“FACTORS WHICH ENHANCE CUSTOMER VALUE IN SUPPLY

CHAIN & LOGISTICS.”

Under The Guidance Of: Submitted By:

Dr. A Nag Surbhi Khirbat Roll No: 06-S1-142

IN PARTIAL FULFILLMENT OF POST GRADUATE DIPLOMA IN MANAGEMENT

(2006-2008)

INSTITUTE OF MARKETING & MANAGEMENT

NEW DELHI

STUDENT UNDERTAKING

This work is originally done by me and not copied from other reports.

Based on my knowledge, data and information collected during my thesis

work, I have prepared this report and I believe it is true and up to the best

of my knowledge.

Surbhi Khirbat

06-S1-142

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CONTENTS

S. NO TOPIC NAME PAGE NO

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2.

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8.

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13.

14.

EXECUTIVE SUMMARY

INTRODUCTION

LITERATURE REVIEW

CORPORATE OBSERVATIONS

RESEARCH OBJECTIVE

RESEARCH METHODOLOGY

CUSTOMER SERVICE MANAGEMENT

DATA ANALYSIS

FINDINGS

RECOMMENDATIONS

LIMITATIONS

CONCLUSION

BIBLIOGRAPHY

APPENDIX QUESTIONNAIRE

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EXECUTIVE SUMMARY

Today India is fast emerging as an economic super power. Advances in

technology infrastructural development and its vast resources have placed

it in the global arena of growth. The import/export activities have surged

to greater heights. So in the present scenario we cannot ignore the

importance of shipping companies and the logistics companies who are

providing transportation facilities to increase the imports and exports of

country and directly contributing in development of country. Logistics

involves a wide set of activities dedicated to the transformation and

distribution of goods, from raw material sourcing to final market

distribution as well as the related information flows. Supply chain

management is here. It is not about shipping orders; it is not about

making product then pushing it out the door. Supply chain management is

about developing a process to respond to the different requirements of

each customer. Customers are driving suppliers' practices. Being

successful requires logistics effectiveness. Customers, competitors and

vendors are global. This is an exciting challenge and opportunity for

companies who see the potential and make it happen.

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So we see that logistic provider company plays an important role in

efficient working of supply chain for any company. The report tells about

the importance of third party logistics provider in Supply Chain.

Study of business logistics and supply chain management illustrates how

supply chain collaboration can create an enabling environment, within

which service levels will enhance customer value, whilst shareholder

value will also increase.

The Thesis involved the study of “factors which enhance customer value

in the logistics & supply chain.” The project was carried out by taking

appointment from third party operators and meeting them personally and

if not able to get appointment then asking question from them through

telephone.

Survey was carried out through the help of Questionnaire, which is the

primary source of data collection and also secondary data was collected

from articles and www.

All the analysis and findings on the basis of questionnaire and secondary

data are available in the report. The project report is being concluded by

conclusion, recommendations and limitations on the basis of learning and

analysis, which I experienced during my Thesis.

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In the end annexure is given where sample questionnaire is attached.

Bibliography is also given which shows from where I have taken

reference while preparing my project report.

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INTRODUCTIINTRODUCTIONON

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INTRODUCTION

A production supply chain refers to the flow of physical goods and

associated information from the source to the consumer. Key supply

chain activities include production planning, purchasing, materials

management, distribution, customer service, and sales forecasting. These

processes are critical to the success of any operation whether they’re

manufacturers, wholesalers, or service providers.

If you are not in a company being impacted right now by Supply Chain

Management or by Continuous Replenishment and do not think that

Supply Chain Management affects you, then you are wrong. If it does not

impact you now, it will. The concept is appearing in various industries

and is moving to smaller companies. Start to understand what it is, and

what it means to you. Supply Chain Management is a dynamic paradigm

driving through companies. Articles on supply chain management appear

in many different publications, national and international, with different

target audience. While many of the stories relate to large companies who

supply large retailers or grocers, the attention SCM is getting is

phenomenal. Add in the global impact of customers, competitors and

suppliers; and the magnitude of the supply chain is very significant.

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What It Is All About. Supply Chain Management is a reverse of prior

practices where manufacturers supplied product to customers and they

wanted to. Now customers tell suppliers how and when they want their

inventory delivered. The driver behind Supply Chain Management is to

remove inefficiencies, excess costs and excess inventories from the

supply pipeline which extends from the customer back through his

suppliers and through his suppliers' suppliers and so on back. By having

the program driven by the customer, it is hoped that inventories, caused

by uncertainties and slow response, will be significantly eliminated.

While there are sales incentives to major suppliers with the carrot of

category management or similar programs, the success of supply chain

management rests with logistics.

The Five Key Issues of Logistics Effectiveness are core to Supply Chain

Management--

• Movement of Product

• Movement of Information

• Time / Service

• Cost

• Integration, both internal and external, both organizations and

systems

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Supply chain management requires a logistics model based on quick

order to delivery response. A model which focuses from vendors' doors

through to delivery to customers' doors. The model must meet the

customers' demanding and specific requirements. It requires

organizational flexibility and responsiveness, internal and external

teamwork and demands the use of processes and technology. A common

practice which causes inefficiencies, excess inventories and high costs is

forward-buying. On the surface, it looked like a way to purchase at a low

price. But in reality, this practice is inefficient and results in additional,

higher costs and negative impact throughout the supply chain. Forward-

buying strains the capabilities of suppliers to respond and for the

distribution department of customers to handle the products. It creates an

operational and cost inefficiency for both supplier and customer. By

forcing excess sales through the supply chain, then the hidden costs of

manufacturing and distribution valleys, after the huge peak caused by the

forward-buy can be significant. Supply Chain Management is about what

the customer demands. It is not about what the supplier is capable of

doing at present.

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The customer requirements may vary by customer, but they do have

certain consistencies to logistics--

• Quick response to orders from order receipt through shipment to

invoicing

• Complete and accurate orders / no backorders

• Delivery windows or appointments

• Special shipment preparation as to packaging, marking, labeling,

stenciling, slip sheets or pallets, etc.

• Bar coding

• EDI

• Carrier selection

Effects of Supply Chain Management: The initial benefits of supply chain

management accrue to the customer, the initiator of his supply chain. He

earns the reduction in inventories by driving out excesses inventories

which he must purchase, store and be responsible for. The impact of

supply chain management to the supplier may be more difficult to

classify, initially, as benefits. They may vary, but may include:-

• Fewer orders initially while the customer draws down excess

inventories.

• Small and more frequent orders.

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• Vendor carries inventory, not the customer.

• Higher warehousing costs for picking smaller and more orders.

• Higher freight costs for shipping smaller order and more orders.

• Penalties for not meeting the customer's requirements.

• Possible loss of business for not meeting the customer's

requirements.

• Additional capital expenditure to satisfy the need for information

and technology to provide the base for SCM responsiveness.

Supply chain management success dictates new ways of doing

business for suppliers. There is no "standard" practice; no

"standard" way of doing business. Instead, there is a practice for

each customer.

If a company has one hundred customers, he may have one

hundred customer practices. Adjusting this way challenges

traditional management concepts.

Impediments: There are impediments to supply chain success.

Emphasis is presently on the initial customer-supplier link. It is not

coordinated through the supply chain. Instead as the effects ripple

through the supply chain, it is more like a "whisper down the lane"

impact, where suppliers are not clear as to their role and what they

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must do. Responding to supply chain demands is not easy. There

are issues which must be recognized and dealt with, such as--

• Accounting Silos- Supply chain management is a leading-edge

technique. Yet the traditional cost measurements used by

companies goes back to the Model A. Meeting Generally Accepted

Accounting Principles is one thing; measuring the costs and

benefits of logistics and supply chain management is something

quite different.

• Logistics has a difficulty with having its costs properly identified,

captured and measured properly. Some costs, such as freight, show

on the P&L. Some, such as inventory, show on the balance sheet.

And the driver to supply chain management, service, does not

appear on any financial document. As a result, suppliers may have

difficult seeing the cause-effect of supply chain management to

them and the gain-sharing benefits as you progress with it.

Activity-Based Costing is the closest approach to measuring the

effects of supply chain management on an organization. With

ABC, you can develop cost information based on the activities

required to the logistics service.

• Functional Silos- Supply chain management is a process which

requires integrated teamwork. Its goal is customer order-response-

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satisfaction. Yet traditional organizations, with their

responsibilities and goals, may not be teamwork enhancers. Each

function may have its own internal goals which run counter to

effective logistics performance necessary for supply chain

management success. Look at the underlying driver of supply chain

management, the customer. In developing a tailored process to

meet the needs of each customer, who is responsible for it? Sales--

after all, it is one of their customers.

Logistics, since they are on the front-line for making supply chain

management work? Manufacturing who must be able to adapt to

the dynamics of point-of-sale or other production drivers? Or

consider that the company uses tools such as MRP to drive its

production planning; yet supply chain management is a pull, not a

push approach. How does this shift in a company's practice be

absorbed? Who is responsible then for a company's supply chain

management? The answer is everyone in the company is

responsible; yet the organization has often dictated that one group

be responsible.

• Reactionary Practices- Since supply chain management is a process

it takes time, focus and discipline to make the necessary changes to

the way a company does business. It is not reacting to an order; it is

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responding to a customer. "Fighting fires" and other reacting

events are anti-process and, while it seems like it is customer-

focused, it is not. Instead reacting to crises and other emergencies

keeps a company for doing what must be done to implement the

needed process for supply chain management. At the end of day of

crises, the company is often no closer to implementing the

necessary integrated process.

• Tactical versus Strategic Role for Logistics- Supply chain success

depends upon logistics. To develop the necessary programs for

supply chain management, the logistics organization must be

involved in the planning activity from the beginning. Other groups

cannot meet without logistics, decide what logistics must do, give

logistics orders and think there will be supply chain success. If that

approach is used, then the likelihood of meeting the customer

requirements and implementing the technology and teamwork

needed, will not be there.

• Unclear Mission- Supply chain management requires a rethinking

of the company and the logistics mission. Is it customer or is it

cost? These can be conflicting goals. Saying the mission is service,

and then measuring it by cost can cause organizations to lose focus

on what must be done. Supply chain management is a new concept

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and requires a reassessment of what the company is doing, where it

is going and how it wants to get there.

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LITERATURELITERATURE REVIEWREVIEW

18

LITERATURE REVIEW

The planning, scheduling and control of the supply chain, which is the

sequence of organizations and functions that mine, make or assemble

materials and products from manufacturer to wholesaler to retailer to

consumer. The driving force behind supply chain management (SCM) is

to reduce inventory

Supply chain success just doesn't happen. It takes focus and effort across

the entire company organization and with outside suppliers and service

providers. Logistics touches every part of a company. So supply chain

management must be multidimensional in its approach and scope. And

this takes process, people and technology. This is true whether you are a

wholesaler, retailer or manufacturer. And it is true if you are lean and

need to be agile, flexible and collaborative. Supply chains can be long

and complex, stretching between different countries. A firm may have

many customers, each with different order and shipment requirements

and destinations. There can be many suppliers, sourced from different

cities and many countries. Each supplier may require instructions and

planning as to lead times. There are internal needs too. These include

where warehouses should be located, both in the U.S. and internationally;

how inventory is forecast and allocated to each warehouse; how orders

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are handled and shipments prepared and how production is assigned

among plants and suppliers.

PROCESS: Process means a practice, a series of actions, done for a

specific purpose, such as satisfying customers. Customers demand and

expect more from their suppliers; that is a fact regardless your size or

industry. And supply chain management is critical to that customer

satisfaction. Supply chain process is a flow of activities with the goal of

meeting the requirements of a customer. It includes all internal functions,

logistics, distribution, sourcing, customer service, sales, manufacturing

and accounting. It includes external companies. The series flows

backward--from delivering each customer order each order as demanded

back through the performance of suppliers to provide needed finished

products, components, parts and assemblies. Process has structure. This

compares what some companies call "process" which may be a series of

repetitive, standalone transactions. Process has standardization with its

understanding of what must be done. With that in place, it also has

flexibility to handle exceptions and changes that are a reality of doing

business.

PEOPLE : People make organizations and are important to supply chain

success. They need to have functional expertise and skills. They need to

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know how to manage and operate warehouses, inventory, transportation,

purchasing. They need both a tactical view for everyday business and a

strategic vision of where and how their function fits in the supply chain

and how to make it better. People success is a function also of the

corporate culture, how the company sees itself, defines itself and

operates, both internally and externally. The culture can be a facilitator of

processes or an inhibitor. If the company has myopia, then it negatively

impacts its ability to respond in all areas required.

