Contents

Introduction & Historical background.......................................................................................2 Industry Overview:.....................................................................................................................4 Four Major 3PL Segments:....................................................................................................4 Types of 3PL Providers..............................................................................................................5 Transportation Based..............................................................................................................5 Warehouse/DistributionBased:...............................................................................................5 Forwarder Based:...................................................................................................................5 Financial Based:.....................................................................................................................5 Informational Based:..................................................................................................................6 Why Organizations need to use 3PL services??.........................................................................6 Save time and cost..................................................................................................................6 Expansion...............................................................................................................................6 Narrow Focus on Core activities............................................................................................6 Effectively reach their customers:..........................................................................................6 Increased sales and market share...........................................................................................6 Flexibility in operations.........................................................................................................7 Some Leading Global 3PL service providers.............................................................................7 3PL Services...............................................................................................................................8 Pros and Cons of 3PL...............................................................................................................10 Recent Developments...............................................................................................................11 Conclusion and Recommendations..........................................................................................12 References:...............................................................................................................................15

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Introduction & Historical background
Right from the pre-historic times, trade has been the most significant achievement that mankind has ever got par with and the conquest for excellence still continues. This even gets justified when we look at the present day structure of the world economy solely based on trade and commerce. The term trade comes along with the supply and demand of the goods and commodities being traded. To enable an increase in sphere of influence of the products, the companies want their product to be available to their customers and also to search for potential customers by exploring newer markets. This requires heavy transportation (selection of mode of transport depends upon the proximity of market to be served and the financial constraints of the organization) and hence, the term “Logistics”. “Logistics”, as defined classically, is the time related positioning of goods, has been in place ever since warfare existed between mankind. Tracing on the history and evolution of logistics, it would be correct to say that Military logistics is the predecessor of modern business logistics. It’s in fact appropriate to take a field of military warfare into modern day business as the competitive environment today is no less fierce than the wars fought by mankind, let alone the weaponry. The basic military strategy of protecting one’s own supply while attacking those of an enemy can be rephrased to suit modern day business as follows. The usage “Competitive advantage” over rivals is very much in vogue in management vocabulary. Various military practices have been adopted into commercial world to gain this competitive advantage. The field of operations research also grew out of the military logistics efforts of WWII. Through the time, as the competition between firms increased, the focus shifted to the details of the strategy as to provide the right item in the right quantity at the right time at the right place for the right price to the right person (very much the realization of 4 P’s of Marketing). This condition called for the integration of 2

information, transportation, inventory, warehousing, material handling and packaging which further led to the need of highly efficient systems to attain these goals. The branch of business logistics evolved in the 1950s. The reason for the evolution being the need for supplying one’s own business with the materials and shipping out the products in a globalised supply chain. During 80’s, there was increased globalization and an increased use of IT. These trends resulted in increased demands on firms and possibilities for companies to operate more competitive and lean. It was during this time that many successful 3PL companies of today emerged. Some of them are: DHL/Exel, FedEX, Kuehne-Nagel, Schenker, UPS, Panalpina, C.H. Robinson, TNT Logistics, Schneider, Maersk Logistics and NYK Logistics. Third party logistics (3PL) or contract logistics is thus the supply chain practice of outsourcing the various logistics functions of inbound freight, customs consolidation, ware housing, distribution, and outbound freight to the client's customers. The 3PL provider executes these logistics functions on behalf of the client company by using own assets resources. This provides the service user company to concentrate more on its core competences while at the same time operating in a leaner fashion without owning many assets, thereby reducing the overall operational costs. The resources and funds that would otherwise have been utilized for the performance of the logistics functions can be now redirected towards improving operational efficiency in other disciplines. India is not aloof as well, when we talk about the utilization of 3rd Party logistics by companies in India, it has been 55% when compared to the global index of 71%. This further testifies the increasing role and understanding of optimal business practices by the Indian firms. With the relaxation in government policies and banking on the highly skilled and educated labor force, the industries in India (specifically; Manufacturing and Services) are in the phase of expansion and with globalization in its full fray, the companies here too are looking to supply its products throughout the globe to increase its market presence and this active participation in the world trade makes India’s position as inevitable in the 3PL usage. Moreover, the rapidly growing Indian Consumer Market and the increase in consumption expenditure has made the Indian customer sensitive towards the quality and speed of the service being provided, due to which the organizations are forced to go for “3rd 3

Party Logistics” so that they can concentrate on their competencies i.e. production by outsourcing the critical processes of the Supply Chain to the experts thereby lowering their costs. DHL was the first company to begin 3rdParty Airlift Cargo operations in India in the late 70’s.

