Supply Chain Management

Third Party Logistics

07-02-2010
Done By-

Nitin Lahoti

Nike_lahoti@rediffmail.com

MBA (International)

Edith Cowan University

Table of Contents
Supply Chain Management Third Party Logistic

Executive Summary –......................................................................................................................4

Introduction......................................................................................................................................5

Logistic market in India...................................................................................................................5

Role of 3pl in supply chain:.............................................................................................................6

Services outsourced:....................................................................................................................7

Categories of 3PL providers........................................................................................................7

1. Standard 3PL Providers....................................................................................................7

2. Service Developers...........................................................................................................8

3. Customer Adapters............................................................................................................8

4. Customer Developer.........................................................................................................8

Drivers of 3pl:..................................................................................................................................8

Phased implementation of VAT:..................................................................................................8

Government infrastructure initiatives:.........................................................................................8

Growth in automobile and retail sector:.......................................................................................9

When does it make sense to use 3PL?.............................................................................................9

How have the 3PLs fared globally?...............................................................................................10

Future of 3PL in India....................................................................................................................11

Benefits and drawbacks of 3PL concept........................................................................................12

Benefits......................................................................................................................................12

1. Focus on Core Competency –.........................................................................................12

2. Technological Flexibility –.............................................................................................13

3. Geographical Coverage...................................................................................................13

Some other advantages are-.......................................................................................................13

Disadvantages............................................................................................................................14

1. Loss of Control................................................................................................................14

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Supply Chain Management Third Party Logistic

2.. Higher Exit Barriers........................................................................................................14

3. Unexpected Fees.............................................................................................................14

What values have 3pl brought to their customers?........................................................................14

What are the Challenges?..............................................................................................................15

1. Infrastructure congestion:...................................................................................................15

2. Lack of trust and awareness:...............................................................................................15

Conclusion and Recommendation.................................................................................................16

Bibliography..................................................................................................................................17

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Supply Chain Management Third Party Logistic

Executive Summary –
This report is part of our Masters of Business Administration (MBA) academic program. This
report summarizes the work of third party logistics and the current situation of this industry. In
this report we look upon how this industry works and the various factors which affect the
functions of this industry. Our report deals with various aspects of 3PL such as its role in supply
chain and the various types and drivers of 3PL. We also look upon why a company uses 3PL.
Our report also tries to answer that when should we use 3PL and when we should not use this.
Moreover we have discussed the benefits customers get from the 3PL and challenges this
industry is facing. We also compared world market of 3PL with Indian market and foretell what
it can become in near future. However our report doesn’t deals with the 3PL service providers
and use of IT in 3PL. In the whole report we tried to emphasize equally on all the aspects. This
report opens some issues for further study such as “Use of IT to improve 3PL”.

In our entire report we have used credible sources of information such as articles from the
news papers, ebscohost, books and trustworthy web resources.

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Supply Chain Management Third Party Logistic

Introduction

The third party logistic concept is now become a very significant and well functioning
logistic concept. It’s largely because of the outsourcing trend in the transportation business.
Providers of 3PL services balanced the efficiency of logistics supply chain management
enlarging the performance of hauliers and forwarders to what might be called outsourced
logistics services providers. The main driver for this was large transportation companies that
have struggled to make their limited services to the whole transport chain. Firstly, this extended
to what now is called forwarding services, i.e. responsibility and transport service was extended
from only physical transportation to additional services. Some transport companies constantly
enlarging their responsibility so that they can make their supply chain more responsible. A nature
of transportation services became more and more the nature of logistics. Companies started
offering complete logistics solutions, instead of only isolated physical transportation services.
This allowed a customer to concentrate on the core business instead of paying much attention to
material flows [ CITATION Cur09 \l 1033 ]. .