Similarly, organizations, with their hierarchical design, create barriers to

supply chain process, which is horizontal. Organization silos can short

circuit the supply chain process. Each silo can have its internal goals that

can work cross-functionally to the process. Even though the focus of the

supply chain process is the customer, merchandising, logistics, finance

and others may work to optimize their role, but which may sub optimize

the process.

TECHNOLOGY : Supply chain management is sometimes define, or

incorrectly defined, in terms of technology. Process can be defined as

technology, with an overemphasis on hardware and software, and not on

the purpose of the process. Software may be "sold" as the answer, the

means, to supply chain nirvana. That can lead to an over expectation by

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the user, which in turn can lead to disillusion with what is required to set

up and operate the system and with the results actually achieved.

AN EXAMPLE WITH SUPPLIER MANAGEMENT: Every

company has a position in Supplier Management. You are dealing with

suppliers and/or you are a supplier. This is a vital part of the total supply

chain. And it must be aligned with the goal of meeting customer

requirements. Supply chain visibility is a desired means to supply chain

effectiveness. And that visibility need may be greatest with the inbound

part of the supply chain. This part of the total supply chain is very

complex and involves a significant financial obligation. Many purchase

orders with many supplier shipping diverse products from multiple plants

and warehouses, both from the U.S. and various countries and ports or

airports can be a significant management challenge. Add in different

cultures, time zones and business practices the visibility need with a

global supply chain can be daunting. And the pressures in supplier

performance are great for all, wholesalers, manufacturers, retailers and

suppliers. Supplier management as part of inbound supply chain requires

process, people and technology. It demands a process, not a series of

purchase order transactions. It requires people with vision and skills to

manage the complexity and to build the collaboration and deal with the

flexibility needed as sales and other events change the purchasing

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demands. The people need to be linked. It requires technology to gain the

needed visibility of purchase orders, suppliers and transportation of what

is going on and to use event management and exception management to

deal with all the vagaries that can occur.

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SUPPLY CHAIN ACTIVITIES

Supply chain management is a cross-functional approach to manage the

movement of raw materials into an organization, certain aspects of the

internal processing of materials into finished goods, and then the

movement of finished goods out of the organization toward the end-

consumer. As organizations strive to focus on core competencies and

becoming more flexible, they have reduced their ownership of raw

materials sources and distribution channels. These functions are

increasingly being outsourced to other entities that can perform the

activities better or more cost effectively. The effect is to increase the

number of organizations involved in satisfying customer demand, while

reducing management control of daily logistics operations. Less control

and more supply chain partners led to the creation of supply chain

management concepts. The purpose of supply chain management is to

improve trust and collaboration among supply chain partners, thus

improving inventory visibility and improving inventory velocity.

Several models have been proposed for understanding the activities

required to manage material movements across organizational and

functional boundaries. SCOR is a supply chain management model

promoted by the Supply Chain Management Council. Another model is

the SCM Model proposed by the Global Supply Chain Forum (GSCF).

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Supply chain activities can be grouped into strategic, tactical, and

operational levels of activities.

Strategic:

Strategic network optimization, including the number, location,

and size of warehouses, distribution centers and facilities.

[[Strategic partnership] with suppliers, distributors, and customers,

creating communication channels for critical information and

operational improvements such as cross docking, direct shipping,

and third-party logistics.

Product design coordination, so that new and existing products can

be optimally integrated into the supply chain, load management

Information Technology infrastructure, to support supply chain

operations.

Where-to-make and what-to-make-or-buy decisions

Aligning overall organizational strategy with supply strategy.

Tactical:

Sourcing contracts and other purchasing decisions.

Production decisions, including contracting, scheduling, and

planning process definition.

Inventory decisions, including quantity, location, and quality of

inventory.

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Transportation strategy, including frequency, routes, and

contracting.

Benchmarking of all operations against competitors and

implementation of best practices throughout the enterprise.

Milestone payments

Focus on customer demand.

Operational:

Daily production and distribution planning, including all nodes in

the supply chain.

Production scheduling for each manufacturing facility in the supply

chain (minute by minute).

Demand planning and forecasting, coordinating the demand

forecast of all customers and sharing the forecast with all suppliers.

Sourcing planning, including current inventory and forecast

demand, in collaboration with all suppliers.

Inbound operations, including transportation from suppliers and

receiving inventory.

Production operations, including the consumption of materials and

flow of finished goods.

Outbound operations, including all fulfillment activities and

transportation to customers.

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Order promising, accounting for all constraints in the supply chain,

including all suppliers, manufacturing facilities, distribution

centers, and other customers.

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LOGISTICS FRAMEWORK

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OUTSOURCING SUPPLY CHAIN MANAGEMENT-8 ISSUES

Outsourcing is done for various reasons. The driver can be generating

cost reductions and downsizing; this has been a traditional reason for

outsourcing. But there are others, such as gaining capabilities that are not

available internally, implementing lean programs, streamlining

operations, strategically positioning the company, or improving or adding

capabilities to gain competitive advantage. Regardless of the reason,

outsourcing succeeds when it is well thought out and done properly.

Some key points to identify for all parties involved in outsourcing

are:

*Know and Define Reason for Outsourcing: This may seem obvious,

but it can be tricky. What do you want to accomplish and why? What is it

that you want to do better? What would it take to do it and do it well

inside the company? Why is that option not viable?

For example, the reason may be to reduce freight costs. But freight cost

can be a problem, with high rates or the carriers used or the methods

selected. Or, freight can be a symptom of a problem from use of high cost

shipping methods because of forecasting, inventory or supplier problems.

In these situations, high freight cost is a derivative of another problem. If

29

the real cause of freight is not identified, then the outsourcing will not be

successful, or at least as successful as it could be because the reason for

the outsourcing has not been properly identified.

Freight also has a service factor, whether it is moving inventory from

suppliers, between company operations or to customers. That has to be

understood in order to evaluate the freight cost problem and needs. What

are you buying for transportation? What are you paying? Why are you

dissatisfied? What do you require?

Similar comments can be made about outsourcing to manage inventory.

The problem may seem to be too much inventory or out-of-stock

situations. But the inventory problem could be the result of a larger

problem as to sales forecasting reliability, supplier performance in

delivering purchase orders timely and correctly. It could be a need for

systems or systems integration to provide visibility of all inventories in

the supply chain, whether at warehouses or purchase orders at suppliers

or in-transit.

*Evaluate Outsourcing Business Process versus Function: Knowing

what is being outsourced and why it is being outsourced then drives the

type of logistics service providers to be considered. The reason for

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outsourcing may also direct whether you are looking to outsource a

function or a process. Outsourcing management of inbound transportation

takes a function and transfers it to an outside party. Outsourcing the

management on the inbound supply chain, including supplier purchase

orders, supplier performance and transportation takes a process and

transfers it to an outside provider.

Outsourcing a function versus a process can change the type of service

provider that should be evaluated. A 3PL is often used with functions,

such as inbound transportation and related activities. Managing a function

requires depth of skills sets from the service provider. A 4PL may be the

better choice with managing a process, which requires breadth of logistics

skill sets.

The point is that outsourcing to optimize a function, without fully

understanding the process, problem and need, can sub optimize the

supply chain effectiveness and costs. Outsourcing may fail, but not for

the right reason. The need was not clearly understood; so the outsourcing

solution was not properly identified. The functional issue overrode the

process; so the proper logistics service provider was not identified and

selected. Of the eight issues, this may be the key one, process versus

function, because without this the outsourcing selection may be skewed,

if not flawed.

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Also determine if the outsourcing and the desired results require

collaboration with any of the company trading partners. This is important

to defining the needs, identifying partners and designing the needed

program.

*Recognize Seller and Buyer Roles: Each party has a reason to be

involved in the outsourcing action. And they bring different confidences

and expectations into the effort. The company selling its outsource

service wants the business for his reasons. He may want the volume to

build his own leveraging position with the transport carriers or others he

deals with. He may want the volume to increase the throughput and

reduce costs at warehouses or other operations. The point is that the

Seller may be focused on his needs and not focused on the Buyer's needs.

He may not listen to the potential buyer's requirements and instead

present his capabilities as a stand-alone instead of how it meets the

Buyer's requirements. Understanding and satisfying the Buyer's unique

and complete needs can become subordinate to "getting the business".

Also see if the Seller views you as a "client" or as a "customer".

Outsource providers who see the potential buyer as a client will recognize

the unique needs and develop, tailor and manage the relationship

accordingly. Those providers who view a prospective buyer as a

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"customer" may not pay the attention to the business if and once they

have gained it. A customer is one of many customers; he is not unique.

Laying out a list of "customers" utilizing the service provider is not a

critical as his demonstrating how that provider will manage the client's

needs, both today and as they may change. Such a provider is proactive,

not reactive. Client management differentiates successful outsource

service providers, for both gaining and retaining business.

Also, the company, more exactly, the persons, seeking to outsource can

be very emotional; that should not be underestimated. And the effort can

be in a more in a difficult situation. They may be under internal pressures

that make them feel they are under attack. As a result, they may not be as

open and receptive to the effort as they should be. They may close

themselves off to what the company's seeking the business are offering to

do.

As a result, either or both parties may be talking "at" each other instead of

"with" each other. The result of such communication can lead to bad

decisions by either or by both parties.

*Detail Your Operation. Clearly specify in writing what is done, by

whom, how it done, when and why. Highlight both the strengths and its

weaknesses. Show and understand interfaces between departments and

33

how duties and work is handed off between them. Understand "hidden",

peripheral and "assumed" work that is done and that is beyond the job

descriptions and department purpose and responsibilities that outsiders

may not know about. Define critical points in the function or process.

The function or process should be mapped. Supply chain management

crosses organizational lines; mapping will delineate the cross-functional

roles and interfaces. It will also show gaps or redundancies that may

exist. These gaps or redundancies may highlight key areas for the 3PL or

4PL that are critical for success.

Detail the cost of the operation. What are the components, direct and

indirect, such as labour, space, freight and other? Recognize any

disconnect with some costs, such as transport costs and inventory, in the

financial system. Freight is on the monthly profit and loss; inventory is a

balance sheet item. Yet there is often a cause-effect, a connection,

between them even if it is not readily reflected in the accounting system.

*Set Metrics/Key Performance Indicators and Accountability: The

outsourcing is being done for a specific reason with anticipated results.

Define those expectations clearly. The planned results should be tangible.

The results should be measurable. "Reducing costs", "improving supplier

34

performance" or similar goals are vague and can lead to disputes during

the contract on whether the outsourcing is successful.

The anticipated results should be clearly set early in discussions as part of

the expectations. The Seller needs to know these to see the realities of

accomplishing them, given the requirements and how and when it will be

done.

Benchmark key costs and performance. The two are tied. Even if the

purpose is a cost reduction or service improvement; benchmark both for

the sake of the outsource arrangement and relationship. However do not

develop measure for the sake of measures and do not develop too many

measures. Focus on the key metrics and performance indicators that relate

to outsourcing success.

With insights into the present operation and performance, then mutual

agreement can be established on the results during an agreed time period.

That clearly sets the framework and standard for evaluation of the

outsourcer.

Does the program include incentives, for results beyond the baseline

goals? Then drill down into the costs and results for an understanding of

cause-effects. The mapping work will be of great aid for developing the

changes needed for incentives results.

35

Accountability and responsibility should be understood too, from and for

both parties. Supply chain management has multiple areas of

responsibility and accountability; it is a complex, multifunction process

that spans states and continents. It runs from suppliers’ right through to

customers. The impact of each function on the total process cannot be

overlooked nor assumed away. Key points of decision-making should be

identified.

Problems will occur; successful, quick resolution involves knowing who

is responsible. A single person should be deemed accountable for both

parties. The time to identify and define responsibilities and metrics is

early in the process, before any contract is signed.

*Be Aware of Risks. Outsourcing is change management: It may very

well be business process reengineering. There is no guarantee that the

outsourcing will succeed. "The best-laid plans o' mice an' men gang aft a-

gley, an' lea'e us nought but grief an' pain for promised joy. '', quoting

Robert Burns. Anticipate the various scenarios and the internal and

external factors that can impact the program and results. There are

planned benefits.

36

But, perhaps more importantly, there are potential downsides from the

outsourcing. Be aware of them. No rose-colored glasses are allowed

during the outsource evaluation. Do a risk assessment. Identify real and

perceived risks. Work to mitigate risks. There will likely be a contract;

that is a commitment to the program. Consider contract length as an

option in risk mitigation.

Think through the "what ifs." What if goals are not attained? What if

there are service problems that seriously impact the company as to

customer deliveries or with purchase orders from suppliers? What if there

are inventory difficulties, either stock outs or surges in levels? What if

there are unanticipated, significant cost increases? What options will

there be then?

