THIRD PARTY LOGISTICS FUNCTION FOR CONSTRUCTING VIRTUALCOMPANY STUDY OF ASSIGNMENTS IN JAPANESE COMPANIES Kajita, H. Deloitte Tohmatsu Consulting 1-2-8 Toranomon, Minato-ku Tokyo Japan hkajita@dc.com and Ohta, T. 1 Graduate School of Information Systems University of Electro-Communications 1-5-1 Choufugaoka, Choufushi Tokyo, Japan ohta@is.uec.ac.jp Abstract : This study focuses on the assignment of logistics management activities in a virtual company. From the viewpoint of organizational design, management activities are classified into a layered model of logistics management. Two Japanese firms that are said to be cases of successful third-party logistics management are used to demonstrate the worth of this model. It is possible to use the model to clearly explain the assignment of logistics management activities. Keywords 3 rd Party, Management, Virtual Company. 1. INTRODUCTION Third-party logistics (3PL) services have been an important trend in logistics management since the 1990 s. Some defines 3PL as the performance of all or some of a company s logistics functions by an external supplier. However, the use of external resources for logistical operations has a long history. In Japan, logistics firms carry out almost half of nations all logistics operations. The differences between traditional logistics outsourcing and 3PL may be explained by the term, virtual company. IT reduces the costs of coordinating activities, and promotes the trend towards virtual companies. The word 3PL was born in the rapidly growing IT environment. Much literature has been devoted to the study or discussion of 3PL services. However, not every shipper wants all of the possible services. The definition of 3PL thus varies with the services required. If 3PL is a part of a structure of virtual companies, a consignee isn t a necessary part of the management of logistics operations, and the 3PL provider must correspond to that part of the logistics management function. If, on the other hand, logistics is defined to that part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from the point of origin to the point of consumption in order to meet customers' requirements, a 3PL provider carrying out all of the logistics management function is not realistic. To construct a virtual company to carry out the logistics function, logistics management activities must be classified. In this paper, the classification of logistics management functions from the viewpoint of the virtual company is discussed. management activities are layered on the basis of the concept of the coordination of the supply chain. This model is used to study two Japanese companies as cases of successful virtual logistics companies. This study may help with the management of logistics in the virtual company environment. Proceedings of the First International Conference On Integrated 1 Corresponding Author 207
2. COMPONENTS OF LOGISTICS MANAGEMENT ACTIVITIES The activities involved in supplying the right product at the right place at the right time in the right condition with the right cost (5R), through the supply-chain to the customers who will consume the product, are collectively referred to as logistics management. While much has been written about logistics management, few have touched on the organization of logistics management. According to Galbraith(1978), when organization is designed, its role and structure, human resources, system of rewards, information flow, and decision processes must all be considered. With regard to 3PL, the role of the organization and its system of rewards have been the subject of several papers, but the role of management and decision-making processes in the adoption of a structure for a virtual company have not been clearly discussed. Here, management activities are discussed from the viewpoint of decision-making processes and human resources aimed towards the design of a virtual company for the provision of logistical services. 2.1 Coordination M. E. Porter explains with his value-chain model, the primary activities involved in reaching the customer are as follows; inbound logistics, production, outbound logistics, marketing and sales, and service. Management of these activities is needed for the successful logistical operation of a supply chain. Ballou has explained logistics activities as the set of activities to do with production, logistics, and marketing. This model places several activities on the interface between production-logistics and marketing-logistics. Lambert and Cook use the terms external audit and internal operation audit in developing their model of logistics management. Both logistics management flames show that coordination between production and marketing is needed for successful logistics management. With virtual companies, these activities need not be located in a single company, but they must be coordinated by a single company. 2.2 Planning, Implementation, & Control Management activities consist of planning, implementation, and control. Plans for logistics management have different time-spans; in order from longest to shortest term, the plans are the strategic logistics plan, long-term logistics systems plan, and short-term system improvement plan. The strategic logistics plan is for directing supply-chain logistics and includes changes in production system and standards of service. The long-term logistics systems plan includes determining the locations of warehouses, modes of transportation and carriers, and so on. This plan is guided by the strategic logistics plan, and the strategic logistics plan must count on the implementation of the long-term logistics systems plan. Particular skills and knowledge are required for the planning of logistics systems. plans may be made by in-house personnel but this requires logistics-related personnel development and runs counter to the outsourcing of logistical services, where it is assumed that logistics is not a core competence of in-house personnel. For reduced costs, continuous improvements to systems are necessary. In terms of system development periods, it is best if long-term system implementation, the short-term system improvement plan, and implementation and control are all carried out within one firm. 2.3 Auditing The virtual company has been realized by the evolution of information technology. The capacity to integrate flows of products, information and cash for decision-making purposes in a way that links both internal and external processes leads to a new form of organization. Information for decision-making is especially important for the management of logistics. Continuous auditing is required to improve the performance of logistics functions. If a market is changing quickly, a tight link between system-improvement plans and auditing is a means of identifying areas in which the quick taking of action is of value. Proceedings of the First International Conference On Integrated 208
