Logistics Relationships and Third-Party Logistics

Chapter 11:
Logistics Relationships and

Third-Party Logistics
Learning Objectives - After
reading this chapter, you should be able to
do the following:
 Understand the importance of logistics

relationships and the types of relationships that
may be formed.
 Be knowledgeable of a process model that will
facilitate the development and implementation
of successful supply chain relationships.
 Define what is meant by third-party logistics
(3PL), and know what types of firms provide 3PL
services.
Management of Business Logistics, 7th

Chapter 11 Ed. 2
Learning Objectives
 Know what types of 3PL services are
used by client/customer firms, and know
what types of 3PL providers are used.
 Appreciate the role and relevance of
information technology-based services
to 3PLs and their client/customers.
 Realize the ways in which 3PLs are
involved in global supply chain issues.

Chapter 11 Ed. 3
Learning Objectives
 Know the extent to which customers are
satisfied with 3PL services, and
understand where improvement may be
needed.
 Recognize the importance of
“collaborative” relationships in the
context of supply chain management.

Chapter 11 Ed. 4
Logistics Profile:
UPS Logistics Group
 UPS Logistics Group signed a five-year $150 million
deal to manage National Semiconductor’s global
supply chain distribution center in Singapore.
 The DC uses radio frequency, bar-code scanning,
and web-based technology.
 Fills >450K orders per year; receives 12 million
inbound chips daily; and ships four billion products
per year on sales of $2.1 billion.

Chapter 11 Ed. 5
Logistics Relationships and
Third-Party Logistics:
Introduction
 With more firms interested in working
more closely with their supply chain
partners, high priorities are:
 Developing and implementing
successful supply chain relationships;

 The need for collaboration to achieve
supply chain objectives; and,

 Value created by third-party logistics.

Chapter 11 Ed. 6
Logistics Relationships:
Types of Relationships
 Vertical
 Refer to the traditional links between
supply chain members such as retailers,

distributors, manufacturers and suppliers.
 Horizontal
 Firms that have parallel or cooperating
positions in the supply chain such as a

transportation firm and a warehousing firm
serving the same customer.

Chapter 11 Ed. 7
Intensity of Involvement
 Vendor relationship shows little or no
integration or collaboration.
 Strategic alliance shows full integration
and collaboration.
 Partnership shows a customized
relationship that results in better
outcomes than could be reached
separately.
 Examine Figure 11-1 on the next slide.
Chapter 11 Ed. 8
Figure 11-1
Relationship Perspectives

Chapter 11 Ed. 9
Intensity of Involvement
 Regardless of form,  Interaction and
there are numerous Communication
ways that the
relationships may
 Cooperation
differ:  Planning Goals
 Duration  Performance
 Obligations
analysis
 Expectations
 Benefits and
burdens
Chapter 11 Ed. 10
Figure 11-2 Effectiveness of
Supply Chain Relationships
50% 48%
42%
40%
Percentag
30%
23%
22% 21% 20%
20%
e
8%
10% 7%
4%
2%
0%
Poor Fair Average Good Exceptional
Suppliers Customers

Chapter 11 Ed. 11
Model for Developing and
Implementing Successful Supply Chain
Relationships
 Six step process for forming and sustaining supply
chain relationships:
 Step One – Perform strategic assessment
 Step Two – Decision to form relationship
 Step Three – Evaluate alternatives
 Step Four – Select partners
 Step Five – Structure operating model
 Step Six – Implementation and continuous
improvement

Chapter 11 Ed. 12
Figure 11-3 Process Model for
Forming Logistics
Relationships

Chapter 11 Ed. 13
Relationships
 Step One – Perform strategic assessment

 Manufacturer becomes fully aware of its
logistics and supply chain needs and overall

strategies that will guide its operations.
 This step is referred to as a Logistics Audit,
and will be covered in Chapter 14.

 Time spent at the outset is well spent.

Chapter 11 Ed. 14
Relationships
 Step Two – Decision to form relationship
 When using an external supplier, will the
firm’s services be needed.

 If the firm has core competencies in the area
that external supplier provides, then the firm

can provide its own services.
 Using channel partners depends on whether
there are compelling drivers and facilitators

for partnerships are present.

Chapter 11 Ed. 15
Figure 11-4 What Does It Take to
Have an Area of Core
Competency?

Chapter 11 Ed. 16
Relationships
 Drivers might include:  Facilitators might include:

 Corporate compatibility
 Asset/Cost efficiency
 Management philosophy and
 Customer service techniques

 Mutuality of commitment
 Marketing advantage  Symmetry on key factors
 Profit stability/growth
such as relative size, financial
strength, etc.

Chapter 11 Ed. 17
Relationships
 Step Three – Evaluate alternatives
 Measure and weigh drivers and facilitators.
 Decide on type of relationship.
 Match manufacturer’s needs with capabilities
of each potential partner.

 Involve other functional managers in the
overall selection process.

