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1 TABLE OF CONTENTS CHAPTER 4: INTRODUCTION TO LOGISTICS OUTSOURCING Page 4.1 INTRODUCTION Background and methodology of the chapter Logistics outsourcing defined Third-party logistics (3PL) defined The development of logistics outsourcing Conclusion SUPPLY-SIDE TRENDS IN 3PL LOGISTICS Introduction Growth and development of the 3PL industry Trend toward comprehensive solutions The growing importance of information technology Critical success factors for a 3PL Conclusion DEMAND-SIDE LOGISTICS OUTSOURCING TRENDS Industry sectors and outsourcing Position in the supply chain and outsourcing Size of company and outsourcing Current use of outsourcing Reasons not to outsource Projected use of outsourcing in the 21 st century Activities and services outsourced Number of providers used Reasons to outsource Page Chapter 4-1

2 4.3 DEMAND-SIDE LOGISTICS OUTSOURCING TRENDS (cont.) Managerial involvement in outsourcing decisions Type of outsourcing agreement and relationship Steps in outsourcing and potential problems areas Criteria when selecting providers Areas of concern in current relationships Cancelling/replacing outsourcing providers General trends and opinions Conclusion CONCLUSION SOURCES OF REFERENCE Chapter 4-2

3 CHAPTER 4: INTRODUCTION TO LOGISTICS OUTSOURCING 4.1 INTRODUCTION Background and methodology of the chapter As outlined in Chapter 1, the main purpose of this thesis has been to investigate general logistics outsourcing practices and trends, with particular reference to the US, a developed economy, and to establish practices, trends and issues in logistics outsourcing in the manufacturing sector in South Africa and make recommendations regarding logistics outsourcing practices. In Chapters 2 and 3 therefore, current business environments and challenges facing management world-wide, have been discussed, with an emphasis on the important role that both logistics and outsourcing play in this scenario. The increasing pressure that companies are under to maintain and increase their profitability, while at the same time increasing customer service and market share in a global economy, has been discussed in some detail. Chapter 2 focused on the role that logistics can play in providing a company with a competitive advantage over other companies. The concept itself, as well as the impact that it has on shareholder value, other company functions, and indeed the economy, was discussed in some detail. Chapter 3 on the other hand focused on how the concept of outsourcing can be a powerful tool for achieving competitive advantage, however that when unsuccessful, it can lead to sub-optimal performance, lack of morale, and lost business opportunities. It outlined how many problems result from outsourcing, due to companies searching for short cuts to deal with incompetence, financial pressures or technological weakness, and their failure to consider the long-term implications of outsourcing. In order to ensure success, outsourcing must be a strategic decision and a well-planned and executed initiative. These aspects were dealt with in some detail as a basis for the logistics outsourcing discussions presented in this chapter. Chapter 4 introduces the concept of logistics outsourcing in more detail. It develops the previous discussions of outsourcing options and arrangements, advantages and Chapter 4-3

4 opportunities, pitfalls, impacts and implications, but specifically with respect to the outsourcing of logistics activities. Therefore while logistics was discussed in general terms in Chapter 2 and outsourcing in Chapter 3, Chapter 4 will specifically discuss practices, trends and issues with respect to logistics outsourcing in developed countries generally and with particular reference to the US. These discussions, as with Chapters 2 and 3, have been compiled from a number of sources, continuing to provide a background to the material that will follow in the rest of the thesis, particularly the survey of logistics outsourcing in the manufacturing sector in South Africa, thereby contributing to the purpose of the thesis. Further concepts and definitions necessary for the discussion of logistics outsourcing will also be introduced in this chapter. The main focus however will be further development of a background to logistics outsourcing and related practices, trends and issues. This more globally-focused chapter will lay the foundation for Chapters 5 and 6 which will focus more on South Africa, the survey undertaken of logistics outsourcing trends, practices and issues among South African manufacturers, and a comparison with the US. The survey was undertaken to ascertain current trends, practices and issues with regard to logistics outsourcing in South Africa. The aim of the survey therefore included ascertaining whether manufacturing companies outsource logistics activities, and if they do not, the reasons for this, while if they do the reasons for that. The survey also undertook to ascertain what activities are most frequently outsourced and the levels of satisfaction of problems experienced, and practices with regard to companies with outsourcing initiatives. Further details with regard to the undertaking of the survey are provided in Chapter 5 and Annexures B and C to this thesis. The results are tabled and compared to those of similar surveys in the US, in Chapters 5 and 6. This provides the background necessary to draw conclusions on trends and issues related to logistics outsourcing, compared to those identified in this chapter, Chapter 4, and to highlight possible areas of consideration and action necessary to the success of a logistics outsourcing initiative. This will be provided in Chapter 7. Chapter 4-4

