International Logistics and Supply Chain Outsourcing: From Local to Global

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INTERNATIONAL LOGISTICS AND SUPPLY CHAIN OUTSOURCING

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INTERNATIONAL LOGISTICS AND SUPPLY CHAIN OUTSOURCING From Local to Global Alan Rushton and Steve Walker

London and Philadelphia

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Publisher’s note Every possible effort has been made to ensure that the information contained in this book is accurate at the time of going to press, and the publishers and authors cannot accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editor, the publisher or the authors. First published in Great Britain and the United States in 2007 by Kogan Page Limited Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the Copyright, Designs and Patents Act 1988, this publication may only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the publishers, or in the case of reprographic reproduction in accordance with the terms and licences issued by the CLA. Enquiries concerning reproduction outside these terms should be sent to the publishers at the undermentioned addresses: 120 Pentonville Road London N1 9JN United Kingdom www.kogan-page.co.uk

525 South 4th street #241 Philadelphia PA 19147 USA

© Alan Rushton and Steve Walker, 2007 The right of Alan Rushton and Steve Walker to be identified as the authors of this work has been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. ISBN-10 0 7494 4814 8 ISBN-13 978 0 7494 4814 1

British Library Cataloguing-in-Publication Data A CIP record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Rushton, Alan. International logistics and supply chain outsourcing : from local to global / Alan Rushton and Steve Walker. p. cm. Includes bibliographical references and index ISBN-13: 978-0-7494-4814-1 ISBN-10: 0-7494-4814-8 1. Business logistics. 2. Contracting out. I. Walker, Steve, 1959– II. Title. HD38.5.R867 2007 658.7--dc22 2007002315 Typeset by Saxon Graphics Ltd, Derby Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall

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Contents

Preface Introduction and background

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The outsourcing market Introduction 16; The global market 16; Global market drivers 19 Summary 44

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Regional logistics markets Introduction 46; Europe, the Middle East and Africa (EMEA) 46; The Americas 71; Asia Pacific (APAC) 81; Summary 103

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Outsourcing operations and services Introduction 104; Outsourcing operations 105; Breakdown of broad service types 120; Value-added services 130; Summary 134

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Major providers Introduction 136; The overall 3PL market 136; Growth of the 3PL market 137; Global providers 142; European providers 149; US providers 175; Asia Pacific providers 192; Summary 198

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Key drivers Introduction 201; Outsourcing context 202; Business drivers 211; Logistics drivers and drawbacks 222; The critical factors of choice 228; Summary 233

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Current issues and influences Introduction 235; External issues influencing logistics outsourcing 236; Internal outsourcing issues 252; Summary 266

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The selection process Introduction 268; General approach 268; Detailed steps 269; The contract 293; Summary 296

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Outsourcing management Introduction 297; Need for management 298; Managing the relationship 306; Implementation planning 313; Why monitor outsourced logistics operations? 318; Different approaches to cost and performance monitoring 319; What to measure against? 325; An operational planning and control system 329; An approach to monitoring a 3PL 330; Detailed metrics and KPIs 335; Influencing factors 344; Did we get it right? 345; Summary 350

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4PLs and beyond Introduction 352; Understanding 4PL 352; Choosing a 4PL provider 359; The 4PL perspective 362; The reality and development of 4PL 366; The future for outsourcing and 3PLs 369; Summary 376

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Abbreviations References Index

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Preface

This book has been written to address a number of needs, but perhaps the most important is to provide a comprehensive description of the use of, and opportunities for, outsourcing logistics and supply-chain operations. As such we hope that the major benefit from the book will be that it provides a single source for the description and application of all aspects of logistics and supply-chain outsourcing. A key objective has been to take the subject area beyond local or national issues and to cover aspects of global outsourcing – a phenomenon that is becoming an essential requirement for many companies, as sources of supply and locations of demand become worldwide. In this respect, the book addresses all the major markets of the world across Europe, the United States, and other parts of the Americas, together with the various regions in the Asia Pacific. The book is designed to be used as a quick reference guide as well as one that provides comprehensive explanations. Although we have designed the structure of the book to have a natural flow, we have tried to ensure that each chapter is self-contained, to allow for selective use when only particular topics are required. Finally, the book aims to cover both strategic and operational aspects with plenty of practical advice and observations. The content covers several important aspects related to outsourcing, including a review of the market, an assessment of the major providers, a description of the main services that are offered, and a consideration of the key drivers for outsourcing logistics and supply-chain operations. In addition, a detailed framework for the selection of a suitable service provider is examined, together with a comprehensive evaluation of the change management and subsequent contract management requirements. The book concludes with a look into the future at the development of fourth-party logistics and outsourcing in general. Logistics and supply-chain outsourcing is currently an area of fast change and constant growth. Although correct at the time of writing, it is to be expected that some of the company and country-specific data and information will become outdated. We can only apologize for this. Nevertheless, the bulk of the content of the book will be of significant relevance for many years to come.

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The content of the book contains ideas and examples from a variety of different sources. Where possible, we have tried to acknowledge the origin of these sources. Where this has not been possible, we offer our apologies. Our thanks go especially to those of our colleagues who have helped us, but who are not directly acknowledged.

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Introduction and background Introduction Logistics and supply-chain management have become increasingly important over the last two decades. Over that period most businesses have gone through a significant period of change. Growth has become all important for companies, together with achieving scale. This has prompted an unprecedented wave of acquisitions and mergers across all industry sectors. New technology combined with consumer demand has driven companies to expand their range of products, and indeed to significantly increase the level of new product introduction. The need to satisfy demanding shareholders has meant that businesses have focused on manufacturing and distribution efficiencies, seeking ways to reduce costs. This in turn has prompted companies to seek lower-cost locations for their manufacturing bases, moving factories to Asia, Central and South America, and Eastern Europe. Companies now operate in a global market that, while offering opportunities, is extremely competitive and demanding. All of these changes have affected companies’ supply chains and logistics requirements. Now supply chains are extended over several continents and include suppliers as well as customers. They are significantly more complex, involving sea, air, rail and road movements, and different types of storage requirements, as well as the multitude of ancillary activities such as relabelling, repacking, configuration, postponement, line sequencing and reverse logistics. Already challenging for most companies, supply chains have become even more difficult for many businesses. Of course, all of this has had a profound impact on outsourcing. Whilst some companies have outsourced parts of their logistics activities for some

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time now, these changes in business practices and supply chains have driven businesses to seek more efficient and effective ways to provide products in marketplaces across the world. The result is that according to research by investment banker Lazard Freres and BG Strategic Advisors, the outsourced logistics and supply-chain market has grown at a rate greater than 20 per cent per year since the mid-1990s (Gordon, 2006). Globally around US$148 billion is spent on outsourced contract logistics, with a further US$117 billion spent with freight forwarders (Transport Intelligence, 2006). Clearly, logistics and supply-chain outsourcing has come of age.

Scope and definitions Scope This book is concerned with the outsourcing of logistics and supply-chain activities to third parties, and addresses the outsourcing of contract logistics, freight forwarding and other supply-chain activities. It does not specifically address the express parcels market, nor does it focus on the shipping line and air carrier industries. One of the most important elements within the book is the recognition of the many areas of growth and change concerning logistics outsourcing. This is reflected, in particular, through the sub-title of the book, ‘From local to global’. In the past few years the extent of business and industry globalization has expanded prodigiously. At the same time, there has been a similar growth in the demand for global outsourcing. Yet the supply of suitable global outsourcing operations has been slow in coming, with users and potential users constantly bemoaning the lack of true global providers. We believe that this is now at a moment of change, as many of the largest providers are now in a position to offer appropriate global services. Despite these new developments, many global businesses do need to offer localized solutions on both the inbound (supply) and outbound (demand) sides of their operations. Hence the rather hackneyed phrases ‘think global, act local’ and ‘global reach with localized excellence’ remain even more relevant today, and will be so as we move into the future. This viewpoint is reflected in the scope and content of this book. As well as committing large amounts of research and space to global outsourcing and its associated markets and providers, it retains a significant emphasis on the more traditional elements of outsourcing, such as key drivers, the provider selection process and the importance of contractor and contract management. Logistics outsourcing is currently an area of fast change and constant growth. Although the company and country-specific data and infor-

Introduction and background

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mation are correct at the time of writing, it is to be expected that some of this will become outdated. We can only apologize for this. Nevertheless, the bulk of the content of the book will be of significant relevance for many years to come. Logistics and outsourcing statistics can be both difficult to identify at source and somewhat conflicting in content. We have, however, identified some very useful and up-to-date sources, and can only apologize where there is any conflict with the different outputs from the various surveys that are quoted. One final point regarding the scope and content of the book is to recognize that several of the key discussion areas may appear on more than one occasion. Examples include globalization and key drivers for outsourcing. This is because they are very relevant to a number of the different themes that we have explored, and to leave them out would be inappropriate. On occasions they will merely be alluded to, and further discussion or description elsewhere in the book will be indicated. To help with this, a very detailed index has been included at the end of the book.

Definitions Here are some definitions for terms that are frequently referred to within the book.

Contract logistics Contract logistics is used to define the logistics activities that relate to warehousing, distribution and other associated activities that are outsourced. The term refers to the asset-intensive nature of the activity and the need for a contract to be in place between the third-party logistics provider and the customer.

Distribution Distribution can be defined as the process of delivery of manufactured products to the customer.

Fourth-party logistics A fourth-party logistics service provider can be defined as an integrator that assembles the resources, capabilities and technology of its own organization and other organizations to design, build and run comprehensive supplychain solutions.

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Freight forwarding Freight forwarding may be defined as the secure and efficient movement of goods on behalf of an exporter or importer, commonly known as the shipper. Freight forwarders might use the services of shipping lines, airlines or road and rail freight providers, or in some cases the freight forwarding company itself provides the service.

Logistics Logistics can be defined as the process of planning, implementing and managing the movement and storage of raw materials, work-in-progress inventory, finished goods and the associated information from the point of origin to the point of consumption.

Logistics service provider (LSP) Logistics service providers are external providers who manage outsourced activities on behalf of the shippers or customers whose business processes they support. They are also commonly referred to as 3PLs (see below).

Offshoring Offshoring is the relocation of the provision of services from one country to another to benefit from cost savings (for example through lower labour costs in India). Organizations can undertake offshoring without outsourcing and vice versa, be they manufacturers or service providers. Car manufacturers have been both offshoring and outsourcing for years. They select the most effective locations around the world for their manufacturing facilities, and outsource some, but by no means all, of their manufacturing supply.

Outsourcing Outsourcing can be defined as the strategic use of external specialized service providers to execute and manage activities or functions that are normally seen as non-core to the business. Outsourcing should not be, but often is, confused with offshoring (see above).

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Supply chain Supply chain can be defined as the flow of materials and products through the process of procurement, production, storage, distribution and disposal.

Supply-chain management Supply-chain management may be defined as the integrated management of all parts of the supply chain from the originating supplier to the final customer.

Third-party logistics (3PL) Third-party logistics can be defined as the management of outsourced logistics, transportation and distribution activities. 3PL is commonly used as the term to describe an external provider who manages outsourced activities on behalf of the shippers or customers whose business processes they support. 3PL services typically include: ឣ ឣ ឣ ឣ ឣ ឣ ឣ

outbound transportation; warehousing; inbound transportation; freight bill auditing/payment; customs brokerage; freight forwarding; customs clearance.

Transportation or freight transport Transportation or freight transport may be defined as the physical movement of goods, both inbound and outbound, including the collection of product and its delivery to the end user. Transportation can be executed across a variety of modes including air, sea, rail and road.

Background A historical perspective The emergence of outsourcing After the Second World War, businesses sought diversification in order to achieve scale and protect profits. In the 1970s and 1980s organizations found

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themselves struggling to compete in a more global environment because of their lack of agility, caused by over-complex and over-staffed management structures. To resolve this, many large companies developed a strategy of focusing on their core business. This meant selling off some non-core activities, but also identifying those non-critical processes that could be outsourced. Meanwhile, transportation deregulation occurred across the Western world, making it much easier and more attractive for companies to contract out their road freight transport function. In many countries external purchases of freight transport services had been constrained by government controls on the capacity of the road haulage industry. These controls excluded road freight vehicles from operating on an ‘own-account’ basis and thus encouraged companies to operate their own road freight operations. Deregulation allowed new and more sophisticated haulage and freight companies to emerge. The growth in contracting out cannot, however, simply be attributed to deregulation because the move away from in-house transport did not accelerate until the general change in managerial attitudes to contracting out that occurred in the late 1980s. At this time, companies also began to contract out other physical distribution activities such as warehousing and materials handling. Interestingly, outsourcing was not officially identified as a business strategy until 1989 (Mullin, 1996). During the 1990s businesses, by now under cost pressures, reviewed their core competencies and as a result outsourced more and more activities, such as accounting, human resources, data processing, security and maintenance. In logistics this was mostly confined to outsourcing dedicated distribution and transportation activities, but gradually other logistics services were outsourced, including stock control, order processing and returns operations.

The logistics service provider and 3PL As globalization began to dawn, freight forwarders began to emerge to support the increased movement of goods across the world. Transportation and distribution companies began to see an opportunity to operate warehouses and other parts of the logistics process. The term ‘logistics’ started to be used in the early 1990s, and haulage and distribution companies reinvented themselves as ‘logistics providers’. One such company was the National Freight Corporation (NFC) in the United Kingdom. NFC, which had emerged from the nationalized freight industry, trading as National Carriers, reinvented itself as Exel Logistics over just one weekend in the mid-1990s. It was around this time that industry coined the name ‘3PL’.

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Supply-chain management In the UK, the retail industry was quick to see the opportunity of outsourcing and a number of large deals were completed during the 1990s, usually on an open-book contract (cost plus management fee). In the late 1990s, with the advancements of information technology (IT) and globalization impacting on more businesses, logistics service providers broadened their service offerings and reinvented themselves yet again, this time positioning themselves as providers of supply-chain management. Subsequently all industry sectors across the world have seen the benefits of outsourcing some or all of their logistics or supply-chain activities.

Impact on outsourcing In the 2006 study of third-party logistics (Langley, 2006), it was found that during the first six years of the study (1996–2001) about 72 per cent of the respondents surveyed described themselves as ‘users’ of 3PL services; this has increased to 80 per cent in 2006. Bearing in mind the growth in the 3PL market of around 20 per cent per annum, this also means that existing customers were outsourcing significantly more to 3PLs. The study went on to say that the most common logistics services outsourced to 3PL providers are still transportation and warehousing, although during the last 10 years many other services have increasingly been outsourced, including customs clearance and brokerage, freight forwarding, crossdocking/shipment consolidation, and order fulfilment and distribution. Further, the majority of 3PL customers rated their overall relationship as a ‘success’, albeit they expected improvement in a number of areas. Finally, the study concluded that the 3PL industry is still growing, with regional expansion, the development of services, integrating information technologies and developing customer relationships as key focuses for thirdparty providers (Langley, 2006). The type of logistics outsourcing by companies indicated above was endorsed in a study of Europe’s Fortune 500® companies (Eyefortransport, 2006a). This also indicated that transport and warehousing were the most common logistics services outsourced to 3PLs. The third most popular was information technology, as Figure 0.1 shows.

External drivers of the growth of logistics outsourcing As well as a number of internal company-related drivers for logistics outsourcing, typically categorized as organizational, financial, service and physical, there are also several external drivers that have helped to accelerate the growth of outsourcing.

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Transport Warehousing Information systems Others Reverse logistics Fleet management Customization Inventory management Order processing Customer support

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Figure 0.1 Logistics functions outsourced in Europe 2006 Source: Eyefortransport (2006a)

Globalization Perhaps the most prominent factor has been the increase in the number of companies operating in the global marketplace. This necessitates a broader perspective than when operating as an international company, which may include, amongst others, attributes such as global branding, global sourcing, global production, centralization of inventories and the centralization of information. All of these aspects serve to emphasize the added difficulty of operating effectively in a global environment. Logistics and supply-chain networks have become far more complicated, and meeting the need to plan and manage logistics as a complete and integrated system has become far more difficult. Because of this, the best solution for a global company is very often to outsource its logistics operations. The types of services required by global companies are much more sophisticated than those that have been traditionally offered by 3PLs (Howlett, 2005). These include, for example: ឣ

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manufacturing support: undertaking or supporting sourcing, managing procurement, owning finished products, completing light manufacturing and assembly activities; origin management: managing vendors, purchase orders, in-country collections, order consolidation; freight management: managing and coordinating global freight movements, covering all different major modes of transport; destination management: managing downstream operations, port to distribution centre (DC) delivery, deconsolidation, customs brokerage, demurrage, quality checking;

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contract distribution: the more traditional aspects of storage and delivery, and certain value-added elements such as inventory management, DC management, pre-retailing (labelling, etc), reverse logistics, retail delivery, home delivery.

Complexity Linked closely to the globalization of business is the increase in the complexity of supply-chain management. As already indicated, globalization almost certainly leads to greater complexity, which in turn provides some significant implications for logistics operations. These include extended supply lead times, production postponement with local added value, complicated node management, multiple freight transport options, extended and unreliable transit times, and the need for greater visibility in the supply chain. In order for a manufacturer or retailer to succeed in this new, more complex, environment, many companies choose to outsource their supplychain management. This reflects one of the key business reasons for outsourcing logistics, which is to concentrate on core competencies or key business areas; however, the need to do this is very much involved with the increased complexity of logistics and supply-chain management.

Emerging markets In the current business environment there are some very significant regional market developments. The most important is probably the Far East, in particular the opening up of China. There are obvious implications for logistics regarding the flow of products out of the Far East, whether raw materials, components or finished goods, and the inward flow of mainly finished goods into the Far East. There are significant implications for logistics as a result of these long and unsophisticated supply chains. One solution that many companies adopt is to outsource these operations. Key reasons for this include the difficulty of setting up in-house operations in these regions and the risk of investing in organizations and structures that may not see the growth in supply and demand that is initially forecast. Another important area for change and growth is Eastern Europe, which has seen significant developments in the relocation of low-cost manufacturing and also opportunities for new markets and a growth in demand. Here, the main issues for logistics are the poor transport infrastructure, the inexperienced and untrained labour market, and the lack of guaranteed product flows. Thus, there are good reasons for manufacturers and retailers to avoid the high risk and high cost of setting up in-house logistics

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operations, and to use the outsourcing alternatives that are on offer. Thirdparty providers are in a much better position to undertake investment because they can spread the costs across a number of different customers. A survey undertaken in July 2006 (Eyefortransport, 2006b) endorses the importance of these emerging markets to the outsourcing market. This indicated that, from a European 3PL perspective, the geographic region rated as having the highest growth potential in the next few years was China, followed by India and then Eastern Europe and Russia. On a five-point scale, China was identified by 37 per cent of companies as having the most (scoring 5 out of 5) growth potential. Indeed, more than two-thirds of the respondents believed that China had either ‘the most’ or ‘very good’ growth potential. The results for regions and countries believed to have the most growth potential are given in Figure 0.2.

E-commerce and e-fulfilment One major development in recent years has been the growth in the use of the internet and the World Wide Web. This has created the opportunity for both business and consumers to purchase goods online from a variety of sources. Internet shopping has led to a growth in the demand for the fulfilment (or e-fulfilment) of internet orders, the actual physical fulfilment still being undertaken through physical distribution operations. This can lead to the need for new methods of physical distribution because traditional channels are often inappropriate for delivery into residential areas. This type of operation is one that few internet companies wish to develop, so there are major opportunities for new and established 3PLs to specialize in e-fulfilment delivery operations and to offer these as value-added services. China India Russia Eastern Europe Turkey Middle East Asia (excl China & India) Brazil North America S America (excl Brazil) 0

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Figure 0.2 Geographic regions with the most growth potential for outsourcing Source: Eyefortransport (2006b)

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There are many different reasons for outsourcing e-fulfilment. These include lower set-up costs, faster set-up times, scale economies with multiuser operations, reduced transport costs through order consolidation with other users, and easier expansion of geographic coverage. These and other influences are discussed in the book.

Opportunities for growth Finally, in this section, it is worth dwelling briefly on the likely opportunities for new growth and developments in outsourcing. These cover both external and some internal opportunities. It is no coincidence that the traditional areas of warehousing and transport are a long way down the list in terms of opportunity; the reason for this is that there is a strong feeling (in Europe) that these aspects are virtually saturated. In many other areas of the world these are still, of course, significant areas of opportunity. The study that is reviewed here (Eyefortransport, 2006b) is considering outsourcing growth opportunities in Europe. Results for those elements showing the best opportunity for growth are given in Figure 0.3. Providing technology or IT solutions was identified by 29 per cent of companies as having the best opportunity for growth (scoring 5 out of 5 on a five-point scale). This was followed by supply-chain design (25 per cent), reverse logistics (23 per cent) and global freight management (20 per cent). This is quite a varied selection of activities, ranging from the strategic to the operational. Perhaps the most interesting factor is that it demonstrates the wide range of value-added opportunities that 3PLs will be able to provide both now and into the future. These are a distinct move away from the low profit, commodity markets of storage and transport.

Providing technology/IT solutions Supply chain design Reverse logistics Global freight management Spare parts logistics 4PL/LLP services Providing RFID solutions General transportation/distribution WEEE Directive opportunities General warehousing Packing/picking Freight audit payment

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Figure 0.3 Elements likely to have the best opportunity for growth in the European 3PL industry Source: Eyefortransport (2006b)

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Content This book seeks to provide a comprehensive review of logistics and supplychain outsourcing and, as its title suggests, looks at the subject from both a global and local perspective. In order to understand the key drivers for outsourcing it is necessary to examine the factors that have most affected the growth of 3PLs. Chapter 1 looks at these factors in some detail, including how globalization and world economic development and trading have influenced key industry sectors. The chapter also reviews the size of the overall logistics market, comparing it with the total value outsourced. In summary, the chapter provides the backdrop for logistics and supplychain outsourcing globally. Chapter 2 follows on by providing a valuable insight into the key logistics and supply-chain markets of the world. The three key regions of EMEA (Europe, Middle East and Africa), the Americas and APAC (Asia Pacific) are examined, and key logistics market values are analysed. Key countries within each region are also reviewed, with interesting facts and figures that provide an insight to the status of each country within the logistics and supply-chain market. In Chapter 3, the various outsourcing operations and services that are offered by third-party logistics service providers are described. Third-party companies have continued to expand the many operations and services that they offer in order to succeed and progress within a very competitive marketplace. Initially, the breadth of outsourcing opportunities is outlined, from very limited participation to total asset management, including all of the many other opportunities between these extremes. The concept of the outsourcing continuum is discussed, emphasizing the need for potential users to be absolutely clear where different responsibilities lie and where the boundaries between these responsibilities occur. Various standard types of operation are introduced and described, and then the question of whether to adopt a dedicated or a multi-user approach is reviewed. This is followed by a broad breakdown of the different services available with respect to the main logistics components of warehousing and transport. Also considered are some alternative opportunities for occasional outsourcing. Many companies now realize the advantage of taking a complete supply-chain perspective when planning their logistics and supply strategy because there are significant cost and service benefits to be gained. This concept is reviewed in the context of how it might be applied to the outsourcing of logistics operations. Chapter 3 concludes with a discussion of the many additional services offered by third-party logistics providers, often known as ‘value-added’

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services. They represent opportunities for 3PLs to develop services that are more profitable than the more standard storage, picking and transport of goods. The book would not be complete without a review of the leading thirdparty logistics providers from around the world. In addition to providing key facts and information about the history and services of individual 3PLs, Chapter 4 also provides analysis and comparisons across the industry. The chapter looks at the emerging global providers and 3PLs from Europe, the Americas and APAC. In Chapter 5, the many reasons that companies either should or should not outsource their logistics operations are discussed. It is noted that the pros and cons of outsourcing are viewed very differently, dependent on which company you talk to and who you talk to within that company! In addition to this, similar advantages are often claimed for both third-party and own-account distribution operations. Thus, it is important to be able to assess the potential benefits and drawbacks of outsourcing with particular reference to each company that is considering the option. In this chapter the key drivers for outsourcing are outlined. The chapter begins with a consideration of the outsourcing decision and the reasons or drivers for outsourcing in terms of the context of the company business and logistics environment; alternative channels of distribution are described, a series of channel objectives are defined and various different channel characteristics are outlined. The use of outsourcing in other industries and functions is also reviewed to see if there are any lessons that might be learnt. In particular, the main drivers for outsourcing the IT function are discussed. It will be seen that there are some similar reasons for IT outsourcing compared to logistics, and also some that are surprisingly different. A number of external drivers for outsourcing are indicated in Chapter 5, particularly globalization, supply-chain complexity, emerging markets and e-commerce. The importance of understanding and taking account of a company’s competitive advantage is also discussed, particularly the need to understand the balance between trying to achieve a cost or a service advantage. It is noted that this will have a major impact on determining outsourcing objectives and requirements, and in identifying the preferred type of outsourcing relationship. The major logistics drivers for outsourcing are then described, together with a consideration of some of the drawbacks. Finally, there is a review of the factors that seem to be most critical for the outsourcing decision. Several company case histories are included. Logistics is a good example of a business function under constant review and experiencing constant change. In Chapter 6, the many issues and influences that impact on logistics outsourcing are described. In recent years

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there have been very significant developments in the structure, organization and operation of logistics, notably in the interpretation of logistics within the broader supply chain. In addition, there are a number of other influencing pressures that are now impacting on companies’ logistics systems. These include both factors that are external to logistics, such as deregulation, and internal ones that derive from changes within logistics, such as improved handling or information technology; Chapter 6 is divided into two sections to reflect this. The first section covers aspects such as the external environment, manufacturing and supply, technology, retailing and the consumer. The second section considers some of the main internal outsourcing issues that are currently important, both from a user and a 3PL perspective. Some surveys results are used to help highlight these issues. While the many elements introduced in this chapter are all important influences on logistics outsourcing, it is noted that the traditional key drivers of cost and service are still of paramount importance. In Chapter 7, an overall approach to the contractor selection process is described. The importance of a carefully structured process is emphasized and the key steps are described in detail. The main task for the client company is shown to be to put together a detailed invitation to tender. This is used by the contract companies to prepare a suitable proposal for their running of the operation to be outsourced. A method of evaluating tender proposals is outlined so that the most suitable contractor can be identified. The key elements that should be included in the final negotiation and assessment phase are reviewed, and the use of a contract that should form the basis for a positive provider–user relationship is discussed. The management of outsourcing arrangements is fundamental to the success of the relationship between the 3PL and the customer, and this is discussed in Chapter 8. In this chapter, the need for managing an outsourced contract is investigated, alongside the causes and implications of failure. Some of the key factors required in managing a successful relationship are reviewed, including partnership and collaboration, the engagement model, continuous improvement and communications. The initial issue after the contract has been negotiated is the successful implementation of the operation. This process is discussed. The basic reasons for monitoring a logistics operation are reviewed. A formal approach to the monitoring and control of logistics and distribution operations is outlined. There are several techniques that can be used and these are discussed. There are also a number of different methods that can be adopted to determine appropriate goals. A number of alternative methods are described. It is concluded that most well-developed systems are internally budget-oriented, but are also linked to external performance measures.

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A typical logistics operational planning and control system is outlined, and this is developed within the context of a specific approach for a client’s monitoring of a 3PL. The key performance indicators (KPIs) for measuring a logistics operation are considered in some detail and a number of case histories are presented with particular reference to the monitoring of outsourced logistics operations. Chapter 9 looks beyond 3PL outsourcing and examines the 4PL (fourthparty logistics) model. This model is compared to 3PL and lead logistics providers (LLP). The chapter also reviews whether 3PL or the consultants are best placed to provide these services. The reasons why customers choose a 4PL solution, including the key drivers, are also reviewed, together with the 4PL value proposition. In addition, the reality and development of 4PL is examined, together with the issues facing 3PLs who are seeking to migrate to this model. Finally, Chapter 9 looks at the future for outsourcing in general and the key influences for its future.

Summary This introductory chapter has set out the backdrop for the book, providing clarity around the scope and definitions used throughout. The background and history of outsourcing has also been outlined, including the emergence of outsourcing generally, the development of the third-party logistics providers (3PL) and their reinvention into managers of the supply chain. This section also reviewed the current status of outsourcing, providing some statistics and views from a recent study. Some of the key external drivers of outsourcing have been identified and these will be considered in more detail later in the book. Finally, there has been a brief description of each of the different chapters, to give the reader an overview of the content of the book as a whole.

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The outsourcing market Introduction IBM has estimated that approximately US$3 trillion is spent globally on supply chains, a market which in 2005 prompted it to establish a supplychain optimization and management business (Supply & Demand Chain Executive, 2005). This huge spend represents arguably the most fragmented market in modern business, being impacted by virtually every company in the world, across individual industry sectors, some of which are global, some pan-regional and many local. It is not surprising, then, that in this highly complex and fragmented market only a relatively small proportion of logistics and supply-chain activity is outsourced. This book is interested in the logistics portion of the total supply-chain spend, including storage and warehousing, domestic road and rail transportation, cross-border transportation (road and rail) and freight forwarding (air and sea). This chapter seeks to set the scene for logistics and supply-chain outsourcing across the world, and as such the chapter looks at the market forces and drivers that influence the outsourcing market. The size of the overall logistics market is analysed and compared with the total value outsourced. The chapter also examines globalization and world trade as well as key industry sectors and their impact on outsourcing.

The global market Size of the global market Global logistics market value The global logistics market has an estimated value of US$972 billion (R770.7 billion) (Transport Intelligence, 2006). The emerging market of Asia Pacific

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(APAC) has the largest market with US$412 billion (R327.1 billion) spent on logistics (Transport Intelligence, 2006). As shown in Figure 1.1, this represents 42 per cent of the global spend. The more mature Europe, Middle East and Africa (EMEA) region has an estimated US$290 billion (R230 billion) spend on Logistics (Transport Intelligence, 2006), whilst the Americas accounts for the balance of US$270 billion (R214 billion) (Transport Intelligence, 2006).

Outsourced logistics value Of the total US$972 billion logistics market, around US$265 billion is outsourced to contract logistics providers and freight forwarders, as shown in Figure 1.2 (Transport Intelligence, 2006). As shown in more detail in Chapter 4, the 25 largest third-party providers make up just 56 per cent of the outsourced revenue, leaving a very long tail of thousands of other thirdparty providers representing the balance. The largest third-party logistic provider, DHL Logistics (a member of Deutsche Post World Net, DPWN), represents just over 10 per cent of the outsourced spend and just 3 per cent of the total addressable global logistics market, further underlining the fragmented nature of the market.

Key sectors and services According to Armstrong & Associates (2006b), the global Fortune 500 outsourced 3PL market was US$98.4 billion in 2004. The automotive and technology sectors spent the most on 3PL services (US$32.1 billion and US$30.9 billion, respectively). Overall, the services provided by 3PLs were led by transportation management, warehousing, value-added services and international 3PL services, as shown in Figure 1.3.

30% 42% EMEA Americas Asia Pacific

28%

Figure 1.1 Logistics percentage spend by region Data source: Transport Intelligence (2006)

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27%

In-house Outsourced

73%

Figure 1.2 Global logistics in-house spend versus outsourced Data source: Transport Intelligence (2006)

Transportation management 22.3%

29.4%

Warehousing Value-added services

21%

8%

International 3PL services

19% Other

Figure 1.3 Percentage of Fortune 500 3PL services by types Source: Armstrong and Associates (2006b)

Regions and outsourcing European businesses are more likely to outsource logistics and supply-chain activity, as the 2004 study by Capgemini showed (Capgemini and Langley, 2004). Western European businesses that responded to the study spent 61 per cent of their logistics spend on third-party provider services against 44 per cent in North America and 49 per cent in Asia Pacific. Interestingly, respondents from the emerging market of Latin America reported they spent 65 per cent of their logistics budget on third-party provider services, probably reflecting the emerging markets in the region and the relative lack of local expertise in the area. This study was based on responses from 222 businesses from North America, 263 from Western Europe, 43 from Asia Pacific and 128 from Latin America. Over 65 per cent of responses came from the manufacturing sector (Capgemini and Langley, 2004).

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Reasons for not outsourcing Of course many of the businesses who do outsource to third-party providers do not outsource all their logistics or supply-chain activities to those providers. In the Capgemini study (Capgemini and Langley, 2004) the biggest reasons respondents reported they did not outsource to third-party providers were: ឣ ឣ ឣ ឣ

They saw logistics as a core competency. They saw logistics as too important to outsource. They believed that the costs would not be reduced. They believed that they would lose control.

Global market drivers The key global market drivers can be summarized as follows: ឣ ឣ ឣ ឣ ឣ ឣ ឣ

global trade; manufacturing moving to low-cost economies; global brands and retailers; information and communication technology (ICT); focus on inventory reduction; consolidation across all industry sectors; new logistics and supply-chain services.

These key drivers will now be explored in more detail.

Global trade GDP In order to understand the logistics and supply-chain outsourcing market, it is necessary to review the global economy and its impact on outsourcing. Gross domestic product (GDP), defined at a country level as consumption plus investment plus exports minus imports, is an important measure of the growth of economies, World GDP growth, which is estimated as a weighted average of economies’ real GDP growth, has been growing at between 3.5 per cent in the 1980s and just over 4 per cent in the 2000s (IMF, 2005).

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World trade Growth More importantly for logistics and supply-chain outsourcing is the growth in world trade. World trade is defined as the exchange of goods and services across international boundaries or territories. Over the same 20-year period world trade has grown at nearly double the growth in GDP: from just over 6 per cent in the early 1980s to just over 7 per cent in the 2000s (IMF, 2005). The forecasts for world trade growth for the years 2005–07 are from 6.2 per cent to 7.3 per cent (World Bank Global Economic Prospects, 2006). It is estimated that up to 30 per cent of world GDP currently crosses borders (Vigoroso, 2003). This steady growth in world trade has been largely due to deregulation, reduced barriers to trade and increased investment. Significantly, the value of world trade in goods has increased in the last 10 years to the level of US$8.88 trillion in 2004 (WTO, 2005).

Developing regions In 2004, world merchandise trade (exchange of goods only, internationally) grew by around 9 per cent, reflecting improvements in the global economy and in particular the price of oil and metals. The manufacture of products has grown rapidly in countries with large, low-wage labour-force countries such as China and India, which have opened up their markets in recent years. To underline the growth in developing countries, their share in world merchandise trade increased to 31 per cent in 2005, the highest level since 1950 (WTO, 2005). Specifically, the Asian region recorded export growth of 14 per cent in the year, with China, Korea and Singapore showing growth rates in excess of 20 per cent (WTO, 2005). In contrast North America showed the slowest growth in exports and imports of any region during the year, and actually recorded a trade deficit in 2004, while Europe’s growth rose moderately over the previous year, spurred by the enlargement of the European Union, albeit it was the lowest real merchandise import growth across all regions (WTO, 2005).

Impact on outsourcing The increase in world trade has been the powerhouse for growth in the outsourcing market. As more products are sourced across borders, the complexity of the supply chain increases, driving many companies to outsource to third-party providers. This is particularly true as companies move manufacturing and operations to regions such as Asia, Eastern Europe or South America, where they seek to mitigate risk by outsourcing their logistics and supply-chain operations. Additionally, companies have taken

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advantage of increasing consumer demand in developing countries, leading to increases in goods from groceries to televisions and cars. The third-party providers have followed their customers into these regions, establishing capabilities to support both manufacturing and finished goods distribution.