With outsourcing, there is transference of company knowledge, practices

and resources. If the outsourcing, for whatever reason, is not working,

how do you fix it quickly and well? What if it cannot be remedied? Do

you terminate the agreement and find another service provider? If so, how

do you do it? How do you transfer from one provider to another? How do

you regroup and bring the outsourced service back inside? Can you bring

it back? There may be no calamities with the outsourcing. But recognize

that there could be.

37

*Plan the Change: Outsourcing is not like turning on a light. All parties

should plan the migration. Do not depend on the contract to make the

outsourcing work. There are major tasks to plan and mundane ones that

should be considered. Recognize the outsourcing means that people and

departments in the company are giving up ownership of the function or

process. Build teams among all affected parties and have the teams meet

to detail what must be done. Develop the plan and time lines. Plan tests.

Identify any opposition and how to overcome it. Build the relationship

during the planning phase, before the change is made.

Understand any customization and reengineering that will be made and

how it will be developed and implemented. Look at interfaces and

handoffs of work or information between, within and among the

company, the service provider and trading partners. Provide training.

Make sure that people and systems are ready. Ignore no detail or task.

*Manage the Outsource Operation: Do not assume the contract will

manage the logistics service provider and operation. Use the key

performance indicators continuously. Meet regularly, especially during

the implementation, to review progress, problems and successes. Test

accountability. Assess the relationship.

38

1. The Nature of Logistics

The growing flows of freight have been a fundamental component of

contemporary changes in economic systems at the global, regional and

local scales. These changes are not merely quantitative (more freight), but

structural and operational. Structural changes mainly involve

manufacturing systems with their geography of production, while

operational changes mainly concern freight transportation with its

geography of distribution. As such, the fundamental question does not

necessarily reside in the nature, origins and destinations of freight

movements, but how this freight is moving. New modes of production

are concomitant with new modes of distribution, which brings forward

the realm of logistics; the science of physical distribution.

Logistics involves a wide set of activities dedicated to the transformation

and distribution of goods, from raw material sourcing to final market

distribution as well as the related information flows. Derived from Greek

logistikos (to reason logically), the word is polymeric. In the Nineteenth

century the military referred to it as the art of combining all means of

transport, revictualling and sheltering of troops. Today it refers to the set

of operations required for goods to be made available on markets or to

specific destinations.

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Logistics is thus a multidimensional value added activity including

production, location, time and control of the supply chain. Activities

comprising logistics include physical distribution; the derived transport

segment, and materials management; the induced transport segment.

Physical distribution is the collective term for the range of activities

involved in the movement of goods from points of production to final

points of sale and consumption. It must insure that the mobility

requirements of supply chains are entirely met. Physical distribution

includes all the functions of movement and handling of goods,

particularly transportation services (trucking, freight rail, air freight,

inland waterways, marine shipping, and pipelines), transhipment and

warehousing services (e.g. consignment, storage, inventory management),

trade, wholesale and, in principle, retail. Conventionally, all these

activities are assumed to be derived from materials management

demands.

Materials management considers all the activities related in the

manufacturing of commodities in all their stages of production along a

supply chain. It includes production and marketing activities such as

production planning, demand forecasting, purchasing and inventory

management. Materials management must insure that the requirements of

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supply chains are met by dealing with a wide array of parts for assembly

and raw materials, including packaging (for transport and retailing) and,

ultimately, recycling discarded commodities. All these activities are

assumed to be inducing physical distribution demands.

The close integration of physical distribution and materials management

through logistics is blurring the reciprocal relationship between the

induced transport demand function of physical distribution and the

derived demand function of materials management. This implies that

distribution, as always, is derived from materials management activities

(namely production), but also, that these activities are coordinated within

distribution capabilities. The functions of production, distribution and

consumption are difficult to consider separately, thus recognizing the

integrated transport demand role of logistics.

2. Distribution Systems

The nature and efficiency of distribution systems is strongly related to the

nature of the economy in which they operate. In economies dependent on

the extraction of raw materials, logistical costs are comparatively higher

than for service economies since transport costs account for a larger share

of the total added value of goods. Contemporary logistics was originally

dedicated to the automation of production processes, in order to organize

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manufacturing as efficiently as possible, with the least cost-intensive

combination of production factors. A milestone that marked rapid

changes in the entire distribution system was the invention of the concept

of lean management, primarily in manufacturing. One of the main

premises of lean management is eliminating inventories and organizing

materials supply strictly on demand, replacing the former storage and

stock keeping of inventory. The outcome is a specialization of production

and a greater variety of products.

In a broader sense distribution systems are embedded in a changing

macro- and microeconomic framework, which can be roughly

characterized by the terms of flexibility and globalization:

Flexibility implies a highly differentiated, strongly market- and

customer-driven mode of creating added-value. Contemporary production

and distribution is no longer subject to single-firm activity, but

increasingly practiced in networks of suppliers and subcontractors. The

supply chain bundles together all this by information, communication,

cooperation, and, last but not least, by physical distribution.

Globalization means that the spatial frame for the entire economy has

been expanded, implying the spatial expansion of the economy, more

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complex global economic integration, and an intricate network of global

flows and hubs.

The flow-oriented mode affects almost every single activity within the

entire process of value creation. The core component of materials

management is the supply chain, the time- and space-related arrangement

of the whole goods flow between supply, manufacturing, distribution and

consumption. Its major parts are the supplier, the producer, the distributor

(e.g. a wholesaler, a freight forwarder, a carrier), the retailer, the end

consumer, all of whom represent particular interests. Compared with

traditional freight transport systems, the evolution of supply chain

management and the emergence of the logistics industry are mainly

characterized by four features:

A fundamental restructuring of goods merchandised by establishing

integrated supply chains with integrated freight transport demand.

Whereas transport was traditionally regarded as a tool for overcoming

space, logistics is concerned with reducing time. This was achieved by

shifts towards vertical integration, namely subcontracting and

outsourcing, including the logistical function itself.

According to macro-economic changes, demand-side oriented activities

are becoming predominant. While traditional delivery was primarily

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managed by the supply side, current supply chains are increasingly

managed by demand.

Logistics services are becoming complex and time-sensitive to the point

that many firms are now sub-contracting parts of their supply chain

management to what can be called third-party logistics providers

(3PL). A 3PL is an asset based company that offers logistics and supply

chain management services to its customers (manufacturers and retailers).

It commonly owns distribution centres and transport modes. More

recently, a new category of providers, called fourth-party logistics

providers (4PL) have emerged. A 4PL integrates the resources of

producers, retailers and third-party logistics providers in view to build a

system-wide improvement in supply chain management. They are non-

asset based meaning that they mainly provide organizational expertise.

3PL and 4PL providers benefit from economies of scale and scope by

offering integrated solutions to many freight distribution problems.

3. Geography of Freight Distribution

Logistics has a distinct geographical dimension, which is expressed in

terms of flows, nodes and networks within the supply chain. Space /

time convergence, a well known concept in transport geography where

time was simply considered as the amount of space that could be traded

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with a specific amount of time, including travel and transhipment, is

being transformed by logistics. Activities that were not previously

considered fully in space / time relationships, such as distribution, are

being integrated. This implies an organization and synchronization of

flows through nodes and network strategies:

Flows: The traditional arrangement of goods flow included the

processing of raw materials to manufacturers, with a storage function

usually acting as a buffer. The flow continued via wholesaler and/or

shipper to retailer, ending at the final customer. Delays were very

common on all segments of this chain and accumulated as inventories in

warehouses. There was a limited flow of information from the consumer

to the supply chain, implying the producers were not well informed (often

involving a time lag) about the extent of consumption of their outputs.

This procedure is now changing, mainly by eliminating one or more of

the costly operations in the supply chain organization. Reverse flows are

also part of the supply chain, namely for recycling and product returns.

An important physical outcome of supply chain management is the

concentration of storage or warehousing in one facility, instead of several.

This facility is increasingly being designed as a flow- and throughput-

oriented distribution centre, instead of a warehouse holding cost intensive

large inventories.

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Nodes and Locations: Due to new corporate strategies, a concentration

of logistics functions in certain facilities at strategic locations is

prevalent. Many improvements in freight flows are achieved at terminals.

Facilities are much larger than before, the locations being characterized

by a particular connection of regional and long-distance relations.

Traditionally, freight distribution has been located at major places of

production, for instance in the manufacturing belt at the North American

east coast and in the Midwest, or in the old industrialized regions of

England and continental Europe. Today, particularly the large-scale

goods flows are directed through major gateways and hubs, mainly large

ports and major airports, also highway intersections with access to a

regional market. The changing geography of manufacturing and industrial

production has been accompanied by a changing geography of freight

distribution.

Networks: The spatial structure of contemporary transportation networks

is the expression of the spatial structure of distribution. The setting of

networks leads to a shift towards larger distribution centres, often serving

significant trans-national catchments. However, this does not mean the

demise of national or regional distribution centres, with some goods still

requiring a three-tier distribution system, with regional, national and

international distribution centres. The structure of networks has also

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adapted to fulfil the requirements of an integrated freight transport

demand, which can take many forms and operate at different scales.

Most companies consider the use of a 3rd party to help them with their

supply chain services when they realise how important it is to have

competitive customer service and how costly and difficult it can be to

achieve on their own.

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THIRD-PARTY LOGISTICS PROVIDERS/ LOGISTICS

SERVICE PROVIDERS- A BRIGHT FUTURE

There is a bright future for third-party logistics providers (3PL) and

Logistics Service Providers (LSP), for international and/or domestic

logistics opportunities. The continuing growth of supply chain

management, outsourcing and globalization plus the dynamic effect of e-

commerce are driving and will drive growth.

We distinguish 3PL from LSP. A 3PL is a division of a company, often

asset-based, that provides transport, warehousing, forwarding,

information technology or other logistics or supply chain management

related services. 3PL is seen by the parent organization as a way to

develop more business for the parent focus. The 3PL also provides higher

revenue and higher profit opportunities than the traditional business of

the corporation, which is in a commodity-service arena where price is

often the key differentiator versus competitors. 3PLs generally are

developed to develop profitable business while using the services of the

parent company. That can challenge their ability to develop logistics

solutions for all possible customers. Not all customers need logistics

programs that include the services of the parent company for all or a

significant part of the activity.

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An LSP is a stand-alone endeavour. With no parent company that

provides a transport or other service, the LSP is free to develop and

manage tailored supply chain programs for its customers without having

to use the parent company as part of its service package. It can position

itself to clients as their de facto in-house logistics department.

Growth for 3PLs and LSPs will come more in consumer related industries

that practice supply chain management (SCM). Slower to develop will be

industries that use more traditional traffic and other approaches to

logistics. Non-consumer goods industries will still be outsourcing

opportunities. Their needs and requirements will differ though.

Consumer goods businesses are also more likely to be involved in

international with either sourcing and/or sales. The Asia-U.S. trade lane,

the largest in the world, is a key outsourcing opportunity. Even more, the

dual sword of SCM and globalization creates outsourcing opportunities

for companies who do not view logistics as a core competency.

Supply chain management is driving customer practices, both directly

and indirectly. Asia-US cargoes are very much consumer-goods-type

products. And consumer goods companies are key players of SCM. The

purpose of supply chain management is to drive inefficiencies out of the

system. That means consumers have the products they want and when

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they want them. Inventories, as a buffer for uncertainties, should be

reduced. Logistics cycle times would be reduced.

To drive out inefficiencies and reduce cycle times, an effective supply

chain is built from the customer’s door back through his suppliers. This is

what SCM is about, and suppliers of companies that practice supply chain

management know this. They have to find ways to be both cost and

service responsive. Yet sourcing from Asia, with its ocean transport, is a

problem link in the supply chain and creates its own issues. How can you

be service responsive with a service that could take two weeks or a month

or longer in transit? Shippers will continue to demand faster transits.

3PLs/LSPs may create the package to put together service and cost

alternatives to meet a shipper’s specific needs.

SCM presents a way for 3PLs, who may have an ocean carrier or

forwarder as their parent, to break out of their commodity service

provider market approach. LSPs can blossom to with being able to meld

different carriers and different forwarders, with different services and

prices into a flexible program that is responsive to a customer's needs.

Being a supply chain partner to shippers will provide a way for

3PLs/LSPs to differentiate them in the marketplace.

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In international, forwarders and carriers struggle with the concept of

supply chain management, with building customer-specific, tailored

logistics programs and with moving away as a traditional, commodity

freight service provider. Plus, there are many forwarders chasing cargo.

