THE EFFECT OF GLOBAL LOGISTICS TRENDS ON 3PL: CASE LITHUANIA MARKET Ignas Masteika 1, Jonas Čepinskis 2

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1 6 th International Scientific Conference May 13 14, 2010, Vilnius, Lithuania BUSINESS AND MANAGEMENT 2010 Selected papers. Vilnius, 2010 ISSN print / ISSN X CD doi: /bm Vilnius Gediminas Technical University, 2010 THE EFFECT OF GLOBAL LOGISTICS TRENDS ON 3PL: CASE LITHUANIA MARKET Ignas Masteika 1, Jonas Čepinskis 2 Vytautas Magnus University, K. Donelaičio 58, LT Kaunas, Lithuania 1 ignas.masteika@gmail.com; 2 j.cepinskis@evf.vdu.lt Abstract. True globalization involves much more than simply importing or exporting products and materials. Globalization requires a highly coordinated flow of goods, information, and cash within and across national boundaries. Every globally recognized company has inherently different supply chain and thirdparty logistics (3PL) management. What may work for a company that trades with domestic partners and warehouses doesn t automatically work for companies trading worldwide. The main problem of the article is how global logistics trends affect third-party logistics systems in Lithuania. Third party logistics as an object of scientific research is thoroughly analyzed in this paper. Impacts of global logistics on domestic 3PL, the advantages and disadvantages in Lithuanian market, its basic trends and prospects are also a subject to research. The article also analyses the challenges that Lithuanian suppliers face in the process of world trade globalization. Keywords: global logistics, third-party logistics, outsourcing, supply chain management. 1. Introduction Globalization is a process that has during the last 30 years the most tremendous impact on the world s business, as we see it today. As borders become more transparent and market access is facilitated, both government and business have been forced to augment their competitiveness, creating the infrastructure and strategies needed to benefit from the accelerated growth of international commerce. Mostly all economic processes that happening in countries market are effected by the phenomenon of globalizations, logistics is not an exception. The logistics process has become a rapidly growing area and many organizations began to realize its impact on supply chain profitability. In these companies, this involves outsourcing to third party service providers in a bid to reduce costs and increase productivity by focusing on core competencies. In Lithuania logistics services play a big role in countries economical and political area. In the beginning of the 21 st century the situation in Lithuanian logistics market started to change, third party logistics becomes more and more popular. Thus it is important to investigate the effects of global logistics trends on third party logistics in Lithuania market. The principle aim of the article is to highlight the effects of global logistics trends on third party logistics in Lithuania market. Tasks: to analyze the trends of global logistics in scientific literature, to emphasize the effects of global logistics on 3PL in Lithuania market. Object of the article: 3PL in Lithuania market. Research methods: analysis of scientific literature and statistical data. 2. Concept of 3PL People around the world became more connected to each other than ever before. Information, finance and etc. move around the world faster than ever. Products produced in a most remote corner of the globe are now available to the rest of the world. It is much easier for people to travel, communicate, exchange information and do business worldwide. This whole phenomenon is called globalization. Spurred on in the past by merchants, explorers, colonialists and internationalists, globalization has, in more recent times, been increasing rapidly due to explosive evolution in communications, information and transport technologies. It has also been affected by trade liberalization, logistics internationalization and financial market deregulation. Globalization, as a process itself, year by year leaves increasingly deeper traces in world s economics development. Friedman (2008) has an opinion that globalized trade, outsourcing, supplychaining, and political forces have changed the world permanently, for both better and worse. The author states that the pace of globalization is quickening and will continue to have a growing impact on business organization and practice. Palmer (2004) defines globalization as "the diminution or elimination of state-enforced restrictions on exchanges across borders and the increasingly integrated and complex global system of production and exchange that has emerged as a result. 856

