“Third Party Logistics:

Key Market/Key Customer Study”

Executive Summary

C. John Langley Jr., Ph.D.

Dove Distinguished Professor of
Logistics and Transportation
University of Tennessee
314 Stokely Management Center
Knoxville, TN 37996-0530
Phone: 423-974-1646
Fax: 423-974-1932

November 15, 1996

 Third Party Logistics: Key Market/Key Customer Study

Executive Summary

During the summer of 1996, the University of Tennessee’s Center for Logistics
Research conducted a comprehensive study of the use of third party logistics services
by firms in several key markets. The objectives of the study were as follow:

• Measure the growth of the third party logistics concept across several key
industry markets;

• Deepen our knowledge of the third party logistics buying process;

• Identify the key metrics which characterize the success of third party
involvement, and observe differences from industry to industry;

• Document the strategic role of information technology in the provision of

value-added third party services; and

• Understand overall satisfaction with third party relationships, and how they
influence the success of efforts at supply chain improvement.

The principal industries selected for inclusion are listed below. These represent several
of the key industries which evidence acceptance of the logistics concept and a move to
integrated supply chain management.

• Automotive
• Chemicals
• Computers and Peripherals
• Consumer Products
• Medical Supplies and Devices

This study was funded by a grant from Exel Logistics - North America. It is intended
that the study be conducted on an annual basis to identify and measure current trends
in key markets for third party logistics services.

Study Methodology
The principal vehicle for gathering logistics user perspectives was a mail survey which
was sent to the chief logistics executive at prominent firms in the industries identified
above. With an objective of mailing 100-125 surveys to executives in each of these
industries, the total number of surveys mailed was 572. Of these, 251 usable
responses were received, for an overall response rate of 44%. Appropriate statistical
tests for non-response bias were utilized.

Respondent Demographics
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Prior to a discussion of the study results, the following items help to describe the 251
firms which provided usable responses.

• Most respondents were from the manufacturing sector. Of the 198 in this
category, 31 manufactured components or ingredients, while 167
manufactured finished products. The study included 6 raw materials
suppliers, 9 wholesalers, and 3 retailers.

• Approximately one-half (49%) of the responding firms indicated 1996 sales

revenues in excess of $1 billion. Another 16% were in the range of $500
million to $1 billion, and 25% in the $100-$500 million range.

• 68% indicated having a centralized vs. decentralized logistics system

structure, and 53% reported that they have a separate logistics division.

• Principal factors affecting the respondents’ industries included pressure to

reduce cost (87%), pressure to enhance customer service (65%),
globalization (58%), and development of new technology (47%).

• In relation to the perceived importance of logistics, 57% of the respondents

viewed logistics in terms of being customer service driven, 24% cost
minimization, 15% as a source of competitive advantage, and 4% having a
profit center orientation.

Based on this information, it is apparent that the firms represented a relatively broad
cross-section of the industries surveyed. This contributes to the generalizability of the
study findings.

Study Results and Findings

Overall Usage
Exhibit 1
Of the 251 responding executives, 181 Third Party Use by
(72%) indicated that their firms currently Key Market Type
use or are considering the use of third Percent
86.8
party logistics services. The remaining Using or 100
Considering 80
78.6
75
64.4
70 (28%) indicated that they did not Third Party 54.5
60
meet this qualification. Exhibit 1 40
provides a summary of third party use by 20
market type, where it can be seen that 0
Auto Chemical Computer Consumer Medical
the most prominent use is in the
computers and peripherals industry
(86.8%), followed by chemical (78.6%),
consumer goods (75.0%), medical

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supplies and devices (64.4%), and automotive (54.5%). Of those firms currently using
or considering the use of third party services, 83% indicated that they are either
maintaining or expanding the use of these services.

Specific Services

Exhibit 2 summarizes the current and projected use of specific third party logistics
services for the respondents in the user group. Further examination of the available
data indicated that the top ranking of the computer industry in terms of intensity of third
party use is influenced significantly by the extensive use of third party services for return
and repair operations in this industry. An analysis of the information contained in Exhibit
2 shows that the services which represent the most likely candidates for future
outsourcing are product returns and repair (projected increase of almost 100%), and
information systems (projected increase also of almost 100%). Additional questions
suggested that 20% of the respondents felt that these services were significantly
integrated or “bundled,” while another 41% felt that they were somewhat integrated.
39% felt that the services were integrated only slightly or not at all.

