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A third-party logistics provider is (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 include 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.
According to the Council of Supply Chain Management Professionals, 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."
Advantages of 3PL
- Cost and time savings for the client
As logistics is the core competence of third party logistics providers. They possess better know how and a greater expertise as any producing or selling company could be able. This know how together with the global networks of the often large company size enables a higher time and cost efficiency. Another point is, that the equipment and the IT systems of 3PL providers are constantly updated and adapted to new requirement of their customers, so that they are able to meet the requirements of their customer’s suppliers. And that is more than essential to a company’s survival. Producing or selling companies often do not have the time, resources or expertise to adapt their equipment and systems as quickly as necessary. So in conclusion a 3Pl provider can meet the technical requirements in a faster and more cost efficient way than a company could do itself.
- Low capital commitment
Thus the fact that most or all operative functions are outsourced to a 3Pl provider there is no need for the client to hold own warehouses or transport assets. There is very less or no tied up logistics capital. This is very beneficial if a company has high deviations in warehouse capacity utilization, because a bad capacity utilization ratio at equal fix cost (for warehouse) is evil for a company’s efficiency and profits.
- Ability of client to focus on core business
The outsourcing of logistics departments permits the company to focus even more on their real core business. If logistics is one of the firms’ core businesses then outsourcing doesn’t make sense. But if logistics is no core competency but rather needed or annoying attachment it should be outsourced to a logistics provider, because the continuous increasing of business complexity makes it impossible to be an expert in every division or sector. And if you are no expert in a division, there is always the opportunity to improve. Often only the core competency is really adding value to your product. So it is immense important to be best in class or one of the market leaders to generate profits, because normally the quality of the core product is the main (not the only, but the main!) reason for the consumer to buy it.
-3PLs provide flexibility
Third party logistics provider can provide a much higher flexibility in geographic aspects and can offer a much larger variety of services than the clients could provider their selves. In addition to that, the client gets flexibility in resources and workforce size and logistics fix costs turn into variable costs.
The only big disadvantage (if you see it as one) is the loss of control a client has by working with third party logistics. Eminently in outbound logistics when the 3PL provider completely assumes the communication and interacting with a firms customer or supplier. By having a good and continuous communication with their clients most 3PL’s counter and try to charm away such doubts. Some 3PL’s even paint the clients logos on their assets and vest their employees like the clients ones.
Due to the fact that a 3PL to client collaboration is a typical strategic alliance, as the author mentioned earlier in this thesis, there will be an introduction of problem areas in the practical implementation of strategic alliances. This points are important for a successful strategic alliance. If they aren’t fulfilled or only badly, this will lead to immense problems. And these problems will be even more serious in the development of a strategic alliance than in a company’s daily routine, because damaged faith in respect to the benefits and success of such an alliance is deadly and destructive for change motivation of all people involved.
All this points can be transferred nearly equal on third party logistics to client frame contract collaborations.
Another point to be examined separately is the fitting accuracy of the IT systems of the provider and the client. A good fitting of the different information technologies is essential for an effective and smooth work flow. So it’s problematic that there is a great gap between the expectations and the needs of the 3PL clients and the IT resources the 3PLs provide.
First you have to know about your own logistics costs. Because only if you know exactly your own costs you can compare it to the costs of a logistics provider. Often it is useful to know the direct costs of each product and service, because sometime it makes sense to outsource only some parts of the logistics and leave some products or operating steps untouched because the in-house logistics is able to do better or cheaper than an external provider. Another important point is the customer orientation of the 3PL provider. The provider has to fit to the structures and the requirements of the company. This fit is more important than the pure cost savings, like a survey of 3Pl providers shows clearly: The customer orientation in form of adaptability to changing customer needs, reliability and the flexibility of third party logistics provider were mentioned as much more important than pure cost savings.
Closely entangled together with the point of customer orientation is the point of a 3PL’s specialization. The special requirements of the own company should be flow into the decision which 3PL is the right one to choose. Experts often suggest firms to choose 3Pl providers with roots in the same area of logistics as the department that shall be outsourced.
Furthermore it is worth to discuss if the company wants an asset-owning or a non-asset-owning 3PL Provider. 3PL provider without own assets are called lead logistics providers. Lead logistics provider have the advantage that they have specialized industry expertise combined with low overhead costs, but lower negotiation power and less resources than a third party provider has, based on a normally big company size, a good customer base and established network systems. But 3Pl providers tend to shed clients efficiency consciously by preferring their own assets in order to maximize their own efficiency. In addition to that third party logistics provider often are bureaucratic and have long decision making cycles caused by the size of the company.