Logistic market in India

Indian Supply Chain and Logistics Industry is more than Rs 1, 000 crore in size and is the
heart of Indian Economy. Our industry is growing at a rate of 8-10% yearly and has been a
critical contributor in the growth and development of the Indian economy. In the near future,
Traditional Logistics services like Transportation and Warehousing would continue to growth at
a good rate. However, the big ticket growth would come from the Value Added Logistics
services in the near future. At present, Outsourced Logistics has for only one-third of the total
Logistics market in India. Growth in this industry is currently being driven in India by over Rs 3,
000 crore worth of infrastructure investments, the phased introduction of VAT, the development
of organized Retail and Agro-processing industries, along with a strong manufacturing growth.
Except this, we expect strong Foreign Direct Investment inflows in the Indian markets, which
would lead to increased market opportunities for providers of Third-Party Logistics in India. It is
felt that the growth will continue, and might even scale newer heights, as the economy is

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experiencing a retail boom with Western companies such as Metro, Wal-Mart planning to start
operation in this country, and large local retailers such as Shoppers Stop, Pantaloon and Big
Bazaar planning to expand their operations in smaller cities[ CITATION Cur09 \l 1033 ].

Therefore, India has significant opportunities for growth in the Supply Chain & Logistics
industry in the future, not with position the temporary shake due to the economic slowdown.
Several factors have positively impacted the growth of the logistics industry like the country's
changing tax system, growth across major industry segments such as pharmaceutical, fast
moving consumer goods (FMCG), automobile, and the emergence of organized retail. With
growing competition and cost pressures, companies are increasingly focusing on their core
competencies by outsourcing their logistics requirements to third party logistics (3PL) players.

Role of 3pl in supply chain:

Third Party Logistics (3PL) provider handles all or most of freight of the organizations
including the management of information by the third party, freeing the company from day to
day interaction with carriers, and having to oversee hundreds or thousands of shipment. New and
cheaper information flow resulting from internet enabled solutions, will lead not only achieving
immediate cost reductions in operations but also to enormous productivity gains.
The tracking and control of movement of goods drive freight optimization and asset utilization.
The options are: increased trailer utilization, combining full truckload shipments, consolidation
and aggregation of smaller buyers to put simply, 3PL refers to the outsourcing of a logistics
function. It could be the use of a transportation carrier, a warehouse, or a third party freight
manager to perform all or part of a company’s production distribution functions[ CITATION
Ben10 \l 1033 ].

But the huge diversity in geographic conditions, consumer habits, and infrastructure
conditions across the country make it a major challenge for Indian industries to efficiently
manage their supply chain to reach all parts of the country. Additionally, India’s retail network is
very vast, estimated at about 3.3 million outlets in 2005. The highest priority of all industries in
India is to achieve a consistent presence of their products across maximum possible section of

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Supply Chain Management Third Party Logistic

this vast retail network. This could be achieved through a well knit end-to-end logistics process
managed efficiently by a professional logistics service provider[ CITATION Thi10 \l 1033 ].

Nevertheless, the logistics industry, providing services to fulfil these major logistics
needs of the Indian industries is highly fragmented. The transportation service provider segment
is completely dominated by small trucking companies and individual truckers. The freight
forwarding service provider segment is also represented by thousands of small customs brokers
and clearing & forwarding agents. Similarly, there are a huge number of participants in the
warehousing service segment and MIS service segment also. Few service providers have the
capability to provide more than one service and it is very rare that a single service provider has
the capability to provide all the logistics services. Such fragmentation had lead Indian industries
to outsource packets of individual logistics functions to different service providers while
retaining the overall control of logistics in-house, despite incurring heavy administrative and
infrastructural costs[ CITATION Key09 \l 1033 ].

Services outsourced:
 Activities such as, pick and pack, warehousing, and distribution (business) – the most
basic functions of logistics.
 Advanced value-added services such as: tracking and tracing, cross-docking, specific
packaging, or providing a unique security system.
 Inventory management.
 Order picking.
 Fleet management and consolidation.

Categories of 3PL providers

Some literature sources are describing four categories of 3PL providers:

1. Standard 3PL Providers

This is the basic form of 3PL providers in which they execute the most basic function of logistic
like pick and pack, warehousing and distribution. For these providers, the 3PL is not the main
activity.