Globalization Globalization has been revolutionizing our world since the Second World War and particularly over the last 20 years or so. To understand the impact of globalization on the logistics and supply-chain industry we need to understand more fully what globalization is and what the drivers are for this phenomenon.

Definition The International Monetary Fund (IMF) has described globalization as ‘the growing economic interdependence of countries worldwide through increasing volume and variety of cross-border transactions in goods and services, freer international capital flows, and more rapid and widespread diffusion of technology’ (IMF, 1997). The essence of globalization is the exchange of cultures, politics, goods and services between countries of the world. This has happened as a result of the opportunities created by modern communication and transportation as well as the political resolve to open international borders for trade. Indeed, globalization has been defined as the movement not just of product and services but also money, information and people. This perhaps provides a more commercial view.

Impact on the world What is clear is that through globalization people across the world are becoming connected to each other culturally, politically and economically. There is significant migration of workers from less-developed countries to the wealthier economies, both legally and illegally. This migration, which has been occurring since the 1950s, has brought with it a sharing of cultures into the developed world. Albeit adapted for Western tastes, Chinese, Indian and Italian restaurants have been fully embraced by the West and can now be found in most major cities and towns in the Western world. Developed countries have also been exposed to the cultures and religions of immigrants, while in turn the Western world has propagated its culture and prosperity on the developing world through advertising and the export of Hollywood movies. Additionally there is more foreign travel and tourism than ever before, with Westerners visiting Asia, Africa and South America, something that was a rarity just 20 years ago.

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Enablers for globalization A key enabler for globalization is the political will to open up trade across the world through the establishment of organizations and agreements such as: ឣ

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GATT (General Agreement on Tariffs and Trade), a treaty organization established in 1944, associated with the United Nations, focused on facilitating international trade; the WTO (World Trade Organization), which superseded GATT in 1995, established to promote free trade between member nations, reduce or remove tariffs, administer global trade agreements and resolve disputes; NAFTA (the North American Free Trade Agreement), a 1994 agreement reached by the United States, Canada, and Mexico, focused on the phasing out of tariffs and elimination of fees and other trade barriers in order to encourage free trade between the three North American countries; the EU (European Union), an economic association of European countries seeking to create a unified, barrier-free market for products and services and a common currency.

These initiatives have focused on reducing barriers to trade since the Second World War and have encouraged businesses to invest outside their domestic bases. Specifically, the Uruguay Round of GATT negotiations, which concluded in 1994, removed many barriers to free trade, including import tariffs and quotas. This has been a key driver in the increase of the volume of world trade to the value of US$8.88 trillion in 2004 (WTO, 2005). This growth was facilitated by developments in information and communication technology, allowing faster movement of data and transactions, as well as lower transport costs for both sea and air freight. Indeed ocean freight costs have dropped by over 70 per cent since the 1980s, while air freight costs have been reducing by 3–4 per cent per year over the same period (WTO, 2005).

Freight market The freight market has seen significant growth as a result of globalization, with ocean freight being used for many inbound materials and lower-value finished products. Ocean freight has seen growth rates of 5–6 per cent over recent years; container shipping is the fastest growing element with predicted growth rates of 6–8 per cent (DPWN Factbook, 2005). Sea freight is measured in volume of containers using a standard measure of 20-foot equivalent units known as TEUs. The estimated ocean market size measured in TEUs in 2003 was 17.2 million, which is predicted to grow to

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23.5m by 2008, a compound annual growth rate (CAGR) of 6.8 per cent (DPWN Factbook, 2005). The air freight industry too has seen significant growth for inbound components and higher-value products outbound to the developed markets of the world. In 2003, the global air freight market was estimated at around R22 billion, having increased at a similar rate to sea freight (DPWN Factbook, 2005). With a CAGR of 6.7 per cent, this market is expected to grow to R34.5 billion by 2008 (DPWN Factbook, 2005). These increases in freight volumes, although welcomed by freight shippers, have driven the reduction of costs for sea and air freight, putting third-party providers under margin pressure.

Manufacturing moving to low-cost economies Migration Aided by the development of free trade, lower transport costs and fast communications, Western businesses have seen the advantages of moving their manufacturing to lower-wage economies. The last 15 years have seen a migration of factories from the developed world to Asia, South America and Eastern Europe, often setting up automated manufacturing facilities to take advantage of the low-skilled cheap workforce in developing countries. Indeed, Deloitte’s study conducted in 2003 showed that 61 per cent of manufacturers surveyed had moved production to lower-cost countries (Deloitte, 2003). Initially the charge was led by technology manufacturers, closely followed by automotive parts manufacturers and OEMs (original equipment manufacturers), most of which saw great opportunities in the low-cost Asian economies. Consumer goods manufacturers have since reviewed their own manufacturing and supply-chain strategies, and a number have moved to low-cost countries, albeit nearer their market because of the lower-value products being manufactured. Western European manufacturers have seen Eastern Europe as an opportunity to reduce cost with only a modest impact on supply-chain delivery times, whilst North American companies have preferred Central America as a destination. Fashion and apparel manufacturers too have seen the opportunity and have moved into countries such as China, India, Sri Lanka, Vietnam, Mauritius, Turkey, Hungary and Romania.

Complex supply chains This migration of manufacturing has brought with it ever more complex and lengthy supply chains, requiring more transportation to move the product into the main marketplaces of the world and significantly more

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coordination and management for both inbound materials and outbound finished goods. Global manufacturers need to manage and have visibility of all inventory including inbound materials, raw materials stock, work in progress, finished goods, goods in transit and service parts and returns. However, they also need to be able to balance the trade-off between origin costs and savings made at destination. They have to consider all aspects of a product’s landed cost, including transportation, duty, order lead time and inventory holding costs. This clearly requires full cooperation from all partners across this global supply chain.

Visibility A major objective for global manufacturers is ensuring that their products are flowing to the right places at the right time. A key requirement to making this work is the need for full visibility of the whole supply chain. From raw materials in transit to finished goods at destination and all points in between, the manufacturers must know the exact location of their inventory and when it will reach the destination. This relies on managing information about inventories and shipments and not just the physical stock.

Challenges Many companies that have become global manufacturers are struggling with the impact of the complexity on their businesses. In their 2003 study of 800 manufacturers studied from the Asia Pacific (10 per cent), Central and Eastern Europe (10 per cent), North America (34 per cent) and Western Europe (44 per cent), Deloitte (2003) identified just 7 per cent of manufacturers that had excelled across what Deloitte refers to as the ‘value chain’. On average these companies achieved 73 per cent higher profits than the other companies in the study. This complexity has prompted businesses both to review their supply chains and to seek the support of third-party providers that have built up capabilities and expertise in global supplychain management.

Third-party providers This in turn has provided an opportunity for third-party providers to develop their capabilities in these developing countries in support of their customers. All of the major third-party providers have set up operations in Asia, in most cases in support of existing customers that have moved their manufacturing there from their developed markets. This involves not just physical activities such as shipping and warehousing but also management of supply chains through the use of visibility and event management tools. The third-party provider has had to develop its skills in order to support this

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new requirement to manage global supply chains. Key to this is information management, and all major third-party providers have invested in visibility and event management software. The global providers have become as much supply-chain information brokers as logistics providers.

Case study: Dell Founded in 1984 by Michael Dell, Dell Inc. has become a market leader in selling a range of personal computer products and services directly to customers worldwide. Revenue for 2005 totalled US$49.2 billion, and the company employs approximately 63,700 staff around the world. Dell’s simple concept of selling computer systems directly to customers allows it to build every system to order and offer customers preconfigured systems at highly competitive prices. Dell introduces latest technology much more quickly than its competitors, uses demand-driven manufacturing and supply-chain techniques, and turns over inventory every four days on average. As a result nearly one out of every five standards-based computer systems sold in the world today is a Dell. In 2006, Dell reported that 44 per cent of its sales were from outside the United States, with revenue in China growing by 29 per cent yearon-year. In addition shipments in Europe, Middle East and Africa had increased by 18 per cent year-over-year, while sales in the Americas excluding the United States showed growth of 26 per cent. Dell maintained its position as number one in the US personal computing market with a 32 per cent market share. In 2006, Dell announced the intention of increasing its workforce in India by 50 per cent in the following two years. This will take the total number of Dell employees in India up to 15,000. Dell is planning to set up a manufacturing facility in the country with the intention of boosting its 4 per cent market share in India. The company will also be setting up its fourth Indian call centre in the country, with nearly 1,000 workers. Dell also reported that by the end of the 2006 fiscal year, it will have opened 14 new manufacturing, call centre and design and development facilities over a two-year period. In addition it is making significant investments in China, India, Germany, Brazil and the United States. Source: Dell, 2006.

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Global brands and retailers Global brands In addition to the movement of manufacturing to lower-cost economies, manufacturers have also been focusing on establishing global brands. Developed to appeal to a global market to drive growth and for manufacturing and logistics efficiency, global market branding has been a real focus for large manufacturers over the past 20 years or so. Businesses have recognized the importance of protecting their global brands across all markets, and together with the need to develop logistics efficiencies, they have focused on the development of effective global supply chains. Brands like Sony, Nike, Nokia, Gillette and BMW are known across the world and have been associated with desirable lifestyles. These global brands, fuelled by advertisements, have created an expectation for such lifestyles among people all over the world, thus creating global demand for these products.

New products The success of these brands is also dependent on the introduction of new products to drive turnover. In its study of 800 global manufacturing companies, Deloitte (2003) identified that 35 per cent of revenues will come from new product programmes started in the previous three years, compared with 21 per cent identified in 1998. This sharp increase in new product development and introduction, together with the need to get the product to market in record time, has added significantly to the complexity faced by these manufacturers (Deloitte, 2003). In the mobile phone industry, new products are now being introduced in six to nine months, while the car industry, led by Nissan, is developing new cars in less than a year.

Consumer demand and the retailers The combination of advertising and enticing new products has created a significant demand for consumer goods in developing countries. Retailers have not been slow to see this opportunity and have responded by moving into potentially lucrative developing markets. Retailers such as Carrefour, Metro, Wal-Mart, Tesco and Ahold have all moved into developing countries. The most popular developing market destinations for the major retailers are Argentina, China, the Czech Republic, Mexico, Poland, Slovakia, South Korea and Thailand.

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Case history: Carrefour Created in 1959 by two families, French retailer Carrefour has become the largest retailer in Europe and the second-largest supermarket in the world after Wal-Mart. What is perhaps more remarkable is that, based on the 2004 results, less than 50 per cent of its revenues are from France, with just over 37 per cent from the rest of Europe, while 6.5 per cent are from the Americas and 7 per cent from Asia. It operates out of four leading formats: hypermarket, supermarket, hard discount and convenience store. At year-end 2004 Carrefour posted 190.681 billion of consolidated sales including VAT, and employed 430,000 staff. Despite being behind Wal-Mart in turnover, Carrefour operates out of more countries worldwide than its American rivals, with operations in 29 countries. With nearly 1,200 of its total 6,500 stores outside Europe, Carrefour is generally considered the most ‘global’ retailer in the world. It has stores in over 30 countries, including Poland, the Czech Republic, Slovakia, Romania, Turkey, Egypt, Mexico, Argentina, Chile, Colombia, South Korea, Indonesia, Malaysia, Thailand and China. On 20 January 2006, the Qibao Carrefour hypermarket opened as Carrefour’s 71st hypermarket in China. The store offers a sales area of 9,830 square metres, 65 checkouts and 425 parking spaces. Source: Carrefour, 2006.

Information and communication technology (ICT) Technological advance The extent of change in information and communication technologies over the last 20 years, and in particular since the 1990s, has had a profound impact on how businesses operate. The pace of change over this period has been breathtaking, which is evident in how technology is an integral part of supporting business in the 21st century. It is almost unbelievable that the internet has only been commercially available since the early 1990s! To underline this level of growth, the global ICT market grew at a compound annual growth rate (CAGR) of 7.6 per cent between the years 1993 and 2001. Over this period the market value grew from US$1.3 trillion to over US$2.4 trillion (ASOCIO, 2003).

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Availability of ICT Western world The number of personal computers (PCs) and access to the internet are two key measures of the importance of ICT for both business and personal use. The use of wide area networks for business and broadband connectivity in homes underlines the speed of communications across the world. All of these advances have allowed the sharing of information between people irrespective of their geographic location. This has made the exchange of large amounts of data possible, almost instantaneously. For business the development of electronic data interchange (EDI) has made it possible for this data to be exchanged from system to system through the use of common standards.

Developing countries The lack of infrastructure in underdeveloped countries has been a constraint for the development of those economies. The developed world has taken an interest in this as the lack of development in these areas has had the effect of inhibiting entry and continued growth of businesses in the underdeveloped countries. To that end global policy venues have been created to address this, including the WTO and International Telecommunications Union as well as other institutions such as World Wide Web Consortium (W3C) and Global Business Dialogue (GBD), which have focused on supporting global commerce and social development in developing countries.

E-commerce B2B Many businesses have seen e-commerce as an opportunity to provide new channels to market and enable efficiency gains. The development of e-markets that allow business-to-business (B2B) transactions to be conducted has had a significant impact in the buying and selling of goods, especially standard components and services. These often private e-markets with a pre-vetted membership not only allow businesses to conduct business across geographical divides, but also ensure high levels of efficiency for the transaction.

B2C Business-to-consumer (B2C) websites have exploded over the last five years or so. From groceries to DVDs, to property and real estate, retailers have

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discovered that a large number of products can be sold via the internet. Not only does this provide consumers with an opportunity to purchase from their homes, allowing retailers to break into new market opportunities, but the transaction itself can be conducted extremely efficiently without the overheads of the normal retail shopping environment. Some businesses have been developed using solely this model, for example LastMinute.com, while eBay has used the internet to provide an e-marketplace for its members. The linking of execution systems such as warehouse picking and distribution systems to these websites and e-markets allow for an efficient end-to-end process for delivery to the door of the customer.

Transportation industry Finally there are transportation management companies that operate primarily through web-based companies such as freightquote.com, freightpro.com and transportation.com in the United States. They provide small to medium-sized markets with the opportunity, often on a transactional basis, to have relatively sophisticated solutions.

Focus on inventory reduction With the demand for better returns on capital, the need to develop and launch more new products than ever before, and manufacturing plants that are often thousands of miles from their markets, global manufacturers are focusing on becoming lean and more responsive to their customer demand. Manufacturers are focused on ensuring that their production lines are kept supplied with inbound materials, but without large inventories of components, many of which have a short shelf life because of rapid obsolescence. In summary, businesses must balance supply and demand whilst reducing inventories by developing inventory reduction strategies. In his article ‘Seven mega-trends shaping modern logistics’, Benjamin Gordon (Victoria University, 2006) identifies that a key driver in the 50 per cent reduction of logistics costs as a percentage of gross domestic product (from 16.2 per cent in 1981 to 8.5 per cent in 2003) is reductions in inventory levels. Inventory carrying costs reduced by 60 per cent over the same period.

Demand models A key strategy in the reduction of inventories is the move to a pull-based demand model, where instead of product being purchased or manufactured on the basis of a forecast, its procurement depends on consumption or

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demand further up the chain. For example, within a factory kanban replenishment process (a just-in-time technique to signal the need for a part), materials will only be moved to beside the line as they are required. In turn the consumption will be electronically advised to the supplier so that it can replenish the products taken from the stores or warehouse. In this model there is no speculative or forecast stock or supply. Each part of the chain only supplies against the consumption of the next process. This addresses the traditional approach of holding forecast stock to address customer service, where there is always a balance between the amounts of stock to hold versus the level of customer service to be attained. In the demand model there is no trade-off, provided that the supply chain is flexible and responsive.

Flexible manufacturing Most manufacturers that embark on this strategy also develop flexible manufacturing techniques. This allows them to move from long production runs, which focus on the efficient use of production lines, to short runs that support and focus on the customer demand, only manufacturing products that are required to be replenished against real demand.

Retail demand model This can also work in the replenishment of manufactured or purchased products into the retail market. As products are consumed and registered on EPOS (electronic point of sale) tills, a signal can be sent to the warehouse and in turn to the supplier to replenish the product, based on the agreed timescales. This move to a demand model has a significant impact on the levels of inventory, but also creates the need for accuracy and close relationships with suppliers.

Supplier relationships Closer relationships with vendors usually involve a supplier rationalization programme. This means that only one or two suppliers are selected to supply each material or component, so that a more integrated relationship can be established. This typically includes more meetings and communication between the two parties, providing improved management, but also electronically integrating the two businesses. This is achieved through the use of electronic data interchange (EDI) to link businesses’ systems together through the electronic transfer of transactions and data such as orders, acknowledgements, inventory levels and invoices. At the very least, manufacturers that are focused on reducing inbound materials and components provide their suppliers with visibility of the inventory levels in warehouses and factories, so that the suppliers can monitor the need for replenishment and manufacture of replacements.

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The delivery cycle A key component for reducing inventories is the re-engineering of the order-to-delivery cycle. This involves reviewing and examining every process within the cycle, focusing on reducing the time and complexity of each component. This is particularly vital with extended and complicated supply chains, and companies often engage the services of a consultant or third-party provider to support some or all of this activity.

Third-party providers The viability of reduced inventories relies on an integrated supply and demand model, where vendors are fully involved and manufacturing and supply is focused on demand replenishment. Many third-party providers have developed capabilities to support these strategies and play a part in the integrated model.

Case history: Procter & Gamble Procter & Gamble is a major consumer manufacturing company that boasts on its website that its brands touch the lives of people all across the world 2 billion times a day. It posted a turnover of US$56.7 billion for the year ending June 2005, of which 23 per cent was achieved in developing countries, including China and Latin America. The business has around 110,000 people working in 140 plants and offices in almost 80 countries worldwide, supplying products to consumers in 140 countries. Its brands include Pampers, Tide, Ariel, Always, Pantene, Bounty, Folgers, Pringles, Charmin, Downy, Iams, Crest, Actonel and Olay (P&G, 2006). Focused on the consumer, Procter & Gamble has developed a business strategy called the consumer-driven supply network. The strategy aims to deliver real value for its retail customer and growth and profit for all parties. The essential principle of this demand-focused strategy is that the supply of products works off real demand, basing production on what actually sells and not on forecasts. The aim is for all the company’s manufacturing plants and its 100,000 suppliers to work directly off this demand data. The concept of mass customization has been adopted, with flexible manufacturing techniques that allow for short production runs. The company has changed its customer service measure from the perfect order to measuring on-shelf availability, focusing on the impact on the customer and consumer. Source: Global Logistics & Supply Chain Strategies, 2006.

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Global industry sectors Automotive Global manufacturers The top 10 global car manufacturers – Toyota, Ford, Honda, GM, RenaultNissan, BMW, Volkswagen, DaimlerChrysler, Hyundai and PSA Citroen – account for 90 per cent of the global automotive market, with producers in China, India and Malaysia making up the balance. Toyota is the world’s largest car manufacturer, producing over 7 million cars in 2005 with a market capitalization of around US$150 billion (Economist, 2006a).

Emerging markets The emerging markets in Asia, particularly in China and India, are growing steadily. It is predicted that in a few years China will replace Japan as the second-largest car market after the United States. In turn this incredible increase in the car market will require an increase in manufacturing capacity to almost double in the next 20 years. Further, car manufacturers in China have already shown their models at motor shows in Europe, seeking to sell into the developed markets (Economist, 2006a).

Global manufacturing The automotive industry has fully embraced the concept of global manufacturing and supply chains. All of the major car manufacturers have set up manufacturing operations in Asia, and many in Latin America. The car component suppliers are obviously an important part of the automotive industry and supply chain. Under pressure from car manufacturers, supplier profit margins have become extremely tight. Western component suppliers are also under huge pressures from low-cost Chinese manufacturers. In addition, as car manufacturers move their production to Asia and other low-cost geographies, they expect their suppliers to move with them and set up factories nearby, usually on a supplier park. Suppliers are more and more producing subassemblies for sequencing supply to the car production line. Car manufacturers have set up processes based on line sequencing, pull-demand manufacturing techniques and kanban. In addition manufacturers have focused on a rapid decrease in time-to-market at a time when products are becoming more complex and incorporating more advanced technology.

Outsourcing This complexity and need for intricate timing and demand planning and execution have been the key reasons that logistics service providers have

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been involved in global automotive supply chains. Certainly automotive companies have outsourced their non-core value functions for some time, but increasingly are looking for third-party providers to manage key aspects of their supply chains like final configuration services, line sequencing and inventory management.

Healthcare Market pressures increase complexity Market pressures have caused pharmaceutical companies to start focusing on the supply chain as a strategic tool. The reduction in the launch of new drugs driving high revenue has been a key pressure for the major pharmaceutical companies. In turn, generic manufacturers are launching competitive products at vastly reduced prices, piling more pressure on the branded manufacturers. As will be discussed later in the chapter, pharmaceutical and other healthcare companies have also been consolidating to achieve efficiencies and scale. These issues, plus the pharmaceuticals’ move towards globalization, have been a key driver in manufacturers now operating with increasingly complex supply chains and higher costs.

Third-party outsourcing Pharmaceutical companies have increasingly turned to third-party service providers for support in managing their complex supply chains. Many third-party logistics providers already have much of the infrastructure and specialist skill in place to achieve supply-chain efficiency on both a national and global level. The pharmaceuticals seek services such as warehousing (often pan-regional), integrated transportation and visibility of where their products are within the supply chain for both inbound to manufacturer and outbound to their customers. Increasingly they are also seeking valueadded logistics services including pre-wholesaling (where products are consolidated and prepared for delivery to the retailer), co-packing and clinical trials logistics.

Consumer packaged goods (CPG) Pressure from retailers Under extreme pressure from retailers, led by Wal-Mart, the competition in the CPG industry has never been so intense. Suppliers to the retail sector are faced with ever-increasing demands in such areas as packaging, promotions and delivery, in both frequency and presentation. Supplier compliance is

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vital to the success, and compliance is mostly achieved via changes and improvements in the supply chain. These pressures are forcing manufacturers to drive for improvements in supply-chain efficiencies, product availability, lower inventory holding costs, reduced order cycle times and accelerated new product development and launch processes.

Initiatives CPG companies led by the likes of Procter & Gamble, Unilever, Coca-Cola, Kraft, Pepsi-Cola, Colgate Palmolive and Nestlé have established a number of initiatives since the 1990s to help them realize these improvements. These initiatives include: ឣ ឣ ឣ ឣ ឣ ឣ ឣ

efficient consumer response (ECR); collaborative planning, forecasting and replenishment (CPFR); vendor-managed inventory (VMI); electronic product codes (EPC); global data synchronization (GDS); radio frequency identification (RFID); business process management (BPM).

Third-party support Manufacturers now have to manage such services as customized packaging, kitting, and labelling for promotions. Increasingly they are seeking the support of third-party logistics providers to assist with these activities and also provide cost savings through the consolidation of warehousing and deliveries across multiple manufacturers. Third-party logistics providers assist manufacturers with combining bulk and loose shipments, handling custom case packaging and pallet configurations, for example rainbow pallets that contain multiple products from various manufacturers.

Electronics and high technology The market The high technology and electronics market is worth an estimated US$1,300 billion worldwide and is growing at around 8 per cent per year (DTI, 2006). The industry has a number of key drivers and forces that are impacting on its supply-chain complexity. Digital convergence of products, product miniaturization, wireless technology, globalization of manufacturing, the need to introduce more new products more quickly and the emerging demand in developing regions like China, India and Eastern Europe are all impacting significantly on manufacturers’ supply chains.

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Based on 2005 sales, the world’s top five electronics manufacturers were Taiwan’s Hon Hai, Singapore’s Flextronics and the US Sanmina-SCI, Solectron and Celestica (Forbes, 2006).

Supply-chain transformations Key verticals such as mobile phone and personal computer manufacturers have totally re-engineered their supply chains in recent years to cope with these pressures on their supply chains. Manufacturers such as Nokia, Motorola, HP, IBM and of course Dell have reinvented their supply chains, moving to demand-led pull processes. This has created services and processes like VMI, inbound to manufacturing (I2M), just-in-time line-side material supply, production staging and line feed. These processes and services have required the coordination of all parts of the supply chain, from demand planning through manufacturing and of course vendor supply. This coordination in turn requires the full visibility of all inventories across the supply chain from vendors through to finished goods. Many manufacturers have seen the advantage of outsourcing some or all of their supply chains to third-party service providers to support these dynamic and complex supply chains.

Case history: HP HP is a major player in printer and imaging solutions, personal computers and technical solutions. For the year ending January 2006, HP’s revenue totalled US$87.9 billion, and it served more than a billion customers in more than 170 countries on five continents. HP has approximately 150,000 employees worldwide. Each day, it delivers around 1.3 million inkjet cartridges, 110,000 printers, 75,000 personal computer systems and 3,500 servers. These are mostly produced by contract manufacturers or OEMs. The company spends about US$50 billion on supply-chain activities and also has a fast-moving new product pipeline which launches hundreds of new products each year. With this level of spend and complexity, it was essential for HP to ensure control of the supply chain in order to reduce costs and ensure successful relationships with its suppliers. Accordingly, HP management treats supply-chain optimization as top priority. Before the transition, HP served its customers through one of 35 different supply chains, but it has since consolidated these into five: ឣ ឣ

no touch; low touch;

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configure-to-order; high volume; solutions and services.

HP relies heavily on third-party providers for warehousing and shipping and has established an integration hub to provide a single point of entry to HP globally, reducing the time and expense involved with making connections to third-party providers. This focus on the supply chain has provided many benefits, including significant savings and has also earned the company the Managing Automation Progressive Manufacturer Supply Chain Mastery Award. Source: HP, 2006.

Fashion and apparel The sector The fashion and apparel industry is segmented, with at the low end, retailers such as Wal-Mart, Tesco and Carrefour that buy huge quantities of garments and sell predominantly own brands at low prices. In the centre are mid-priced quality brands and retailers such as Levi-Strauss, Gap and Marks & Spencer, while companies such as Hugo Boss, Ralf Lauren and Burberry represent the high-quality premium-priced brands. Each of these segments brings with it a different challenge, each requiring a unique supply-chain solution.

Manufacturing outsourcing Retailers and manufacturers have for some time outsourced to relatively low-cost economies like Eastern European countries (from Western Europe) and Latin America (from North America). However since the WTO embargoes were rescinded in 2005, outsourcing to China has exploded and it is set to become the world’s largest manufacturer and net exporter of clothing by 2010. India is also well positioned to become an export powerhouse. Virtually all European and North American retailers and manufacturers now produce a significant percentage of their clothing offshore. Most still launch four to six seasonal collections per year, although leaders such as Zara can launch a collection every two weeks, putting pressure on their competitors’ supply chains. Zara’s focus on having a high proportion of

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new lines on shelf at all times is leading the way, and retailers are being forced to accelerate their supply chains and turn stock over much more quickly in order to compete. The agility and speed of fashion and apparel supply chains is absolutely vital to the success of the business. Failure to have product available almost certainly means a lost sale, and could mean thousands of garments unsold in the supply chain.

Asia and the supply chain Together with the need to drive new launches through the supply chain more frequently and faster, the outsourcing of manufacturing to Asia has brought an altogether more complex supply-chain challenge to the industry. The new supply chains require greater emphasis on consolidation, flow-through and cross-docking of shipments before they reach Western markets. This is forcing retailers and manufacturers to seek supply-chain management specialists that have a comprehensive global network and capability.

Third-party supply-chain specialists These new breeds of third-party providers need to be capable not only of supplying the standard logistics and shipping activities, but also of providing real-time visibility of all garments, both in transit and in storage across the world. This requires specialist IT systems and processes which leading third-party providers have been investing in for some time. Manufacturers are also seeking to limit unnecessary expenditure in highcost countries, so activities such as quality control and labelling are increasingly being conducted at source, often by third-party providers. Finally, in order to optimize the supply chain, manufacturers and thirdparty providers need to look at the end-to-end supply chain and understand upstream activities such as the sourcing of yarn, weave and accessories, the manufacturing process and of course the logistics requirements into the retail store. Not only can costs be optimized, so can the availability of product on the store shelf or rail.

Retail The market Retailers have become increasingly powerful in recent years with Wal-Mart (United States), Carrefour (France), Ahold (Netherlands), Metro (Germany), Kroger (United States) and Tesco (United Kingdom) leading the way in grocery. Between them these six top retailers’ turnover is in excess of a

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staggering US$600 billion (Forbes, 2006). However, this figure is put into perspective by the total global retail market, which was calculated by market intelligence group Euromonitor at an incredible US$8,694 billion sales value in 2005 (Franchise International, 2006).

Supply chain The supply chain has become increasingly important for retailers in Western Europe and North America as they face competition from new trading formats and foreign entrants. Retailers must ensure that costs are contained or preferably reduced, and profits increased. Their strategy is based on improving product availability while at the same time reducing lead times, inventory levels and other operating costs. This strategy has focused on changes to the supply chain to realize these improvements, including sourcing from developing countries and regions and moving towards demand-driven supply strategies.

Outsourcing Despite the importance of the supply chain for retailers, very few employ third-party logistics providers to manage all their logistics or supply-chain needs, and in most cases only a small percentage is outsourced. In general, the larger the retailer, the less likely it is to outsource all its logistics of supply-chain needs. This is especially true in grocery retailing, while nonfood retailers tend to outsource a larger proportion to third-party providers. This may be because of the size of many grocery retailers, which provides the scale to operate logistics activities and the supply chain as efficiently (or more so?) as a third-party provider. Indeed if retailers do outsource, they are much more likely to retain the capital in building and vehicles and simply contract out the management and resources, usually on an open-book plus management fee contract. They are also more likely to outsource transportation than warehousing, and if they do outsource both, this may well be with two different contractors. Often retailers outsource some operations and retain others in-house in order to benchmark operational performance and costs. As retailers have moved out of their domestic heartland into developing markets like Eastern Europe and Latin America, they have called upon third-party providers to support their logistics activities, perhaps wanting to mitigate risks and take advantage of providers’ capabilities in the geography.

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Case history: Wal-Mart Founded in 1962 by Sam Walton, Wal-Mart was reported as the largest sales company in the world in 2005, reporting a turnover of US$285 billion with a net income (profit) of US$10 billion. By the end of 2006 the company operated out of 6,500 stores and outlets worldwide, including more than 2,700 stores outside the USA. Their operations spanned 15 countries, including Argentina, Brazil, Canada, China, Costa Rica, El Salvador, Germany, Japan, Mexico, Puerto Rico and the United Kingdom. Wal-Mart has a total worldwide staff of 1,800,000, with 75,000 in Logistics and IT alone. Wal-Mart’s total 5,000 stores worldwide are supplied with up to 100,000 product lines each from around 68,000 suppliers. While many of Wal-Mart’s logistics operations in the United States are operated internally, a significant amount of transportation, known as ‘trucking’ in the United States, is outsourced. Outside the United States, however, operations are more likely to be outsourced, including Canada and Germany. As part of its drive to improve supply-chain efficiency, Wal-Mart has instructed that it requires its top 100 suppliers to use RFID to identify pallets of products being delivered into its distribution network. The plan is to use RFID to manage and identify the location of stock all the way from the receiving door of a warehouse to the store shelf. Source: Wal-Mart, 2006.

Consolidation across all industry sectors Over the last 20 years or so there have been unprecedented levels of acquisition and mergers across the world in every business vertical. This activity has been driven by companies’ desire to grow, but also to acquire scale to reduce costs and strengthen their position in the marketplace. Geographical spread and presence has also been a key driver for acquisitions. This consolidation has resulted in greater operational efficiencies and economies of scale. However, this has in turn created larger and more complex supply chains for companies, which has driven the need of many companies to consider outsourcing their supply-chain and logistics activities to thirdparty providers.

Automotive The highly competitive automotive industry realized that focusing on lean practices alone to achieve competitiveness was insufficient, and that the

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benefits of economies of scale are essential for long-term growth and profitability. The industry has seen significant consolidation since the 1980s. Small independent manufacturers, such as Aston Martin, Jaguar, Saab and Volvo, have been acquired by their larger American rivals. Ford has been very active, acquiring Jaguar, Volvo, Land Rover, Aston Martin and Mazda in recent years. General Motors (GM), which bought Saab and Daewoo in 2000, has focused the rest of its attention on investing in partners such as Japan’s Suzuki, Isuzu and Subaru. The two biggest deals in the automotive industry have been the takeover of Chrysler by Daimler-Benz in 1998 and the alliance of Renault and Nissan in the following year. Other manufacturers such as Volkswagen, who itself acquired Seat and Skoda, have become potential targets for acquisition, although the 19 per cent ownership by the German state of Lower Saxony is some protection for the historic German car maker. Other German manufacturers, like BMW (which itself purchased the Rover Group, retaining the Mini marque) and Porsche, are very attractive to the larger global car companies. However, their independence and family heritage (both are controlled by descendants of the founding families) makes an acquisition less likely, although if the price were right both might be tempted. Japanese manufacturers such as Toyota and Honda have focused more on organic growth, although Toyota have done a deal with PSA Peugeot Citroen to jointly build a new small car in Europe. What is interesting about consolidation in the automotive industry is that in the main the car badges have been retained, whilst consolidation has taken place around manufacturing and the supply chain. Indeed the top 10 largest manufacturers still account for over 50 brands, and the top five manufacturers an incredible 75 per cent of the global market (Economist, 2006a).

Healthcare Consolidation has been critical for the healthcare and pharmaceutical industry, as companies are forced to bring escalating costs under control and develop more new products for the market. It is reported that patents on US$100 billion worth of drugs are expiring over the next few years (Thayer, 2002). As a result, pharmaceutical manufacturers and biotech companies have undertaken huge mergers to seek cost savings and scale in R&D and marketing. Three key consolidations took place in 2000, namely Wellcome’s merger with SmithKline Beecham, Pfizer ’s acquisition of Warner-Lambert, and Pharmacia & Upjohn’s merger with Monsanto to form Pharmacia Corp. 2001 saw Johnson & Johnson buying Alza, and Bristol-Myers Squibb acquiring DuPont Pharmaceuticals. Then in 2002 Pfizer acquired Pharmacia in a deal estimated to be worth US$60 billion. This deal reinforced Pfizer’s position as

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the world’s leading pharmaceutical company, with a 2005 turnover of over US$52 billion. Meanwhile UK drug manufacturer AstraZeneca made four significant acquisitions in 2005. In 2006, Bayer Consumer Care bought Roche Consumer Health to supplement its over-the-counter (OTC) products with brands such as Rennie and Feminax, while Bayer’s acquisition of Schering AG for R16.5 billion was the largest in Bayer’s 140-year history.

