3pl Providers and Users

As companies realized the need to adapt to the ever-changing conditions in an environment of globalization, technological innovation, and more sophisticated consumer demand to survive and flourish they began to incorporate into their systems of operations and focus on a strong LSCM component. Superior logistics and supply chain performance is now a well-recognized strategic dimension for companies to gain competitive advantage. The growth of logistics outsourcing in the USA is attributable to better transportation solutions; greater focus on core businesses; impact on cost reduction; improvements in services; development of necessary technological expertise; availability of computerized systems; and the need for more professional and better-prepared logistics services. The growth of business dynamics has caused outsourcing of the logistics activities to gain increasingly greater importance.

Companies have been considering various options to manage their logistics activities including, creating in house dedicated logistics function, setting up logistics subsidiaries, or acquiring a logistics firm. A 3PL provider is a company that supplies and/or co-ordinates logistics functions across multiple links in the supply chain. The company acts as a 1 “third party” facilitator between seller/manufacturer (the “first party”) and buyer/user (the ‘second party’), Figure 1.

Figure 1. Main components of 3PL.

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Definition The use of external companies to perform logistics functions that have traditionally been performed within an organization. The function performed by the third party can encompass the entire logistics process or selected activities within that process. The procurement of an integrated set of logistics services in a longterm relationship between a shipper and a service provider. A relationship between a shipper and a third party which, compared with basic services, has more customized offerings, encompasses a broader number of service functions and is characterized by a longer-term, more mutually beneficial relationship. Activities carried out by a logistics service provider on behalf of a shipper and consisting of at least management and execution of transportation and warehousing.

In addition, other activities can be included, for example, inventory management, information-related activities, such as tracking and tracing, value-added activities, such as secondary assembly and installation of products, or even supply chain management. Also, the contract is required to contain some management, analytical, or design activities, and the length of the co-operation between shipper and provider to be at least one year, to distinguish 3PL form traditional “arm’s length” sourcing of transportation and/or warehousing. Organizations use of external providers, in intended continuous relationships bound by formal or informal agreements considered mutually beneficial, which render all or a considerable number of the activities required for the focal logistical need without taking title. Relationships between interfaces in the supply chains and third-party logistics providers, where logistics services are offered, from basic to customized ones, in a shorter or longer-term relationship, with the aim of effectiveness and efficiency.

PL services help to achieve the strategic objectives by concentrating more on the core competency of the main business. The study by Sahay and Mohan, 2006, has cited substantial growth in various financial indicators using services of 3PL, for instance, various improvements in sales revenue by 13. 5%, working capital by 12. 3%, returns on assets by 10%, capital assets reduction by 10%, production cost reduction by 10. 5%, labor cost reduction by 10. 0%, and logistics cost reduction by 15%. PL users depend on 3PL service providers to secure capacity and gain agility who not only provide core services like supplying the right quality product, Figure 2.  The role 3PL service providers play in enhancing services and thereby satisfying customers has been universally recognized. The growth in 3PL service providers is seen across the world. As the logistics service demand increases, the challenges and opportunities will continue to increase. With the wide availability of modern decision-making tools and information technology, a paradigm shift in logistics is witnessed. Figure 2 depicts the evaluation and the state of the art witnessed in logistics outsourcing. Companies across industries and around the world regard logistics and supply chain management as key components of their overall business success. Many users feel that their relationships with 3PLs have helped them achieve critical goals related to service, cost, and customer satisfaction. Third-Party Logistics in India: Ever since the liberalization of its economy India has been on a path to become one of the top economic powers in the world.

New avenues for progress and development have opened up; the manufacturing and retail sectors gained popularity because of the changes in China’s export policy of not exporting manufactured items, from which Indian manufacturing firms have benefitted. Hence this sector will contribute to GDP significantly in the long run. The growth and competitiveness in these two sectors largely depend on the efficiency of the logistics operations that facilitate the companies’ ability to reach out to their customers quickly and at the desired location. Realizing this many manufacturers and retailers are now restructuring their supply chain processes in a manner to incorporate partnerships with expert supply chain service providers and outsourcing such activities as domestic transportation, international transportation, customs brokerage, warehousing, forwarding, cross-docking, product labeling, packing, assembly, kitting, reverse logistics, freight bill auditing and payment, IT services, fleet management, supply chain consultancy services provided by 3PLs, order entry, processing and fulfillment and limited liability partnership (LLP)/4PL Service.