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2. Service Developers
This kind of 3PL provider will offer their clients advanced value-added services such as: tracking
and tracing, cross-docking, specific packaging, or providing a unique protection. A solid IT base
and a focus on economies of scale and scope will enable this type of 3PL provider to perform
these types of tasks.

3. Customer Adapters
This kind of 3PL provider comes in at the demand of the client and essentially takes over
complete control of the firm’s logistics actions. It improves the logistics significantly, but do not
develop a new service. The customer base for it is typically very small.

4. Customer Developer
It is the maximum level of 3PL provider. It can achieve with respect to its processes and actions.
This happens when the 3PL provider combines itself with the client and takes over their
complete logistics function. It will have fewer clients, but will perform extensive and
comprehensive jobs for them.

Drivers of 3pl:

Phased implementation of VAT:

Value Added Tax (VAT), the Indian Government’s proposed uniform tax regime, is
expected to drive Indian industries towards using more 3PL services. Introduced partially in
2005, a full implementation of this regime is expected to necessitate having centralized large
warehouses in regional hub cities, to achieve best efficiency in logistics. Since building such
large warehouses requires huge investments, most Indian companies are likely to outsource the
warehousing function, creating immense potential market for 3PL service providers. Leading
companies in major industries have already started planning for the new scenario and the
required warehousing capacity to be outsourced. Others are expected to follow them soon.

Government infrastructure initiatives:

The government of India’s increased focus on improving logistics infrastructure is
expected to have a huge positive impact on 3PL market. The government has invested US $17

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billion to upgrade highway networks, with the implementation of two major projects, namely the
Golden Quadrilateral network and the North-South-East-West (NSEW) Corridor. Apart from
this, in a remarkable infrastructure related decision, the government has opened up rail freight
operations to private players, thereby creating opportunities for cheaper and faster movement of
goods. Transportation by rail is definitely cheaper than by road, as trains are faster and have
lower costs per unit distance travelled. This is expected to enable 3PL service providers in
offering more cost-effective services to clients, thereby increasing the 3PL usage by all
industries.

Growth in automobile and retail sector:

Apart from these factors, the increasing list of multinational companies starting
operations in India is expected to fuel the growth of 3PL market. Entry of giants like BMW,
Flextronics, and Wal-Mart are expected to contribute to considerable growth of 3PL usage in
their respective industry sectors. The opening up of the Indian economy to foreign investments is
expected to attract more companies into the country, thereby adding momentum to 3PL market
growth. The wide-spread information technology awareness and expertise in India is also
expected to help 3PL companies in offering several value added services using IT such as Fleet
Management Systems, Warehouse Management Systems, and integrated Supply Chain
Management systems.

When does it make sense to use 3PL?

While there's definitely more than 5 reasons why a company might turn to a third party
logistics provider here are a few common ones.

1. To provide supplementary supply chain support to test the waters in new regional
markets or countries where your company doesn't currently have a presence without
taking the full plunge and opening a new distribution center.
2. If you are a company whose business is seasonal in nature using a 3pl provider allows
you to scale your warehousing space, labor, and transportation to provide full support
during the peak months of your business while cutting back during slower months.

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3. To increase on-time performance and realize efficiencies with the management of your
inventory by using a 3PL provider that has superior technology and processes than your
in-house operations.
4. To take advantage of lower transportation rates provided by logistics firms that have
significant buying power due to the volume of freight they deal with and their ability to
leverage load consolidation and backhaul opportunities.
5. To quickly build a multi-location distribution network with lower risk, without the
significant capital investment associated with building out a network on your own.
6. The major user of these services in India is IT and real estate industry. Now a day retail
industry is also started using this service. These are using these services simply because
above mentioned aspects.

How have the 3PLs fared globally?

