry lays a good foundation on fast development in Japan.

2.2.2

Emerging of 3PL in China

3PL in China begins at the recent years, although it popularizes in the world since 1980s. Its unique advantage attracts more attention from lots of enterprises. With Chinas optimized economic systems and intense market competition, price wars among enterprises become more fiercely. In order to maintain high profits, the problem of costs reduction has urgently to be settled. 3PL, providing the whole set of logistics activities and solutions to bring down warehousing and transportation costs, becomes goods Third Profit Source. 7 Chinas 3PL is underway, but it has unbelievably fast development and huge market potential. According to the statistics, annual expenditure of related logistics in China is RMB 1,900 billion and the costs of logistics accounts for 20% of GDP. China market scale in 2001 is RMB 40 billion, and the business of 70% logistics providers increased by 30% in the past 3 years. Evenly, the annual increase rate of China logistics market from 2000 to 2005 reached by 25%.8 Chinese enterprises have great demands on the new-fashioned logistics services, which leads to the source of rich profits and the bright prospects of logistics industry.

(5Communications Information Industry Journal, 2001-5) (6Jiang Chaoqun, Modern Logistics Operation Management) (7Wang Shen, Wang Xiaoli, The Analysis of the Third Profit Source Appearing in Enterprises) (8 Report of China Logistics Development 2005, National Development and Reform Committee)

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2.3

SWOT Analysis of China 3PLs Market

The method of SWOT analysis is extensively applied into many economic researches. SWOT refers to Strength, Weakness, Opportunity and Threaten, which means the analysis of the Strengths and Weakness of an organization and the Opportunities and Threats facing it.9

Strength of China 3PLs Market: Some large-scaled 3PL providers appeared in China 3PL market during these years, such as Sino-trans, Zhong Hai Logistics and so on. Compared with foreign 3PL companies, those local providers are acquainted with Chinese logistics market, have national network, lower operation costs and good relationship with local governments, which are incomparable advantages than foreign companies.

The table 1 shows the types of 3PL providers in China and their own advantages and characteristics.10 Indeed, these advantages only can be taken effective within some time, China 3PL enterprises must enhance their management, services and information level, as well as educate talents if they wish to enter into the international market successfully.

Weakness of China 3PLs Market: Simplex service At present, most of China 3PL companies only can provide simplex service, such as transportation, warehousing and inter-city distribution, but there is little packaging, distribution processing services provided, which leads to the incomplete form of supply chain. Strictly speaking, those companies could not be put into the category of 3PL.

(9 J.H. Adam, Longman English-Chinese Dictionary of Business English) (10 Wang Zhitai, Modern Logistics Management)

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Table 1

Types of 3PL providers in China Transformed from traditional transportation and warehousing enterprises 1. In possession of national network, transportation and warehousing assets Transformed from the monopolized group which was directly governed by state in the past 1. Extensive range 1. Flexible of transportation and warehousing network 2. Past Logistics market, operation 2Deep-rooted basis of customer relationship network, equipment and enterprise scale 2. Provide feasible logistics solutions for special industries systems and low manageme nt costs Private logistics companies

Transformed from Types state-owned large or medium-sized enterprises 1. Ready-made logistics basic infrastructure and equipments Advantages 2. Wide area of warehouse 3. Existed management system 4. Familiar with local market

Zhong Hai Logistics Sino-trans; Company, etc. Example Cosco (China Ocean Shipping Group Company); CMST (China National Materials Storage and Transportation Corporation), etc. Fast development Characteristics Strong core competition capability

China Railway United Logistics; China Post, etc.

P.G.LOGISTIC S GROUP; Datong International Group, etc.

Have the fastest development and the brightest prospect in China logistics industry
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 Low information technology level Low information technology level of current Chinese 3PL market represents in the following aspects: low mechanization, lacking of advanced logistics equipments, not fully making use of some scientific measures, such as Global Position System (GPS), Electronic Data Interchange (EDI), Warehousing Management System (WMS), Electronic Order System (EOS), etc. Customer could not get timely and accurate goods tracking information, and their needs for service diversity have not been satisfied. All these bring about the difficulty in forming mutual trust and establishing long-term partnership between user companies and 3PL providers, which heavily restricts 3PL fast development in China. Be Short of talents who have advanced logistics and management knowledge Although some experts have carried out many researches on 3PL, and some related courses and majors have been opened in University, advanced general logistics knowledge is not popularized in China. Many people only know logistics can provide transportation and warehousing service, but do not know advanced logistics knowledge should be the new integration of those traditional businesses. In addition, some logistics companies do not pay enough attention on talents, and they lack professional logistics management talents.

Opportunity of China 3PLs Market: Great market potential From the angle of market demands, China is one of the most economic energetic countries and the biggest consumption market in the world. Many multinational companies are transferring more business to China and decrease supply chain costs via outsourcing logistics operation. For example, IBM, Lenovo, Sumsung have entered into China 3PL market in some core cities, e.g. Beijing, Shanghai, Tianjin, Guangzhou, Shenzhen, Shenyang and so on. Besides, 2008 Olympic Game will be held in Beijing, and the estimated logistics demands will reach RMB40 billion.11 Undoubtedly, it will bring about many opportunities and huge profits.

Governments high recognition

(11 Beijing Investment Guide (2005-2006))

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The article Ideas on speeding up China advanced logistics development12 was published in March, 2001 by Economic & Trade Commission and Ministry of Railways of the Peoples Republic of China. And in Catalogue of industries, products and technology which are encouraged to develop in China13 issued by State Planning Commission of the Peoples Republic of China and Economic & Trade Committee, the development of logistics distribution center has been listed as an urgent key task to fulfill. Till now, logistics development planning has been constituted in over 20 provinces and 30 cities in China. Governments high recognition on logistics creates favorable macro-environment for China 3PL development. Opportunity after WTO After entry into WTO, Chinese local market is opening step by step. Under increasing pressure of calling for cost reduction and core competence increase, Chinese enterprises will increase their demands for logistics out-sourcing. At the same time, emerging of foreign logistics companies will inspire local logistics companies to learn advanced managerial knowledge and seek for new room of development.

Threaten of China 3PLs market: Challenges from foreign logistics companies After China enters into WTO, not only some famous foreign logistics companies go into Chinese logistics market rapidly, but more unknown foreign logistics companies have plans to occupy Chinese logistics market. Chinese local 3PL companies are facing huge challenges from foreign logistics companies. Emergence of the Fourth Party Logistics (4PL) Chinese people have vague ideas on the 3PL, however, the emergence of 4PL has been another focus in logistics industry. The emergence of 4PL certainly will have some impact on 3PL. The automotive and FMCG sectors seem to be the most proactive when it comes to trying out the 4PL engagement.14 Management people have to think about the problems whether to change existed business model or to create new systems, or to seek development between both of them.