5 4.1.2 Logistics outsourcing defined Logistics management has been defined in this thesis as that part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of raw materials, in-process inventory, finished goods, services and related information from the point-of-origin to the point-of-consumption (including inbound, outbound, internal and external flows) in such a way as to meet customers' requirements cost-effectively and ensure that current and future profitability are maximised. (Council for Logistics Management, various). Outsourcing has also been defined as the act of transferring some of a company s recurring internal activities and accompanying decision rights and factors of production, to outside providers, as set forth in a contract establishing a long-term relationship between supplier and beneficiary, with a high degree of risk-sharing. (Adapted from Greaver, 1999; and Bendor-Samuel, 2000). With respect to logistics outsourcing specifically, Lynch (2000) provides the following summary: Logistics outsourcing is an arrangement whereby a logistics service provider performs services for a company that could be, or have been, provided in-house. Logistics outsourcing is about subcontracting logistics activities to companies that are equipped to provide the services. According to Rabinovich, Windle, Dresner and Corsi (1999), logistics outsourcing can be defined as long and short-term contracts or alliances between manufacturing and service companies and third-party logistics providers (3PLs). They go on to state that the development thereof, which will also be discussed in further detail in Sections and 4.2.2, has been largely based on the needs that companies have to obtain cost savings and to concentrate on their core competencies, with market and company characteristics influencing the decision to contract multiple combinations of 3PL services. They add that these services range from single transport activities to integrated warehousing, distribution, and information management activities. Chapter 4-5

6 Similarly Ravi (2001) points out that the outsourcing of logistics functions is a business dynamic of great importance for many shippers and that it involves the use of external companies (i.e. third parties) to perform logistics functions that have traditionally been performed within an organisation. Chow and Gritta (2002) add that there are many companies providing logistics services including transportation and warehousing companies, consultants, forwarders and third party logistics businesses, and that all of these logistics service providers (LSPs) are external suppliers that perform all or part of a company s logistics functions. They state however that these vary in their service provision from traditional transportation, warehousing and freight forwarding, limited to one primary logistical process and executing decisions in these areas for the shipper; to those that add a high degree of management service whereby they assist in planning and controlling a specific logistic process; to those that provide a high degree of management service across multiple logistics processes. Contract logistics, relationship marketing, integrated logistics management (ILM), fourth party logistics (4PL), supply chain integration, (SCI), third party supply chain management (3PSCM), and lead logistics provision or management (LLP or LLM) have all been used to describe the latter companies. (Stock & Lambert, 2001; Ravi, 2001; Burns, 1999; as quoted by Chow & Gritta, 2002; Langley, et al. 2002). These companies provide value to shippers or users by planning and controlling logistics activities and execution. (Chow & Gritta, 2002). For example, lead logistics providers or managers (LLPs or LLMs) design, build, and manage supply chain assets, processes, people and technology for users. (Langley, Allen & Tyndall, 2002). They can, theoretically, provide everything in the product cycle from design and development to manufacture, transaction processing and after-sales support, in addition to actually delivering the goods to the customer. (Manchester, 2001). Although Langley, et al. (2002) do indicate that LLMs are more advanced in their service offering than LLPs, the distinction is not always that clear in other literature reviewed and these terms have thus been used interchangeably in this thesis. Chapter 4-6

7 The key is that these providers fulfil the need for a super manager to supervise all aspects of the supply chain of a manufacturer or distributor, and provide a sole point of contact between that company and its range of logistics and information service providers. (Heroux, 2001). In addition to the above-mentioned forms of LSP, Ravi (2001) states his opinion that logistics outsourcing includes three types of arrangements, i.e. logistics transaction and processing services (LTPS), logistics business process outsourcing (LBPO), and other asset-based services, such as truck rental and leasing; where: LTPS involves business activity outsourcing with performance metrics for accuracy, timeliness and efficiency of information flow and high-volume service capabilities. Clients retain control over key decisions and the provider has a lower level of strategic involvement at contract level. LBPO involves managing logistics, warehousing-related functional services, or both, to move products physically. Moreover LBPO is an IT-enhanced and integrated function that stretches from the provider to end customer, thus going beyond the mere physical flow of products to encompass the process and information necessary to optimise a client s logistics activities and involving the outsourcing of logistics process or functions. Performance metrics ties to the strategic business value of services provided and to customer satisfaction. Providers also participate in decisionmaking regarding the outsourced process or function and have high levels of strategic involvement. (Ravi, 2001). Stock and Lambert (2001) highlight yet another concept that goes beyond traditional outsourcing, namely relationship marketing which is a form of partnering and involves the establishment of close, long-term working relationships with suppliers of goods or services aimed at creating efficiency between the user company and the provider, resulting in improved communications, better service, and shared cost savings. Chapter 4-7