Chapter 11 Ed. 18
Relationships
 Step Four – Select partners
 Made only after close consideration of the
credentials of the most likely candidates.

 Interact with and get to know the final candidates
on a professionally intimate basis.

 Attempt consensus to maximize “buy-in”.

Chapter 11 Ed. 19
Relationships
 Step Five – Structure operating model
 Planning
 Joint operating controls
 Communication
 Risk/Reward sharing
 Trust and commitment
 Contract style
 Scope of the relationship
 Financial investment

Chapter 11 Ed. 20
Relationships
 Step Six – Implementation and

continuous improvement
 Depending upon the complexity of
the relationship, the implementation

period may vary in length.
 Future successes will be a direct
function of the ability of the partners

to achieve both breakthrough and
continuous improvement.
Chapter 11 Ed. 21
Third-Party Logistics:
Industry Overview
 Firms have directed considerable attention to
developing supply chain relationships.
 Many companies have been in the process of
extending their logistics organizations into those of
other supply chain participants and facilitators.
 One way of accomplishing this extension is through
the use of a supplier of third-party or contract
logistics services.5

Chapter 11 Ed. 22
Figure 11-5 Implementation
and Continuous Improvement

Chapter 11 Ed. 23
Third-Party Logistics (3PL):
Definitions
 3PLs are external suppliers that perform all
or part of a company’s logistics functions,
including:
 Transportation
 Warehousing
 Distribution
 Financial services
 Terms contract logistics and outsourcing

are sometimes used in place of 3PL.

Chapter 11 Ed. 24
Types of 3PL Providers
 Transportation-Based
 Warehouse/Distribution-Based
 Forwarder-Based
 Financial-Based
 Information-Based

Chapter 11 Ed. 25
 Transportation-Based
 Services extend beyond transportation to offer
a comprehensive set of logistics offerings.

 Leveraged 3PLs use assets of other firms.
 Nonleveraged 3PLs use assets belonging solely
to the parent firm.

 Ryder, Schneider Logistics, FedEx Logistics, and
UPS Logistics are examples of 3PLs.

Chapter 11 Ed. 26
 Warehouse/Distribution-Based
 Many, but not all, have former warehouse
and/or distribution experience.

 Transition to integrated logistics has been
less complex than for the transportation

based providers.
 DSC Logistics, USCO, Exel, Caterpillar
Logistics, and IBM are examples of

warehouse/distribution-based 3PLs.

Chapter 11 Ed. 27
 Forwarder-Based
 Essentially very independent
middlemen extending forwarder roles.

 Non-asset owners that capably provide
a wide range of logistics services.

 AEI, Kuehne & Nagle, Fritz, Circle, C. H.
Robinson, and the Hub Group are

examples of forwarder-based 3PLs.

Chapter 11 Ed. 28
 Financial-Based
 Provide freight payment and auditing,
cost accounting and control, and tools

for monitoring, booking, tracking,
tracing, and managing inventory.
 Cass Information Systems, CTC, GE
Information Services, and FleetBoston

are examples of financial-based 3PLs.

Chapter 11 Ed. 29
 Information-Based
 Significant growth and development in
this alternative category of Internet-

based, business-to-business, electronic
markets for transportation and logistics
services.
 Transplace and Nistevo are examples
of information-based 3PLs.

Chapter 11 Ed. 30
On the Line:
Trade Team
 Excel, the largest provider of brewery distribution
services in Great Britain, and Bass, the industry’s
low-cost producer, formed Trade Team, the UK’s
leading independent logistics provider to the
beverage industry.
 Annual sales of $200 million; 280 million gallons of
beer and other beverages to over 27,000 retail
customers; 40-50% market share.
 Has capability to move other products.

Chapter 11 Ed. 31
Research Study: Industry
Details
 Of 93 responding executives, 71 percent
indicate a current or possible use of 3PLs.
 Overall percentage of companies using 3PLs
is steady, but the computer and peripheral
and consumer products industries tend to
exhibit higher use (90 and 85 percent,
respectively).
 Less use in automotive, chemical and retail
(50 to 60 percent usage range).

Chapter 11 Ed. 32
Details
 Outsourced logistics services include:
 Warehousing (73.7%)
 Outbound transportation (68.4%)
 Freight bill auditing/payment (61.4%)
 Inbound transportation (56.1%)
 Freight consolidation/distribution (40.4%)
 Cross docking (38.6%)

Chapter 11 Ed. 33
Figure 11-6 3PL User/Nonuser
Experience, 1996-2001

Chapter 11 Ed. 34
Table 11-1
Shippers Using More than Five
3PLs

Chapter 11 Ed. 35
Table 11-2 Third-Party
Revenues Estimated at $56.4
Billion in 2000

Chapter 11 Ed. 36
Table 11-3 Top Six
Outsourcing Logistics
Services: 2001

Chapter 11 Ed. 37
Figure 11-7 Nonuser
Respondents: Rationale for Not
Using 3PL Services

Chapter 11 Ed. 38
Table 11-4 Information Technology-Based
Services: Current Percent versus Future
Percent

Chapter 11 Ed. 39
Figure 11-8
Sources of Information
Technology

Chapter 11 Ed. 40
Figure 11-9 3PL Customer Use of
Industry Vertical Procurement
Markets

Chapter 11 Ed. 41
Figure 11-10 3PL Customer Use of
Transportation/Logistics Electronic
Markets

Chapter 11 Ed. 42
Figure 11-11 3PL Involvement in
Outsourcing: Who Is Responsible for
Implementation?