(12Extract of ( Extract of
13

www.cq56w.com/Html/wlzs/20072/200723111936.html, 2001) www.gwytb.gov.cn/tzzn/zdglfz.html, 2000)

(14 Fang Guangluo, Third Party Logistics)

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2.4

Benefits of 3PL Distribution

Core Competencies Forces Focusing Optimized resources deployment urges enterprises to concentrate their limited human and financial resources on their core business. In this way, enterprises can develop basic technology and new products to compete with other competitors in the market. As a result, companies are actively involved in a 3PL engagement or are evaluating opinions with some lead logistics providers (LLPs) for certain business units. Expenditure Saving 3PL vendors aid in bringing down the customers expenditure levels. Professional 3PL providers use the advantages of economic-scale and low costs to increase utilization rate of all processes, and expenditures are deceased consequently. According to the result of truck-use survey15 in 3PL enterprises, fixed costs, which include the purchase of new trucks and packaging equipments, and the costs of delivering goods and labors, have been cut down due to more use of external transportation services instead of their own trucks. Inventory Decrease Enterprises can not burden the unlimited increasing on inventory of raw material and products, especially some high-value spare parts should be sent to assembling place on time to realize minimum or even zero inventory. 3PL providers use well-planned logistics solutions and delivery means to minimize the inventory, improve the cash flow status and realize cost advantage. Image Upgrading 3PL providers and customers are strategic friends, not competitors. 3PL providers are professional and considerate to customers. They use sufficient equipments and well-trained employees to control the whole supply chain to lessen the complexity of logistics. Lead-time is also heavily shortened via the transportation network and subcontracts in the world. Meantime, they help customers improve service and establish brands image. Customers can get to know the situation of products distribution from time to time via Internet. Some favorable conditions of competition for enterprises, such as low costs and high efficiency, which are created because of tailored logistics solutions design by 3PL providers.
(15 Hao Jumin, Transportation Management)

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 Business Efficiency Increase Out-sourced 3PL distribution service makes enterprise be dedicated in its familiar business and put limited resources allocation into core competence. As the professional in the logistics industry, 3PL distribution provider is of great benefits to customers logistics operation because of its rich knowledge and experience. 3PL provider can look at the whole logistics market in a higher and more extensive angle, instead of just from the angle of one enterprise. And their logistics system developing and design ability brings on completion of some difficulty logistics tasks, especially for some medium or small-sized enterprises hard to finish. Enterprises business efficiency is increased by 3PL distribution service.

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CURRENT SITUATION AND PROBLEMS IN CHINAS 3PL

DISTRIBUTION AND DISTRIBUTION CENTER

Economic globalization has great effect on the development of global logistics industry, which promotes the process of reasonable allocation and efficient usage of resources in the whole world. Business expansion of multinational companies urges the fast development of international logistics business and the room increasing of value-added service. Simultaneously, increased moving of resources and goods promotes the process of economic globalization due to the industrialization, socialization, information and network of logistics industry. Therefore, logistics modernization has the balancing function of promoting world economy development. China is in the process of adjusting economic structure and upgrading traditional industries. It is necessary to develop advanced logistics in China. In order to speed up advanced logistics development so as to realize the high efficiency, high value and low cost, people have turned attention to the development of 3PL distribution and distribution Center (DC).

3.1

Types of Enterprises Distribution in China

In current China, enterprise logistics distribution can be represented as the following three types and they have been coexisted for some time.16 Type 1: Enterprises own DC Many enterprises have their own DCs but the reasons are various. For example, most of chain store enterprises are established from the old vegetables or foods companies, and they have their own warehouses, equipments and people, which are the resources and basis of establishing modern DCs. However in the long run, those DCs information and mechanic level are comparatively low and distribution efficiency is also not high. Type 2: Suppliers acting as logistics agency Suppliers acting as logistics agency means direct goods distribution by suppliers. Headquarter assigns a uniform supplier and the supplier directly distribute the goods to dealers stores when goods are in needed. Chinese old economic system leads to the prevailing of this type of distribution for long time.
(16 Niu Yulong, China Logistics)

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Type 3: Enterprises Distribution Supported by 3PL Recently, owing to the fierce competition in international circulation industry, some large-scaled companies begin to out-source logistics distribution to social professional logistics companies, concentrating on their core business. And this trend is more and more obvious. For example, Metro consigns DHL to distribute its goods in China.17 These stores are mainly depending on 3PL logistics companies to doing distribution in the needs of competition. As A key client for 3PL, the retailing industry desires to incorporate supply chain management systems that look beyond the processes of procurement, storage, and distribution of goods. According to China Logistics Development Report, the products distributed by 3PL in China only accounts for 16% and industrial raw material accounts for 20%. From retailing industry, it can be found that some chain stores have carried out some helpful trials on 3PL distribution. For example, Beijing Commercial Group, which has over 300 convenient stores and supermarkets in Beijing, assigns Hutchison Tibbett & Britten Group to distribute its goods. Hutchison Tibbett & Britten Group is a professional 3PL company. Its area of DC reaches 10,000 square meters and annual distribution capability is 5,000,000 cases and one billion RMB, which can satisfy the requirements of 200 convenient stores distribution twice a day. The logistics expense accounts for around 2% sales revenue.18 It is the typically 3PL distribution in retailing industry of China. With the deepen of Chinese economic system, especially the dramatic competition in international and domestic market after entry into WTO, enterprises have higher demands on logistics services. 3PL companies face the austere challenge on how to comprehensively improve the quality of customer logistics operation management.

3.2

Prospects and Future of Chinas 3PL Distribution

China basically possesses the qualification of economic environment and market condition for logistics and distribution. In the long run, China logistics and distribution development will step into the new phase and have prosperous future. And in the short run, some constraints will stop its fast development, but still have many opportunities in the industry.
(17 Extract of DHL Solutions Internal Journal, 2005)

(18 Extract of Company Introduction, http://www.htblogistics.com/)

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Part of logistics activities assigned to professional 3PL is popular, but the business scope is narrow, and the relationship between 3PL providers and customers is short-term and seems not stable. Medium and short distance transportation is mainly responsible by some enterprises own logistics departments, which may reflect enterprises laggard logistics management level and low-quality logistics service ability in China logistics industry. Out-sourcing is the effective approach to realize logistics socialization and reasonableness. It is necessary for enterprises to take a trial on the range and means of assignment if enterprises would like to fully make use of business resources and satisfy the high degree of logistics system. Development of 3PL distribution undoubtedly is an important way of promoting the enterprises reasonableness and efficiency, so as to improve the whole society logistics reasonableness. 3PL distribution has the vast prospects, especially in nowadays information times. It will greatly boost the development of logistics industry when advanced information and network technology is put into the logistics management.