Exhibit 2
Outsourced Services – Number of Respondents
Current Future
Outbound Transportation 110 27
Inbound Transportation 87 35
Inventory Management 21 20
Information Systems 27 26
Product Returns and Repair 30 29
Cross-Rocking 40 26
Warehousing 108 37
Customer Service 10 10
Selected Manufacturing Activities 69 23
Product Marking/Labeling/Packaging 54 20
Traffic Management/Fleet Operations 33 24
Product Assembly/Installation 25 18
Freight Bill Auditing/Payment 65 34
Order Entry/Order Processing 14 14
Freight Consolidation/Distribution 58 46

A question pertaining to how respondents achieve consistency among several logistics

providers produced some interesting results. While most respondents indicated that the
key to this objective was information-sharing, having a focal group or person in the
company, or sharing of “best practices” across facilities, 37% suggested that the key
was the contract or general agreement between users and providers. This seems to
contrast to contemporary management practices which would place greater emphasis
on successful management of the relationships themselves, without overly relying on
the formal contract or agreement to help achieve this objective.

Type of Provider
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 Included in Exhibit 3 is information
Exhibit 3
concerning the type of provider used most
Types of Third Party Used by each respondent. As is evident, the
most commonly-used were the warehouse/
Less-Than
Truckload distribution-based firms, followed by less-
Warehousing/
Distribution
15%
than-truckload, truckload, express logistics,
40% Truckload
14% forwarder/broker, and shipper/
management, in that order.
Express
Forwarder / Logistics
Shipper /
Broker 12%
Management
7% 12%

Executive/Managerial Involvement
Exhibit 4
in Outsourcing Involvement in Outsourcing
Who Recognizes the Need?
Exhibit 4 summarizes information President / CEO 83

concerning who recognizes the need Finance 82

for outsourcing at respondent firms. Logistics / Trans. 129

While the logistics/transportation Manufacturing 51

executive is involved in a significant Human Resources 22

Marketing 31
number of instances, the president/ Information Systems 30

CEO and finance executives are also 0 20 40 60 80 100 120 140

involved to a substantial degree. Responses

Having lesser involvement are

executives from manufacturing, human
resources, marketing, and information systems. Considering the recent attention
directed to the strategic importance of information systems, however, the relatively low
level of involvement is somewhat surprising. Other questions pertaining to who selects
the supplier, who is responsible for implementation, and who “champions” outsourcing
suggest that the logistics executives are principally involved in all of these activities.

Third Party Logistics Buying Process

Of the 181 users of third party services, 90% indicated a preference for utilization of a
bid process, in contrast to negotiating with individual suppliers on a sole-source basis.
Almost 75% preferred a formal, written contract, while the results indicated about an
even split between preference for a “fixed term” vs. “evergreen”, or “rolling” contract.
Overall, respondents indicated a preference for limited scope involvement at first, to be
followed by more intense utilization of the third party services as experience and
satisfaction are gained.

Respondents were asked about specific issues which were addressed in their contract
or agreement for third party logistics services. Among those addressed most frequently
were the following:

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 • Service standards and performance measurement
• Process for termination or dissolution of agreement
• Key performance indicators

Among those addressed least frequently were the following:

• Potential involvement with other third party providers

• Gainsharing/performance incentives
• Specific goals related to continuous improvement
• Procedures for conflict resolution

Overall Satisfaction With Third Party Logistics Services

Exhibit 5 summarizes the results of a

Exhibit 5
Factors Used in Evaluating
question pertaining to factors used in
Third Parties evaluating third parties. While traditional
Cost 171
factors such as cost, service,
Service 167
responsiveness, reliability, and delivery
Responsiveness 158 prominent, the significant number of
Quality 157 respondents indicating importance of the
Delivery 132 “management” factor is noteworthy.
Management 129

100 110 120 130 140 150 160 170 180

Responses

As indicated in Exhibit 6, 90% of the

respondents felt that their outsourcing
efforts were either extremely or somewhat
successful. This result speaks highly of the
Exhibit 6
Customer Evaluation
positive experience which was felt to have
Of Outsourcing been experienced by a very significant
percentage of the respondents. Overall,
Extremely respondents felt that there was
succesful
Somewhat 38% considerable variation among providers of
successful
52%
third party logistics services. When asked
Neither/ or
about the issue of breadth of service
somewhat
unsuccessful
offerings, the majority felt that providers
10% should focus on a broad, comprehensive
set of service offerings, rather than a
limited set of service offerings.