2.4 Operations and their Control The outsourcing of resources for logistics operations has a long history, and the proportion of resources that are outsourced has increased in the era of information technology. For example, loads for trucks are procured by Internet-based load-matching systems, the usage of rental warehouses has increased, and third-party firms offer warehouse labor. Forwarding businesses may be thought of as a form of operations-related activity. Such businesses coordinate loading services (control operations) to execute operations. Many articles have pointed out the advantages of asset-free 3PL. There is no doubt that operations are easy to outsource. Precise controls of operations are needed to realizes 5R. 3. CLASSIFICATION OF LOGISTICS MANAGEMENT ACTIVITIES To assist in considering the various roles of virtual companies, management structure is discussed in this section. Here, a layered model of logistics management is proposed as a way of allocating logistics management activities in a structure of virtual companies. Strategic Planning & Coordination Operations Audits & Decision Support System Planning Planning for System Implementation & Improvement Operation Control Execute Operation Transportation & Warehousing loading Figure 1: Management Layer Model 3.1 Strategic Planning and Coordination One of the objectives in the construction of supply chains is the reduction of inventories across whole distribution systems. To reduce inventories, production, logistics, and marketing must be coordinated. Quantities procured, produced, and sold must be controlled to reduce inventories. On the interface between marketing and logistics, items to be sold, product designs from the viewpoint of reducing the costs of distribution, and logistical services are all items that should be examined. Even if system planning is carried out externally, internal section must be done the final decision in order to make consistency of all other planning. The outputs of operations audits are used for systems planning inputs. 3.2 Operations Audits and Decision Support The auditing of customer-service levels, transportation, warehousing, order processing, and inventory are all needed to maintain logistical performance. The auditing of, for example, order tracking, turnover of inventory, costs of delivery to each receiver, distribution cost of each SKU, level of delivery service, and quality is needed to coordinate production and marketing. Changes in locations for delivery and amounts delivered may be essential inputs to system-implementation plans. Additional data are needed as a basis for changes to systems. Detailed reports on operations are used to identify points that require change. Simulation data is valuable in considering possible changes. The simulations are set up from data stored in computers. Proceedings of the First International Conference On Integrated 209
3.3 System Planning System planning includes decisions on warehousing locations, transportation networks, modes of transportation to use, carriers and forwarders to use, warehouse loading systems, total system costs, acceptable charges, etc. System planning activities are a focus of the 3PL business. The coordinator issues a request for proposals (RFP), and the bidders submit their proposals. The RFP contains data that assists in making the decisions. Proposals contain information for deciding firms to contract. 3.4 Planning for System Implementation and Improvement In logistics systems, frequent minor system changes are the preferred way of adapting to changes in markets and of improving systems. Gain sharing, a type of 3PL contract, is one of the effect methods on the implementation and improvement of systems by providers. To improve logistics, components of logistics system like transportation networks, carriers to contract, warehouse-loading systems need to be changed. Data from auditing and environments for simulation are strong requirements for the making of effective decisions. The gain-sharing contractor thus holds the informationprocessing function. 3.5 Operation Control The scheduling and direction of labor, and the searching of temporally resources are examples of activities for the management of operations. If a 3PL provider is the non-asset type and uses a forwarder, the forwarder is responsible for these activities. If the 3PL provider is of the asset type, the 3PL provider carries out the activities. When the system is in a tight spot because of budget or time, 3PL providers carry out these activities, whether they are asset or non-asset. 