Retail The pressure on the retail sector has continued, with the might of Wal-Mart forcing competitors across the globe to seek ways to defend themselves. Additionally in many markets, discounters are challenging the traditional retailers. Consolidation provides both growth and scale to achieve cost reductions, both of which are important defences against competition. Retailers have also used consolidation to focus more on global sourcing. There have been a number of high-profile and significant acquisitions and mergers over the last few years. French retailer Carrefour purchased Promodes in 1999, helping it to become the leading European food retail group, and number two in the world behind US giant Wal-Mart. In turn, Wal-Mart acquired Asda in the United Kingdom, whilst UK supermarket chain Morrison bought UK rival Safeway. Further, Group Mulliez, the parent company of French retailer Auchan, is looking at potential British targets, including Allied Carpets, and UK retailers Tesco, Sainsbury and Kingfisher are all seeking partners either in the United Kingdom or abroad.

Consumer packaged goods Under pressure from the retailers, CPG manufacturers are seeking to defend their position through consolidation. This provides them with an opportunity to reduces costs and potentially realize a little more power in their relationships with retailers. In addition, CPG companies are seeking to move into developing countries and have seen consolidation as a means to achieve this. The acquisition of chewing gum company Adams by Cadbury Schweppes fits into its long-term strategy of focusing on growth sectors such as gum, and developing markets including Eastern Europe and Latin America. The acquisition of niche ice-cream business Ben & Jerry’s by Unilever to add to its existing ice-cream brands Walls, Good Humor and Breyers highlights the opportunity to reduce operational and material costs. Both Heineken and Interbrew have made key acquisitions and alliances in Eastern Europe and Asia, focused on targeted growth in specific regions. Finally, Procter & Gamble’s takeover of Gillette is one of the largest of its type in recent years, providing an opportunity for the buyer to redesign its supply-chain and sourcing strategies.

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New logistics and supply-chain services Over the last few years several new logistics and supply-chain services have emerged, which are discussed below.

International supply-chain, consolidation and value-added services The globalization of manufacturers has created the need for international supply-chain services where contract logistics activities at both source and destination are integrated with freight-forwarding services to create an endto-end supply-chain solution. These end-to-end services focus on reducing operational costs through lower freight rates, changing modes of freight and improving container fill rates. Third-party providers seek to deliver supply-chain value through consolidation services, added-value services at origin, vendor management and providing business value through lower inventories, improving product availability and overall lower product costs. Added-value services at origin, include quality control at origin, pre-retail and ticketing activities, product assembly, repacking and reworking.

Reverse logistics Reverse logistics is now an estimated US$35 billion market (Victoria University, 2006), involving the management of returned goods and products across the entire supply chain. Retailers have become focused on the opportunity to improve margins by improving the efficiency of their returns processes. Store retailers can expect between 4 and 15 per cent of their goods to be returned, depending on the products, whilst catalogue retailers can expect up to 18 per cent returns (Gordon, 2003). Retailers have deployed systems and third-party providers to assist in this complicated and inherently inefficient process. Specialist third-party providers, such as US-based Genco, have built successful businesses by focusing on this new and growing service. The introduction of the Waste Electrical and Electronic Equipment (WEEE) directive in Europe, which aims to encourage recovery, reuse and recycling of products, is likely to drive significant growth in that region.

Packaging Packaging services is also a growing opportunity for third-party providers. Manufacturers require flexible packaging services to support their manufacturing and marketing strategies. By outsourcing packaging, the manufacturer can decouple the manufacture of the product from the finished

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product packaged for a specific market, and effectively achieve postponement. Indeed the globalization of manufacturing is driving this service opportunity for service providers as it allows for manufacturing efficiency and local customization through packaging. The service also provides for marketing initiatives and product combinations to be done locally and flexibly. An example of a third-party provider delivering this service is Power Logistics, acquired by Exel in 2004.

Service parts logistics Service parts logistics has become important for high-technology businesses. This rapidly growing service is based on ensuring the rapid fulfilment of post-sales high-value or critical parts in support of customers worldwide. These services typically include: ឣ ឣ ឣ ឣ

ឣ ឣ ឣ ឣ ឣ

parts logistics; returns management; field technical support; field stocking network, usually enabling between one and four-hour response times; central distribution centres; depot and field repairs; parts planning; asset recovery; recycling management.

Post-sales service can differentiate a company’s offering and provide growth opportunities. However the complexities associated with managing a global or pan-regional service-parts supply chain stops many manufacturers from achieving this. They often struggle with the visibility and control required to deliver the right parts or services to the right place, at the right time and at an acceptable cost. This is prompting many businesses, especially technology and electronic companies, to outsource these activities to a service provider who can demonstrate this skill. Third-party providers have developed skills in this area which they see as added-value services; these often involve the development of advanced IT and visibility systems to support the logistics offering.

Inbound to manufacturing Inbound to manufacturing, often referred to as I2M, is a service used in support of a manufacturer’s need to ensure that parts are purchased in the

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best way in support of its customers’ variable manufacturing demands. Global manufacturers are seeking to reduce the overall supply-chain costs by reducing inventory that they consume in their manufacturing process, reducing operational costs and using expensive factory space more productively. I2M is the supply-chain management of the inbound flow of materials from collection points at component suppliers’ facilities to the consumption point in manufacturers’ production lines, which are usually situated in developing countries. Usually a VMI programme is established in support of this service.

Case history: Nokia Nokia, with listings on four major exchanges, reported 2005 net sales of 134.2 billion, increasing by 16 per cent on the previous year (Nokia, 2006). Nokia’s website (2006) reported that in 2005, Europe accounted for 42 per cent of the company’s net sales (41 per cent in 2004), Asia Pacific 18 per cent (16 per cent), China 11 per cent (10 per cent), North America 8 per cent (12 per cent), Latin America 8 per cent (9 per cent), and Middle East and Africa 13 per cent (12 per cent). The 10 markets in which Nokia generated the greatest net sales in 2005 were, in descending order of magnitude, China, the United States, the United Kingdom, India, Germany, Russia, Italy, Spain, Saudi Arabia and France, together representing 52 per cent of total net sales in 2005 (Nokia, 2006). Nokia has manufacturing facilities across Europe, North and Latin/South America and Asia and has focused on establishing collaborative demand planning techniques and processes with its global suppliers, who deliver products into vendor-managed hubs situated close to each factory. These hubs, known as i-Hubs, are managed by DHL (acquired via Exel) worldwide, which provides not just the logistics services but also the systems integration with both Nokia and its vendors, providing full visibility and alerting across the entire supply chain for all parties. In an article in the Economist (2006b), Nokia was described as managing an extraordinary efficient logistics chain handling over 60 billion components a year.

Summary This chapter looked at the size and composition of the global logistics market, and assessed the value of spend outsourced to third-party providers. The impact of globalization and world trade on outsourcing was

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also examined, demonstrating its importance to the third-party provider industry. Key industry sectors were also reviewed, including supply-chain strategies and drivers and outsourcing trends. The chapter also looked at industry consolidation, often a key reason for outsourcing, and examined new services increasingly being demanded by third-party provider customers.

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Regional logistics markets Introduction This chapter reviews the regional logistics markets by examining key countries’ economic and trading information, and analysing the logistics markets in key geographies. The most mature logistics market, Europe, is analysed, showing the importance of the highly developed logistics countries like the United Kingdom and Germany, together with the opportunities presented by economic growth in Eastern Europe and the recent accession of 10 countries to the European Union. The United States and Canada are reviewed, showing both the risks and opportunities caused by increasing trade with China. The developing markets of Central and South Americas are also examined. Finally, Asia is analysed, with growth powerhouses China and India examined in some detail. Other key countries are also reviewed, including established wealthy countries like Japan and South Korea, together with emerging countries like Thailand and Indonesia. For countries that are examined, there is a summary of facts and figures, together with a summary of the economy and a review of the logistics market.

Europe, the Middle East and Africa (EMEA) Europe European logistics market The European logistics market, generally regarded as the most mature outsourced logistics market in the world, was valued at N182 billion

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(US$230 billion) in 2005 (Transport Intelligence, 2006). Approximately 25 per cent of the total logistics spend is outsourced to third-party contract logistics providers (Transport Intelligence, 2006) as shown in Figure 2.1. The outsourced logistics market is forecast to grow at a compound annual growth rate (CAGR) of 9.5 per cent between 2005 and 2009, with Spain (12 per cent) and the merging markets of Eastern Europe (10 per cent) leading the growth. Within Europe, as shown in Figure 2.2, Germany is the major market, with an estimated logistics spend of N40 billion, followed by the United Kingdom (N31 billion) and France (N29 billion), (Transport Intelligence, 2006). The size of the markets in Italy and Spain demonstrates the opportunity for third-party logistics providers. As is shown in Figure 2.3, these countries have relatively low levels of logistics outsourcing. The emerging markets of Eastern Europe are the majority of what is shown in Figure 2.2 as ‘Other ’. This underlines the opportunity for growth in the logistics markets of these countries. Historically, the logistics industry in Europe has been focused locally for each country with its own particular culture, language, business practices and legal requirements. This makes the region a particularly challenging marketplace for aspiring pan-European third-party providers to develop. However European countries, which have traditionally traded cross-border, have looked to outsourcing as a part of their business model. As shown in Figure 2.3, outsourcing rates in Europe range from around 8 to 50 per cent, with the highest percentage of outsourced logistics spend in the Netherlands followed by Belgium, reflecting Benelux’s position as the location of choice for many companies’ centralized European distribution centres. The mature market of the United Kingdom is third-highest followed by Germany, with both markets dominated by large wellestablished local providers (acquisition notwithstanding).

g46 bn

Europe outsourced Europe in-house

g136 bn

Figure 2.1 European in-house contract logistics spend versus outsourced Source: Transport Intelligence (2006)

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4%

France

2% 2% 3% 3% 2%

21%

Italy

8%

Spain Nordic Netherlands

8%

Belgium

17%

Austria

14%

16%

Ireland Portugal Other

Figure 2.2 Percentage of total logistics spend by European country Source: Transport Intelligence (2006) 60% 50% 40% 30% 20% 10%

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th e O

ai Sp

a tri Au s

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Figure 2.3 Percentage of logistics outsourced by European countries Source: Transport Intelligence (2006)

Enlargement Following the admission of 10 new countries into the European Union in 2004, the enlarged European Union of 25 countries has a population of over 450 million inhabitants, bigger than the United States, Canada and Mexico put together. The economic union has a gross domestic product (GDP) of over US$12 trillion (Central Intelligence Agency (CIA), 2006 (2005 estimation)) and represents 18 per cent of world trade in goods and 24 per cent of world trade in services (Delegation of the European Commission to Australia and New Zealand, 2006).

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Trade The European Union exported US$1.318 trillion goods and services outside the union as a whole, with the following key commodities: machinery; motor vehicles, aircraft; ឣ plastics; ឣ pharmaceuticals and other chemicals; ឣ fuels; ឣ iron and steel; ឣ nonferrous metals; ឣ wood pulp and paper products; ឣ textiles; ឣ meat; ឣ dairy products; ឣ fish; ឣ alcoholic beverages. (CIA, 2006) ឣ ឣ

Figure 2.4 shows the European Union’s key export partners. 24.2%

United States Switzerland China 7.7%

58.4%

5.0%

Russia Other

4.7%

Figure 2.4 The European Union’s key export partners Source: CIA (2006) (2004) figures

The European Union imported US$1.402 trillion in 2004 from outside the union. Key imported commodities were: ឣ ឣ ឣ ឣ ឣ ឣ ឣ

machinery; vehicles; aircraft; plastics; crude oil; chemicals; textiles;

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metals; foodstuffs; ឣ clothing. (CIA, 2006) ឣ ឣ

Figure 2.5 shows the European Union’s key import partners. 15.3% United States 12.4%

China Russia

57.3%

7.8%

Japan Other

7.2%

Figure 2.5 The European Union’s key import partners Source: CIA (2006) (2004 figures)

Freight transport Western European roads are extremely congested, and environmental lobbyists are putting pressure on road transportation. According to a European Commission report (European Railway Agency, 2006), the European freight transport sector saw around 2.5 per cent growth per annum from the mid-1990s. Further the report showed that road and sea freight increased the most (both over 25 per cent over the period 1995 to 2003). In contrast, despite the issues over road congestion and increasing fuel costs, rail freight only grew by around 2.5 per cent over the same period. The report showed that in the 25 member states, rail freight transport amounts to a modal share of 10 per cent of the total freight transported. Rail has shown an improvement in growth in recent years, increasing by 5.8 per cent between 2003 and 2004 in the old member states (EU15) and by 4.4 per cent in the enlarged union (EU25). The reliability of the rail network is still insufficient for supply-chainfocused companies, and more investment and inter-country cooperation will be required to drive more tonnage from the roads onto the tracks. This is being driven by the European Commission, which is promoting technical harmonization and improvements across member states.

Middle East With its wealth from oil the Middle Eastern countries, and in particular the United Arab Emirates, Bahrain, Oman and Saudi Arabia, are developing

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their economies along Western lines. Together with Qatar, Kuwait, Jordan and Yemen, these countries are becoming attractive to third-party providers as consumer manufacturers and other industrial companies move into the region.

Africa In Africa, South Africa is the largest market but has had its fair share of challenges, in particular the declining value of the rand. About 85 per cent of South Africa’s exports are to other African countries. Its largest export industry lies in its automotive manufacture industry, servicing markets in Europe and Oceania. Eight of the world’s largest car manufacturers are in South Africa, supported by the government’s Motor Industry Development Programme. North Africa has often been seen as the gateway to Africa by European countries, many of which have traditional ties with countries such as Morocco, Tunisia and Algeria. Western consumer goods manufacturers are entering these markets, creating opportunities for third-party providers. The rest of Africa is relatively poor, and although some consumer manufacturers are entering countries like Kenya, the region is still some way behind its more wealthy neighbours.

Sector drivers, including prospects for outsourcing Retailers Grocery retailers like Carrefour and Tesco have developed additional nonfood product ranges to add to their food lines, in order to further stimulate growth. This is driving more complexity in their supply chains, which provides opportunity for third-party providers. This is especially the case for the management of the inbound supply chain for garments and other items from Asia. Retailers have also been adopting factory-gate pricing policies, whereby they negotiate product costs with suppliers that do not include delivery. The retailer then uses empty vehicles returning from deliveries to stores to collect the goods. Additionally, as retailers are moving to developing markets in Europe such as Poland and the Czech Republic to take advantage of the growth in economies, they are turning to third-party providers to support them.

Consumer packaged goods (CPG) Consumer companies are steadily moving their production eastwards to Central and Eastern Europe, because of cost pressures from retailers, the rise

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of private label products and the emergence of discounters like Lidl and Netto. With a lack of available expertise and infrastructure in these countries, manufacturers are turning to third-party providers for support. In developed markets, manufacturers are seeking to reduce their costs and see the benefits of becoming part of third-party providers’ shared-user warehouse and transportation networks. This provides for more regular deliveries to retailers at highly competitive costs.

Healthcare and pharmaceutical While the number of pharmaceutical and healthcare businesses has declined in Europe over the last few years as a result of acquisitions and mergers, this activity has created complex and inefficient supply chains. Leaders in the market have recognized the opportunity and are redesigning their European supply chains and creating pan-European distribution networks. This seeks to reduce costs, provide improved visibility across the supply chain and provide an integrated approach to serving customers across the continent. As well as implementing enterprise resource planning (ERP) systems such as the one produced by SAP to link all countries’ demand to a central or small number of European distribution centres (EDC), these companies are engaging third-party providers to run the network.

Automotive Automotive manufacturers are moving production to Eastern Europe in their continuing quest to reduce costs. They require third-party providers not only for logistics activities in these underdeveloped countries, but also to manage the inbound flow of materials, often involving the use of vendormanaged inventory.

The China and Asia impact Imports from China and other parts of Asia have increased steadily in the last few years and are set to grow rapidly for the rest of the 2000s. Although European manufacturers have lost ground, the logistics industry has benefited from longer and more complex supply chains. However, service providers have had to invent new services and solutions to support their customers. Managing inbound product from China and Asia is fundamental to many businesses, and can make the difference to a company’s success or failure. Third-party service providers have been focused on linking their European logistics activities to freight and shipping services to create end-

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to-end supply-chain processes that provide their customers full visibility across the supply chain.

The United Kingdom UK facts and figures Population: 60 million (2006 estimated) Area: 244,820 sq km Currency (code): British pound (GBP) £ GDP: US$2.218 trillion (2005 estimated) GDP real growth rate: 1.7 per cent (2005 estimated) GDP per capita: US$30,900 (2005 estimated) Unemployment rate: 4.7 per cent (2005 estimated) Exports: US$372.7 billion fob (2005 estimated) Imports: US$483.7 billion fob (2005 estimated) Export partners: United States 15.3 per cent, Germany 10.8 per cent, France 9.2 per cent, Ireland 6.8 per cent, Netherlands 6 per cent, Belgium 5.1 per cent, Spain 4.5 per cent, Italy 4.2 per cent (2004) Import partners: Germany 13 per cent, United States 9.3 per cent, France 7.4 per cent, Netherlands 6.6 per cent, Belgium 4.9 per cent, China 4.3 per cent, Italy 4.3 per cent (2004) Roadways total: 387,674 km all paved (including 3,523 km of expressways) Ports and terminals: Hound Point, Immingham, Milford Haven, Liverpool, London, Southampton, Sullom Voe, Teesport Source: CIA (2006).

UK economy While services such as banking, insurance and business services have grown in recent years, the manufacturing industry has declined in importance as manufacturing has migrated eastward. GDP growth slowed in 2001–03 in line with the global economy slowdown and the high value of the pound, impacting manufacturing and exports. Output recovered in 2004, to 3.2 per cent growth, but fell again in 2005, to 1.7 per cent. Despite slower growth, the economy is one of the strongest in Europe, with inflation, interest rates and unemployment remaining among the lowest in Europe (CIA, 2006).

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UK logistics industry UK logistics market As one of the most mature outsourced markets in the world, with around 40 per cent of logistics activities outsourced, the UK total logistics market is estimated to be worth around N31 billion (Transport Intelligence, 2006). The outsourced logistics market is the fifth-largest sector in the United Kingdom, employing over a million people and with a value of around N12 billion (Transport Intelligence, 2006). The industry has traditionally been led by the retail sector, which has sought to optimize and improve its logistics operations and supply chains. This has included the outsourcing of distribution centres and transportation to third-party providers across the 1980s and 1990s. The United Kingdom is unique in having a significant number of dedicated open-book outsourcing deals with major retailers and manufacturers. However, in recent years this outsourcing trend has stalled, with a number of retailers taking operations back in-house in order to take advantage of their scale and overall distribution network. Despite that, the UK logistics outsourced market is forecast to grow at a CAGR of 8.9 per cent from 2005 to 2009 (Transport Intelligence, 2006). Increasingly, the larger fast-moving consumer or consumer packaged goods (CPG) manufacturers have also outsourced, followed by the medium and smaller players who have taken advantage of shared user or network facilities set up by third-party providers. The retailers and larger CPG companies have required dedicated distribution: in other words, a single warehouse dedicated to one customer, which is still somewhat of a British phenomenon. These contracts are usually open book where the contractor provides services at cost, usually open to audit, plus an agreed management fee, often a fixed percentage. In some cases there are value share or bonus opportunities.

UK road haulage According to the UK Road Haulage Market Research Report (Market & Business Development, 2006), road haulage, which is key to the British logistics activity, has virtually stagnated, with around 2 per cent growth since 2001. The report concludes that the volume of goods lifted principally reflects the economic performance, including the decline of heavy engineering in the United Kingdom. The report forecasts that between 2006 and 2010 road freight lifted will increase by 3 per cent. Road haulage is highly competitive, with companies often outsourcing to the lowest-cost provider. The haulage industry continues to suffer from a range of problems. These include rising fuel costs, which are often difficult to pass on to customers, and high levels of government tax, against which

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the haulage industry has protested in recent years. There is also a growing shortage of qualified drivers, made worse by the introduction of the EU Working Time Directive, which according to the Road Haulage Association will require an estimated additional 60,000 drivers across the United Kingdom (Whitfield, 2006). Finally the United Kingdom’s roads are becoming increasingly congested, with the Confederation of British Industry estimating that Britain’s traffic congestion costs the country £20 billion a year (Times Online, 2006).

United Kingdom: changing face of logistics The movement of British manufacturers to low-cost economies and the increase of imports have forced the third-party logistics providers to reexamine their offerings. Consolidation centres and transhipment centres are increasingly being developed instead of large warehouses designed to take manufacturing output. Third-party providers are focused on how to link the inbound movement of products with the UK supply chain, seeking ways to optimize the holding of inventory and transport costs. This not only ensures third-party providers maintain their turnover but provides an opportunity for improved margins through providing added-value activities such as co-packing, customs clearance, quality control and inventory management.

France France facts and figures Population: 60 million (2006 estimated) Area: 547,030 sq km Currency (code): euro (EUR) R GDP: US$2.068 trillion (2005 estimated) GDP real growth rate: 1.6 per cent (2005 estimated) GDP per capita: US$30,000 (2005 estimated) Unemployment rate: 10 per cent (2005 estimated) Exports: US$443.4 billion fob (2005 estimated) Imports: US$473.3 billion fob (2005 estimated) Export partners: Germany 15 per cent, Spain 9.5 per cent, United Kingdom 9.3 per cent, Italy 9 per cent, Belgium 7.2 per cent, United States 6.7 per cent (2004)

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Import partners: Germany 19.2 per cent, Belgium 9.9 per cent, Italy 8.8 per cent, Spain 7.4 per cent, United Kingdom 7 per cent, Netherlands 6.7 per cent, United States 5.1 per cent (2004) Roadways total: 891,290 km all paved (including 10,390 km of expressways) Ports and terminals: Bordeaux, Calais, Dunkerque, La Pallice, Le Havre, Marseille, Nantes, Paris, Rouen, Strasbourg Source: CIA (2006).

French economy French business is going through a transformation from high levels of government ownership to a more open market. The government has partially or fully privatized many large companies, but retains controlling interests in several others, including Air France, France Telecom, Renault and Thales. In addition, the telecommunications sector is being opened to competition. Income taxes have been lowered and measures to boost employment and reform the pension system have been introduced by the government. Significant challenges for the French economy are the high cost of labour and stringent employment laws, making France a high-cost country for business. The tax rate is one of the highest in Europe (nearly 50 per cent of GDP in 2005), whilst unemployment stands at 10 per cent (CIA, 2006).

French logistics industry The total French logistics is estimated at around N29 billion, of which approximately 22 per cent is outsourced to third-party providers, representing N6.6 billion (Transport Intelligence, 2006). Although France is a leading logistics outsourcing market in Europe, worth around N6.6 billion, economic uncertainty and a declining manufacturing industry have provided challenges to logistics service providers based in France. This, together with regular industrial action and rising fuel costs, has impacted on the profitability of third-party provider companies. Many non-French 3PLs have entered the French market, but most have found it very difficult to achieve the desired margins or business growth. The French logistics outsourcing market is estimated to grow at a CAGR of 9.5 per cent over the period 2005 to 2009 (Transport Intelligence, 2006).

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French manufacturing Like many Western countries, France has been adapting to globalization and the movement of manufacturing to low-cost Eastern European countries. With relatively high wages and payroll taxes, together with stringent employment laws, France has become a difficult place for manufacturers seeking even lower costs. However, a growing number of French firms involved in manufacturing and retailing view logistics as a high-cost activity that should be outsourced. This has presented some opportunities for third-party providers which have been focused on helping French businesses by providing shared-user, lower-cost logistics and innovative, value-added solutions. This includes providing customers with track-and-trace capabilities, import services and reverse logistics. Indeed, third-party providers have set up on-site freight management operations for companies, such as Philips, Goodyear, Snecma and Pratt & Whitney.

French retailers The growing retail market in France is also providing revenue growth in warehousing and transportation. Further, French retailers – including the second-largest grocery retailer in the world, Carrefour, together with Auchan, Intermarché and Leclerc – are demanding lower logistics costs, and third-party providers are seeking ways to develop added-value services to maintain margins.

French global fashion and luxury brands In support of global French businesses, including famous fashion names such as Christian Dior, Lacoste and Louis Vuitton, third-party providers are providing fully integrated road, air and sea services in order to manage the inbound flow of goods.

French global companies A number of significant global companies, including numerous US firms such as Columbia Sportswear, Hewlett-Packard and Pfizer, have set up or relocated to European distribution centres in France, in order to take advantage of the country’s strategic positioning. Situated at the crossroads of the UK, German, Italian and Spanish markets, France borders seven countries and is well positioned to provide close access to many key European markets.

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Benelux (Netherlands and Belgium) The Netherlands facts and figures Population: 16.5 million (2006 estimated) Area: 41,526 sq km Currency (code): euro (EUR) R GDP: US$586.7 billion (2005 estimated) GDP real growth rate: 0.7 per cent (2005 estimated) GDP per capita: US$30,600 (2005 estimated) Unemployment rate: 6.5 per cent (2005 estimated) Exports: US$365.1 billion fob (2005 estimated) Imports: US$326.6 billion fob (2005 estimated) Export partners: Germany 17.9 per cent, Belgium 9.9 per cent, United States 7.9 per cent, China 7.4 per cent, United Kingdom 6.4 per cent, France 4.8 per cent (2004) Import partners: Germany 19.2 per cent, Belgium 9.9 per cent, Italy 8.8 per cent, Spain 7.4 per cent, United Kingdom 7 per cent, Netherlands 6.7 per cent, United States 5.1 per cent (2004) Roadways total: 116,500 km, of which 104,850 km are paved Ports and terminals: Amsterdam, Groningen, Ijmuiden, Rotterdam, Terneuzen, Vlissingen, Zaanstad Source: CIA (2006).

The Netherlands economy The Netherlands has a stable and prosperous economy, which depends heavily on foreign trade. The economy has moderate unemployment and inflation and is one of the leading European nations for attracting foreign investment. It has developed an important role as a European transportation hub. Economic growth slowed significantly in 2001–05, as part of the general global economic downturn, but for the four years before that, annual growth averaged nearly 4 per cent, well above the EU average (CIA, 2006).

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Belgium facts and figures Population: 10 million (2006 estimated) Area: 30,528 sq km Currency (code): euro (EUR) N GDP: US$352.6 billion (2005 estimated) GDP real growth rate: 1.5 per cent (2005 estimated) GDP per capita: US$31,900 (2005 estimated) Unemployment rate: 8.4 per cent (2005 estimated) Exports: US$269.6 billion fob (2005 estimated) Imports: US$264.5 billion fob (2005 estimated) Export partners: Germany 19.9 per cent, France 17.2 per cent, Netherlands 11.8 per cent, United Kingdom 8.6 per cent, United States 6.5 per cent, Italy 5.2 per cent (2004) Import partners: Germany 18.4 per cent, Netherlands 17 per cent, France 12.5 per cent, United Kingdom 6.8 per cent, Ireland 6.3 per cent, United States 5.5 per cent (2004) Roadways total: 149,757 km, of which 117,110 km are paved (including 1,747 km of expressways) Ports and terminals: Antwerp, Brussels, Gent, Liege, Oostende, Zeebrugge Source: CIA (2006).

The Belgian economy The Belgian economy is based on a modern, private-enterprise model which has capitalized on its central geographic location, highly developed transport network and diversified industrial and commercial base. With few natural resources, Belgium imports large quantities of raw materials and exports substantial volumes of products, making its economy very dependent on world markets. Around three-quarters of Belgium’s trade is with other EU countries. Economic growth in 2001–03 dropped sharply as a result of the global economic slowdown, showing a moderate recovery in 2004–05 (CIA, 2006).

Benelux logistics market Consisting of the Low Countries, Holland, Belgium and Luxembourg, the Benelux has enjoyed the growth in logistics activity driven by the move

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towards EDCs. The total logistics market of the region is around N12 billion, of which just less than 50 per cent is outsourced (Transport Intelligence, 2006). Benelux is geographically ideally positioned to provide a single optimized distribution point to the major conurbations in Western Europe. Benelux plays host to many significant European and US companies from industry sectors as diverse as high technology and electronics, fashion, tyres and pharmaceuticals. Additionally the growing retail market in Benelux is providing revenue growth in warehousing. The Netherlands has approximately 9,000, mostly family-owned, logistics companies, clearly demonstrating the highly segmented nature of the market (Holland International Distribution Council, 2006). All of the major third-party providers have significant operations in Benelux, with 50 per cent of logistics activity in the Netherlands outsourced, the highest in Europe (Transport Intelligence, 2006). Around 400,000 people are employed in the transport and distribution sector, which handles about 40 per cent of all European sea cargo through its port in Rotterdam as well as 27 per cent of all international road transportation (Holland International Distribution Council, 2006). The Benelux region is benefiting from the increased outsourcing of manufacturing to China. With the largest port in the world in Rotterdam, which is within easy reach of the majority of Europe’s prosperous consumer population, the Netherlands and Belgium have become key centres for the establishment of European distribution centres. Indeed half of Europe’s major markets lie within a 400-mile radius of the Netherlands. With over 90 per cent of the Netherlands and Belgium’s population bilingual with English, and a good transport infrastructure, Benelux is extremely attractive to foreign companies seeking to develop their European markets. Companies including Coca-Cola, Cisco Systems, IBM, Sun Microsystems, Timberland and Reebok have been attracted to set up their European operations in Benelux. To underline this, an industry sector analysis (Holland International Distribution Council, 2006) reports that 57 per cent of all US and 59 per cent of all Asian central distribution centres are positioned in the Netherlands. Further, the report goes on to say that the Netherlands has 57 per cent of all EDCs, of which 71 per cent are outsourced. The Benelux third-party logistics market is anticipated to grow at a CAGR of around 7.5 per cent across 2005 to 2009 (Transport Intelligence, 2006).

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Germany Germany facts and figures Population: 82 million (2006 estimated) Area: 357,021 sq km Currency (code): euro (EUR) R GDP: US$2.764 trillion (2005 estimated) GDP real growth rate: 0.9 per cent (2005 estimated) GDP per capita: US$29,800 (2005 estimated) Unemployment rate: 11.6 per cent (2005 estimated) Exports: US$1,016 billion fob (2005 estimated) Imports: US$801 billion fob (2005 estimated) Export partners: France 10.3 per cent, United States 8.8 per cent, United Kingdom 8.3 per cent, Italy 7.2 per cent, Netherlands 6.2 per cent, Belgium 5.6 per cent, Austria 5.4 per cent, Spain 5 per cent (2004) Import partners: France 9 per cent, Netherlands 8.3 per cent, United States 7 per cent, Italy 6.1 per cent, United Kingdom 5.9 per cent, China 5.6 per cent, Belgium 4.9 per cent, Austria 4.2 per cent (2004) Roadways total: 231,581 km, all paved (including 12,037 km of expressways) Ports and terminals: Bremen, Bremerhaven, Brunsbuttel, Duisburg, Frankfurt, Hamburg, Karlsruhe, Mainz, Rostock, Wilhemshaven Source: CIA (2006).

German economy As Europe’s largest economy, with its second-largest population, Germany’s affluent and technologically powerful economy has become one of the slowest-growing in the European Union. Growth in 2001–03 was under 1 per cent, increasing to 1.7 per cent in 2004 before reducing to 0.9 per cent in 2005. The integration of eastern Germany continues to be an expensive long-term process, while structural rigidities in the labour market have made unemployment a major problem (CIA, 2006).

German logistics market The German total logistics market is estimated at around N39 billion of which approximately 28 per cent is outsourced to third-party providers

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(Transport Intelligence, 2006). Germany has a good strategic location at the heart of Europe and an excellent transport infrastructure that allows it to gain maximum benefit from this advantage. The efficiency of Germany’s transport system, together with its seaports, have played a key role in enabling it to become a key European exporting nation. Germany has long enjoyed a buoyant car manufacturing market with names such as Volkswagen, BMW and DaimlerChrysler, all of which seek lower-cost logistics operations for their increasingly complex supply chains. Electronics companies such as Siemens, now a truly global company, are seeking to compete across the world with low-cost manufacturers out of Asia. Businesses like this are seeking ways in which they can reduce their logistics costs and increase the agility of their supply chain. The CPG market includes household names such as Nestlé, Danone and Coca-Cola, all of which are seeking lower logistics costs as they compete on price to satisfy the major retailers such as Metro, who in turn are competing with discounters like Lidl. With the enlarged European Union, Germany has become the geographic centre of European logistics and a natural staging post for the new markets of Eastern Europe. The third-party logistics market is dominated by large providers such as DHL, Schenker and Dachser (as described in more detail in Chapter 4). Bordering nine countries, analysts expect the German outsourced logistics market to grow by around 9 per cent (CAGR) between 2005 and 2009 (Transport Intelligence, 2006).

Spain Spain facts and figures Population: 40 million (July 2006 estimated) Area: 504,782 sq km Currency (code): euro (EUR) R GDP: US$1.021 trillion (2005 estimated) GDP real growth rate: 3.4 per cent (2005 estimated) GDP per capita: US$25,200 (2005 estimated) Unemployment rate: 10.1 per cent (2005 estimated) Exports: US$194.3 billion fob (2005 estimated) Imports: US$271.8 billion fob (2005 estimated)

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Export partners: France 9.3 per cent, Germany 11.7 per cent, Portugal 9.6 per cent, United Kingdom 9 per cent, Italy 9 per cent, United States 4 per cent (2004) Import partners: Germany 16.6 per cent, France 15.8 per cent, Italy 8.9 per cent, United Kingdom 6.8 per cent, Netherlands 4.8 per cent (2004) Roadways total: 666,292 km, of which 659,629 km are paved (including 12,009 km of expressways) Ports and terminals: Algeciras, Barcelona, Cartagena, Gijon, Huelva, La Coruna, Tarragona, Valencia Source: CIA (2006).

Spanish economy Through its mixed capitalist economy, Spain has a GDP per capita that is 80 per cent of the four leading West European economies. Since the 1990s, Spain has focused on liberalization, privatization and deregulation of the economy. Unemployment has fallen steadily but remains high at 10.1 per cent. Growth of 2.5 per cent in 2003, 2.6 per cent in 2004, and 3.4 per cent in 2005 was seen as acceptable given the downturn in the European economy (CIA, 2006).

Spanish logistics market An estimate of the size of Spain’s logistics market is N15 billion, of which around 15 per cent is outsourced (Transport Intelligence, 2006). However, this is one of the fastest-growing outsourcing markets in Europe, with an estimated CAGR of 12.8 per cent from 2005 to 2009 (Transport Intelligence, 2006). Despite considerable competition from its European rivals, Spain is seen as a good strategic geographical location, as the gateway for business with Europe, to and from Africa, the Middle East and Asia. Spain’s ties with Latin America further strengthen its importance as a location for international business and logistics. Spain has been investing in its infrastructure, including the development of so-called Logistic Activities Zones at the ports of Barcelona and Valencia, expansion of Madrid’s Barajas and Barcelona’s El Prat airports and the improvement of the port of Bilbao and the dry port of Madrid. The Spanish market is essentially a number of regional markets joined by two major hubs in Madrid and Barcelona, and the logistics market in Spain follows this model. The Spanish third-party provider market is home to both domestic and European providers, and has an estimated value of N2.3 billion.

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The automotive industry in Spain is the fifth largest in the world and invests more in logistic operations than any other sector in Spain. The healthcare sector also has large spends on logistics, including automated warehousing, and increasingly Spanish hospitals are seeking to subcontract the management of their logistics operations to third-party providers.