How do they distinguish themselves from competitors? They are too

many forwarders in a very highly fractured industry. Consolidation is

inevitable. With such market turmoil, 3PLs/LSPs can seize opportunities.

LSPs/3PLs will become the customers for the steamship lines. This is

creates a dynamic for everyone. And this same dynamic is and will

continue to happen in domestic transportation and warehousing.

3PLs and LSPs will continue to grow and thrive. After all, it could be a

multibillion-dollar global market opportunity. Corporations will look at

outsourcing of their logistics as a way to gain competitive advantage,

realize it is not a core competency, and reduce costs or whatever drives

their decision. A third-party will be the customer.

Carriers must look at the 3PL/LSP market and decide whether they can

compete in it. It has many of the same requirements as the supply chain

management market. If carriers choose to compete, how will they? Will

they develop their own 3PL division with the ability to market it over the

core shipping business? Will they view the 3PL as an extension of their

business or a competitor? Will they be able to work with 3PL’s to

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develop cooperatively the programs needed by the 3PL or 4PL? This does

not mean quoting rates and negotiating volume contracts. It is a much

focused business endeavour, but the size is huge and profitable.

Success means having a viable 3PL/LSP strategy as to market(s) and how

to penetrate it. Inherently that means having the capability to look at each

shipper and his individual requirements and developing a unique solution

logistics program for that particular customer. If the program is not

tailored to each customer, then the 3PL/LSP is not being a true 3PL/LSP.

He is providing a generic commodity service.

3PLs and LSPs must define their strengths and weaknesses, from their

internal view, customers and market view and competitors view.

Perception can be stronger than reality. This is fundamental to knowing

what they can and cannot do presently and what is demanded to change.

They must assess their reason for being or wanting to be a 3PL or LSP. If

they want to move into other arenas, international or domestic, or other

industries, they must understand what practices exist and why. This is

important for assessing and defining market opportunities, from having a

wish list and turning into business.

There are fundamentals to being a third-party. Whether a 3PL or LSP is

established and growing or just beginning, they must understand how

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supply chain management and logistics differ from their traditional

transportation, warehousing or forwarding. 3PLs must understand how

they can and cannot drive business to their parent without compromising

the customer’s specific requirements; how they can tailor to meet a

customer’s needs and support their parent and how they cannot do this.

They must understand a customer’s real issues and behind-the-scenes

issues. Effective 3PLs and LSPs need and have a shipper’s perspective.

Their staff can and does provide the shipper view.

We would be remiss if we did not mention E-commerce. E-commerce is

the "in" word in business. Its growth rate and future development is

unfathomable. E-commerce is here for both B2B (business to business)

and B2C (business to consumer). It redefines the traditional business

model. 3PLs and LSPs must decide on how they will participate in the E-

commerce. They have no option. They must have dynamic web sites, for

booking, tracking, tracing, rates and much, much more. That is the

minimum they must do. E-commerce logistics will be a driver in

outsourcing because effectiveness lies outside the core competency of

shippers. 3PLS/LSPs must also be able to integrate into their customer's

system with management information, not with dumping data files into a

customer's computer. Customers must have integrated information to

manage their business effectively.

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The Internet also opens up a new way to quickly handling information

and managing business. Where EDI (electronic data interchange) never

fulfilled its promise, the Internet will and has. XML and other tools are

being developed for this. The web may be the tool and vehicle to really

develop logistics effectiveness as it is meant to be. Any company who

ignores the Internet should be in a unique business or be prepared for

possible extinction.

In conclusion, the growth of 3PLs and LSPs will be significant. The

market will evolve as competitors come and go. It will evolve as shippers

define and redefine their needs. But they will grow.

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HAVING REVIEWED THE WHOLE PICTURE THEY COME TO

REALIZE THAT THERE IS MORE THAN 1 REASON WHY

ENTRUST YOUR SUPPLY CHAIN WITH SOMEONE ELSE?

Performance

Obtaining best practice performance can be allusive and requires

expertise and focus on the complete supply chain.

Focus

Being able to handle responsibility to "the experts" allows management to

focus on the core business activity

Investment

Why invest in facilities and resources on your own when they can be

better utilised and shared with several others

Economies of scale

Smaller companies don't have the scale or volume to be competitive with

those that do. Out sourcing remedies this problem

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Local presence

Most companies don't have sufficient scale to justify there own regional

facilities. Outsourcing is an economic way to a regional presence

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THIRD PARTY LOGISTICS

Third Party Logistics ( 3 PL), or Managed Warehousing as it is known, is

the function by which the owner of goods (The Client Company)

outsources various elements of the supply chain to one 3 PL company

that can perform the management function of the clients inbound freight,

customs, warehousing, order fulfilment, distribution, and outbound

freight to the clients customers.

The global trend towards outsourcing elements of the supply chain is to

achieve superior customer service levels. It is recognised the importance

of cost competitiveness, and most organisations focus great efforts on

continuous improvements to efficiency and productivity.

However, an organisation with superior ability to satisfy customers will

be able to command a price premium and still match the competitiveness

of a lower cost organisation. Service based 3 PLs require a change in role

from arms length contractor to business partner. A contractor will do as

they are asked, meet the specifications but understand little about his

clients real business needs, and wins or loses on price alone.

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A business partner, on the other hand has real expertise that the client

organisation lacks, and understands how to meet the clients business

needs better than the client does. 3PL partners are able to add value

through innovation. When considering your options it's important to take

into account all the issues. Supply chain logistics is an essential part of

your business. It’s our total focus and reason for being. Taking this

responsibility on your behalf leaves you to focus on your core activities.

This partnership guarantees out mutual success. Clients have come to use

our services for a variety of proven reasons:

WHY USE 3PL

Customer service performance

Clients verify our delivery reliability and accuracy on a daily basis. 3 pl

provides a simple more cost effective path to economic best practice

customer service reliability that is unattainable "in house"

Cost benefits

Savings arise from better utilisation of shared resources. Additional

benefits from reduced capital investment in facilities and inventory.

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Economies of scale

Few companies in NZ have the scale of operations to go it alone in the

global market place. All 3 pl clients regardless of their size can share the

benefits of scale of activities.

Volume variable

Clients pay only for the resources they consume. Costs fluctuate with

activity. There are no fixed costs to cover in the quiet times nor is there a

performance shortfall if sudden increases in demand occur.

One stop integrated solution

3pl take responsibility for supply chain. 3 pl cultivates strategic partners,

integrated procedures and systems to minimise the risk of service failure.

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History of 3PL

The ideas that drive third party logistics providers are hardly new. A

Bible story tells about an Egyptian pharaoh who, haunted by nightmares

of plenty and famine, took a servant’s advice to warehouse excesses

harvests in years of plenty because years of scarcity would follow.

In pre-Renaissance Italy, in the province of Lombardy they used paper

documentation, known as Lombards, as receipts for inventory stored in

common (3PL) warehouses. Upon a purchase, the customer would take a

Lombard from the market to the centrally located warehouse to retrieve

the merchandise. This allowed the merchants to keep their stock in a

centralized location and avoid the cost of shipping it to the market and/or

to customers. This merchandise proxy was the forerunner of paper

money. In Latin America, this warehousing practice continues today.

The ships that sailed the oceans were common carriers. They provided

both transport and storage of goods so that the manufacturer could again

focus its effort to its core enterprise. In the United States, the pioneering

American spirit was constantly seeking new and creative methods to

build wealth. The Interstate Commerce Act of 1887 was passed to ensure

that railroad monopolies practiced fair pricing. Thus, small businesses

had the same access to (and same price for) third party transportation as

large corporations. The use of freight cars and railroad depots as

warehouse storage points and the construction and use of co-op grain

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elevators to store harvests are prime examples of outsourced warehousing

activities. World War II and the resultant number of disrupted households

created a demand for household good storage. The multi-story buildings

erected or modified for such use were quickly converted after the war to

general purpose warehousing. This was the birth of public warehousing

on short-term contracts, as we know it today. The availability of these

public warehouse operations throughout the country provided substantial

areas of warehouse storage on short-term arrangements, allowed

manufacturers, particularly in the food industry, to re evaluate their

philosophy of having to maintain their own proprietary warehouse

operations in each marketplace. Consequently, carriers were needed to

transport the various goods from the factory to the warehouse and from

the warehouse to the point of sale.

In the 1980s and 90s, the need for service-providing specialists was on

the rise, and businesses were competing to provide logistics services.

Federal Express, under CEO Fred Smith, revolutionized the way people

thought about 3PL and the way we have conducted business ever since.

Federal Express became an overnight success because of its overnight

delivery. It became possible (and soon, necessary) to deliver almost

anything almost anywhere overnight. The resulting decrease in cycle time

continues today in business-to-business (B2B) and business-to-consumer

(B2C) transactions.

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The proliferation of the 3PL concept and 3PL providers affected the

grocery industry. Third party warehousing and Just-in-time techniques

assisted in keeping transportation costs down and inventory fully stocked.

This gave rise to the theory and application of efficient-consumer-

response (ECR) techniques, which espoused smaller, more efficient

shipments. This and other new methods spread to other retail markets and

led to the growth of the super chain, such as Wal-Mart.

As the noted business author Peter Drucker remarked in the article “To

Sell the Mailroom,” the trend among many companies today is toward

contracting out their support or accessorial work (e.g., warehousing, and

transportation) to external suppliers and focus on their core business

competencies. Outside contractors, says Drucker, must be efficient

because they compete in an open marketplace. In addition, unlike

warehouse and transportation managers in most corporations, people who

work for third party contractors have a potential to move into senior

management positions. Thus, they have a greater incentive to work hard

at attracting customers and keeping them happy.

Many organizations for which 3PL works want to reduce the number of

direct employees and their associated liabilities. A diminishing work

force, particularly at entry level, and the need for more professionally

managed approaches to logistics helped fuel the growth of third party

service providers.

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Quicker, Faster, and Better

Looming on the horizon during the changes of the 80s and early 90s was

the Internet. The Internet would compel not only retailers and

manufacturers to overhaul their practices, but 3PL providers themselves.

With the advent of the Internet, consumers wanted their products cheaper

and quicker. This process shapes the way we do business today.

In the past decade, third party logistics gained great popularity.

Substantial increases in outsourced logistics activity can be readily noted,

although experts differ on the actual degree of market penetration. Robert

V. Delaney of Cass Information Systems has reported that third parties

currently provide more than 20 percent of the principle logistics

functions, as opposed to less than 10 percent in 1992.

“The outsourcing of logistics has enormous growth potential.

U.S. manufacturers today hire third party companies for only about 12

percent of their logistics. With increased competition in a global

economy, companies will find it more efficient to outsource as much as

25 percent to 30 percent (of their non-core activities),” Delaney has said.

Regardless of the actual numbers, there is no question that there has been

a substantial growth in the use of outsourced logistics services—

particularly third party warehousing and transportation. In automotive,

industrial, small-package-fulfillment, grocery, and building supplies

industries, the movement to outsourcing is significant. This shift has

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substantially increased the demands on the third party providers. These

demands are sometimes not being met, creating a need for change and the

possibility of disappointment, including business and career-damaging

consequences. This continued growth of demand for third party services

has stimulated a significant number of new providers.

Less than a decade ago, only a handful of third party providers offered

any form of national coverage, and the industry was dominated by strong

regional and single-city operators. In the past few years, many of these

have banded together to form the core of today’s national offerings.

Today, there are a number of national third party logistics operators, and

numerous regional operators who are often linked together through

service and marketing affiliations. Presently, we are seeing the emergence

of truly global 3PL companies that provide services across all continents.

One drawback, however, is that the growth of third party providers and

the increase in opportunity has encouraged some organizations to enter a

field in which they may have had minimal background and experience.

The road to 3PL as it stands today has been long, winding, and—at times

—bumpy. Many developments in business and technology have helped

shape the world of outsourcing. It has been an interesting trek to the

present explosion of 3PL services and providers today.

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CHALLENGES IN MANAGING THE 3PL RELATIONSHIP

In the last two decades, increasing numbers of organisations world wide

have recognised the fact that it is necessary to develop products suitable

for global markets in order to widen their market network and at the same

time source material globally to be competitive in the local as well as

overseas market place. Globalisation has opened many lucrative avenues

to the business world and also posed many challenges to be successful in

the global trade. One of the biggest challenges in the Global Trade is

logistics networking and the ability to manage seamless forward and

backward flow of material and information. This is an enormous task and

in order to be successful organisations have developed strategic alliances

with 3PL (Third Party Logistics) companies all over the world to manage

their logistics operations network.

Many commercial establishments world wide have turned to logistics

outsourcing as a way to re-engineer their distribution networks in order to

meet the global market demands and also gain competitive edge.

