CHAPTER 4

MBM5229 INTERNATIONAL LOGISTICS AND SUPPLY CHAINS

INTERMEDIARIES and ALLIANCES in GLOBAL LOGISTICS

INTRODUCTION Various types of intermediary have a role to play in international logistics. They have existed for centuries and have remained prominent into the 21st century. Despite predictions of their demise throughout the second half of the 20th century, intermediaries in international logistics such as freight forwarders have proved to be resilient and adaptable. They have not only survived but also developed new functions with the advent of containerisation, simplified documentation systems, and advances in information technology. OBJECTIVES At the end of this unit you should be able to fulfil the following objectives:

Understand the interaction between the trading and logistics channels Appreciate the complex relationship between ownership of goods and transport decisions
in international trade.

Identify the functions of intermediaries in trading channels. Identify the functions of intermediaries in logistics channels. Understand the nature of vertical marketing systems. Appreciate the different relationships between shippers and freight forwarders. Identify the different types of complexity likely to influence the use of intermediaries. Appreciate the relationship between the carrier and the logistics intermediary.
International Logistics and Supply Chains (V2002) Dr. Richard Gray (rgray@plymouth.ac.uk) 1

 Identify the changing role of the freight forwarder. Identify changes in industry barriers related to international logistics. Assess the potential for global logistics providers.
1. INTERACTION OF TRADING AND LOGISTICS CHANNELS

Logistics intermediaries are typically facilitating the smooth operation of a channel for goods. Facilitators such as freight forwarders are important, because although they do not buy, sell or own the goods moving through a channel, they assist in the efficient performance of the channel. Marketing channels exist for services as well as for goods. The logistics channel is itself a marketing channel of a service such as shipping or forwarding. However, because the logistics channel provides a support service for a marketing channel for goods, we need to consider the interaction of the two channels - the goods (or trading) channel and the logistics channel. As a starting point, let us assume that the simplest system consists of two parallel channels ( Figure 1).

SUPPLIER

GOODS

CUSTOMER

TRANSPORT

SHIPPER

CARRIER

Figure 1: Goods (trading) and transport channels in parallel The carrier is the supplier of shipping services to the shipper, and the shipper is the supplier of goods to a customer. In a marketing channel for goods, otherwise known as a trading channel, a simple system is between two organisations, the supplier and the customer. A typical example is the flow of goods between manufacturer and retailer. However, there is often a wholesaler or other intermediary between those two organisations. Similarly, intermediaries such as freight forwarders exist in logistics channels, situated between a shipper and a carrier. Logistics TRADING CHANNEL intermediaries have traditionally performed a range of functions, particularly associated with international transport. Such functions include services, and GOODS groupage or consolidation SUPPLIER CUSTOMER preparation of shipping documentation. Figure INTERMEDIARY 2 develops the example given in Figure 1 to show the two channels with intermediaries.
SUPPLIER AS SHIPPER TRANSPORT INTERMEDIARY CUSTOMER AS SHIPPER

International Logistics and Supply Chains (V2002) Dr. Richard Gray (rgray@plymouth.ac.uk) CARRIER

LOGISTICS CHANNEL

Figure 2: Parallel goods and transport channels with intermediaries

2. 2.1

THE FUNCTIONS OF INTERMEDIARIES Intermediaries in a trading channel

In a trading channel, a wholesaler intermediary is likely to perform six groups of tasks each for his supplier and for his customer 1. The six tasks performed for the manufacturer or supplier are to:

Provide market coverage (because there are many dispersed customers); Establish sales contact (able to provide a substantial sales effort); Hold inventory (thus reducing the manufacturers burden and risk through holding too
much inventory); Process orders (enables the manufacturer to overcome the problem of dealing with a large number of orders); Provide market information (the wholesaler keeps good intelligence contact with customers); and Give customer support (goods are exchanged, returned or repaired). The six tasks performed for the customer are to:

Ensure product availability (making it easy to get goods); Provide customer service (undertaking repairs etc.); Give credit and financial assistance;

Provide assortment convenience (bringing together combinations of products from different manufacturers); Break bulk (buying large volumes from manufacturers and breaking them into smaller orders); Give advice and technical support (on inventory planning, store layout etc.). 2.2 Intermediaries in a logistics channel

When we turn to the tasks of intermediaries in a logistics channel, there are similarities, but also important differences. Therefore, a different categorisation is required. The four classes of task primarily performed for the shipper are:

Transport services
1

International Logistics and Supply Chains (V2002) Dr. Richard Gray (rgray@plymouth.ac.uk)

 Logistics centre services Information processing services Professional advice and support.
The three classes of task performed for the carrier are:

Marketing services Asset holding Assortment and volume convenience.

Logistics channel intermediaries also undertake roles more usually performed by trading channel intermediaries such as wholesalers. In such cases, they are effectively acting as an intermediary between the shipper and the trading partner. There is nothing new about this; for example, freight forwarders have undertaken customs clearance for many years. However, in recent years there has been a substantial increase in these types of activity, often called valueadded logistics. Tasks performed by logistics companies acting as intermediaries between the shipper and trading partner fall into the broad classes:

Inventory management of goods Information processing services Product transformation Delivery.

