Third party Logistics (3PL) Chapter 3 Third party Logistics (3PL)

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) ILM-1

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

3PL Providers ILM-1

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) ILM-1

Why Use 3PL? ILM-1

3PL Vs. Transportation Services ILM-1

Models of 4PL A) Lead logistics provider: The 4PL provider acts as an in house freight management company, it might or might not have a role in the selection of 3 PL partners. It takes care of transport invoicing and the monitoring of the performance of the 3 PLs. B) Solution Integrator: In this variant of the model, the 4PL acts as the integrator of various 3PLS and as a single window for freight negotiations, 3PI selection and freight management on behalf of its client. C) Industry Innovator: Under this model the 4PL uses its expertise and resources to create a solution not for any single client, but for offering 4PL services to a number of clients in an industry. ILM-1

Services Offered by Third Party Logistics Providers Standard Advanced Complete Warehouse management Transportation Dispatching Delivery documentation Customs documentation Assembly Packaging Returns Labeling Stock accounting Order planning and processing IT management Invoicing Payment collection Source: OECD, Logistics Integration in the Asia-Pacific Region, 2000. ILM-1

Why is it Needed? Advantages Cost reduction Focus on core competency Improved efficiency, service and flexibility Industry-specific application – “built-to-order” systems and e-merchants Penetrate new markets Reduce the inherent financial investment risks associated with owning logistics assets like trailers and warehouses. Coordinate producers and distributors within a global approach. Access new technologies, sophisticated warehousing operations, or new delivery options. ILM-1

Services by 3PL Basic services Physical contract logistics services Management contract logistics services Integrated contract logistics ILM-1

Associated Risks Strategic risk- same services to competitors Commercial risk- manufacturer reputation and future orders are in hands of 3PL Management risk- Costs and real value of service provided must be visible at both the ends. ILM-1

When to opt for 3PL The prerequisite for the company before hiring a logistics provider is to explain him clearly as what is expected out of his services. In logistics terminology it is known as ‘Base case’. The base case is defined as the situation the company presents before the arrangement with a 3PL ,in terms of the metrics it considers relevant for its performance. Generally there are four dimensions a company looks into before deciding to outsource the services of logistics service provider.

Continuation. They are 1. Company needs (is logistics a core competence ?) 2. Tangible values( are there any measurable advantages?) 3. Management commitment 4. Provider capabilities. Viewing seriously all the above dimensions with other company specific requirements involves an overall evaluation of the entire logistics system, including inbound, in plant and outbound logistics.

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