Industry Overview: (Datamonitor)
The 3PL industry is a difficult to analyse for it’s volume and size. The global logistics market generated total revenues of $804.6 billion in 2007,representing a compound annual growth rate (CAGR) of 6.2% for the period spanning 2003-2007. In comparison, the European and Asia-Pacific markets grew with CAGRs of 3.2% and 10.5%, respectively, over the same period, to reach respective values of $248.7 billion and $272.3 billion in 2007. The retail logistics segment was the market’s most lucrative in 2007, generating total revenues of $514 billion, equivalent to 63.9% of the market's overall value. Logistics for the automotive sector contributed revenues of $105.8 billion in 2007, equating to 13.2% of the market's aggregate value. The performance of the market is forecast to follow a similar pattern, with an anticipated CAGR of 5.3% for the five-year period 2007-2012, which is expected to drive the market to a value of $1,041 billion by the end of 2012. Comparatively, the European and Asia-Pacific markets will grow with CAGRs of 0.6% and 9.7%, respectively, over the same period, to reach respective values of $255.6 billion and $431.9 billion in 2012. The market share of the Asia pacific is one third accounting to 33.8 % of the total, with United States contributing the lion share with 35.2% and Europe 30.9% of the total revenue generated.

Four Major 3PL Segments:
Non-asset based Domestic Transportation Management (TM):3PLs providing valueadded transportation management services dealing with shipments originating in and destined to domestic locations. Services are usually performed in conjunction with freight brokerage and are often contractual. Non-asset based International Transportation Management (ITM):3PLs providing valueadded international transportation management services dealing with shipments, and usually performed in conjunction with freight forwarding, often contractual in nature. Asset-based Dedicated Contract Carriage (DCC):3PLs providing dedicated contract carriage services supplying tractors, drivers and management. Trailers are normally included, contract terms are 1-7 years. 4

Asset-based Value-Added Warehousing/Distribution (VAWD):3PLs normally providing long term contract warehousing or distribution centre operations with a host of value-adds.

Types of 3PL Providers
3PL firms promote themselves as provider of a comprehensive range of logistics services. It is useful to categorize them in one of the following ways:

Transportation Based: The 3PL services
provided by this type of firms are leveraged, in that way they utilize the assets of other companies, and some are non-leveraged, where the principal emphasis is on utilizing the transportation-based assets of the parent organization. Basically, these firms extend beyond the transportation activity to a more comprehensive set of logistics offerings. Few transportation based suppliers are Ryder, Menlo logistics, Schneider Logistics, FedEx Logistics and UPS Logistics.

Warehouse/DistributionBased:
Traditionally, most Warehouse/Distribution based logistics suppliers have been in the public or contract warehousing business and have expanded into a broader range of logistics services. Based on their traditional orientation, these firms are in Inventory Management, Warehousing, Distribution, etc. Examples of such firms are DSC Logistics, USCO, and Excel, Caterpillar Logistics Services, IBM.

Forwarder Based: This category includes companies like Kuehne & Nagel, Fritz, C.H
Robinson and Hub Group. They have expanded their middleman roles as forwarders and/or brokers into the broader range of 3PL services. Essentially, these firms are non-asset owners, are very independent and deal with a wide variety of suppliers in logistics services.

Financial Based: This category of firms provide freight payment and auditing, cost
accounting and control, and tools for monitoring, booking, tracking, tracing, and managing 5

inventory. Examples: Cass Information Systems, CTC, GE Information Services, FleetBoston.

Informational Based: There has been a significant growth and development in this
category of Internet-based, business-to-business, electronic markets for transportation and logistics services. Examples: Transplace, Nistevo are popular companies in this type of 3PL services.

