THIRD PARTY LOGISTICS

Chapter Objectives:

After reading this chapter, you should be able to do the following:

1. Understand the concept of third-party logistics and its role in the movement of goods
2. Identify the different types of third-party logistics service providers
3. Describe the four types of transportation activities that are outsourced
4. Discuss the reasons why companies seek integrated third-party logistics services
5. Understand the size and scope of the third-party logistic market
6. Evaluate the reasons for outsourcing and the results achieved
7. Summarize the process for outsourcing transportation and logistics activities
8. Appreciate the current challenges and competitive issues in the third-party logistics industry
9. Compare the coordination roles of various service provider types
10. Recognize the importance of information technology in managing outsourced activities

Chapter Overview

Given the financial and service impact of transportation on a company’s success, it is critical to develop an
effective transportation strategy. For a growing number of organizations, particularly those moving freight
internationally, this strategy involves outsourcing some responsibilities to external service provider. These
third-party logistics service providers (3PLs) are experts in the management and flow of freight, allowing
customers to focus their resources on other activities. Some of the larger global 3PLs provide a “one-stop
shopping” solution where customers can purchase all their transportation service needs, regardless of mode
or geographic requirements.

Companies must be careful with outsourcing activities. It is imperative to work with 3PLs that have strong
capabilities, capacity, and track records of quality transportation services. How to find these top notch 3PLs
is the goal of Chapter. The chapter discusses the general structure of the 3PL industry, customer
characteristics, and relationship options. Specific issues related to establishing and managing 3PL
relationships is addressed, followed by a discussion of current and future 3PL industry issues. Throughout
the chapter, students gain an understanding of the key benefits and challenges of outsourcing transportation
requirements.
INDUSTRY OVERVIEW

Given the expansive list of 3PL definitions, the introductory section of the chapter provides students with a
broad interpretation of 3PL companies, that being: “an external supplier that performs all or part of a
company’s logistics functions.” This encompasses suppliers of services such as inventory management,
warehousing, distribution, financial services, and transportation, though Chapter 12 focuses on the
transportation aspects of the 3PL industry. Still, it is important to remind students that transportation
services provided by a 3PL must be well integrated with the customer’s other logistical activities.

Types of 3PL Providers

Most 3PLs have a core expertise in one or more logistics function. Thus, the initial segmentation of
providers is based on functionality. 3PLs can be categorized as: transportation based, distribution based,
forwarder based, financial based, or information-based firms. Although some 3PLs may fit in more than one
area, this discussion provides students with an idea of the scope of activities that may be outsourced.

 Transportation Based - these 3PLs trace their origins to freight movement via truck, rail, air, or other
modes of transportation. As customer requirements expanded, these transportation companies
developed 3PL subsidiaries or major divisions to provide a broader set of capabilities to serve the
marketplace.
 Distribution Based - these 3PLs suppliers originated from the public or contract warehousing
business and have expanded into a broader range of logistics services. Based on their traditional
orientation, these types of organizations are heavily involved in logistics activities such as inventory
management, warehousing, and order fulfillment.
 Forwarder Based - this group of 3PLs includes freight forwarders, brokers, and agents that
primary facilitate the flow of goods on behalf of customers. These providers were discussed
extensively in Chapter 10 and Chapter 11.
 Financial Based This category of 3PL providers helps customers with monetary issues and financial
flows in the supply chain. Their traditional roles include freight rating, freight payment, freight bill
auditing, and accounting services.
 Information Based The Internet has provided an excellent platform for the growth of information
based 3PLs. These companies have digitized many activities that were previously performed
manually or required the use of licensed software. Today, these information based 3PLs provide
logistics information systems, online freight brokerage services as well as cargo planning, routing,
and scheduling.

Another 3PL segmentation method is the company’s ownership of tangible assets - facilities and equipment.
When a 3PL owns many or all of the assets necessary to run its customers’ transportation and logistics
activities, they are known as asset-based providers. When a 3PL contracts with other firms to provide
transportation and logistics service rather than owning the required equipment and facilities, it is called a
non-asset-based provider. Students are much more likely to be familiar with asset-based providers like UPS,
FedEx, and other transportation based 3PLs. Thus, it is important to help them understand the concept of a
non-asset-based provider, its roles, and benefits.
3PL Services and Integration
Within the transportation function, 3PLs provide four primary types of services: freight movement, freight
management, intermediary services, and specialty services. Figure 12-1 highlights different services in each
category and explanations are provided for 3PL services that are not discussed in other chapters of the
textbook. The coverage includes traditional 3PL services, as well as some of the more unique capabilities
and participants:

 Surface freight forwarding

The services section wraps up with a discussion of two key capabilities being developed by innovative 3PLs.
First, they are developing integrated service offerings to accommodate customer desires for “one stop
shopping” with a single service provider. Second, they are expanding service territories to meet the
requirements of increasingly global customers.

3PL USER OVERVIEW

The second section of Chapter 12 focuses on the customer aspects of 3PL. The key issues include: who are
these customers, why they outsource transportation and logistics activities to 3PLs, and what services they
require. As they read the chapter, students learn that outsourcing has become a way of life for shippers who
rely heavily on 3PLs to help plan, execute, and control their supply chains.

The discussion centers on annual data collected by Armstrong & Associates, Inc. and the Georgia
Tech/CapGemini annual study of the 3PL industry. The data reveals that aggressive growth and expansion of
the global 3PL industry produced revenues of $487 billion in 2007. In the U.S. alone, 3PL gross revenues
grew to $122 billion in 2007 - an $8.4 billion increase over the previous year. This represents approximately
16 percent of total U.S. logistics spending. Key customers include Fortune 500 companies, particularly
technology, automotive, and retailing industries.