Eastern Europe and emerging markets This section considers the position of the main Eastern European countries.

Poland

Poland facts and figures Population: 38.5 million (July 2006 estimated) Area: 312,685 sq km Currency (code): zloty (PLN) GDP: US$242.7 billion (2005 estimated) GDP real growth rate: 3.5 per cent (2005 estimated) GDP per capita: US$12,700 (2005 estimated) Unemployment rate: 18.3 per cent (2005 estimated) Exports: US$92.72 billion fob (2005 estimated) Imports: US$95.67 billion fob (2005 estimated) Export partners: Germany 30 per cent, Italy 6.1 per cent, France 6 per cent, United Kingdom 5.4 per cent, the Czech Republic 4.3 per cent, Netherlands 4.3 per cent (2004) Import partners: Germany 24.4 per cent, Italy 7.9 per cent, Russia 7.2 per cent, France 6.7 per cent, China 4.6 per cent (2004) Roadways total: 423,997 km, of which 295,356 km are paved (including 484 km of expressways) Ports and terminals: Gdansk, Gdynia, Swinoujscie, Szczecin Source: CIA (2006).

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The Polish economy Poland has been focused on a policy of economic liberalization throughout the 1990s and has become a success story among developing economies. However there is still much to be done, including reducing the unemployment rate which in 2006 was the highest in the European Union. The privatization of many small and medium-sized state-owned businesses and liberal laws on developing new companies have supported the establishment of the private business sector. Poland became a member of the European Union in May 2004, and large exports to the European Union contributed to the country’s strong growth in 2004. The European Union has made nearly US$23.2 billion available to Poland in the course of 2006 (CIA, 2006).

The Czech Republic Czech Republic facts and figures Population: 10 million (July 2006 estimated) Area: 78,866 sq km Currency (code): Czech koruna (CZK) GDP: US$110.2 billion (2005 estimated) GDP real growth rate: 4.8 per cent (2005 estimated) GDP per capita: US$18,100 (2005 estimated) Unemployment rate: 9.1 per cent (2005 estimated) Exports: US$78.37 billion fob (2005 estimated) Imports: US$76.59 billion fob (2005 estimated) Export partners: Germany 36.2 per cent, Slovakia 8.5 per cent, Austria 6 per cent, Poland 5.3 per cent, United Kingdom 4.7 per cent, France 4.6 per cent, Italy 4.3 per cent, Netherlands 4.3 per cent (2004) Import partners: Germany 31.7 per cent, Slovakia 5.4 per cent, Italy 5.3 per cent, China 5.2 per cent, Poland 4.8 per cent, France 4.7 per cent, Russia 4.1 per cent, Austria 4 per cent (2004) Roadways total: 127,672 km all paved (including 518 km of expressways) (2002) Ports and terminals: Decin, Prague, Usti and Labem Source: CIA (2006).

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The Czech economy The Czech Republic has become one of the most successful and prosperous of the former Soviet states of Eastern Europe. The country’s growth in 2000–05 was supported by exports to the European Union, particularly to Germany, as well as strong foreign and domestic investment. Domestic demand is playing an important role in the economy’s growth as interest rates reduce and the availability of credit increases. In addition there is increasing demand for Czech products by the European Union. Accession to the European Union in May 2004 has given further focus to economic reform and improvements in the financial sector, and the availability of EU funds should support increased output growth (CIA, 2006).

Slovakia Slovakia facts and figures Population: 5 million (July 2006 estimated) Area: 48,845 sq km Currency (code): Slovak koruna (SKK) GDP: US$42.74 billion (2005 estimated) GDP real growth rate: 5.5 per cent (2005 estimated) GDP per capita: US$15,800 (2005 estimated) Unemployment rate: 11.4 per cent (2005 estimated) Exports: US$32.39 billion fob (2005 estimated) Imports: US$34.48 billion fob (2005 estimated) Export partners: Germany 34.4 per cent, the Czech Republic 14.6 per cent, Austria 8.2 per cent, Italy 5.8 per cent, Poland 5.3 per cent, United States 4.5 per cent, Hungary 4.3 per cent (2004) Import partners: Germany 26 per cent, the Czech Republic 21.3 per cent, Russia 9.1 per cent, Austria 6.6 per cent, Poland 4.9 per cent, Italy 4.9 per cent (2004) Roadways total: 42,993 km, of which 37,533 km are paved (including 313 km of expressways); unpaved: 5,460 km (2003) Ports and terminals: Bratislava, Komarno Source: CIA (2006).

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The Slovakian economy Slovakia, which joined the European Union in May 2004, has had an excellent transition from a centrally planned economy to a modern market economy. It made excellent progress during 2001 to 2004 in stabilizing the economy and introducing structural reform. Major privatizations of companies are virtually complete and the government has supported foreign investment with appropriate policies, such as a 19 per cent flat tax. Foreign investment in the automotive sector in particular, has been strong and Slovakia’s economic growth exceeded expectations in 2001–05, despite the general European slowdown. However, unemployment is at an unacceptable level of 11.4 per cent in 2005 and remains the country’s biggest challenge (CIA, 2006).

Hungary Hungary facts and figures Population: 10 million (July 2006 estimated) Area: 93,030 sq km Currency (code): forint (HUF) GDP: US$104.5 billion (2005 estimated) GDP real growth rate: 3.9 per cent (2005 estimated) GDP per capita: US$16,100 (2005 estimated) Unemployment rate: 7.1 per cent (2005 estimated) Exports: US$61.75 billion fob (2005 estimated) Imports: US$64.83 billion fob (2005 estimated) Export partners: Germany 31.4 per cent, Austria 6.8 per cent, France 5.7 per cent, Italy 5.6 per cent, United Kingdom 5.1 per cent (2004) Import partners: Germany 29.2 per cent, Austria 8.3 per cent, Russia 5.7 per cent, Italy 5.5 per cent, Netherlands 4.9 per cent, China 4.8 per cent, France 4.7 per cent (2004) Roadways total: 159,568 km, of which 70,050 km are paved (including 527 km of expressways) Ports and terminals: Budapest, Dunaujvaros, Gyor-Gonyu, Csepel, Baja, Mohacs (2003) Source: CIA (2006).

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The Hungarian economy Hungary has made the transition from a centrally planned to a market economy and has continued to demonstrate strong growth since its accession to the European Union in May 2004. The private sector accounts for over 80 per cent of GDP, and foreign ownership and investment in Hungarian business is widespread, totalling more than US$60 billion since 1989. Inflation has declined to 3.7 per cent in 2005 from 14 per cent in 1998, but unemployment has persisted around the 6–7 per cent level. Germany is Hungary’s largest economic partner (CIA, 2006).

Turkey Turkey facts and figures Population: 70 million (July 2006 estimated) Area: 780,580 sq km Currency (code): Turkish lira (YTL) GDP: US$332.5 billion (2005 estimated) GDP real growth rate: 5.6 per cent (2005 estimated) GDP per capita: US$8,200 (2005 estimated) Unemployment rate: 10.2 per cent plus underemployment of 4 per cent (2005 estimated) Exports: US$72.49 billion fob (2005 estimated) Imports: US$101.2 billion fob (2005 estimated) Export partners: Germany 13 per cent, United Kingdom 8.2 per cent, Italy 7 per cent, United States 6.9 per cent, France 5.1 per cent, Spain 4.2 per cent (2005) Import partners: Germany 13.9 per cent, Russia 10.5 per cent, Italy 7 per cent, France 5.6 per cent, China 4.4 per cent, United States 4.1 per cent (2005) Roadways total: 347,553 km, of which 154,807 km are paved (including 1,886 km of expressways); unpaved: 192,747 km (2004) Ports and terminals: Aliaga, Ambarli, Eregli, Haydarpasa, Istanbul, Izmir, Kocaeli (Izmit), Toros. Source: CIA (2006).

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The Turkish economy Modern Turkey was founded in 1923 by national hero Mustafa Kemal, now known as Ataturk, or ‘Father of the Turks’. Under his guidance, the country underwent comprehensive social, legal and political reforms, leading to the 1950 election and the orderly transition of power to the opposition Democratic Party. Since then, Turkey has had periods of volatility and intermittent military coups (1960, 1971, 1980), although each occasion has resulted in the return of political control to civilians. Turkey joined the UN in 1945 and became a member of NATO in 1952. It became an associate member of the European Community in 1964 and has focused hard on making reforms to reinforce its democratic system and economy. It is currently in talks with the European Union with regards to full membership. Turkey has developed an energetic economy, which is an intricate blend of modern industries together with traditional farming, which still accounts for over 35 per cent of employment. The government still plays an important role in industry, banking, transport and communication, but there is a strong and fast-developing private sector. Textiles and clothing is the largest industry sector, accounting for a third of industrial employment. Other sectors, in particular the automotive and electronics industries, are increasing in importance within Turkey’s economy. The economy has been improving steadily and the GDP growth reached 9 per cent in 2004, with inflation falling to a 30-year low of 7.7 per cent in 2005. However the economy is still weighed down by a high current account deficit and high levels of debt. Prior to 2005, foreign direct investment (FDI) in Turkey averaged less than US$1 billion annually; however additional economic and judicial reforms together with the prospect of EU membership are expected to increase FDI in the future (CIA, 2006).

Eastern Europe and emerging countries logistics market EU membership On 1 May 2004, an unprecedented 10 countries were admitted to the European Union. The accession of Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia has provided a significant opportunity for economic growth and investment for these previously underdeveloped countries. In addition Bulgaria and Romania hope to join by 2007, while Turkey and Croatia are hopeful of joining before the end of the decade. Together with political and economic developments and with the move of Western manufacturers to lower-cost Eastern European locations, these

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developing markets have become very attractive to manufacturers, retailers and third-party providers alike. The growth of the Eastern European countries is outpacing the rest of Europe. As manufacturers move their production to countries like Poland, the Czech Republic, Slovakia and Hungary, their economies are being fuelled and retailers are following. Because of relatively poor infrastructure and logistics knowledge, both manufacturers and retailers are seeking third-party providers to support their Eastern European logistics activities. The services required in these countries are virtually the same as those offered in Western Europe as manufacturers and retailers seek to establish blue chip operations, albeit at low cost. While the number of third-party provider operators in Poland, Hungary, the Czech Republic, Slovakia and the Baltic States is still small compared with developed Western European markets, they are steadily increasing and attracting the larger pan-European players. These larger players are looking to establish generic growth with existing customers moving into the region as well as making acquisitions to break into the market. Countries including Croatia, Rumania, Ukraine, Bulgaria and Russia are growing at a slower pace and as such the requirement for outsourcing is lagging behind.

Key industry sectors Key industry sectors such as automotives, high-tech/electronics, CPG and retail have been increasing the demand for logistics activities such as transportation, contract logistics and other added-value activities. In particular, the Czech Republic, Poland, Slovakia, Hungary, Slovenia and the Baltic States have attracted substantial investment by consumer manufacturers. Furthermore, a wealthier middle class with disposable income has emerged in Poland, the Czech Republic and Hungary, and they are being targeted by retailers such as Carrefour, Tesco, Hornbach, Billa, Marks & Spencer and Mango.

Outsourced logistics market The outsourced logistics market is estimated to be around N680 million but with a significant CAGR of 20 per cent (Transport Intelligence, 2006). The Polish third-party logistics market is expected to see significant growth from the growing numbers of automotive and CPG manufacturers setting up in the country as well as retailers, who are seeing the opportunity of the growing economy. Spend on outsourced contract logistics in Poland was estimated at N145 million in 2003 with a CAGR growth rate of 24.2 per cent up to 2007 (Transport Intelligence, 2006). The Czech Republic can expect increased growth due to its strategic location and highly disciplined workforce, while

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the Slovakian logistics market is growing because of its strong economy and availability of labour, and in particular through a strong automotive industry. The Hungarian logistics market is in a powerful position largely due to more than 40 airports, which require logistical support for air freight operations. The Hungarian outsourced contract logistics market was valued at N90 million in 2003, with a CAGR growth expectation of 18.7 per cent over the following five years (Transport Intelligence, 2006). Turkey has been developing its logistics market since the 1990s and many leading 3PLs have moved into the country to take advantage of developing textile, fashion and automotive markets. The logistics market is relatively unsophisticated, although local providers are well organized and disciplined. As European providers enter Turkey, a number of local providers are being acquired or becoming members of joint ventures, and as a result, third-party capabilities and services are improving.

The Americas The Americas, made up of the United States, Canada and Latin America, has a total logistics market with an estimated spend of US$270 billion (N214 billion) (Transport Intelligence, 2006). The United States of America dominates the Americas market and together with Canada and Mexico is party to NAFTA (the North American Free Trade Agreement), a treaty which is focused on removing trading barriers between the three countries. Latin American countries have been developing their economies, fuelled by foreign investment largely by global manufacturers. Third-party providers have followed their customers into the region and established capabilities.

United States US facts and figures Population: 298 million (July 2006 estimated) Area: 9,631,418 sq km Currency (code): US dollar (US$) $ GDP: US$12.47 trillion (2005 estimated) GDP real growth rate: 3.5 per cent (2005 estimated)

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GDP per capita: US$42,000 (2005 estimated) Unemployment rate: 5.1 per cent (2005 estimated) Exports: US$927.5 billion fob (2005 estimated) Imports: US$1.727 trillion fob (2005 estimated) Export partners: Canada 23 per cent, Mexico 13.6 per cent, Japan 6.7 per cent, United Kingdom 4.4 per cent, China 4.3 per cent (2004) Import partners: Canada 17 per cent, China 13.8 per cent, Mexico 10.3 per cent, Japan 8.7 per cent, Germany 5.2 per cent (2004) Roadways total: 6,407,637 km, of which 4,164,964 km are paved (including 74,950 km of expressways) Ports and terminals: Corpus Christi, Duluth, Hampton Roads, Houston, Long Beach, Los Angeles, New Orleans, New York, Philadelphia, Tampa, Texas City Source: CIA (2006).

The US economy The US economy is the largest and most technologically powerful in the world, and businesses enjoy a more flexible and open market than their counterparts in Western Europe and Japan. Rises in GDP in 2004 and 2005 were underpinned by substantial gains in labour productivity, providing Americans with the highest average GDP per capita in the world. Due to the rapid growth of the US economy in recent years, American consumers have been buying foreign goods of all kinds, including cars, consumer electronics and clothing. At the same time, relatively slow growth in some economies, including the European Union and Japan, has slowed down the demand for products made in the United States. So even though US exports are increasing, the value of imports is rising faster. The trade deficit soared to a record high in 2005 for the fourth year in a row, giving real cause for concern for the US economy. There are other longer-term challenges for the United States, including too little investment in economic infrastructure, the rapidly increasing medical and pension costs of an ageing population, significant budget deficits, and lack of growth of family income in the lower economic groups (CIA, 2006).

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The US logistics market Growth The United States has a relatively mature logistics outsourcing market, although it has historically been focused on road freight, or ‘trucking’ as it is known in the United States. The value of the total logistics market is around US$210 billion with an estimated 18.5 per cent outsourced, representing a third-party provider market of about US$39 billion (Transport Intelligence, 2006). However in recent years US companies have been seeking to outsource more of their logistics and supply-chain activity. The US third-party provider market has been growing steadily over the last few years, and the compound annual growth rate for third-party businesses in the United States is over 14 per cent since 1996 (Armstrong & Associates, 2006c). In particular this growth has been driven by international transportation management, the core component for global supply-chain management. This growth has reflected the large increases in global merchandise imports into the United States, particularly from China. As US companies expand trade with NAFTA neighbours Canada and Mexico, and as security compliancy increases, cross-border services are providing increasing opportunities for innovative third-party providers. Over the last 10 years, US exports to Canada have grown at around 10 per cent annually, while exports and imports with Mexico have more than doubled over the same time period (Victoria University, 2006).

Outsourcing The larger the company in the United States, the more likely it is to outsource its logistics and supply chains. Among Fortune 500® companies surveyed in 2004, 80 per cent reported the use of third-party service providers (Lieb and Bentz, 2004). Armstrong & Associates (2006b) report that 64 per cent of Fortune 500 US domestic companies use 3PLs for logistics and supply-chain functions. Further, the report details that customers such as General Motors, DaimlerChrysler and Wal-Mart each use 30 or more 3PLs, whilst overall customers are utilizing 3PLs for an average of three services. The very large automotive and high-technology industries in the United States have outsourced many of their services. Large CPG manufacturers such as Procter & Gamble, Pepsi-Co, Sara Lee and Colgate Palmolive all outsource significant elements of their logistics services. Finally retailers such as Wal-Mart, Home Depot, Sears Roebuck and Kroger all outsource logistics activities.

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Inbound congestion There is major congestion in US ports, particularly in Southern California, causing shippers to bring their products via the Panama Canal into East Coast ports. This lengthens the supply chain and is having the effect of increasing inventory to compensate. Shippers have realized that they need to address this issue, and a number of companies are redesigning their supply-chain networks. In order to address this challenge, Dell is building a new factory in North Carolina to better serve its East Coast customers, while Wal-Mart is building a 2 million square feet distribution facility alongside the Port of Houston to avoid West Coast delays. Companies are also turning to third-party providers to support this approach. Third-party providers that are focused on lean logistics and demand-led principles are particularly well positioned in the future US logistics market.

Road freight The US road freight industry is under pressure because trucking demand is 10 times greater than supply, due mainly to driver shortages and rising fuel prices. In response shippers are increasingly turning to rail freight, which is growing at around 5 per cent per year. There are also increases in intermodal volumes, showing up to 10 per cent annual growth (Hickey, 2006).

Apparel and textiles The impact of China’s growth in the apparel and textiles industry has had a devastating impact on the US manufacturing industry and a number of large manufacturers have gone bankrupt.

Retail Retail is a very significant industry in the United States, led by the world’s largest retailer, Wal-Mart. Retail sales in the United States were recorded as US$3,435 billion in 2001 (Bizstats, 2006). DIY centres (or home centers, as they are known in the United States), such as Home Depot, have been enjoying strong growth, although some of the increase is as a result of hurricanes Katrina and Rita. Competition among retailers has never been tougher as they compete with new channels to market and competitive pricing. As a result retailers are continually seeking to reduce their supplychain costs to enable them to be more competitive and profitable. This is an opportunity for third-party providers in the United States, especially tiertwo retailers.

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Toys’R’Us case history Toys’R’Us was founded in the United States in 1948, selling baby furniture, but by 1957 the retailer had evolved to become a toy supermarket. The company is now an US$11 billion company with approximately 1,400 stores worldwide. The company imports 90 per cent of its merchandise, and when delays and uncertainties of using West Coast ports started to lead to higher inventory levels Toys’R’Us took the decision to divert containers to East Coast destinations via the Panama Canal, thereby reducing the delay time to at most one day.

Canada Canadian facts and figures Population: 33 million (July 2006 estimated) Area: 9,984,670 sq km Currency (code): Canadian dollar (CAD) GDP: US$1.023 trillion (2005 estimated) GDP real growth rate: 2.9 per cent (2005 estimated) GDP per capita: US$32,900 (2005 estimated) Unemployment rate: 6.8 per cent (2005 estimated) Exports: US$364.8 billion fob (2005 estimated) Imports: US$317.7 billion fob (2005 estimated) Export partners: United States 85.1 per cent, Japan 2.1 per cent, United Kingdom 1.6 per cent (2004) Import partners: United States 58.9 per cent, China 6.8 per cent, Mexico 3.8 per cent (2004) Roadways total: 1,408,900 km, of which 497,342 km are paved (including 16,906 km of expressways) Ports and terminals: Fraser River Port, Goderich, Halifax, Montreal, Port Cartier, Quebec, Saint John’s (Newfoundland), Sept Isles, Vancouver Source: CIA (2006).

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The Canadian economy Like the United States, Canada is an affluent, high-tech industrial society with a market-oriented economic system, enjoying affluent living standards. The 1989 US–Canada Free Trade Agreement (FTA) and the 1994 NAFTA (which also includes Mexico) launched a dramatic increase in trade and economic integration with the United States. Given its great natural resources, skilled labour force and modern capital plant, Canada enjoys good economic prospects. Canada enjoys a substantial trade surplus with the United States, which takes more than 85 per cent of Canadian exports (CIA, 2006).

The Canadian logistics market Trade with the United States Canada has a world-class infrastructure, and since NAFTA went into effect in the mid-1990s has seen some benefits, with Canadian manufacturing companies now making considerably more products for US markets (Terreri, 2006). Terreri’s article goes on to say that according to the Ontario Ministry of Transportation, trade between the United States and Canada represents US$590 billion annually and 87 per cent of Canadian exports are bound for US markets. Indeed, according to Terreri’s report, Canada’s transportation infrastructure currently supports about US$1 billion in trade across the US–Canada border every day by rail, road, sea and air. Canada’s logistics industry strives to ensure border crossings are as seamless as possible, by developing and putting into place innovative technologies, procedures and equipment. This has become particularly important with new security requirements, and the establishment of C-TPAT (Customs Trade Partnership against Terrorism) is one of a number of initiatives that assist in the security of goods across the border (Terreri, 2006). The automotive industry takes advantage of this opportunity with a large amount of movement in the Detroit area, with automotive components passing backwards and forwards between the two countries (Terreri, 2006).

Excellent infrastructure Canada’s logistics industry enjoys an excellent infrastructure for road transportation, together with rail and inter-modal operations. Toronto is a key logistics centre, attracting many large US business players because they can serve around 60 per cent of the North American market population within a 12-hour drive (Terreri, 2006). Toronto Pearson International is Canada’s busiest airport, handling 325,000 metric tons of cargo in 2001, according to Toronto’s Economic Development Office (Terreri, 2006). Air cargo traffic

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through the airport is expected to grow at an average rate of 5 per cent per annum through to 2020. Calgary provides distribution access to markets in the Pacific Northwest and offers more than 100 million square feet of warehousing and distribution centre space (Terreri, 2006). With the number of people employed in Calgary’s transportation industry having grown 120 per cent in the last 10 years, it is now the largest industry in Calgary. The city can supply goods to 40 million people within a 24-hour drive.

Wal-Mart outsourcing case history Third-party provider Tibbet and Britten, since acquired by Exel, which itself was bought by Deutsche Post World Net (see Chapter 4), set up Supply Chain Management Logistics (SCM) exclusively to handle WalMart’s Canadian warehousing and distribution operations. Wal-Mart operates 240 retail stores throughout Canada. SCM employs 1,000 people at its 1 million sq ft warehousing facility in Calgary, and also runs two smaller operations to handle all of Wal-Mart’s Canadian logistics needs. Offshore shipments usually come into the port of Vancouver from where they are shipped inter-modally to the three Canadian distribution centres.

Latin America Mexico Mexico facts and figures Population: 107 million (July 2006 estimated) Area: 1,972,550 sq km Currency (code): Mexican peso (MXN) GDP: US$699.5 billion (2005 estimated) GDP real growth rate: 3 per cent (2005 estimated) GDP per capita: US$10,100 (2005 estimated) Unemployment rate: 3.6 per cent plus underemployment of perhaps 25 per cent (2005 estimated) Exports: US$213.7 billion fob (2005 estimated) Imports: US$223.7 billion fob (2005 estimated)

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Export partners: United States 87.6 per cent, Canada 1.8 per cent, Spain 1.1 per cent (2004) Import partners: United States 55.1 per cent, China 7.1 per cent, Japan 5.3 per cent (2004) Roadways total: 349,038 km, of which 116,928 km are paved (including 6,979 km of expressways) Ports and terminals: Altamira, Manzanillo, Morro Redondo, Salina Cruz, Tampico, Topolobampo, Veracruz Source: CIA (2006).

The Mexican economy Mexico operates a free market economy that has recently entered the trillion-dollar club. It has a mixture of modern and outdated industry, increasingly dominated by the private sector. Per capita income is onefourth that of the United States and income distribution remains highly unequal. Trade with the United States and Canada has tripled since the implementation of NAFTA in 1994. Mexico has 12 free trade agreements with over 40 countries, including Guatemala, Honduras, El Salvador, the European Free Trade Area and Japan, putting more than 90 per cent of its trade under free trade agreements (CIA, 2006).

Brazil Brazil facts and figures Population: 188 million (July 2006 estimated) Area: 8,511,965 sq km Currency (code): real (BRL) GDP: US$619.7 billion (2005 estimated) GDP real growth rate: 2.4 per cent (2005 estimated) GDP per capita: US$8,400 (2005 estimated) Unemployment rate: 9.9 per cent (2005 estimated) Exports: US$115.1 billion fob (2005 estimated) Imports: US$78.02 billion fob (2005 estimated)

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Export partners: United States 20.8 per cent, Argentina 7.5 per cent, Netherlands 6.1 per cent, China 5.6 per cent, Germany 4.1 per cent, Mexico 4 per cent (2004) Import partners: United States 18.3 per cent, Argentina 8.9 per cent, Germany 8.1 per cent, China 5.9 per cent, Nigeria 5.6 per cent, Japan 4.6 per cent (2004) Roadways total: 1,724,929 km, of which 94,871 km are paved Ports and terminals: Gebig, Itaqui, Rio de Janeiro, Rio Grande, San Sebasttiao, Santos, Sepetiba Terminal, Tubarao, Vitoria Source: CIA (2006).

The Brazilian economy Brazil, with its large and well-developed agricultural, mining, manufacturing and service sectors, is leading the way in the developing economies of South America. It is also expanding its presence in world markets and becoming a target for global manufacturers. 2001–03 was a tough period for Brazil, with real wages falling and its economy only growing at 2.2 per cent per year. However it survived this period and in 2004, it enjoyed much improved growth that created increases in employment and real wages. Brazil has started to show a trade surplus reflecting its attraction for Western manufacturers. There are however vulnerabilities, including the increasing domestic and foreign debt which is large in relation to Brazil’s small, albeit growing, export value (CIA, 2006).

Latin American logistics market Growth and investment The rapid growth in many Latin American countries has occurred as they have opened their economies to trade and foreign investment and privatized their state-owned enterprises to encourage economic growth. Brazil and Mexico have been the largest beneficiaries of foreign investment in the region. Forecasters have predicted foreign direct investments in Brazil of over US$18 billion, reflecting its destination as a low-cost centre for manufacturers, especially from the United States (Ribeiro, 2006). Increased public and private partnerships are focusing on road and railway infrastructure, with the establishment of export corridors to the Pacific Ocean. Finally, incredibly, China is itself seeking to invest in Latin America. In 2005 the Chinese president met with South American governments and

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signed agreements with Chile, Argentina, Peru and Venezuela. China has committed to invest up to US$100 billion in the region over the following 10 years, underlining China’s aspiration to trade integration with the region (Lam, 2006).

High technology High-technology manufacturing has grown considerably since the early 1990s, particularly in Argentina, Brazil and Mexico, with Chile, Colombia, Costa Rica and Venezuela also benefiting. Global manufacturers including Compaq, General Electric, Hewlett-Packard, IBM, Intel, Motorola, Philips, Sony and Xerox have all invested significantly in the region. The United States has been the primary recipient and beneficiary of the expansion in Latin America’s high-technology trade.

Pharmaceutical Global pharmaceutical companies including Glaxo Wellcome, Pfizer and Roche have also invested heavily in Latin America, particularly in Argentina, Brazil and Mexico.

Apparel and textiles Brazil is also poised to become a major apparel and textile player, having made a number of major investments in the industry. Argentina is also focusing on the apparel and textile sector and predicts growth of around 10 per cent.

Retailers Retailers have also focused on the Latin American market, with Wal-Mart and France’s Carrefour among others establishing businesses in Mexico, Brazil and Argentina in recent years. Mexico has seen retailers move into this developing market, including companies such as Home Depot and Office Depot.

Automotive and other A number of additional industry sectors have emerged in Mexico, including automotive manufacturers and suppliers, home appliances, medical devices and aerospace. Volkswagen has the only remaining factory in the world producing the original Volkswagen Beetle in Mexico. The plant, which also manufacturers the New Beetle, employs some 16,000 people and produces about 1,500 units per day, which are sold to the United States, Canada and Europe.

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Third-party providers Third-party providers have been following their customers into Latin America, where they have established capabilities in support of their customers. These capabilities are varied, ranging from classic logistics operations like warehousing, through to the planning and execution of manufacturing components for assembly.

Asia Pacific (APAC) The logistics market The Asia Pacific has a total logistics market spend of around US$412 billion, representing 42 per cent of logistics spend globally (Transport Intelligence, 2006). Of that spend it is estimated that only 9 per cent is currently outsourced, providing a third-party provider revenue of around US$38.5 billion (Transport Intelligence, 2006). The outsourced logistics market in the region has a CAGR of 17.5 per cent from 2005 to 2009 (Transport Intelligence, 2006).

Regional diversity Asia Pacific, which makes up more than half of the world’s total population, is an extremely diverse region and ranges from some of the poorest to the richest countries in the world. Cultural and religious diversity, coupled with three of the world’s four most populous countries, makes the region both a dynamic and a demanding area in which to invest. The region has had strong economies in countries like Japan, Taiwan and South Korea, which have established strong industrial bases since the Second World War. Countries like Singapore, Malaysia and Thailand took advantage of the growth of global manufacturers, which had moved to lowcost economies in the 1980s and 1990s. Since 2001, and its inclusion in the WTO, China has become the largest growth economy in Asia Pacific. Other emerging countries include India, Vietnam and Indonesia.

Foreign investment The success of this fast-developing region is reflected by the entry of foreign retailers, including Wal-Mart, Carrefour, Ahold, Metro, Tesco and ItoYokado. In addition, CPG manufacturers have moved into the region, seeing vast numbers of people with greater spending levels as opportunities to market, manufacture and sell their products. These companies include household names such as Procter & Gamble, Unilever, Nestlé, Colgate Palmolive and Coca-Cola.

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The economic growth and investment in Asia Pacific has had a profound impact on the logistics industry. Both local and foreign service providers have seen demand for their basic logistics services increase, but also requirements for more advanced and integrated logistics giving the larger foreign players an edge.

The old guard Japan Japan facts and figures Population: 127.5 million (July 2006 estimated) Area: 377,835 sq km Currency (code): yen (JPY) GDP: US$4.848 trillion (2005 estimated) GDP real growth rate: 2.4 per cent (2005 estimated) GDP per capita: US$30,700 (2005 estimated) Unemployment rate: 4.3 per cent (2005 estimated) Exports: US$550.5 billion fob (2005 estimated) Imports: US$451.1 billion fob (2005 estimated) Export partners: United States 22.7 per cent, China 13.1 per cent, South Korea 7.8 per cent, Taiwan 7.4 per cent, Hong Kong 6.3 per cent (2004) Import partners: China 20.7 per cent, United States 14 per cent, South Korea 4.9 per cent, Australia 4.3 per cent, Indonesia 4.1 per cent, Saudi Arabia 4.1 per cent, UAE 4 per cent (2004) Roadways total: 1,177,278 km, of which 914,745 km are paved (including 6,946 km of expressways) Ports and terminals: Chiba, Kawasaki, Kiire, Kisarazu, Kobe, Mizushima, Nagoya, Osaka, Tokyo, Yokohama Source: CIA (2006).

Japanese economy Japan has developed steadily to become the second most technologically powerful economy in the world after the United States. Japan’s industrial

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sector is heavily dependent on imported raw materials and fuels. From 2000 to 2003, the government focus to revitalize economic growth was frustrated by the slowing of the US, European and Asian economies. In 2004 and 2005, growth improved and concerns about deflation in prices and economic activity reduced. However, Japan’s huge debt, which totals 170 per cent of GDP, and the ageing of the population remain two major long-term concerns, and with its low growth rate it is generally agreed that the country is in recession (CIA, 2006).

Japan’s logistics market Japan’s main export products are cars, electronic devices and computers. Its most important single trade partner is the United States, which accounts for more than 20 per cent of all Japanese exports. Japan’s key industry sectors are electronics and high technology, automotives, construction, distribution, real estate, services and communications. In particular, technological innovation has enabled Japan to establish its position as a leader in the semiconductor and automobile industries. Companies like Fujitsu, Nikon and Kyocera are examples of Japanese high-technology and electronics manufacturers. Of course, the automotive industry includes leading car manufacturers Toyota and Honda. Japan’s grocery retail market includes domestic players like Ito-Yokado (which includes ‘7 eleven’), Aeon and Daiei Inc. However Western retailers have also moved into this attractive consumer market, including Wal-Mart, Carrefour Metro, Tesco and Costco. Japan has seen China as a source of low-cost manufacture, and a number of Japanese businesses have moved their production accordingly. This, together with Japan’s export of components and cars, has driven the freight forwarding market in Japan, as companies have benefited from this additional international transportation. Japan’s outsourced logistics market continues to grow as Japanese companies seek to outsource their logistics as a response to the ongoing economic recession. Some major companies have established thirdparty logistics spin-offs to address this demand. The Japanese logistics outsourcing market is still very nationalistic, with few global players present. However, Western third-party providers are seeking to move into the country and many are eyeing up acquisition targets. Exel, itself since purchased by DPWN (see Chapter 4), acquired Fujitsu’s logistics business in order to establish a base from which to grow its Japanese business. Since the acquisition, it has won a logistics contract with WalMart in Japan.

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Taiwan Taiwan facts and figures Population: 23 million (July 2006 estimated) Area: 35,980 sq km Currency (code): new Taiwan dollar (TWD) GDP: US$326.5 billion (2005 estimated) GDP real growth rate: 3.8 per cent (2005 estimated) GDP per capita: US$26,700 (2005 estimated) Unemployment rate: 4.2 per cent (2005 estimated) Exports: US$189.4 billion fob (2005 estimated) Imports: US$181.6 billion fob (2005 estimated) Export partners: China (including Hong Kong) 37 per cent, United States 15.3 per cent, Japan 7.7 per cent (2005) Import partners: Japan 26 per cent, United States 12 per cent, China (including Hong Kong) 12 per cent, South Korea 7 per cent (2005) Roadways total: 37,299 km, of which 35,621 km are paved (including 1,789 km of expressways) Ports and terminals: Chi-lung (Keelung), Hua-lien, Kao-hsiung, Su-ao, T’ai-chung Source: CIA (2006).

Taiwanese economy Taiwan has a successful and dynamic capitalist economy with reducing government involvement. Exports have provided the momentum for industrialization, and the trade surplus is substantial. Taiwan is a major investor throughout South-East Asia. China has become Taiwan’s largest export market and in 2005 China became Taiwan’s second-largest source of imports after Japan. Taiwan has benefited from increases in world demand to achieve significant growth in its export sector; however, excess inventory, higher oil prices and rising interest rates have reduced consumption in developed markets since 2005 (CIA, 2006).

