Metrans 2nd Annual Transportation Conference INDUSTRIES IN TRANSTION: FREIGHT TRANSPORTATION INTERMEDIARIES IN THE INFORMATION AGE Jiong Song and Amelia C. Regan Metrans 2nd Annual Transportation Conference Feb. 2, 2001 ITS, UC Irvine

Outline Traditional Freight Transportation Intermediary Section I Traditional Freight Transportation Intermediary Section II Current State and Evolution of the Industry Section III Niche Markets -- Online Logistics Providers Section IV Research Needs / Opportunities Predictions / Conclusions Section V ITS, UC Irvine

Traditional Freight Transportation Intermediary Section I Traditional Freight Transportation Intermediary Section II Current State and Evolution of the Industry Section III Niche Market -- Online Logistics Providers Section IV Research Needs / Opportunities Predictions / Conclusions Section V ITS, UC Irvine

Third Party Logistics “Third-party Logistics is simply the use of an outside company to perform all or part of the firm’s materials management and product distribution function.” -- Simchi-Levi (2000) “A relationship between a shipper and third party which, compared with the basic services, has more customized offerings, encompasses a broad number of service functions and is characterized by a long-term, more mutually beneficial relationship” -- Murphy & Poist (1998) ITS, UC Irvine

Third Party Logistics 3PL Shipper Outsourced Operation Transportation Warehousing Shipper 3PL IT support Shipper In-house Operation SC integration Shipper In-house Logistics Department Others Others IT support Warehousing Transportation

Characteristics of 3PL Perform outsourced logistics activities Process management / Multiple activities More customized services Mutually beneficial and risk-sharing relationship Long-term commitments (1~ 3 years) ITS, UC Irvine

Why is it needed? Advantages Disadvantages Cost reduction Focus on core competency Improved efficiency, service and flexibility Industry-specific application – “build-to-order” systems and e-merchants Disadvantages Loss of control Impact on in-house workforce ITS, UC Irvine

Traditional Freight Transportation Intermediary Section I Traditional Freight Transportation Intermediary Section II Current State and Evolution of the Industry Section III Niche Markets -- Online Logistics Providers Section IV Research Needs / Opportunities Predictions / Conclusions Section V ITS, UC Irvine

Broader more integrated services Industry Evolution Third Generation ( 2000 and beyond) Online freight marketplaces Web-based 3PLs Increasing supply chain integration Non asset-based companies Asset-based companies increased service offerings Second Generation (1980s - 1990s) Transportation / warehousing Freight forwarders / brokers Shipper’s agents First Generation (1970s - 1980s) Broader more integrated services

Current State -- Service Offerings Dedicated Contract Transportation / Transportation Procurement Inventory Management Logistics Management and Consulting Freight Audit and Bill Payment Customs Services Shipment Tracking and Tracing Reverse Logistics and Value-added Services ITS, UC Irvine

Current State -- Market Size 3PL market is growing ( $ Billions ) ITS, UC Irvine

Market Structure Annual Revenue > $100 million $20 - 100 million Orange Courier Regal Logistics Cass Information System California Distribution Bax Global Logistics Menlo Logistics ITS, UC Irvine

Current use of 3PL by industry Percentage of 3PL use in different industries Computer Consumer Retail Chemical Medical Auto Source "What's ahead for 3PLs“ Modern Materials Handling, April, 2000 ITS, UC Irvine

Current Industry Status No commonly accepted terminology Technologies increase visibility, efficiency and integration The service menu is rapidly changing New breed of companies are emerging ITS, UC Irvine

Traditional Freight Transportation Intermediary Section I Traditional Freight Transportation Intermediary Section II Current State and Evolution of the Industry Section III Niche Markets -- Online Logistics Providers Section IV Research Needs / Opportunities Predictions / Conclusions Section V ITS, UC Irvine

Niche Markets – Online Logistics Providers Online Freight Marketplaces Spot market Auction and RFQ Exchange Meta-marketplaces Application Service Providers (ASPs) Purchasing Consolidation Market Infomediaries ITS, UC Irvine

Online Logistics Providers-Opportunity The Freight Transportation Industry is Ideally Suited e-commerce High Fragmentation of Shippers and Carriers Many Intermediaries Complex Supply Chains High Search Costs Significant Opportunities for Economies of Scale Several Models Emerging ITS, UC Irvine