According to Cap Gemini 2005 annual study, North American

organisations are planning to outsource in 2008 – 2009, 56% of their

Logistics expenditure (49% in 2005) where as Western Europe is panning

81% (65% in 2005) and the Asia Pacific intend to outsource 60% of their

logistics spend against 50% in 2005. Further the same report revealed that

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78% of the respondents are outsourcing logistics activities in North

America; 79% in Western Europe and 58% in Asia Pacific Region. One

of the Massey University Post Graduate Student conducted survey in

2005 under the supervision of this author (hereafter called as Massey

University study) indicated that the NZ rate of outsourcing 3PL activities

is around 66.7% in manufacturing environment.

One of the innovative trends used today is the outsourcing of logistics or

third-party logistics to manage complex distribution requirements,

postponement of manufacturing, cross docking, Kitting or Assembly,

Inventory Financing, Vendor Managed Inventories, Reverse and Repair

Logistics etc. This triggered phenomenal growth in 3PL business world

wide. We can classify outsourcing into three categories. The first level of

outsourcing is transactional outsourcing. This is typically based on

transactions and no long term contracts and no bonding between 3PL and

outsourcing company. The second classification is known as Tactical

outsourcing. This kind of outsourcing is on long term basis with

negotiated contacts in place and with integrated IT systems, to facilitate

free flow of information and create supply chain visibility. This is

considered as a stepping stone for strategic alliances/outsourcing which is

the third category.

Strategic outsourcing is based on long term relationships with successful

outcomes. In this category the 3PL companies become partners in supply

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chain management and complete transactional transparency will be

established. Very few 3PL companies are able achieve this status with

their customers by constantly innovating and maintaining operational

integrity. Some even follow open book costing method to demonstrate the

transparency of the system. The Logistics Activities Outsourced and their

classification is given in attached annexure is produced by the author

based on Cap Gemini 3PL 2005 Annual Study and Massey University

Study in order to explain different levels of outsourcing and Logistics

activities outsourced to 3PL companies.

The main reason for the momentous growth in 3PL business is change in

the thinking process of outsourcing community. More and more

organisations are outsourcing their logistics activities and upgrading their

relationships with 3PL companies from transactional to tactical and

strategic relations. According to the survey conducted in 2005 17%

average business growth is envisaged by the CEOs of 3PL Companies

operating in Asia Pacific Region for the next three year period.

One of the biggest enemies in managing any logistics operation is the

time. The Logistics professionals world wide have daunting task of

managing a global supply chains and this includes keeping customers or

stores properly stocked and deliver the perfect order every time. They

must balance the need for low costs, proper inventory levels and

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maximum service. Some of these responsibilities are now shared by 3PL

companies at tactical level as well as strategic level.

Unfortunately these 3PL relationships are always not successful.

According to a recent Warehousing Education and Research Council

(WERC) pamphlet reported that 55% of logistics outsourcing alliances

are terminated after 3-5 years. In some cases it was noticed that the

relationship ended even before completion of the first year of operation.

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3PL LOGISTICS AND SUPPLY CHAIN MANAGEMENT

Sweeping changes continue to redefine the consumer products

marketplace and to deal successfully with these changes many firms are

now investigating and implementing alternate business and logistics

support models. Two such models which have emerged over the last few

years are Third Party Logistics and Co-Distribution. Although these are

individual concepts in their own right, powerful synergies can be

developed and harnessed when both concepts are combined under the

appropriate circumstances. Why would one consider combining these two

concepts? Well unfortunately for many reasons, some firms have been

unable to identify substantial enough benefits to justify moving to

outsourcing or Third Party Logistics (TPL). Benefits generated must not

only exceed the cost of 3PL fees, they must go well beyond this level to

offer savings significant enough to justify such a major business change.

Specifically, this article outlines an approach and methodology for

investigating, defining, implementing and realizing the benefits apparent

in this opportunity. Within this, the critical role and importance of the use

of Outside Facilitation in both planning and implementing a Co-

Distribution network of this type cannot be stressed enough as such

facilitation is the key to ensuring success. As mentioned above, the

involvement of a Third Party Logistics provider is the next key ingredient

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in the sustainable creation of a Third Party Co-Distribution Network

(TPCDN their role in this process will also be discussed in this article.

Co-Distribution represents the partnering of two non-competing firms for

the express purpose of developing a shared supply chain. Obviously for

either party to consider such an undertaking, significant synergies and

potential benefits must be identified. A review of the eight potential

benefit areas such synergies create will then be reviewed in the final

section. As mentioned, there are two facilitation roles required to

successfully create and rollout the Third Party Co-Distribution Network

envisioned within this article and a number of specific steps required. The

first is Outside Facilitation or advisory support services provided to the

two potential partners in a number of key areas. Initially, this party would

conduct a high level feasibility analysis to confirm the existence of

potential benefits in the areas identified. Next, once the general feasibility

hurdle has been cleared this party would carry out a detailed analysis in

conjunction with in-house resources from both firms to fully analyze,

define and prepare the Co-Distribution Network Plan and Design

document. Once this plan is completed and both firms are prepared to

proceed, the search for a Third party entity would then begin. This third

phase would include the preparation of a detailed RFP document,

followed by ongoing management of the RFP Process itself. This would

include issues surrounding contractor performance, contract types,

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duration, renewal, contract incentives and penalties. In addition, items

such as payment timing and methods would also be reviewed which may

have material implications for the firms involved. Finally, the role of the

Outside Facilitator in implementation and ongoing support from direct

involvement from concept development right through planning to actual

execution is an important continuity to maintain consistency, momentum

and stability in the overall relationships surrounding the new network.

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SOME FREQUENTLY ASKED QUESTIONS ABOUT THE

LOGISTICS INDUSTRY AND WHICH WILL AFFIRM GRIP ON

YOUR UNDERSTANDING OF THE INDUSTRY.

What is Logistics?

Logistics is "the process of planning, implementing and controlling the

efficient, effective flow and storage of raw materials, in-process

inventory, finished goods, services and related information right from the

point of origin to the point of consumption (including inbound, out

bound, internal and external movements) in order to satisfy customer's

requirements.

LOGISTICS is also defined as time related positioning of resources. The

whole concept of Logistics is based on 7 R's which are:-

• Right place

• Right time

• Right quantity

• Right quality

• Right price

• Right condition

• Right customer

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What is third party logistics?

Third party logistics is the activity of outsourcing activities related to

Logistics and Distribution. The 3PL industry includes Logistics Solution

Providers (LSPs) and the shippers whose business processes they support.

Companies opt for Third Party Logistics for the following reasons:

• Focus on core competence

• Resource constraints

• Cost saving / cost optimization

• For large and global coverage

• For more professional and scientific approach to logistical

problems

• For improvement in service levels with improved response time

• Efficient management of inventory resulting in better utilization of

working capital.

What is fourth party logistics (4PL)?

Fourth party logistics provider is a supply chain integrator that assembles

and manages the resources, capabilities, and technology of its own

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organization with those of complementary service providers to deliver a

comprehensive supply chain solution to the client.

A standard 4PL supply chain solution involves four distinct steps:

Step I: Reinvention

At this level, the overall business strategy is aligned with supply chain

strategy to reengineer the supply chain of the participants.

Step II: Transformation

Here the focus is on coordinating specific supply chain functions such as

sales and operations planning, distribution management, procurement

strategy, customer support and supply chain technology, with the aid of

process and organizational changes, T&D, information technology, etc.

as applicable.

Step III: Implementation

The implementation is done on the basis of recommendations made at the

earlier two levels and the transition is put across to the 4PL delivery

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team, taking special care to consider the dimension of human resources

and organizational change.

Step IV: Execution

A 4PL provider's scope of responsibility also includes operational

responsibility for numerous supply chain functions, besides the traditional

transportation management and warehousing operations logistics

outsourcing

How is logistics different from transportation?

Transportation is physical movement of goods (inbound and outbound) as

well as picking up of products as per customers order and delivering it to

the ultimate user whereas Logistics encompasses several activities related

to supply chain management such as planning, implementing and

controlling the efficient, effective flow and storage of raw materials, in-

process inventory, finished goods, services and related information, in

which transportation is a major element in the entire chain.

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What is supply chain?

In simple language at the material level, supply chain may be defined as

"Flow of materials through procurement, manufacture, distribution, sales

and disposal" while at the human level the chain is an "entity of people

organized as structures and systems for delivering the desired value and

goods".

Supply Chain Management may also be defined as "the integrated

management of all linkages and value added activities from the supplier's

supplier to the customer's customer in such a way that enhanced customer

value is achieved at lower costs.

What are the objectives of supply chain management?

A well designed supply chain is expected to support the strategic

objectives of:

• Reduced Costs

• Shorter Lead Time

• Best of Quality

• Flexibility

• Enhanced Service

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• Better Product Availability

• Better Product Reliability

The best configuration of the chain will vary from individual chain to

chain and individual organization to organization. But, in all the case the

architecture of the chain would include the following three elements -

System, Technology, Relations.

How is logistics different from supply chain management?

Logistics forms an important element of supply chain management

whereas supply chain management is interplay of all the functions and

integrates marketing, planning, distribution and purchases with the entire

manufacturing process.

Can a transporter provide logistics solutions?

Yes, provided the transporter has a wide network, fleet, material

handling, human infrastructure and strong IT support.

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What is the pre-requisite infrastructure required to provide logistics

solutions?

The pre-requisite infrastructure required to provide logistics solutions

are:

• Land and Building (Warehouse)

• Trained Manpower

• Material Handling Equipments

• Hardware and Software

• Transport Network

• Vendors

• Consultants

Does one need any software to provide logistics solutions?

Yes

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What does Logistics activities comprise of?

Logistics activities, as a part of Supply Chain Management comprises of

the following:

• Purchase and Supply

• Material Handling

• Production Planning

• Production Control

• Transportation

• Storage

• Distribution

• Product Management

• Installation and Servicing

• Strategic Management

What is the significance of logistics in manufacturing industry?

In a manufacturing industry, Logistics plays a key role in Supply Chain

Management as there is a strong inter-play of activities starting from raw

materials till the finished goods. In all the activities there is a flow of

goods whether it is raw materials or WIP or semi-finished goods or

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finished goods. Logistics plays a significant role in the management of

entire supply chain.

How do logistics solutions help to reduce the inventory cost?

One of the important elements of supply chain management is the

management of warehouse and inventory levels. Efficient management of

inventory helps to keep a tab on:

• Replenishment level

• ABC analysis of stocks

• FSN stocks

• Helps customer to concentrate more on fast moving stocks

What are the legal issues involved?

The legal issues involved are:

• Conforming and non-conforming areas

• Excise Duty

• Local Taxes

• Labour Acts

• Pollution Act

• Industry Act

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• Fire Act

• Sanctions from appropriate bodies

What is Warehousing?

A warehouse is a point in the logistics system where a firm stores or

holds raw materials, semi-finished goods, or finished goods for varying

periods of time. In the macroeconomic sense, warehousing performs a

vital function. It creates time utility for raw materials, industrial goods

and finished products. The proximity of market-oriented warehousing to

the customer allows a firm to serve the customer with shorter lead times.

This warehousing function continues to be increasingly important as

companies and industries use customer services as a dynamic, value-

adding competitive tool.

What is Material Handling?

Material Handling can be defined as "efficient short-distance movement

of goods that usually takes place within the confines of a building such as

a plant or a warehouse or between a building and a transportation

agency."

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Material Handling has four dimensions:

• Movement

• Time

• Quantity

• Space.

Material Handling improves efficiency by making the logistics system

respond quickly and effectively to plant and customer requirements. For

efficient movement of goods into the warehouse, locating stock,

accurately filling orders, and rapidly preparing orders for shipment to

customers, materials handling is very important to outbound logistics. In

inbound logistics terms, materials handling serves company plants in the

same way. Firms need to integrate materials handling requirements not

only for the company's departmental needs, but also for meeting their

customers' needs.

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CHALLENGES TO 3PL IN 21 ST CENTURY

Third party logistics (3PL) has established itself as a significant, growing

segment of the global logistics industry. The 3PL industry includes

Logistics Solution Providers (LSPs) and the shippers whose business

processes they support. Customers of third-party logistics (3PL)

companies want more than just transportation services, they want 3PLs to

provide the technology that drives the supply chain process Trends in

Shippers' Logistics Requirements Shippers are demanding to LSPs to

support their increasingly complex business processes, to enable them to

improve supply chain performance. Shippers are requiring that LSPs

provide:

Enhanced traditional logistics capabilities like enhancing the

reliability

• Smaller, more frequent shipments

• Shipments to a greater number of destinations

• Coordinated flows of materials through crossdock or merge-in-

transit operations shippers.

