3pl selecftion and implementation

P. Bajec

3PL SELECTION AND IMPLEMENTATION: KEY CONSIDERATIONS AND SUCESS FACTORS

3PL SELECTION AND IMPLEMENTATION: KEY CONSIDERATIONS AND SUCCESS FACTORSPatricija Bajec, B.Sc. University of Ljubljana Faculty of Maritime Studies and Transport Pot pomor akov 4, SI- 6320 Portoro , Slovenia ABSTRACT The manufacturing and trading companies have been forced to focus their operations on a relatively small set of core processes or competencies, due to the harder global competitive environment and turning other non-core processes, including logistics, over to external suppliers, which ensures stable competitive advantages, rises market share and helps to follow new strategic objectives. Till recently manufacturing and trading companies operates its logistics activities in-house. Logistics has not play an important role and logistics services have not been recognized as possibility of achieving competitive advantage, too. However, present global industry environment create need for high service performance, which forces manufacturing and trading companies using external organisations. Logistics outsourcing has grown up rapidly, which improves not only the integrated cooperation betwen the producer and the buyer of logistics services, but also complexity and totality of service performance. Hence, outsourcing logistics began. The aim of the paper is directed towards what way shippers should outsource logistics in partnerships with service providers with emphasise on identification and selection, integration and management of 3PL relationships. In that study the advantages and disadvantages from shipper point of view are also investigated. 1 INTRODUCTION

The outsourcing of an increasing number of logistics activities by using logistics service provider, so called third-party logistics or contract distribution is a general trend during the last 15-20 years. The third-party logistics phenomenon could be described as outsourcing logistics services in an integrated relationship between a shipper and a logistics service provider. This kind of logistics partnerships are now emerging in a business where words like reengineering, lean inventories, time based competition, service differentiation and global competition are frequently mentioned. In this environment logistics operations are also udergoing major changes, for instance, physical distribution and its organisation is an area under change. The global competition, where the markets are becoming larger, and the customer and suppliers more dispersed, will from logistic point of view result in increased network complexity. One of the way to handle the logistics challenges and improve the efficiency and effectiveness of logistics system is the outsourcing of logistics activities. From the providers perspective it is mainly deregulation, globalisation, harmonisation and decreasing margins in the functional origins transportation as well as client demands that drive 3PL development.

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Client's reasons to enter TPL relations are mainly to decrease asset intensity, restructure logistics processes, and to reduce costs. Companies have realised that improved logistics service performance can enhance their product's attractiveness to the customers. An integrated cooperation betwen a service provider and a shipper could be one solution to attain a high service performance and thereby achieve a competitive advantage. To be successful in outsourcing logistics, the company should learn and consider how to select a logistics provider carefully. Next step is working together. Both sides need support from top management and have to share information, risk and rewards, mutually trust, always update vision and goals, evaluate their performance regularly, etc. However, there are some hidden risks in logistics outsourcing. Identifying hidden risks and preventive measures can help build successful logistics partnerships. 2 MANAGEMENT OF ORGANISATIONS LOGISTICS FUNCTION IN MODERN

Management of logistics functions in modern organizations involves decision making for the complete distribution of goods and services in the marketing function with a view to maximize value and minimize cost. A growing awareness that competitive advantage comes from the delivery process as much as from the product has been instrumental in upgrading logistics from its traditional back-room function to a strategic boardroom function. The following reasons have been proposed to explain this trend: There is a growing need to be more responsive to customer and market demand. As an integrative concept that cuts across the traditional functions of the business logistics can deliver better customer service. Logistics activities involve a large commitment of capital. The logistics function can be the key facilitator in the cross-functional effort towards supply chain integration. Hence it is not surprising that concepts such as supply-chain management have now assumed strategic importance. In order to handle its logistics activities effictively and efficiently, a company may consider the following options: It can provide the function in-house by making the service. It can own logistics subsidiaries through setting up or buying a logistics firm. It can outsource the function and buy the service [5]. Currently, a growing interest in the third option outsourcing has been indicated. 3 OUTSOURCING: DEFINITION AND LEVELS

Outsourcing is a decision of a company about make or by goods or services. As for logistics outsourcing, if the company operates logistics activities more cheaply than hires someone to manage it, the company should insource. However, if the company operates those activities more expensively than hires someone to do it, the company should outsource. To understand profoundly in the outsourcing, there are five levels of logistics outsourcing as illustrated in Figure 1 [3].

