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Logistics outsourcing can make a significant contribution to the competitive advantage and profitability of a company through its role in reducing costs and improving customer service, promoting company growth and shareholder value. In a country such as South Africa, where companies are under increasing pressure from both customers and shareholders to improve performance, and where the growth strategy is aimed at exports, logistics outsourcing can have an important impact.
The main purpose of this assignment has therefore been to investigate the advantages that accrue to stakeholders when outsourcing logistics practices to third party logistics providers (3PL) and a discussion follows as to other value adding services that 3PL organisations can provide.
Table of Contents: Introduction: According to the CLM (Council of Logistics Management), logistics is that part of the supply chain process that plans, implements and controls the effective flow and storage of goods, services and related information from the point of origin to the point of consumption in order to meet customer’s requirements.
For many companies, logistics represents a strategic competitive advantage due to the gains from operational efficiency such as reducing costs and improving communications; innovation; revenue generation through increased productivity; and customer satisfaction through improved service. Effective logistics management is able to provide a major source of competitive advantage to a company by ensuring that it is able to continuously respond faster, more effectively and efficiently than competitors, to customer requirements.
Management need to understand their internal costs, market, core business and identify the business’s core competencies before deciding to outsource a function. The risks involved must be given due analysis. Companies are under tremendous pressure to cut costs, and improve customer service and company profitability. One of the ways to achieve the above mentioned is to outsource non-core areas. For a firm or supply chain to gain competitive advantage over rivals it must perform some combination of value chain activities more efficiently or in uniquely differentiated ways that rivals won’t be able to imitate easily.
The key issues for 3PL providers is to, “help their clients achieve reliability levels which will enable inventory cost savings or to increase transparency throughout the supply chain so as to enable their customer companies to meet or exceed the rising expectations for customer service,” (Coltmana,2008). There are many advantages of outsourcing and many different reasons to embark on such an initiative. These include areas such as: cost reduction, customer service improvement, increased competitive advantage and company profitability, as well as the opportunity to focus on the company’s core competence and to expand its markets.
Many companies also find that due to a lack of internal expertise and capability, they are obliged to outsource certain functions. It has been found according to Gilley and Rasheed (cited in Lewis, 2006) that outsourcing the logistics function to a 3PL is positively related to firm performance for organisations that follow a cost leadership strategy and negatively for organisations that follow a differentiation strategy. The 3PL industry is relatively easy to enter and exit and consists of several different kinds of 3PL firms.
According to Wikipedia. org, the types of 3PL’s today are: Standard 3PL provider {text:list-item} Service developer {text:list-item} The customer adapter {text:list-item} The customer developer {text:list-item} Non Asset-based Logistics Providers {text:list-item} This assignment has identified that in managing the supply chain with strategic outsourcing relationships (3PL) there are a number of driving factors that lead to this initiative.
The following table is a representation of these drivers. Advantages to stakeholders The organisationally driven reasons for outsourcing to a third party logistics provider are to enhance the effectiveness of their activities by focusing on what the organisation does best and to increase flexibility so as to meet changing business conditions, demand for products and services, and technologies as well as to transform the organisation and increase customer satisfaction, product, service and value for the stakeholders (including shareholders).
For example, Nike (shoes) is great at marketing and selling their shoes, however they do not own any assets to produce them, nor deliver the shoes to retail locations. Outsourcing to a 3PL allows them to focus on product development, engineering and customer satisfaction. There is a system of value creation activities aimed at profitable exchanges between the firm and its stakeholders in the market. Prime focus is on the effective communication and exchange with stakeholders -a firm’s survival and competitive advantage i. . the overall ability to create profit, depends on the amount of value created for its stakeholders therefore the firm must successfully communicate the value proposition to the stakeholders. example shorter cycle times, better quality, enhanced productivity, better utilisation of available, improvement in management and control, improving their risk management, acquiring innovative ideas and improving their credibility and image by associating themselves with superior logistics providers. ssets and to free up resources for other purposes and to generate cash by transferring assets to the provider. A major issue here for stakeholders was the opportunity cost of funds that is tied up in capital assets. access to markets and opportunities through this new provider network, accelerate their expansion by tapping into the 3PL provider’s already developed capacity, processes, and could be financed, and exploit the 3PL’s as well as their own organisation’s existing skills.
Outsourcing to a 3PL brings further advantages to the organisation of decreasing costs through superior provider performance and the provider’s lower cost structure as well as through converting their fixed costs into variable costs as firms only need to contract for the This initiative will also give employees of the organisation a stronger career path whilst increasing commitment and energy in non-core areas.