If a company gets the result that it wants to implement a third party logistics provider into their processes, it has to work on the following implementation issues. These are points a company that is purchasing the third party logistics services, has to fulfill.
The startup phase of such a strategic alliance is the most difficult and most critical phase. For implementation considerations there has to be planned a time frame of between six months and a year! Otherwise you risk quality and reliability losses. The client company has to clearly identify their needs and expectations to the 3PL exactly to avoid misunderstandings and disaffections due to miscommunications. Performance measure have to be set. Concrete guidelines are necessary.
Both parties, provider and client, must concentrate on the aim of a good collaboration concept with mutual beneficial. Otherwise if there is no win-win situation one party suffers and reduce its efforts. Just as important as the good communication between client and provider is the communication within the workforce and employees and not only within the managers’ level. In the best case the communication is informative, motivating and anticipatory. The integration of employees should have highest priority! To avoid incertitude of employees, customers and business partners’ changes in respect to structures and reliabilities have to be communicated internal and external as early as possible. Good communication is essential within such a project, employees want to know why a company is outsourcing and what the expectations of this step are. Upcoming fear in respect to employee reduction have to be faced within the different departments in an early stage, if there is none, because fear of losing one’s livelihood is paralyzing the working morale. The employees should be motivated and mobilized to an active cooperation by understanding the change as a chance.
The first point reported about now, is instantly the most stimulating and propulsive reason for shippers and companies to commit their selves into strategic alliance collaborations with third party logistics providers.
Often companies, equal what size they have, aren’t able to improve their market position, as fast as the hard concurrency and competition in the national and international business requires, alone. Or if they are able this fast adaption to the market requirements would cause immense and disproportional costs. So the companies try to get their logistics more efficient and costs economic by working together with third party logistics provider that have the size, the experience and the know-how to make the clients supply chain more cost efficient, more flexible and more profitable ( see also the advantages of 3PL in chapter 7.1). The 2014 annual Third Party Logistics Study (subtitle: The State of Logistics Outsourcing) of Capgemini investigated, that third party logistics clients have an average logistics cost reduction of 11%, an average inventory cost reduction of 6%, and an average fixed logistics cos reduction of even 23% by outsourcing their logistics to 3PL providers. Another important point for shipper is, that their fill rates and their order accuracy increase what is really important within the hard competition to satisfy, in special the challenging, but also the general customer.
Hertz and Alfredsson (2003) describe four categories of 3PL providers:
Advancements in technology and the associated increases in supply chain visibility and inter-company communications have given rise to a relatively new model for third-party logistics operations – the “non-asset based logistics provider.” With companies operating globally, the need to increase supply chain visibility and reduce risk, improve velocity and reduce costs – all at the same time – requires a common technological solution. Non-asset based providers perform functions such as consultation on packaging and transportation, freight quoting, financial settlement, auditing, tracking, customer service and issue resolution. However, they do not employ any truck drivers or warehouse personnel, and they don’t own any physical freight distribution assets of their own – no trucks, no storage trailers, no pallets, and no warehousing. A non-assets based provider consists of a team of domain experts with accumulated freight industry expertise and information technology assets. They fill a role similar to freight agents or brokers, but maintain a significantly greater degree of “hands on” involvement in the transportation of products.
To be useful, providers must show their customers a benefit in financial and operational terms by leveraging exceptional expertise and ability in the areas of operations, negotiations, and customer service in a way that complements its customers' preexisting physical assets.
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On-demand transportation is a relatively new term coined by 3PL providers to describe their brokerage, ad-hoc, and "flyer" service offerings. On-demand transportation has become a mandatory capability for today's successful 3PL providers in offering client specific solutions to supply chain needs.
These shipments do not usually move under the "lowest rate wins" scenario and can be very profitable to the 3PL that wins the business. The cost quoted to customers for on-demand services are based on specific circumstances and availability and can differ greatly from normal "published" rates.
On-demand transportation is a niche that continues to grow and evolve within the 3PL industry.