• Cost-effective flow of goods and information

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Additional activities that support complete solutions tailored to

particular industries and customers

• Shippers are asking LSPs to co-locate their activities at the

shipper's site

• Additional activities at their sites or at new sites at ports,

outsourced warehouses and/or sorting points

• Activities at supplier or customer sites. This may include, for

example, delivery, installation and removal activities.

Additional Information:

• Shippers are asking for "pipeline visibility" of information

visibility of the status of goods in the pipeline from suppliers

through intermediary companies and organizations to a factory,

retailer or customer

Decision-Making Responsibilities :

• Mode selection, routing and re-ordering and replenishment

decisions, to LSPs. They may be asked to take on some parts of

financial processes, such as invoicing, credit checks, and collection

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e.g. Customized Transportation Inc. (CTI), 3PL to General

Motors' plant in Kansas City, Mo., provides automobile interior door-

panel modules at the exact moment they are needed on the production

line. Although GM selects the materials vendors, CTI issues the purchase

orders and buys the material from those vendors. The 3PL then receives

the material, assembles the modules, puts them in racks, and delivers

them to the production line. GM receives an invoice from CTI that

includes all operating costs, the cost of goods sold, and a profit margin

Integration and coordination of activities performed by many entities

in support of local and global solutions

• Many LSPs are working to position themselves as lead logistics

providers who have the relationship and operations management

skills, as well as the ICT capabilities, to oversee the

implementation and execution of complex supply chain solutions.

Coordinating traditional and value-added activities performed by

several LSPs who either have the required functional expertise

(e.g., warehousing or some form of transportation) or geographic

presence

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FOURTH PARTY LOGISTICS

Fourth Party Logistics (4PL): 4PL is a new concept in supply chain

outsourcing. It is emerging as a path to achieve more than the one time

operating cost and asset transfers of a traditional outsourcing

arrangement. Through alliances between best-of-breed third party service

providers, technology providers management consultants, 4PL

organizations can create unique and comprehensive supply chain

solutions that cannot be achieved by any single provider.

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Next wave of RTSCM

While outsourcing third-party logistics is a now accepted business

practices, Fourth Party Logistics is emerging as a breakthrough solution

to modern supply chain challenges to provide maximum overall benefit.

A Fourth Party Logistics provider is a supply chain integrator 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.

Central to the 4PL's success is a "best of breed" approach to providing

services and technology to a client. The development of 4PL solutions

leverages the capabilities of third party logistics providers, technology

service providers, and business process managers to deliver a

comprehensive supply chain solution through a centralized point of

contact. The 4PL will integrate the client's supply chain activities and

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supporting technologies across these "best of breed" service providers,

with the capabilities of its own organization.

4PL Supply Chain Solutions

Management consultants have traditionally focused on the strategic end

of supply chain solutions reinvention and transformation. These supply

chain solutions have leveraged technology to support the strategic

imperatives. Third party logistics providers have focused on operational

issues- implementation and execution.

As illustrated in the 4PL Supply Chain Solutions (Figure 8.2), a 4PL

solution leverages the combined capabilities of both management

consulting and third party logistics providers to get the true essence of a

RTSC. More importantly, the design, implementation and execution of a

leading edge, client optimized, uniform technology plan that will meet

the needs of the 4PL client is ensured by leveraging the technology

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capabilities of consultancies, technology providers and third party

logistics providers.

At the highest level of the 4PL solution is Reinvention. The most likely

source of true quantum enhancements in Real Time supply chain

performance comes through either synchronization of supply chain

planning and execution activities across supply chain participants, or

increased collaboration between independent supply chain participants.

Reinvention leverages traditional supply chain management consulting

skills, aligns business strategy with supply chain strategy, and is

facilitated by technology that integrates and optimizes operations both

within and across participating supply chains.

The second level of the 4PL solution is Transformation. Transformation

efforts focus on improving specific supply chain functions. These include

sales and operations planning, distribution management, procurement

strategy and customer support. At this level supply chain technology

becomes critical to the success of the solution.

The third level is Implementation. A 4PL implements recommendations

including business process realignment, systems integration of

technology across the client organizations and service providers, and

transition of operations to the 4PL delivery team. Careful attention is paid

to organizational change, recognizing that the "people" factor is a critical

driver of success in the transition to the 4PL arrangement. The goal is to

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avoid the all too common, ineffective implementation of well-designed

strategies and business processes that have limited the effectiveness of

solutions and the delivery of projected results.

The fourth and final level is Execution. A 4PL provider takes on

operational responsibility for multiple supply chain functions and

processes. The scope goes well beyond traditional third party

transportation management and warehouse operations to include:

manufacturing, procurement, supply chain IT, demand forecasting,

network management, customer service management, inventory

management, and administration. While an organization can outsource

the entire range of its supply chain activities to a 4PL provider, a 4PL

solution will more likely be a subset of critical path supply chain

functions or processes.

In summary, a 4PL responds effectively to the broad, complicated needs

of today's organizations by delivering a comprehensive supply chain

solution. This solution is focused on all elements of supply chain

management, provides continuously updated and optimized technologies,

and is tailored to specific client needs.

What is the difference between a 3rd party logistics provider and a

4th party logistics provider?

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The term "fourth-party logistics provider" is a trademarked term owned

by Andersen Consulting. It refers to the evolution in logistics from

suppliers focused on warehousing and transportation (third-party logistics

providers) to suppliers offering a more integrated solution. Among other

services, fourth-party logistics providers include supply chain

management and solutions, change management capabilities, and value

added services in their offering. These companies are basically third-party

logistics providers that either add these capabilities to their services or

form alliances to provide the services.

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RESEARCHRESEARCH OBJECTIVEOBJECTIVE

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RESEARCH OBJECTIVE

“STUDY THE FACTORS THAT CAN ENHANCE CUSTOMER VALUE IN THE SUPPLY CHAIN WITH RESPECT TO

SHIPPING.”

OBJECTIVE

1. To study the supply chain activities in the international business.

2. To determine the scope of activities this can be efficiently handled by third party operators.

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CORPORATECORPORATE OBSERVATIOOBSERVATIO

NSNS

94

CORPORATE OBSERVATIONS

The Indian logistics industry is estimated at US$50 billion per annum and

has good growth potential. Contributing 13% of India's GDP, India's

transport & logistics sector is still in its infancy and is highly fragmented.

Key sectors with significant contribution to the logistics market include

the automotive, manufacturing, fast-moving consumer goods (FMCG),

retail and healthcare sectors. Overall India's 3rd-Party Logistics (3PL)

market is worth S$16billion and it’s expected to grow to S$ 33 billion by

2008.

With Indian corporate houses increasingly outsourcing their logistics

requirements to specialised operators, the domestic logistics market is

beginning to attract new logistics services providers, particularly foreign

players.

Industry analysts say the time is not far off when corporate houses would

be demanding more non-traditional services that go beyond the usual

inbound/outbound transportation and Customs clearing and forwarding to

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spill over to services such as reverse logistics, inventory management,

packaging, labelling and even order processing. This is encouraging both

foreign and Indian players to broaden the syntax of logistics services.

The latest to join the bandwagon of foreign logistics services providers

was Swift, a subsidiary of Swift Freight LLC of UAE, which launched its

Indian operations in Mumbai last week.

Rhenus AG, a subsidiary of the $2.4 billion German Major Rethmann

Group, is also setting up shop in India, by tying up with Hyderabad-based

Seaways Shipping Ltd. The joint venture, Seaways Rhenus Logistics Ltd,

will launch its Indian operations in Mumbai on January 27.

While foreign players like APL Logistics, Panalpina and Maersk

Logistics have been operating in India for quite some time, a clutch of

Indian players, which until recently were providing minimum logistics

services, are also planning to broaden their areas of operation.

"We see exciting opportunities in India, as corporates are realising that

outsourcing of their logistics requirements to specialised service

providers can result in substantial savings," says Mr Mark D'Souza,

Managing Director of Swift.

Each of these players is trying to consolidate their presence in their own

core areas of strengths. For example, Swift will be focussing on logistics

services covering the Indo-African trade, as the company has a strong

presence in the African market. Seaways Rhenus Logistics will similarly

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be focussing on the Indo-European trade route, covering sectors such as

automotive, healthcare, chemicals and consumer goods.

A recent study by Transport Corporation of India Ltd, a major Indian

player in the logistics market, and the Management Development

Institute (MDI) has shown that the benefits that outsourcing of logistics

requirements had brought to corporate houses range from improvement in

delivery schedules and reduction in operation cost to enhancement of

their geographic reach and improvement in operational flexibility. The

study has also shown that less than 55 per cent of the Indian companies

subscribe to 3PL (third party logistic) Services, as compared to over 75

per cent globally, meaning that the market will be growing at a brisk

pace.

Present trends indicate that the cement sector has reaped the maximum

benefits by outsourcing logistics requirements to 3PL service providers,

especially as logistics constitute between 10 and 15 per cent of their

operating costs. Likewise for the automobile and engineering sectors,

logistics account for 5 to 10 per cent of their operations costs, while that

for FMCG ranges between 3 and 7 per cent, as it gets the benefit of

volumes, analysts point out.

The future trend seems to be towards fourth party logistics (4PL) service

providers, which would act as a single interface between the client and

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multiple logistics services providers so as to manage all the aspects of the

supply chain.

The Indian logistics industry is poised for a significant growth in the

coming years as new companies, especially in the automotive,

pharmaceutical, manufacturing and FMCG sectors, are increasingly

opting to outsource their logistic requirements to specialised service

providers.

Industry analysts say that the key drivers for logistics outsourcing are the

corporate trend of focus on core operations, competitive pressure,

increasing global trade and MNCs investments in India.

Third party logistics service providers in India are gearing up to meet the

growth demand, incorporating value-addition in their services and

customising their supply chain management solutions.

Says Mr Manoj Agarwal, Head (Retail) of Gati, India's leading logistics

service provider: "We see a lot of growth from the FMCG sector. We are

in talks with companies such as Emami Ltd, Rupa and Wrigley's chewing

gum for handling their entire supply chain management."

Gati is planning to add new services in its portfolio, such as

transportation of clinical samples for pathological labs and medical

institutions and reverse logistics that involve movement of defective

products from the dealers back to the factory.

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Echoing similar sentiments, Mr Chris Callen, country manager of DHL,

told Business Line that "the global air express industry is also expected to

undergo huge transformation in the years to come as a result of increasing

spread of e-commerce and the need for vendors to match the speed of

electronic ordering with physical delivery of critical inputs for the

industry. In fact, we feel that by 2020, this industry is expected to

represent almost 30 per cent of the global air cargo with an average

annual growth rate of 10 per cent."

Indeed, a recent study on the logistics market by Frost & Sullivan has

estimated that the revenue of the logistics industry from the

manufacturing sector alone was $15.46 billion in 2005, with the market

likely to grow at a CAGR of 6.2 per cent during the next five years.

Chemicals, metal, FMCG, cement and textiles were identified as the top

five contributors to the revenues of the logistics industry.

In fact, the trend in the industry is towards the third party logistics (3PL)

concept — the market size for this category of service was estimated at

$280 million in 2006. "The market for 3PL services is likely to grow at a

CAGR of 20.4 per cent during the next five years, with the growth being

fuelled by the entry of MNCs and export focus of Indian companies. At

present, the automotive, IT hardware and FMCG companies are the major

users of 3PL services," says Mr Ganesh Ralekar of Frost & Sullivan.

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In India the logistics costs are still higher than in the developed markets

— it is estimated to be around 13 per cent of GDP, against 9 per cent of

GDP in the US. The transportation cost accounts for nearly 40 per cent of

the cost of production, with more than half the goods in India being

moved by road.

One sector that is increasingly looking for outsourcing logistics is

textiles, especially as it is facing the challenges of exacting delivery

requirements and multiple export markets.

Analysts say that with large retailers such as Wal-Mart and Target

seriously evaluating new suppliers for textiles in India, this sector is

bound to outsource logistics in the coming years. Also, the retail industry

is expected to jump into the 3PL bandwagon, with such large retailers as

Shoppers Stop and RPG expanding to smaller cities.

Realising the potential in the outsourced logistics market, 3PL service

providers are expanding their basket of services as companies are now

looking for more than just transportation of their products and raw

materials. The logistics firms are also focussing on related services such

as customer clearing and forwarding, inbound warehousing, labelling and

packaging, fleet management, order picking and inventory management.

Says Mr Agarwal: "We at Gati are constantly re-inventing the company.

