Outsourcing Logistics operations

Why outsource ?

• Concentration on core capabilities for both parties

• Flexibility of operations

• Cost Focus

• Single window concept

 Outsourced vs. In house logistics
IN HOUSE OUTSOURCED
BENCHMARKING Internal, across various units or time Comparison with other companies
FLEXIBILITY Low flexibility to adapt to business Highly flexible
conditions
COST Higher control but complacency can Lower control, plus payout to 3PL, but
creep in specialization, shared premises,
competitive pricing help in lower costs
MANAGERIAL High internal monitoring needed Can be low if contracts and processes
FOCUS NEEDED for 3PL arrangement are properly
defined
CUSTOMER Customer connect is maintained Loss of informal connect with customer
INTIMACY
ADOPTION OF BEST Through improvement focus by internal May happen in case of selected 3PL
PRACTICES managers service providers
 Difference between 1PL, 2PL, 3PL, 4PL & 5PL

1PL • A first-party logistics provider is a firm or an individual that needs to have cargo, freight,
goods, produce or merchandise transported from a point A to a point B. The term first-party
logistics provider stands both for the cargo sender and for the cargo receiver.

2PL
• A second-party logistics provider is an asset-based carrier, which actually owns the means of
transportation. Typical 2PLs would be shipping lines which own, lease or charter their ships;
airlines which own, lease or charter their planes and truck companies which own or lease
their trucks.

3PL • A third-party logistics provider provides outsourced or 'third party' logistics services to
companies for part or sometimes all of their supply chain management functions.

4PL
• A fourth-party logistics provider is an independent, singularly accountable, non-asset based
integrator who will assemble the resources, capabilities and technology of its own
organization and other organizations, including 3PLs, to design, build and run comprehensive
supply chain solutions for clients.

5PL
• A fifth party logistics provider will aggregate the demands of the 3PL and others into bulk
volume for negotiating more favorable rates with airlines and shipping companies. Non asset
based, it will work seamlessly across all disciplines. The central ethos of 5PL is its commitment
to collaboration and to obtaining a higher degree of resource utilization in order to achieve
savings and open up opportunities to secure the best possible solution at minimum
cost/carbon etc.
Difference between these entities
 Evolution of outsourcing landscape

Warehouse keepers, transport companies Until

Shipping companies, forwarders 1980’s

Distribution companies, NVOCCs 1990’s

Integrators , Logistics

3PLs 2000’s

4PLs, 5PLs 2010-

 Indian scenario
• Mix of MNC and local players
• Size of logistics industry in India FY17-18 – USD 160 billion - source IBEF
• CAGR 13%
• Size of 3PL market in India – USD 20 billion

• Major MNC players : DHL Supply Chain, Blue Dart Express, UPS, Fedex, Schenkers, Panalpina,
Kuehne+Nagel, Flyjac-Hitachi, Gati-KWE
• Major Local Players : Mahindra Logistics, AllCargo Global, TCI Supply Chain Solutions, VRL

• Traditional small-time entrepreneurs making way for professional companies

• Global outsourcing trends now gaining momentum in India

 Customer satisfaction dropping…
• Common issues cited against LSPs
– Service level commitment not met with
– Cost Creep and subsequent price increase after start of contract
– Lack of kaizen initiatives
– Lack of consultative and strategic management skills
– Targeted direct and indirect cost savings not achieved
– Unsatisfactory transition during implementation stage

Contract renewal rates typically less than 50%

 Types of logistics outsourcing
• Complete oursourcing: Space, infrastructure, full manpower,
transportation

• Partial outsourcing
–Only contractual Manpower
–Contractual Manpower plus supervisory manpower
–Space and infrastructure
–Transportation
 Nature of 3PL commercial contracts
• Concept of open book vs Closed book costing

• 3PL remuneration contracts

–Cost reimbursement plus management fee
• Open book costing
• Pros: transparency through better visibility, control, no surprises
• Cons: no incentive for 3PL to reduce cost unless benefits linked to savings, cost of detailing
–Per piece handled OR per unit area managed
• Closed book costing, with a minimum guarantee for 3PL
• Pros: ease of administration, volume escalations/dips better handled
• Cons: opacity leads to trust deficiency, contingency planning a challenge
• Warehouse cost template for 3PL
–warehouse cost
 Cost of changing a 3PL
• Visible cost savings to be compared

• Cost of transition to be included which is

– cost of separation with outgoing LSP
– cost of induction/training the incoming LSP
– cost of disruption in service

• Known devil vs unknown angel dilemma

 Contractual issues
• LOI sign-off  

• Service agreement sign-off (SOPs and KPIs)

• Tenure of contract

• Risks & Insurance / Liability cover - lien of goods

• Exit clause

• Commercial terms including contract profitability

 Basic expectations from 3PL

Role of Project Manager and Operations Manager

Process focus – building S.O.P.'s

K.P.I.s adherence by the team

Formal Performance review process by 3PL management

Kaizen: Continuous cost reduction initiatives

Kaizen : Raising the bar in line with customer expectations

 Selection of a 3PL
• Information gathering L S P s e l e c t i o n criteria
P r i c e 30
• Feedback from market S e r v i c e reliability 12
• Visit with a checklist Flexibility 10

• Commercial evaluation F r e q u e n c y , ro ut i n g &

t i m e
transit 12

R e p u t a t i o n 8
• Meeting senior management of 3PL
R e l a t i o n s h i p p ot en t i al 6
E q u i p m e n t availability 6
I T c a p a b i l i t y 5
U s e o f e . C o m m e r c e 6
S S H E i ni t i a t i v es 5
100
 Managing your 3PL service provider
• Link KPIs with remuneration
Contracts • Liabilities & risks

• Daily/weekly/monthly/quarterly with various hierarchy levels

• Timely objective feedback for corrective action at appropriate quarters
Formal Reviews • CAPA – (Corrective and preventive action) Issue (raised by client), Analysis, reason
and action (to be executed by 3PL)

• Costs
Market intelligence • Current practices
• Other customers of 3 PL

• SOPs to demarcate responsibilities

Accountability • Escalation matrix to be clearly specified

• Celebrate success instantaneously e.g. achieving KPIs consistently

Relationship Management • Conduct lessons learnt workshop after every project completion
 Future trends
• Customer demands are likely to be • 3PL market will remain fragmented.
influenced by: Industry consolidation has yet to prove
financially beneficial in many cases
–legislation
–environment
• The larger 3PLs tend to be more
–increasing geographical competition
successful, Too many LSPs still fail in the
–transport cost differentiation across the basics
modes • 4PLs likely to be rare; trend towards 3PLs
–collaboration • 3PL business likely to get commoditized
–increased volatility
–major changes in the sourcing of • The key to 3PL operation success will lie in
product close monitoring and collaborative
–eBusiness approach from the company.