Why Organizations need to use 3PL services?
3PL services are very important for organization to gain effectiveness in many of their activities. A few such activities which lay the very foundation in ensuring the effectiveness of the offering by the company are: Save time and cost: Organizations are not required to invest in both time and money and they save a lot in both these factors if they take up the services of the3PL companies. They would save themselves of the time and cost involved in buying trucks and providing for the training and development required in these services. Expansion: Accessing 3PL services help the organizations in expanding their business to a wider range of new, unexplored markets. Apart from providing services in the domestic sectors, 3PL provides international services as well. This will help the organizations to expand to international markets. This, at times, may be a major problem for organizations which are taken care of by the 3PL service providers. Narrow Focus on Core activities: 3PL services help the organizations to narrow their focus to their important functions and more of their strengths and leave the job of logistics on the 3PL providers. Basically an organization is saved of the trouble of focusing on this aspect and not spread their functions so wide. Effectively reach their customers: Providing finished products to actual customers can be hindered with many problems from the organizational point of view. This is a affecting the organizations around the globe. 3PL services providers reduces this trouble of the organizations. They take up this job of reaching the customers and delivering the products on time and effectively. Increased sales and market share: With expansion in newer markets, organizations benefits a lot in increasing their sales as well as their market share in the fiercely competitive global economy. Thus 3PL services contribute a lot in the profitability of the organizations. 6

Flexibility in operations: Access to 3PL services brings in a lot of flexibility in the overall operations of the organizations. They take up an important part of their activities which helps in improving their other important operations of the organization.

Some Leading Global 3PL service providers
DHL DHL was founded as a company in 1969 by Adrian Dalsey, Larry Hillblom, and Robert Lynn . The company is now a wholly owned subsidiary of Deutsche Post World Net. The company offers expertise in express, air and ocean freight, overland transport, contract logistics solutions as well as international mail services. DHL links 120,000 destinations in more than 220 countries and territories. The company provides services from a network of about 6,500 offices, and it employs a fleet of nearly 76,200 vehicles and about 420 aircraft. The company operates through four major business divisions, namely the DHL express catering for international business and personal courier services, DHL Freight and DHL Global Forwarding catering to international air and ocean transportation as well as European overland transportation. The DHL Exel Supplychain division caters for the contract logistics services and corporate information solutions. DHL Global mail division provides for the mail and communication solutions and integrated solutions for the corporate.

Federal Express: FedEx provides transportation, e-commerce and business services. The company offers integrated business applications through its operating companies. The company's subsidiary, FedEx Express, is the world's largest express transportation company.FedEx has a host of services to cater to all segments starting from the personal consumer to the complicated supply chain solutions for today’s global business environment.

The list of global 3PL service providers can be very lengthy and way beyond the scope of this report. Therefore we shall list a few more of these firms by name, United Parcel Services ( UPS ) NYK Logistics Mearsk Logistics Nerbert Dentressangle ( Previously Christian Salvesen) ABX Logistics Worldwide SA 7

Schneider Logistics

3PL Services
With the increasing number of 3PL service providers, the service users have to distinguish the best provider suitable for their purpose. Various mathematical models considering a variety of factors have been proposed by researchers world over in this regard. Since requirements are unique, solutions also need to be unique and there is no readymade solution to all logistical problems. With the market growing competitive the 3PL service providers also try to differentiate their service offerings by unique services and benefits for the customer in order to gain an upper market share. We’ll now have a look at few of the services provided and technology used by 3PL providers.

Inbound and Outbound Logistics: Movement of raw materials into the organization and finished goods to the destination. The basic service provided by all 3PL providers.

Inventory and Warehouse management services: The 3PL service might provide to manage the entire inventory of the customer according to stated specifications and contract conditions. This option may be accepted by the customer weighing all the pros and cons of complete outsourcing of inventory and warehouse management activities.

Shipment Tracking and tracing: Most of the global 3PL services provide with this facility where one can track his consignment using the bill of lading details to know the status of the shipment and trace the real time position as well. Services like DHL and UPS provide facility for customers to track. This is offered by extensive back office processing work done by the service and hence comes at cost. So it’s up to the customer as to whether he needs this kind of a facility for his purpose.

Freight Consolidation, Forwarding and Customs Clearance : Transportation across the globe often calls for more than one mode of transport, air, sea and road. The 3PL provider will provide consolidated solution by picking up the consignment from the consumer’s place delivering till the final destination, not requiring the customer to take the pains of co ordinating with the various transport service providers otherwise. Furthermore, the consignments will be cleared off from customs formalities at various intermediate points 8

using local agents. This is very essential service which otherwise would make it impossible for the cargo to be transported across the globe. Reverse Logistics: This refers to the process of moving the goods from the final user in the reverse direction, either as part of a rejection, or for recycling for capturing the value or for proper disposal.

Cross Docking: This refers to the direct transfer of goods from one mode of transport to another with minimal or no warehousing. An efficient container handling system, wherein the containers from the ships are straightaway unloaded to the queuing trailers can be an example of cross docking. This reduces the inventory costs as well as provides a higher shelf presence to the products benefitting both the retailer as well as the manufacturer. Wal-Mart runs 85% of it’s goods through cross docking amounting to 2-3% reduction in the cost of sales of their products.