3.3 China

Major Problems affecting 3PL distribution development in

As a rising industry, advanced logistics industry has great market potential in China. It can be approved that domestic and foreign logistics companies are emerging in multitude into China, such as UPS, DHL and TNT. But our logistics people are worried about it, because they are clear to know that it is not ideal of enterprises logistics performance, market share and profits earning ability. Nearly all logistics enterprises, especially 3PL companies, are in the difficulty and eagerly to get out of the trouble.

Bottleneck and major problems Chinese enterprises lacking of right and sufficient understandings on logistics and distribution Although the researches on logistics and distribution have begun from 1980s, and academic and governments related departments have more understanding and cognition on them, in the whole society, enterprises in particular, have very vague understanding on logistics and distribution.

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Economic theory in Chinese enterprises for a long time has been attaching great importance on production process and taking lightly on circulation process since it is regarded as no value is produced in the circulation process, but produced in production process. Some enterprises ignore the importance of logistics distribution and finally lose the business in this respect. In addition, many enterprises, whichever are small or big, all have their own logistics departments, which leads to the low economic benefits. On the other hand, some enterprises do not pay enough attention to their own core business, but devote most of energies to the logistics and try to bring it into business scope. All these greatly affect the China 3PL distribution development and the overall social benefit optimization. In this point, enterprises in China should learn from foreign companies, outsourcing logistics operations to focus on core competencies.

Not enough to satisfy everyone Market demand is in a sorry plight. Considering the actual situation, business form of Chinas current 3PL is obviously different from that of Europes advanced 3PL. In Europe, 3PL indicates the third party that is independent from the supplier and demander. 3PL providers can organize and operate the logistics activities according to customers requirements. And the user enterprises may escape from the logistics binding, and concentrate on their core business. Thus, 3PL are welcome by enterprises. In Europe and America, 3PL has formed comparatively big scale. Experts believe that the quantity of 3PL providers in the market becomes the maturity remark of logistics market. Usually, logistics market is regarded as mature when the quantity of 3PL providers accounts for more than 50% of all logistics companies.19 According to the related statistics, the quantity of 3PL providers accounts for 57% in America, 35% in European Union and 80% in Japan respectively, but less than 20% in China.20 In our country, most of 3PL providers are agency of ministry of harbor or railway and have big limitation. Just like what Ding Keyi said, President of Shenzhen Merchants Logistics, in current China, most of great demands on 3PL come from foreign invested companies. Some high-tech, retailing and e-commerce businesses are accustomed to doing logistics by themselves, and unwilling or neglect the management model of supply chain. Even though some industrial business companies out-source their transportation and warehousing businesses, the relationship between companies and service providers is simple and unstable business relationship, absolutely not the close cooperation in the supply chain management.21
(19 Martin Christopher, Logistics for Reducing Cost and Improving Service) (20 Wu Caixia, Distribution Management )

(21 Extract of An interview to Ding Keyi, President of Shenzhen Merchants Logistics) Page 21 of 51

Logistics has been recognized as the third profit source.22 Enterprises have taken many measures to strengthen the logistics management to reach logistics reasonableness. However, due to the superficial recognition on 3PL and some unknown reasons, most of industrial companies are not willing to use 3PL. 3PL market demands are in a sorry plight.

Short of Logistics Talents Analyzed from the development of international logistics and distribution, logistics practitioner should have certain logistics knowledge and practical experience. Foreign logistics distribution education and training are very developed and reasonable education training systems have been well established. Logistics major and non-logistics major students also could get comprehensive logistics knowledge. Initiated by some logistics industry associations, vocational education on logistics distribution develops nationwide. It has to be paid special attention that vocational education is very important economic way of educating logistics distribution talents. After getting related certificates, practitioners can start logistics distribution work in many countries. Education on logistics distribution in China is far behind in developed countries. Logistics major is open in only 10 tertiary colleges, which accounts for only 1% of total quantity of Universities in China. Logistics education on graduate students just starts, but doctorate education has not start yet.23 Logistics vocational education is even rare in China. According to the information from the Beijing talent agency company which mainly works for foreign companies, the needs for logistics managers have been greatly increased during these years. It is hard to find the suitable logistics managers for those companies in Beijing. Therefore, education and training on logistics distribution should be strengthened in China. On one hand, logistics education should be put in a certain position in tertiary education. On the other hand, various ranges of logistics education and training should be encouraged. Government should strengthen the contact and cooperation between technology, education, management consulting and international logistics.

Business expansion constrained by limited self-capability

(22 Shi Jiannian, Logistics Distribution) (23Huo Hong, 3PL Operation Management)

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According to the international customs, 3PL companies can be divided into two parts. One part is comprehensive integrated logistics company, which refers to the companies with large scale, abundant capital, and excellent service. Another part is functional logistics company, which represents as the companies with single or several simple functions, such as the function of transportation, warehousing, and distribution processing, etc. Depending on their own advantages, 3PL providers are actively developing their business scope, But in current situation, service ability is insufficient in most of 3PL enterprises. Simplex service function, low operation efficiency and insufficient service network all restrict core competence that heavily affects local 3PL companies competition with foreign high-level comprehensive logistics companies.

System environment for logistics distribution development awaiting to be deeply reformed It is the prerequisite and heavy task for China to reform the economic system and environment. System environment for logistics distribution development, is also the system environment or market environment for enterprise to do business. Those systems mainly include financial system, talents system, social security system, and so on. The reform of the systems is far behind the business operation of enterprise and also cannot be accustomed to the demands of market economic system reform. Reallocation of logistics resources internally or externally is necessary to be involved when enterprise begins to improve its own logistics efficiency. Reallocation will be blocked if system reform is not improved. For example, out-sourced logistics service will have conflicts with enterprise internal resources, and it must have impact on the improvement of enterprises logistics operation. In order to proactively promote the development of logistics distribution, government must take some measures on the reform of system environment. Logistics industry is related with many industries, such as railway, aviation and ocean industries. In addition, it has many affiliations with other Commissions and Ministries, such as State Planning Commission, Ministry of Communications, Ministry of Railway and General Administration of customs, etc. Different regulations and plans impose various constraints on resources reallocation. They are hard to be unified into the same standard and hard to operate in the real life although some so-called industry associations have set up some standards. So reallocation of 3PL resources in China is subject to the constraints on this kind of multi-governed systems.