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5 PL E-business 4 PL Supply-Chain-Management 3PL Forwarding/Contract logistics 2PL Asset-based Logistics 1 PL Producer

Management of all parties of the supply chain in conjunction with eBusiness Management of the whole supply chain Management of complex service chains Traditional transport and warehouse management Own operating of logistics by the producer

Figure 1: Levels of logistics outsourcing 3.1 Third-party logistics [3PL or TPL] and Third-party logistics provider [3PL provider]: definition

The term Third-party (TP) comes from the observation that a company party three - , acts between two primary participants (parties 1. and 2.) in a supply chain without taking title (ownership) or at least no commercial risk for the goods in the flow of materials in the supply chain. These companies are generally denominated the providers, as they provide services, whereas their clients are normally called shippers. The primaly participants have ownership of goods and are therefore named parties one and two (Figure 2).The two primary participants Shippers Third party organisations Providers

Part 1Producer/ or Supplier

Part 3Service provider

Part 2Industrial Customer

Figure 2: The relationship between the three parts

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The Logistics component in conjunction with Third-party logistics tend to have two main interpretations. The first one emphasis the logistics aspect of 3PL and the term 3PL only should be used when all the activities included in the term logistics are outsourced. The other interpretations is not as strict and allows contracts where only some of the logistical activities are included, to be classified as a 3PL service. It is not possible to say which of the interpretations is right or wrong, however it can be concluded that there is a noteworthy difference between providing single services and services containing a large range of different activities [4]. This whole leads up to following definitions that, in short, describe 3PL [2]: The services offered by a middleman in the logistics channel that has specialised in providing, by contract, for a given time period, all or a considerable number of the logistical activities for other firms. Activities carried out by an external company on behalf of a shipper and consisting of at least the provision of management of multiple logistics services. These activities are offered in an integrated way, not on a stand-alone basis. The co-operation between the shipper and the external company is an intended continuous relationship. The following definition describe 3PL provider [4]: A 3PL provider is an organization that for external clients manages, controls, and delivers third-party logistics. 4 DRIVING FORCES AND CONCERNS

The decision to enter a logistics partnership is influenced by both driving forces and concerns. There are many general reasons drivers of outsourcing why a company should adopt an outsourcing strategy and they are company dependent [7]. The most important strategic reason for shippers to be interested in outsourcing their logistics activities is a need to reduce costs or amount of capital invested. Other reasons that score high are service or quality improvement, the need for strategic flexibility and a focus on core competencies,whereas outsourcing as a facilitator for change implementation scores much lower [4]. Details can be found in figure 3

Cost reduction Service improvement Strategic flexibility Focuse on core business Change implementation0% 20% 40% 60% 80%

Figure 3: Strategic reasons for outsourcing

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IT Poor performance Inadequate knowledge Lim ited acceptance by employees Trust in provider Over-dependence on single provider Loss of control Other0% 20% 40% 60% 80%

Figure 4: Concerns before setting up a partnership Although outsourcing logistics services generates a large number of advantages to the organization, some dissadvantages are appeared in the outsourcing process. The concerns a shipper had before setting up a partnership are illustrated in figure 4. This shows there clearly exist fears about outsourcing among shippers. 5 CONSIDERATIONS IN THE OUTSOURCING PROCESS

The outsourcing decision is a variant of the classical make/buy decision: companies can either invest in building a logistics organisation, or they can contract this function out consider factors related to quality, capacity, labor, scheduling and skill to be important in a make-orbuy decision. Only after companies conduct a thorough self-examination can they proceed with the identification and selection processes for a 3PL [5]. The number of outsourcing steps is not as important as the method of those. The various selection, integration and management of 3PL relationships are outlined below [6]. 5.1 The selection process

Making the decision: The companies should define their most aggressive logistics management goals and then attempt to visualize what the firm will look like after achieving those goals. Firms must clearly articulate where they want to go before they develope a plan that will take them to the new performance level. Companies can also employ outside help to aid in figuring out if there really is a need for a 3PL partnership. The external consultants will help the company to narrow down a list of 3PLs and identify would-be partners.