Vertical Industry        March             August

Automotive                   -37.5%          -18.5%
Consumer Goods          -7.3%              -3.7%
Healthcare                     -2.3%              -2.0%
Industrial                       -7.0%              -6.3%
Hi-Tech                         -6.7%              -7.2%
Retail                             -8.1%              -11.3%
Food & Beverage          -0.1%              -1.2%

Due to the recession this market suffers a lot on global platform but after slowdown now
again it is recovering slowly. The 14th annual 3rd party logistics study shows that now again this
market is increasing. In the key findings of the report they showed that 305 shippers were
interested in 3PL. A recently released Armstrong & Associates survey of 3PLs reveals that for
the first half of 2009 gross revenues decreased -12.2% and net revenues declined -5.9%. Of the
companies reporting, 72% said gross revenues decreased and 24% said gross revenues had
increased over 2008. The average increase for the increased revenue group was 6.6%. Of the
3PLs responding, 64% reported positively when asked if business improved in July and August.

Current 3PL Market in India

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Supply Chain Management Third Party Logistic

3PL industry’s foundation in India can be traced back to mid 1990s. The industry was
leaded by global logistics players most of them are providing their services to the Indian
subordinate of multinational companies in automobile, electronics and FMCG sectors. Indian
subordinate of multinational companies in these sectors took reminder from their main
companies and began to outsource a share of their logistics tasks to these specialist service
givers. It is inconsequential in the first few years but after year 2000 Indian 3PL industry is
experiencing a rapid growth. The number of players in this industry had increased to be more
than 600 by year 2007[ CITATION Rep091 \l 1033 ].

Future of 3PL in India

The 3PL in India is still in a growing stage because multinational companies are the main
user of these services. However, local companies in the industry have also begun to follow the
same steps of their MNC counterparts and starting with contract out their basic logistic functions.
They are realizing that by doing this they can save huge amount of money. The great numbers of
small to medium organizations in all the industries are starting to use 3PL services in their
logistic tasks, resulting in a marvelous prospective market for the 3PL market in India. The
multinational companies that are using 3PL in basic logistic functions might adapt to outsourcing
value-added services such as customer support, inbound logistics, and reverse logistics . The
domestic companies might increase their 3PL usage in the basic logistic functions and irregularly
testing with the value-added services but the small and medium companies could now begin to
use 3PL services for their basic logistic functions. However, taking into account that the most
important logistics functions for Indian companies still are transportation and warehousing,
which are likely to be outsourced to 3PL in increasing share, a high level of growth is estimated
for the Indian 3PL market in the next 5-7 years.

Benefits and drawbacks of 3PL concept

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Supply Chain Management Third Party Logistic

Very first use of 3PL is to encourage companies that, that they can increase their net
value by reducing cost of goods. 3PL gives good co-operation and also good partners. This
ability can be developed through experience with 3PL. by using 3PL Services Company can save
investment of capital, and also can reduce financial risks. It can invest in logistics, like physical
distribution. It is really very hard task to make a combination between company and 3PL
provider. If relation is to be made it happens in two stages: first stage while selecting partner as
3PL, it is very important to select only those who can provide good facilities. If they don’t do so,
they may suffer from crisis or waste of money. It is not possible to know about the ability of 3PL
in selection stage. It is also important to maintain relationship with partner after selecting the
partner. Always information’s should be shared time to time. Commitment from both parties is
also most important, to save from leaking information. This will increase transaction cost. Some
risks in 3PL are: demand risk, inventory risk and financial risk[ CITATION Ben10 \l 1033 ].
The method which is used to calculate risk is calculated from firm and 3PL Company and
also transaction cost and IT development.
Logistics cost: LC= HC+ MC
HC= RC+ IC
MC= TC+HC
Means MC= RC+IC+TC+HC

Benefits

1. Focus on Core Competency –

Perhaps the biggest advantage to using a 3PL is to allow your organization to

focus on its core competency, or what it does best. 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.  This allows them to focus on product
development, engineering and customer satisfaction[ CITATION Adv10 \l 1033 ].  

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2. Technological Flexibility –

With the current lightning-speed changes in technology, it is extremely difficult

for an organization to keep abreast of the latest functionality without substantial
investment in information technology. RFID and other developments require software
that can utilize and process vast amounts of data that current systems may not. The new
business model for information technology is to utilize software as a service (SaaS),
where a usage fee is paid to access the application through a web portal. The software
provider deals with upgrades and maintenance, freeing up your resources to focus on
your business[ CITATION Adv10 \l 1033 ]. 