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 Bad logistics companies doing harm to the market regulation Current transportation market in China is comparatively disordered. Abnormal cost decrease leads to some bad logistics companies offer very low quotation when they try to expand their markets. At the same time, for some enterprises those need outsourced logistics service, being oppressed by high costs, they rate the prices of 3PL services as a key criteria when they make choices on 3PL. Although some enterprises know the quotation provided by bad logistics companies are illegal, they still choose to only out-source their transportation function to them, which leads to the disordered competition in the logistics market and emerging of strange phenomenon that excellent qualified logistics companies were defeated by bad logistics companies. On the other hand, according to the analysis of some logistics experts, the phenomenon of failure of out-sourcing logistics service is because some people worry about their own benefits be affected if logistics service is out-sourced. They do their utmost to stop it happening. Moreover, some of them have decisive position on enterprises operation, so this potential rule is more popular in some state-owned or private companies. It is evitable result of faultiness of China legal person structure governing.

3.4
3.4.1

Existing Problems in Chinas 3PL Distribution Center

Characteristics of 3PL Distribution Center

Observing from the whole process of production to completeness of DC, DC has many types, mainly including goods collecting center, goods picking center, processing center and distribution center. Actually, distribution center is the integration of the first three functions and brings into play the function of goods picking and delivering to a higher level. 3PL DC is the combination of distribution activity, sales and supply activities. It is not a simple logistics activity, but also is a kind of business means. As a modern circulation establishment, 3PL DC is different from department stores, trade centers and warehouses. This circulation establishment is based on advanced equipments and technology, which not only can deal with the business flow, but also material logistics. It is the circulation establishment with complete functions of business flow, material logistics, cash flow, and information flow. 3PL DC is the unique result of advanced logistics, including a series of optimized functions, such as storage, goods picking, goods collecting,
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processing, packaging, truck loading, route arrangement, etc. It has big difference from the traditional warehouse, which only covers the business of keeping, storing-in, and storing-out. Goods in 3PL DC is in the situation of ceaseless movement, which can realize the continuous value added in the whole process. The function of distribution is actually derived from the function of transportation, but it includes not only the transportation, but also goods picking, goods collecting, trucks arrangement and so on.

Considering from the angle of resources allocation, it is the economic activity in the form of modern goods delivering to realize the resources allocation. And from the angle of delivering form of actual goods, it helps to consolidate the businesses in DC and send the goods to customers in the most reasonable way. Normally, except the inter-city long haul, distribution mainly refers to the short-distance, small-volume and small range. It is the extended function of the ending of logistics system.

3.4.2

Restraints impacting 3PL Distribution Center fast development

3PL DC belongs to the acting DC, and it can realize the maximum benefits of society, but 3PL DC in China is immature and has imperfect technology. Layout of traditional warehousing establishments, such as warehouse and transportation routes, is not reasonable, which has impact on the goods normal circulation. Because many 3PL DCs are transformed from the old-function logistics companies, such as transportation companies, warehousing companies, and processing companies, their equipments could not completely satisfy the customers needs. Current 3PL DCs in China are not really established on the basis of modern electronic information technology and their efficiency is also awaited to be improved. Low-speed, too much wastage and unreasonable circulation structure of traditional ways restrict the overall logistics and even national economy development. Market intensive competition and regional increasing economy scale both require the enterprises to reduce costs to their utmost degree.

Besides, poor infrastructure, flexibility and low customer service level also heavily hold back the fast development of 3PL DC in China.

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RESEARCH OBJECTIVES AND METHOD

4.1

Research Objective

The objective of research is to find out the factors affecting the Chinese 3PL distribution and to get the highest degree of 3PL distribution reasonableness. It can be identified from the following aspects whether 3PL distribution is reasonable or not: Whether to cut down the logistics expense, Whether to decrease the logistics loss, Whether to increase logistics speed, Whether to express the optimized results of all logistics means, Whether to effectively connect the line-haul transportation and terminal transportation, Whether to reduce the times of logistics transfers, Whether to take the advanced technology measures In a word, the degree of reasonableness of 3PL distribution determines customers confidence on 3PL providers capability, thereby the ultimate objective is to get maximized customer satisfaction

4.2

Design and Return of Questionnaires

This research focuses on the 3PL distribution in China, and the method of questionnaire is adopted. It investigates the current status and development of 3PL distribution in China, and does analysis on the result of survey. There are three parts in the questionnaires, which includes: Basic situation of 3PL enterprises interviewed: It includes the names of enterprises, their registered places, capital resources, time length in 3PL distribution industry, number of employees
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and so on. Current business status of 3PL enterprises interviewed: It includes the enterprise main business scope, service area, infrastructure, application status of modern information technology and use of out-sourced strategy, etc. Ideas on future development: It includes the enterprises ideas on future market, worries on future development, and expectation on market environment, that mainly refers to the expectation on government. Objective choices questions and subjective open questions are presented in questionnaires. From the return of questionnaires, some information, such as annual sales revenue, is vacant due to their self-protection consciousness of enterprises. This survey starts from October 2006 and ends in December 2006. The objectives of survey are chosen from 3PL company list in China consolidated by China Transportation Association, China Goods Agency Association an China Purchase and Logistics Association. The research is taken via telephone, fax, email and face-to-face interview and meeting. The total effective quantity of returned questionnaires is 84. For those ineffective questionnaires, their contents are not completed, or cannot reflect the actual situation of 3PL in China.

4.3 Descriptive Statistics Analysis on Research Result

Basic situation of 3PL enterprises interviewed

According to the result of research, the quantity of returned effective research paper is 84. The enterprises include 10 state-owned enterprises, 45 private companies, and 29 foreign companies, which accounts for 11.9%, 53.6%, 34.5% respectively. a) Regional distribution Among all the enterprises taking the research, the enterprises whose registered address is Beijing have the largest number, accounting for 45%, the second largest is Shanghai, accounting for 18%.

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Figure 2: Enterprises Regional Distribution

1% 1% 4% 1% 2% 6% 6% 45% 4% Beijing Tianjin Shangdong Shanghai Jiangsu Zhejiang Guangdong Liaoning Jilin Heilongjiang Gansu Qinghai Yunnan Regional Distribution

5% 18% 2% 5%

From Figure 2, the research is mainly taken on the enterprises that locate in economic developed area of Eastern China.

b) Scales of enterprises which take the research Figure 3: Employee Number of Enterprises

number of employees

2% 2% 5% 42%

14%

35%

<50 people 50-99 people 100-199 people 200-499 people 500-999 people >=1000 people

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Figure 4: Registered Capital of Enterprises

Registered Capital (,000RMB)

6% 2%

14% <500 500-1000 1000-10000 >10000

78%

Because many enterprises would not like to show their annual sales revenue, the number of employees and registered capital are the important criterion for identifying the scales of enterprises in this research. The enterprises whose employees are less than 200 are small-size enterprises, whose employees are more than 200 but less than 1000 are medium-size enterprise, and whose employees are more than 1000 are big-size enterprises.