Small businesses can benefit from outsourcing to a 3PL due to economies of scale whilst bigger companies can benefit by outsourcing those functions that are badly managed in-house. Outsourcing can also reduce costs due to economies of scale A third party provider can, for example, invest in expensive computer programmes as they will use this on all their contracts. They can also negotiate bulk discounts on certain an organization to keep abreast of the latest functionality without extensive investment in information technology,” (www. ogistics. about. com). RFID (radio frequency identification) and other developments require software that can utilize and process vast amounts of data that current systems may not. Other advantages include time savings where for most companies, the opportunity to save costs that are not discovered until a process is outsourced,” (Kujawa, 2003). Speciality areas outside the core business gain substantial amounts of management attention; outsourcing is a way to minimise these issues that would have previously meant hidden costs.
It must also be assets are no longer needed by the organisation. This initiative will allow the organisation to re-evaluate their existing business processes. “Share performance is often enhanced, as investors expect cost reductions,” (Kujawa, 2003). Management will also have greater flexibility in allocating human resources. The 3PL is also bound by a contractual agreement to perform to the agreed levels of service whilst an in- house function may not control expenditure efficiently.
The service levels, distribution obligations and other conditions are agreed upon and taken up in the contract. “The agreement will spell out the expectations regarding performance measures such as delivery reliability, return loads, cost objectives, and general management aspects such as communication systems and measures, reports, cost indexing of non-controllable cost factors, non-performance sanctions, contract termination conditions and dispute resolution mechanisms,” (Hugo, WMJ, 2004).
It is therefore argued that the organisation faces little risk The advantages that small businesses reap from outsourcing to a 3PL are that, “outsourcing is a proven means to secure the best available expertise and/or products and services available in the market,” (Kujawa,2003); it is cost effective as specialists that the company could not otherwise afford to appoint would now be available to them.
It could also improve management’s control over the business if implemented by means of a well-structured agreement and it can provide peace of mind and allow an entrepreneur to attend to more pressing daily activities. A 3PL can add value through cost savings and service improvements by having market knowledge and a network, through helping the organisation reap the benefits of economies of scale, by third party flexibility, the leverage of technology investments, reduced capital costs and increasing the organisations market access.
A third party (3PL) will benchmark against competitive logistics practices, there is also the ability to negotiate contracts with carriers and there is geographical expertise. With regard to Geographical Coverage – transportation costs (DC). One option may be to use satellite distribution centres closer to the market demand rather than to build another, as the volumes may be too low to warrant another facility. PL’s that operate in those areas are able to consolidate volume from other organizations to keep savings, specialisation, asset reduction and a reduced workload for the organisation. In addition as mentioned briefly before, one of the basic reasons for a company outsourcing its logistics is the inability to manage the logistics function effectively in-house. Companies may also turn to 3PL’s when they are experiencing service problems which are due to late and/or inconsistent delivery times, rising loss and damage claims, errors in order entry and fulfilment, and customer complaints. Many companies find the pressure to outsource coming from top management, particularly as they see the companies they benchmark against increasing their use of 3PLs,” (Kujawa, 2003). Fleets will no longer be undercapitalised and under maintained- the benefits of a more reliable distribution from a 3PL and higher customer service levels result in increased sales that is sufficient to offset the higher distribution costs. A lack of specialised and skilled manpower to manage distribution, forces businesses to seek alternative arrangements.
In today’s fast changing logistics environment, these skills are crucial for the business to keep abreast of a changing environment where the main focus should be on customer service. capital can be invested elsewhere in the business or in the market, where higher returns can often be obtained. The requirements for the operation of a vehicle fleet are infrastructure such as workshops, stores, fuel, facilities and offices. These infrastructural requirements will not be necessary when the distribution activities are contracted out.
Another aspect is the requirement for an administration system that has to be maintained when the organisations own fleet is operated and can thus be downscaled to the management of the contractor, based on the contract conditions. Value adding activities As the market becomes more global and competition intensifies, firms realise that competition has moved to the domain of supply chain against supply chain. Today new requirements for value-adding services are emerging based on greater information access, transparency and inventory reduction.
Companies are looking to streamline the number of service providers that they use so that they can better manage their provider relations. Therefore, companies have started seeking service providers that offer more comprehensive logistics outsourcing solutions, and logistics outsourcing service providers are adding new technologies and service options to expand the value of their offerings Required skills for logistics outsourcing service providers Source: IDC, 2001; as quoted by Ravi, 2001.
Satisfied Customer service excellence The provider must recognise the critical need to develop its in-house human resource capabilities, thus maintaining a strong focus on training and development. “This must be a combined effort between management, the unions, and the employees to ensure training excellence and the development of each employee to their fullest potential,” (Hum, 2000). The provider must build a track record of hiring, training, and retaining quality people, at the same time building a culture that will help align its people and efforts for strategic competitiveness. There must also be ongoing focus on logistics research and development, and constant identification of new logistics problems and application of a conscious problem-solving approach to these problems leading to state-of-the-art logistics solutions,” (Gonzales, 2003). 3PL’s need to be leading users of the following: Electronic Data Interchange (EDI), satellite communications, web enablement and electronic supply chain management (e-SCM).