Table 1 provides a list of specific tasks performed by logistics channel intermediaries. It would be wrong to consider the list as exhaustive, because logistics intermediaries are constantly seeking new avenues of profitable activity. Provided there is no legislative restriction, many activities have potential for inclusion. Trading channel intermediaries may also perform logistics functions - a typical example of this is where a wholesaler operates a road freight fleet. Figure 3 shows the relationship between members of the trading and logistics channels including the broad classes of functions.

International Logistics and Supply Chains (V2002) Dr. Richard Gray (rgray@plymouth.ac.uk)

Table 1: Functions of logistics intermediaries INTERMEDIARY BETWEEN SHIPPER AND CARRIER Shipper-oriented services Transport services Operate transport FTL (full truck load) or FCL (full container load) transport LTL (less than truck load) or LCL (less than container load) transport Position equipment Local collection and delivery Transport co-ordination Door-to-door delivery service Pool shipments with other companies Establish international network (Inter) modal co-ordination Book vessel space Obtain best transport service Consolidate shipments Vehicle scheduling Route planning Transport equipment control Inventory control of transport equipment Order transport equipment Repair transport equipment Logistics centre services Consolidation Transhipment Export packing for transport requirements Obtain warehouse space Information processing services Tracking and tracing Trace and expedite shipments Payment and collection of money Pay freight charges Pay port charges Collect payment from consignees for shipments Pay customs duties Manage value added (or sales) tax advances Present documents to the bank Pay goods through draft or letter of credit Prepare, issue or obtain documents Prepare certificates of origin Prepare commercial invoices Issue bills of lading Issue air waybills Issue export declarations Obtain and prepare consular invoices Obtain proof of delivery Obtain export licenses Contact relevant agencies or authorities (e.g. for food or drug imports) Professional advice and support Selection Selection of warehouse location Selection of transport equipment Selection of logistics operators Obtain insurance cover Recommendation Evaluate logistics services Advise on exports and/or imports Advise on terms of sale Give legal advice Recommend routes and services Advise on special features of goods (hazardous goods, special licences, special packaging restrictions) Advise on special requirements of countries (e.g. duties, taxes, import restrictions) Advise on packaging Negotiation Negotiate contract with logistics operators Settle insurance claims Negotiate best carrier rates Table 1 continued.

International Logistics and Supply Chains (V2002) Dr. Richard Gray (rgray@plymouth.ac.uk)

Customisation Offer tailored service beyond the standard offer Advise on or arrange alternative service if problem (e.g. port strike) INTERMEDIARY BETWEEN SHIPPER AND CARRIER Carrier-oriented services Marketing services Collect and pay freight charges Provide local knowledge Provide international network Asset holding Own and operate transport equipment (e.g. roll-on/roll-off trailers, containers) Own and operate logistics centres Own and operate IT systems Assortment and volume convenience Consolidation of shipments (e.g. LCL) Break bulk Geographical specialisation Global or regional network (contribute to carriers network) Industry specialisation (e.g. food, clothes) Subcontract within the logistics sector INTERMEDIARY BETWEEN SHIPPER AND TRADING PARTNER Shipper-oriented services Goods inventory holding Inventory management of goods Management of inventory location Order picking Reshipment

Vendor management Disposal of old or obsolescent products Information processing services Document preparation Invoicing Customs clearance Order processing Product advice to consignees Bar code scanning Product transformation Main objectives Postponement Make goods country-specific Make goods customer-specific Functions Assorting Mixing and blending Marking Bar coding Packaging or repackaging Labelling or relabelling Replace or repair damaged goods Install components Add parts and manuals Delivery Organise delivery according to shippers customer service standards Shipment consolidation Cross-docking Install product at consignees premises.

International Logistics and Supply Chains (V2002) Dr. Richard Gray (rgray@plymouth.ac.uk)

TRADING CHANNEL
FOR GOODS Market coverage Sales contact Inventory holding Order processing Market information Customer support FOR GOODS Service availability Customer service Credit and financial assistance Assortment convenience Breaking bulk Advice and technical support

GOODS INTERMEDIARY

SUPPLIER

CUSTOMER

SUPPLIER OR CUSTOMER AS SHIPPER

LOGISTICS CHANNEL

FOR GOODS Goods inventory holding Information processing services Product transformation Delivery

FOR LOGISTICS SERVICE Transport services Logistics centre services Information processing services Professional advice and support

LOGISTICS INTERMEDIARY

FOR LOGISTICS SERVICE Marketing services Asset holding Assortment and volume convenience

CARRIER

Figure 3: Relationship between trading and logistics channels including classes of functions

International Logistics and Supply Chains (V2002) Dr. Richard Gray (rgray@plymouth.ac.uk)

4.1

Vertical integration in international logistics

Vertical marketing systems experience both forward and backward integration. In the relationship of carrier + intermediary + shipper, integration of functions can take place between the shipper and intermediary, or between the carrier and intermediary. The ultimate level of integration is where the shipper performs all the functions in the logistics channel. However, in some areas of logistics there has been a move away from shippers providing their own logistics resources particularly transport. For example, in international shipping, in 1971 the oil majors owned 21% of the world tanker fleet, but by 1994 they owned only 9% of the fleet2. Another example is, in Great Britain, the relative decline of total road freight tonnage carried by shippers themselves (called own account transport) since 1980 3. This was mainly because of an improvement in the quality and range of services offered by professional hauliers. 5. THE RELATIONSHIP BETWEEN SHIPPER AND INTERMEDIARY

The success of intermediaries often depends not only on the quality of transport or other logistics services offered, but also on the relationship with shippers. This is an intangible quality, difficult to measure. Nevertheless, forging a stable relationship between the shipper and the intermediary can play an important part in establishing competitive advantage. It also means the establishment of efficient communication between the shipper and the intermediary. There are different types of intermediary in international shipping. For example, a ship manager may operate a ship on behalf of a shipowner and conduct business with shippers or charterers4. The most prominent type of intermediary in international logistics is the freight forwarder, and much of this unit is devoted to consideration of the role of the forwarder. Three broad classes of relationship exist between forwarders and shippers:

The traditional approach Shippers undertaking their own forwarding (forward integration) Forwarders undertaking shippers export distribution functions (reverse integration) 5.