2 THE EFFECT OF GLOBAL LOGISTICS TRENDS ON 3PL: CASE LITHUANIA MARKET Globalization and logistics are related very closely, logistics is one of the major accelerator for development of globalization process. In the 21 st century logistics services improves at a very high rates, at the moment third party logistics (logistics outsourcing) becomes more and more popular among organizations. Outsourcing can be defined as the act of third parties rather then in-house capability to perform non-core activities (Ellram, Cooper 2002). It represents a way by which organizations reduce their financial risk whilst maximizing the possibilities of developing comparatively higher levels of competitiveness. Outsourcing generally involves the transfer of responsibility and the need for assets to a third party (Ellram, Cooper 2003) who can then leverage their expertise to provide these services (Spekman 2001). In the scientific literature sources authors agrees that the importance of outsourcing activities becomes more and more actual to the futher organizations strategy (Prahalad, Hamel 2000). In particular, cost/service trade-offs and the quality of information systems along the marketing channel are some of the factors, which influence organizations decisions to outsource some or all of their functions to third parties (Cristopher 2003) Third party services can include any or all of information technology, administration, transportation management, warehousing, financial service management, inventory management, logistics integration, import/export activities, etc. (Copacino 2006). Thus, third party logistics providers have service based types, which are presented in Table 1. Interest in logistics outsourcing (sometimes referred to as third-party or contract logistics) has been growing over the past few years as a result of the increasing trend of global logistics (Copacino 2006) and as indicated by the volume of writings an the subject in trade publications and scholarly journals. Regarded as one of the most widely discussed contemporary topics in the field of business logistics (Lieb, Bentz 2005), outsourcing of logistics processes represents a specifically defined contractual relationship that is dependent on the 3PL s meeting the buying organizations defined performances and service goals. Third party logistics service providers can offer logistics expertise as well as cost advantages to individual companies, because they provide an opportunity for companies not to relate unnecessary capital in costly logistics related equipment such as warehouses, trucks, sortation equipment, etc. At the heart of all these strategic logistics issues is the fact that supply chain organizations need to reconfigure their operations in order to accommodate the changes inherent in a logistics outsourcing strategy. One of the most common ways of doing this is to adopt a process oriented approach (Bowersox, Calantone 2002; Cooper 2001), placing increased emphasis on business processes that cut across functional barriers. In practice, this requires an integrative approach to supply chain management. Table 1. Types of 3PL providers TYPE Transportation - Based Warehouse - Based Forwarder - Based Financial - Based Informational - Based EXPLANATION Services extend beyond transportation to offer a comprehensive set of logistics offerings Leveraged 3PL s use assets of other firms Nonleveraged 3PLs use assets belongingsolely to the parent firm Many have former warehouse and distribution experience Integrated logistics has been less complex than for the transpotation based providers Essentially very independent middlemen extending forwarder roles Non-asset owners that capably provide a wide range of logistics services. Provide freight payment and auditing, cost accounting and control, and tools for monitoring, booking, tracking, tracing and managing inventory Significant growth and development in this alternative category of Internet-based, business-to-business, electronic markets for transportation and logistics service. In order to achieve this integrative approach in practice, organizations have tended to form logistics alliances with third party service providers (La Londe, Cooper 2003). Third-party logistics or logistics outsourcing is gaining importance in more companies across the world, unable to manage their complex supply chains, are outsourcing logistics activities to the 3PL or logistics service providers. By outsourcing logistics services, corporations are able not only to concentrate on their business operations, but also achieve cost-efficiency and improve delivery performance and customer satisfaction. The concept of logistics outsourcing can be traced back as far as one goes down the history of mankind. In Europe, a number of logistics service 857

3 I. Masteika, J. Čepinskis providers can trace their origins back to the Middle Ages. We restrict ourselves to the recent decades, and trace below the evolution of 3PL from the 1950 s (Table 2). Table 2. Evolution of 3PL DATE 1950 & 1960 EXPLANATION Logistics outsourcing was limited to transportation and warehousing. The transactions were mainly short-term in nature 1970 Emphasis was on improved productivity, costs reduction and long-term contracts 1980 Value-added services such as packing, labeling, systems support and inventory management 1990 Outsourcing has picked up momentum and more value-added services are being offered. Some of them are import/export management, customs clearance, freight forwarding, order processing, distribution, consulting and etc to present Logistics outsourcing moved to higher technological level. More and more organizations refuses they own logistics department, starts using warehouses of 3PL providers. With the globalization of trade has come the merging of previously distinct services into one seamless operation. Where previously importers and exporters had their own warehouses and used one for customs, and another one for freight forwarding, these services have over time merged into full service providers. These days, any freight forwarder that doesn t offer the full suite of transport, warehousing and distribution services will struggle to stay alive, and the international market is dominated by companies that have worldwide coverage and are interested to changing needs. 