Bar coding :These are data representation in optical machine readable format which can store the details of a particular material and can be read using optical scanners. The system has been extensively used in the logistics industry for identification of materials

RFID Tags : These are programmable re recordable labels, capable of storing data that can be read without contact. RFID tags can be active, which emits radio waves or passive which just stores the information and can be read in using a radio frequency reader. The tag can be read from several meters and even out of line of sight. This has been extensively used in inventory management and material tracking.

Electronic Data Interchange (EDI) : EDI is the transfer of structured data, by agreed message standards, from one computer system to another without human intervention. This facility offered by the service reduces the paperwork and human labour required in large documentations including bills of lading etc.

From the host of offerings provided, the customer might not need all of them at every time. Since the value added services come at an added cost, the customer has to choose the best option available for him. The differentiation at the service provider’s has to go to the level of service being customizable to meet the requirements of the customer at all times and 9

providing the best value as perceived by the customer. At all times it might not be the cheapest option that is the viable solution. For instance, DHL has a special service wherein one can send medicines along with proper prescriptions to foreign countries, from India. The cost may be as high as Rs. 3500/- for a pack of 500 gms., but then there are not many options available for this purpose. In the industrial sector, once the decision to outsource is made, the company has decided to do away with the function as a whole. Now comes the question of choosing the best 3PL service from the various ones available. With large amounts of money involved in the logistics functions, company executives often labour hard to come out with the best solution for the problem. Extensive research is done on this issue and various mathematical models have also been proposed by many studies incorporating many factors to be considered in the selection process. “Ganesh Vaidyanathan” while discussing a “Framework for Evaluating 3PL”, argued that companies undergoing strategic alliances with the 3PL providers face reduced conflict, increased efficiency and stability, and establish marketplace legitimacy. In another very important very interesting study on supply chain competition by Peter McCullen et al. of Brighton Business School, the supply chain performance has been compared with the performance of an F1 race car on ciruit. The paper unwinds the degree of competition in the field and attention to detail required synonymous to the tuning of a race car, where fractions of second decides the winner. Summing it up, the key word for the customer is “customization” whereas that for the service provider will be “differentiation”.

Pros and Cons of 3PL
Before going further with discussing the pros and cons of using the contract logistics industry, one should understand that, rather than a matter of choice, 3PL has grown to the stature of a necessary service in today’s business environment. Most companies cannot feasibly own all the physical assets, nor doesn’t have the expertise needed to execute the logistics function in today’s global environment. Having understood the various services provided by the 3PL providers, let’s analyse the Pros and Cons in contracting the logistics activity. PROS:

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Experience: The 3PL provider owning the assets to perform the logistics operations contracted has the expertise to operate them and is more familiar with the work than the customer himself. Technology: Improved technology in the respective segment will be adopted by the provider to provide better service and hence to stay competitive in the market. Scalability: The 3PL service with it’s vast fleet of transportation and warehousing facilities will be able to provide service scaleability with more ease than an inhouse logistics system. This will be very useful in case of seasonal demand fluctuations. CONS: Lack of Control: The customer company effectively has very less control over the freight, once it leaves their premises except for the tracking service offered by the the service providers. This lack of control raises the question of security as well for goods in transit. 3PL Service Optimisatddion: The asset based 3PL firm which in itself is a separate business will look for the optimum utility of the asseststhey own. The 3PLs often attain this goal of best utility of resources by routing the consignments through existing networks or alternative routes in case of non availability of space in the best route. Delayed deliveries finally might affect the parent company in lost business opportunities.

Recent Developments
3PL has already evolved beyond the conventional boundaries of being an outsourcing contractor providing warehousing and transportation solutions with it’s storage space and transportation fleets. Information technology has played a major role in the development of this field and the developments happening in this sector has been often compared with the rates at which the IT sector itself grows.

4PL or Fourth Party Logistics provider is further evolution of the outsourced logistics function. A 4PL is an integrator that assembles the resources, capabilities, and technology of its own organization to design, and supply other chain organizations

solutions. Unlike the 3PL provider, the 4PL company does not own any 11

assets or resources for executing the outsourced activities. Further they take the role of a consultant, understanding the logistics functions of the client company utilising their intellectual and computer systems and to select the best 3PL service that can fit into the scenario. 4PL has often been confused with non asset based 3PL, which can be just an agent acting on behalf of the 3PL provider with no consulting capabilities to offer for the customer.Arguments as to whether the approach is a right one is still going on. Accenture was the company that coined out the term as well as the idea of 4PL.