6.
2 3

OUTSOURCING TO INTERMEDIARIES

Drewry Shipping Consultants (1995) The Oil Tanker Fleets Drewry Shipping Consultants, London. See Unit 4 Third Parties in International Logistics. 4 For a discussion on the nature of relationships in ship management see Panayides, Ph.M. and Gray, R. (1999) An empirical assessment of relational competitive advantage in professional ship management. Maritime Policy and Management, 26, 2, 111-125 5 Davies, G.J. and Gray, R. (1985) Purchasing International Freight Services, Gower Publishing, Aldershot

Since the 1980s, many companies, particularly manufacturers, have returned to focusing only on their core business. There have been various reasons for this, often associated with the increasing need for manufacturers to give all their main attention to production and marketing in a world of changing consumer preferences and shorter product life cycles. Many companies have also pursued a policy of reducing the number of staff to achieve greater cost efficiency and to eliminate or minimise problems associated with employment legislation. The outcome has been an increase in outsourcing, or the transfer of certain business functions to independent companies or third parties. This applies to many areas such as advertising, recruitment, and even aspects of manufacturing itself. One of the main areas suitable for outsourcing has been logistics. For example, as mentioned earlier, in the UK there has been a substantial growth in the use of third parties for road freight transport. Of course, this unit is concerned with a further stage of outsourcing; the use of an intermediary between the first and third parties, most notably, between a shipper and an international transport company such as a shipping line. Whether or not a shipper uses an intermediary may of course be down to the individual preferences of a specific manager. However, it is likely that the management of a shipper company will need to consider whether it wishes to get tangled in the complexity associated with international logistics, discussed earlier in this course. There are three basic types of complexity likely to influence the use of intermediaries:

Network complexity Process complexity Product complexity6.

Network complexity increases with the number of trading partners, countries and regions, and the number of stock-keeping units (SKUs) and origin-destination combinations. Process complexity is associated with how critical is timing in a supply chain. Product complexity is related to the special requirements of products, for example dangerous goods. 6.1 Intermediaries help to overcome complexity

Intermediaries can play a crucial role in overcoming some of the problems of each type of complexity. For example, network complexity may result from the use of a large number of shipping lines, each of which the shipper has to contact. However, the shipper may employ an intermediary such as a freight forwarder to undertake such contact. Thus, using a freight forwarder leads to greater contactual efficiency, a concept introduced earlier in this module. Process complexity can be reduced by outsourcing various tasks such as special labelling, or the addition of country-specific features to products. In contrast, product complexity may prevent the use of intermediaries. For example, if the product is dangerous, such as certain chemicals, the shipper may prefer to maintain close control throughout the transit.

Rao, K. and Young, R. (1994) Global supply chains: factors influencing outsourcing of logistics functions International Journal of Physical Distribution and Logistics Management 24, 6, 11-19. Rao and Young make this point about 3rd parties in general, but it is equally valid for intermediaries in particular.

Another form of network complexity is associated with information systems, and is better termed information complexity. The quality of information systems is as important as the quality of the actual transport, and intermediaries have always provided a service in dealing with information complexity. For example, they have been expert at overcoming the complexities of paper documentation for international transport and trade. In the modern context, they are able to offer a specific service providing a link between electronic information systems that are not entirely compatible. Larger logistics providers are likely to be more successful in this area since they are able to invest substantially in such systems. For example, large investments in technology improvements have been made by intermediaries such as AEI ($16 to $20 million a year) and Fritz who invested about $35 million in information technology systems integration in 19967. Fritz was subsequently taken over in 2001by UPS who are famous for even larger investment in IT some $1 billion a year.8

10.

GLOBAL LOGISTICS PROVIDERS

The term logistics provider is increasingly more widely used, being sufficiently broad to cover all possible activities in a rapidly changing market. It reflects the breakdown of barriers between the different categories of transport carrier and intermediary in a deregulated environment. Indeed, the disappearance of barriers goes much wider than transport, so that a single company, or a group of affiliated companies, may offer a broad range of logistics services including transport, warehousing, inventory management and other value-added services. Favourable use of terms like global and mega suggests that large-sized companies are desirable. Certainly, many commentators take this for granted. The term mega-carrier is sometimes used to refer to the very large companies that have come to dominate certain freight sectors because of concentration of ownership, sometimes following deregulation of the sector. In this sense, it is associated with the oligopolistic nature (i.e. a limited number of main players found in any market) of many sectors of business or industry. In the shipping industry the liner trade is an example of oligopoly with shipping lines forming conferences or, in recent times, alliances. Used in this way, the term mega-carrier can refer to a large company offering a narrow range of services, such as just an ocean container service. Elsewhere, in the European context, it has been used to refer to very large companies with a combination of a geographical presence and a well-developed portfolio of transport and logistics services. Sea liner companies have a number of advantages to enable them to become this type of mega-carrier, notably the wide reach of their services, their long-standing skill at raising substantial finance, their wide customer base, and their wide range of markets9. The last-mentioned use of the term mega-carrier has more in common with the concept of one-stop shopping. If any type of institution is going to offer a global logistics service, ocean carriers have an existing advantage in breadth and depth of service. They have grown both internally and through strategic alliances or mergers with other carriers. However, they also have a problem as far as shippers perceptions of them are concerned. Ocean carriers may not appreciate the
7 8