Taiwan’s logistics market Taiwan’s traditional labour-intensive industries have been slowly replaced by capital and technology-advanced industries such as chemicals

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production, information technology, high technology and electronics equipment. High technology, electronics and information technology have developed into the core of Taiwanese industry, accounting for over 35 per cent of the total. The Taiwanese economic development has been supported by literally thousands of small and medium-sized businesses, and there are relatively few large businesses. However one large conglomerate, Hon Hai Precision Industry, is the Taiwanese manufacturer that makes everything from PCs for Hewlett-Packard to cell phones for Nokia and PlayStation 2 game consoles for Sony. Hon Hai, more commonly known by its trade name, Foxconn, has been closing the gap on other global electronics competitors and is now one of the world’s largest contract electronics manufacturers. The textiles industry has traditionally been an important part of the Taiwanese economy and exports, earning large amounts of foreign exchange. However since the mid-1980s a number of problems, such as labour shortages and increasing costs, have forced textile businesses to move production to South-East Asia and China in order to remain competitive. Those textile companies that stayed in Taiwan however have been transformed into medium-sized or large businesses, with commercial and innovative management introduced to raise quality and productivity. Taiwan does not produce natural fabrics but has developed synthetic fabrics, which have been very successful. Indeed Taiwan is now prominent in the world’s textile industry, which has been a key contributor in maintaining the country’s positive trade balance. Taiwan is seen as an ideal global logistics base for the Asia-Pacific region, given its central location, which provides for fast shipping times at reasonable costs. With its geographical, cultural and language links with China, Taiwan has been establishing itself as a stepping stone into this major market for global investment. Taiwan has an effective and competitive logistics industry that has been supported by its improving infrastructure and its wealth of skilled resource. Taiwan has a well-developed retail market with over 60,000 stores. Foreign grocery retailers have also invested in the country, including Carrefour, Tesco, Auchan, Casino, Ito-Yokado and Costco, although many have established joint ventures with Taiwanese companies. The logistics industry in Taiwan offers practicable solutions for retail companies, especially sophisticated systems that support purchasing, storage, delivery and distribution management. Global third-party providers are seeing the opportunities in Taiwan and have been establishing operations in the country.

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South Korea South Korea facts and figures Population: 48.8 million (July 2006 estimated) Area: 98,480 sq km Currency (code): South Korean won (KRW) GDP: US$801.2 billion (2005 estimated) GDP real growth rate: 3.9 per cent (2005 estimated) GDP per capita: US$20,400 (2005 estimated) Unemployment rate: 3.7 per cent (2005 estimated) Exports: US$288.2 billion fob (2005 estimated) Imports: US$256 billion fob (2005 estimated) Export partners: China 19.6 per cent, United States 17 per cent, Japan 8.6 per cent, Hong Kong 7.1 per cent (2004) Import partners: Japan 20.6 per cent, China 13.2 per cent, United States 12.9 per cent, Saudi Arabia 5.3 per cent (2004) Roadways total: 97,252 km, of which 74,641 km are paved (including 2,778 km of expressways) Ports and terminals: Inch’on, Masan, P’ohang, Pusan, Ulsan Source: CIA (2006).

South Korean economy South Korea has developed a successful high-tech modern world economy over the last 40 years or so. In the 1960s, South Korea’s GDP per capita was comparable with the poorer countries of Africa and Asia, but in 2004 South Korea became a member of the trillion-dollar club of world economies. Since the 1990s the economy has been volatile but since 1999 growth has ranged from 3.3 to 9.5 per cent, with an average of 4 per cent growth between 2003 and 2005. Overall though, South Korea’s economy is supported by moderate inflation, low unemployment, an export surplus and relatively equal distribution of income (CIA, 2006).

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South Korea’s logistics market The South Korean economy relies on high technology and electronics manufacturing, machinery and transport equipment, as well as steel, ships and petrochemicals. Major Korean companies include the high-technology manufacturer Samsung Group, car maker Hyundai Motor Group, energy to pharmaceuticals giant SK Corporation, steel producer POSCO and trading company Doosan Corporation. Retailers have seen opportunities in South Korea, with Wal-Mart, Tesco, Ito-Yokado, Costco and Carrefour all establishing stores in the country, although Carrefour has since withdrawn. South Korea aims to become Asia’s logistics capital and become a key logistics hub in the APAC region. Ports are the core to the Korean economy and the country is now focused on developing them into large container ports to serve the Pacific Rim. South Korea’s location also means that it is ideally situated to service the North American, South-East Asian and European routes. As part of this drive, the government also plans to move investment from roads to railways and ports, aiming to link main arterial railway lines to all the major ports. South Korea’s logistics outsourcing rate stands at around 25 per cent, and in order to encourage logistics activity South Korea has decided to give various tax incentives to logistics businesses (Chi-dong, 2006). Companies that outsource 70 per cent or more of their logistics activity will get the benefit of a three-year tax credit for 2 per cent of the logistics costs paid. In addition foreign workers in the logistics industry will be exempt from income tax.

China China facts and figures Population: 1,313 million (July 2006 estimated) Area: 9,596,960 sq km Currency (code): yuan (CNY); note – also referred to as the renminbi (RMB) GDP: US$1.79 trillion (2005 estimated) GDP real growth rate: 9.3 per cent (2005 estimated) GDP per capita: US$6,300 (2005 estimated) Unemployment rate: 4.2 per cent official registered unemployment in urban areas in 2004; substantial unemployment and underemployment in rural areas; an official Chinese journal estimated overall unemployment (including rural areas) for 2003 at 20 per cent (2004)

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Exports: US$752.2 billion fob (2005 estimated) Imports: US$631.8 billion fob (2005 estimated) Export partners: United States 21.1 per cent, Hong Kong 17 per cent, Japan 12.4 per cent, South Korea 4.7 per cent, Germany 4 per cent (2004) Import partners: Japan 16.8 per cent, Taiwan 11.4 per cent, South Korea 11.1 per cent, United States 8 per cent, Germany 5.4 per cent (2004) Roadways total: 1,809,829 km, of which 1,447,682 km are paved (with at least 29,745 km of expressways) Ports and terminals: Dalian, Guangzhou, Nanjing, Ningbo, Qingdao, Qinhuangdao, Shanghai Source: CIA (2006).

The Chinese economy Over the last 25 years or so, China’s economy has changed from a centrally planned system that was mostly closed to international trade to a more market-oriented economy. China, now the third-largest economy in the world, has become a major global player, and the restructuring of the economy has contributed to a more than 10-fold increase in GDP since 1978. Economic growth has been more rapid in coastal provinces than in the interior, and there are large disparities in per capita income between regions. Foreign investment continues to be a strong element in China’s extraordinary growth in world trade, and has been a key factor in the development of jobs (CIA, 2006).

The Chinese logistics industry China’s logistics industry has enjoyed a period of impressive growth, helped by economic progress and the increased acceptance of outsourcing by Chinese manufacturers and retailers, as well as more sophisticated logistics providers entering the market. The estimated value of China’s logistics spend was N207 billion in 2005, of which just 2 per cent is outsourced to contract logistics providers, representing revenues of N4.9 billion (Transport Intelligence, 2006). The contract logistics outsourcing market is forecast to grow at a CAGR of 30 per cent per annum over the next few years (Transport Intelligence, 2006). However, there are issues. China’s economic growth has been hindered by a weak transport and communications infrastructure, high transport and logistics costs, and a relatively poorly educated and trained workforce. Indeed the cost of moving goods in China is up to double that of developed countries, including those in Europe and North America. To address these

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challenges, China has been investing in the transport industry, including roads, railways, water and air transport infrastructure. Furthermore, logistics education and training have been reinforced and China’s logistics education programmes are increasing quickly. By mid-2005, the China Federation of Logistics and Purchasing had arranged for nearly 20,000 people to attend Certified Professional Logistician qualification training (Xinqian, 2006).

Industry sectors China’s growth has been fuelled by technology and automotive manufacturing, both parts and final assembly. China also has a highly developed apparel and textile industry providing high-quality low-cost production to the developed markets across the world. Until the end of 2004, China’s textile exports were subject to limits. Following the end of these restrictions, China increased its textile exports dramatically, showing an incredible 29 per cent in the first quarter of 2005 (Craig, 2006). China is now the world’s largest exporter of clothing, with a 28 per cent share of the world market (Craig, 2006). Many Western countries are expecting to double their total imports from China in the five years up to 2010. The incredible development of the Chinese high-technology and automotive manufacturing market has major implications for the global logistics industry. As China’s economy grows at up to 10 per cent per annum, cargo volumes have increased significantly. The Chinese growth phenomenon will have huge potential for third-party providers, particularly those that are focused on manufacturing and industrial sectors. Major third-party providers from around the world are determined to enter this market, through acquisitions, start-ups or joint ventures. Also, as the population has become increasingly wealthy, retailers have identified an opportunity for development. Thus, companies such as WalMart, Carrefour, Metro, Auchan and Ito-Yokado (7–eleven) have all invested in China. In order to reduce costs and delivery times, global retailers have started to integrate their Chinese operations into their supply chains and buying networks through the organization of local purchasing departments. Some retailers have set up buying organizations in places such as Shenzhen, Shanghai and Tianjin, which are near to many production facilities.

Logistics service providers The Chinese logistics industry is highly fragmented and characterized by commoditized and low-quality transport and warehousing. This level of service and capability is inadequate to meet the growing supply-chain demands of foreign global manufacturers and retailers. This provides great

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opportunities for foreign companies, and indeed the better-developed domestic players, to increase market share. China’s commitments on its entry into the WTO effectively marked the beginning of China’s transportation and logistics industry. For some years, foreign 3PLs have had to operate in joint ventures with Chinese companies in order to be able to trade within the regulations. However, with the establishment of the many free trade zones around major ports and manufacturing parks, 3PLs are able to operate under their own names and ownership. 3PLs that have set up on their own include UPS Supply Chain Solutions, Kühne + Nagel, DHL Logistics, FedEx, Nippon Express and Kintetsu World Express (Foster and Armstrong, 2006). The ability of foreign 3PLs to operate on their own in China is bringing in more investment. The Foster and Armstrong (2006) report provides examples, including UPS building a 240,000 square feet warehouse in a foreign trade zone near Hong Kong, and APL Logistics building a flow centre there. In 2005, domestic transportation and logistics providers had half of the Chinese market, while joint ventures and foreign companies enjoyed the other 50 per cent of the market. Since the full opening of the Chinese logistics market, international companies have targeted China because of its tremendous opportunities. Some have been setting up new operations while others have formed joint ventures, like China’s Cosco Group and the Netherlands’s TNT Group which have formed a strategic partnership.

India India facts and figures Population: 1,095 million (July 2006 estimated) Area: 3,287,590 sq km Currency (code): Indian rupee (INR) GDP: US$720.3 billion (2005 estimated) GDP real growth rate: 7.6 per cent (2005 estimated) GDP per capita: US$3,400 (2005 estimated) Unemployment rate: 9.9 per cent (2005 estimated) Exports: US$76.23 billion fob (2005 estimated) Imports: US$113.1 billion fob (2005 estimated) Export partners: United States 17 per cent, UAE 8.8 per cent, China 5.5 per cent, Hong Kong 4.7 per cent, United Kingdom 4.5 per cent, Singapore 4.5 per cent (2004)

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Import partners: China 6.1 per cent, United States 6 per cent, Switzerland 5.2 per cent, Belgium 4.4 per cent (2004) Roadways total: 3,851,440 km, of which 2,411,001 km are paved Ports and terminals: Chennai, Haldia, Jawaharal Nehru, Kandla, Kolkata (Calcutta), Mumbai (Bombay), New Mangalore, Vishakhapatnam Source: CIA (2006).

Indian economy India has a diverse economy that ranges from traditional village farming to modern industries and services. Services are the main source of economic growth, producing 50 per cent of India’s output with less than one-quarter of its labour force. Government controls on foreign trade and investment have been reduced in some areas, but high tariffs and restrictions on foreign investment still exist. In 2005 the government liberalized investment in the civil aviation, telecom and construction sectors. The economy showed an average growth rate of more than 7 per cent per annum in the 10 years since 1994, and 7.6 per cent GDP growth in 2005. India has capitalized on the large numbers of well-educated English-speaking people to become a major exporter of software services. Despite strong growth, there are concerns about the combined state and federal budget deficits, running at approximately 9 per cent of GDP. Government borrowing has also kept interest rates high. Further economic deregulation will help to attract more foreign capital and lower interest rates. The huge and growing population, expected to overtake China’s in the next 25 years, is the fundamental social, economic and environmental concern (CIA, 2006).

The Indian logistics industry With a population that is set to grow above China’s within the next 25 years and an increasing number of well-educated English speakers, it is no wonder that India’s growth rate has been around 7 per cent per annum in recent times. However, much of that growth is in services, and much of the manufacturing and retail sector is still subject to restrictions on foreign direct investment. The third-party logistics market in India is still at an emerging stage, but the concept of outsourcing has begun to gather pace as companies in India seek to reduce costs and cope with shorter product lifecycles and pressure on lead times. Traditionally India has suffered from poor logistics and supply chains, driven by a tax regime that encouraged multiple warehouses spread across the country and an infrastructure that lacked a proper highway network and proper warehousing and storage facilities. However the Indian

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government has started to address these issues, and changes in the tax laws should see companies moving to more centralized warehousing and distribution. In addition the government has invested billions of US dollars to upgrade highway road networks. The majority of logistics in India has traditionally been undertaken by road; however the government is also opening up rail freight operations to private companies, and as transportation by rail is both less costly and faster than by road, more freight could well move to the railways. The third-party logistics industry in India is highly fragmented, with thousands of transporters, consolidators and freight forwarders. Organized third-party providers represent only a small proportion of this market. International service providers have generally found the Indian market difficult to navigate, but increasingly they are seeking opportunities for growth in the country. The Indian third-party logistics market, estimated at around US$890 million in 2005, is expected to grow at a CAGR of 21.9 per cent to reach around US$3,556 million in 2012 (Manda, 2006).

Indian apparel and textiles India is less appealing as a centre for apparel and textile manufacturing because of its poor geographic location. Unlike key competitors China (for Japan and the US West Coast), Mexico (for the United States) and Turkey (for Europe), India is remote from all the main markets, resulting in high shipping costs and long supply times. However, although the Indian government has historically kept foreign investment out of textile and apparel manufacturing, it has been slowly removing these restrictions. Consumer brands like Adidas, Benetton, Levi Strauss, Marks & Spencer and Nike have all entered the Indian market by setting up wholly owned sourcing and marketing organizations in the country.

Indian retail The retail industry remains closed to foreign direct investment, and although steadily growing, large-scale retailing is scarce. Germany’s Metro is the only large foreign retailer to have entered the market, selling in a business-to-business format with its Metro Cash and Carry business. However there are signs that the Indian government will relax these restrictions in time. If they are relaxed it is likely that third-party providers will follow their domestic retail customers into India.

Indian automotives Since deregulation in 1993, many high-profile car and component manufacturers have established joint ventures or otherwise invested in India,

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including DaimlerChrysler, Delphi, Ford, General Motors, Honda, Hyundai, Johnson Controls and Visteon. The number of cars produced in India since 2000 has nearly doubled, with just over a million cars being manufactured in 2004–05. The value of automotive component production has more than doubled since 2000 to an estimated US$8,700 billion in 2004–05, of which US$1,400 billion was exported, an increase of 224 per cent in the same period (ACMA, 2005). Principal export items include replacement parts, tractor parts, motorcycle parts and car parts (ACMA, 2005). The automotive industry is the most advanced logistically in India, and as this market has continued to grow it has become an exciting opportunity for third-party logistics providers.

Indian high technology and consumer electronics India has been liberalizing its foreign trade policy for electronics and IT products and this sector is now the fastest-growing industry in the Indian economy in both production and exports. Today, apart from aerospace and defence electronics, the electronics industry is completely deregulated and is attracting substantial interest from international companies. In the five years since 2000, India’s value of consumer electronics exports nearly doubled, while exports of industrial exports trebled (Department of Information Technology, India, 2005). APC, Dell, Intel, LG Electronics and Motorola have all invested in India in recent years. This sector is providing good opportunities for logistics service providers as companies strive to reduce costs, lead times and inventory.

South-East Asia Singapore Singapore facts and figures Population: 4.5 million (July 2006 estimated) Area: 692.7 sq km Currency (code): Singapore dollar (SGD) GDP: US$111.5 billion (2005 estimated) GDP real growth rate: 5.7 per cent (2005 estimated) GDP per capita: US$29,900 (2005 estimated) Unemployment rate: 3.3 per cent (2005 estimated)

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Exports: US$204.8 billion fob (2005 estimated) Imports: US$188.3 billion. (2005 estimated) Export partners: Malaysia 15.2 per cent, United States 13 per cent, Hong Kong 9.8 per cent, China 8.6 per cent, Japan 6.4 per cent, Taiwan 4.6 per cent, Thailand 4.3 per cent, South Korea 4.1 per cent (2004) Import partners: Malaysia 15.3 per cent, United States 12.7 per cent, Japan 11.7 per cent, China 9.9 per cent, Taiwan 5.7 per cent, South Korea 4.3 per cent, Thailand 4.1 per cent (2004) Roadways total: 3,165 km, of which 3,130 km are paved (including 150 km of expressways) (2003) Ports and terminals: Singapore Source: CIA (2006).

Singapore economy Singapore has a well-developed and thriving free market economy and a per capita GDP equal to that of the most successful West European countries. The economy relies heavily on exports, particularly in electronics and high-tech manufacturing. It was hard hit in 2001–03 by the global recession and the government hopes to set up a growth path that will be less susceptible to external economic pressures. Low interest rates, a growth in exports, and internal flexibility led to strong growth in 2004, with real GDP increasing by 8 per cent. This was the economy’s best performance since 2000, but growth slowed to 5.7 per cent in 2005 (CIA, 2006).

Singapore’s logistics market In 2005 the estimated logistics spend in Singapore was SGD427 million (US$272 million), an increase of 5 per cent over the previous year (Transport Intelligence, 2006). Singapore has established itself as a global transport and logistics hub, offering some of the best sea and air connectivity in the world. Over 200 shipping lines call on Singapore annually, connecting it to 600 ports across 123 countries around the world. In 2005 Singapore handled over 23 million 20 foot equivalent units (TEUs). In addition, Singapore is connected to over 181 cities by air and in 2005 was Asia’s fourth-largest cargo airport (Ministry of Foreign Affairs of Denmark, 2006). Singapore has been focusing on establishing itself as a global centre for manufacturing. Specifically, the government is targeting to double manufacturing output to SGD300 billion from 2003 to 2018 and establish 15,000 new jobs each year (Singapore Economic Development Board, 2006).

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Singapore is located at the intersection of major trade routes and in the heart of an increasingly developing Asia. Its strategic location has given Singapore the opportunity to be a strategic distribution hub for global companies to extend to Asian markets. As a result many global companies, in particular high-technology and automotive companies, have based their procurement, marketing and logistics functions there. These companies can rely on well-developed, sophisticated Singapore-based logistics providers to support their supply chains. The logistics industry in Singapore has developed from providing basic transportation and warehousing to offering total integrated logistics solutions. As outsourcing continues to increase, Singapore is well placed to become a centre of excellence for integrated solutions for manufacturers and other services and has its sights set on becoming the leading integrated logistics hub in Asia by 2010. There are over 8,000 logistics businesses in Singapore, including many of the world’s leading third-party logistics providers. As the global logistics players grow larger and become more sophisticated, the local providers must be capable of competing through increasing their capabilities or forming alliances, or risk losing out to their larger rivals.

Malaysia Malaysia facts and figures Population: 24 million (July 2006 estimated) Area: 329,750 sq km Currency (code): ringgit (MYR) GDP: US$121.2 billion (2005 estimated) GDP real growth rate: 5.2 per cent (2005 estimated) GDP per capita: US$10,400 (2005 estimated) Unemployment rate: 3.6 per cent (2005 estimated) Exports: US$147.1 billion fob (2005 estimated) Imports: US$118.7 billion fob (2005 estimated) Export partners: United States 18.8 per cent, Singapore 15 per cent, Japan 10.1 per cent, China 6.7 per cent, Hong Kong 6 per cent, Thailand 4.8 per cent (2004)

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Import partners: Japan 16.1 per cent, United States 14.6 per cent, Singapore 11.2 per cent, China 9.9 per cent, Thailand 5.5 per cent, Taiwan 5.5 per cent, South Korea 5 per cent, Germany 4.5 per cent, Indonesia 4 per cent (2004) Roadways total: 71,814 km, of which 55,943 km are paved Ports and terminals: Bintulu, Johor, Labuan, Lahad Datu, Lumut, Miri, George Town (Penang), Port Kelang, Tanjung Pelepas Source: CIA (2006).

Malaysian economy Malaysia is a middle-income country that between 1971 and the end of the 1990s has transformed itself from a producer of raw materials into an emerging multi-sector economy. Growth was almost solely driven by exports, particularly of electronics. This resulted in Malaysia being hit hard by the global economic slump and the drop in the IT sector in 2001 and 2002. GDP in 2001 grew only 0.5 per cent, but a substantial financial incentive package mitigated the worst of the recession and the economy rebounded in 2002 with a 4.1 per cent increase. The economy grew 4.9 per cent in 2003, moving to a high of 7 per cent in 2004 and settling at 5 per cent in 2005. Strong foreign exchange reserves, low inflation and a small external debt are all strengths that make it unlikely that Malaysia will experience a significant financial crisis in the future. The economy continues to be reliant on sustained growth in the United States, China and Japan, all of which are top export destinations and key sources of foreign investment (CIA, 2006).

The Malaysian logistics market In the 1970s, Malaysia began a transition from being dependent on mining and agriculture to an economy that depends more on manufacturing. Supported by Japanese investment, Malaysia established a successful heavy industry sector that subsequently became the country’s main growth engine. In more recent years, Malaysia has attracted electronic and hightechnology manufacturers, but more latterly has been losing finished goods manufacturing to China. However it is unlikely that Malaysia and its welldeveloped South-East Asian neighbours will lose out altogether, and they are likely to retain manufacturing of components at least. Retailers have entered Malaysia in order to take advantage of the developing economy, and companies such as Carrefour, Tesco and Ito-Yokado have set up operations in the country. The logistics industry in Malaysia is forecast to have strong growth due to the strength of manufacturing in the country, maintaining its compounded annual growth rate of over 12 per cent through to 2007. Among the services

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offered are warehousing and storage facilities, inventory control, packaging and labelling services, consolidation and deconsolidation management, and cross-docking. Although exports are vital to Malaysia, the capability of cargo handling facilities at Kuching International Airport has caused concerns to hi-tech manufacturers and logistics providers alike.

Thailand Thailand facts and figures Population: 64.6 million (July 2006 estimated) Area: 514,000 sq km Currency (code): baht (THB) GDP: US$177.2 billion (2005 estimated) GDP real growth rate: 4.4 per cent (2005 estimated) GDP per capita: US$8,300 (2005 estimated) Unemployment rate: 10.9 per cent (2005 estimated) Exports: US$105.8 billion fob (2005 estimated) Imports: US$107 billion fob (2005 estimated) Export partners: United States 16.1 per cent, Japan 14 per cent, China 7.4 per cent, Singapore 7.3 per cent, Malaysia 5.5 per cent, Hong Kong 5.1 per cent (2004) Import partners: Japan 23.6 per cent, China 8.6 per cent, United States 7.7 per cent, Malaysia 5.8 per cent, Singapore 4.4 per cent, Taiwan 4.1 per cent, UAE 4 per cent (2004) Roadways total: 57,403 km, of which 56,542 km are paved Ports and terminals: Bangkok, Laem Chabang, Prachuap Port, Si Racha Source: CIA (2006).

Thai economy With a well-developed infrastructure, a market-driven economy and positive investment policies, Thailand was one of East Asia’s best performers in 2002–04. Boosted by increased consumption and strong export growth, the Thai economy grew by 6.9 per cent in 2003 and 6.1 per cent in 2004, notwithstanding a lethargic global economy. The country has pursued preferential trade agreements with a number of partners in an

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effort to increase exports and to sustain high growth. In 2004, Thailand and the United States began negotiations on a free trade agreement. Growth slowed to 4.4 per cent in 2005 as a result of high oil prices, weaker demand from Western markets, severe drought in rural regions, the tsunami’s impact on tourism, and lower consumer confidence. More positively, the economy performed well, beginning in the third quarter of 2005 driven by export-oriented manufacturing, including in particular automobile production. In 2006, the economy is forecast to benefit from an influx of investment and revived tourism, although a possible avian flu epidemic could drastically affect economic prospects across the region (CIA, 2006).

Thailand’s logistics market Thailand has built a successful manufacturing industry including electrical appliances, electronic and high-technology components, and motor cars. Companies like Hitachi, which has been manufacturing hard disk drives since 1989, have been attracted into Thailand. Thailand also has a small but growing CPG industry. Most are Thai companies, but global CPG manufacturers like Unilever have also entered this market. Foreign retailers have entered Thailand as well, including Carrefour, Ahold, Tesco, Casino and Ito-Yokado. Many of these companies have engaged foreign logistics providers to provide local services for them. There is a growing logistics industry that includes local and the larger global players. They provide basic logistics services such as trucking, warehousing, customs clearance and consolidation to sea freight and air freight. However there is an increasing demand for integrated solutions in Thailand, coming both from multinational manufacturing companies and larger local companies.

Indonesia Indonesia facts and figures Population: 245.5 million (July 2006 estimated) Area: 1,919,440 sq km Currency (code): Indonesian rupiah (IDR) GDP: US$270 billion (2005 estimated) GDP real growth rate: 5.4 per cent (2005 estimated) GDP per capita: US$3,700 (2005 estimated) Unemployment rate: 13.3 per cent (2005 estimated)

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Exports: US$83.64 billion fob (2005 estimated) Imports: US$62.02 billion fob (2005 estimated) Export partners: Japan 22.3 per cent, United States 12.3 per cent, Singapore 8.4 per cent, South Korea 6.8 per cent, China 6.4 per cent, Malaysia 4.2 per cent (2004) Import partners: Singapore 13.1 per cent, Japan 13.1 per cent, China 8.8 per cent, United States 7 per cent, Thailand 6 per cent, Australia 4.8 per cent, Saudi Arabia 4.2 per cent, South Korea 4.2 per cent (2004) Roadways total: 368,360 km, of which 213,649 km are paved Ports and terminals: Banjarmasin, Belawan, Ciwandan, Krueg Geukueh, Palembang, Panjang, Sungai Pakning, Tanjung Perak, Tanjung Priok Source: CIA (2006).

Indonesian economy Indonesia, with the fourth-largest population in the world, still struggles with high unemployment, a fragile banking sector, inadequate infrastructure, lack of investment and imbalanced resource distribution among regions. Indonesia became a net oil importer in 2004, and the cost of subsidizing domestic fuel combined with an indecisive monetary policy resulted in the government raising the price of fuel by an average 126 per cent in 2005. The resultant inflation and interest rate increases will reduce growth prospects in 2006. The key to future growth remains internal reform, building up the confidence of international and domestic investors, and strong global economic growth. The tsunami that struck in December 2004 took 131,000 lives and caused an estimated US$4.5 billion in damages and losses (CIA, 2006).

The Indonesian logistics market Indonesia’s economy relies on natural resources including crude oil, natural gas, tin, copper and gold. It is the world’s second-largest exporter of natural gas whilst it also produces rice, tea, coffee, spices and rubber. Indonesia’s large consumer population has attracted retailers like Carrefour into the country. The Indonesian transport system has been fashioned over time by the needs and constraints of an archipelago with thousands of islands. All transport modes play a role in the country’s transport system, being complementary rather than competing with one another. Road transport is the major mode, whilst the railway system has four unconnected networks in Java and Sumatra chiefly dedicated to transporting bulk commodities

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and long-distance passenger traffic. Sea transport is enormously important for economic integration and for domestic and foreign trade. Logistics providers in Indonesia include local and global providers who mainly supply bulk logistics and shipping services.

South-East Asia logistics market summary South-East Asia has developed as a successful destination for global manufacturers since the mid-1990s. In particular Singapore, Malaysia and Thailand have established themselves as manufacturers of electronic and high-tech components and finished goods. However, China has been a recent threat as it has attracted increasing numbers of global manufacturers. It is likely that although finished goods and component manufacturing has moved to China, South-East Asia will remain as a key source of electronic components. The relative success of the South-East Asian country economies has attracted the attention of the larger global retailers who have selectively moved into many of the countries. Developing countries such as Vietnam are establishing capabilities in such industries as apparel and fashion manufacturing, but are also seeking to enter the more lucrative high-tech manufacturing industry. Intel has recently sought permission to set up a semiconductor factory in Vietnam. East Asia has a number of local logistics providers but has also attracted many of the global service providers.

Australasia Australia Australia facts and figures Population: 20 million (July 2006 estimated) Area: 7,686,850 sq km Currency (code): Australian dollar (AUD) GDP: US$633.5 billion (2005 estimated) GDP real growth rate: 2.6 per cent (2005 estimated) GDP per capita: US$32,000 (2005 estimated) Unemployment rate: 5.2 per cent (2005 estimated)

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Exports: US$103 billion (2005 estimated) Imports: US$119.6 billion (2005 estimated) Export partners: Japan 18.7 per cent, China 9.2 per cent, United States 8.1 per cent, South Korea 7.7 per cent, New Zealand 7.4 per cent, India 4.6 per cent, United Kingdom 4.2 per cent (2004) Import partners: United States 14.8 per cent, China 12.7 per cent, Japan 11.8 per cent, Germany 5.8 per cent, Singapore 4.4 per cent, United Kingdom 4.1 per cent (2004) Roadways total: 811,601 km, of which 316,524 km are paved Ports and terminals: Brisbane, Dampier, Fremantle, Gladstone, Hay Point, Melbourne, Newcastle, Port Hedland, Port Kembla, Port Walcott, Sydney Source: CIA (2006).

Australian economy Australia has a Western capitalist economy with a per capita GDP on a par with the main West European economies. Growing output in the domestic economy, strong business and consumer confidence, and rising exports of raw materials and agricultural products have fuelled the economy. Australia’s focus on low inflation and growing ties with China are other key reasons behind the economy’s strength. The impact of drought, fragile foreign demand and strong import demand pushed the trade deficit up from US$8 billion in 2002, to nearly US$17 billion in 2005. Conservative fiscal policies have kept Australia’s budget in surplus from 2002 to 2005 (CIA, 2006).

New Zealand New Zealand facts and figures Population: 4 million (July 2006 estimated) Area: 268,680 sq km Currency (code): New Zealand dollar (NZD) GDP: US$97.53 billion (2005 estimated) GDP real growth rate: 2.5 per cent (2005 estimated) GDP per capita: US$24,200 (2005 estimated)

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Unemployment rate: 4 per cent (2005 estimated) Exports: US$22.21 billion (2005 estimated) Imports: US$24.57 billion (2005 estimated) Export partners: Australia 20.9 per cent, United States 14.4 per cent, Japan 11.2 per cent, China 5.7 per cent, United Kingdom 4.7 per cent (2004) Import partners: Australia 22.4 per cent, United States 11.3 per cent, Japan 11.2 per cent, China 9.7 per cent, Germany 5.2 per cent (2004) Roadways total: 92,662 km, of which 59,109 km are paved (including 169 km of expressways) Ports and terminals: Auckland, Lyttelton, Tauranga, Wellington, Whangarei Source: CIA (2006).

The New Zealand economy New Zealand has transformed its economy into an industrialized, free market, globally competitive economy. The dynamic growth has boosted real incomes, broadened and deepened the technological capabilities of the industrial sector, and controlled inflationary pressures. Per capita income has increased for six consecutive years and was more than US$24,000 in 2005 in purchasing power parity terms. New Zealand is heavily dependent on trade, especially in agricultural products, in order to drive growth. Exports equate to about 22 per cent of GDP (CIA, 2006).

The Australian and New Zealand logistics markets The logistics industry in both Australia and New Zealand is relatively mature in support of the strong economies of both countries. The logistics market in the two countries is estimated in excess of AUD66 billion (US$49 billion) per annum (Toll, 2006). The industry is made up of both strong local service providers and global providers, which both support domestic logistics activities and freight imports and exports. It is estimated that half of the logistics market is outsourced (Toll, 2006). Over 1,900 million tonnes of freight are estimated to be transported around Australia each year, just under 500 million tonnes of freight exported and approximately 55 million tonnes imported into Australia each year. The Australian logistics industry is highly competitive and has rapidly evolved as it has taken on the challenges of globalization, new production and supply-chain processes and technological advances. It is forecast that the size of the freight market in Australia will double over the next 15 years (Toll,

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2006). Imports from China and other Asian countries are expected to grow, necessitating the use of integrated logistics solutions. Australia has recognized the importance of the logistics industry for the country’s economic performance and global competitiveness. In support of the logistics industry, the Australian government initiated the Freight Transport Logistics Industry Action Agenda in 2000 and established the Australian Logistics Council (ALC) to drive the implementation of the strategy. The ALC, a partnership between Australian governments and senior leaders in logistics, exists to lead the advancement of logistics in Australia and to create competitive advantage for Australian companies and the economy.

Summary In Europe there are well-established logistics markets in the Western countries, while the emerging Eastern countries provide significant opportunities for future outsourcing as manufacturers and retailers migrate to low-cost, albeit developing, economies. The Americas is clearly split into North America and the less-developed Central and South American markets. The United States, the largest consumer market in the world, has a mix of well-developed logistics and supply-chain providers and ‘truckers’ that have developed into extremely large road freight businesses. Similar to the markets of Eastern Europe, the countries of Central and South America provide opportunities for outsourcing as North American-based manufacturers and retailers migrate south. The Asian boom is led by China, already the third-largest economy in the world and growing at around 10 per cent per year. India, with an economy growing by around 7.5 per cent per year, is becoming increasingly important for logistics providers. Mature countries, including Japan and South Korea, are attracting foreign 3PLs, whilst emerging markets like Thailand, Indonesia and Malaysia represent significant outsourcing opportunities.

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Outsourcing operations and services Introduction This chapter considers and describes the various outsourcing operations and services that are offered by third-party logistics (3PL) service providers. Third-party companies have continued to expand the many operations and services that they offer in order to succeed and progress within a very competitive marketplace. The chapter first outlines the breadth of outsourcing opportunities, from very limited participation to total asset management, including all of the many other opportunities between these extremes. The concept of the outsourcing continuum is discussed, emphasizing the need for potential users to be absolutely clear where different responsibilities lie and where the boundaries between these responsibilities occur. Various standard types of operation are introduced and described, and then the question of whether to adopt a dedicated or a multi-user approach is reviewed. Following this, there is a broad breakdown of the different services available from the viewpoint of the main logistics components of warehousing and transport. Some alternative opportunities for occasional outsourcing are also considered. Many companies now realize the advantage of taking a complete supply-chain perspective when planning their logistics and supply strategy because there are significant cost and service benefits to be gained. This concept is reviewed with respect to how it might be applied to the outsourcing of logistics operations. Finally, the many additional services offered by 3PL providers, often known as ‘value-added’ services are discussed. They represent opportunities for 3PLs to develop services that are more profitable than the more standard storage, picking and transport of goods.

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Outsourcing operations As a result of the fast growth in the use of outsourcing and the robust competition between the various third-party companies, there are now many different distribution and distribution-related services on offer. It is useful to be aware of the breadth of services that are available and to be able to select those that are most appropriate for a user company. As well as the standard types of operations involved in the warehousing and the transport of goods, such as storage, picking and final delivery, there are also many other operations that can be outsourced, such as the repacking of goods or a returns operation. One very important decision that must be made by any company that is contemplating outsourcing as an option is whether to outsource a part of the operation or the complete operation as a whole. This is the decision whether to use a multi-user style of operation or a dedicated operation, and these alternatives will be discussed in this section of the chapter.