3. Global logistics tends and impacts to 3PL concept The globalization process has been recognized as one of the main underlying forces impacting global logistics service providers (Lemoine 2005). The last few decades have seen a steady growth of international trade and international transport. The main driving forces behind this growth are worldwide growth of the global economy and relaxation of trade barriers. Of course this growth is not evenly spread around the globe and sometimes disruptions can be observed caused by incidental factors such as local economic crises, weather conditions, and political incidents. It is important to understand the mechanism behind this development and, furthermore, to seek to assess the consequences of these mechanisms on global transportation systems, global economies, and their level of environmental sustainability. As a result of globalizations input to global logistics trends, (Pesut 2009) notices that: Global logistics commonly considered as one of driving forces of economic growth and social development Transport is central and functions as an enabling mechanism Freight transport services have become more critical Accommodating new technologies, markets and organizational structures requires changes Need for greater efficiencies has made urgent the need for a more seamless transport market in which delays in freight movements are minimized and choices of efficient route or mode combination are unhindered by national or modal boundaries Knemeyer and Murphy (2003) states that thirdparty logistics (3PL) refers to outsourcing transportation, warehousing and other logistics related activities to a 3PL service provider that were originally performed in-house. More and more corporations across the world are outsourcing their logistics activities due to various reasons, some of them are outlined below: Due to globalization, corporations across the world are increasingly sourcing, manufacturing and distributing a global scale making their supply chains very complex for them to manage. Hence they have to outsource their logistics activities to experienced 3PL providers, who have global operations. Some 3PL providers with their sophisticated IT capabilities and state of the art transportation and material handling equipment and warehousing facilities offer complete supply chain solutions Logistics outsourcing is used to complement the logistics activities the corporations do not have competency in, and also to increase the geographic research. When the corporation expands business overseas, it may not be conversant with the customs duties, Tax structures, rules and regulations, import/export policies of the government and culture of the foreign country. 3PL providers, who have long been operating in that country, will be better able to carry out the logistics operations. Logistics may not be one of the core activities of the corporation. So, Inefficiency may creep in if it is looked upon as a secondary activity. By 858

4 THE EFFECT OF GLOBAL LOGISTICS TRENDS ON 3PL: CASE LITHUANIA MARKET outsourcing logistics, corporations may focus on their core competencies. Logistics outsourcing may also reduce costs as the 3PL providers can get the advantage of the economies of scale, which is otherwise not available to the corporations. By outsourcing, corporations can reduce their asset base, and deploy the capital released for other productive usage. Logistics outsourcing improves cycle time and delivery performance, thereby increasing customer satisfaction. Since the 3PL providers are now offering a number of value added services such as customs clearance, freight forwarding, import/export management, distribution, after sales support, reverse logistics and so on, corporations can outsource all these activities, and concentrate on their core business operations. Due to an incredible growth in electronic retailing many firms around the world with virtually no distribution systems rely heavily on the 3PL providers for delivery of the merchandise at the customer s doorstep. This has resulted in a significant growth in the order fulfilment sector of the 3Pl service industry. The logistics outsourcing literature has acknowledged this phenomenon and has focused primarily on the benefits and outcomes of the relationship building efforts between 3PL s and the customers of their services. Customers embedded in relationships with 3PL s have been found to experience higher levels of trust and commitment (Knemeyer, Corsi, Murphy 2003). 3PL s engaged in such relationships also develop important capabilities, such as organizational learning and enhanced innovation abilities, thus promoting improvement in supply chain, operational, and market performance (Panayides, So 2005). 