The industry has generated employment for 45 million people in the country in comparison with the IT and ITES sector, which employs approximately 4. 3 million people1. As per the World Bank Survey, India ranks 39th in terms of the logistics performance index and indicators, with Singapore on top, the UK, USA, and China in 9th, 14th, and 30th positions, respectively. India spends US$1,148 in handling costs to import one cargo container and US$820 to export it. In comparison, Singapore spends US$367 per imported container and China US$390, according to a World Bank study1. India spends 13% of its GDP on logistics compared to an average of 10% in developed countries, while the U. S. spends just 8%. Better supply chain management has reduced logistics costs by nearly 1% in 10 years 1. The Indian government plans to spend US$24 billion over the next eight years on supply chain infrastructure1. 3PL solutions are on course to grow at a compound annual growth rate (CAGR) of over 16% from 2007-2010. Consequently, 3PL service providers are expected to corner an increased share of the Indian logistics pie, from 6% in FY2006 to 13% in FY2011, at a CAGR of 25% (CII)1.

According to the ASSOCHAM2, outsourcing of 3PL businesses in India should reach the value range above US$ 90 million by 2012 as the concept first introduced in the US and Europe is being adopted at a pace that will lead to increases in the efficiency of domestic operations through better-managed logistics functions. Companies in the textile, automotive, pharmaceutical, manufacturing, retail, and FMCG sectors are increasingly opting to outsource their logistics requirements to specialized service providers. According to a recent survey of 3PL service providers engineering, automotive and retail sectors were top revenue earners. PL Market Structure in India The 3PL market in India has comprised of two segments: the first one is asset-based in which assets like trucks, distribution centers, and warehouses are utilized in supply chain management, and the second one is non-asset based. Reasons for not outsourcing Necessity of e-commerce Collaborative relationship Gainsharing is important for relationship Freight bill payment (61. 4%) Inbound warehousing (56. 1%) Control would diminish (63%) Costs would not be reduced (63%) Service commitment would not be met (48%) Logistics is a core competency (44%) 72% Custom clearing and forwarding (51%) 82% 14% 80% 6. 6% Source: 3PL Practices in India, Sahay. B. S., Poor infrastructure of provider (81%) Inability to respond to changing needs (81%) Unreliable promised from providers (80%) Concerns about the capability of providers (77%) 7%. A considerable amount of research on the topic of the implementation of 3PL in different countries has been published in academic and trade journals. Viewpoints of both users and service providers have been considered to identify the major issues, industry dynamics, current status, and future prospects of the 3PL industry.

However, most of the research is descriptive in nature and does not go into in-depth statistical analysis of survey data. In the present study, Indian 3PL providers’ service dimensions are analyzed in terms of the key success factors and growth strategies using various statistical tools. Literature Review In this section a review of the literature is presented, which examines the perspectives of the 3PL users and service providers to understand the variation in the services offered and services expected. Reasons for outsourcing logistics activities. Understand the motives for the growth of logistics outsourcing in the USA. Development of necessary technological expertise and computerized systems; and need for more professional and better- 6 Maltz, (1994) Establish the relative impact of cost and services on the decision to outsource warehousing The study determined that organizations are reluctant to use third party warehousing due to customer service considerations. Product-related (e. g. special handling needs), process-related (e. g. cycle times), and network-related (e. g. countries served) drivers are believed to have an indirect influence in the outsourcing decision The service users believe that they are getting benefits like reduction in inventory levels, order cycle times, lead times and improvement in customer service. The “do or buy” decision is also affected by the evaluation of cost/service trade-offs. One important determinant of the decision is the cost comparison between alternative options. Costs associated with performing logistics activities inhouse and investment in capital assets are traded-off against service provider fees. The lowest cost solution should Concentration on the core competencies was the most important factor for the acquisition of third-party logistics services. Bhatnagar et al. , (1999) Find out factors for the decision-making process or choosing contract logistics service providers. Ascertain benefits of the alliance between manufacturing and global logistics service providers. Study the benefits of outsourcing logistics activities. The major reasons for the outsourcing of logistics activities were cost-saving (86. 8%), customer satisfaction (76. 3%), and flexibility (75%). Study growth strategies for logistics service providers Forming relationships with 3PL providers is an efficient and effective means of achieving the required services without investing heavily in assets and new capabilities.

Reference

1. Objective Conclusion Bagchi and Virum, (1996).
2. Financial stability Sink & Langley, (1997).
3. Develop a managerial framework for the acquisition of 3PL services Menon et al. , (1998).
4. To study the selection criteria for 3PL providers. Meade and Sarkis, (2002).
5. Flexibility Aghazadeh, (2003).
6. Key management 9 Colson and Dorigo, (2004).
7. H. S. Hwang et al. , (2005).
8. Efendigil et al. , (2008).

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