8 They add that the use of outsourcing and the number of alliances or partnerships is increasing each year as more companies recognise the benefits that can arise from working in partnership with their LSPs rather than independently. They state that all indications point toward the continuation of this trend in the foreseeable future. It is also necessary to outline the meaning of 3PL, so often referred to in logistics outsourcing, in greater detail, which will be done in a section dedicated solely to the definition thereof due to the growing use of this term. Chapter 4-8

9 4.1.3 Third-party logistics defined In addition to his definition of logistics outsourcing, given in the preceding section, Lynch (2000) states that the term third party, as well as that of fourth party, while commonly used, can be quite confusing and he prefers to refer to the outsourcing of logistics activities to companies that are equipped to provide the services, rather than to third-party or fourth-party logistics providers (3PLs and 4PLs respectively). However, the use of the term third-party logistics (3PL or TPL) is growing at a significant pace and therefore warrants further discussion and includes the following definitions. A 3PL is an independent company that performs all or a portion of a client s supply chain logistics activities for a profit. The range of services offered by 3PLs is large. It can be as simple as arranging the transportation of a single shipment or as complex as designing, implementing, and/or operating and managing a client s supply chain logistics needs. (Konezny & Beskow, 1999). A 3PL is a relationship between a shipper and third party which, compared with basic services, has more customised offerings, encompasses a broader number of service functions and is characterised by a longer-term, more mutually beneficial relationship. (Murphy & Poist, 2000). A 3PL is a logistics service provider, usually asset-based, which focuses on specific elements of the supply chain in order to optimise the physical movement of goods from the point-of-origin to the end-user. (Stock & Lambert, 2001). According to Berglund, van Laarhoven, Sharman and Wandel (n.d.), the size of the 3PL industry and the different requirements placed on logistics as opposed to basic services, such as transportation or public warehousing, justify the need to treat 3PLs as a separate industry. Konezny and Beskow (1999) add that the 3PL provider specialises in a range of logistics services with the aim to sell these services to organisations that are typically involved in manufacturing and distribution activities. Third-party logistics has also been referred to as contract logistics, third-party supply Chapter 4-9

10 chain management, and many other terms. The key differentiating factor between a 3PL and a typical transportation or other supply chain service provider, however, is that a 3PL s primary value-add is based on information and knowledge versus providing a non-differentiated service at the lowest cost. For example, pure trucking companies are not considered to be 3PLs, however, some 3PLs own transportation and other assets to execute logistics needs while others do not. Murphy and Poist (2000) concur and state, in addition to their above-mentioned definition, that while many definitions suggest that 3PL involves the provision of multiple distribution activities, they often do not include the concept of longer term, mutually beneficial relationships between the parties. Therefore, while logistics activities, in particular transportation and warehousing, have been outsourced to third parties for many years, generally on a transaction-by-transaction basis, the distinguishing characteristic of the contemporary 3PL is that it, by contrast, is focused on a formal, contractual, long-term relationship between the provider and the user. Similarly, Chow and Gritta (2002) state that a 3PL company is distinguished from other logistics service providers by the broader scope of physical services or processes and the broader scope of managerial services that it provides. Therefore while traditional transportation, warehousing and freight forwarding companies are limited to one primary logistical process and executing decisions in these areas for the shipper, the newer form of provider adds a high degree of management service whereby they assist in planning and controlling a specific logistic process. Examples of this latter form include dedicated/contract transportation or dedicated/contract warehousing and value added warehouse/distribution. The newest form of provider supplies a high degree of management services across multiple logistics processes. In the past, a company might have outsourced planning by using a consultant or their own in-house professional to plan, a for-hire transportation company to execute, and their-in-house systems to control. A 3PL will provide all three aspects of managing logistics activity under a single service. Therefore 3PL services inherently involve long-term, interdependent relationships, which are oriented towards solving problems for customers, sharing risks and benefits and recognising mutual interdependency. In a 3PL arrangement, users may negotiate with a single provider that supplies a Chapter 4-10

11 broader set of order fulfilment activities, ranging from storage to order picking to transportation. (Chow & Gritta, 2002). Langley, et al. (2002) point out that in their 2001 survey of the use of 3PLs, respondents identified the following three characteristics as best describing 3PLs:- multiple activities, integration of activities, and provision of solutions to logistics and supply chain problems. The 2002 survey, in addition to 3PL provision, identifies and characterises the LLM or 4PL as including more project/programme management of sub-contractor 3PL operations. They also state that since the inception of the annual 3PL study in 1996, the joint evolution of 3PL service providers and their customers has been tracked from a relatively simple resource-driven relationship to what is now one of the most significant strategic partnerships a company can establish. Many companies that have realised the financial and operational improvements made possible through outsourcing are searching for new opportunities to leverage these partnerships. Consequently these companies are pulling service providers deeper into their supply chains and pushing them to increase the breadth and complexity of their capabilities. This is leading to next-generation 3PLs, for example LLMs, as mentioned previously. Section will discuss logistics outsourcing and 3PL development in more detail. Chapter 4-11