Reasons for Outsourcing

While outsourcing is popular among companies with few internal transportation capabilities, 3PL services
are also used by companies with world class supply chain capabilities. They use 3PLs when it is appropriate
to reduce costs, increase resource capacity, and fill gaps in expertise. Both groups
leverage the knowledge, skills, networks, and resources of experienced 3PLs rather than building or
extending internal capabilities. Table 12-3 provides a comprehensive list of reasons for outsourcing.
Primary Activities Outsourced

While the use of 3PLs has grown dramatically, customer engagement patterns have not changed dramatically
from year to year. 3PL services are widely "tactical" in nature, meaning 3PLs are used for specific tasks such
as transportation or warehousing. These tactical services often focus on transportation. The 2009 Georgia
Tech-CapGemini study found that half of the most frequently outsourced activities are related to the
movement and management of freight.

Far fewer companies engage in outsourcing at a strategic level where a 3PL essentially takes over a
customer's entire logistics and supply chain operation. However, customers seek out 3PLs that have the
ability to leverage IT and integrate people, processes, and services.

Results Achieved

The section wraps up with a discussion of customer perspectives regarding their 3PL relationships. Overall,
3PL users are satisfied with their outsourcing results, according to the Georgia Tech-Capgemini study. The
study participants, from across industries and around the globe, place a high value on their relationships with
3PL service providers and credit 3PLs with helping them to attain goals related to service, cost, and
customer satisfaction.

While the successes are many, there remains an opportunity for improvement. Customers continue to have
concerns regarding the following issues: unrealized service-level commitments, lack of continuous
improvements and achievements in offerings, and cost reductions not realized.

ESTABLISHING AND MANAGING 3PL RELATIONSHIPS

The development of a 3PL relationship should involve significant planning and preparation. After all,
companies are entrusting 3PLs to safely distribute their products and maintain their reputations. Thus,
companies should carefully evaluate potential 3PL service providers and select the one whose capabilities,
commitment level, and price match the buyer’s requirements. This can be a time-consuming process but it
will greatly increase the likelihood of a mutually beneficial relationship. The chapter outlines a six-step
process for selecting and managing 3PL partners.

 Step 1: Perform Strategic Assessment - The first stage involves the process by which the
manufacturer becomes fully aware of its transportation and logistics needs and the overall strategies
that will guide its operations.
 Step 2: Decision to Form Relationship - The second stage focuses assessing internal competencies
and weaknesses, in an effort to identify potential partners with strong capabilities that are needed by
the customer.
 Step 3: Evaluate Alternatives - Another key activity that requires significant attention is conducting
thorough assessments of the capabilities of each 3PL under consideration. This should involve
capability and capacity reviews, performance evaluations, and interviews.
 Step 4: Select Partners - While this stage is of critical concern to the customer, the selection of a
transportation or logistics partner should be made only following very close consideration of the
credentials of the top candidate 3PLs.
  Step 5: Structure Operating Model - The fifth stage focuses on the “rules of engagement” and
coordination of the 3PL relationship. This focuses on the activities, processes, and priorities that will
be used to build and sustain the relationship.
 Step 6: Implementation and Continuous Improvement - The ongoing step of the process is to
continuously monitor and evaluate performance, seek out improvement opportunities, and sustain a
mutually beneficial, long-term relationship.

The ultimate goal of this six-step process is to develop productive relationships between companies and 3PL
service providers that create outstanding customer service and cost-efficient operations. Like any
relationships, both organizations must invest time and energy into its development and sustainment. Both
parties must share information, trust their counterparts, and be open to new ideas and methods. The most
successful, long term 3PL relationships occur when the organizations collaborate on a regular basis, adopt a
team approach to problem solving, and leverage each other’s capabilities.

STRATEGIC CHALLENGES FOR 3PL USERS

Although the industry is poised for future growth, 3PLs must prepare for future challenges and growing
customer requirements. The wrap up section of Chapter 12 discusses the issues facing 3PL users and their
service providers as they move into the future. In an increasingly complex, global operating environment,
customers must carefully evaluate their outsourcing options and bear in mind a number of potential strategic
issues related to 3PL relationships: service needs, strategic coordination, technology integration, goal
cohesion, supply chain security, and more:

 Service Requirements - Early in their planning processes, 3PL customers must determine if they are
going to take a tactical or strategic approach toward outsourcing. This will drive other key decisions
throughout the lifecycle of the 3PL relationship.
 Coordination Role - 3PL customers must also identify the specific roles required of 3PLs and choose
a provider accordingly. Those customers using a tactical approach to purchasing 3PL services will be
well served by specialist while those using a strategic approach would be best served by lead logistics
providers and 4PL companies.
 Technology Integration - When customers outsource transportation activities, they must take steps to
maintain control and visibility of their freight. Hence, they must work with 3PLs possessing strong
technology capabilities to foster communication, enhance shipment visibility and event management,
and improve day-to-day operations.
 Goal Cohesion - Customers must work with their 3PLs to develop reasonable expectations and
requirements that are achievable as well as provide the opportunity for service provider profitability.
 Supply Chain Security As a company’s supply chain becomes more global, the potential for security
risk multiplies. The ability of 3PLs to navigate the complex and changing pathway of government
anti-terrorism regulations is another factor that customers must consider when selecting a 3PL service
provider.
 Future Issues and Challenges - As customers extend their global activities, supply chain complexity
will also grow. 3PLs, especially those developing far reaching physical networks, integrated logistics
capabilities, and effective IT tools, will be well positioned to serve the transportation and logistics
requirements of their customers.