Table 2: Time length of receiving 3PL distribution and enterprise scale Enterprise scale Service Length < 2 Years 2-8 Years >8 Years Small-size enterprise Medium-size Big-size enterprise enterprise Total

18 25 0

8 13 2

4 7 7

30 45 9

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4.4
a)

Services Provided by 3PLs

The service scope of 3PL provided

According to the research, 49.5% enterprises are provided with comprehensive logistics services, 40% enterprises are provided with transportation and warehousing service, and 9% with warehousing and value-added service. And the customers products ranges are from normal goods, cold chain goods to dangerous goods.

b) Relationship between 3PL and enterprises From the statistics of research (see Figure 5), more than 10% enterprises have long-term relationship with 3PL.

Figure 5: Time length of Relationship

Time of relationship between TPL and enterprises

>10% >1 years 2-3 years >3 years

>33%

>50%

It is easily found from the research that some certain reasons leading to the short-term service agreement between user enterprises and 3PL vendors. No need for logistics service provider stability in the past: Traditional service is only focus on one simple function of logistics, such as transportation, warehousing or packingIt can be gained in one-off way and customer has low request on service stability. But new-typed distribution is the integrated service by external suppliers to integrate the customers internal and external resources. So it calls for the comparative stability for providers. Low cooperation degree: With the deep degree of the cooperation between customers and
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3PLs, costs and risks of changing 3PL providers increase sharply. So more enterprises prefer long-term relationship with 3PL providers. And they wish to establish the partnership relationship instead of short business relationship with 3PLs. Low individuation degree: Similar or same quality of service provided will easily lead to frequent change of 3PL. The characteristics of no enough flexibility exposes with the customers fluctuated demands. Severe competition in the market: More and more providers compete in the market. So enterprises may choose different 3PLs from time to time when they consider the costs and other factors.

c)

Information technology Level

Easily found in this research that some 3PLs use information technology to transmit information, such as EDI, GPS etc. More and more 3PL companies use electronic technology to get to know the position of goods and provide the service. From the Figure 6, we may find the situation of order tracking in different companies.

Figure 6: Status of Order Tracking

Situation of Order Tracking 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

Local company foreign company

or de r

no

fr ee

tr ac ki ng to ll nu mb er in te rn pe et op le co nt ac t

ot he rs

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It is easily found that the most common way in all enterprises is people contact. Foreign companies prefer Internet as the order tracking way because of its low cost and 24-hour consistent service. But due to the limitation of high expenditure of expensive equipments, the quantity of local companies who use Internet is less than that of foreign companies. The way of free toll number seems not be suitable for 3PL distribution, although it is the effective way for ordinary consumer to check the position of their packages in the Express Industry. After all, contract logistics distribution service focus on companies instead of individuals. More and more companies use GPS and Short Messaging Service (SMS) to track the order status, but currently they are not the most popular ways. It is inevitable that in the fact fixed meetings of both managers in 3PL and customers are the most common ways.

4.5

Aspects to be Improved

a. For those enterprises who have chosen 3PL:

Table 3: Reasons that enterprises are not satisfied with 3PL providers Reasons Production enterprises 7% Business enterprises 0% 34% 33% 0% 0% 0% 0% 33% 0%

High operative costs Not timely and inaccurate 21% information Low speed operation 21% Incomplete service contents 7% High goods damage rate 7% High operation error rate 13% Bad service attitude 0% No network service 7% Cannot satisfy the demands 0% fluctuation SourcesChina Warehousing Association

According to the above table from China Warehousing Association, it lists some aspects that are not satisfied by customers. Although maybe it does not include all aspects that were not satisfied, it lists major parts of problems existed in the current 3PL distribution market.

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b. For those enterprises who have not chosen 3PL till now: According to the 2002 China 3PL Market Investigation Report, customers do not have confidence in 3PL service level and are hard to find an excellent and suitable 3PL providers in the market. Many 3PL providers are good at marketing, but are disappointing in actual operation. Some 3PLs could not provide customers with consistent high-level service. There are many reasons for enterprises not to choose 3PL as their external logistics service providers. They include: Enterprises already have their own strong internal logistics operation capability, Enterprises do not have confidence in 3PL service level, There are severe 3PL providers shortages in the logistics market, Enterprises lack confidence in the benefits they can get after using 3PL service, Different work are managed by different departments in the enterprises, Enterprises think 3PL service is too expensive, Enterprises have unpleasant experience with 3PL in the past, Enterprises have wrong understandings on 3PL, Enterprises do not choose 3PL for lack of related information technology system.

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HOW TO DEVELOP CHINAS 3PL DISTRIBUTION AND OPTIMIZE THE OPERATION OF DC

Although many problems exist in current China 3PL industry, we could not hesitate to move forward. Compared with Chinas 3PL market potential, current China 3PL capability is slim but have abundant development room. According to the investigation of China Warehousing Association, 82% of raw material logistics services are provided by enterprises themselves or suppliers, even higher in business enterprises. In addition, another investigation by China Warehousing Association shows that 45% of enterprises will choose new logistics providers in the coming one or two years, and 75% of which will choose new type logistics companies instead of past warehousing and transportation companies. And 60% of them will out-source its comprehensive logistics operation to new type logistics companies in order to gain lower costs of warehousing, transportation, packing, processing and sales strategy and information service.

5.1

Trends of 3PL Distribution

Today, organizations are increasingly engaging the services of 3PLs to overhaul their logistical operations. Industrial and material industries will have deepen intervention on business logistics. Firstly, manufacturing enterprises logistics have expanded to business logistics. In some industries with fierce competition, such as home appliance, fashion, cosmetics and health care industries, large-scaled manufacturing enterprises directly participate in the market activities that focus on consumers. Transportation departments of some manufacturing enterprises have transformed from self-distribution to social distribution and been used to the requirement of large-scale chain enterprises. Secondly, traditional logistics companies are transformed to 3PLs. With the reformed structure and logistics market expansion, some old warehousing enterprises which have experience in storing and storage in the past, begin to engage in providing the professional logistics service.