12 4.1.4 The development of logistics outsourcing Although the outsourcing of transportation and warehousing has been common in most countries since the 1950s, relationships were mostly transaction-based and short-term. For example warehousing transactions were standard thirty-day public warehouse agreements. (Lynch, 2000). Furthermore, as recently as the 1960s, most third-party transport and distribution services on offer to clients were still based on some form of general haulage. (Buck, 1990). During the 1970s manufacturers focused on cost reductions and improved productivity, and longer-term relationships became more common, particularly in the warehousing area. Single tenant facilities were built and operated by warehouse companies in major markets. Consolidation of facilities into larger operations became increasingly frequent. In the early 1980s the services offered by most outside companies expanded rapidly. So-called value-added services included packaging, blending, systems support, inventory management, customised handling and other offerings which had not been available previously. (Lynch, 2000). However, at this point, difficulties began to surface as some providers defined valueadded services as whatever the client wanted them to be. They quickly found themselves unable to provide services they had agreed to, either because they did not have the resources or knowledge. With increased competition in the road transport industry however, innovative, long-term relationships between carriers and customers began to develop and true logistics partnerships were established. These alliances quickly brought about major improvements in both customer service and logistics economies. The 1980s also brought with them many mergers and acquisitions and in many cases companies found themselves with more warehouses and distribution centres than were necessary, which led to consolidation and outsourcing of facilities. (Lynch, 2000). The growth of logistics outsourcing in the US, in particular, was also promoted by the increasing demands placed on manufacturers and distributors following deregulation of the transportation industry and the effects of an economic downturn in the 1980s. (Trunick, 2002). Konezny and Beskow (1999) state that while 3PLs, for example Chapter 4-12

13 freight forwarders, have existed for decades, this deregulation of the transportation markets as well as the increasing recognition of logistics and supply chain management and the important role thereof in companies, has resulted in the more recent substantial growth in the third party logistics industry. In Europe earlier deregulation of many transportation and distribution markets resulted has in a more developed 3PL industry. Delaney (2002) asserts that in North America 3PLs are still developing in comparison to the United Kingdom (UK), Europe and Asia where 3PLs have been long established and are very mature. Dereli (1998) states that, in the UK, since the early 1990s there has been an increase in the development of highly specialised logistics contractors that are ready to take over most of a company s logistics activities; and that well-known companies in the UK have been contracting out their logistics service provision to these outside specialists. It has also furthermore been asserted that the logistics sector in the UK is more developed in that manufacturers have traditionally looked for added value within their logistics services. (Anon., 1996). Major trends, therefore, such as deregulation in US and inter-european transportation markets, further globalisation of economies, and growth of emerging markets have all supported the increased global use of 3PLs. These factors combined with the increased focus of companies on logistics costs and operations, have driven the growth of the 3PL industry. As outlined in Chapter 3, outsourcing received particular momentum in the 1990s in the service sector (Kakabadse & Kakabadse, 2000), due to growing pressure on companies to save costs and increase customer service. The concept of focusing on core competencies was increasingly dominant and companies were re-evaluating vertical integration and self-sufficiency. (Lonsdale & Cox, 2000). The significance of outsourcing as a strategic tool was identified (Bendor-Samuel, 2000; Lankford & Parsa, 1999), and technological developments added further fuel to outsourcing opportunities and service provision. (Embleton & Wright, 1998). The 1990s also saw an increasing interest in outsourcing any function not directly related to a company s core business. (Lynch, 2000). Chapter 4-13

14 The dynamic and competitive market environment facing companies in the 21 st century will continue to add impetus to the growth of outsourcing. For example, the dynamic technological environment of today requires substantial systems investment, support and expertise, leading to increasing levels of outsourcing in this area. Companies are reluctant to invest in and maintain cutting-edge technology and technical specialists internally, when similar assets exist externally, and were developed with the investment of and risk by another company. (Greaver, 1999). This is increasingly the case with logistics activities, and together with the fact that companies are recognising that their core competencies are not in logistics, is leading companies to outsource their logistics to 3PLs to help them manage their logistics more efficiently and effectively. As was also mentioned in Chapter 3, companies seek various benefits in outsourcing. According to Lynch (2000) there are almost as many reasons for outsourcing supply chain operations as there are companies that do it, but most of those companies have the same basic motives, namely to improve return on assets and reduce costs. Companies that outsource are able to reduce their investments in expensive technology, warehouses and equipment, and can significantly enhance their returns. Furthermore, surveys that ask companies why they outsource, in fact, almost always find cost and pricing to be among the top three determinants. Similarly the majority of companies that do not outsource feel that outsourcing would not reduce their costs. This may be correct if a company has an efficient, well-managed distribution system, as outsourcing that system may not reduce operating costs. However, another important consideration is that outsourcing can add value to a company s operations. Actual outsource operating costs may be higher than the cost of inhouse operations, but the value received from outsourcing may more than offset the cost. (Lynch, 2000). Similarly Wilson (2001b) states that many large companies are outsourcing their transportation and logistics functions, driven by pressure to cut costs combined with the challenges of increasingly complex logistics technology. Although many companies are reluctant to hand over critical supply chain functions to an outside company, they are discovering that logistics service providers are better at integrating Chapter 4-14