4PL relations are often found successful with businesses which do not have the IT and physical assets infrastructure and does not want to invest in those areas. Organisations having these in place might not benefit much out of the 4PL provider rather would complicate the situation. 4PLs acting as an intermediary between the organization and the 3PL provider ensures co ordination of day to day activity while at the same time providing inputs to the parent organization regarding improvement of their own overall activity inlinewith the consumer needs of the time. Thus in times of highly dynamic supply chain requirements, the adoption of 4PL service can be justified. These services are often contracted on a financial incentive basis, wherein the service provider gets a financial incentive for the implementation of a project which results in the improvement of delivery and financial results. "We pay for returns, not ideas. They benefit from ideas/projects that work," says Victor Guzman about 4PL service providers, director logistics and supply chain planning with aerospace products manufacturer Honeywell International Inc.

Though not as common as the term and idea of 4PL is the idea of fifth party logistics or 5PL. 5PL is attributed to Logistics Service Providers who plan, organize and implement logistics solutions on behalf of a contracting party.

The latest in the development arena of the contract logistics industry is a hybrid formed out of a combination of 3PL and 4PL and aptly christened as 7PL (7PL = 3PL + 4PL). 7PL, is the effective fusion of physical and process expertise of 3PLs, with the enhanced knowledgebased macro-strategic consulting and IT capabilities of 4PLs. 3PL providers often promise to provide the total logistics solutions, but many a time fail in doing that. But they are very 12

competent at the operational level and understanding the needs at bare supply chain level. 4PL on the other hand addresses the strategic management perspective of the organisation, thereby raising the question of actual operation and implementation expertise they have. 7PL combines these two elements to provide a holistic approach to bridge the gap between strategy and implementation.

Conclusion and Recommendations
With 3PL playing such a major part in the modern day structure of the industries and its operational advantage over the existing or the conventional logistics system has made it very much acceptable and to an extent an integral part of today’s manufacturing firm. The future in India looks bright as the strong and rising consumer market is forcing the industries’ to mend their long rendering ways and focus on exceeding the customer’s expectations rather than merely meeting them. To successfully implement 3PL services, organizations need to do the following:

Outsourcing strategy: Organizations need to identify their effective outsourcing
strategy. It needs to be well thought out and measured against in-house solutions and capabilities. Once one identify your strategies for outsourcing, it will help you in finding out the exact 3PL service one needs and finally implementing it successfully to benefit the organizations.

SWOT analysis: As a company you should understand the strengths, weaknesses,
opportunities and threats of outsourcing logistics, rather than keeping them in house. Once you identify the above mentioned factors, you can easily implement the required 3PL services.

Proper homework: Initial homework is very essential while implementing the 3PL
services. Organizations need to do a comprehensive study of their operations and clearly document advantages, challenges, costs and benefits involved in the operation. Then they need to identify their expectations out of their 3PL services and then they need to set down their expectations in clear terms and calculate their current costs. This is a very step while implementing the 3PL services.

Create a robust selection process: organizations need to invite companies to give a
formal presentation without giving requirements. This can help document their strengths 13

and weaknesses which ultimately helps in identifying most effective and appropriate 3PL service provider. Organizations can make a site visit to the 3PL providers and talk with its existing customer and get a feedback about their performance and operations to help in their decision-making.

Performance measurement and review: Organizations need to have an efficient and
accurate measurement system to measure the performance of their 3PL services. They can go for qualitative measures that focus on effectiveness and quantitative measures that focus on efficient utilization. Then they can review the measurement with the pre-decided benchmark and take effective decisions. They should have an efficient costing system to understand the costs involved in outsourcing. This will help them calculate their actual profits earned engaging in 3PL services and take appropriate decisions to implement the services which will earn them more profits.

Create an Implementation Strategy: organizations need to create a project plan and
a road map to be clear about what to be done and who is the best to do the job. They need to create a project management team with members from both organizations i.e. the 3PL firm and themselves and review the progress with planned milestones. This will make the implementation process successful for the organization.

Nurture the Relationship: Both the organization using 3PL services and the service
provider must nurture their relationship to make outsourcing successful. There should be mutual trust, respect and a sense of integrity to make their association successful.

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