5.2

Trends of 3PL DC Modern Development

Modern information technology has been widely used in current DC, such as automatic picking system, automatic warehousing system and Electronic Ordering System (EOS), etc. Under the support of modern information
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technology, a series of modern trends appear gradually. Automatic warehousing DC usually uses the warehousing system with automatic solid pallets and goods picking, which largely increase the warehouse use rate, accuracy and speed of goods storing and picking. Mechanization of goods loading and moving DC uses forklifts truck, pallets operation system and Automatic Glided Vehicle (AGV) to realize goods loading and moving operation automatically. Electronic assembly In foreign DCs, the quantity of labor force who are responsible for goods sorting, order picking and goods collecting accounts for 70% of overall quantity of labor force. Thus, more and more DCs begin to use automatic sorting and automatic picking system to finish the assembly operation. For example, Electronic Label Picking system has been widely used to increase the goods operation speed and lighten the operation intensity. Electronic goods supplement In order to supplement goods timely, DC uses Automatic Goods Supplement system. This system uses the computer technology to achieve the result of electronic goods supplement. It can not only exchange the information with suppliers on time, but also decrease the mistakes of human operations. Goods digitalization Use of bar-code and electronic scanning technology can realize the automatic inspection and monitor of goods. The goods quantities and detailed pallet position will appear in the screen when order number is put into the computer. Operation people may conveniently find the goods on the pallets. Go into the next step of tally after the process of assembly is finished. No paper in the process After using bar-code, electronic scanning and EDI technology, no paper is used in the whole process, which decrease the operation mistake rate extensively. From goods receiving, inspection, storing-in, sorting, order picking, goods collecting to assembly, bar-code and no paper operation is realized comprehensively by the use of PCs wireless communication. Intellectualized operation Logistics application in PC technology far exceeds the statistics
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processing and administrative governing, and has stepped into an intellectualized governing field. For example, trucking arrangement system software is commercialized in America and Japan. It can shorten the time length of truck arrangement and planning, increase the truck use-rate and decrease the lead-time. Communication cooperation Because DC must often exchange information with many suppliers, the cooperation of planning and operation shows particular importance during the operation. But the key of cooperation is information sharing. After using the ways of Internet, electronic business and EDI, information system can be closely integrated into both sides business process to reach the cooperation.

In a word, high efficiency, low wastes and high-qualified service can be achieved by adoption of modern information technology that optimizes the distribution business process and business with suppliers and customers.

5.3

Suggestions and Assumptions of Chinas 3PL Distribution Development and the Operation Optimization of DC

Figure 7: Value of 3PL

Value of 3PL

Service Value

Social Value

Cost Value

Management & Technology Ability Network ability System Planning

Economic-scale

Price Negotiation ability

Inter-supplement Effect

Individual Service

Extensity

Depth

Information System

Consistent Improvement

Customer integration

Supplier integration

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Michael F. Corbett & Associates ever concludes 10 key factors for 3PL to successfully establish relationship with customers. They are communications, flexibility, innovation, integrity, personal service, productivity, relationship management, responsiveness, technical competence and value. 3PL industry is undergoing a huge transition. Currently competing in a highly fragmented, high growth market, 3PL providers are dealing with a massive wave of consolidations. An excellent 3PL provider should have the following characteristics:

5.3.1

Excellent Customer Service Function

As a service company in the fierce competition, 3PL should have 3CS concept, that is Care, Cooperation and Communication. Service should always surround the customers needs and 3PL tries to create customer needs. This requires 3PL to provide customer with basic service (transportation, storage, etc), and actively provide customer with custom-built value-added service. Excellent 3PL providers do research on customers needs, offering customers elaborate-designed service for their choice. Propose various distribution schemes according to requirements of different industries 3PL companies should propose various distribution schemes according to customers special demands on the characteristics of products in different industries. For example, there are some characteristics of logistics distribution in chain store industry, which includes fast changing price, frequent ordering, splitting order and strict request on goods guarantee period. The above characteristics require 3PL providers fast feedback and recur to the perfect information system and complicated technology support. Provide value-added service Customers expectation on 3PL that they not only could cut down their logistics costs, but provide more value-added service. So some 3PLs begin to provide the services of re-labeling and repacking as part of value added services in the logistics operation. Hence, more customers would like to establish business relationship with 3PLs, and even establish long-term strategic partner relationship with 3PLs. Work out differentiation strategy

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It is impossible to perform the same service standard when enterprise has different products. 3PL should set different storing volume, transportation means and storage environment according to the characteristics of different products. Unnecessary costs will happen if characteristics of different products are ignored. For example, different products have different temperature control requirements. Normal goods and chemical dangerous goods must be stored into different warehouses and transported by different transportation means. Adapt to the new trend of logistics distribution 3PL distribution is developed with the development of enterprises own business. For example, the distribution of frozen fresh foods will be paid great attention. DC will add the function of distributing frozen fresh foods when people have more and more demands on it. This is the trend of establishment and development of specialized DC in China. Accompanying the higher living standards and demands on goods quality, some logistics distribution companies which were specialized in fresh foods (such as milk, eggs, vegetables, bread and ice-cream) will gradually transformed to the integrated multi-function DC with normal temperature storing, chill space, packing, processing and distribution. Provide individual customer management and information service Economic development urges 3PL providers to develop in the direction of profession, individuation and big scale. Normally 3PL focus on several enterprises to offer individual services. DC is in the state of being middling of supply chain and must communicate and feedback with upriver and backward position. Thus, it is necessary for 3PL provider to provide individual customer management and information system according to customers special requirements. After setting up EDI system, daily and monthly operation statistics can be transferred to customer, and 3PL can directly log into the system and help customer to settle the problems happened in regional DC and work out the solutions. At the same time, some reports, such as order operation report, inventory management report, damage report, carrier management report, can be automatically generated. Opening 24-hour service hotline, 3PL may receive and collect the complaints and the newest demands from customers and
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end-users, also communicate with customers with complete records in call center. At the same time, goods information tracking team organized by 3PL Transportation Department and Customer Service Department is set up for customers frequent inquires. In this way, 3PLs service level and fast reaction capability is constantly increasing.

5.3.2

Optimized Distribution Network

An important criterion for enterprise to choose 3PL is to consider whether enterprises products target market is within the network of 3PL logistics providing and the network has to be adapted to the dynamic increasing of enterprise target market. With the development of commodity economy, enterprise target market is extended to the whole country, even the whole world, which requires 3PL could provide with customer more choices at the aspect of distribution network. Establishment of DC The article focuses on piecing together a distribution center operations plan. At the beginning of DC establishment, logistics planning seeks to resolve seemingly competing demands by recognizing that a building can be designed so that it is economical to build, efficient to operate, serviceable for decades, and easily expanded. Distribution purpose and functions also should be clarified. DC should be established and operated in a scientific and standardized principle. The following steps and contents must be considered during the establishment of DC 1) Logistics diagnose and analysis: It includes diagnose and analysis on the logistics costs, logistics process, logistics resources allocation, human resources allocation and logistics functions setup. 2) Logistics strategy analysis and design: It includes the analysis and redesign on the supply chain and logistics operation mode. 3) Overall logistics layout and design: It includes layout and design of resources allocation, logistics process optimizing, logistics management, resources allocation, logistics technology and logistics information.
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4) Logistics operation layout and design: It includes logistics network management, warehousing management, transportation management, inventory control, costs and risk control. 5) Operative measures of logistics process and Layout and design of logistics functions: Evaluation is taken as the operative measures during the logistics process. 6) Operation of DC: It includes the operation and analysis on equipments and operation in DC, and DCs automation, as well as the way of increasing DC operation efficiency.