15 logistics functions into their supply chain management environments and can obtain lower prices. In search of immediate savings, many companies may turn to logistics service providers simply to get lower prices, by benefiting from the economies of scale and leverage of the provider. Companies are therefore finding that outsourcing logistics can be a source of saving, and over the long-term they need logistics as part of their overall supply chain strategy, but most companies find that it is not a core competency for them. Once on board, many manufacturing companies are discovering that the logistics service provider can help them co-ordinate disparate logistics applications and services, and that outsourcing can provide improvements in the efficiency and effectiveness with which activities such as transportation are executed. There are many ways outsourcing can add value to an efficient, cost-effective logistics network. Lynch (2002) goes on to quote the following practical examples: The automotive industry often relies on outside providers to perform functions associated with JIT operations, for example making use of a 3PL to collect parts from suppliers and deliver them to a cross-dock where shipments can be consolidated and shipped to different assembly plants. The parts are therefore never warehoused or inventoried at the plants. In the grocery industry, collaborative planning, forecasting and replenishment (CPFR) links customer demand with replenishment scheduling to reduce inventory in the system. This results in smaller, more frequent shipments. Contract logistics companies are able to combine these smaller shipments into truckloads, reducing freight and handling costs and enhancing the distribution process. Information technology management is perhaps the most important valueadded offering that third parties have provided in recent years. For many companies, increasing demands for new information systems, resources and realtime visibility into production and order status can often be met most efficiently through outsourcing. Today there are also contract logistics companies that can assist clients in identifying logistics problems while providing integrated, end-to-end supply chain technology solutions. A major benefit is providing clients with technological capabilities that they could not acquire on their own. Chapter 4-15

16 The benefits of and reasons to outsource will also be discussed further in Section Outsourcing therefore does add value through cost reductions; however informed logistics managers will look beyond that to the total gains in customer service, information technology and state-of-the-art supply chain management techniques that logistics outsourcing can help them achieve. (Sopher, Lareau & Crum, 2002). As was also discussed in Chapter 1 and covered in greater detail in Chapter 2, the globalisation of businesses and the competitive pressures of the business arena have led to the growing strategic importance of the logistics function within the company. In fact, the logistics function has often been referred to as the last frontier for the development of strategic competitive advantages. Increasingly therefore, many organisations are looking to their logistics operations, and seeking to manage them strategically, so that significant competitive advantages may be made available for the business as a whole. (Hum, 2000). Together, therefore, with the increasingly evident benefits of outsourcing, the opportunities for improving competitive advantage by means of logistics outsourcing are being investigated on a growing scale. Greaver (1999) states that although outsourcing of entire processes has not occurred at significant levels in the past, more recently inbound and outbound logistics are increasingly being outsourced, and the outsourcing of entire processes is particularly becoming a trend in larger organisations. Trucking companies in particular are aggressively marketing their logistics services and are assuming responsibility for many internal logistics processes. However the outsourcing of entire key company processes such as logistics, should involve significant strategic partnering between providers and users. These relationships need to be strategic in nature, and include the transfer of significant decision rights by the user, and the provision of large sophisticated operations by the provider, thus enabling value-added services at a level incomprehensible even a decade ago. (Sopher, et al. 2002). Chapter 4-16

17 Therefore, where outsourcing relationships historically were based on routine functions, such as warehousing operations and freight payment, today they are based on logistics activities that require more strategic knowledge and expertise, for example, information systems, inventory management, and customer order fulfilment. Furthermore, internal logistics experts are increasingly needed to maintain organisational control of the outsourcing process where the outsourcing of multiple logistics functions has been implemented to increase cost savings. (Rabinovich, et al. 1999; as quoted by Murphy & Poist, 2000). According to Stock and Lambert (2001), it was during the 1980s that many companies began to outsource various logistics activities to third parties and examining the viability of developing partnerships and strategic alliances with them. They go on to point out that, historically, relationships between shippers and logistics service providers have been arm s-length transactions, with each entity attempting to maximise its own interests with little regard for how the relationship might benefit or penalise the other party. However logistics service providers and users are increasingly recognising the benefits that can result from outsourcing partnerships. The industry is thus moving from one where third party operators were regarded as adversaries to one that now considers the providers to be corporate collaborators. (Bowersox, n.d.; as quoted by Thuermer, 2000). As companies continue to seek to identify and focus on their core competencies, it is also important that they identify the areas of their supply chain which are currently weakest and may most benefit from being outsourced. Burns, Warren and Cook (2001), for example, showed in their research that almost 25% of the shippers surveyed indicated that planning and scheduling was the weakest area of their supply chain, followed by manufacturing responsiveness. Other areas needing improvement apparently were vendor supplier management, warehousing, transportation pricing, supply chain visibility, optimisation software, and transportation management, and virtually all the remaining areas identified are directly within the core competency of a logistics service provider. Providers should therefore increasingly develop their strength in inbound traffic management; optimisation Chapter 4-17