We are designing customised supply chain management packages, with a

guarantee of cost savings to our clients." Similarly, at DHL, the thrust is

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on expansion, with the company recently inaugurating its first exclusive

express handling unit in India at the Delhi airport and acquiring a new

fleet of 300 vehicles from Mahindra and Mahindra, Maruti Suzuki and

Tata Motors.

"We are also making significant investments in IT so that customers can

know what is happening with their shipments. Our express agents are

being equipped with new generation GSM scanners, which facilitate real-

time information in shipments within 15 minutes of pick-up or delivery,"

Mr Callen pointed out.

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RESEARCHRESEARCH METHODOLOMETHODOLO

GYGY

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RESEARCH METHODOLOGY

RESEARCH DESIGN

I had used both descriptive and exploratory type of research design.

Descriptive research means deliberate pattern in collecting information to

try and solve the problem. In this I am using survey method. Whereas

exploratory research means the focus is on discovery of new ideas.

DATA COLLECTION

There are two types of data collection source that is primary and

secondary. In case of primary source of data collection there was

questionnaire to be filled by 3pl operator. I am also required to visit the

three PL operator and try to find out information related to their business

operation. In case I am not able to take appointments from them then I

can also collect data through telephone. So far secondary data is

concerned i got addresses of three pl operator from the company

personnel and gathered information about concept of three pl from

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internet and also gathered information about my first two objective from

internet and news articles.

QUESTIONNAIRE TYPE

I am going to use structured disguised questionnaire. A structured

disguised questionnaire is one where the listing of questions is in a

prearranged order and where the object of enquiry is not revealed to the

respondent.

SAMPLE SIZE AND TECHNIQUE

I am given the area of Delhi and NCR where I have to go to three pl

operators and try to take information from them about their businesses.

The sample size for my survey is 31 and I used area sampling.

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The above thing can be summarized as follows:

A. Sampling - Area sampling. Sampling size-31 B. Data source - Primary-questionnaire Secondary-www and articles.

C. Research design - Descriptive and exploratory.

D. Research approach - Survey method.

E. Research instruments - Questionnaires.

F. Mode of collecting data - Personal interview, Telephonic interview.

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CUSTOMER SERVICE

MANAGEMENT

FACTORS THAT ENHANCE CUSTOMER VALUE

PRODUCT AND/OR SERVICE QUALITY:

It hinges around whether customer requirements are being exceeded. The

days of conformance to standards winning orders are long gone. The

fundamental principle at stake here is that non-conformance will lead to a

product or business being disqualified from a certain market or market

segment. Exceeding customer requirements can lead to winning orders.

Therefore, continuously exceeding customer expectations will lead to a

sustainable competitive advantage.

Key performance areas for measuring customer quality are in line with

many lean manufacturing and being world-class principles. These

parameters include meeting customer requirements, fitness for purpose,

process integrity supported by statistical process control, continuous

improvement and elimination of waste.

Meeting customer requirements is about so-called perfect orders. A

perfect order is achieved when customer requirements are met in full, and

must conform to the following criteria; namely on-time delivery, orders

filled completely, and error free delivery documentation and invoicing. In

the eyes of the customer, there are only two types of service levels

namely 100% or 0%. On time delivery refers to the number of deliveries

that meet the customer’s original request in relation to the number of

orders received during the same period. Order fill also known as in-full

delivery, refers to the percentage of orders shipped complete on the first

shipment. Line fill refers to the percentage of ordered lines, which are

shipped complete with the first shipment. A supply chain either delights a

customer or it does not.

Fitness for purpose in essence refers to conformance to specification.

Here, one must differentiate between technical specifications and

functional specifications. In a supply chain, it makes sense to rather

specify the functional specification as a customer in the supply chain,

detailing expected outcomes of the product or service. It follows that

collaborating with the upstream supply chain partne, more customer

value can be added by making use of the upstream supply chain partner’s

specialist knowledge to design the technical specification that will better

meet the expected outcome.

An example of a technical specification is when a customer orders a chair

and issues fully detailed technical drawings to the supplier. If the supplier

delivers this chair, and the chair does not functionally conform to the

customer’s requirements, the customer has no option but to accept it,

because the chair conforms to all the technical requirements.

Alternatively, if the customer specified the required functions that the

chair must perform during its operational installation, then the chair

manufacturing specialist could have designed a more suited solution,

using superior specialist knowledge, and added customer value in the

process.

Process integrity supported by statistical process control refers to the

continuous on line monitoring of quality. This process supports the

proverb that quality cannot be inspected in, but must be built in.

Statistical process control (SPC) monitors conformance to process

parameters on line, and records are kept for later reference. For example,

the Perishable Product Export Control Board (PPECB) approves all

refrigerated vehicles that carry products for export purposes. When these

carriers transport products for export, temperature graphs of the cargo

temperature throughout the time in transit are recorded and kept to ensure

product quality and integrity, thus adding customer value.

Supply chain partners expect or even demand of their upstream partners

to have SPC in place thereby ensuring process integrity. To quote another

example, Ford Motor Company has embarked on a world wide campaign

called the Q1 supplier approval scheme. Built into this scheme is SPC. If

suppliers do not conform, they will simply not be part of the Ford supply

chain.

Continuous improvement is about a continuous urge to improve quality

and a climate of willingness to do something about opportunities. This is

in keeping with the ‘Kaizen’ principles listed below:

• Personal discipline;

• Teamwork;

• Improved morale;

• Quality circles; and

• Suggestions for improvement.

These incremental improvements support the notion of total quality

management, and focus on changing to become better in all aspects of the

organisation. Organisations must embrace speed of change, especially at

the operational level. The sustainability of changes at the operational

level is key to the organisations long-term success. It is here that the

Kaizen philosophy could potentially make its greatest contribution, due to

its simplicity and ease of implementation.

All five the Kaizen principles work together to create a positive spiral

that result in improved business processes. A culture of high levels of

self-discipline also contributes towards continuous improvement

programs being maintained on a sustainable basis. Although the focus of

continuous improvement programs such as Kaizen are mainly on the

operational level, teamwork amongst all levels is a key building block.

Cooperation and teamwork is required to evaluate and implement

suggestions for improvement. These suggestions for improvement are

mainly received at the operational level through quality circles.

Suggestions are often a result of a positive business culture or climate, as

well as high levels of morale. However, if suggestions are not managed,

this will result in a rapid decline in morale and a negative spiral that will

result in lower levels of quality.

Part of total quality management supported by the philosophy of

continuous improvement, is the continued upward escalation of customer

expectations regarding supplier capabilities. Performance which meets

customer expectations one year, may result in extreme dissatisfaction the

next year, as customers increase their expectations regarding acceptable

performance levels.

The last key performance area for measuring customer quality, namely

the E limination of Waste is focused mainly on the reduction in business

waste in the operational environment as a result of overproduction,

waiting time especially at capacity constraints, excess inventory, rejected

products, excessive movement and double handling.

SERVICE DIFFERENTIATION:

In recent years, some firms have discovered that there is another

commitment that can be made to gain true competitive advantage through

logistical performance. This commitment is based on recognising that a

firm’s ability to grow and expand market share depends on its ability to

attract and hold the industry’s most successful customers.

The real key to customer-focused marketing lies in the organisation’s

ability to use its performance capabilities to enhance the success of those

customers. This focus on customer success represents major commitment

toward accommodating customers.

Key performance areas that are vitally important for service excellence

are customer support, product support, flexibility to meet customer

demands, and flexibility to meet market changes.

The customer satisfaction platform, in particular customer support, is

built on the recognition that customers have expectations regarding

performance and the only way to ensure that customers are satisfied is to

assess their perception of performance relative to their expectation levels.

Customer support shifts the focus from expectations to the customers’

real requirements. Requirements are frequently downgraded into

expectations due to perceptions of previous performance, word-of-mouth,

or communications from the enterprise itself. This explains why simply

meeting expectations may not result in happy customers. For example, a

customer may be satisfied with a 98 percent fill rate, but for the customer

to be successful in executing his/her own strategy, a 100 percent fill rate

on certain stock-keeping units may be necessary.

Product support is another key performance area vitally important to

service levels. Technical product support is critical, especially taking into

account the potential value of the ‘augmented product’. For example, a

leading automotive glass supplier Shatterprufe, has recently developed

on-line technical support to glass fitment centres, for installation and

other technical related queries, thereby enhancing their value proposition

to both their customers, being the fitment centres as well as for their

customer’s customers, the motorist being the end user of automotive

glass. Claim analysis and procedures is another aspect of product support

that adds value to customers. Claims must be analysed in order to

determine trends, their causes, how long it takes to resolve them, and how

an enterprise makes it up to a disappointed customer.

The next aspect of product support is the commitment and involvement

by suppliers in the development of end technology.

Flexibility to meet customer demands is the next parameter to be

examined. Clearly, a customer success program involves a thorough

understanding of individual customer requirements and a commitment to

focus on long-term business relationships having high potential for

growth and profitability. Such commitment cannot be made to all

potential customers. It requires that firms work intensively with

customers to understand requirements, internal processes, competitive

environment, and whatever else it takes for the customer to be successful

in his/her own competitive arena. Furthermore, it requires that an

organisation develop an understanding of how it can utilise its own

capabilities to enhance customer performance.

The last parameter supporting service differentiation is Flexibility to Meet

Market Changes. Market changes are imposed onto both business

enterprises and their customers alike. The response to these imposed

market changes is important. in many ways a customer success program

requires a comprehensive supply chain perspective on the part of logistics

executives. The typical focus in basic service and satisfaction programs is

that the firm attempts to meet standards and expectations of next-

destination customers, whether they are consumers, industrial end users,

intermediate or even internal customers. How those customers deal with

their customers is typically not considered to be a problem. From a

supply chain perspective, a customer success program explicitly

recognizes that logistics executives must alter this focus. They must

understand the entire supply chain, the different levels of customers

within that supply chain, and develop programs to ensure that next-

destination customers are successful in meeting the requirements of

customers down the supply chain. If all supply chain members adopt this

perspective, then all members share in the success.

TOTAL LOGISTICS COST:

Total logistics cost consists of many aspects, but for the purposes of this

study, a trade-off between the following cost aspects namely design and

engineering, conversion, quality, distribution, inventory and total cost of

ownership will be discussed. Using technical specifications when only

functional specifications are required can potentially erode much

customer value. It must be encouraged at all times to use the skills of the

upstream value adding partner in a supply chain to take ownership of the

detailed technical specifications. This is a value-adding service that is

offered by upstream supply chain partners.

Another important point to take into account is the effect of Design and

Engineering changes on costs. The cost of a design change is dependent

on when the change is implemented during the life cycle of the product.

The earlier the changes are made known, the more possibilities can be

accommodated, and the lower the cost when making the change. The later

the changes, the fewer the opportunities and the more expensive it

becomes to effect changes. This is particularly applicable in the

development of new products or services, or during the redesign or re-

introduction of existing products or services. For example, if a motorcar

manufacturer plans to launch a new model, they obviously need to stock

up their dealer network. It will be very costly to change anything, even

something as insignificant as the wiper blades, because of all the re-work

and inventory redundancy cost.

Conversion cost is where the form utility is created. Form utility is

created when material changes in form and / or function. The material is

worth more once it has changed its form. For example, individual

ingredients used during the production of cold drinks are not worth much

to a potential consumer of Coca Cola. However, this conversion process

must be aligned with the rest of the supply chain in order to add

maximum customer value. Aspects that are critical to take into account

are demand alignment, location of the value adding facility, lot quantities,

specifications, and process capability, to mention a few.

Quality costs are made up of prevention cost also know as quality

assurance cost, inspection costs or sometimes quoted as quality control

costs, and the cost of non-conformance which often results in corrective

action costs. Quality costs are normally expressed as a percentage of

sales, and can become significant, especially when the full cost of non-

conformance is taken into account.

Distribution costs are made up of warehousing costs, inventory carrying

costs, information systems costs, picking costs, material handling costs,

transportation costs, and the cost of reverse distribution especially when

recycling the product. Reverse distribution of non-conforming products

will form part of non-conformance costs.

Inventory is the life-blood of any supply chain. Measuring inventory

levels can therefore be compared to measuring the blood pressure of a

supply chain. Most of the companies that produce commodities carry

inventory, and it is common belief that most of them carry too much

inventory. From inventory analysis one can learn that for some stock-

keeping units one could have many years of inventory cover, whilst other

items run out-of-stock regularly.

The last aspect of total logistics costs is Total Cost of Ownership. Often,

the focus falls on the acquisition price, and the total cost of ownership is

ignored.