Transportation and Distribution, February, 61-62. Lloydslist.com 15 Jan 2001 UPS sets performance targets after Fritz takeover by Roger Hailey

Cooper, J., Browne, M. and Peters, M. (1991) European Logistics: Markets, Management and Strategy Blackwell, Oxford.

full range of shippers needs, or would necessarily make choices of logistics providers that are in the shippers interests. Also, they may not be able to offer sufficiently sophisticated information tracking systems at the level of the purchase order, or to be able to manage pipeline inventory. Some container lines (e.g. Maersk) have global product groups in various industry sectors such as automobiles or chemicals intended to gain and provide productspecific logistics expertise. Other players in the market are also following this lead. The following excerpt shows recent decisions by P&O Nedlloyd. Note that they intend to focus on maritime intensive supply chains10.

MEANINING OF THE 3 PL AND 4 PL

10

See also the P&O Nedlloyd Logistics web site http://www.ponlogistics.com/

Outsourcing is a viable option for companies. Businesses outsource for many and varied reasons-increase shareholder value, reduce costs, business transformation, improve operations, overcome lack of internal capabilities, keep up with competitors, gain competitive advantage, improve capabilities, increase sales, improve service, reduce inventory, increase inventory velocity and turns, mitigate capital investment, improve cash flow, turn fixed costs into variable costs and other benefits, both tangible and intangible. To the maximum, and if done correctly, outsourcing and business process outsourcing can be used to create a viable virtual corporation. 3PLs. 3PLs have led the way in logistics outsourcing. Drawing on its core business, whether it be forwarding, trucking or warehousing, they moved into providing other services for customers. Creation of a 3PL presented a way for a commodity-service logistics provider to move into higher margin, bundled services. Customers, anxious to reduce costs, want what 3PLs have to offer. The potential market opportunity for outsourced logistics service providers, whether domestic, international and/or global is huge. But something has happened on the yellow-brick road. The reasons are varied, but the bottom line is many have failed at their own business transformation. Some 3PLs have not moved past their core commodity service to become true multi-service providers. Or international 3PLs have not understood how to provide domestic services; or domestic ones have not succeeded at venturing into international logistics services. Others have failed to differentiate themselves against the competition. Certain 3PLs have not done a good job positioning and defining themselves in the marketplace. Or the parent company has not given them the resources, especially sales and sales leads, to penetrate even their existing customers. And, sundry have commoditized their 3PL service, as a result undoing the very purpose of their 3PL. These setbacks have slowed down the growth of some 3PLs in terms of both customer retention, especially, and new customers. Fragmentation of the 3PL sector reflects both the uncertainty of how 3PLs view themselves and the diversity of customer needs. As a result, customers have had to compare apples and oranges in their RFP replies. Shippers share some accountability with an overemphasis on cost reduction as the key metric and without a clear definition of their requirements for services they need and how it will all work within their company. They looked for silver bullets and quick answers to complex needs. 4PLs. Into the service vacuum created by 3PLs, the 4PL has emerged. Using a 4PL, fourth party logistics service provider, is different than the traditional 3PL. Much on 4PLs discusses technology. Technology is not THE answer; it is part of the answer. It is one element of success of process, people and technology. 4PLs see the process and what is required to make it succeed. 4PL's combine process, technology and process to manage. The 4PL is a Business Process Outsourcing, BPO, provider. This lead logistics provider will bring value and a reengineered approach to the customer's need. A 4PL is neutral and will manage the logistics process, regardless of what carriers, forwarders or warehouses are used. The 4PL can and will even manage 3PLs that a customer uses.