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3PL SELECTION AND IMPLEMENTATION: KEY CONSIDERATIONS AND SUCESS FACTORS Do you need to consider partnering with a 3PL? Yes If logistics is simply not and cannot be a core competency, if you have little logistics expertise in your company. If your supply chain is not integrated internally or with your trading partners. Your supply chain is decentralized, if there is Decentralized sources Too many transportation managers Large inventories at rest Low stock turns/high stock outs Too many distribution centres Too long to react to unexpected customer demand changes If there is dissatisfaction with Inventory levels Inventory locations Costs of inventory Inventory turns Total logistics costs Real-time access to logistics information Transportation i.e. fuel and maintenance Warehouses and distribution centers Logistics labour

Figure 5: Short diagnostic designed to help companies in deciding whether a 3PL is needed Clarify needs and objectives: When companies decide that a 3PL alliance will be the best way to go, a lot of homework must be done in gathering data about its operations. Setting objectives and criteria should be a cross-functional group activity. Every department, for example, marketing, operations, accounting, personnel, that will be involved directly or indirectly with the 3PL should participate actively. A company should start by gathering general information about its operations, such as product lines, shipping volume, geographic areas and industries served, growth forecasts and the computer systems. Included with this list should be the value-added services that the company would require from a 3PL. After evaluating the company's operations, the company will see their weakness and set the objective and goal to improve their service and operations. Making the list and sending request of proposal: Next, the company has to make the possible logistics provider's list. In this step, the listing may be founded on the size of the potential provider and the company, the capability of provider, the specialty and timeframes of the provider [3]. The next step is to send out a request for proposal or request for quotes to the short list of 3PL. The company should not invest too much time on this step. Furthermore the detail of RFP should include the service required, requirement, and other relevant information. Consideration and selection: Industry experts advise that a companies set a deadline to make a decision and stick to it. After receiving the reply from potential providers, the company has to visit the 3PL, learn from those 3PL's customers experience and their performance to the customers who have a similar business to the company, and ask the question to the logistics provider and the company itself. Clear and realistic objectives and expectations of a 3PL alliance will enable a company to establish its selection criteria and better evaluate which 3PL's will provide the best fit.

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There are several criteria that companies should take into account when making their final selection for a 3PL [see Figure 6 below]. According to experts, during the selection process, most companies do not place much importance on the 3PL's capacity and willingness for continuous performance improvement. However, there is little incentive for 3PLs to invest much in partnership because contract pricing is usually fixed over time, which means that incremental improvements by the 3PL are not rewarded. This can lead to operational stagnation and diminished value for the service provided. To handle this potential problem, leading companies are moving towards a pay for measured performance approach, where during the selection process, 3PLs are asked to demonstrate their ability to manage operations and improve operational efficiency over time. Companies must perform their own research on the 3PLs capabilities and not rely only on information obtained from the 3PLs. It is recommended that companies evaluate 3PLs by what they have done and not what they plan to do. Experience gained by the 3PL in the client's industry can be applied to the new project. Therefore the 3PL's prior performance should be a weighly factor in the selection process.

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3PL SELECTION AND IMPLEMENTATION: KEY CONSIDERATIONS AND SUCESS FACTORS Criteria General Company Considerations Price Financial stability Experience in the same industry or with similar companies Location Asset ownership International scope Capabilities Information system and technology capabilities Customer service Capacity to accomodate and grow the client's business Flexibility and capability to handle unique business requirements (creative management) Responsiveness to unforeseen problems or unexpected events The ability to meet or exceed promises Quality Service quality and performance Commitment to continuous improvement Quality of the provider's management team Client relationship Availability of top management when necessary Cultural fit between the partners (compatibility with company culture and philosophy) Service cancellations General reputation Labor relations Human resource policies Availability of qualified talent

Figure 6: Factors to be considered in selecting 3PL partners 5.2 The integration process