Niche Markets – Online Service Providers Spot market Auction and RFQ Exchange Meta-marketplaces Application Service Providers (ASPs) Purchasing Consolidation market Infomediaries ITS, UC Irvine

ITS, UC Irvine

ITS, UC Irvine

Niche Markets – Online Service Providers Spot market Auction and RFQ Exchange Meta-marketplaces Application Service Providers (ASPs) Purchasing Consolidation market Infomediaries ITS, UC Irvine

ITS, UC Irvine

ITS, UC Irvine

Niche Markets – Online Service Providers Spot market Auction and RFQ Exchange Meta-marketplaces Application Service Providers (ASPs) Purchasing Consolidation market Infomediaries ITS, UC Irvine

ITS, UC Irvine

ITS, UC Irvine

ITS, UC Irvine

Niche Markets – Online Service Providers Spot market Auction and RFQ Exchange Meta-marketplaces Application Service Providers (ASPs) Purchasing Consolidation market Infomediaries ITS, UC Irvine

ITS, UC Irvine

Niche Markets – Online Service Providers Spot market Auction and RFQ Exchange Meta-marketplaces Application Service Providers (ASPs) Purchasing Consolidation market Infomediaries ITS, UC Irvine

ITS, UC Irvine

ITS, UC Irvine

Niche Markets – Online Service Providers Spot market Auction and RFQ Exchange Application Service Providers (ASPs) Purchasing Consolidation market Infomediaries ITS, UC Irvine

ITS, UC Irvine

Niche Markets – Online Service Providers Spot market Auction and RFQ Exchange Application Service Providers (ASPs) Co-ops Infomediaries ITS, UC Irvine

ITS, UC Irvine

Traditional Freight Transportation Intermediary Section I Traditional Freight Transportation Intermediary Section II Current State and Evolution of the Industry Section III Niche Markets -- Online Logistics Providers Section IV Research Needs / Opportunities Predictions / Conclusions Section V ITS, UC Irvine

Recent Research General market examination Contracts and relationships Lieb and Randal (1999) Lieb and Peluso (2000a, 2000b) Contracts and relationships Leahy, Murphy & Poist (1995) Sankaran & Charman (2000) Decision-making processes Menon, McGinnis & Ackerman (1998) Lim (2000) ITS, UC Irvine

Behavioral Models Carrier and Shipper behavior models Carrier selection Contract design Contract negotiation 3PL provider’s behavior Service offerings ITS, UC Irvine

Online Freight Marketplaces Integrated and Time Sensitive Optimization Problems Dynamic and stochastic routing and scheduling systems Dynamic inventory management systems Combined inventory-routing models Real-time bidding and freight matching algorithms Optimal pricing strategies for intermediaries and carriers Optimal bidding strategies for shippers Simulation-based analysis of costs and benefits to shippers, carriers and 3PLs under competing business models Is it a zero sum game? Who wins? Who loses? How much? ITS, UC Irvine

Traditional Freight Transportation Intermediary Section I Traditional Freight Transportation Intermediary Section II Evolution and Current State of the Industry Section III Niche Markets -- Online Logistics Providers Section IV Research Needs / Opportunities Predictions / Conclusions Section V ITS, UC Irvine

Predictions and Conclusions The total market for freight transportation intermediaries is still growing with the boom of e-commerce; The conventional 3PLs will not fade, but will face with the competition from the online logistics providers; The companies have to combine the logistics expertise with advanced technology to evolve; Strategic alliance and merge/acquisition will be important to obtain comprehensive and intergrated supply chain solution capability; Small carriers and niche carriers will benefit from increased access to shippers and reduced search costs Medium sized and Large carriers may resist and try to continue business as usual or simply become e-commerce enabled using current business models The 120+ on-line freight marketplaces will be reduced to less than 10 leaders and a few successful niche players in near future. ITS, UC Irvine

Predictions and Conclusions The freight transportation industry has historically been slow to change Personal relationships will continue to be important despite a growing acceptance of web based interactions The potential benefits of IT are huge Major industry changes will come – the question is how soon ITS, UC Irvine

End ITS, UC Irvine