4. CASE STUDIES 4.1 Case A: A Consumer Electronic Manufacturer Japanese consumer electronics distribution has been vertically integrated for a long time. Most manufacturers have distribution companies and a network of small affiliated shops. Therefore, each consumer electronics manufacturer controls the whole of its supply chain. The company I present as a case (Company A) is a global firm which has plants and markets beyond Japan. In the Japanese market, this company also controls its own distribution network. It is planning to become a holding-company-based structure, and logistics management activities will be affected by this organizational change. The organizational structure, including the logistics-management functions, is shown in Figure 2. Until 1998 the parent company has had several production-centered business units, which sold all of the products that they produced to the sales business units or sales subsidiary companies. business units mainly respond to production costs so they concentrate on increasing their capacity usage ratios. Subsidiary companies were of three types. -plant companies assembled only the parent company s product. The marketing company sold only the parent company s product. Only the logistics company would do business for other firms, consigning their cargo. The logistics company held assets, and it planned to be nonasset type one. The production-marketing board on the parent company discussed coordination of these processes. The logistics division of the parent company brought the report of an audit that had been carried out on it, for decision support. In 1999, business units were changed from production- to product-based, so that they now were responsible for inventory. Coordination activities were transferred to these business units. In early 2000, the functions of the logistics division were transferred to a logistics subsidiary company. And in mid 2000, plant companies were reorganized to create several electronics manufacturing service (EMS) firms. The coordination of production, logistics, and selling were transferred to these firms. Proceedings of the First International Conference On Integrated 210
Before 1998 BU P coordination Prod.- Mktg. Board Div 1999 BU coordination P Div Plant Plant early 2000 P mid 2000 P BU BU (R & D) coordination Plant EMS coordination Figure 2: Organizational Structure and Management Activities of Company A 4.2 Case B: A Convenience Store Operator The next case, company B, is the operator of a chain of convenience stores in Japan. Company B does not own plants, stores, warehouses, or inventory. B also has a subsidiary company abroad but it is not a functional unit. B plans the knowledge of convenience storage methods to the foreign countries market. Here, however, we will be solely looking at the Japanese-market case. It offers systems for operating stores to franchisees (the actual retailers), and the operation of its logistics systems is outsourced to wholesalers. B designs the systems, from manufacturer s plants to stores. Wholesalers sell goods to franchisees by using the systems put in place by B, and B takes a charge for the use of these systems. Company B may say that it controls the whole of the supply-chain logistics from a third-party position, or as a virtual company. The goods to be sold are determined by B and retailers select items from the list that B provides. Manufacturers promote sales to B, and B negotiates the required changes to outbound logistics systems when they are successful. 5. CONCLUSION In this paper, a model for the assignment of logistics management activities in the virtual company environment has been presented. The logistics-management structures of leading-edge cases of logistics outsourcing in Japan are explained in terms of this model. Figure 3 shows the assignments of activities in cases A and B in terms of the layered model. Several themes are good potential subjects for future study. First is the verification of this model in the environments that exist in other countries. The companies I have presented as cases deal in overseas markets where their logistics-management systems have different structures, so that tracing these differences in organization may help in verifying the model. Proceedings of the First International Conference On Integrated 211
Second point for further examination is the relation between the members of the virtual company s core competence and assignments of management activities. Such a study is necessary for the clarification of the relation between virtual company and logistics management. Comparisons of several firms in single industries may also be helpful in this study. Third point for further examination is the relationship between the market characteristics and virtual company. The function of coordinating entire supply chains will differ depending on several marketing factors such as the price and lifecycle of products, market structure and the market share held by each company. A virtual company can be realized for a firm of any type with the aid of the Internet and other advanced information technologies. To construct a successful virtual company, the management system must be designed to make full use of the core competences of the companies within the virtual company structure. It should be able to help in the logistics strategy of both shippers and third-party logistics providers. EMS Co. Co. Company A Operations Audits & Decision Support Strategic Planning & Coordination Operation Control System Planning Planning for System Implementation & Improvement Execute Operation Transportation & Warehousing loading Convenience Store operation Co. Wholesaler Co. Company B Operations Audits & Decision Support Strategic Planning & Coordination Operation Control System Planning Planning for System Implementation & Improvement Execute Operation Transportation & Warehousing loading Figure 3: Assignment of Management Activities REFERENCES Ballou, R.H., 1999, Business Management, 4th ed., Prentice Hall, USA. Coyle, J.J., Bardi, E.J., and Langley, C.J., 1996, The Management of Business, 6th ed. West Publishing, MN., USA Galbraith, J.R., and Nathanson, D.A., 1978, Strategy Implementation: The Role of Structure and Process, West Publishing, USA. Lambert, D.M, and Stock, J.R., 1993, Strategic Management, 3 rd ed., Irwin, USA. Porter, M.E., 1985, Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, USA. Murphy, P.R., and Poist, R.F., Third-Party : Some User Versus Provider Perspectives, Journal of Business, Vol. 21, No. 1, 2000. http://www.clm1.org/mission/.asp Proceedings of the First International Conference On Integrated 212