18 capabilities; warehouse management capabilities; and their overall ability to improve clients supply chain visibility. With regard to future developments, research shows that companies will tend to increase the frequency of their shipments suggesting a strategy of investing in transportation and reducing investment in inventory and warehousing. On the other hand, shippers will also tend to reduce less-than-truckload (LTL) shipments and combine volumes to larger shipments to realise transport savings, but will want to reduce shipment sizes to improve visibility and realise inventory savings. Data on modal changes also suggests that LTL carriers will continue to operate in a declining market while truckload (TL) carriers will gain market share. Freight forwarders that can consolidate and convert LTL shipments into lower cost TL shipments should benefit from increasing demand. Another important trend will be the long-term plans of shippers to expand globally and increase international expenditure as a percentage of their total supply chain. (Burns, et al. 2001) Conclusion As has already been noted, logistics has a key role and impact in the company, extending to company performance, sustainability, competitiveness, and profitability. As companies find themselves under growing pressure from both customers and shareholders to seek ways in which to decrease their costs while at the same time increasing performance, they are being forced to seek ways in which they can improve the efficiency and effectiveness of their operations. These pressures are increasingly impacting the way in which companies, and their customers, view logistics activities. Logistics is thus playing a more important role in the performance of companies, and in particular in companies seeking to increase their competitive advantage and corporate profitability. In line with these developments, and the increasing recognition of the strategic nature of outsourcing as a corporate tool to enhance performance, the trend toward logistics outsourcing is growing. (Lynch, 2000). Furthermore, the services offered by 3PLs are continuing to consume a significant portion of overall logistics and Chapter 4-18

19 supply chain budgets. The use of 3PL services is also increasingly prevalent throughout the world particularly in areas such as North America, Western Europe, and Asia-Pacific. (Langley, et al. 2002). Logistics service providers, such as the 3PLs and LLMs, are also continuing to grow in sophistication and service. In whatever form, logistics outsourcing and 3PL services are an important trend in logistics management. Lynch (2000) furthermore asserts that there is plenty of room for growth in logistics outsourcing and that even with the increased emphasis on outsourcing, less than ten per cent of the relevant logistics services in the US are outsourced, while in Europe, where outsourcing has a longer history, the percentage is slightly under 25%. He states that as intense competitive pressures in the marketplace persist, streamlining and downsizing will also continue, no doubt resulting in increasing interest in outsourcing arrangements. At the same time, as 3PLs increase in their efficiency, sophistication and service offering, this interest will manifest itself in new and more creative relationships. Estimates of growth in the logistics outsourcing sector however vary, which may be due partly to the number of different definitions of the 3PL concept, as well as the fact that the 3PL industry is not always clearly delineated and shippers, for example, are understandably wary of the many companies that are merely adding the word logistics to their names without providing the necessary services in this regard. (Murphy & Poist, 2000). Nevertheless, there is little doubt that opportunities for 3PL services will continue to grow, and a brief description will be given in a later section, providing an indication of the growth experienced and expected in the 3PL industry, in particular in the recent past, at present, and the near future. From a supply chain point of view, Ravi (2001) classifies these logistics outsourcing trends into supply-side and demand-side trends, providing a useful platform for the discussions that follow in Sections 4.2 and 4.3. Chapter 4-19

20 4.2 SUPPLY-SIDE TRENDS IN THIRD-PARTY LOGISTICS Introduction One of the interesting business phenomena of the 1990s has been the continued emergence and evolution of the third-party logistics profession. Some observers refer to third-party logistics as an industry. Yet a closer look reveals a higher order of calling, one that might justify the term profession. Providers of third-party services have steadily expanded their offerings across the breadth of the supply chain. They are developing innovative services that are pushing the bounds of conventional practice. And they are forging close, mutually productive alliances with their customer partners. Despite these advances, the profession still has much progress to make. (Langley, Newton & Tyndall, 1999). In Section 4.2 various practices, trends and issues will be discussed with regard to this development of the supply of logistics services, by various types of logistics service providers, mainly referred to in these discussions as 3PLs. Due to the limited availability of literature regarding logistics outsourcing in general (Hum, 2000 & Lynch, 2002) and the fact that the context and focus of this thesis is logistics outsourcing, although mainly from a user perspective, the supply-side discussions in Section 4.2 are included to provide information for the South African 3PL industry. It is important for 3PLs to be aware of and understand the various practices, trends and issues involved in the industry if they are to win the trust and confidence of companies considering the outsourcing of their logistics activities. They need to understand why companies outsource their logistics, as well as their requirements, issues, as well as the criteria and process used to select a provider. This is critical if they are to retain satisfied customers and obtain new ones. Understandably companies are often nervous about turning over their business to a third party. The best way for a 3PL to overcome this anxiety is to demonstrate that it has the necessary capabilities and has been successful with other clients. (Sopher, et al. 2002). Logistics service providers must be informed of the major concerns that clients have with logistics outsourcing as well as the problems Chapter 4-20