Business process outsourcing is traditional outsourcing and more. Outsourcing is often taking a set of work, tasks, responsibilities or functions and transferring them to an outside service provider. Business Processing Outsourcing (BPO) involves that and more. A BPO service provider brings a different perspective, knowledge, experience and technology to the existing function and can and will work with the firm to reengineer it into an improved or new process. It is an outcome-based result, not just a pure cost reduction issue. The new process will interact or be integrated into the company in a way that can bring value, even bottom line and shareholder benefits, to the client. A good 4PL will have the shipper perspective and experience in what he does and offers to prospective customers. That means a better understanding of the complexity of the customer's requirements, present viable solutions and to have customer satisfaction and retention. The firm sees the relationship, not a chunk of freight. Instead the BPO provider seeks incentives and metrics to define the relationship and collaborates with each customer as to goals and outcomes. A 4PL wants to position itself as an extension of and part of its customer. This BPO provider recognizes the role of and need for information technology in managing the process. A successful 4PL should have both the strategic and tactical capabilities. He should have real world logistics experience, especially on the "shipper"/customer side. Experience lets you see real issues and hidden agendas that are present. They also give you the ability to develop the process, people and technology that are needed because they have "been there, done that". They understand meeting the needs of their clients because they have managed and been responsible for logistics. A 4PL, with real world supply chain experience, can present a way for customers to take control of their supply chains. They can structure the relationship and the process in a way that best meets the requirements of the customer, rather than the customer having to accept what the outsourcing provider has to offer. 3PL vs 4PL. When it comes to outsourcing, there are three questions and underlying issues. One, do you outsource a function versus outsource a process? 3PLs target the function. They want to handle containers/shipments/freight, not the transport management process, for example. The true need is the process, which is what the 4PL targets. Is there really a process in place--or a series of standalone transactions? What is the present process? How does it work? Where does it fail? Where are there gaps? Where are there redundancies? The supply chain process crosses organizational lines. It runs horizontal in a vertical organization. Two, do you outsource work/tasks or do you outsource managing? Much outsourcing is work related. Handle warehousing. Handle shipments. Not manage them. This matter is part of the next evolution of outsourcing and where the 3PL will have to migrate-and where the 4PL is already positioned. Three, the outsource service provider, to truly meet the needs of his customer, should be neutral. 4PLs should be neutral if they are to manage the process. 3PLs, especially those which are asset-based struggle to be neutral. 3PLs which seek to push shipments through their transport contracts or through their warehouses are not neutral.

Conclusion. Some 3PLs have not fully stepped up to meet the exact needs of customers. Some have become too focused on "managing" tasks, not processes and on serving the parent company's core business, and have missed opportunities to present value. The 4PL opportunity exists because 3PLs failed to meet the real logistics/supply chain requirements of customers. There will not be a "model" (or cookie cutter) for the 4PL. After all, he knows to customize to the needs of each customer. As a result, 4PLs have become alternatives for business process outsourcing. These new BPO logistics service providers enable firms to manage a critical part of their supply chain by providing visibility and integration across multiple enterprises. They manage with the three key elements of process, people and technology. Users of a 4PL can focus on core competencies and better manage and utilize company assets and resources, as to inventory and personnel. A third-party logistics provider (abbreviated 3PL, or sometimes TPL) is a firm that provides service to its customers of outsourced (or "third party") logistics services for part, or all of their supply chain management functions. Third party logistics providers typically specialize in integrated operation, warehousing and transportation services that can be scaled and customized to customers' needs based on market conditions and the demands and delivery service requirements for their products and materials. Often, these services go beyond logistics and included value-added services related to the production or procurement of goods, i.e., services that integrate parts of the supply chain. Then the provider is called third-party supply chain management provider (3PSCM) or supply chain management service provider (SCMSP). Third Party Logistics System is a process which targets a particular Function in the management. It may be like warehousing, transportation, raw material provider, etc. 3PL is defined as "a firm that provides multiple logistics services for use by customers. Preferably, these services are integrated, or bundled together, by the provider. Among the services 3PLs provide are transportation, warehousing, cross-docking, inventory management, packaging, and freight forwarding."

Types of 3PL providers Third-party logistics providers include freight forwarders, courier companies, as well as other companies integrating & offering subcontracted logistics and transportation services. Hertz and Alfredsson (2003) describe four categories of 3PL providers:[1]

Standard 3PL Provider: this is the most basic form of a 3PL provider. They would perform activities such as, pick and pack, warehousing, and distribution (business) the most basic functions of logistics. For a majority of these firms, the 3PL function is not their main activity. Service Developer: this type of 3PL provider will offer their customers advanced value-added services such as: tracking and tracing,cross-docking, specific packaging, or providing a unique security system. A solid IT foundation and a focus on economies of scaleand scope will enable this type of 3PL provider to perform these types of tasks. The Customer Adapter: this type of 3PL provider comes in at the request of the customer and essentially takes over complete control of the company's logistics activities. The 3PL provider improves the logistics dramatically, but do not develop a new service. The customer base for this type of 3PL provider is typically quite small.

The Customer Developer: this is the highest level that a 3PL provider can attain with respect to its processes and activities. This occurs when the 3PL provider integrates itself with the customer and takes over their entire logistics function. These providers will have few customers, but will perform extensive and detailed tasks for them.

Logistics outsourcing[edit]
Logistics outsourcing involves a relationship between a company and an LSP (logistic service provider), which, compared with basic logistics services, has more customized offerings, encompasses a broad number of service activities, is characterized by a longterm orientation, and thus has a strategic nature.[19] Outsourcing does not have to be complete externalization to a LSP, but can also be partial:

A single contract for supplying a specific service on occasion Creation of a spin-off Creation of a joint venture

Third-party logistics[edit]
Main article: Third-party logistics Third-party logistics (3PL) involves using external organizations to execute logistics activities that have traditionally been performed within an organization itself.[20] According to this definition, third-party logistics includes any form of outsourcing of logistics activities previously performed in house. For example, if a company with its own warehousing

facilities decides to employ external transportation, this would be an example of third-party logistics. Logistics is an emerging business area in many countries.