Chapter 11 Ed. 43
Figure 11-12 3PL Customer Evaluation of
Outsourcing (Yearly Comparisons)

Chapter 11 Ed. 44
Figure 11-13
3PL Factors for Selecting and Evaluating
3PLs

Chapter 11 Ed. 45
Details
 Quantifiable measures of 3PL success:
 Logistics costs reduced by 8.2 percent.
 Logistics assets reduced by 15.6 percent.
 Average order cycle length changed from
10.7 to 8.4 days.

 Overall inventories reduced by 5.3 percent.

Chapter 11 Ed. 46
Details
 Reported problem areas:
 Service level commitments not realized.
 Strategic management skills lacking.
 Cost reduction goals not realized.
 Cost “creep” and price increases occurring.
 Improvements and achievements lacking.
 Control of outsourced functions diminished.
 Consultative, knowledge-based skills lacking.
 Technology capabilities not being delivered.
 Time and effort spent on logistics not reduced.

Chapter 11 Ed. 47
Figure 11-14
How Respondents View Providers of Third-
Party Logistics Services

Chapter 11 Ed. 48
A Note on Fourth-Party
Logistics (4PL): The Next
Evolution?
 Thought of as supply chain
integrator, a firm that
“assembles and manages the
resources, capabilities, and
technology of its own organization with
those of complementary service providers to
deliver a comprehensive supply chain
solution.”12
 4PLs manage and direct the activities of
multiple 3PLs, serving as an integrator.

Chapter 11 Ed. 49
Figure 11-15
Fourth-Party Logistics (Registered
Trademark of Accenture, Inc.)

Chapter 11 Ed. 50
Need for Collaborative
Relationships13
 Supply chain relationships are most effective
when collaboration occurs.
 Collaboration is facilitated by the ability of
the supply chain partners to readily access
and exchange information over the Internet.
 Table 11-5 lists the “Seven Laws of
Collaborative Logistics” and is a guide to
establishing and maintaining collaborative
logistics networks.

Chapter 11 Ed. 51
Table 11-5
Seven Laws of Collaborative
Logistics

Chapter 11 Ed. 52
Chapter 11:
Summary and Review Questions
Students should review their knowledge of the

chapter by checking out the Summary and
Study Questions for Chapter 11.

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Chapter 11:

Logistics Relationships and

 Understand the importance of logistics

Management of Business Logistics, 7th

Management of Business Logistics, 7th

Management of Business Logistics, 7th

Management of Business Logistics, 7th

successful supply chain relationships;

supply chain objectives; and,

Management of Business Logistics, 7th

supply chain members such as retailers,

positions in the supply chain such as a

Management of Business Logistics, 7th

Management of Business Logistics, 7th

Management of Business Logistics, 7th

 Step Two – Decision to form relationship

 Step Three – Evaluate alternatives

 Step Four – Select partners

 Step Five – Structure operating model

 Step Six – Implementation and continuous

Management of Business Logistics, 7th

Management of Business Logistics, 7th

 Step One – Perform strategic assessment

logistics and supply chain needs and overall

and will be covered in Chapter 14.

Management of Business Logistics, 7th

firm’s services be needed.

that external supplier provides, then the firm

there are compelling drivers and facilitators

Management of Business Logistics, 7th

Management of Business Logistics, 7th

 Drivers might include:  Facilitators might include:

 Customer service techniques

Management of Business Logistics, 7th

 Decide on type of relationship.

 Match manufacturer’s needs with capabilities

of each potential partner.

overall selection process.

Management of Business Logistics, 7th

credentials of the most likely candidates.

on a professionally intimate basis.

Management of Business Logistics, 7th

Management of Business Logistics, 7th

 Step Six – Implementation and

the relationship, the implementation

function of the ability of the partners

Management of Business Logistics, 7th

Management of Business Logistics, 7th

 Terms contract logistics and outsourcing

Management of Business Logistics, 7th

Management of Business Logistics, 7th

a comprehensive set of logistics offerings.

 Nonleveraged 3PLs use assets belonging solely

to the parent firm.

UPS Logistics are examples of 3PLs.

Management of Business Logistics, 7th

and/or distribution experience.

less complex than for the transportation

Logistics, and IBM are examples of

Management of Business Logistics, 7th

middlemen extending forwarder roles.

a wide range of logistics services.