4th Translog Conference, Hamilton (Canada), June 15-16 2011

The Functional Relations between Third Party Logistics and Intermodal Transport SystemsJean-Paul RodrigueAssociate Professor, Dept. of Global Studies & Geography, Hofstra University, New York, USAMarc-André RoyVice President, CPCS - North America, 72 Chamberlain Avenue, Ottawa, Ontario, Canada

The Product as a Supply Chain…

iPad 1 (2010)iPad 2 (2011)

25.4

cm

3.1 lbs.2.8 lbs.

19.8 cm

20.3 cm

4.3 cm 5.1 cm

Let’s Begin with the Conclusion about 3PLs…

Growing organizational and functional complexity

Blurring of roles and services

Asset stigma

Significant clustering of actors

Layers to Logistics Services

1PL2PL

3PL4PL

Manufacturing, Retailing

Transportation

Logistics

Supply chainmanagement

Cargo owners

Carriers

Logistics serviceproviders

Lead logistics providers& consultants

Supply chain integration

Actors Services

Service integration

Third Party• A firm other than the

BCO, and usually but not necessarily independent of the carrier(s).

Services• Range of logistics

services provided can be narrow or wide, regional or global, sector or commodity specific.

Assets• 3PLs can be asset-

based (operator of modes, terminals or DCs) or non-asset based (forwarding, planning, consulting) logistics services providers.

Value Added• Value is supply chain

specific (e.g. time or cost, increased reliability) rather than specific to physical characteristics of goods.

A firm that adds value to the supply chains of beneficial cargo owners, directly or indirectly, by providing a range of logistics services beyond the mere carriage of goods.

3PL: An Attempt at a Definition

3PLs control 40% of the global TEU in transit through maritime shipping

Key Drivers for Third and Fourth Party Logistics Providers

Globalization• Supply chains becoming increasingly global (even within manufacturing

processes), requiring greater management of supply chains

Core competencies• Manufacturers and retailers are focusing on their core business (and

outsourcing logistics services to specialized firms)

Innovation and management• 3PLs becoming increasingly sophisticated in supply chain management,

making investments, realizing economies of scale

Asset utilization• 3PL model promotes greater asset utilization (e.g. balancing flows,

backhaul, within their networks) and asset-sharing alliances

Main Core Competencies of Third Party Logistics Providers

Sourcing Shipping

Warehousing Routing

TransportProduct

Getting Blurry: Services Offered by Third and Fourth Party Logistics Providers

3PL ► ◄ 4PLStandard Advanced Complete IntegratedTransportation servicesCarrier selectionRate negotiationFleet managementWarehousingCross dockingPick and PackDistribution (direct to store/home)DispatchingDelivery documentationShipment consolidation

Vendor managed inventoriesStock accountingCustoms clearance and documentationAssemblyPackaging LabelingManaging product returnsFinancingRetail delivery, set up and on site training Inventory tracking

Order planning and processingInformation and Communications Technologies (ICT) managementSingle invoiceLanded duty paid cost (per piece)Payment collectionReal time inventory updatesJust in Time (JIT) inventory management

Production planning SourcingRouting transit times air vs. ocean Supply chain consultingComplete real time supply chain monitoring and adjustment

Location of 3PLs in Canada by Number of Employees

Source: base data from Dun & Bradstreet, primary NAICS code 488510

Reflective of the Canada’s commercial geography of gateways and corridors.

Ontario: 50.2% of employees

Location of 3PLs in Canada by Number of Headquarter Employees

Source: base data from Dun & Bradstreet, primary NAICS code 488510

Reflective of the Canada’s urban hierarchy and cross-border intensity.

Ontario: 64.2% of headquarter employees

Asset and Non-Asset Issues

■ Asset Stigma• Perception that an asset-based firm will be pressured to route

flows through its own assets.• Majority (85%) of 3PLs brand themselves as non-asset

based (may lease facilities or use hybrid model).• Large 3PLs:

• Greater share of asset-based firms.• Networks of assets.

• Small / micro 3PLs:• More alliances (sharing of assets).• Smaller long-term commitments to assets and more focus on being

agile.

The Clustering of 3PL Activities: Observed Patterns

Transactional centric•A location within major central business districts where close interactions with major customers, in the form of corporate head offices, is key.

Airport centric•A location in proximity to a major airport terminal to effectively deal with the time sensitivity of air cargo.

Border centric•A location in proximity to a major cross-border gateway to assist customs-related procedures and take advantage of cargo consolidation / deconsolidation opportunities.

Port centric•A location in proximity to port terminals. This type of location tends to be coincidental with central business districts.