Fourth-party logistics[edit]
The concept of a fourth-party logistics (4PL) provider was first defined by Andersen Consulting (now Accenture) as an integrator that assembles the resources, capabilities, and technology of its own organization and other organizations to design, build, and run comprehensive supply chain solutions. Whereas a third-party logistics (3PL) service provider targets a single function, a 4PL targets management of the entire process. Some have described a 4PL as a general contractor that manages other 3PLs, truckers, forwarders, custom house agents, and others, essentially taking responsibility of a complete process for the customer.

ROLE OF THE 3PL AND 4PL

This from Wikipedia; Accenture described the 4PL as an "integrator that assembles the resources, capabilities, and technology of its own organization and other organizations to design supply chain solutions". Wikipedias definition is quite contrived, A fourth-party logistics provider is an independent, singularly accountable, non-asset based integrator of a client's supply and demand chains. To avoid any conflict of interest, it is important that this fourth-party logistics provider be nonasset based, as far as logistics, transportation, and supply chain management assets are concerned. What a 4PL should be. A full blown 4PL can provide all the functions of a 3PL (procurement, storage and distribution and processes for each) as well as the ability to provide a customer with the outsourced financial, customer services and computer systems to support commerce. Let me give you an example; Say I am an importer of bicycles. I maintain my own stock and warehouse as I move 10,000 units a year. However, by law (such as the Consumer Guarantees Act) I must carry spare parts to maintain my bicycles. Because my supply chain is set up to move entire bicycles, the parts side is not a core business (but one I must have) and is not profitable often it is costly. I would then approach a 4PL who would provide all the business functions I require for my spare parts at a fee that should at least break even, if not make this business unit profitable. The 4PL then absorbs this business function into their warehouse facility and by leveraging their latest technologies (warehouse management, integrated ecommerce, ERP etc.) they are able to run my parts business profitably, allowing me to concentrate on core business and keeping on the right side of consumer law.

Outsourcing is a viable option for companies. Businesses outsource for many and varied reasons-increase shareholder value, reduce costs, business transformation, improve operations, overcome lack of internal capabilities, keep up with competitors, gain competitive advantage, improve capabilities, increase sales, improve service, reduce inventory, increase inventory velocity and turns, mitigate capital investment, improve cash flow, turn fixed costs into variable costs and other benefits, both tangible and intangible. To the maximum, and if done correctly, outsourcing and business process outsourcing can be used to create a viable virtual corporation. 3PLs. 3PLs have led the way in logistics outsourcing. Drawing on its core business, whether it be forwarding, trucking or warehousing, they moved into providing other services for customers. Creation of a 3PL presented a way for a commodity-service logistics provider to move into higher margin, bundled services. Customers, anxious to reduce costs, want what 3PLs have to offer. The potential market opportunity for outsourced logistics service providers, whether domestic, international and/or global is huge. But something has happened on the yellow-brick road. The reasons are varied, but the bottom line is many have failed at their own business transformation. Some 3PLs have not moved past their core commodity service to become true multi-service providers. Or international 3PLs have not understood how to provide domestic services; or domestic ones have not succeeded at venturing into international logistics services. Others have failed to differentiate themselves against the competition. Certain 3PLs have not done a good job positioning and defining themselves in the marketplace. Or the parent company has not given them the resources, especially sales and sales leads, to penetrate even their existing customers. And, sundry have commoditized their 3PL service, as a result undoing the very purpose of their 3PL. These setbacks have slowed down the growth of some 3PLs in terms of both customer retention, especially, and new customers. Fragmentation of the 3PL sector reflects both the uncertainty of how 3PLs view themselves and the diversity of customer needs. As a result, customers have had to compare apples and oranges in their RFP replies. Shippers share some accountability with an overemphasis on cost reduction as the key metric and without a clear definition of their

requirements for services they need and how it will all work within their company. They looked for silver bullets and quick answers to complex needs. 4PLs. Into the service vacuum created by 3PLs, the 4PL has emerged. Using a 4PL, fourth party logistics service provider, is different than the traditional 3PL. Much on 4PLs discusses technology. Technology is not THE answer; it is part of the answer. It is one element of success of process, people and technology. 4PLs see the process and what is required to make it succeed. 4PL's combine process, technology and process to manage. The 4PL is a Business Process Outsourcing, BPO, provider. This lead logistics provider will bring value and a reengineered approach to the customer's need. A 4PL is neutral and will manage the logistics process, regardless of what carriers, forwarders or warehouses are used. The 4PL can and will even manage 3PLs that a customer uses. Business process outsourcing is traditional outsourcing and more. Outsourcing is often taking a set of work, tasks, responsibilities or functions and transferring them to an outside service provider. Business Processing Outsourcing (BPO) involves that and more. A BPO service provider brings a different perspective, knowledge, experience and technology to the existing function and can and will work with the firm to reengineer it into an improved or new process. It is an outcome-based result, not just a pure cost reduction issue. The new process will interact or be integrated into the company in a way that can bring value, even bottom line and shareholder benefits, to the client. A good 4PL will have the shipper perspective and experience in what he does and offers to prospective customers. That means a better understanding of the complexity of the customer's requirements, present viable solutions and to have customer satisfaction and retention. The firm sees the relationship, not a chunk of freight. Instead the BPO provider seeks incentives and metrics to define the relationship and collaborates with each customer as to goals and outcomes. A 4PL wants to position itself as an extension of and part of its customer. This BPO provider recognizes the role of and need for information technology in managing the process. A successful 4PL should have both the strategic and tactical capabilities. He should have real world logistics experience, especially on the "shipper"/customer side. Experience lets you see real issues and hidden