The contract arrangement and implementation process is unique to every company. However, it is important for every firm to partner with the selected 3PL to develope optimum solutions to help ensure a smooth implementation and gainful partnership. The integration process is discussed below. Make sure both sides are clear about service requirements: Before signing a contract, companies must make sure the requirements are clarified on both sides. A firm must discuss, clearly define and establish its service expectations with the 3PL. Most 3PLs find it useful to document the exact processes, functions, services, and job descriptions are involved in the hiring company's operations, to ensure that all its actions are geared towards helping the company to reap the desired benefits from the relationship. There should some upfront goals established for short and longer-term savings. Measurable standards including performance metrics for assessing the 3PL, and a monitoring process, complete with periodic reviews should be set up. Have an implementation plan: Firms must develop and follow a detailed project implementation plan and conduct periodic reviews to make sure everything is on track. One thing to watch out for is scope change. Minor changes in the project plan could develop into

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huge changes that mihgt throw the whole project off track and even affect the customized solution being devised and offered by the 3PL. Ensure complete support from upper management: Companies must ensure complete support from upper management. An effective 3PL program will affect every aspect of a company's operations and will also require some changes to be made. For the changes to be successful there has to be support from upper management. These people will help to push the program through the organization and obtain the support and acceptance of the other managers and employees. The legal team is of course involved but should not be primary drivers of the process. Have open and honest communication channels: There must be open communication channels. Communication mix-ups can lead to lost data and information, and could result in the client company or the 3PL underestimating the complexity of the job. At this point, both companies must be willing to share enough detailed information so that each side will have a clear sense of the other's processes. There should be a recognized point of contact on both sides, a knowledge of who the process drivers and decision-makers are, and multiple levels of communication. It is advisable for both sides to have an account executive the highest level contact who will be in charge of making sure that strategies on both sides are aligned, the account manager who is responsible for managing the relationship, and a supporting project team that handles the day to day activities. Company should keep employees up to date on the progress of the implementation efforts and how the new system is going to work. This ensures a minimum of surprises, especially in relation to an in-house logistics department that has to give way to the incoming 3PL. When contacts change employees should be made aware immiediatly so people know whom to deal with. Firms must tackle everyday problems immediately and not allow them to backlog. At the same time, there should be care in responding to problems and not to overracting to the first sign of trouble. Glitches should be expected and the client company must work with the 3PL to design problem solving tactics. Plan an exit strategy: For practical purpose, a company must have a back-up plane, which must include an off ramp strategy for canceling the contract with the 3PL. Companies must plan for contingencies like a break down in negotiations, which can occure midway into the implementation. Unexpected events like a management change at the 3PL firm, organisation problems or an acquisition of the 3PL by another company could result in the client having to look for a different 3PL. Therefore, the client company must have at least one other 3PL in mind as a second choice while implementing a contract with the first. 5.3 Managing the relationship

It's important to keep in mind that a third-party provider represents an equal partner in an outsourcing relationship and should be treated as such. That means maintaining open communication with that third party as well as making a long-term commitment to the relationship. Some of the practices recommended for a lasting relationship are discussed below: Have consistent checkpoint meetings: The company should use the performance metrics that were defined and astablished in the initial stages of the relationship to assess the 3PL. There should be regular and consistent checkpoint meetings for evaluation. For example, for transportation management services, the company should consider such metrics as the 3PL percentage of on-time deliveries, shipment-tracking accuracy, and the percentage of damagefree-shipment. For warehouse management, the company should look at the percentage of orders that the 3PL ships in the exact quantity shown on the order. It's advisable that for fairness and objectivity purposes either an independent company or a cross-functional team of