The success of these services is critical for excellent communications which are needed to effectively coordinate the many partners in the supply chain. Other services are logistics services such as JIT, global trade services, inbound logistics, process re-engineering, payment audit processing, vendor management, and product life cycle management. Special services are reverse logistics; transportation services with respect to small package, intermodal and dedicated contract carriage; and warehousing services which includes location services and vendor management inventory (VMI).
A 3PL can add value at the most basic level of the supply chain by determining and arranging the most appropriate method of transporting a single shipment of goods, while at the most sophisticated level, a provider can be fully integrated into a company’s supply chain. In this case, a 3PL designs, co-ordinates and executes a supply chain strategy while providing the company with value-added information to better manage core competencies.
With regard to optimisation, due to the increase in time-sensitive delivery (owing to the development and increased adoption of the JIT philosophy) the need for the development and adoption of dynamic routing and scheduling systems are crucial for a sustainable competitive advantage. According to Chew et al (2003) there is an increasing trend for major automotive manufacturers to employ 3PL’s to provide Kanban delivery for their vehicle manufacturing. The utilization of CAST and FLO Modelling Software* as a form of value *adding. CAST-dpm is a strategic and tactical supply-chain modelling tool.
It is designed to create a computer model of a complex distribution operation (dedicated or network based) and allows various strategies to be run against the model to find a least cost solution. CAST-dpm enables the examination of depot locations and the flow of product groups throughout the entire supply chain. FLO (fleet logistics optimiser) is a vehicle scheduling and tracking system designed to improve fleet utilization and reduce delivery cost. FLO finds delivery routes and truckloads that minimize costs. It then compares the actual route driven to the suggested route using GPS satellite tracking.
Any unauthorized vehicle use is automatically identified. By improving vehicle routing and reducing driver misuse of vehicles an overall reduction of up to 20% in delivery costs can typically be achieved. FLO also provides a fleet planning module called FLO-Plan. FLO adds further value as regular routes can be downloaded or interactively defined. Master routes can be maintained and each route can be individually optimized. For warehouse environments, FLO facilitates pre-scheduling by creating routes before all orders are finalized.
These routes are then updated once all the orders have been received and utilises geocoding on vector maps with a full street search. It also plans routes for future days and takes into account the “what-if” scenarios. There is full security with user profiles allowing different users access to specific parts of the system. FLO helps by planning the deliveries in the most efficient way, and reducing operating costs by improving fleet utilization, reducing waiting time, reducing distance travelled, and minimizing the number of vehicles used.
It enables the logistics service provider to identify and record the costs associated with the fleet and automatically assess and record the performance of each driver. It therefore helps in the drive to improve customer service and enhances the investment in GPS tracking units. It is also able to integrate with all popular tracking solutions and displays the daily schedules and actual tracked routes on a vector road map. It automatically identifies routes taken and deliveries made and the time spent at each customer and the cost of each delivery is calculated.
The schedule is downloaded to onboard computers and tracking equipment. It calculates real-time expected arrival times and flags late deliveries and un-authorised vehicle use. Drivers will have to explain all unscheduled stops as stops are marked as authorized or unauthorized by the system. A report generation facility is also included. FLO keeps up to date databases of the customers, products and routes by using live links to the client’s back-end databases. The product database has a size or mass associated with each product so that FLO can automatically calculate the size of each invoice.
The database of vehicles has any number of vehicle types and the fixed and variable costs for each vehicle type. The jobs for the day can either come from the invoicing database or from a set of regular routes. Regular routes can be downloaded or interactively defined. Master routes can be maintained and each route can be individually optimized. Ad-hoc jobs can be entered manually. It uses an advanced randomized algorithm to plan routes. One could also manually plan routes or change the suggested routes. It allows what-if comparisons between delivery schedules and calculates the marginal cost of each delivery.
Some major clients in the industry such as Gillette are requiring the adoption on Radio Frequency Identification (RFID) because it helps in achieving item-level inventory visibility, with the hopes of decreasing finished goods inventory level, theft of products, hijacking of truckloads, and labour cost in terms of the time it takes to pick and pack the product. The outbound logistics implications of adopting RFID would be that there will be real-time ability to react to lost-in-transit deliveries and to fix supply problems before they cause disruption for clients.
The servicing of parts is another non-core area for many companies. A 3PL could provide additional value-add if they could take over this operation of service and maintenance. According to Chew et al (2003), small and large companies alike have indicated the need to streamline their logistics operations and reduce transactional costs by communicating with their 3PL’s through a single point of contact. The main advantages of this would be central problem resolution, and event/crisis management in order to uphold customer service levels and it also enables true customisation.