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Exhibits 7 and 8 identify a number of
areas in which users of third party Exhibit 7
services felt that their objectives had Did You Get What You Paid For?
(Answer = Yes)
been met, and several in which they felt
Percent Experiencing
that improvement would be desirable. Business Objective Improvement
While providers have been able to meet Asset Reduction 96.0%
expectations in a number of areas, the Reduction in Employees 89.8
ones in which additional progress is Expand Geographic Coverage 87.8
needed are critical to the future success Risk Reduction 84.4
Cost Reduction 83.6
of logistics and supply chain processes.
Specialized Services 83.3

Key Performance Indicators

In response to a question pertaining to

what specific performance requirements Exhibit 8
Did You Get What You Paid For?
or key performance indicators were used (Answer = Not as Much)
to evaluate the relationship with third Percent Experiencing
party suppliers, the following percentages Business Objective Improvement
indicate the factors which were identified Improved Information Systems 45.3%
most frequently:
Move from “Push” to “Pull” 51.4

• Cost – 37% Faster Implementation 58.5

• On-time delivery – 23%
• Quality of service – 17%
• Value-added services – 13%
• Customer service/complaints – 10%

Exhibit 9 Exhibit 9 summarizes the results of several

Measuring Logistics Performance questions pertaining to the measurement
(All Respondents) and quantification of logistics value. The
Measure Quantify Improved available information suggests that while
Performance? Value? Results?
progress is being made with regard to
Product Availability 64% 35% 50%
performance measurement, there is a
Order Cycle Time 77 33 66 need for improvement in terms of
Logistics System
Responsiveness 77 35 70 quantification of logistics value. Also, it
Logistics Systems
Information 53 24 48 appears that utilization of third parties have
Post-Sale Customer
21 11 20 helped in many instances to improve
Support
results in the logistics area.

Strategic Role of Logistics vs. Third Party Usage

Of the 181 user firms, more than 40% regarded logistics as a “core competency of the
firm,” and approximately 60% felt that it represented a “key competitive advantage.”
These figures suggest that the use of third party services is not necessarily inconsistent
with logistics being an area of strategic importance to the firm. Thus, it is apparent that
there are a significant number of firms which view logistics as a core competency and a
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source of competitive advantage, and which have elected to outsource certain elements
of the logistics process. While this issue also may have much to do with how one
defines core competency, the study results document the fact that many firms which
use third party logistics services also view logistics as an area of strategic and
competitive advantage.

Summary

Overall, the results of this study have helped to better understand the third party
logistics concept and the ways in which it is growing in use. The following points
capture the major findings of this research project:

• The use of third party logistics services is growing across several key
industries. While study results show that 72% of the firms surveyed
currently use or are planning to use such services, 80% of this total have
plans either to maintain or expand their usage.

• Examination of the overall buying process suggests that both providers and
users of third party services are becoming more knowledgeable and better
prepared to effectively utilize the range of services which are available.

• Information technology is viewed as a key to the success of third party

operations. Effective utilization of technology requires the development of
meaningful working relationships between users and providers of third party
services.

• Current users exhibit a high degree of satisfaction with the third party
services they currently utilize. Among the non-users, there is evidence that
many will seriously consider the use of such services in the future.

• Future priorities include further integration of existing third party services,

and expansion of services and effectiveness such that strategic impacts will
be made on logistics and the total supply chain.

• The use of outsourcing by firms which consider logistics to be a core

competency and/or provide a competitive advantage is not an inconsistency.
While these firms have elected to leverage certain areas of core competency
using internal resources, the decision to use external suppliers for certain
logistics and supply chain services helps to achieve even greater
competitiveness in the marketplace.