Distribution modes adjusting to different conditions The development of 3PL lies on the local economy level, basic establishment requirement and local labor costs. Current logistics industry in China is immature. The level of Eastern China and Western China, and costal area and inland have big gap. Unsound laws and regulations, conservative thoughts, various goods tastes, these factors all result in the low efficiency of national distribution. So distribution modes must be suitable for the local market changes.

5.3.3

High Degree of Information Technology

The percent of outsourcing is likely to increase with the logistics service providers improving their efficiency and productivity through service integration and incorporation of information technology. Technological enhancements in particular have led to superior information management systems, which ultimately enable 3PL enterprises to come out with customized solutions for the end users. High degree of information technology represents as the digital and computerized logistics information processing, standardization and real-time of logistics information transmission, database and codes of logistics information collection. All request the establishment of modern information system, bar-code technology, database technology, digital ordering system, and fast and effective customer reaction. Promoting scientific level in DC

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Real 3PL distribution is established and developed on the basis of modern electronic information technology. In the logistics field, information and communication technology (ICT) include EDI, Bar-code, GPS, etc. Application of information technology related with enterprise logistics will promote the enterprise modern logistics level. Logistics operation automation not only increase the efficiency, but deeply decease the enterprise operating costs which brings about comparatively lower sales price and strong competition capability in the market.

5.3.4

Distribution Costs Reduction

Several strategies have to be considered when considering decease of distribution costs. Such as consolidation strategy, standardization strategy, and order period improvement strategy. Consolidation strategy means the consolidation of ways of distribution, which is the optimization of route and increasing of truck full loading rate under the permission of product characteristics and delivery time. In addition, this strategy means co-distribution. Combining all orders in one region or cooperating with other DCs decrease the distribution costs. Standardization strategy means truck loading capability is increased because of more use of standard packaging of products. For example, the difficulty of distribution will be increased if combined transport of products and promotion products, because the volume and size of promotion products are normally not standard.

Order period improvement strategy means customers try to order goods at the same quantity and the fixed time in one area. For example, transportation contract rate of company AB with its 3PL is RMB 200 per ton, and the transportation distance is over 300KM. But due to the unstable orders with different quantities and the key is company AB has no plan and fixed time to make orders every week, sometimes its 3PL can not satisfy the needs of on time delivery. If 3PL could persuade the end-users to agree with the fixed time order and comparative FTL in one week, 3PL is willing to cut down at least 20% of the transportation rate with company AB. Meantime, good and smooth communication between 3PLs and customers shows great importance in distribution costs reduction. For example, customer will not consider the 3PLs difficulties to order goods erratically when they try to increase their sales. Rule-less orders make against the
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distribution cost optimizing. 3PL should fully communicate with customers to understand their real purpose to choose full truck load (FTL) and avoid less truck load (LTL) to guarantee goods on time delivery and decrease the distribution costs. Besides, customers can directly benefit from 3PL s accurate distribution planning.

5.3.5

Establishment of Excellent Management Team

The process of 3PL distribution is unique, because the employees of 3PL have frequent and direct contact with customers when they receive orders, make transportation plans and deliver goods. This frequent contact plays an important role in winning the customer satisfaction. Logistics technology is constantly developing, and 3PL has to innovate and develop itself during the use of logistics technology process and at the same time it asks for high quality management team. They should have the same idea on providing customers with utmost satisfaction, establishing the thought of win-win situation with customers

5.3.6

Continuous Distribution Process Monitoring

Feedback loop for monitoring continuous improvement is essential. 3PLs are suggested to provide quick feedback to customers new requirements, marketing strategy and even complaints. Some key performance indicators (KPIs) must be set up and weighed during the whole distribution process, such as on-time delivery rate, desired market reach, forecasting accuracy rate, inventory accuracy and so on.

It easily can be found that the 3PL distribution optimization can be reached by integrated suggestions, not one suggestion independently. 3PL services an integration of transportation, warehousing, and distribution activities demand a well-developed and synchronized infrastructure to boost their revenues. Furthermore, they require ample support in the form of favorable government initiatives and regulations. Hereby, 3PL enterprises must also focus on building their knowledge repositories, skill sets and should cultivate a long-lasting relationship with the customers.

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6 FINDINGS
In a word, China has many types of 3PLs, and 3PL distribution operation structure and modes have been elementarily formed. 3PLs must provide the reasonable comprehensive logistics service from the customers points of view and must be acquainted with the development of enterprise logistics activities, and have the logistics system development and creative ability. The relationship between 3PL and enterprise is the alliance relationship. After the long-term business alliance relationship, 3PL and customer may both reach the goal of win-win situation. The task before logistics people is to grow on profound understandings on 3PLs. According to own actual situation, company should improve its own core competence and creatively develop logistics business. 3PLs help to provide comprehensive and high level excellent logistics services. For those enterprises established in planned-economy times, facing the challenges of capital restructure and enterprise re-establishment, it is the best time for them to adjust its logistics business and offer it to professional 3PL. For those new-established enterprises, they should operate in social collaboration according to market economy model, and out-source its logistics operation to 3PL. These reforms form the solid basis and wide room for China 3PL development. Seizing the opportunity, overcoming the problems, consequentially, Chinas logistics prospective future is coming soon.

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7 CONCLUSION
Based on the first-hand research and statistics from some authorized institutions, the dissertation shows major factors affecting Chinas 3PL distribution, and also presents the ways of improving and optimizing the operations for readers. Although 3PL Providers have led the way in logistics outsourcing, drawing on its core business, whether it be forwarding, trucking, or warehousing, they moved into providing other services for customers. It presented a way for a commodity-service logistics provider to move into higher margin, bundled services, but the power of 3PLs is limited. And obviously it could not integrate all logistics resources in the society, settle the bottlenecks to reach the highest efficiency of the whole region, country and even the whole world. Therefore, Fourth Party Logistics (4PL) appears and it emerges as the times requires. 4PL is a Business Process Outsourcing (BPO) provider. This leads logistics provider will bring value and a reengineered approach to the customers need, realize the benefits of logistics out-source to the utmost Regarding the advantages and disadvantages, as well as the concrete operations of 4PL, the dissertation leaves room for the future further research.