21 and pitfalls associated with outsourcing in general and logistics outsourcing specifically. The 3PL market is also in development and transition. While in earlier years 3PLs may have been viewed as vendors for whom the key issues were cost, control and service, now more meaningful relationships are emerging with increasing emphasis on value, innovation, and performance in a global context. However, although many 3PLs have significantly improved their operating practices and range of capabilities over the years, there generally remains a gap between what users require and what they feel has been achieved to date. (Langley, Allen & Newton, 2000). Therefore, 3PLs should position and market themselves to assist outsourcing companies in strategically managing their logistics functions. This means that the 3PL must build and possess logistics capabilities which will enhance the strategic effectiveness of the logistics function for their customers and enable them to capitalise upon their competitive advantage in the marketplace. (Hum, 2000). The following sections provide various discussions with regard to these supply-side trends as well as insight into important issues connected thereto Growth and development of the 3PL industry Although 3PL services are playing a significant role in the increasingly popular trend of logistics outsourcing, the term 3PL did not even exist before Nevertheless, according to statistics quoted in the US, 3PL services proceeded to grow at a 15% to 20% pace per year during the 1990s. Between 1991 and 1995, the proportion of Fortune 500 manufacturing companies making use of 3PL services increased from 37% to 60% (Lieb, 2002), and the market for 3PLs that offers expertise in providing the most reliable and cost-efficient freight services and, through economies of scale, can negotiate the most favourable rates, continues to grow (Wilson, 2001a). In 1999, Sankaran and Charman stated that, in keeping with the trend towards outsourcing and the focus of companies on their core competencies, the 3PL industry Chapter 4-21

22 appeared to be on the growth phase of its lifecycle in the US, Europe, and elsewhere. Also in 1999, Konezny and Beskow predicted annual 3PL growth of about 20%. By 2000, total annual revenues of these companies were expected to be in the range of $40 to 50 billion. (Armstrong, 2000; as quoted by Langley, et al. 2000). Figures later quoted showed an increase in revenue generated by 3PLs in the US from $46 billion in 1999 to $56.4 billion in (Armstrong & Associates, 2001; as quoted by Sopher, et al. 2002). By 2001 estimated total contract logistics market revenues were $60.8 billion. (Armstrong & Associates, 2002; as quoted by Langley, et al. 2002) These third-party revenues come mainly from the following services, ranked in order of largest revenue share of the total contract logistics market to smallest:- valueadded warehousing; distribution services; international operations; domestic transportation management; dedicated contract carriage; and IT. (Sopher, et al. 2002). The services supplied by 3PLs consume a significant portion of overall logistics and supply chain budgets in the US, and the figures being spent on logistics are on the increase. (Delaney, 2000; as quoted by Langley, et al. 2000). With regard to other countries, research has found that the US 3PL industry is broadening its international focus with particular emphasis on opportunities in Europe and Asia. (Lieb & Randall, 1997; as quoted by Murphy & Poist, 2000). Furthermore, Asia-Pacific has been rated as the fastest growing region, followed by Latin America, Eastern Europe and Africa-Middle East, for 3PL opportunities. (Burns, et al. 2001). In 2001, it was forecast that the outsourcing of business processes to logistics service providers in the Greater China region would become a US$21 billion a year industry by (Anon., 2001). The percentage of supply chain outsourced is expected to remain stable over the next five years (Burns, et al. 2001), however long-term growth for 3PLs is expected to come from significantly more market penetration and continued globalisation. (Armstrong, 2001). Analysis of 3PL customers in the US indicates that there is significant opportunity to expand. Furthermore, the area with the most potential is value-added warehousing and distribution services. (Armstrong, 2001). However, future growth for 3PL providers also depends on their success in attracting new Chapter 4-22