3. Geographical Coverage

Transportation costs will increase if you are servicing customers far away from
your main distribution center (DC). One option may be to use satellite distribution
centers closer to the market demand rather than build another DC, as the volumes may
be too low to warrant another facility. 3PL’s that operate in that area are able to
consolidate volume from other organizations to keep costs lower[ CITATION Adv10 \l
1033 ].

Some other advantages are-

 Enhanced customer service capabilities through shorter shipment times and increased
shipments visibility.
 Reduction of capital expenditures (administrative cost, equipment, distribution centers.
delivery costs, fuel and maintenance cost)
 Liability Minimized so risk reduction

 Cost benefits through volume shipping discounts[ CITATION Adv10 \l 1033 ].

 The IT expends in the Indian logistics industry by Freight Forwarding, Airports, storing,
express & Courier Services and RFID (Radio Frequency Identification). It will file in the
next five years to about two-and-a-half times the Rs 830 lacs now. This was the outcome

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of a study, 'Technology Survey for the Indian Logistics Industry - 2008' conducted by
Kale Consultants Ltd.

Disadvantages

1. Loss of Control  
This is the single biggest disadvantage of using a 3PL. Where there may be a certain
comfort level to servicing your customer when logistics is in-house, that feeling is gone when
you outsource to a 3PL. For example, it would be much easier to accommodate a retail location
that needed a rush delivery of windshield washer fluid in the winter months prior to outsourcing,
where the request must pass though many approvals as it affects the final budget. 

2. Higher Exit Barriers  

It is very difficult to reverse the decision to outsource once your organization has signed
up with a 3PL provider. Contracts are usually 2-5 years in length with penalty clauses for early
termination. 

3. Unexpected Fees
Unless explicitly stated in the contract, extra usage fees may apply. This is dependent on
the type of contract that is used, open-book or closed book. In open book, all costs are visible to
both parties and a management fee is applied for the 3PL service. In closed-book a cost per piece
is charged, so as the volume handled increases, the cost increases.

What values have 3pl brought to their customers?

1. 3PL reduces the overall cost using economies of scale and the benefit ultimately goes to
customers.

2. Using 3PL logistics become more responsiveness so it is increase customers satisfaction

level.

3. It reduces lead time so delivery reaches much earlier to customer

4. It is Meeting market demand effectively so a customer has not to be left without product.

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What are the Challenges?

1. Infrastructure congestion:
Infrastructure limitations in India, which limit the scope of logistics services package, are
another concern for 3PL service providers. The congested roadways and ports resulting in
significant delay in movement of goods, affect the performance of 3PL service providers.
Similarly, the lack of sufficient warehousing and specialized storage facilities of major cities of
the country result in 3PL service providers to restrain from offering warehousing services across
the country. Hence result in their failure to become the complete logistics service providers for
clients. Building own warehousing facilities in strategic geographic locations that would serve as
hubs for specific regions, could address this problem.

2. Lack of trust and awareness:

The complicated tax structure, deep-rooted corruption and high bureaucratic control are
some other hassles faced by 3PL service providers in providing the best of logistics solutions for
their clients. However, despite the existence of challenges, several factors are driving the growth
of Indian 3PL mark.

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Conclusion and Recommendation-

Third party logistic is enhancing its business in all over the world. It has huge opportunity to
grow and develop. It’s a time saving process which help to reduce the cost and time because of
the outsourcing. The marketers who are providing the service of 3pl they can earn lots of money
only by focusing on it. It’s a part of SCM so any one can become the market leader by
developing this process. After analyzing the data we came at the conclusion that 3pl makes
supply chain more responsive. It also help to deliver the product anywhere in the world.
In some developed countries it is used frequently but in India there is still a lot of scope
available for this market to develop and after going through the whole report we come up with
some recommendation to develop 3PL in India.
1. Peoples are still not much aware about the thought of 3PL so it needs a lot of awareness
programme.
2. Government should take some initiative and provide some aid in form of finance so this
industry can develop. 3PL is a very good notion for cost saving and ultimately it is the
customers who gets the benefits.

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Supply Chain Management Third Party Logistic

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