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executives from various departments that are affected by the 3PL's performance should do the evaluation. Company should measure performance the same way it measures its own and its supplier's performance in the supply chain. The performance should be measured two ways: from the customer's perspective, and using company specific performance metrics. To determine the customer's satisfaction level, the following measures should be implemented: Performance indices for logistics outsourcing: The performance assessment indices in logistics outsourcing should include both cost and service measures. The performance assessment indices should evaluate systematically the performance of integrated third party logistics operation, reflect accurately the relationship between third party logistics providers and firms and realize effectively the integration of third party logistics providers and users. Information sharing encouragement mechanisms: The most common risks in logistics outsourcing are probably decision-making risk due to incomplete information and moral risks resulting from asymetric information. In order to avoid potential problems, information sharing encouragement mechanisms must be developed. Information technologies can be used to establish these information-sharing mechanisms which can lead to win-win situations for both participating parties. In logistics outsourcing, key operational information such as costs, demands, shipment plans, capacities, etc., should be easily accessible by both participating parties. Such information should be accuarate and timely, rendering it useful to both parties for planning and re-planning purposes.Thus, it is important that information sharing encouragement mechanism are established so that any updates are made as timely as possible. Suitable performance tactic: Designing a suitable performance tactic enables third party logistics providers to improve customer service levels and ensure that successful logistics partnership are developed. The performance tactic of a third party logistics provider should be centered on the characteristics of product or industries. Different products or industries have different requirement. Customer relationship management: For logistics outsourcing arrangements to be successful they must include a strong emphasis on customer relationship management. It should be active, not only solving problems but also maintaining close contacts. Customer relationship managament seek to develope strong and lasting ties to customers by anticipating their needs rather then simply reacting to their dissatisfaction. Customer relationship management tries to provide a unified view of a customer across the firm by integrating the firm's customer-relations process and consolidating customer information from multiple communication channels so that the firm can provide a single coherent face to the customer. Customer relationship management relies on the integration of marketing and logistics customer service. Advanced customer relationship management aims at reducing logistics service costs, increasing gains, strengthening customer relation, increasing customer satisfaction and loyalty, improving information quality, reducing information transmission delays and simlifying customer service processes. Maintain the open communications initially established: Third party logistics providers must be treated as an extension of the company's own business. Partners must understand that they are in it for the long term and that success and failure are to be equally shared. Excellent and open communications should not end when the relationship becomes established. Consistent two-way communication will ensure continuous improvement by redefining the partnership goals to reflect the experience gained in the relationship and the changing market conditions. There should be openness in dealings and surprises should be minimized. In some

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alliances, employees from the logistics provider are stationed full-time on the customer's premises and are treated the same as the customer's employees [6]. 6 SUCCESS FACTORS AND OBSTACLES IN LOGISTICS OUTSOURCING RELATIONSHIP

Outsourcing logistics services is the activity that a company passes its logistics functions to a logistics services provider to manage. As for the companies who realize that logistics tasks are not their core competency, they should learn about the impacts of outsourcing before making a decision to outsource. The impacts have both bright and dark sides. The process to select a third party logistics provider is not too complicated but there are many factors to be considered. In contrast, success in outsourcing is not simple and needs some strategies to build it up. The success keys in logistics outsourcing are as follows in subheadings 6.1. 6.1 Key success in logistics outsourcing

For a logistics outsourcing relationship to work, ten bacis rules must be followed [6]: 1. Develop a strategy for outsourcing. Outsourcing should always be thought out carefully and measured against an in-house solution. This helps identify relative strengths and weaknesses for each alternative. Include the provider in the process from the outset. 2. Establish a rigorous selection process. Check industry sources, existing clients and financial institutions. Carefully analyze such things as management depth, strategic direction, information technology capability, labour relations, and personal chemistry and compatibility. 3. Clearly define expectations. Often providers are asked to submit bids based on inadequate information about volume, size of shipments, frequency, seasonal variations, etc. Some user firm simply lack accurate or detailed knowledge of their own logistics activity. In additional, the cost of providing the service often is underestimated and/or misunderstood. When given inadequate or inaccurate information, providers can develop costing and commit to arrangements that don't reflect reality. Once they develop a greater knowledge and experience with the relationship, providers often find they have made decisions they find impossible to live with. 4. Develop a good contact. Provide incentives to improve operations and productivity with both parties sharing in the benefits. Clearly spell out obligations, expectations and remedies. 5. Establish sound policies and procedures. Since no contract can contain all the policies and procedures applicable to day-to-day activity, it is important for the client to provide the service provider with an operating manual. Ideally, this would be one they develop together and should contain all policies, procedures and other information necessary for the efficient operation of the account. 6. Identify and avoid potential friction points. Both parties usually are well aware of friction points that may arise. These should be identified in advance, if possible, along with a procedure developed for dealing with them. 7. Communicate effectively with your logistics partner. Poor communication is second only to poor planning as a major cause of outsourcing relationship failure. Communication on all aspects of the operation must be frequent and two-way. Often the logistics service provider is expected to operate in an information vacuum, ad before long, the entire operation becomes reactionary. This is the first step toward failure. 11