Figure below is a diagrammatic presentation that shows the total cost of

ownership depicts an iceberg. The acquisition cost is visible, but there are

many hidden costs that will influence the total cost.

LEAD TIME:

Product availability is critical if an organisation is to compete in an ever

more demanding environment. the key performance areas that need to be

managed regarding lead-time management are time to market, response

to market forces, and inventory management throughout the supply

chain.

The first key performance area namely T ime to Market can be spilt into

two construct, from concept to delivery and from order entry to delivery.

Concept to delivery time deals with the lead-time to develop a product

and /or service from inception until the end user can benefit from it. The

key aspects that directly influence the time from concept to delivery are

design time, engineering time, conversion time and delivery time.

Figure illustrates three phases namely the investigation phase,

development phase and delivery phase. The investigation phase overlaps

with the design stage, engineering stage and the conversion stage. The

development stage straddles from the design stage to the development of

delivery concepts. The delivery phase focuses mainly on the integration

of the converted service offering to the end user.

There are many possibilities to investigate during the design stage, and

the cost to change during the design stage is relatively low. During the

design stage of product or service development, all concepts are

developed in concept only with the view to test their respective

compatibility with the conversion and delivery processes, as well as to

determine their respective contributions to the business objectives.

During the engineering stage, the number of concepts is reduced to only a

few viable options, and the focus is on detailed product and / or process

design with the view to gain maximum compatibility with the other

business processes and maximum competitive advantage from the

product or service.

The conversion stage focuses on aspects such as prototype developments,

advanced development models, pre-production samples, and pilot or trial

runs. Products and / or service offerings are tested under realistic

operating conditions in order to test their compatibility with business

processes and their respective contribution to customer value.

The last stage in the development process is the delivery stage. This stage

focuses on launching the product or service, ensuring high product

availability and awareness, and customer support training aspects.

It is clear that time to market from concept to delivery is a very complex

process, and could lead to a substantial competitive advantage, if it is

done well.

The other component of time to market, namely from order entry to

delivery, is less complex and easier to manage. Diagrammatic

representation of a customer’s perspective of the total order cycle is given

below. All these steps are largely under the control of the business

enterprise, and can therefore be managed.

Response to Market Forces is essentially a philosophy, but must be

supported by competent people and adequate business processes, capable

of responding to market needs. Shorter product life cycles make response

time critical. Thus, Late entrants or slow responders to market

opportunities run the risk of including obsolete inventory in their supply

chains, because the market demand might have dropped off by the time

that their product reaches the market.

Therefore, strategic Inventory Management is critical to lead time

management. Having inventory available at the right place in the supply

chain is the key. An enterprise’s demand and supply parameter defines

their logistics concept, and these business parameters influence the

extended enterprise’s macro inventory strategy.

Under conditions where the market is predictable and long lead times are

acceptable, one would adopt a lean manufacturing approach. In lean

manufacturing, one would eliminate waste as much as possible, and

optimise one’s manufacturing economies of scale by minimising set-up

cost and maximising economic run lengths. One would typically not carry

any finished goods inventory, but rather accept a logistics concept of

‘purchase and make to order’.

Under conditions where the market is unpredictable but relatively long

lead times are acceptable, one would adopt a strategy of postponement.

Postponement is when one delays the decision to integrate the assembly

into its final form, thereby reducing the risk of obsolete inventory. One

would not carry finished goods inventory, but rather carry sub-assemblies

or component parts, so that these can be assembled into the right

configuration as required by the customer. Many of the leading

automotive manufacturers make subassemblies like body-, engine-and,

interior parts and then paint the body, assemble the right engine and

interior trim commensurate with the customer requirements. This

logistics concept is called ‘assemble to order’ and can accommodate mass

customisation as experienced in the automotive industry of late, whilst

maintaining very low levels of finished goods inventory.

Under conditions where the market is unpredictable but the market also

demands relatively short lead times, one would adopt a strategy of agile

replenishment. Agile replenishment is associated with a logistics concept

of ‘make to central stock’ and is used for example in the ‘white goods

industry’ where demonstration models are being displayed at the sales

centres, but the finished goods inventory is kept centrally. Once the sales

centres conclude a sale, they will then notify central distribution who will

deliver. With this logistics concept, responsiveness is high, whilst

finished good inventory is centralised and relatively low.

Under conditions where the market is predictable and demands relatively

short lead times, one would adopt a strategy of continuous replenishment.

Under these market conditions, one typically follows an inventory

strategy such as this in the fast moving consumer goods (FMCG) industry

where product must always be available at arms length, otherwise

customers might switch to competing brands. This inventory strategy is

complimented by a ‘make and ship to stock’ logistics concept, and the

results are that inventory is normally kept at decentralised inventory

control locations, thereby guaranteeing availability. The trade off is made

between the inventory carrying cost and the cost of lost sales due to non-

availability.

DATA DATA ANALYSISANALYSIS

DATA ANALYSIS

FUNCTION PERFORMED AS 3PL PROVIDER

All of Above 5

Transportation & Distribution, Prod. planning7

Transportation, Distribution, Material handling, Storage

12

Transportation, Distribution, Material handling, Installing, storage

7Total 31

Functions Preformed by 3PL provider

16%

23%

38%

23%

All of Above

Transportation &Distribution, Prod. planning

Transportation,Distribution,Material handling,storage

Transportation,Distribution,Mat handlg,Installing,storage

INDUSTRY SERVED

Auto 13

Oil 1

Auto & Oil 2

Auto & Retail4

Garment & Auto11

Industry Served

43%

3%6%13%

35%

Auto

Oil

Auto & Oil

Auto & Retail

Garment & Auto

ADVANTAGES OF THIRD PARTY LOGISTICS TO CLIENTS

Customer Service Performance

23%

19%

36%

6%

16% very important

important

Average

less important

not important

Cost Benefits

16%

32%

23%

16%

13%veryimportantimportant

Average

lessimportantnot important

Economies of Scale

16%

19%

26%

16%

23%

very important

important

Average

less important

not important

Volume Variable

13%

23%

6%39%

19%

very important

important

Average

less important

not important

One Stop integreted solution

29%

6%

13%23%

29%

very important

important

Average

less important

not important

INFRASTRUCTURE REQUIRED TO START 3 PL Frequency

L&B,Trained Manpower,MHE,Transport,Vendors

5

L&B,Trained Manpower,MHE,Transport Network

12

L&B,MHE,Transport Network7

All of them 4

L&B,Trained Manpower,MHE,Transport,Consultants

3Total 31

Infrastucture required for 3PL

16%

38%23%

13%

10%

L&B,TrainedManpower,MHE,Transport,Vendors

L&B,TrainedManpower,MHE,TransportNetwork

L&B,MHE,TransportNetwork

All of them

L&B,TrainedManpower,MHE,Transport,Consultants

REVENUE MODELFrequency

Brokerage 4

Commission 14

Depends upon customer3

all of them 2

Brokerage & commission8

Total 31

Revenue Model

13%

45%10%

6%

26%

Brokerage

Commission

Depends uponcustomer

all of them

Brokerage &commission

FINDINGSFINDINGS

FINDINGS

• The Five Key Issues of Logistics Effectiveness are core to Supply

Chain Management--

• Movement of Product

• Movement of Information

• Time / Service

• Cost

• Integration, both internal and external, both organizations

and systems

• The most important supply chain activities in business are:

• Material Handling

• Transportation

• Stock management

• Purchase orders

• Processing

• Warehousing

• Distribution

• Transportation, Distribution, Material handling, storage are the

major function which are performed by third party operators, in

sample of 31 operators 12 told that they basically perform these

four major functions.

• The third party operator basically caters to auto industry in my

survey it was found that 43% operators serve the auto industry.

• The important infrastructure required to start the third party logistic

business are land and building(warehouse),trained manpower,

material handling equipment, transport network.

• The revenue model used by third party logistic operator is either

commission or brokerage and many of them basically use

commission as their revenue model.

• The main advantage to clients or the customer is one stop

integrated solution and cost benefits which they get from third

party operators.

CONCLUSIONCONCLUSION

CONCLUSION

The way third party logistics operator business is growing, the time is not

far away when all the supply chain works will outsourced to them. As

from my survey I had found that they basically perform four process of

supply chain i.e. Transportation, Distribution, Material handling, storage

but the time is not far away when they will look into other process like

Purchase orders. There is immense opportunity for third party operators

not only in shipping industries but they can also provide there services to

other industries like FedEx and DHL are doing

Thesis has helped me a lot in going in to the deep of the subject matter;

while I was going through my Thesis I came to know about many things

of which I was not aware earlier. In particular it has really enhanced my

knowledge of shipping industry and the different activities and process

performed in that industry. Also while I was conducting interviews, I

came to meet many peoples who had given me much useful information

which have helped me in developing my knowledge base.

I had a very good experience of learning both the things that is exposure

of the fieldwork that is through research work and the other of in-house

job that is collecting data through secondary sources. Both of them taught

me how to handle situations outside as well as inside.

RECOMMENDATIRECOMMENDATIONSONS

RECOMMENDATIONS

There is business opportunity for SPG shipping in third party

logistic business as there are many big shipping lines operating in

this field like MAERSK and P&O. The company can generate a lot

of revenue from entering into third party logistics business.

As there is availability of manpower, capital, and technology with

SPG shipping so it will be easy for company to enter into this field.

Only company has to make arrangement for warehouse.

Company should first try to go for sectors like auto and garments

as these are the major sector which uses third party logistic service.

Generally a company goes to third party to increase its efficiency

and concentrate on core business activities and to minimize fixed

cost. So, if SPG shipping wants to establish him in this field then it

has to concentrate on above things.

SPG shipping can also look forward for 4 pl business as this is a

new concept and it can be exploited by the company

LIMITATIONSLIMITATIONS

LIMITATIONS

• Working on Thesis is a good experience because you have to go in

deep of the subject matter; I came to know about many things

which I didn’t know earlier.

• I learnt a lot about practical aspects of life as my project was live

project, like how we behave in corporate world, how we talk to

executives, how to put forward our point in front of them, etc. but

there are various problems being faced by us while going through

all these things.

• As I was required to do survey by going to the third party operators

and collecting information related to their business. The first

problem I faced was difficulty in taking appointment. By listening

that we have come for the survey the gatekeeper does not allow us

to enter the company. If we are able to convince the gatekeeper the

next problem comes with the receptionist, who does not allow

meeting the concerned person, even I was facing lots of difficulty

in taking appointment through telephone.

• If all the barriers are over then comes the main problem that is the

concerned person himself. He/she might be in the meeting, gone

out of the city, is busy and would not be able to meet, etc. If are

able to meet them then they are reluctant to give information by

saying they do not have authority to tell these entire thing about

company or they are very busy that they cannot answer all the

questions. Before we ask anything they start asking questions from

us like why are you collecting this information, what is the

purpose, etc?

BIBLIOGRAPBIBLIOGRAPHYHY

BIBLIOGRAPHY

Kotler Philip \Marketing Management \prentice hall of India

private limited \ eleventh edition \identifying the market segment \

278 page number.

G.C Beri \ Marketing search \ Tata McGraw-hill publishing

company limited \ 2000 edition \ secondary data, collecting

primary data, sampling design 79,92,138 page numbers

respectively.

Website:

• http://www.etstrategicmarketing.com

• http://www.logisticsfocus.com

• http://www.indiainfoline.com

• http://www.financialexpress.com

• http://www.findarticles.com

• http://www.keepmedia.com

• http://www.maxwell.co.nz

• http://www.redprairie.com

• http://www.tata.com

• http://www.tcil.com

• http://www.ltdmgmt.com

•

Reference from research work in the library.

APPENDIXAPPENDIX

APPENDIX

QUESTIONAIRE

Company name-

1) What are the functions you perform as third party logistics

provider?(tick)

a. Purchase and Supply

b. Material Handling

c. Production Planning

d. Production Control

e. Transportation

f. Storage

g. Distribution

h. Product Management

i. Installation and Servicing

j. Strategic Management

2) Which specific industry you serve? (tick)

a. Garment

b. Auto

c. Oil

d. Retail

3) What are the advantages of third party logistics to clients?

(Rate them on the scale of one to five)

a. Customer service performance

b. Cost benefits

c. Economies of scale

d. Volume variable

e. One stop integrated solution

4) What are the infrastructures required for third party logistics?

(tick)

a. Land and Building (Warehouse)

b. Trained Manpower

c. Material Handling Equipments

d. Hardware and Software

e. Transport Network

f. Vendors

g. Consultants

5) What is the revenue model for you? (tick)

a. Brokerage

b. Commission

c. Part of profit

d. Depends upon customer