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8 Table of acronyms and abbreviations

ABBREVIATIONS

EXPLANATION

AGV CMST COSCO DC EDI EOS GPS ICT IT KPI LC LLP SMS WMS 3PL or TPL 4PL

Automatic Glided Vehicle China National Materials Storage and Transportation Corporation China Ocean Shipping (Group) Company Distribution Center Electronic Data Interchange Electronic Order System Global Position System Information and communication technology Information System key performance indicator Logistics Center lead logistics provider Short Messaging Service Warehousing Management System Third Party Logistics Fourth Party Logistics

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Sink, H. L., Langley, C. J., & Gibson, B. J., Buyer observations of the US third-party logistics market, International Journal of Physical Distribution & Logistics Management, 1996 Skjoett-Larsen, T., Third party logistics-from an inter organizational point of view, International Journal of Physical Distribution & Logistics Management, 2000 Stacey, R., Strategic Management and Organizational Dynamics, Pitman, 1993 Wang Shen, Wang Xiaoli, The Analysis of the Third Profit Source Appearing in Enterprises, Commercial Research, 2005-14 Wang Shuyun, Cost Changes and Distribution, Logistics Technology Journal, 2005-11, pp. 16
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 Wang Zhitai, Modern Logistics Management, China Workers Publishing Company, 2001 Wu Caixia, Distribution Management, China Light Industry Publishing Company, 2000 National Standard Logistics Words GB/T18354-2001, PR China Report of China Logistics Development 2005, National Development and Reform Committee, Nan Kai University Modern Logistics Research Center, China Machine Press, 2005 Logistics International General Management and Success Case Model, Xinhua Press, 1999 2002 China 3PL Market Investigation Report, Mercer Consulting Company, China Federation of Logistics & Purchasing 3PL company list in China, China Transportation Association, China Goods Agency Association & China Purchase and Logistics Association, 2004 The reasons that enterprises are not satisfied with 3PL providers, China Warehousing Association Extract of Enterprise Internal Customer Service and Human Resources Management , www.tingniu.com/archiver/tid-56289.html Extract of Strategic Analysis of the Third Party Logistics Markets in Australia, http://www.giichinese.com.cn/ Extract of Ideas on speeding up China advanced logistics development, www.cq56w.com/Html/wlzs/20072/200723111936.html, 2001 Extract of Catalogue of industries, products and technology which are encouraged to develop in China, www.gwytb.gov.cn/tzzn/zdglfz.html, 2000 Extract of Company Introduction, http://www.htblogistics.com/ Extract of An interview to Ding Keyi, President of Shenzhen Merchants Logistics, http://www.56cn.cn/html/2006-5/2006531140057.htm, 2006

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Appendix I
Social Logistics Expenditure, 20032004
Year 2004 ocial Logistics Expenditure Expenditu re 29113.5 Transportation in Total Railway Truck 16557.5 1754.4 7598.6 2119.3 142.2 52 4891 Revenue 23442.2 15500.9 1140.3 3263.1 1001.8 1917.1 141.6 52 3100 962 3922.8 8466.6 4336.6 7941.3 3252.5 1084.2 1777.1 92.1 525.8 22.6 245.7 1228.3 230.3 8.1 4089.4 20.6 2 170.7 74.9 853.6 375.2 186.5 43.8 7.8 0.2 3570.4 6.5 171.4 975.1 186.2 592.4 1184.8 92.1 73.9 413.7 17.1 15.4 1.7 129.3 56.7 677.6 297.4 135.4 36 6.3 0.3 114.5 123.4 134.4 126 132 1507 7376.3 4025.5 1692.6 115.2 47.9 3762 Year 2003 Expenditu re 24975.1 14028.4 1582 6828.7 Revenue 20581.8 13619.4 1012.9 2929.2 899.3 1531.1 115.7 47.9 2722 869 3492.3 6962.4 3019.1 1006.4 502.3 1004.7 73.9 124.7 127.1 132.1 133.6 116.7 132.1 132.1 126 126.2 137.8 121.6 124.7 76.6 14 14.3 0.1 2.7 14.5 2.9 117.9 117.9 117.9 124.7 1.1 6.2 0.3 21 7.5 14.9 1.2 0 0.3 0 2.1 0.9 10.7 4.7 2.3 0.6 0.1 0.003 14.3 0.1 2.3 13.2 2.5 1 5.6 0.2 20.4 7.2 14.4 1.1 0 0.2 0 1.9 0.8 9.7 4.3 1.9 0.5 0.1 0 114.8 107.7 125.2 123.4 108.5 130 Increase % Expenditur e 116.6 118 110.9 111.3 Revenue 113.9 113.8 112.6 111.4 111.4 125.2 122.4 108.6 113.9 110.7 112.3 114.1 107.7 29.1 100 51.2 33.9 12.8 0.9 0.3 29.5 Expenditure Structure of Year 2004 % of All Expense 100 56.9 100 10.6 45.9 % of Each Function Revenue Structure of Year 2004 % of All Revenue 100 66.1 100 7.4 21.1 6.5 12.4 0.9 0.3 20 6.2 25.3 86.3 41 29.5 100 54.6 33.8 12.1 0.8 0.3 26.8 % of Each Function Expenditure Structure of Year 2003 % of All Expense 100 56.2 100 11.3 48.7 % of Each Function Revenue Structure of Year 2003 % of All Revenue 100 66.2 100 7.4 21.5 6.6 11.2 0.8 0.4 20 6.4 25.6 85.5 43.4 % of Each Function

Published Figures:

Total

Management

Transportation Storage

Including: Enterprise Internal Service Water Carrying Aviation Pipeline Loading, Unloading, Carrying & Others Including: Enterprise Internal Service Transportation Affixation Storage in Total Interests Including: Enterprise Own Capital Interests Warehousing Including: Enterprise Internal Service Insurance Goods Wastage Information and Related Service Including: Enterprise Internal Service Distribution Including: Enterprise Internal Service Distribution Processing Including: Enterprise Internal Service Packaging Including: Enterprise Internal Service Other Storage Including: Enterprise Internal Service

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Appendix II
3PL Activities in Each Functions

Table :

Source: TPL, Dongbei University of Finance & Economics Press2005

Shipping, Forwarding, Contract Delivery, Household goods relocation, Load tendering, Brokering Warehousing Storage, receiving, assembly, return goods, labeling Inventory Management Forecasting, location analysis, network consulting, layout designing Information System EDI, scheduling Packaging Design, recycling

Transportation

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Appendix III
3PL Demand Analysis

Figure 1:

Logistics Demands Hierarchy

Joint-ventures & Foreign Invested company

Supply Chain Management

Strengthen Core Competence

Large & Medium-sized Company Integrated Logistics Service

Cost Reduction

Medium & Small-sized Company

Basic Functional Service

Not Enough Resources

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Appendix IV

Figure 2: Drivers for 3PL Logistics Outsourcing

No ability to invest more in capital, human resources

Logistics is not the core business.

Logistics outsourcing

Enterprises can not set up logistics improving systems internally

No logistics competitive ability compared with others

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