3PL s also benefit from engaging in close relationships with customers by experiencing higher levels of customer retention and new customer referrals (Knemeyer, Corsi, Murphy 2004). According to global logistics trend 3PL is orientation presented in Fig. 1. Logistics outsourcing has become a rapidly expanding source of competitive advantage and logistics cost savings. With increased global competition and higher customer expectations, an increasing number of companies are outsourcing their logistics activities to third-party logistics firms so that they can concentrate on their core competencies. Third-party logistics is one of the fastest growing industries in whole world, the statistical data of 3PL spread worldwide are presented in Table 3. Source: A.T. Kearney Fig. 1. Outsourcing industry trends (adopted from Knemeyer, Corsi, Murphy 2004) Table 3. 3PL services worldwide (Eleventh Annual 3PL Study 2006) Europe Asia Latin Amer ica North America Transportation Warehousing Customs Forwarding Payment Shipment Consolidation Cross- Docking Reverse Logistics Transportation management Labelling, Packing Supply chain Consulting Avoid Capital Expenditures Cut Costs Increase Flexibility (service/financial) Focus on Core Business Improve Service Lack of Scale Acquire Talent Avoid Labor Problems The high spread of 3PL can be shown by evaluated by statistical data. These data proves that 3PL time by time generates larger and larger part worlds gross domestic product. Currently, the logistics cost around the world is about 2 trillion dollars. For any country, the logistics cost is pegged between 9 % and 20 % of GDP. The 3PL market across the world I s increasing at a rapid rate. According to Armstrong & Associates, the world 3PL revenues in 1992, 1996 and 2000 were 10 billion dollars, 25 billion dollars and 56 billion dollars respectively. According to another research firm IDC, the 3PL revenue was 141 billion dollars in 2003, and it will touch 430 billion dollars in 2009 growing at a compounded annual rate of 25 %. The world s largest 3PL providers are headquartered in Europe. Top seven 3PL providers in terms of revenues are European 859

5 I. Masteika, J. Čepinskis based. The largest market is U.S., which was about 200 billion dollars in 2008 accounting for nearly 60 % of the world market. 4. The effect of global logistics on 3PL in Lithuania market Global logistics trends affected and Lithuanian 3PL providers. Because of increasingly intensified competition in the emerging global economy, manufacturing and retail firms are increasingly turning to outsourcing their logistics functions. Motivated by the rapid increase in logistics outsourcing in certain regions of the world. Outsourcing is reliable business strategy because turning non-core functions over to external suppliers enables companies to leverage their resources, spread risks and concentrate on issues critical to survival and future growth. Many Lithuanian companies have selected logistics outsourcing as a way to restructure their distribution networks and get competitive advantages. Logistics outsourcing, as a third party logistics provider for all or part of the company s logistics operations, has grown at a high rate over the last years. Logistics outsourcing in Lithuania has increasingly become an effective solution to reduce costs and spread risks for traditional, vertically integrated companies. As research shows, approximately 55 percent of selected 500 companies in Lithuania had at least one contacted with a third party logistics provider. Why companies use 3PL? (Table 4) Table 4. Why use 3PL ELEMENT Cost reduction Investment Economies of Scale Saves time Performance DESCRIPTION 3PL works extra hard because they need to be profitable, Continues innovation is expensive Reduce the investment a company would make Utilize economies of scale because they are so large Better use resources to focus on core competency, Flexibility Do it better because of position in the supply chain, Improve expertise and data access Third party logistics is an emerging industry in many parts of the world, Lithuania as well. At the moment 3PL is a key component of logistics management strategy in many industries. Furthermore, the industry is experiencing rapid growth in Lithuania. Recently, many companies and other structures have recognized the importance of the development of third party logistics, because 3PL is superior then transportation service. The difference between 3PL and transportation service is indicated in Table 5. Table 5. 3PL and transportation service Third Party Logistics Commands premium price but still competitive Understands clients on higher level. Combines people, technology systems and logistics methodology for distribution operations Focuses on cost competitiveness, efficiency and productivity Adds value through innovation Transportation Service Wins or loses based on price alone Understand little about their clients real business needs Meets the specifications of the company Lamoine (2005) states that there are many arguments for outsourcing logistics, not only reduced distribution costs and perfect service for customers. In Lithuania the main key to fortunate logistics outsourcing is to identify and chose those 3PL s who share a mutual vision with the company of the strategic relevance of processes in logistics and can contribute to the organisation at a level that goes beyond the achievement of operational excellence. Third party logistics in Lithuania gives