Specific modes of transport that may be subject to the on-demand model include (but are not limited to) the following:
On-demand transportation is a term to reflect what have become known as "smile and dial" brokerages that essentially work as telemarketing call centers. Brokers have no obligation to successfully ship all loads (as opposed to contract logistics providers) and almost all sales representatives are heavily (and 100%) commissioned, and much of the workers' day is spent cold-calling sales leads. Smile-and-dial brokerages typically require a 15% gross profit margin (the difference between what the shipper pays the brokerage and what the brokerage pays the carrier), and the commission compensation scheme means that the turnover of personnel in the call centers approaches 100% per year.
For the occasional shipper, smile-and-dial brokerages can provide a convenient way to have goods shipped. But the lack of deep expertise due to constant turnover, combined with the 15% pricing margins, mean that a reasonably capable traffic professional can obtain transportation services much more economically and reliably.
First party logistics provider are single service providers which are usually specialized on certain goods, branches and shipping methods. They do the functional transport and logistics services in a straitened region. They do the core activities of logistics, namely transport, storing and handling of cargo, which were done by the most producing companies by themselves till the late seventies if we look back into history. Examples are: Carrying companies, port operators, depot companies. The logistics department of a producing firm can also be seen as a first party logistics provider if they have own transport assets and warehouses.
Second party logistics provider are service providers which provide their specialized logistics services in a larger (national) geographical area than the 1PL do. Often there are frame contracts between the 2PL and the customer, which regulate the conditions for the transport duties that are mostly placed short term. 2PL’s provide own and external logistics resources like trucks, forklifts, warehouses etc. for transport, handling of cargo or warehouse management activities. Second party logistics arouse in the course of the globalization and the uprising trend of lean management, when the companies began to outsource their logistics activities to focus on their own core companies. Examples are: courier, express and parcel services; ocean carriers, freight forwarders and transshipment providers.
See Definition above.
A fourth party logistics provider has no own transport assets or warehouse capacity. They have an allocative and integration function within a supply chain with the aim of increasing the efficiency of it. The idea of a fourth-party logistics provider was born in the seventies by the consulting company Accenture. Firms are outsourcing their selection of third party logistics provider and the optimization process of the integration of these to a PL as an intermediary. That reduces costs and the 4Pl have to have an overview about the whole logistics market to choose the ideal 3Pl for all operative logistic activities. For being able to provide such an ideal solution fourth party logistics providers need a good knowledge of the logistics branch and a good IT infrastructure.
Fifth party logistics providers are engaged with supply chain management and offer system oriented consulting and supply chain management services to their customers.
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The most significant difference between a second party logistics provider and a third party logistics provider is the fact that a 3Pl is always integrated in the customs system. The 2 Pl is not integrated, in contrast to the 3Pl he is only an outsourced logistics provider with no system integration. A 2Pl works often on call (e.g. express parcel services) whereas a 3Pl is almost every time informed about the workload of the near future. Another point that differs 2 and 3PL is the specification and customizing of services. A 2Pl normally only provides standardized services. 3Pl’s against it often provide services that are customized and specialized on the needs of their customer. This is possible by the long term contracts that are usual in the third party logistics market. So the if there are customized logistics services are needed the contracts in the 3PL segment have to be long term, because customizing always costs money. A cost effectiveness for the third party logistics provider is only given over longer periods of time with a stable contract and stable profits. In contrast to that second party logistic services can’t be customized, concerning to the fluctuating market with hard competition and a price battle on a low level. And there we have another distinguishing point between 2PL and 3PL: Durability of contracts. 3 PL contracts are long term contracts, whereas 2Pl contracts are of a low durability, so that the customer is flexible in responding to market and price changes.
The one great point of determination between a third- and a fourth party logistics provider is the point of own assets. In contrast to a 3Pl a 4Pl has no own transportation or warehouse assets! A fourth party logistics provider selects the 3 Pl providers from the market which are most suitable for the logistical issues of his customer. Unlike the allocative function of a 4PL in the supply chain, the core competence of a 3Pl provider is the operative logistics.
As a cut surface between 3Pl and 4 Pl there are existing so called lead logistics providers (abbreviation: LLP) which have the typical 4Pl attributes but hold own operative assets.
Lead logistics providers are a combination out of 3PL and 4PL logistics providers and are sometimes called 3,5PL provider. Because LLPs have the needed know-how for controlling and managing complex supply chains and additionally hold transport and warehouse assets, LLPs are able to provide comprehensive supply chain management services.