23 customers. Research shows that there is a growing market, and major sources of revenue, for US-based 3PLs in Western Europe, and significant projected growth in Eastern Europe, Mexico and Asia. Providers are also aggressively expanding their service offerings to include purchasing capabilities, inventory management and financial services. (Accenture, 2001). The main reason for these growth patterns in logistics outsourcing, and specifically the 3PL market, is that these contract providers can achieve supply chain management services cheaper and better than outsourcing companies themselves. Furthermore with the increasing focus by companies on their core competencies, manufacturing and retail companies are outsourcing transport, warehousing and inventory management as these are not their areas of expertise or primary concern. Developing and selling their products is the core focus; however at the same time they are dependent on the efficient and effective functioning of their supply chain, and logistics improvements usually result in significant savings and increased customer service. However such improvements require specialised knowledge, advanced technology applications and significant process improvements. (Armstrong, 2001). According to Gottschalk (2001) 3PLs are increasingly having to concentrate on value-added services, such as consulting; accumulating expertise and experience; the application of IT to supply chain management; tailor-making logistics solutions for customers; and addressing customers logistics needs. The provider must therefore leverage their abilities and be prepared for constant changes in the industry driven by technology, innovation, outsourcing trends and phenomena, and globalisation. Logistics service providers also increasingly need to manage themselves strategically in order to gain a growing share of the outsourcing market. (Hum, 2000). They will need to provide significant quality process improvements and cost savings including staff flexibility; better asset deployment; innovative IT capability; pre-built efficient and adaptable processes; and specialised skills. These capabilities will allow 3PLs to efficiently execute a number of activities, which are often integrated to obtain major savings from less inventory and shortened supply chains. (Armstrong, 2001). Chapter 4-23

24 Providers also need to take cognizance of the shifting competitive landscape. For example, according to Sopher, et al. (2002), there are four key emerging trends that will shape the 3PL industry s future and of which 3PLs must be aware, namely: There is an increasing focus on security and safety. Supply chain visibility and access to real-time information on inventory, shipments, order status and so on, is important to logistics efficiencies such as reduced inventory levels and improved customer service, and for managing unexpected events or problems. It is also critical to maintaining the integrity and security of products while they are being transported, handled, and stored. Providers will increasingly be expected to take the lead in identifying and implementing improved security processes and contingency planning throughout the supply chain. There are more 3PLs emerging from the ranks of shippers, and large shippers in particular are looking to leverage their logistics assets and resources and generate new revenue streams. These shippers often have the capability to offer a full range of logistics services, including warehousing, inventory management, information systems, order fulfilment, call centres, demand forecasting and planning, and transportation. They are also well-positioned to integrate supply chains in which they participate. There are global 3PL companies being formed via mergers. The consolidation of the 3PL industry is ongoing and a number of major providers have made acquisitions to expand or strengthen their international scope. Mergers and acquisitions create 3PLs that can provide one-stop shopping for logistics services, and that can manage global supply chains for their clients. There is increasing sophistication and co-ordination in logistics service provision, such as the growth of LLMs, providing an alternative to the fully integrated logistics service provider. Few individual 3PLs are able to provide all the logistics requirements of a company, and the company must thus employ more than one 3PL to meet its needs while designating one of the 3PLs or a consulting company to serve as a LLM, managing and co-ordinating the different providers employed. The LLM must provide strategic leadership and utilise the comparative advantages of each of the 3PLs to achieve the supply chain objectives of the company. One result of this emerging trend is that 3PLs are Chapter 4-24

25 finding themselves in the position of co-operating and partnering with companies that they compete with in other markets. The partnering 3PLs must also be able to integrate their systems with one another and with those of the client. In the US, many 3PLs are also developing strategies to pursue more medium-sized opportunities. According to Armstrong (2001) there are two main trends in this regard. The first is the founding of web-based companies where transportation managers operate primarily through the Internet, affording small-medium markets the opportunity, often on a transactional basis, to have sophisticated solutions. The second is for distributors and shippers to form their own 3PLs. Companies who have built integrated warehousing and transportation infrastructures are joining the 3PL market. These new 3PLs are often found in the retail sector, where the lack of supply chain management visibility and control is leading to a host of new Internet options. Web solutions will be necessary to remain competitive. In summary, the ever-changing and increasing demands of customers, along with the natural maturation of the industry are creating both opportunities and challenges that 3PLs must consider in their strategic planning. (Sopher, Lareau & Crum, 2002). Although, outsourcing is potentially difficult, experience gained by 3PLs over the last few years along with advancements in the flexibility of information technology, has reduced the complexity of logistics outsourcing. Furthermore 3PLs are increasingly developing methods to assist companies in their supply chain management. As additional data is released on the positive implications of logistics outsourcing with a 3PL, scepticism in this regard should also diminish. (Konezny & Beskow, 1999) Trend toward comprehensive solutions As more companies, for example manufacturers, outsource their logistics to enable them to focus more on their core business and become more efficient, logistics companies will focus more on providing efficient 3PL services, in the process improving the entire supply chain. (Wolfe, 2000; as quoted by Christie, 2000). Chapter 4-25

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