Thanks to Ankit Verma and Chandan Bharambe of IIM Kozhikode.
Have you ever wondered when you walk in big retail stores for shopping, that why the same product is priced at different rates in different retail stores? Why big retail stores are able to provide huge and daily discounts to its consumers? Well, as a consumer you should not really worry about it but yes, as a manager you should!
If you think economies of scale is the sole factor for this then probably you are mistaken! Numerous supply chain strategies are being employed by the firms in a competitive world of free economy. Logistics has been a key part of operation for any firm. For large manufacturers it has been always a source of dilemma whether to outsource the logistics and focus on their core competencies or involve in vertical integration to own the logistics system as well.
Innovation has become necessity in this industry and even shippers are ready to invest in innovation of these outsourced companies. 3PLs could able to demonstrate innovation by introducing process improvements, improving execution, offering new services and adding technology. But shippers do not see these activities as truly innovative, instead they seek disruptive innovation in 3Pl industry like a new product or service idea which when implemented significantly disrupts the market and/or value chain by simplifying, automating, generating value, or reducing costs5. Further, role of these outsourcing companies is increasing day by day. Initially, companies used to only ship the goods but then it further added the value with inventory management, warehouse management, order acceptance and processing, pick-and-pack operations, order fulfilment, assembly, packaging, and other value-added activities, credit card verification, invoicing, credit, and collection, pre-sort capabilities, and returns handling.
Thus, Utility of third party Logistics (3PL) has increased drastically. Global Supply Chain Management is the new trend in big manufacturers which requires sourcing and dispatching from different locations around the world to counter, by using different approaches such as Hub and Spoke, Cross Docking utilise their economies of scale and expertise in moving products efficiently along the global supply chain.
Evolution of 3PL:
- Pre 1980s, it started with companies with strong logistics and who could store big inventory gave their services to retailers and manufacturers
- In the early 1990s, Express networks and experience came in picture with the rise of companies such as DHL, TNT, and UPS with the rise of Global Supply Chain
- In the late 1990s, their value proposition changed from service provider to solutions provider. Many companies emerged with extensive knowledge in information technology, consultancy, and financial services such as Accenture, GE Capital Services, and IBM
With the change in value delivery the 3PL market witnessed phenomenal growth. As a result many organizations spun off their logistics businesses to focus on their core business. Table 1 shows global 3PL market and 3PL as a part of logistics. Growth of revenue in 3PL business for North America is sluggish with compared to Asia Pacific and Latin America which shows maturity stage of 3PL market whereas for Europe growth has been declining which is due to economic challenges faced by Europe.
3PL companies have huge presence in Europe and North America so the logistics costs average 8.9 percent GDP, while the percentage of logistics costs to GDP is higher in the rest of the world
The below figure indicates types of logistics service providers depending upon their functions. This matrix can also be viewed as solutions by these companies from standard services to highly customized services.
- The service developer offers advanced value-added services such as forming specific packaging, cross-docking, track and trace, and special security systems.
- The standard 3PL provider supplies typical 3PL services including warehousing, distribution, and pick and pack.
- The customer adapter handles customer’s existing activities and improves handling efficiency
- The customer developer is the most advanced form and involves high integration with the customer, taking over its whole logistics operations. This is similar to what is now known as fourth-party logistics (4PL)
Then the core question arises how companies should decide whether they should go for 3PL or not? What can be possible criteria to judge the performance of 3PL Company?
Here are some of them. If shipper thinks that any of the following tangible or intangible benefits are associated with adopting 3PL to its operations then it should give deep thought for it.
- Lead time reduction
If company is able to reduce its Lead time to replenish inventory, by efficient and close coordination goods movement, especially when changing from one mode to another; hassle free official work and clearances in movement of goods.
- Reduction in Bull- Whip effect.
By proper time management and economies of scale 3PL Company should be able to utilize its big network to minimize interruptions and delays. This Reduction in variability helps in better inventory management and much improved productivity and building of trust between partners
- More focus on core Business
Airtel-IBM joint venture in management of operations has provided fillip to Airtel to expand in other regions as well because Logistics management in extended supply chains is itself a very complex process which has been reduced and eliminated and Airtel is now focusing on its primary business functions.
- Increased supply chain flexibility
The customer shall have a better bargaining power over its suppliers. Access to big network of suppliers and leveraging that could be one point of differentiation in business. 3PL facilitates sourcing from different locations just like Apple, Walmart extract majority of revenues and small portion of revenue goes to their suppliers. In this way, supply chain is flexible and adaptable to market forces.
- Market development and Market entry vehicle
There is certain demand for some products in different locations but due to unavailability of raw materials market is unexplored. 3PL providers can solve this problem through their huge network and help customers explore new market opportunities and assisting with marketing in new territories by triggering demand in those regions by sharing of information, expertise and network.
- Expertise in Logistics
3PL integrates various supplies from different customers, hence have access to huge information. This information can help to identify potential growth areas and help in introduction of new products, new processes, trends in business climates in foreign countries, trends in transportation modes, and more.
Over the years there are major changes in the reasons for not employing the 3PL strategies for the operations. Figure 2 shows these change in the reasons over the time. Other than IT compatibility all other issues has observed drastic decline. Even those who considered logistics as their core competencies do not think it the same over the years. Decline in cost reductions indicates modern technology has reduced the cost for total logistics for the shippers.
Challenges in 3PL implementation:
- Incompetent suppliers with variable supplies:
In global supply chain scenario, a company has its suppliers spread all over the world. It is highly unlikely that all of your suppliers are able to keep the same pace throughout the operation. This poses a great challenge for 3PL implementation.
- Lack of integrated Solution provider:
There are few players in 3PL industry which offer full range of services needed, and their services might not be suited to the supply chain. Figure 3 shows different kinds of services provided by the 3PL player and use of the services in different regions.
- Less autonomy:
Any incompetency in supply and logistics can lead to huge amount of shortage costs or non-utilization of assets leading to business failure. In a way, this creates variety and hence uncertainty in supply chain. So competent and qualified human resource is required
- Thorough tangible and non-tangible value analysis:
Customers shall be able to carry out cost-benefit analysis with outsourcing. The value from outsourcing should offset the value by internal management of logistics
- Compatibility with supply chain
- Cost, delivery time quality of service
- Performance measurement Mechanism
- Hassle free paper work
- Management of service provider and organization
- Information sharing and mutual trust
- Operational performance and use of modern technology
- Size and quality of fixed assets
- Experience in specific industry
- Financial performance, Market share of the company
- Geographical spread, range of services provided and network
- Risk management and reduction in variability/uncertainty
- Quasi rents management and effective remuneration system
- Cost of delivery and solutions
- Financial Stability