Breadth of outsourcing As already indicated, there is a vast choice of different operations and services that can be outsourced. A good way to understand the opportunities available is to consider a typical logistics structure as shown in Figure 3.1. This represents the theoretical physical flow, storage and manufacture of a product all the way through from the supplier of a raw material to the delivery of finished goods to the final customer. Many companies do not actually fulfil all of the many physical logistics functions that are represented in the diagram, but some fast-moving consumer goods (FMCG) manufacturers fit this model. The key point to appreciate is that any of these functions could be outsourced to a third-party contractor. This includes the more traditional areas for outsourcing, such as storage and transport, but also those services that are perhaps thought to be more specialist, such as the manufacturing and assembly of products. But of course this is not the whole story. In addition to the physical logistics functions that are shown in Figure 3.1, there are also many supporting processes for these functions which could also be outsourced, not forgetting any opportunities to outsource reverse-logistics flows of product. Thus, decisions to outsource should cover the three main broad alternatives: ឣ ឣ ឣ

physical logistics/delivery operations; logistics processes; reverse-logistics flows.

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bulk delivery

raw materials store packaging store component store internal transfer

supplier

Primary production

transport customers

assembly

local delivery transport

transport

Regional distribution depot

finished goods warehouse Primary transport

Primary transport National distribution depot

Figure 3.1 A typical physical logistics structure showing the many different functions that can be outsourced

These three aspects are summarized in Figure 3.2, where another typical logistics configuration is shown in association with the three different areas for outsourcing. One set of arrows distinguishes the traditional physical flow of products that are physically distributed to a company’s key customers. A second set shows the reverse-logistics flows of goods and packaging that have to come back through the existing distribution operation. A third set of arrows alludes to the various process and information support mechanisms that serve to allow the physical operations to take place. These broad aspects will be broken down further and discussed in the remainder of this chapter. One example, however, is the process of customers or end users ordering goods. This might include the following elements, some or all of which might be outsourced: ឣ ឣ ឣ ឣ

order receipt; telesales; credit control; customer enquiries;

supply chain

raw material components packaging items product sourcing Imported materials

packaging

finished goods inventory

depots

unitization

warehouse

distribution centres

subassembly work-inprogress

end users

production

bought-in parts

suppliers

logistics

upstream

customers downstream

key

Physical outbound Process & information Physical inbound/ reverse

Figure 3.2 A logistics configuration of an FMCG company showing that there are different physical flows and processes 107

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stock availability; stock allocation.

Thus, for a user company, it is important be aware of these three different aspects that can be outsourced: outward and inward physical flows, and supporting processes. It is also important to understand that in distribution and logistics probably every different function can be outsourced. The ultimate option is to outsource the whole operation, keeping in-house only those non-logistics functions that are deemed to be the core business of the company. For example, some high-tech companies, such as 3M, are more concerned with the research and development that goes into the planning and production of new products rather than the sales and logistical operations that support the bringing of these products to market. However, many users do not wish to outsource everything, but they are keen to concentrate their resources on certain aspects of their business and to outsource others. One useful way to understand the breadth of opportunities that are available for outsourcing is to view this as a continuum of services, ranging from total internal logistics management to total external logistics management. This is illustrated in Figure 3.3. The continuum diagram demonstrates some of the different opportunities that are available across the whole scope of outsourcing physical logistics operations. This is by no means an exhaustive collection of possibilities, but should provide a particular perspective of what might be done. At one extreme there is what might be termed total internal asset management. This shows a company that has kept the entire logistics operation in-house and is not outsourcing anything. Thus we see that it has, for example, full ownership of its logistics building facilities and has its own management, systems, internal depot workforce and transport operation. At the other extreme there is total external asset management, where the company has outsourced all of its physical logistics operations. Thus, it has no logistics capital investment, no asset management and no labour management. Within these two extremes there are a multitude of alternatives. One common approach is to outsource the delivery transport operation but to keep the warehouse and storage operation in-house. However, no single solution is the ‘right’ answer. Any of the multitudes of different combinations may suit one particular company, so the implications of all options should be explored. Chapter 5 in the book will outline the main reasons that companies seek to outsource their operations, and these reasons often help to clarify what should be included and what should be excluded from the outsourcing solution. Note, once again, that although Figure 3.2 is representative mainly of the various physical functions of logistics, the many associated logistics

Total internal asset management

Total external asset management

Outsourcing continuum

 Full-building ownership  Own management  Own systems  Own internal workforce  Own transport

 Own building  Own internal workforce  3PL transport  Internal WMS, shipment systems  Own management

 Lease building  Contract warehouse labour  3PL transport  Own management

 Own building  Combined inhouse workforce and contract  3PL transport  Own management

 Lease building  Full outsource of specific functions - storage - postponement - picking - transportation - packaging

 No logistics capital investment  No asset management  No labour management

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Figure 3.3 Continuum of logistics outsourcing: some of the range of physical functions and services that might be outsourced

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processes that support the business and physical operation may also be outsourced in addition to these more traditional physical aspects. For any company that is contemplating outsourcing as an option, there are some important reasons for considering outsourcing opportunities using an approach based on the idea of the outsourcing continuum. Such an approach is helpful during the initial decision-making phase of outsourcing, trying to answer questions like ‘should we outsource at all?’ and ‘what should we outsource?’ These aspects are discussed in more detail in Chapter 7, which considers the outsourcing selection process. It is also useful during the final preparation and agreement of the contract with the service provider because it can help to identify very clearly what is and what is not to be included in the specific contract. So the use of the continuum can help: ឣ

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To identify where the major benefits of outsourcing might be found. The company may be aiming to achieve, amongst other goals, some cost saving or perhaps some type of service improvement. A company needs to be able to identify which of its particular operations and/or processes should be considered for outsourcing to enable it to obtain the main benefits that it is seeking. To make clear exactly what is included and what is excluded as far as the contractor and the associated contract are concerned. This is important to the subsequent running of the operation. It needs to be clear what the 3PL contractor is responsible for, but also what remains as the responsibility of the user company. The service provided by many logistics operations has failed badly when this is not clear from the outset. To make clear where the boundaries of responsibility change. This is similar to the last point but it also needs emphasizing because of the problems that can result if this is not transparent. To identify the expected ‘gains’ or ‘wins’ from a contract, whether these are cost or service related. This will help in the final decision-making process of whether or not to outsource, as well as being important for post-contract evaluation of the extent of success or failure.

Standard types of operation There is a vast range of different operations that are provided by third-party service companies. In fact there are few, if any, operations that some of the larger companies will not consider. As will be discussed in other chapters, however, some companies tend to specialize in certain types and styles of operation, rather than trying to offer all of the many alternatives that are available. The basic types of operation offered can vary in style and degree; for example, delivery transport might cover just the contract hire of a single

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vehicle, the provision of a fleet of vehicles or a fully dedicated operation including vehicles, drivers and complete transport management. A fully dedicated supply chain-oriented package might cover storage and warehousing, primary and secondary transport, management services, order processing and stock control amongst other functions. A summary of the most common services that are offered includes a list of the key functions of most logistics operations. There is nothing original in such a list, so for anyone currently working in a logistics environment these will be well known. For those unfamiliar with all of the different aspects of logistics, some of the main ones are listed below, together with a brief comment on the operation. Note that this is not an exclusive list, but should provide a flavour of the type of operations that can be undertaken. Also note that many more sophisticated operations can be provided, and these are reviewed later in this chapter under the heading of value-added services.

Warehousing and storage Distribution depot operation Typically this includes all of the standard functions to be found in the operation of a distribution depot. Normally the complete set of functions is outsourced, including goods inward, reserve storage, pick, pack and consolidation for delivery. This is because it is difficult to only partially outsource such a physically intensive operation. However, the boundary between outsourcing and own operation may well concern the asset ownership. Thus, as previously indicated, the ownership of the building could be kept in-house while all the other assets (people, equipment and so on) might be outsourced, or vice versa (the ownership of the building outsourced and the operational assets kept in-house). Of course, a variety of alternative ways of making the split between outsourcing and in-house ownership and responsibilities are possible within this continuum.

Excess storage This was probably the original form of outsourcing, where externally owned general warehouses were used to store, in particular, goods that could not be stored in a company’s own warehouse because of a lack of space. It is typically used if large orders are received or if goods must be stockpiled for a particular event such as Christmas or the summer season.

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Cross-docking Cross-docking is often used to enable customer orders to be consolidated from goods that are sourced from a number of different locations. As physical deliveries from these sources occur, orders are immediately assembled, and on completion the final customer deliveries are made. These operations use a lot of physical space and need to be carefully coordinated for both inbound and outbound movements. Some third-party companies have the facilities and expertise to undertake this.

Transhipment This is similar to cross-docking, but transhipment often refers to the sorting and onward delivery of ready-picked orders. Some third-party providers operate satellite depots in rural or geographically peripheral areas that can collect ready-picked small orders from different companies’ distribution depots and then tranship these at their satellite depots to provide consolidated deliveries to local delivery points.

Break bulk Examples of break bulk operations are where containers or full vehicle loads are received from abroad for final delivery in a country. The loads are broken down into individual orders by the operator and then despatched as required to the appropriate delivery points. This might be for inwardbound raw materials for a company’s manufacturing sites, or for finished goods that need to be delivered to retailers or end users.

Stock and inventory Inventory management Linked very closely to the storage operations previously described, this includes the additional responsibility of the management of all of the stock and inventory that is held, covering elements such as stock control, stock replenishment, stock rotation, obsolescence and other related activities.

Specific stock responsibility Many companies like to have full control and vision of their finished goods inventory, but there are occasions when the control and management of certain types of inventory can be outsourced. Good examples are spares inventory, packaging and unit loads.

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Transport Primary transport (trunking, line-haul) The focus on primary transport is often one of cost reduction. It is seldom regarded as an activity that ‘adds value’ to an operation because there is no direct link to the final customer or retail store. Primary transport is all about moving the product at minimum cost, which generally involves using as large a vehicle as possible and making sure that the vehicle is filled to capacity. These movements usually consist of delivery to a single drop point. Other key aspects include: ឣ

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Vehicles are operated for as long as possible, sometimes on a 24-hour, three-shift basis, to maximize vehicle time utilization. Return loads for the vehicle are important so as to fulfil the criteria for maximum utilization. Additional vehicle specification, for example special on-vehicle handling equipment, is less important than for delivery operations.

The lack of return loads or ‘backloads’ and the difficulty of achieving these other key aspects often drive the decision to outsource the activity to general hauliers. This is because they are in a much better position to identify and create suitable opportunities for improved utilization and therefore lower costs.

Secondary transport Secondary transport and delivery usually involves direct contact with the customer or end user (or, as with retail operations, the key end user interface). These are, therefore, what are known as ‘customer-facing’ logistics operations, and they can be an important part of the customer service element of logistics strategy. As such, cost reduction is not the main operational criterion as it is with primary transport (although it is important). Customer service is the major criterion. Many customers have very restricted delivery windows (the time in which a delivery may be made). This makes the accurate scheduling of secondary vehicles very important. Service is usually critical. In particular, inventory reduction in retail stores and the increase of store selling space and elimination of stock rooms make timely delivery essential. This is to ensure that the store does not run out of stock. Specialist vehicles have been developed for secondary delivery, as in the case of grocery multi-temperature compartmentalized trailers. These are used to maximize the opportunity to make frequent and full deliveries of essential stock to the stores.

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Secondary transport operations are thus both service and cost-sensitive, and require particular skills for planning and management, as well as some fairly substantial financial investment. For these reasons, most companies now outsource their secondary transport operations to medium and large third-party service providers.

Collections Normally, distribution operations are planned and designed to provide a one-way flow of physical product that is delivered to customers. Vehicles, unit loads, handling equipment, schedules and the like may be inappropriate for items to be returned or collected via the outbound delivery system. Thus many types of collection operations (damaged product, packaging, unit loads) are often outsourced.

Fleet management Many companies see the day-to-day management of a vehicle fleet as a specialist technical operation – sometimes described as mobile asset management. Thus, although they may schedule and manage the vehicles and drivers to give them control of their delivery operation, they may choose to outsource the management of the fleet (maintenance, legal responsibility and so on) to a third-party company. Securicor Cash Services (SCS), for example, experienced a considerable reduction in maintenance costs when it outsourced this element of its transport management (Distribution, 2002). The vehicle maintenance for all of its 1,800 vehicles was contracted out to Lex Transfleet. ‘The bespoke fleet management solution devised by Lex Transfleet covered all scheduled and non-scheduled maintenance, breakdowns, and met SCS’s “O” licence requirements including vehicle history and storage, and taxation of the vehicles.’

Contract hire A classic opportunity for third-party providers is the provision of vehicles and/or drivers to supplement own-account fleets when they require additional resources. This might be to cover breakdowns, holidays, seasonal demand increases and similar factors.

Packaging and unitization Packaging There are various different opportunities for companies to outsource packaging operations. These are normally where special requirements make it difficult for the packaging to be undertaken in-house. A typical example is

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packaging product for export, which might be undertaken more costeffectively if a specialist export contractor is used.

Labelling and product preparation Many products are delivered to retailers from their suppliers without specific price information as an integral part of each individual item. This information often needs to be added before the goods are displayed in store. Some products may also need to be presented in a special selling unit in the store. Although shop staff can undertake this work, there has been a move to ensure that all products are sales-ready before they enter the store; the idea is to simplify the store operation so that all effort is concentrated on selling items rather than preparation work. Thus, many companies (and this may be the suppliers or the retailer) now outsource these types of operation to a third party.

Unit loads For operations that use a large number of unit loads (pallets, roll-cages and the like), it is important to have close management and control. This is often for reasons of both cost and supply. The cost reasons are to minimize costs by monitoring units and reusing them as often as possible (thus keeping capital costs down by avoiding the need for the regular purchase of new units). Supply reasons are to ensure a constant availability of units at the end of the production process. This is an operation that is sometimes outsourced.

Other standard operations Product inspection All products that are bought in, especially from abroad, are likely to need to be physically inspected to check for quality. This can be heavily labour and space intensive, and so may be an operation that can be outsourced, providing this does not create additional movement of the goods to an unnecessary location. It is possible to have this undertaken at the country of origin prior to the export shipment.

Reverse logistics An important type of outsourcing opportunity, this was discussed previously concerning collections in the section on transport.

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Merchandising Like labelling and product preparation, outlined above, merchandising is another operation that can be outsourced. This involves the preparation of the product for display and sale, and also involves the review of stock levels in the shop as well as the arrangement of the goods on the shelf in the shop.

Telesales and call centres This is another discrete specialist area that can be outsourced. Although not strictly speaking a logistics operation, very often telesales or call centres for catalogue sales simply deal with order-taking into a system which is linked to the warehouse management system, and this service is therefore very much oriented to logistics.

Different types of operation: dedicated or multi-user? What is the difference? One of the first decisions that a potential user company has to make when contemplating outsourcing as an option is whether to go for a multi-user solution or a dedicated solution. Dedicated operations are normally used by large companies, but the basis for any decision can be a trade-off between cost and service. Generally, small to medium-sized companies cannot afford the high costs associated with an operation that is exclusively dedicated to their logistics operations, because of their lack of scale. However there may be occasions when the service they require for their customers requires that an exclusive operation is used. The two alternatives are dedicated and multi-user operations, as described below.

Dedicated (or exclusive) operation This is where a complete logistics or distribution operation is provided by a third-party company for its client company. The third party undertakes to provide the client with all its distribution requirements, exclusively, on an international, national or regional basis. The resources used may include warehouses, distribution centres, transport fleets, managers and other facilities. Thus, the service provider sets up a specific operation to run all of these different elements for the client that is exclusive to the client company’s products – an operation dedicated to that client alone. This type of service is most common in the United Kingdom but is also used in Europe and North America. The opportunities for dedicated operations are usually confined to very large companies because of the scale and cost involved. Most large retailing

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companies have at least some dedicated third-party logistics operations. A typical example from the United Kingdom is Marks & Spencer. It currently uses three different contractors to run various parts of its operations. The key ones are GIST for all the food distribution centres, together with DHL Exel (since the acquisition of Exel by DPWN) and Christian Salvesen for the fashion and non-food operations. All of these operations are dedicated to Marks & Spencer.

Multi-user (or shared-user) distribution operation Multi-user distribution operations are different from dedicated operations because a group of client companies is catered for within the service provider’s operation, rather than just a single client. Ideally, the different companies will have some similar characteristics, so that there are clear advantages gained in linking them. For example, the clients may all be manufacturers or suppliers of similar goods, and their products may all be delivered to the same or similar customers – electrical goods to retailers, food to catering establishments and so on. A very similar type of third-party operation is where a client company has a dedicated operation that is operating at less than full capacity. Here, additional smaller clients may be taken on for storage and picking within the depot or for delivery via the transport operation. Thus, there is one major client together with a few much smaller ones. These are often known as shared-user operations, but in essence they are also multi-user operations that have initially developed from different circumstances. Such an operation may be owned and operated by the third-party company, or may be a joint venture between the third-party operator and the main client company. The major advantage of all of these approaches is that expensive logistics operations and costs are shared between the clients so all parties enjoy the benefits.

Which operation to choose? As with many decisions within logistics, the most appropriate solution is based on achieving a suitable balance between service requirements and operational costs. This is true for the dedicated or multi-user option. As a general rule: a dedicated operation may provide superior opportunities for service but at a high cost; a multi-user operation will provide opportunities for low-cost logistics but could mean a compromise for service requirements. Figure 3.4 summarizes this, showing the key factors in the dedicated or multi-user decision process, and emphasizing the differences in terms of service and cost advantages and disadvantages.

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Disadvantages

Advantages

Dedicated

Multi-user

• Organization and resources focused exclusively on the customer • Specialism and loyalty of staff • Specialism of warehouse, handling equipment and delivery vehicles • Confidentiality of customers’ product specifications/promotional activity

• Scale economies gained by sharing resources between a number of clients • Consolidation of loads enables higher delivery frequency • Opportunity to find clients with different business seasonality to maximize utilization of assets

• Total costs of the operation borne by customer • Seasonal under-utilization of resources

• Conflicting demands of each customer can compromise service • Staff do not gain specialist customer knowledge • Equipment is not specialized and may not exactly meet individual customer requirements

Figure 3.4 The key trade-offs between dedicated and multi-user distribution, emphasizing the different cost and service advantages and disadvantages

From a cost perspective, major savings can result from the economies of scale that are achieved with joint operations when the key resources are shared among a number of clients. Most small and medium-sized companies that have single dedicated operations are unable to maximize the use of a variety of resources such as storage space, warehouse equipment, specialist warehouse labour, delivery vehicles and delivery drivers. Such operational scale economies are gained through the use of a multi-user option, as well as the scale economies arising from spreading the cost of overheads across a much wider range of activities. The consolidation of loads enables higher delivery frequency to be achieved and also leads to better load utilization in vehicles. There is also often the opportunity to find and link clients with different business seasonality, thus creating an opportunity to maximize the utilization of assets throughout the year. From a service perspective, the dedicated operation provides the major advantages. All of the organization and resources within the operation are focused on the single client. In a multi-user operation there may be conflicting demands from different clients that might compromise the service that is provided. An example concerning delivery transport might be that one company requires early morning delivery of its products, but another has restricted delivery windows at lunchtimes that need to be met. It may not be possible to meet both of these requirements within a multiuser delivery operation because of the implications for cost and vehicle utilization. Dedicated operations also allow staff to become more specialized in terms of product familiarization and operational requirements. This can, for

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example, help to maximize the accuracy and speed of picking performance, because order pickers are more often than not dealing with the same products and the same product locations. Staff in a multi-user operation do not get so much opportunity to gain specialist customer knowledge because of the number of different products and clients they deal with. Service is also often enhanced in dedicated operations through the specialization of buildings, depot storage and handling equipment, packaging requirements, unit loads and delivery vehicles. Once again, the existence of a single client means that all of these different distribution elements can be designed specifically for that client in terms of what is most suitable for the demand characteristics of the product and the customer service that is required. Some of these aspects may be crucial: ឣ

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Buildings: are special areas required for inbound quality control or order consolidation? Storage: is racking configuration important in terms of storage slot sizes, number of floor picking locations, location of reserve pallets? Handling equipment: are special equipment or fork lift truck attachments required for the carriage of some products in the depot? Packaging: are there many export orders that require special packaging, which cannot be provided in a multi-user environment? Unit loads: are different unit loads required for some products due to their size or as special requirements for key customers? Delivery transport: does customer delivery need to be made on vehicles that have any special characteristics, such as vehicle size, unloading equipment or even driver knowledge during unloading and delivery?

For multi-user operations, it is often not possible to deal appropriately with all special requirements because the most standard equipment, organization, procedures and processes are used by the operating companies. Some, but certainly not all, exceptions can be made – but where they are feasible, they will be at a cost that must be met solely by the client that requires them. Thus some service demands may be adversely affected because not all individual customer requirements can be met. In summary, large operations can afford the cost of dedicated services, while most small companies are better suited to multi-user operations. It is the medium-sized companies that have to consider their options carefully, in order to make the right choice in balance between service and cost. The choice of a third-party provider is rarely a straightforward one, especially as there are so many different companies available in the marketplace and so many different types of operation. Once it has been determined that outsourcing is a viable solution, the next step is to clarify whether a dedicated or a multi-user solution is the most advantageous.

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Breakdown of broad service types So far in this chapter the extremes of total internal asset management and total external asset management have been reviewed within the context of a continuum of available operations. There has also been a review of the vast range of operations that are offered and provided by third-party service companies. Finally, the difference between dedicated and multi-user operations has been outlined. This section of the chapter takes an associated, but slightly different, consideration of the various services that are available. This is undertaken from the viewpoint of the main logistics components of warehousing and transport, but also considers some alternative opportunities for occasional outsourcing.

Warehousing As already discussed in the previous section of this chapter, the major warehousing alternatives are usually categorized as dedicated or multi-user. There are key differences between the two types of service, and the decision concerning which approach to adopt is an extremely important one. In association with this major categorization, there are also other different approaches that may be considered for warehousing or depot outsourcing. These are not all mutually exclusive. For example, a multi-user operation may also be a regional operation. The various operations are outlined below.

Specialist distribution operations These distribution operations are used for the storage of products that require special facilities or services, and the distribution operation run by the third-party company is especially tailored to suit these needs. There are several examples of both dedicated and multi-user operations, such as frozen food and hanging garment distribution. In addition, in the grocery industry, for example, many of the grocery multiples run a specialist depot for especially low-demand items and for very large items that require specialist storage, handling and picking.

Regional multi-client distribution operation These operations are provided for any number of clients, and for most product types. They are usually provided by a ‘general’ third-party distributor that probably started as a very small operation and has grown into a regional operation concentrated in a specific small geographic area.

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National multi-client distribution operation This category is very similar to the previous one, a service being provided for any number of clients and product types. The main difference relates to the size of the operation. This is country-wide, and probably includes a number of depots linked by a primary transport (trunking, line-haul) operation between these depots. Thus a client company can have its products delivered to anywhere in the country. A client company’s products might be located in just a single depot, a number of depots or in all of the depots in the third-party network structure.

Satellite operations These are operations where the operator is not involved in the storage of any products, but is only providing a break bulk and delivery service. Thus, no unordered stocks are held, although some minor stock-holding may occur for a limited number of product lines. Many manufacturers and suppliers now use satellite depot operations to enable them to minimize their inventory holding requirements (perhaps to a single central depot) while achieving a very large delivery ‘reach’ to a wide geographical area. This is achieved through overnight distribution of picked orders from the central depot, which are trans-shipped at satellite depots for onward local delivery the next day. This type of service is most commonly undertaken by third-party service providers.

Cross-docking As described earlier in this chapter, cross-docking is often used to enable customer orders to be consolidated from goods that are sourced from a number of different locations. As physical deliveries from these sources occur, orders are immediately assembled, and on completion the final customer deliveries are made. These operations use a lot of physical space and need to be carefully coordinated for both inbound and outbound movements. Some third-party companies have the facilities and expertise to undertake this, so it is a commonly outsourced activity. Third-party companies are used for this type of service when manufacturers or suppliers do not have their own depot in a particular geographic area.

Joint venture A limited number of operations have been set up whereby a third-party operator and a client company form a separate distribution company, called

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a joint venture. This may occur where a manufacturer with its own distribution operation has some underutilized resources. It will then link up with a third-party operator and offer the services on a wider basis. This has occurred in the hanging goods and the high-tech sectors.

International distribution operations These may be dedicated but are most likely to be multi-user, enabling a client to achieve international movements between sites and delivery to final customers over a broad international area. It is still very difficult in a European context to find a single third-party operator that can provide such a universal service across the breadth of an ever-expanding Europe.

Composite depots These are really a specific area of specialization in the grocery industry. Over many years, the logistical structure of grocery multiples has varied from depots where only a single product type is stocked and distributed (frozen food, chilled food, fruit and vegetables or ambient) to what is known as a ‘composite depot’, in which all product types are held. A mixture of goods from these different product types are also transported together on what are known as ‘composite delivery vehicles’ for delivery to superstores and hypermarkets. These are all dedicated operations and usually consist of extremely large and sophisticated depots with expensive delivery transport fleets. Once again, it is an area where the biggest logistics service providers are prevalent.

Transport The various types of transport service that are available through outsourcing can be classified in a different way from that used for warehousing. There are, in general, four main attributes that can be used to differentiate these broad service types. These are: ឣ

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Asset dedication: this concerns whether or not the assets are dedicated to the client (either a multi-user or a dedicated operation). Speed of delivery: this is an important service feature. The range starts at same-day delivery and extends as far as ‘as and when’ (though this is a rather unusual and risky alternative to agree to!). Size of consignment: this obviously has a big impact on both service and cost. Size can be represented in weight, cubic volume or number of items/units.

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Contractual basis: the basic difference here is whether the arrangement is a ‘one-off ’ transactional agreement (sometimes called ‘spot hire’) or whether a specific contract is drawn up and signed. The nature and type of contract can also vary quite significantly.

The key question of cost is negotiable according to the services that are required, although, of course, many transport operators have distinct tariffs that they work with. As a general rule costs will be higher, the larger the load and the faster the delivery required. A summary of this very traditional breakdown of broad third-party transport service types is given in Table 3.1. This is a very broad attempt at categorization and there are undoubtedly several elements where some overlap occurs, nevertheless, this classification is useful to help to clarify some of the main attributes of the various options that are available. The main service types are outlined below.

Express Usually this will be a parcels operation where the emphasis is on the speed of delivery. Non-urgent parcels are often sent via the national or international parcel post where both the costs and the speed of service are low. Table 3.1 A breakdown of the broad third-party transport types showing some of the different attributes Broad Service Type

Asset Dedication

Speed of Delivery

Size of Consignment

Express

shared

same/next day small parcel-size

Groupage

shared

slower than express: several days

larger than transaction express: palletsize plus

General haulage

shared (but could be contract)

slower than express: 48 hours plus

any size

Multi-user

shared

slower than as required dedicated: next day or longer

contract

Dedicated

dedicated

as required

contract

as required

Contractual Basis transaction (could be contract for such as mail order)

transaction (‘spot’) or contract

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Express services are normally transactional, but for some large-scale operations such as mail order, contracts are used.

Groupage or consolidation services This is a very traditional style of transport service. The major attraction is the ability to send small orders via a low-cost transport option. Thus, small orders from any number of companies are consolidated into full vehicle loads. The main drawback with groupage is that orders take a long time before the final delivery is made. This is because time is lost as orders are collected together to create a full load. These options are very much shared rather than dedicated.

General haulage This is another very traditional means of outsourcing transport, one that was in existence for a long time before the recent third-party distribution fashion came about. General haulage is now commonly used by manufacturers and suppliers that need to have non-standard products moved – typically those that cannot be easily unitized. General haulage can be shared or dedicated, dependent on the size of the load and the length of time that a relationship is expected to be required between user and contractor. Transactions are typically of two types, as described above: either transactional (known as ‘spot hire’) or contractual. The former is used for small and occasional loads, and the latter if there is a particularly large load or movement required, because a more formal arrangement is preferable.

Multi-user operation This type of service was described earlier in the chapter. It can be used for both transport and warehousing. Asset dedication is, of course, shared as this is the basis of a multi-user environment. Multi-user services are also contract based, consignment size is variable, and speed of delivery is also negotiable but is likely to be slower than that for dedicated operations.

Dedicated operation This type of service was also described earlier in the chapter, and again it can be used for both transport and warehousing. Assets are dedicated, size of consignment is variable and speed of delivery is negotiable.

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Occasional use Many companies use third-party services on an occasional basis or as an aid to support their own-account operations. There are important opportunities available, and these services represent an important input to shared and multi-user operations. There are a number of reasons that a company might need such occasional use: to cover seasonal peaks in demand; to cover weekly demand peaks; for non-standard products that do not fit easily into its own operation (very small or very large products); to deliver to peripheral geographic areas where there is only limited demand for its products; for non-standard operations (such as returns or collections). The main reasons are outlined below.

Seasonal peaks in demand Most own-account operations should only be resourced up to a level that will allow the company to run the business for somewhere between average and peak demand. If a business has resources that allow it to operate at peak levels, then it is likely that many of the resources will be underutilized for much of the year. Thus, for a correctly resourced operation it will be necessary to outsource at seasonal peak periods of demand. This is demonstrated in Figure 3.5, which illustrates that the company should resource its % 14 12 10 8 6 4 2 0 Jan

Feb

Mar actual

Apr

May

Jun

avge plus

Jul

Aug average

Sep

Oct

Nov

maximum

Figure 3.5 Annual demand, showing that the fleet should be resourced between average or average plus 10 to 20 per cent and so some transport should be outsourced at the two peaks

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fleet to the level of either the lower or the middle straight line (at average demand or average plus 10 to 20 per cent). Thus, outsourcing is required before Christmas and in the summer (for the average).

Weekly demand peak Similar to the previous example of annual demand, many own-account operations may only be resourced up to a level that will allow them to run the business for somewhere between average and peak demand during the week. Thus, it may be necessary to outsource for peaks of demand that occur during the week.

Non-standard products Many distribution operations are designed to cater for the standard products that a company manufactures or retails. Those that do not fit easily into its own operation may be outsourced to a third-party operation – often one that specializes in distributing that type of product. Good examples of this include very small or very large products (in the retail grocery industry), or hazardous products.

Peripheral geographic areas The demand for many companies’ products is concentrated in certain geographic areas. For retailers this is likely to be in highly populated areas of the country. In rural areas, for example, where there is only limited demand for their products, it is often uneconomic for them to run their own distribution operation, so they use a regional third-party company to undertake the distribution for them.

Non-standard operations There are often certain non-standard operations that are not easily undertaken within a typical distribution operation. These may be outsourced to third parties that specialize in those elements of logistics. A good example is ice cream. This may be retailed with other confectionery products but cannot be transported with these products in ambient transport vehicles. Thus, a specialist refrigerated multi-user transport operation must be used for the ice cream.

Spot hire There are often occasions when additional resources are needed over and above the normal operating requirements. This may necessitate the hiring

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of extra vehicles and drivers. This may be the result of additional one-off demand (an unexpected or exceptionally large order), an urgent order, or through sickness or vehicle breakdown. Resources are then hired from hauliers or third-party service providers on what is known as a ‘spot’ basis.

Returns or reverse-logistics operations There are also occasions when goods need to be returned to the distribution depot. These are returns or reverse-logistics operations where, perhaps, returnable packaging needs to be brought back through the supply chain for refurbishment, cleaning and reuse (mushroom containers in the fruit and vegetable market) or collections of returned goods that customers do not want. It is often very difficult to organize this effectively on outwardbound delivery vehicles because it may, for example, affect set delivery times to customers. Thus, many companies now use third parties to undertake these movements. For larger companies this has become more than an occasional requirement, and full-scale dedicated operations are now used – again, particularly by the grocery multiples.

Promotions For many businesses, the introduction of special offers or promotions is a means of stimulating additional sales. It is not always possible to forecast the exact impact of such promotional activity. For any really successful promotion it is often the case that the normal distribution operation is unable to cope with the increased demand on its resources. Thus, third parties are called in to provide any additional resource requirements.

Supply-chain management The concept of the supply chain compared with logistics was illustrated in Figure 3.2. It can be seen from this rather simplistic diagram that logistics is an integral part of a broader entity called the supply chain. The total logistics concept advocates the benefits of viewing the various elements of logistics as an integrated whole. Supply-chain management is similar, but also includes the supplier and the end user in the process. There are four distinct differences claimed for supply-chain management over the more classic view of logistics, although some of these elements have also been recognized as key to the successful planning of logistics operations. These four are: ឣ

The supply chain is viewed as a single entity rather than a series of fragmented elements such as procurement, manufacturing and distribution.

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This is also how logistics is viewed in most forward-looking companies. The real change is that both the suppliers and the end users are included in the planning process, thus going outside the boundaries of a single organization in an attempt to plan for the supply chain as a whole. Supply-chain management is very much a strategic planning process, with a particular emphasis on strategic decision making rather than on the operational systems. Supply-chain management provides for a very different approach to dealing with inventory throughout the pipeline process. Traditionally, inventory has been used as a safety-valve between the separate components within the pipeline, leading to large and expensive stocks of products. Supply-chain management aims to alter this perspective so that inventory is used as a last resort to balance the integrated flow of product through the pipeline. Central to the success of effective supply-chain management is the use of integrated information systems that are a part of the whole supply chain rather than merely acting in isolation for each of the separate components. These enable visibility of product demand and stock levels through the full length of the pipeline. This has only become a possibility with the recent advances in information systems technology.

Thus, many companies now realize the advantage of taking a complete supply-chain perspective when planning their logistics and supply strategy, because there are significant cost and service benefits to be gained. This concept can, and possibly should, also apply to the outsourcing of logistics operations. Given that there are significant benefits to be gained from a company taking a single-entity approach to its supply chain, then it should also be the case that if a complete operation is outsourced the third-party service provider should get the opportunity to plan and manage the operation in its entirety. Companies that outsource would then also be able to benefit from the advantages that accrue from effective supply-chain management. This approach has been endorsed by many service providers, and so the concept of fourth-party logistics has been born. Accenture has defined a fourth-party logistics service provider 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’. The main impetus is for the overall planning to be outsourced and that the complete supply-chain operation should be included within the remit of the 4PL. Fourth-party logistics (4PL) is examined in detail in Chapter 9. Although the adoption of the fourth-party concept has been relatively limited (as discussed in Chapter 9), it would seem that the outsourcing of

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complete supply-chain strategies and operations is a significant area of interest and opportunity for global organizations that see their core competence in manufacturing or retailing rather than supply-chain management.