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8. Measure performance, communicate result. When setting up a relationship, standard of performance should be clearly identified, agreed upon and communicated. 9. Motivate and reward your providers. Good performance should be rewarded, not taken for granted. Compliment recognition, awards, trophies and dinners all are proven motivators. 10. Be a good customer. Good partnerships are mutually beneficial. Successful logistics outsourcing can provide significant benefits to firms and to third party logistics providers. However, there are some hidden risks in logistics outsourcing engagements. Failed 3PL relationships are a result of factors which are described in following subhedaing. 6.2 Some of the reasons for failed 3PL engagements

Failed 3PL relationships are a result of factors such as: Insufficient care in selection of 3PLs: The urgent need for a 3PL sometimes leads firms to choose sub-optimal partners. Most firms do not define the objectives and expectations of the anticipated 3PL alliance. They therefore do not have the proper selection criteria to successfully evaluate which 3PLs will provide the best fit. Inefficient coordination during integration of the 3PL: Some companies fail to appreciate the number of various departments involved in the transition process and the amount of coordination and communication needed for both sides. As a result, there can be conflicting messages among departments and between the company and the 3PL provider, which leads to glitches. Improper management and evaluation of the established relationship: Many firm do not pay sufficient attention to managing the 3PL relationship after the initial integration. Others do not regard 3PLs as equal partners and so lose the benefits of strategic collaboration. Some relationships also suffer from established performance measurements that are either vague or virtually unachievable [6]. 7 CONCLUSIONS

Logistics outsourcing has another name so called 3PL. Originally, outsourcing logistics is to hire a logistics company to work for a company to handle warehousing and transportation. 3PL can manage more functions including inventory and order processing or all logistics activities and look forward to long-term relationship at least 1 year. The companies are likely to pay attention to what they do best so they sometimes avoid operating some activities but hiring a logistics service provider to work instead. The company will be benefited from outsourcing in terms of cost reduction, core business focus, strategic advantages, investment saving, service and technology improvement, etc. However, the company may lose control and ability in logistics tasks, have to consider about cost of outsourcing, and should be careful about human resources. In order to ensure the success of using contract logistics, certain additional factors are to be considered during and after the implementation of the outsourcing process. The first and foremost is that decision to outsource must come from the top. Then the company should learn and consider how to select a logistics service provider carefully. Next step is working together. Internal communication as well as communication between logistics users and providers, which is essential for the coordination of internal corporate functions and outsourced logistics, is also very important factor in this respect. Firms need to specify clearly to service provider their role and responsibilities as well as their expectations and

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requirements. Success of outsourcing depends also on a user-provider relationship based on mutual trust and faith. There are several other critical factors that make outsourcing work: established operating standards and monitored performance against those standards and so forth. It is evident that, to make contract logistics work, a high level of commitment and resolution is needed on the part of the buying firms. Management must examine critically each of these factors to determine how they can be put into practice. Only then firms can truly harness the benefits of oursourcing and to develope long-term partnerships that manifest many advantages that are possible with the use of third-party logistics. REFERENCES [1] D. Andersson, Third Party Logistics-Outsourcing Logistics in Partnerships, Linkoping, 1997, pp.52-84 [2] H. Lundberg, M. Schonstrom, Segmentation of the third party logistics market,Goteborg, 2001, pp. 3-5 [3] J. Ge, L. Ding, N. Bussayadilokskul, L. Zhang, B. Han, Z. Cai, "Outsourcing Logistics Services Including 4PL, 2004, http://www.itls.usyd.edu.au/past_assignments/tptm6155_jing_et_al_2004.pdf [4] M. Berglund, Strategic Positioning of the Emerging Third-Party Logistics Providers, Linkoping, 2000, pp.13-19 [5] M. A. Razzaque, C. C. Sheng, "Outsourcing of logistics functions: a literature survey", Singapore, International Journal of Physical Distribution & Logistics Management, 28, 2, 2000, pp. 89-107 [6] Operations Management Roundtable, Decision support Memorandum, "3PL Selection and Implementation", 2001, http://www.sceb.executiveboard.com/guest/OMR/Sample3PL.pdf [7] P. van Laarhoven, M. Berglund, M. Peters, "Third-party logistics in Europe five years later", International Journal of Physical Distribution & Logistics Management, 8, 2000, pp. 12-18

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