agendas that are present. They also give you the ability to develop the process, people and technology that are needed because they have "been there, done that". They understand meeting the needs of their clients because they have managed and been responsible for logistics. A 4PL, with real world supply chain experience, can present a way for customers to take control of their supply chains. They can structure the relationship and the process in a way that best meets the requirements of the customer, rather than the customer having to accept what the outsourcing provider has to offer. 3PL vs 4PL. When it comes to outsourcing, there are three questions and underlying issues. One, do you outsource a function versus outsource a process? 3PLs target the function. They want to handle containers/shipments/freight, not the transport management process, for example. The true need is the process, which is what the 4PL targets. Is there really a process in place--or a series of standalone transactions? What is the present process? How does it work? Where does it fail? Where are there gaps? Where are there redundancies? The supply chain process crosses organizational lines. It runs horizontal in a vertical organization. Two, do you outsource work/tasks or do you outsource managing? Much outsourcing is work related. Handle warehousing. Handle shipments. Not manage them. This matter is part of the next evolution of outsourcing and where the 3PL will have to migrate-and where the 4PL is already positioned. Three, the outsource service provider, to truly meet the needs of his customer, should be neutral. 4PLs should be neutral if they are to manage the process. 3PLs, especially those which are asset-based struggle to be neutral. 3PLs which seek to push shipments through their transport contracts or through their warehouses are not neutral. Conclusion. Some 3PLs have not fully stepped up to meet the exact needs of customers. Some have become too focused on "managing" tasks, not processes and on serving the parent company's core business, and have missed opportunities to present value. The 4PL opportunity exists because 3PLs failed to meet the real logistics/supply chain requirements of customers. There will not be a "model" (or cookie cutter) for the 4PL. After all, he knows to customize to the needs of each customer. As a result, 4PLs have become alternatives for business process outsourcing. These new BPO logistics service providers enable firms to

manage a critical part of their supply chain by providing visibility and integration across multiple enterprises. They manage with the three key elements of process, people and technology. Users of a 4PL can focus on core competencies and better manage and utilize company assets and resources, as to inventory and personnel.

3PL

Third party logistics refers to outsourced tasks for businesses which help them manage their supply chain, such as warehousing, picking, packing, shipping and inventory management. Some 3PLs might also help with the administrative side of these tasks, such as invoicing and accounts receivable. Third-Party Logistics Providers (3PLs) are organizations that provide logistics support for companies. This simply means that 3PL providers manage or control the movement and storage of products for the company that hires them. Depending on the type of 3PL, this management (and the 3PL's involvement with the hiring company) can take on different characteristics. TYPES Standard 3PLs

Standard 3PLs perform basic logistics work (See Reference 1). 3PLs in this category manage product storage, transportation, and distribution at the behest of the hiring company. Since these 3PLs only offer basic services, they often offer other services beyond logistics (See Reference 3). Service Developer 3PL Service Developers offer the logistics support of a standard 3PL along with added infrastructure and management (See Reference 1). Service Developers offer IT support, product tracking, and product security (See Reference 3). Because of this added infrastructure and expertise, companies that hire Service Developer 3PLs can ensure the safety and reliability of their products. Sponsored Links Logistics & SCM Course Boost Your Career with SCM Course. Get International Certificate Now! www.iactglobal.in/supplychaincourse Customer Adapter 3PL A Customer Adapter 3PL in essence entirely runs the logistics at the behest of the hiring company (See Reference 1). This type of 3PL inherits the logistical operation from the hiring company; it does not create its own operation (See Reference 2). A Customer Adapter 3PL may enhance and improve the existing logistical infrastructure already in place (See Reference 3). Customer Developer 3PL Similar to the Customer Adapter, the Customer Developer takes over the logistics of the hiring company entirely. But, unlike the Customer Adapter, the Developer 3PL integrates itself with the hiring business (See Reference 3). While a Customer Adapter will

run a company's logistics department, the Customer Developer will in essence become the company's logistics department.

4PL

Fourth party logistics companies serve as consultants who manage the relationship between the principal company and one or more 3PLs to make sure all operations are running smoothly. They can carry various levels of responsibility, from advice on choosing the best companies, right up to the day-to-day management of essential logistical tasks being performed for the principal company.