An interesting example of such an application was reported by Eyefortransport.com on 11 July 2003. APL Logistics is to lead a new global international logistics service to the Zip Project, a joint venture between the UK’s Marks & Spencer and Northern Ireland’s privately owned Desmonds, which provides all of Marks & Spencer’s children’s wear range, supplied mainly from Sri Lanka, China, Bangladesh, the Philippines and Vietnam. The service involves the coordination and control of thousands of tons of children’s wear from these manufacturing centres to the United Kingdom. APLL’s solution, developed following a thorough analysis of Zip’s supply chain, concentrates on global import logistics, information management and establishing systems and processes that allow the supply chain to respond quickly to changing needs and circumstances. Zip products are to be shipped using multi-modal transportation methods – sea, air and road. Dan Ryan, APL Logistics’ president (Europe), was quoted as saying: Zip demands world-class supply chain solutions, which require a collaborative partnership with their logistics services providers, as well as the application of best practice. This matches APL Logistics’ global business strategy. … Our focus on adding value through people, process and technology means we have built, in partnership with Zip, a fully integrated global supply chain solution, which will ensure Zip’s products have a fast, reliable and cost-effective route to market.

Areas that have received particular attention include purchase order and vendor management at origin, driven by strict operational processes and enabled by APLL’s global operating system, which facilitates real-time, accurate information flow. APLL is also implementing value-added preshipment services for Zip, such as quality control and bar-coding scanning in Asia. Gary Morter, APLL’s MD for UK and Ireland, commented: Our work with Zip has led to a complete supply chain re-design …. Whereas Zip used to move mostly factory packed containers, they are now consolidating a large percentage of their product in Asia, thereby improving container utilisation and significantly reducing cost. Source: Eyefortransport.com, 11 July 2003

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Value-added services There are also many additional services offered by third-party logistics providers. These are often known as ‘value-added’ services because they consist of, in particular, those functions and services that add significant additional value to the product being distributed. As a general rule they also represent opportunities for the 3PL to develop services that are more profitable than the more standard storage, picking and transport of goods. Examples of these are given below.

Specialist or niche services Here the complete operational package is specifically designed for the distribution of particular product type. There are many examples in a number of different market sectors – automotive, electrical/electronic, hanging garments, high-tech and others. The development of hanging garment distribution is typical. Here the entire distribution operation, from production point through finished goods warehouse, primary transport, distribution centre, delivery transport and into the retail store, is all provided on hanging rails. Products are thus stored and moved as ‘sets’ of garments on hangers. Some of the storage operations are very sophisticated automated systems.

Time-definite services These are set up to support the just-in-time operations of major manufacturers. Typical here are the sequencing centres that have been developed in the automotive industry to support line-side production. TNT, Hays and Ryder have provided these for Rover, General Motors and Nissan, supplying line-ready production modules direct to the production line so that the relevant components can be introduced into the manufacturing process at exactly the appropriate time.

Production and assembly Here the final manufacturing or assembly of products takes place outside the manufacturing environment but within the logistics operation. The computer industry offers a number of examples where basic products, such as PC monitors or processing units are initially distributed to the relevant market before being finally made ready for the end customer. This is likely to include the ‘badging’ of the equipment with the appropriate name and the installation of the final language software. This is often undertaken by the third-party distributor.

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Repacking For some product offerings it may be necessary for goods to be repacked before they are ready for selling. A typical example is the need to blisterpack two different items that are derived from separate manufacturers or suppliers but are to go out as a distinct retail product – a torch together with a battery, for example. This is another niche operation favoured by a few specialist distribution companies.

Refurbishment In the light of current environmental legislation many manufacturing companies have endeavoured to re-engineer their products so that parts from some used products can be reused in new products. It is necessary to return these parts through the supply chain – not an easy task as most distribution operations tend to be geared to moving products out to the customer and not back from the customer to the manufacturer. This has provided an opportunity for third-party companies to offer this return-andrefurbishment operation.

Packaging returns Again linked to environmental legislation, ‘producers’ of packaging waste are legally responsible for the collection of packaging and packaging waste for reuse or disposal. Because this type of ‘reverse logistics’ is difficult to perform through traditional outward-looking logistics operations, a number of third-party operators have set up reverse-logistics systems, in particular for the large grocery multiples. Examples include the development of recycling centres for the disposal of waste and the repair and washing of reusable containers.

Product returns Another issue that has arisen due to environmental concern is the recent legislation for the return of consumer products that have reached the end of their working life. In Europe, this is reflected in the Waste Electrical and Electronic Equipment (WEEE) directive. The objective of this EU directive is to reduce the amount of WEEE being produced and to encourage its reuse, recycling and recovery. Organizations that manufacture, supply and use electronic and electrical equipment are all covered by this legislation, and there are significant implications for their operations. As already indicated with previous examples of reverse logistics, this is extremely difficult to

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undertake through existing logistics structures, so it is a prime opportunity for third-party service providers to set up and run reverse operations to fulfil these legislative requirements.

Inbound logistics The provision and movement of goods into a manufacturing company is also seen as an area for additional value-added service. This involves the coordination of the raw material, component and packaging products that a manufacturing company requires. It typically includes not just the collection and transport of all these different products, but also stock control, ordering and order progress chasing. It is a much-neglected area, and offers a good opportunity for cost saving and improved stock and supplier control.

Pre-retailing Here, products are prepared for immediate use in the retailing environment. This may involve de-packaging from outers, labelling and so on. In the clothing industry, particularly for boxed items, additional services will include cleaning and pressing to make the garments shop-ready.

Retailing point-of-sale material Another example of a retailing value-added opportunity is point-of-sale material. Many point-of-sale requirements cannot be easily identified and distributed through standard information and physical systems. Thus, this has become an area of specialization for some third-party operators. For example, TNT operates a system for a major supermarket chain that allows it to identify, for individual stores, exactly what point-of-sale items and printed labels are required. TNT can then print and produce the appropriate material based on store size and profile, and deliver it to the stores.

Home delivery In some sectors (such as white goods and brown goods), home delivery has been common practice for several years. Many third-party contractors have developed home-delivery operations, and there are also traditional parcels operators that specialize in the home delivery of small orders for a variety of different clients, such as mail-order companies. The white and brown goods sector, for example, has seen a rapid change in consumer and legal requirements. Thus, companies have set up home-

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delivery services that offer a ‘cradle to the grave’ approach including delivery, installation, return and repair, and refurbishment or disposal. They typically provide UK nationwide fulfilment for consumer electronic goods for manufacturers, retailers, insurance companies and service providers. Home delivery refers to the physical delivery of the product to the home, as distinct from home shopping, which refers to the different ways of shopping for and ordering products from home. The delivery of goods to the home that have been ordered via the internet is very similar to home delivery, but is more strictly referred to as e-fulfilment.

E-fulfilment The rapid growth in online selling companies, such as Amazon.com, means that internet shopping is now very common, and this has led to a similar growth in the demand for the fulfilment (or e-fulfilment) of these internet orders. Although internet access provides a direct and instantaneous link from the customer to the selling organization, the actual physical fulfilment must still be undertaken by more traditional physical means. Very often this may necessitate the introduction of a new means of physical distribution, because traditional channels are not appropriate for the type of delivery to the home that is required. A number of new companies, such as Business Express, and Beck and Call, were set up specifically as specialist e-fulfilment delivery operations and thus developed a particular expertise for this type of operation. Some e-fulfilment operations require a special approach. Those companies involved in grocery home delivery have, for example, developed specialist small vehicles that have compartments for the different types of grocery products: ambient, fresh, chilled and frozen. A number of different logistics solutions are still used for the storage and picking elements. The option of building specialist home-delivery depots has generally not been successful. Most operations either stock and pick within designated areas of existing distribution centres or pick from large retail hypermarkets. As well as delivery using conventional systems, other solutions that have been considered are the provision of secure boxes outside or attached to the property. Alternative points of delivery such as the place of work or the petrol station have also been tried with varying degrees of success. Picked and packed goods are delivered to await the customer collection. A number of these approaches to e-fulfilment will be successful (and many will fail), but the area as a whole is one that few internet companies will wish to develop, and so there are big opportunities for 3PLs to specialize and to offer value-added services.

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Information management Advances in information technology have enabled a vast amount of detailed logistics and demand data and information to be made available and to be manipulated very easily. This has led some companies to recognize the need to devise suitable processes to ensure that data is collected, collated and used in a positive and organized way. For logistics this means that detailed information can be made available for individual customers, concerning not just their product preferences but also any customer service requirements that are distribution-specific (delivery time preference, order size preference, invoicing requirements and so on). Some of the new software that has been developed to achieve these advances is both expensive to purchase and difficult to maintain and operate. Thus, this has become another area of opportunity for 3PLs and others to specialize and to offer their services to the marketplace.

Online communication systems Some third-party operators have identified the area of logistics communication systems as one where there is an opportunity to provide added value. One typical example is the provision of online information concerning the status of collections and deliveries. This type of development has been led by the major parcel carriers. TNT Express, for example, has developed interactive web-based solutions that allow its customers to have direct visibility on order status direct from their information systems. Also, where inventory is held for storage and distribution purposes, visibility is also available via the web on up-to-date stock levels and locations. This is particularly useful for spare parts operations that need to offer a two or even onehour guarantee of parts availability and supply.

Summary In this chapter the various outsourcing operations and services that are offered by third-party logistics service providers have been described. Initially, the breadth of outsourcing opportunities was outlined, from very limited participation to total asset management and including all of the many other opportunities between these extremes. The concept of the outsourcing continuum was discussed, emphasizing the need for potential users to be absolutely clear where different responsibilities lie and where the boundaries between these responsibilities occur.

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Various standard types of operation were described, then the question of whether to adopt a dedicated or a multi-user approach was reviewed. A broad breakdown of the different services available from the viewpoint of the main logistics components of warehousing and transport was then provided. Some alternative opportunities for occasional outsourcing were also considered. The concept of supply-chain management was reviewed with respect to how it might be applied to the outsourcing of logistics operations. Finally, the many additional value-added services offered by thirdparty logistics providers were discussed.

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4

Major providers Introduction This chapter considers the leading and influential third-party logistics (3PL) providers, reviewing their history and their current operations and activities. The information is presented in four sections: global providers, European providers, American providers and Asia Pacific providers.

The overall 3PL market In a report for Global Logistics & Supply Chain Strategies, Foster and Armstrong (2006) reported that total revenues for outsourced logistics worldwide had reached US$333 billion by 2004. As in many industries there has been a tremendous change in the 3PL industry over the last 10 years or so. The globalization of trade has been a significant driver in the development of 3PLs, combined with the increasing commoditization of services resulting from the tough attitude of manufacturers and retailers. These global customers, often under their own margin pressure, are seeking higher levels of engagement with 3PLs but at reduced costs. They are looking for a wider range of solutions and capabilities from 3PLs to support longer supply chains. The impact of this is being seen as large global companies send out their requests for proposal for logistics and supplychain services. It is often only the top, larger 3PLs that are asked to respond, and the requirements keep getting more complex and demanding. The smaller 3PLs are progressively becoming marginalized, and increasingly they end up providing parts of the logistics contract as subcontractors. The 3PL market is tough. It is highly competitive and very fragmented. In broad terms, the big players are getting bigger and the small providers are increasingly being marginalized and struggling to achieve growth targets.

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There are pressures on margins across the industry. Indeed, in the 2004 study of 3PLs across the Americas, Europe and Asia, entitled ‘Taking stock of third-party logistics’ (Advantage, 2006), 3PL CEOs indicated that their companies have suffered from lower profitability than forecast in recent years, largely driven by ongoing downward pressure on prices. Furthermore, the 2005 Third-Party Logistics study of 1,091 companies found that for the first time ever, the most important aspect in selecting a 3PL was price (Langley and Capgemini, 2005). Renewed business is inevitably accepted at lower margins than allowed for by the previous contract. In response, 3PLs are looking to develop added-value services and solutions that can help to stem the margin erosion. According to a 2004 Armstrong & Associates study, the top 100 3PLs control around one-third of a then estimated US$270 billion spend on outsourced logistics (Foster and Armstrong, 2006). In 2005/06 the top 25 3PLs had combined revenues of US$149 billion, as shown in Table 4.1. There is an elite group of four super-3PLs with revenues in excess of US$10 billion, with DHL Logistics number one with over US$26 billion revenues, followed by fellow German provider Schenker with revenues of US$12 billion. These four super-3PLs, which also include Nippon Express and Kühne + Nagel, have total revenues of US$60 billion, with the top 10 3PLs representing a total revenue of US$96 billion. These super-3PLs are examples of third-party providers that are striving to achieve scale and coverage to become truly global providers, as can been seen from the number of employees in Figure 4.1. They can provide the expertise, reach, reliability and flexibility that global companies require. They have developed end-to-end solutions in response to their customers’ need, including forwarding, transportation, consolidation, and customs brokerage, warehousing, distribution and a range of added-value services. Following the acquisition of Exel, DHL Logistics now leads across all service sectors. It claims to have an 11.6 per cent share of the N22.2 billion air freight market, followed by Nippon Express with only 5.6 per cent. The German number one claims an 8.6 per cent share of the ocean freight market, with Kühne + Nagel snapping at its heels with 8.3 per cent. Further, following the acquisition of the former number one, Exel, DHL Logistics now also leads the contract logistics market with a 5.5 per cent share of an estimated N167 billion market. TNT Logistics sits at number two with just 2.2 per cent, reflecting the very fragmented nature of the market (DHL, 2006).

Growth of the 3PL market In the developed markets like the United Kingdom, Germany and France, many of the leading logistics companies have emerged from nationalized

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Table 4.1 Top 25 logistics service providers by revenue Rank

Company

Head Office

1 2

DHL Logistics Schenker

Germany, Europe Germany, Europe

26,715 12,163

3

Nippon Express

Japan, Asia Pacific

11,838

4

Kühne + Nagel

Switzerland, Europe

10,100

5

Panalpina

Switzerland, Europe

6,551

6

Toll

Australia, Asia Pacific

6,450

7

DSV (incl. Frans Maas)

Denmark, Europe

6,028

8

UPS Supply Chain Solutions

USA, Americas

5,994

9

CH Robinson

USA, Americas

5,700

10

Geodis

France, Europe

4,925

11

TNT Logistics

Netherlands, Europe

4,795

12

Con-Way

USA, Americas

4,200

13

GEFCO

France, Europe

4,110

14

Expeditors

USA, Americas

3,902

15

Dachser

Germany, Europe

3,836

16

Penske

USA, Americas

3,700

17

FedEx Freight & SCS

USA, Americas

3,645

18

Schneider

USA, Americas

3,500

19

ABX

Belgium, Europe

3,425

20

NYK Logistics

Japan, Asia Pacific

3,300

21

Wincanton

UK, Europe

3,288

22

JB Hunt

USA, Americas

3,128

23

EGL

USA, Americas

3,009

24

Kintetsu

Japan, Asia Pacific

2,600

25

Cat Logistics

USA, Americas

2,500

Total revenue

Latest Reported Revenue (US$ billion)

149,402

Note: Revenues converted into US dollars where appropriate. All revenues referenced to source under 3PL entries.

Major providers 160,000

140,000

120,000

100,000

80,000

60,000

40,000

20,000

DHL Logistics Schenker Nippon Express Kühne + Nagel Panalpina Toll DSV (incl. Frans Maas) UPS SCS CH Robinson Geodis TNT Logistics Con-Way GEFCO Expeditors Dachser Penske FedEx Schneider ABX NYK Logistics Wincanton JB Hunt EGL Kintetsu Cat Logistics Thiel Uti Bax Ryder Norbert Dentressangle

Figures based on latest available All employee figures referenced to source under 3PL entries

Figure 4.1 Top 25 logistics service providers by employees

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industries (examples: Exel from National Freight Corporation (NFC), Schenker from Deutsche Bahn), specialist industries (examples: GEFCO from automotive, Gist from industrial gases, Wincanton from dairies) or shipping companies with a long history (examples: Maersk, Kühne + Nagel, Panalpina). In the United States, prominent third-party providers have come from express parcel companies (FedEx, UPS) or often from trucking or logistics companies formed quite recently by individuals (J B Hunt, C H Robinson, Penske, Ryder), reflecting the ‘mama and papa’ nature of trucking in the States. The Asian providers are led by the large Japanese companies coming from state holdings or large shipping or railway companies (examples: Nippon, NYK, Kintetsu). It is certainly the case that to be considered as a credible provider in the new global trading market, 3PLs need to have a balance of capability between freight forwarding and contract logistics, as shown in Figure 4.3. Freight forwarders like Kühne + Nagel and Maersk have developed their solutions to add contract logistics services, often through acquisition. In turn traditional contract logistics providers have expanded their services to include freight forwarding, typified by the Ocean (MSAS) and NFC (Exel Logistics) merger. However it appears to have been more difficult for legacy contract logistics to expand into freight forwarding, with most developments of combined freight and contract logistics services coming from legacy shippers or forwarders. This is most likely due to the more global nature of their businesses and the existence of a global shipping or freight network. While the likes of DHL and UPS are leading the way in developing global capabilities and services by leveraging on the scale and global reach of their parent companies, operators such as Kühne + Nagel, Panalpina, Schenker and Nippon Express are snapping at their heels as shown in Figure 4.2. There is significant consolidation in the 3PL industry. Recent large acquisitions include Deutsche Post World Net’s (DPWN) 2005 purchase of the largest logistics provider, UK-based Exel, which had itself acquired Tibbet and Britten just a year previously. Kühne + Nagel has acquired ACR (formally Hays Logistics), while Danish company DSV has merged with Dutch firm Frans Maas. P&O Nedlloyd was snapped up by M‘rsk and BAX Global was bought by Schenker (Deutsche Bahn). Toll purchased Australian rival Patrick Corporation and the Singapore provider, SemCorp Logistics in 2006. Equally, more joint ventures and alliances are being formed. ABX announced a strategic alliance with Penske Logistics in 2006, while APL Logistics and Christian Salvesen launched a joint venture company.

Major providers

Schenker Nippon Express Kühne + Nagel Panalpina Toll DSV (incl. Frans Maas) UPS SCS CH Robinson Geodis TNT Logistics Con-Way GEFCO Expeditors Dachser Penske FedEx Schneider ABX NYK Logistics Wincanton JB Hunt EGL Kintetsu Cat Logistics Thiel Uti Bax Ryder Norbert Dentressangle Values converted into millions of US dollars All revenues referenced to source under 3PL entries

Figure 4.2 Top 25 logistics service providers by revenues

30,000

25,000

20,000

15,000

10,000

5,000

DHL Logistics

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141

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Global providers Introduction The key qualifications for becoming a global logistics provider are geographical spread, scale and free cash. Express parcel carriers, which are already established in most countries in the world, are now increasing their services to less-than-container-load and container-load shipments. Further, the larger companies such as DHL, UPS and FedEx have established logistics organizations and are leading the way in global 3PL expansion. To demonstrate the global position of the top 3PL providers, Transport Intelligence produced a 3PL Global Solutions Quadrant, as shown in Figure 4.3. It can clearly be seen that the combined DHL/Exel business is leading the way, with UPS Solutions just behind.

DHL Logistics DHL Logistics facts and figures Head office: Bracknell, UK Parent company: Deutsche Post World Net (DPWN) 3PL revenue: DHL Solutions N7,949 million; DHL Freight circa N4,000 million (2005); Exel N11,456 million (2005) Parent revenue: DPWN N44,594 million (2005), Exel N11,456 million (2005) Global coverage: 220 countries worldwide Employees: DHL Solutions 148,095 including Exel (2006) Key services and products: Air and ocean freight, warehousing, transportation, service parts logistics, other added-value activities Industry focus: Aerospace, automotive, consumer goods, fashion, healthcare/pharmaceutical, high technology, retail Source: DHL (2006).

DHL Logistics background Following the acquisition of UK-based Exel PLC in 2005, Deutsche Post World Net (DPWN) acquired the seventh-largest workforce in the world, with 500,000 employees. DHL Logistics is organized around two business units: DHL Global Forwarding (formerly DHL Danzas Air & Ocean and Exel

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Multiple DHL/Exel

Functionality

UPS

Schenker / Bax NYK Logistics

Fiege Geodis

APL Ryder Salvesen

FedEx TNT Expeditors CAT

EGL

Single Local

Geographic scope

Global

Figure 4.3 3PL Global Solutions Quadrant Source: Transport Intelligence (2006)

global freight) and DHL Exel Supply Chain (formerly DHL Solutions and Exel contract logistics). The purchase of Exel, which valued the company at N5.4 billion, has made DHL Logistics the undisputed global number one in logistics and freight. In air freight, DHL is a clear leader with 11.6 per cent of the estimated N22.2 billion market, twice the size of its nearest rival Nippon Express (5.6 per cent). In sea freight DHL has 8.6 per cent of the market, just ahead of Kühne + Nagel with 8.3 per cent. Exel has increased the size of DHL’s contract logistics business significantly, and the newly formed DHL Exel Supply Chain business is number one globally by some margin. DHL’s contract logistics business has a 5.5 per cent share of the estimated N167 billion market, with TNT in second place with an estimated 2.2 per cent (DHL, 2006). Following the acquisition of Exel, John Allan, former CEO of Exel plc, was appointed CEO of DHL Logistics. Allan, who had been appointed CEO of Ocean Group plc before it merged with NFC to create Exel plc, is very well respected across the logistics industry, winning the Best International Logistics Initiative and appointed a Commander of the British Empire (CBE) in recognition of his services to the freight industry in 2005. The name DHL comes from the first letters of the last names of the original three company founders, Adrian Dalsey, Larry Hillblom and Robert Lynn. The redesigned DHL brand in Deutsche Post yellow was successfully rolled out across all the logistics and express businesses in 2003 (DHL, 2006).

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DHL Logistics history 1969:

DHL is founded by three partners in the United States. The three partners personally ship papers by airplane from San Francisco to Honolulu, initiating the delivery of documents and shipments by airplane and the beginnings of international air express.

1970 to 1987: The DHL Network grows very quickly and the company expands into the Far East and Pacific Rim, then the Middle East, Africa and Europe. 1988:

DHL is present in 170 countries and employs 16,000 people.

2000:

DPWN acquires freight forwarder Danzas.

2001:

DPWN acquires Air Express International (AEI).

2002:

DPWN becomes the major shareholder in DHL, completing a 100 per cent ownership by the end of that year.

2003:

DPWN acquires Securicor Omega, a UK-based third-party provider of express, logistics and container logistics. DPWN consolidates all of its express and logistics activities under the single brand DHL.

2005:

In December, DPWN strengthens the DHL brand further through its acquisition of Exel PLC. Overall, N6.2 billion is spent on acquisitions during the year.

2006:

DPWN announces that DHL Express, with revenues of around N4 billion, is to be brought into the Logistics division as an own subdivision.

Source: DHL (2006).

Exel history Exel plc was formed from the merger of NFC (Exel Logistics) and Ocean (MSAS Global Logistics) in 2000. NFC had previously been the nationalized road freight operation in the United Kingdom, until its privatization through a management and employee buy-out in 1982. Ocean Group plc was a long-established shipping company working routes from Liverpool. It divested itself of its ships and tugs and reinvented itself as a freight management company, becoming especially proficient in air freight. When John Allan joined Ocean as CEO in 1994, he set about making the group a global leader in integrated logistics, through a series of acquisitions and mergers, culminating in Exel’s acquisition of Tibbet and Britten in 2004. At the time that DPWN acquired Exel in December 2005, it had around 111,000 employees across 135 countries, providing an integrated freight and logistics offering to customers (DHL, 2006).

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Danzas and AEI Danzas was founded in 1815, based in Basel, Switzerland. DPWN acquired the business in 2000. By then it had become the world leader in air freight and ranked second in ocean freight. The business also provided overland transport and supply-chain management services (DHL, 2006). Air Express International (AEI), then the largest US air freight provider, was integrated into the Danzas group in 2001 (DHL, 2006).

DHL Logistics operations and activities DHL Global Forwarding DHL Global Forwarding provides air and sea freight across 130 countries worldwide. Other services include compliance and customs consolidation, air freight consolidation, ocean dangerous goods and temperaturecontrolled goods (DHL, 2006).

DHL Exel Supply Chain DHL Exel Supply Chain provides a range of industry tailored logistics solutions, from warehousing and transportation to consulting and supply-chain design. Other services include inbound to manufacturing, order management, service parts logistics, reverse logistics and integrated supplychain management, together with added-value services such as kitting, copacking, packaging and technical distribution (DHL, 2006).

DHL Freight DHL Freight is a road cargo business, offering international and national transport solutions for both part (LTL) and full load (FTL) across Europe. The goods are moved by road, rail and multi-modal systems, and other services, such as customs clearance, are provided (DHL, 2006).

Case history On 19 September 2006, DHL Logistics announced that it had won a contract with the UK government’s Department of Health worth £1.6 billion in revenue over 10 years. The 10-year contract to manage £22 billion (N32 billion) total spend into hospitals and heath trusts involves the operation of the NHS (National Health Service) supply chain. DHL has targeted £1 billion (N1.4 billion) savings to the NHS over 10 years. DHL has also committed to around 1,000 new jobs.

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Klaus Zumwinkel, CEO and Chairman of DPWN, commenting on the win, said the contract demonstrated the success of the group’s strategy: ‘After the take-over of Exel and given DHL’s extensive expertise in the health sector, we were able to make our customer a truly convincing offer. We now reap the benefits of both our internationalization strategy and our broad product range’ (DHL, 2006). Under the contract, DHL will be responsible for delivering all procurement and logistics services across 500,000 products in support of 600 hospitals in England. The operation is aimed at allowing the NHS to dedicate more resources to patient care. John Allan, CEO of DHL Logistics division and management board member of DPWN, commented: ‘This contract is both good for staff and good for the NHS. We are committed to targeting savings on behalf of the Department of Health that can be directed back to patient care by building upon the success of both NHS Logistics and some of the scope of the NHS Purchasing and Supply Agency. The contract will ensure that NHS trusts get access to a wide range of high-quality, innovative products that will be selected by having extensive dialogue and testing procedures with clinicians. We are thrilled to play such a major part in this change to manage and deliver a world-class supply chain for the NHS’ (DHL, 2006). In 2008, DHL plans to open a new 250,000 sq ft distribution centre to act as a stockholding hub for food and other products. It is expected to generate 1,000 extra jobs, with plans to open an additional distribution centre in 2012. Source: DHL (2006).

UPS Supply Chain Solutions (SCS) UPS SCS facts and figures Head office: Atlanta, USA Parent company: UPS 3PL revenue: US$5,994 million (2005) Parent revenue: US$42,581 million (2005) Global coverage: service to 99 per cent of world GDP Employees: 22,000 (2004) (Foster and Armstrong, 2006)

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Facilities and resources: 1,000+ facilities in more than 120 countries; 35 million sq ft; 6,700 tractors; 22,100 trailers; 200+ service centres Key services and products: Logistics and distribution; transportation and freight (air, sea, ground, rail); freight forwarding; international trade management and customs brokerage Industry focus: Automotive, consumer goods, electronics and high technology, healthcare, retail, telecommunications Source: UPS (2006).

UPS background UPS Supply Chain Solutions is part of United Parcel Service Inc (UPS), the world’s largest parcel delivery company, headquartered in Atlanta, Georgia. The company delivers over 14 million packages a day to over 200 countries worldwide, and in 2006 had 407,000 employees (UPS, 2006). UPS is a global brand, well known for its brown trucks. The colour that UPS uses on its vehicles and uniforms is called Pullman brown, after the railroad cars of the same colour, which were created by George Pullman. UPS operates its own airline for international parcel movements. Over the last few years UPS SCS has established itself as the largest North American-based 3PL. It became profitable in 2003 for the first time and has now become an integral part of the total UPS global offering. UPS SCS has worked hard at developing and improving its operations across all areas of the business. UPS’s revenues are about equally divided between the United States and its international operations. Having a financial and operational powerhouse as a parent is a tremendous plus. In order to strengthen its capability outside the United States, it is thought that UPS is likely to make a significant logistics acquisition if it can make the right deal. It has generated over US$2 billion in free cash flow in each of the last two years, and indeed it is rumoured that it looked closely at Exel before Deutche Post snapped it up. UPS SCS has good brand recognition and has significant mid-market strength.

UPS history 1907:

19-year-old James E (‘Jim’) Casey borrows US$100 from a friend and establishes the American Messenger Company in Seattle, Washington.

1913 to 1918: The company focuses on package delivery for retail stores, using motorcycles for some deliveries. The company acquires its first delivery car, a Model T Ford. In 1916, Charlie

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Soderstrom joins the company, bringing with him automobiles, expertise and the colour brown. 1919:

The company expands to Oakland, California, and adopts the name United Parcel Service.

1922:

UPS acquires a company in Los Angeles with a then innovative practice known as ‘common carrier ’ service. This service includes automatic daily pickup calls, and services that would now be provided by home-delivery companies.

1927:

The retail delivery services of UPS have by now expanded to include all the major cities on the US Pacific Coast.

1930:

UPS extends to the East Coast.

1940 to 1945: Despite the Second World War and shortages of fuel and rubber the company continues to grow. 1981 to 1988: The demand for air parcel delivery increases in the 1980s. In response to this, UPS establishes its own jet cargo fleet, receiving authorization from the Federal Aviation Administration (FAA) to operate its own aircraft in 1988. 1991 to 1994: 1993 sees UPS delivering 11.5 million packages and documents a day for more than a million regular customers. 1994 to 1999: In the mid-1990s UPS decides to widen its business, and in 1995 it forms the UPS Logistics Group to provide global supply-chain management solutions and consulting services. 1995:

UPS acquires Sonic Air, giving UPS the ability to offer a sameday, ‘next flight out’ service.

2000 to 2002: UPS Supply Chain Solutions is formed to focus logistics and supply-chain solutions for customers. Source: UPS (2006).

UPS operations and activities UPS SCS provides a wide range of services to customers: ឣ

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Transportation and freight: it has a global freight network and provides road and rail ground transportation across North America. Logistics: it offers a wide range of logistics and supply-chain services, from warehousing through global distribution to post-sales service parts logistics.

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International trade: UPS SCS provides international-trade management, including customs brokerage and compliance consulting and management services. Consulting services: supply-chain strategy supports business strategies.

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Source: UPS (2006).

European providers Introduction Third-party logistics outsourcing is most mature in European countries. In countries like the United Kingdom and Germany, 3PLs came out of the nationalized road freight or railway industries. Overall, European countries have been more reliant on cross-border traffic, driving the need to outsource logistics movements. Across Europe, 25.3 per cent of logistics activity is outsourced (Transport Intelligence, 2006). However, Europe is a diverse continent with different languages, cultures and laws, so most 3PL operations have to be run on an individual country basis to be effective. Countries such as the United Kingdom, Germany, the Netherlands and France have very mature 3PL markets with large 3PLs, as shown in Figure 4.4, whilst countries such as Spain and Italy are still developing, providing good growth potential for 3PLs.

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The European distribution market has developed significantly in recent years, with logistics becoming increasingly important to companies’ strategies as businesses move their manufacturing to lower-cost economies. While in Western Europe the rate of growth of outsourcing has reached a plateau, the opportunities for 3PLs in Central and Eastern Europe are very significant. This has been further aided by the accession of the 10 new EU member states, making it easier for Western 3PLs to move into the region. However there are constraints, including the poor state of the transport infrastructure, the comparative immaturity of the industrial property markets and the lack of experienced workers in some countries. There has been a need to develop European distribution centres (EDCs), for distribution across both Western European markets and the new Central and Eastern European ones. However, as manufacturers move their products east, they are seeking smarter ways to control inventories. As a consequence solutions such as cross-docking and deconsolidation are being deployed, meaning that there are likely to be more smaller but more agile warehouses in the future. In the search for scale and growth, the 3PL industry has seen a large number of acquisitions and mergers. The result is that there are fewer but larger companies that have the capability and coverage to offer panEuropean or global logistics services to customers. This is in response to the opportunities in the enlarged Europe and globally. The listing of European providers below is intended to give an overview of the main 3PLs across the European 3PL market. Across these providers – and including DHL Logistics, listed under global providers – only three have a turnover in excess of US$10 billion. DHL Logistics is the largest of these, followed by Schenker and Kühne + Nagel, as shown in Figure 4.5. Eight 3PLs have turnovers in excess of US$4 billion, with a further four having turnovers over US$2.5 billion. In all, as can be seen in Figure 4.6, only 12 3PLs from Europe have turnovers over US$2.5 billion. This underlines the fragmented state of the market and the reason that even more consolidation is inevitable. Europe has a ‘super-provider ’ in DHL Logistics. With nearly 150,000 employees, as shown in Figure 4.6, it dwarfs its competitors both in Europe and elsewhere in the world. As previously shown in Figure 4.4, Germany and France have the most providers in the top dozen. However, when the revenue of these top 3PLs is considered, Germany is way out in front, followed by Switzerland, as shown in Figure 4.7. This is further underlined by the total numbers of employees for these companies as shown in Figure 4.8. It is clear that Germany is a powerhouse for logistics in Europe and increasingly across the world.

Major providers 30.0

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International logistics and supply chain outsourcing 3,288 3,425

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Figure 4.7 Distribution of Europe’s top logistics providers by revenue

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ABX Logistics GmbH ABX facts and figures Head office: Brussels, Belgium Parent company: 3i (acquired from the Belgian Railways, SNCB Holding, in August 2006) 3PL revenue: N2.5 billion Global coverage: 100 countries worldwide (35 with own subsidiaries) Employees: 10,000 (2006) Facilities and resources: 350 sites with 1.5 million sq m of warehousing Key services and products: Air and sea freight services, road transport network, warehousing and distribution, event logistics Source: ABX (2006).

ABX background and activities ABX traces its roots back to 1800 when Franz Haniel set up a trading, forwarding and inland waterway shipping company in Duisburg, Germany. Following nearly 200 years of growth and mergers, the company became Thyssen Haniel Logistic (THL) which was renamed ABX Logistics in 1999 (ABX, 2006). The company provides air and sea freight services across the world both through its own offices and through agents and partners. It has a European road transport network and is developing its contract logistics business (ABX, 2006). In September 2006 ABX announced a strategic alliance with Penske Logistics to provide integrated global supply-chain solutions for multinational corporations (Penske, 2006).

Aitena Aitena facts and figures Head office: Madrid, Spain Parent company: Fomento de Construcciones y Contratas 3PL revenue: N110 million (2004)

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International logistics and supply chain outsourcing

Parent revenue: N6,286 million (2004) Global coverage: Spain and Portugal Employees: 1,875 Facilities and resources: 24 operating centres; over 350,000 sq m of storage space Key services and products: Warehousing and distribution Industry sector focus: Automotive, consumer goods, healthcare, high technology, personal care Source: Aitena (2006).

Aitena background and activities Aitena is part of Fomento de Construcciones y Contratas, a leading Spanish construction and services company. Following the merger of Loacsa and Aitena, it operates under the name of Aitena for consumer goods and Logística de Navarra for automotive companies. These companies provide dedicated or multi-user warehousing, transportation and cross-docking across a distribution network of 26 operations centres across Iberia. Source: Aitena (2006).