not only the benefits to domestic companies, but faces some risks (Table 6). Table 6. Benefits and risks of 3PL (Adoptev by Lamoine 2005) BENEFITS Economies of scale reduce manufacturing costs Risk pooling demand uncertainties are transferred Reduced capital investment Focus on core competencies Increased flexibility RISKS Loss of competitive knowledge Conflicting objectives: flexibility vs. long term stable commitments The Lithuanian 3PL providers are facing competition from the multi-national 3PL providers, especially in international movements of loads. The multi-national 3PL providers are mainly into freight forwarding, but they are as well in domestic logistics where they have made little or no investment. They outsource all the domestic logistics activities like transportation and ware- 860

6 THE EFFECT OF GLOBAL LOGISTICS TRENDS ON 3PL: CASE LITHUANIA MARKET housing to small operators so that they can take away cost advantage out of them. Lithuanian 3PL companies processes the essential requirement for developing efficient logistics and distribution systems. From our point of view, Lithuanian companies discovers new foreign markets for their production, as a country Lithuania is in perfect geographical position and has excellent opportunities to enter new era of third party logistics development. 6. Conclusions Global logistics connects widely dispersed producers and customers by organizing them through gateways and corridors located in global areas. Global logistics starts the communication with other foreign countries and widespread the opportunities of trading. International commerce consolidates the cooperation and partnership among the world s nations and this appearance makes global economy grow at a very fast pace. Developing global logistics system makes all worlds trade operations more simple and rapid. Third party logistics is growing around the world and more companies prefer to outsource their logistics operations to third party logistics providers. In our opinion the 3PL market in Lithuania is still in it initial phase and is highly fragmented. However, there is a high potential for growth of the market, which was obvious from the survey of the Lithuanian logistics service providers. As a mater of fact, more Lithuanian companies are becoming aware of the benefits of 3PL and outsourcing. The government of Lithuania with the support of European Union has already taken some initiatives, which should attract more private investments in this sector. Lithuania should identify investments in infrastructure that will lead to the growth of 3PL, as one of the thrust areas as this would not only contribute to the GDP, but also generate employment. Finaly we can state that global logistics trends effected Lithuanian 3PL providers in positive way: new foreign routes were opened, 3PL services became more operative and qualified, much more companies chooses 3PL services, because of lower costs, higher quality and reliability of services. References: Bowersox, D. J.; Calantone, R. J Executive Insights: Global Logistics, Journal of International Marketing 6(4): Cooper, M. C The how of Supply Chain Management, NAPMInsights 5(3): Copacino, W. C Copacino on Strategy: get the Complete Supply Chain Picture, Logistics Management and Distribution Report 37(11): 45. Cristopher, M New Directions in Logistics, Global Logistics and Distribution Planning 51: Data from Consulting Agency A. T. Kearney. Available from internet: < Ellram, L. M.; Cooper, M. C Supply Chain Management, Partnership, and the Shipper-third Party Relationship, The International Journal of Logistics Management 1(2): Ellram, L. M.; Cooper, M. C The Relationship Between Supply Chain Management and Keiretsu, The International Journal of Logistics Management 4(1): doi: / Friedman, T. L The Dell Theory of Conflict Prevention. Boston: Bedford, St. Martins 49. Knemeyer, A. M; Murphy P. R Evaluating the Performance of Third party Logistics Arrangements: A Relationship Marketing Perspective, Journal of Supply Chain Management 40(1): doi: /j x.2004.tb00254.x Knemeyer, A. M; Corsi, T. M.; Murphy, P. R Logistics Outsourcing Relationships: Customer Perspectives, Journal of Business Logistics 24(1): La Londe, B. J.; Cooper, M. C Partnership in Providing Customer Service. Council of Logistics Management, Oak Brook, IL. Lemoine, W Organizational Business Models in International Operations, The Logistics Service Provider Industry. Centre for anvendt logistik og transportforskning, Denmark. Lieb, R.; Bentz, B. A The use of Third Party Logistics Services by Large American Manufacturers: The 2004 Survey, Tranportation Journal 44(2): Palmer, T. G Globalization is Grrreat! Cato institute, Panayides, P. M.; So, M Logistics Service Provider Client Relationship, Transportation Research: Part E 41E(3): doi: /j.tre Pesut M Global Supply Chains, Transport and Competitiveness, in Proceedings of the Joint Trade and Transport Conference on the Impact of Globalization on Transport, Logistics and Trade: The UNECE Work. Prahalad, C. K.; Hamel, G Competing in the New Economy: Managing out of Bounds, Strategic Management Journal 17(3): Spekman, R. E Perceptions of Strategic Vulnerability Among Industrial Buyers and its Effect on Information Search and Supplier Evaluation, Journal of Business Research 17: doi: / (88)