The Concept of Outsourcing

Outsourcing to some is not a pleasant term but this concept is used throughout society not only in our country but the world. Companies today are looking for ways to survive but how they accomplish this is open for discussion. There are many products being manufactured today in the private sector and many of them have a large amount of components which must be made and installed to complete the end product. Outsourcing can be a good thing for the economy but it can also be a bad thing. Companies today both large and small do not have the capacity or expertise to manufacture every component of an end product they are getting ready for sale. This is a good thing as this need creates the need for additional jobs provided the market is good for the product being manufactured and assembled. The key to outsourcing is choosing the resource that can provide the quality product or service in completing an end product. The products of today seem to increasing today more than ever in conjunction with technology advances. Outsourcing amounts to companies using suppliers to provide the necessary expertise and/or product to be assembled into an end product. The supplier system in the United States and around the world creates an environment where jobs may be sustained or increased dependent upon the demand for a product or service. How and where these jobs are located is what is creating concern over this concept. To begin the decision to outsource specific operations or functions must be based on sound judgment not just a cost factor though cost is an integral part of an outsourcing decision. There is nothing wrong with this concept but when companies choose this option, it must for the right reasons. The subject of outsourcing and the decision to use this concept is different for each company. The justification and support is as different as there are products and services. It is necessary to evaluate several details or conditions before deciding to outsource operations/functions. Outsourcing is not for everyone and companies sometimes lose something in the process when they incorporate this concept. The main purpose of outsourcing is in effect to reduce costs and increase profit. This is not a bad thing. Companies must make money to survive in the world economy as it is today. While it is up to each company and their management to make the decision for outsourcing, there is an impact to the employees and the consumer when outsourcing is used. Outsourcing for American companies is a good thing if it creates or sustains jobs in the United States but if the jobs are located in foreign countries this sometimes comes under fire in the media. While I feel outsourcing jobs to foreign lands may be necessary in some cases, it is not always the right decision. Granted costs are involved but there are

usually ways to work with employees to keep their jobs and still make a profit. Companies make a variety of products for which they do not have all the resources or talent in house to complete them for their final product. This is where the concept of outsourcing comes into play. One last point to make is that I am not against the concept of outsourcing but specific criteria must be established to provide a basis for the decision to outsource. Before outsourcing the resources of a company must be examined to determine if the capability exist within the company to provide the necessary capacity and expertise. If these conditions are not present and cannot be developed, then outsourcing may be necessary. This is an aspect that should be examined before an outsourcing decision is made. Granted there are many complex issues and factors involved in the manufacture of many products consumers want. Outsourcing is not for every company but it is a necessary option for others. Outsourcing should be used sparingly for direct control of operational performance is lost when outsourcing is utilized. Outsourcing also creates the need for validating requirements are accomplished per contractual terms and this in effect causes an increase in cost that may not otherwise exist.

ROLE OF OUTSOURCING:

In today's highly competitive and dynamic global business environment with vastly extended supply chains, companies can often be confused by the many logistics options and sources available to them when seeking to implement a highly visible supply chain management (SCM) solution. Before making a decision on how to best integrate advancing technologies into your company's supply chain, however, it is more important than ever to evaluate the many existing options today. Companies should closely examine their internal cultural alignment, core competencies and business capabilities before making a decision. A company's cultural alignment, cross-departmental capabilities and corporate commitment to funding IT initiatives provide the seminal factors in determining whether it should keep supply chain management services in-house or outsource them to a qualified third party logistics provider. At SEKO, we have identified several key issues that should be considered when seeking robust Web-based SCM visibility, be it in-house or outsourced. First and foremost, shippers must determine the state of their existing WMS system. If it is consistently out-of-stock with finished products for customers,

an in-house logistics system is not providing the IT capabilities necessary to avoid poor lead times and missed shipments. Outsourcing logistics to a 3PL can prevent losing customers and revenues. If, however, a proper in-house IT infrastructure is in place, cost-savings and efficiencies may be realized - at least in the short-term. (Typically, if companies try to add-on newer technologies to existing legacy platforms, these costs will outweigh the cost of outsourcing.) If a shipper finds that its production facilities are down for long periods of time and logistics operations are not flexible enough to meet the requirements of after-hours deliveries and expedited service, there may be no choice but to pay the extra costs and outsource the logistics process on top of paying for large overhead for an inflexible logistics operation. If the in-house logistics operation is already funded as a core competency, you may already have a competitive edge. Flexibility is the key here. Evaluate delivery date success. If the targeted dates for time-sensitive product launches are not consistently being met, it is a good indication that internal staffing and facility capacity cannot keep up with customer demand. This indicates a company probably requires the assistance of a 3PL along with the financial commitment to the third party has already made to integrated IT development. Shippers should also assess overhead and fixed logistics costs before making a decision. If these expenses are squeezing the bottom line, customers may realize virtually instant savings by consolidating warehouse operations with a "shared" facility operated by a 3PL. This can move fixed costs to a variable expense, which provides flexibility in responding to market dynamics. If in examining IT capabilities, if a company determines that it cannot adapt to growing supply chain needs, it should consider outsourcing its logistics data and integrating it with that of a 3PL that specializes in customized supply chain solutions. Rather than waiting years for a new system to be developed internally, companies often find that outsourcing both the technology and logistics process to a suitable 3PL will realize long-term cost savings, while expediting the supply chain process.

Companies should evaluate their customs compliance readiness. With the implementation of the Customs Modernization Act, compliance assessments and audits became widely used as a tool to maximize compliance and provide uniformity. Regular assessment of import compliance processes and procedures require an evaluation of the overall effectiveness of the Customs Compliance Program, employee education and training programs, and operating procedures. If a company is unable to develop compliance and cost goals, formal policies, training programs, internal revenues and supplier compliance programs, the selection of a suitable 3PL to provide the required skill sets to establish a process-based compliance function is critical. Ultimately, following an in-depth evaluation of the entire supply chain process, many companies find that including a mix of in-house and outsourced logistics functions may provide the best solution for them. In a global economy, where there is no set criterion for supply chain success, companies have to carefully analyze their unique requirements and determine what logistics solutions are best suited to meeting their specific distribution needs. Cost is always important, but ultimately the success of any global supply chain management process relates back to client satisfaction as a means of achieving customer focus and growth in market share