Quebec – Windsor Corridor: Location of 3PL Firms and Value of Freight Transiting at Gateways

Source: base data from Dun & Bradstreet, primary NAICS code 488510

The clustering of 3PLs around major ports of entry along the Quebec Windsor corridor is notable. Ambassador ‐Bridge is largest Transit Point, but not largest cluster of 3PLs. Largest 3PL cluster around Pearson Intl. Airport.

Asia Pacific Gateways and Corridors: Location of 3PL Firms and Value of Freight Transiting at Gateways

Source: base data from Dun & Bradstreet, primary NAICS code 488510

Vancouver: Canada’s sole “all-centric” 3PLs cluster.

Clustering around Western Canadian cross-border ports of entry. Related to customs activities and represent a specialized and localized segment of the 3PL industry.

High concentration of 3PLs along the “sweet spot”; Louisville –Pittsburg. Market-centric 3PL clusters around centroids of optimal regional accessibility or intermediary locations along corridors of freight circulation (e.g. Allentown, PA)

Source: base data from Dun & Bradstreet, primary NAICS code 488510

Services and Commodities

■ Size matters• Degree of supply chain integration tends to increase

proportionally to firm size.• Largest firms most likely to offer a variety of service:

• Large 3PLs handle 90% of commodity/sector categories on average.• Focus on economic sectors characterized by economies of scale

(mass market) along with stable demand.• Some kinds of cargo (e.g. project cargo) are highly localized;

dominance of small / micros.• Large players use a broad network, while smaller firms use a

patchwork quilt of alliances.

Vertical and Horizontal Integration in 3PLs

Commodities Served(Horizontal integration)

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Micro & Small

Medium

Large

Trade Focus

■ Import bias• General focus on 3PL services to imports, rather than

exports.• Importers also include pure freight forwarders who are

generally indifferent with respect to asset placement.• Micros were significantly more inclined to be import-focused.• Exports of raw materials:

• Tend to lean on economies of scale, move in large loads, have a limited number of buyers and few value-added activities involved.

• The expertise of 3PLs is much less required and the tasks are assumed by the carrier.

Main Export-Oriented Regions and Shipping Routes Servicing North America: A Shift to Near-Sourcing?

Intermodal (60%)

All Water (40%)

Western Canada (5%)

Pacific Northwest(20%)

Pacific Southwest(75%)

Mexico(?%)

Via Suez (5%)

Via Panama (95%)

Pacific Asia / American East Coast

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The Big Port Squeeze: Largest Available Containership, 1970-2013 (in TEUs)

L “Lica” Class(3,400 TEU)

R “Regina” Class(6,000 TEU)

S “Sovereign” Class(8,000 TEU)

E “Emma” Class(12,500 TEU)

“Triple E” Class(18,000 TEU)

Supply Chain Differentiation: Pick Your Preference

Costs (38%)Stability of the cost

structure.Relation with the

cargo being carried.

Time (12%)Influence inventory carrying costs and

inventory cycle time.Routing options in relation to value /

perishability.

Reliability (43%)Stability of the

distribution schedule.

Reliability can mitigate time.

Comparative Advantages in Supply Chain Preferences: A Complex Balancing Act

$2,300$2,110

Vancouver

Los Angeles

Houston

New York

Montreal

$1,300$2,100

InboundOutbound

$2,620$1,400

$3,510$2,560

$3,700$1,830

$4,040$3,950

Inbound rates: function of distanceOutbound rates: function of trade imbalances

Time

Costs

Reliability (?)

Shipping Rate from Shanghai for a 40 Foot Container, Mid 2010

The “Terminalization” of Logistics

Bottleneck-Derived

•Terminal as a constraint•Rational use of facilities to maintain operational conditions•Storage space, port call frequency, gate access•Volume, frequency and scheduling changes

Warehousing-Derived

•Terminal as a buffer•Incorporating the terminal as a storage unit•“Inventory in transit” with “inventory at terminal” •Reduce warehousing requirements at distribution centers

Terminalization

CRB Index (CCI), Monthly Close, 1970-201119

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Paradigm shift in input costs…Reaping the consequences of monetary policy.

West Texas Intermediate, Monthly Nominal Spot Oil Price (1970-2011)

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This is also going to propagate along supply chains. Response from shipping companies: slow steaming

Conclusion (Take 2): 3PLs as the Emerging Supply Chain Management Paradigm

Shift from shippers and carriers to 3PLs

Inherent propensity to cluster around commercial gateways

Customs procedures as the most salient issue for the industry

Significant knowledge gap (operational and education)

Expertise dominantly in import logistics