Other value adding activities could include arrangements that provide final assembly, packaging and product labelling (inclusive of promotional advertising such as stickers or mini pamphlets), as well as distribution activities since “the make or buy decision not only has ramifications for the existence of the firm but also for the boundaries (scope) of the firm,” (Bobbitt et al, 2004). Collaboration with 3PL’s represents a trend in the industry. The following is a suggested definition of collaboration in the context of a 3PL-customer elationship: “supply chain collaboration between a 3PL and a customer occurs when both organizations work toward a common set of goals and objectives, and when there is a meaningful exchange of information relating to planning, management, execution and performance measurement. Collaborative relationships thrive on the dedication of both parties to share responsibilities of people, process and technology, in order to drive change and improvement in the overall business relationship. To be effective, the collaboration process should involve not only 3PLs and their customers, but the customers’ customers, suppliers and other key stakeholders.
In reality, 3PLs are in a great position to facilitate collaboration between a customer organization and its trading partners,” (Langley et al, 2007). The benefits of collaboration would be, access to and knowledge about the global marketplace by leveraging the 3PL’s experience and relationships in other markets as well as Improved customer service ” for example, a 3PL has opportunities to interact with end customers and create a positive experience during order entry and order fulfilment. It will also enhance business processes (see appendix).
Conclusion “It is believed that SCM and 3PL have positive interactive effects or synergy effects” (Nemoto, 2001). When firms are intent on introducing SCM, it would be beneficial to outsource logistics activities and utilize a 3PL provider. As supply chain’s become more sophisticated, 3PL’s will continue to be called upon to fill various growing needs because of their unique service offerings. In a world of increasing competition, technological developments and globalisation, logistics is increasingly complex.
Continuous improvement and best practice in logistics is thus increasingly difficult for companies to achieve, due in part to lack of expertise and economies of scale, as logistics is usually not part of their core competence, for example the manufacturing companies. From a supply chain perspective there is also the opportunity for improving the operations and efficiency of the supply chain overall. Logistics is therefore receiving increasing recognition in companies due to the role and importance thereof in their future growth and prosperity.
Like any quality service provider, 3PL’s must continually add value for existing clients, and since many companies look to their logistics provider for leadership in logistics systems development, strong IT capabilities thus become crucial. There is tremendous scope for providers to improve their capabilities around current services as well as to provide more advanced services. These improved capabilities should have a direct impact on the success of providers’ customer relationships. References Beskow, M. J. nd Konezny, G. P. (1999) Third-Party Logistics: Improving Global Supply Chain Performance. Piper Jaffray Equity Research: Third-Party Logistics. January 1999. Bobbitt, L. M.. Mentzer,J,T and Min, S. (2004)Toward a unified theory of logistics[Online]. 88 Paragraphs. Available: www. emeraldinsight. com/0960-0035. htm Chew, C. M. and Graeve, D. (2003) Service bundling opportunities for a 3PL in the value network [Online]. 123 Paragraphs. Available: http://dspace. mit. edu/bitstream/handle/1721. /34972/70077632. pdf? sequence=1 Coltmana, T.. Devinney,T. M.. Hughesa, K. and Keatinga, B. (2008) The Relative Importance of Logistic Service Provider Attributes[Online]. 51 Paragraphs. Available: http://www. ioadmin. unsw. edu. au/agsm/web. nsf/AttachmentsByTitle/TD_3PL_Attributes/$FILE/3PL+Attributes. pdf Davidsson, P.. Hennesey, E. L. and Notteboom, E. T. (2004) Agent-based simulation of stakeholder’s relations: An approach to sustainable port terminal management [Online]. 2 Paragraphs. Available: http://www. ipd. bth. se/lhe/agent-based%20simultion%20of%20SRM%20in%20a%20CT. pdf Gonzales,A. (2003) 3PL Market Still Fragmented: Study. Maritime Press, 2003-01-16. Available:http://www. maritimepress…. /view. asp? num=37637. 9079629630=see http://en. wikipedia. org/wiki/Third-party_logistics_provider http://logistics. about. com/od/outsourcing/a/3pl_adv_disadv. htm 10. http://sreevidya. wordpress. com/2007/10/31/3pl-its-advantages/ 11. ttp://www. opsi. co. za/product_flo. htm 12. 13. Hum,S. H. (2000)A Hayes-Wheelwright Framework Approach for Strategic Management of Third Party Logistics Services. Integrated manufacturing Systems, 11(2). MCB Univeristy Press. Available from: http://www. emerald-library. com 14. Kujawa, B. J. (2003) THE OUTSOURCING DECISION-MAKING AND IMPLEMENTATION PROCESSES. [Online]. 23 Paragraphs. Available: http://etd. rau. ac. za/theses/available/etd-08102004-102826/ 15. 16. Langley,