Management of Transportation

Chapter 13Shipper Strategies

and 3PL

2

Mode Selection Process

• Transport selection decision: 2-part decision– Mode selection– Carrier selection

• Process begins with cost and service goals– Definition of cost and service measures

• Selection criteria/measures– Transportation costs

• Rates and charges assessed by mode

3

Mode Selection Process, cont’d

• Selection criteria/measures, cont’d– Transit time and transit time reliability

• Affect inventory and stockout costs

– Accessibility– Capability– Security, damage, loss

• Affect inventory and stockout costs

• Strategic significance of mode selection

4

Carrier Selection Process

• Can consider same five selection criteria– Usually, accessibility and capability are similar

among carriers in a given mode– Often more specific measures utilized– Relative importance

• Transit time reliability• Transport rate• Total transit time• Willingness to negotiate• Carrier financial stability

3rd Party

• Definition of a 3PL– “an external supplier that performs all or a part of a

company’s logistics functions.”– Services may include: inventory management,

warehousing, financial services, transport, distribution– Our focus on transportation services, but,

• Transport services should be integrated with customer’s

other logistics activities

• Transport focused 3PL should be capable of providing solutions to logistics and supply chain challenges

5

Types of 3PL Providers

• Most 3PLs have their origin in a specific activity, such as transport, IT, etc.

• These foundation services provide a basis for classifying 3PLs– Transportation based– Distribution based– Forwarder based– Financial based– Information based

6

Types of 3PL Providers

• Transportation based– Originally transportation carriers– Developed 3PL subsidiaries in response to expanding

customer requirements– Services now include transport management, dedicated

contract carriage, and fulfillment center operation– Example providers (with parent company)

• APL Logistics/Neptune Orient Lines Limited

• UPS Supply Chain Solutions/UPS of North America

7

Types of 3PL Providers

• Distribution based– Originally public or contract warehousing services– Expanded services into inventory management and

order fulfillment. – Some have integrated transport services into offerings– Wide range of market reach, from local to global– Example providers

• Exel, DSC Logistics, Ozburn-Hessey Logistics

• Caterpillar Logistics Services

8

Types of 3PL Providers

• Forwarder based– Originated from intermediaries such as freight

forwarders, brokers and agents– Arrange transport-related services for less-than-

volume shipments and for international shipments– Example providers

• C.H. Robinson Worldwide, Hub Group, Kuehne+Nagel

• Considerable mergers and acquisitions among this group

9

Types of 3PL Providers

• Alternative 3PL classification scheme– Asset based providers

• The 3PL owns the equipment used to provide services

– Non-asset based providers • 3PL arranges for services from other companies that

own equipment

• The 3PL tends to not own equipment (assets)

10

Types of 3PL Providers

• Asset based providers– Examples include Exel, FedEx, UPS, Menlo– Advantages for user of 3PL services

• 3PL maintains direct control over shipper’s freight

• 3PL has ready access to capacity

• Fewer organizations to work through to resolve problems

– Disadvantages for user of 3PL service• Provider may favor using the type of assets it owns,

this may be less then optimal for user

11

Types of 3PL Providers

• Non-asset based providers– Service integrator

• Build customer-tailored solutions from services offered by transport and logistics service specialists

• Experts in structuring and negotiating contracts

– Popular services include freight management and brokerage, routing and scheduling shipments, international freight flow management

– Examples: CEVA Logistics, C.H. Robinson– Advantages: flexibility, unbiased solutions

12

3PL Services and Integration

• Wide range of services, from supply chain design to daily operations

• Within transport, 3PLs provide 4 principal types of services– Freight movement– Freight management– Intermediary services– Specialty services

13

Figure 9-1: 3PL Primary Transportation Offerings

14

FREIGHT MOVEMENT• For hire carriage• Contract carriage• Expedited service• Time definite service • Intermodal service

FREIGHT MANAGEMENT• Carrier selection, routing, & scheduling • Contract compliance• Performance analysis• Freight bill auditing and payment • Transportation management systems

INTERMEDIARY SERVICES • Surface forwarding • Air forwarding• Freight brokerage • Intermodal marketing • Shippers associations

SPECIALTY SERVICES• Dedicated contract carriage • Drayage• Pool distribution• Merge in transit • Household good movement

3PL Services and Integration

• Intermediary services– Surface freight forwarder

• Picks up, assembles and consolidates shipments

• Arranges for carriers to transport and deliver to final destination

• Serve as shippers and carriers. As carriers, they are liable for loss and damage

– Air freight forwarder (similar to surface forwarder)• Specializes in high value, time sensitive goods

15

3PL Services and Integration

– Freight brokerage• Middlemen between shipper and carrier

• Tries to match carrier’s capacity with shipper’s demand

– Intermodal marketing companies• Consolidators or agents, facilitate intermodal rail service

• Assume no liability, legal shipping arrangement is between shipper and carrier

– Shippers associations• Non-profit coops, aggregate member cargo for shipment

as consolidated load

16

3PL Services and Integration

• Specialty services– Dedicated contract carriage

• 3PL serves as customer’s private fleet

• Customer gains advantage of private fleet without capitalization, operating and management responsibilities

– Drayage• Short haul trucking, pick up and delivery of containers

• Typically contracted for by rail or ocean carriers

17

3PL Services and Integration

• Emerging 3PL capabilities– Customers desire “one-stop shopping” thus, leading

3PLs developing as integrated service providers– Customers desire global reach, thus, leading 3PLs

expanding service territories– Both capabilities require:

• Supply chain network design capabilities

• Process implementation and coordination

• Day-to-day execution

• Strong IT tools and multi-modal capabilities18

3PL Services and Integration

• Approaches to global integration include:– Leveraging strengths of express delivery services

• Visibility, door-to-door, high reliability

– Acquisitions and partnerships among 3PLs– Offering portfolio of transportation, e-commerce

supply chain and business services• Includes inventory, fulfillment, cold chain solutions,

cross docking, brokerage, freight forwarding

– Strategic investments in transport/distribution facilities

19

3PL User OverviewReasons for Outsourcing

• Lack of internal expertise

• Supplement internal expertise

• Opportunity to reduce costs, improve financial performance

• Opportunity to increase resource capacity or improve asset productivity

20

Reasons For and Against 3PL Use

Reasons for Using 3PL Services

• Opportunity for cost reductions • Ability to focus on core competencies• Opportunity to improve customer service• Improve return on assets• Increase in inventory turns• Productivity improvement opportunities• Imbibe more flexibility into logistics

processes• Access to emerging technology• Expansion to unfamiliar markets• Ability to divert capital investments

Reasons Against Using 3PL

• Logistics is a core competency of company• Cost reductions would not be experienced• Control over outsourced function would diminish• Service level commitments would not be realized• Company has more expertise than 3PL providers• Logistics is too important to consider outsourcing• Outsourcing is not a corporate philosophy • Global capabilities of 3PL need improvement• Inability of 3PLs to form meaningful

relationships• Issues related to security of shipments

21Sources: B.S. Sahay and Ramneesh Mohan, “3PL practices: an Indian perspective, International Journal of Physical Distribution & Logistics Management, Vol .36, No. 9, 2006; and, Georgia Tech and CapGemini LLC, Eleventh Annual 3PL Study, 2006.