Bibby Distribution Ltd Bibby facts and figures Head office: Liverpool, UK Parent company: Bibby Line Group 3PL revenue: £123 million (N178 million) Parent revenue: £254 million (N368 million) Global coverage: United Kingdom Employees: 2,600 Facilities and resources: 70 operating centres; 1,500 vehicles Key services and products: Warehousing and distribution Industry sector focus: Automotive, chemicals, consumer goods, defence, industrial and pharmaceuticals Source: Bibby Distribution (2006).

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155

Bibby Distribution background and activities Bibby Distribution is a wholly owned subsidiary of the privately owned Bibby Line Group. The group can trace its history back to 1807 and operates through three main divisions: logistics, marine and financial services. Bibby’s customers include Anheuser Busch (Budweiser), Babcock, BAE Systems, Defence Logistics Organization, Honda, Ilford, Kellogg’s, Marley, Nestlé Waters, Nisa Today’s, Railpart, J Sainsbury’s and Thorntons. Source: Bibby Distribution (2006).

Christian Salvesen Christian Salvesen facts and figures Head office: Northampton, UK 3PL revenue: £820.7 million (N1,190 million) (year ending 31 March 2006) Global coverage: eight countries across Europe including United Kingdom, Benelux, France, Ireland, Portugal and Spain Employees: 13,000 (2006) Facilities and resources: 200 sites; 400,000 sq m warehousing space; 5,000 tractor units and 6,000 trailers Key services and products: Warehousing and distribution Industry sector focus: Automotive, consumer goods, electronics, oil and chemicals, retail Source: Christian Salvesen (2006).

Christian Salvesen background and activities Christian Salvesen is a major European logistics service provider listed on the London Stock Exchange. Its strategy is to expand its business in Europe, which is less mature and arguably less competitive than the United Kingdom, through the replication of its tried and tested UK networks and services. The company is also seeking to develop a freight management capability in Asia, other parts of the Far East and the near Eastern European states. To this end, in December 2005, Christian Salvesen’s CEO Stewart Oades announced a joint venture with the global container transportation company APL Logistics. The joint venture was established to unite the strengths of the two businesses in order to provide integrated end-to-end supply-chain services (Christian Salvesen, 2006).

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D Logistics AG D Logistics facts and figures Head office: Germany 3PL revenue: N315 million (2005) Global coverage: Europe and the United States Employees: 3,210 Key services and products: Air cargo, consumer goods packaging, industrial goods packaging, warehouse logistics Industry sector focus: Automotive, chemicals, consumer goods, healthcare and industrial sectors Source: D Logistics (2006).

D Logistics background and activities D Logistics offers logistics and related services to a variety of industry sectors. The company was founded by Detlef W Hübner, chairman of its board, who in 1979 took over Dönne + Hellwig GmbH & Co from his grandfather. He subsequently restructured the company, and in 1998 launched D Logistics AG as a logistics provider. The company provides a wide range of logistics services, including design and production of packaging, warehouse planning and management, distribution logistics, transport management, assembly, spare parts logistics, just-in-time logistics, document management, special services for capital goods manufacturers and other value-added services. Source: D Logistics (2006).

Dachser Dachser facts and figures Head office: Kempten, Germany 3PL revenue: N2.8 billion (2005) Global coverage: Germany, Benelux, Austria, Switzerland, France, Portugal, Romania, Hungary Employees: 13,400

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Facilities and resources: 1,000,000 sq m of warehouse space; 6,800 transport units Key services and products: pan-European network, warehousing and distribution, air and sea transportation, Industry sector focus: Consumer, DIY Source: Dachser (2006).

Dachser background and activities Dachser was founded in 1930 by Thomas Dachser and is still owned by the founding families. It provides logistics across a pan-European network and specializes in transport and warehousing in the non-frozen food and DIY (do-it-yourself) sectors. It also provides intercontinental movements by air and sea through 400 branch offices at over 300 airports. Dachser also provides added-value services such as consulting and supply-chain optimization. Source: Dachser (2006).

DHL Logistics See under global providers.

DSV A/S (DFDS Dan Transport Group A/S and Frans Maas) DSV facts and figures Head office: Brøndby, Denmark 3PL revenue: N4.4 billion (2005) Global coverage: 50 countries globally with agents in another 50 countries Employees: 19,000 (2005) Facilities and resources: 6,500 trucks Key services and products: Road transportation, sea and air freight Source: DSV (2006).

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DSV background and activities DFDS Dan Transport Group A/S was taken over by DSV in 2000. DSV was established in 1976 as a consortium of 10 independent hauliers in Denmark. Its key service is transportation: European road and international sea and air freight. It uses independent hauliers as subcontractors in order to be agile and reactive to the transport market. In 2006 the trading name changed from DFDS to DSV following its acquisition of Frans Maas (DSV, 2006). Frans Maas, established in 1890, is an intercontinental freight forwarder and pan-European contract logistics provider. The business operates through a network across 32 European countries and a handful of offices in North Africa. Frans Maas uses exclusive partnerships with other providers in North America and Asia Pacific. In addition to forwarding, the company operates road freight across Europe offering both shared-user and dedicated warehousing and other value-added services. In areas and geographies where Frans Maas is dominant the company will trade as DSV Frans Maas (Frans Maas, 2006).

Exel See under global providers, DHL Logistics.

FM Logistics FM facts and figures Head office: France 3PL revenue: N342 million (2005) Global coverage: France, Poland, Czech Republic, Russia, Romania, Belgium, Slovakia Employees: 9,500 (2006) Key services and products: Warehousing, transport, co-packing Industry sector focus: Automotive, consumer goods, healthcare, high technology, industrial, personal care products Source: FM Logistics (2006).

FM Logistics background and activities FM Logistics was founded in 1967 by Claude and Edmond Faure and JeanMarie Machet. The company which has expanded outside France into

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Germany and Eastern Europe, is still privately owned. Nearly 60 per cent of its activities are warehousing, while transportation accounts for a quarter and co-packing makes up the rest. Source: FM Logistics (2006).

Frans Maas See under DSV A/S (DFDS Dan Transport Group A/S and Frans Maas).

GEFCO GEFCO facts and figures Head office: Courbevoie, France Parent company: PSA Peugeot Citroën Group 3PL revenue: N3 billion (2005) Parent revenue: N56.3 billion (2005) Global coverage: network across 80 countries worldwide Employees: 9,372 (2005) Facilities and resources: 4,345 dedicated rail cars, 1,900 trucks, 80 EDCs, 40 vehicle preparation centres across Europe, and 140 dedicated platforms in over 80 countries across the world Key services and products: Automotive logistics and vehicle transport, road freight, air and sea freight Industry sector focus: Automotive and industrial Source: GEFCO (2006).

GEFCO background and activities Founded in 1949 by Société des Automobiles Peugeot, GEFCO, or les Groupages Express de Franche Comté, has grown steadily over the last halfcentury to be one of the top 10 logistics players in Europe. Still wholly owned by the PSA Peugeot/Citroën Group, its automotive logistics and vehicle business accounts for a third of its turnover, with the larger proportion of around 50 per cent coming from its European network road transportation business, while freight and other supply-chain activities account for the balance. Source: GEFCO (2006).

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Geodis Geodis facts and figures Head office: Clichy, France 3PL revenue: N3,595 million (2005) Global coverage: 120 countries, across Europe and Asia Employees: 23,800 Facilities and resources: 3 million sq m of warehouse space, 17,000 vehicles Key services and products: Transportation (groupage and express), warehousing and distribution, air and sea freight, reverse logistics Industry sector focus: Automotive, consumer goods, healthcare and cosmetics, high technology, home and leisure, industrial, luxury, retail Source: Geodis (2006).

Geodis background and activities Geodis was created in 1995 when all of the non-rail SCETA subsidiaries were merged and absorbed by Compagnie Générale Calberson, subsequently renamed Geodis. The company has been steadily expanding outside its French base and is now active in the United Kingdom, Germany, Spain, Italy, Slovakia, Hungary, Romania, Poland, the Czech Republic and the CIS, amongst others. In Asia it is active in 10 countries, with partnerships in a further 10. Geodis has been developing its expertise in reverse logistics and has recently been awarded the recycling contract for the European Recycling Platform, a joint venture founded by Braun, Electrolux, HP and Sony, across France, the United Kingdom, Ireland, Spain and Portugal. Source: Geodis (2006).

Gist Gist facts and figures Head office: Basingstoke, UK Parent company: Linde Group, following its merger with BOC Group in 2006

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3PL revenue: £315.9 million (N458 million) (2005) Parent revenue: N3.6 billion (2005) Global coverage: 35 locations across the United Kingdom, Netherlands, Czech Republic and Australia Employees: 5,500 (2006) Facilities and resources: 35 locations with 400,000 sq m of warehouse space; 1,000 vehicles. Key services and products: Warehousing and distribution; added-value services Industry sector focus: Consumer goods, electronics, gas and retail Source: GIST (2006).

Gist background and activities Gist, until recently a subsidiary of the industrial gases and engineering company BOC, has a rich portfolio of retail customers, including Woolworth, Ocado, Marks & Spencer and Budgens. As its roots would suggest, the company also transports gases and other industrial items. The company currently holds the contract to warehouse and distribute all Marks & Spencer food items in the United Kingdom. In 2005 Gist and Marks & Spencer were presented with the Award for Supply Chain Excellence by the UK’s Institute of Grocery Distribution (IGD), in recognition of their use of RFID technology in the food supply chain. Source: GIST (2006).

Kühne + Nagel International AG Kühne + Nagel facts and figures Head office: Schindellegi, Switzerland 3PL revenue: N8,850 million (SFR14,049 million) (2005); ACR estimated revenue: N1,250 million (2005) Global coverage: service to over 85 per cent of World GDP; 100+ countries Employees: 40,000 (2006) Facilities and resources: 700 locations including 400 warehouses – approximately 6 million sq ft

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Key services and products: Air and sea freight forwarding, warehousing and distribution, road transportation, lead logistics solutions and valueadded services Industry sector focus: Automotive, consumer, healthcare, high technology, industrial, retail Source: Kühne + Nagel (2006a).

Kühne + Nagel background Kühne + Nagel is a well-run company that has consistently achieved solid financial results. Until DPWN’s acquisition of Exel, it was the world’s largest ocean freight forwarder, shipping over 900,000 TEUs per year. In addition the company is estimated to be the third-largest airfreight freight business in the world. Kühne + Nagel takes quality very seriously and has ISO 9001 certification for all of its operations. It has made a number of acquisitions in order to expand its contract logistics capabilities across North American and Asia, and most notably, its acquisition of ACR Logistics (formerly Hays Logistics) to extend its business in Europe, especially in the UK (Kühne + Nagel, 2006a).

Kühne + Nagel history August Kühne and Friedrich Nagel founded Kühne + Nagel, when they established their forwarding and commissioning business in Bremen, northern Germany, in 1890. The company, which concentrated on cotton and consolidated freight, has gone on to become one of the largest logistics businesses in the world. In 2001 Kühne + Nagel acquired USCO, a leading US-based provider of integrated logistics solutions. In 2006, the company announced its largest acquisition with the purchase of UK-based ACR Logistics, formally Hays Logistics. This acquisition expanded Kühne + Nagel’s global network further into Eastern Europe and Asia. Source: Kühne + Nagel (2006a).

Kühne + Nagel operations and activities Kühne + Nagel’s key activities are freight forwarding and contract logistics. It is particularly strong in sea freight, which provides nearly 50 per cent of its revenues; a quarter of its sales come from air freight and the balance from contract logistics, and in particular transportation. Its N440 million acqui-

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163

sition of ACR Logistics has helped in further expanding its global capability, especially into Eastern Europe and Asia. ACR was especially strong in contract logistics in the UK, Benelux, France and Italy.

Maersk Logistics Maersk Logistics facts and figures Head office: Copenhagen, Denmark Parent company: A P Moller–Maersk Group 3PL revenue: not available Parent revenue: DKR208,702 million (US$ 34,350 million) (2005) (Maersk, 2006) Global coverage: 90 countries across Europe, North America and Asia Employees: 60,000 (2004) (Foster and Armstrong, 2006) Facilities and resources: 200 offices Key services and products: Ocean and air freight forwarding, warehousing and distribution, supply-chain management Industry sector focus: Apparel and fashion, consumer and personal care, electronics, retail Source: Maersk Logistics (2006). Note: this entry does not include P&O Nedlloyd – see ‘recent acquisition’ below.

Maersk background Maersk Logistics is part of Maersk Line, one of the leading liner shipping companies in the world. Maersk Line is a division of the highly successful A P Moller–Maersk Group, a global organization with over 100,000 employees across 125 countries. The company is still owned by the MaerskMoller family and third-generation Maersk McKinney Møller, born in 1913, is still the managing owner. Maersk Logistics has been in a strong position to take advantage of the sourcing of goods from Asia into America and Europe. It is estimated that nearly 60 per cent of revenues are between Asia and North America, around a third from Asia to Europe and the balance between Europe and North America. Maersk’s recent purchase of rival shipping company P&O Nedlloyd is thought to be motivated by capacity shortages in the world container market as a result of increasing world trade.

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Maersk Logistics history 1904:

Shipping company D/S Svendborg is founded by Captain Peter Maersk-Møller and his son Arnold Peter Møller.

1928:

First liner service under the name Maersk Line on the transPacific route from the Far East to the United States.

1939:

At the beginning of the Second World War, A P Møller is the second-largest shipping company in Denmark, with a total of 46 ships.

1940:

After Denmark surrenders to the German invasion, Maersk McKinney Møller is made a partner and flees to the United States to manage the fleet from the New York office.

1941–45

The United States takes control of all foreign ships, including the Maersk fleet, of which more than half is lost during the war.

1945 to 1965: Reconstruction following the Second World War; the Maersk fleet is reduced to 21 ships. 1965:

Maersk McKinney Møller takes over the running of the business.

1988:

Maersk begins a trans-Atlantic container service.

1991:

Maersk and P&O begin a joined global container service.

1993:

Maersk Line acquires the Ben-EAC container line and becomes the largest container line in the world.

1996:

Cooperation with P&O is ended and a new container service with Sealand Corporation commences.

1999:

Maersk purchases container shipper Sea-Land Corporation and names the combined company Maersk Sealand.

2005:

Completes acquisition of Royal P&O Nedlloyd NV which will be merged with Maersk Sealand to become the largest shipping and container line in the world with in excess of 550 vessels.

2006:

Following the acquisition of P&O Nedlloyd for N2.3 billion, the new merged company is named Maersk Line. P&O Nedlloyd Logistics and Maersk Logistics are merged under the name Maersk Logistics.

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Maersk operations and activities Maersk Logistics obtains an estimated 50 per cent of its turnover from warehousing and distribution, around 25 per cent from sea freight forwarding and freight consolidation, with the balance from air freight and customs brokerage.

Maersk Logistics acquisition Royal P&O Nedlloyd NV Head office: Rotterdam, Netherlands (Wikipedia, P&O, 2006) 3PL revenue: N5,234 million (2005) (Yahoo Finance, 2006) Global coverage: 120 countries across Europe, Asia, United States (Wikipedia, P&O, 2006) Employees: 10,000 (2004) (Foster and Armstrong, 2006) Facilities and resources: 166 vessels, 1,000 containers, 2,000 trucks and 6,700 trailers (2004) (Foster and Armstrong, 2006) Key services and products: Warehousing and distribution, sea freight shipping, port services (Foster and Armstrong, 2006) Industry sector focus: Chemicals, consumer goods, industrial, retail (Foster and Armstrong, 2006)

P&O Nedlloyd has significant transportation and logistics operations across Europe, and was formed in 1997 by the merger of the Dutch transportation company Royal Nedlloyd (Nedlloyd Line) and the British shipping giant, P&O Group (P&O Containers). Its logistics operations are mainly an addition to its container business. Its US business is mainly focused on retail consolidation and deconsolidation, especially hanging garments (Wikipedia, P&O, 2006).

Groupe Norbert Dentressangle Norbert Dentressangle facts and figures Head office: Saint-Vallier, France 3PL revenue: N1,399 million (2005) Global coverage: 12 European countries

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Employees: 12,200 people (2005) Facilities and resources: 2.1 million sq m of warehousing, 4,500 tractor units Key services and products: Haulage and contract distribution, warehousing and transport Industry sector focus: Apparel and fashion, automotive, personal care, drinks Source: Norbert Dentressangle (2006).

Norbert Dentressangle background and activities Norbert Dentressangle was established in 1979. After a steady growth, including a number of acquisitions across Europe, the company floated on the French stock exchange in 1994. The company operates haulage and contract distribution for packed, bulk and temperature-controlled goods, warehousing and distribution for manufacturers and distributors, and integrated logistics solutions combining transport with logistics services. In 2005 Norbert Dentressangle purchased the majority of TNT NV’s contract logistics and part of its transportation activities in France. Norbert Dentressangle claimed fame by providing the first truck to use the Channel tunnel between France and England. Source: Norbert Dentressangle (2006).

P&O Nedlloyd See under Maersk Logistics.

Panalpina World Transport (Holding) Ltd Panalpina facts and figures Head office: Basel, Switzerland 3PL revenue: N5,224 million (SFR8,293 million) (2005) Global coverage: 140 countries across Europe, Asia, Americas, Africa Employees: 14,000 (2006) Facilities and resources: 500 branches; 300 warehouses, approximately 1.2 million sq m (2006)

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Key services and products: Air and sea freight forwarding, transportation management, warehousing and distribution, oil and gas services Industry sector focus: Apparel and fashion, automotive, consumer goods, electronics and high technology, healthcare, oil and gas, retail, special projects logistics Source: Panalpina (2006).

Panalpina background and activities Panalpina is a leading forwarding and logistics service provider that specializes in intercontinental air and ocean freight and associated logistics services, in order to provide globally integrated supply-chain solutions. The name Panalpina was chosen to represent the ability of haulage services to conquer the Alps, thereby linking northern and southern Europe. Panalpina was wholly owned by the Ernst Göhner Foundation until its flotation on the SWX Swiss Exchange in September 2005, making it more attractive to acquisition. Source: Panalpina (2006).

Panalpina history 1935:

Panalpina’s parent company moves its business into forwarding.

1954:

The company establishes its independence under the ‘Panalpina’ name.

1969:

40 per cent of Panalpina’s share capital is acquired by the Ernst Göhner Foundation, set up by a leading Swiss entrepreneur.

1980 to 1999: Ernst Goehner Foundation becomes the company’s sole shareholder; launches combined air freight and ocean freight operations between the Far East and Europe, Africa, Oceania and India. 2004:

‘A’ licence is approved by China, allowing Panalpina to develop its own service organization in this developing market.

2005:

Panalpina further strengthens its lead in the oil and gas industry through the acquisition of the Singaporean logistics provider Janco Oilfield Services and the Norwegian Overseas Shipping Group.

September 2005: Panalpina becomes listed on the SWX Swiss Exchange. Source: Panalpina (2006).

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Schenker Logistics Schenker facts and figures Head office: Essen, Germany Parent company: Deutsche Bahn AG 3PL revenue: N8,878 million (2005) Parent revenue: N25.1 billion (2005) (Deutsche Bahn, 2006) Global coverage: 80 countries across Europe, Asia, North America, Latin and South America, Africa Employees: 38,237 (2005) Facilities and resources: 1,100 offices, 405 warehouses Key services and products: Air and sea freight forwarding, warehousing and distribution, transportation management Industry sector focus: Automotive, consumer goods, electronics and high technology, healthcare Source: Schenker (2006). Note: this entry does not include Bax Global – see US providers.

Schenker background Schenker is a part of the Transportation and Logistics Division of Deutsche Bahn AG. Schenker, which has a long history, is a major transportation and distribution company in Europe, is emerging in Asia but has limited operations in the United States. This may well have been the attraction for the acquisition of BAX Global, Inc, headquartered in California, by Deutsche Bahn in 2006. BAX, whose sales are in the region of US$3 billion, is predominantly a cargo air freight provider that has been developing its capability in logistics, operating across a global network of nearly 500 offices in 133 countries. Schenker is known for being the official logistics partner for numerous Olympic Games, including Beijing in 2008.

Schenker history 1872:

Founder Gottfried Schenker forms Schenker & Co in Vienna, Austria.

1873 to 1917: Develops rail networks across Europe and establishes ocean shipping company.

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1918:

Following the First World War, Schenker focuses on express delivery and freight forwarding movements, removals and trade-fair services.

1922:

Flies the first air freight shipment across Germany.

1928:

Schenker headquarters is moved to Berlin.

1931:

Schenker is acquired by the German Railways; launches first sea freight shipments.

1945:

Business rebuilds after the Second World War.

1991:

Stinnes AG acquires the majority of shares in Schenker from the German railroad company Deutsche Bundesbahn.

1997:

Schenker AG is reorganized into three business areas: Schenker Logistics, Schenker International and Schenker Eurocargo.

2002:

Schenker celebrates its 130th birthday; Deutsche Bahn acquires majority shareholding of Stinnes.

2006:

Acquisition of BAX Global.

Source: Schenker (2006).

Schenker operations and activities Schenker specializes in road and rail transportation across Europe, with its network of scheduled routes connecting over 30 countries. It also provides air and sea freight. Its specialist logistics services include assembly parts consolidation and deconsolidation centres, component sequencing, integrated logistics and spare parts logistics.

TDG plc TDG facts and figures Head office: London, UK 3PL revenue: £510.5 million (N740 million) (2005) Global coverage: Seven countries across Europe (United Kingdom, Ireland, Spain, Netherlands, Germany, Poland and Belgium) Employees: 7,000 (2006) Facilities and resources: 125 sites: over 12,600,000 sq ft warehousing; 1,600 vehicles

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Key services and products: Warehousing, transportation, freight forwarding, reverse logistics, inbound logistics, added-value services Industry sector focus: Chemical, consumer goods, industrial and retail Source: TDG (2006).

TDG background and activities TDG has its origins in the General Lighterage Co Ltd, which was formed in 1922 from the lighterage department of the London Cologne Steam Ship Co. The company moved into warehousing and road transport and in 1957 changed its name to Transport Development Group. This was later abbreviated to TDG. The company primarily provides contract logistics activities. Source: TDG (2006).

Thiel Logistics AG Thiel facts and figures Head office: Grevenmacher, Luxembourg 3PL revenue: N1.8 billion Global coverage: 41 countries mostly in Europe Employees: 8,000 Facilities and resources: 400 locations Key services and products: Air and ocean freight; haulage; warehousing and distribution Industry sector focus: Fashion, furniture, media Source: Thiel (2006).

Thiel background and activities Founded in Luxembourg in 1985, Thiel Logistics has steadily expanded and now has operations in Germany, Benelux, Switzerland, Austria and several countries in Central and Eastern Europe. Thiel Logistik AG has Delton AG, a German investment company, as a major shareholder, with an equity stake of 50.26 per cent. Source: Thiel (2006).

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TNT Logistics TNT Logistics facts and figures Head office: Netherlands Parent company: TNT NV (until August 2006 – see below) 3PL revenue: N3.5 billion (2005) Parent revenue: N10.1 billion (2005) Global coverage: 28 countries across Europe, Americas, Asia (2006) Employees: 36,000 (2006) Facilities and resources: 360 warehouses, approximately 7 million sq m (2005) Key services and products: Warehousing and distribution, inbound logistics, manufacturing support, services for spare parts and returns Industry sector focus: Automotive, consumer goods, electronics, industrial, publishing and media, tyres Source: TNT (2006).

TNT background TNT Logistics is the second-largest contract logistics company in the world, with approximately 2.2 per cent of the market (DHL, 2006). In December 2005, its then parent company TNT NV surprised the industry when CEO Peter Bakker announced it was putting TNT Logistics up for sale in order to focus on its network businesses (TNT, 2006). This decision was also no doubt prompted by the increasing competitiveness caused by ongoing consolidation in the marketplace. TNT Logistics was sold to the private equity company Apollo Investment Fund in August 2006. TNT Logistics evolved from the Australian company TNT (Thomas Nationwide Transport). Initially, TNT operated express delivery services only, but moved into logistics in the 1980s. It made national news in the United Kingdom in the 1980s when it helped Rupert Murdoch’s News International overcome a strike over the move from Fleet Street to the newly built London Docklands printing facility. News International continues as a key customer for TNT. TNT Logistics has developed sound contract logistics services and is particularly strong in the automotive sector.

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TNT Logistics history 1946:

Thomas Nationwide Transport (TNT) is founded in Australia by Ken Thomas. 1961: TNT expands into Europe. 1996: KPN acquires TNT (Thomas Nationwide Transport). 1998: TNT Post Group NV (express, logistics and mail services) is separated from KPN. 1999: TNT acquires Tecnologistica (Italy). 2000: TNT Logistics and the Koç Group in Turkey enter into a joint venture called TNT Lojistik. 2000: TNT Logistics acquires Mendy (France), Convoi Logistics Exhibition Services (Netherlands), Schrader Gruppe (Germany), Barlatier (France), CTI Logistx (USA) and Taylor Barnard (UK). 2000: TNT Logistics becomes a separate division within TPG. TNT Logistics is awarded a £100 million five-year contract with Volkswagen in the United Kingdom to operate its national parts logistics service and distribution. 2001: TNT Logistics acquires ALS/Advanced Logistics (Italy) and CargoTech (Turkey). 2002: TNT Logistics and DSV enter into a joint venture called DFDS Transport Logistics, with coverage across the Nordic countries. 2002: TNT Logistics enters into a joint venture with the Shanghai Automotive Industry Group, named ANJI TNT Automotive Logistics. 2002: TNT Logistics acquires Transports Nicolas (France). 2004: TNT Logistics’ parent TPG sells stake in TNT DFDS Transport Group A/S. 2004: TNT Logistics buys out Turkish Joint Venture partner Koç Group. 2004: TPG NV acquires the Swedish-based global freight forwarding company Wilson Logistics Group. April 2005: Holding company name is changed from TPG NV to TNT NV. December 2005: Announces intention to exit logistics business and sell TNT Logistics. December 2005: Majority of French contract logistics activities and some transportation activities are sold to Norbert Dentressangle. August 2006: TNT NV announces the sale of TNT Logistics to Apollo Management. Source: TNT (2006).

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TNT operations and activities TNT Logistics offers a full range of logistics services, with particular expertise in automotive and manufacturing support logistics. In addition to the more usual dedicated and shared-user warehousing and distribution activities, it also provides after-market spare parts operations and other specialized services, including inbound logistics and lead logistics provider solutions. TNT has some international sea and air freight management capabilities through its freight forwarding business unit (TNT, 2006).

Unipart Logistics Unipart facts and figures Head office: Oxford, UK Parent company: Unipart Group 3PL revenue: not available Parent revenue: £1.1 billion (2004) (Unipart, 2006) Global coverage: 17 locations worldwide Employees: 3,000 (2006) Facilities and resources: 20 warehouse locations: 4 million sq ft of warehouse space Key services and products: Warehousing and distribution, transportation and shipping, inventory management, service and repair management Industry sector focus: Aerospace, automotive, defence, high technology, industrial, rail, retail and telecommunications Source: Unipart Logistics (2006).

Unipart Logistics background and activities Unipart Logistics is part of the Unipart Group, one of Europe’s leading suppliers of independent automotive logistics, parts and accessories. The group was established following a management and employee buyout from the Rover group, in 1987. Unipart Logistics’ heritage in automotive manufacturing has been transferred to other industry sectors where its expertise in ‘pull’ demand chains has been adapted to suit.

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Wincanton Wincanton facts and figures Head office: Chippenham Wiltshire, UK 3PL revenue: £1.7 billion (N2.4 billion) (2005) Global coverage: European coverage in 15 countries (2006) Employees: 28,000 (2006) Facilities and resources: 360 locations, 1.9 million sq m of warehousing space (2005) Key services and products: Warehousing and distribution, road freight services and specialist supply-chain services Industry sector focus: Automotive, consumer goods, industrial, oil, retail Source: Wincanton (2006).

Wincanton background and activities Wincanton is a highly successful European provider, which has grown its business to be in the top three European contract logistics providers and number two in the United Kingdom. Wincanton has developed its offerings over recent years from standard shared-user and dedicated warehousing and distribution to more sophisticated solutions, including integrated freight management solutions, fully automated storage and distribution, reverse logistics and 4PL.

Wincanton history 1925:

Wincanton Transport & Engineering Ltd (WT&E) is founded, mostly focused on the maintenance of dairy equipment and farm collection of milk for West Surrey Dairy.

1950 to 1969: WT&E moves into milk transportation, primarily for the Milk Marketing Board. 1970 to 1979: Develops temperature-controlled distribution service for manufacturers; WT&E splits into two separate companies: Wincanton Transport Ltd to focus on petrochemicals and milk distribution, Wincanton Chilled Distribution to connect manufacturers to St Ivel’s regional distribution centres.

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1980 to 1989: Grows range of logistics services. 1993:

Acquires Glass Glover plc, in order to strengthen its position in the retail logistics sector.

1994:

First automated warehouse is opened.

2001:

Wincanton demerges from its parent company Uniq (formerly Unigate) and becomes an independent company, quoted on the London Stock Exchange.

2002:

Wincanton acquires P&O Trans European for £152.5 million, thereby expanding its range of services, especially in road freight, and extending its geographic coverage.

2004:

Acquires midiData, a key player in specialist logistics services for the high-technology sector.

Source: Wincanton (2006).

US providers Introduction According to Armstrong & Associates (2006a), 3PL revenues in the United States were over US$100 billion for the first time in 2005, representing an amazing 16 per cent increase over the previous year. Leading the way was domestic transportation management with an 18.3 per cent gain in revenues. International transportation management revenues showed an increase of 13.6 per cent, to £38 billion, reflecting the growth in global economic activity. Dedicated contract carriage also had a good year with a growth of 10.2 per cent in asset-based domestic transportation management due to tight trucking industry capacity. Finally, the report showed that value-added warehousing and distribution had grown by 9.5 per cent. As is shown in Figure 4.9, the largest US-based third-party provider (3PL) is UPS Supply Chain Solutions (see Global providers) with a turnover of just under US$6 billion. Road freight company C H Robinson is second largest with US$5.7 billion revenue. There are eight providers with revenues in the range of US$2.5 to US$5 billion, including FedEx. Interestingly, unlike in Europe there is no ‘super-sized’ 3PL, with the largest 3PL in the region employing 27,000 staff, as shown in Figure 4.10. An overview of key American providers is given below.

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6,000 5,000

4,200 3,902

4,000

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3,645

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Figure 4.9 Largest (by revenue) US third-party providers

30,000 27,000

25,000 22,000 20,000 20,000 20,000

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Figure 4.10 Largest (by revenue) US third-party providers, showing number of employees

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Bax Bax facts and figures Head office: Irvine, California Parent company: Deutsche Bahn AG 3PL revenue: N2.3 billion (2005) Parent revenue: N25.1 billion (2005) (Deutsche Bahn, 2006) Global coverage: 133 countries worldwide Employees: 11,800 (2005) Facilities and resources: Global network of nearly 500 offices, 48 warehouses, 20 aircraft Key services and products: Air freight forwarding, transportation management, warehousing and distribution, added-value activities Industry sector focus: Aerospace, automotive, healthcare, high technology, retail Source: Schenker (2006).

Bax background and activities Established in 1972, BAX is primarily a time-definite, heavy air freight provider that has been increasingly focusing on logistics. In 2006 BAX Global, Inc was acquired by the German railway company Deutsche Bahn AG to add to its existing Schenker business (see Schenker entry in European providers section). In addition to its air freight and logistics activities, Bax also offer a range of added-value activities, including manufacturing material provisioning; fulfilment services such as final stage assembly, postponement activities and retail labelling compliance; reverse logistics; and consulting services. Source: Bax (2006).

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Caterpillar Logistics Services Caterpillar Logistics Services facts and figures Head office: Morton, Illinois Parent company: Caterpillar, Inc 3PL revenue: Not available Parent revenue: US$36.34 billion (2005) Global coverage: 25 countries across Americas, Europe and Asia Employees: 7,200 (2004) (Foster and Armstrong, 2006) Facilities and resources: 95 facilities and operations Key services and products: Warehousing and distribution Industry sector focus: Aerospace, automotive, consumer goods, high technology and industrial Source: Cat Logistics (2006).

Caterpillar Logistics Services background and activities Caterpillar Logistics Services is a wholly owned subsidiary of Caterpillar Inc, the world’s leading manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. Caterpillar Inc, employs more than 85,000 people worldwide. Caterpillar Logistics Services Inc was formed in 1987 in order to provide world-class logistics for external companies. The logistics provider now serves more than 60 customers worldwide, providing services such as inbound, service parts and finished goods logistics. Source: Cat Logistics (2006).

Con-way (formerly CNF) incorporating Menlo Worldwide Con-way facts and figures Head office: San Mateo, California 3PL revenue: US$4.2 billion (2005) Global coverage: North America, Europe, Asia/Pacific and Latin America

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Employees: 20,000 Facilities and resources: 400 service locations; 1.1 million sq m of warehouse space; 7,786 tractors; 30,449 trailers Key services and products: Air freight, road freight; warehousing and distribution Industry sector focus: Consumer, high technology, industrial, retail and wholesale Source: Con-way (2006).

Con-way background and activities Con-way Inc, with a history that goes back to 1929, is a leading logistics and supply-chain management services provider. Con-way, made up of Conway Transportation Services, Menlo Worldwide and Road Systems, has been on the Dow Jones Transportation Average for more than a quarter of a century. In 1989, the company signalled its intentions as a global transportation business with the acquisition of Emery Air Freight Corp. The company formed contract logistics provider Menlo Logistics in 1990, in response to its customers’ needs for services beyond traditional trucking and air freight. In 1996, the parent company, known then as Consolidated Freightways Inc, was renamed CNF Transportation Inc. Menlo Worldwide was created in 2001, when Con-way Inc, merged three of its subsidiaries, Menlo Logistics, Vector SCM and Emery Worldwide, in order to focus on providing global logistics services. The company officially changed its name from CNF to Con-way in 2006. In 2000, the company partnered with General Motors (GM) to create a new supply-chain management company for the automotive industry, Vector SCM. This joint venture has since been known as a leading example of a fourth-party logistics (4PL) model (see Chapter 9). Key customers for Con-way include Cisco, Dow Chemical, HP, IBM, Nike, Ricoh and Sears. Menlo Worldwide provides services across the whole supply chain, from raw materials through product manufacturing to finished goods distribution, including supply-chain management, order management, logistics management, optimization and visibility. Added-value activities include: ឣ ឣ ឣ ឣ ឣ

packaging; kitting; postponement; reverse logistics; supply-chain consulting;

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supply-chain network analysis and design; vendor-managed inventory.

Source: Con-way (2006).

EGL Eagle Global Logistics EGL facts and figures Head office: Houston, Texas 3PL revenue: US$3.09 billion (2005) Global coverage: Over 100 countries worldwide Employees: 10,000 (2006) Facilities and resources: Over 400 service centres Key services and products: Air, ocean and ground freight forwarding, domestic transportation, import and export services Source: EGL (2006).

EGL background and activities EGL, a leading domestic and international freight company, was formed in 1984 by Jim Crane, chairman and CEO. It has grown steadily over the last 20 years, to over US$3 billion turnover. In 2000, EGL signalled its intentions to become a global forwarding organization when it purchased Circle International Group, creating a worldwide network. The company is focused on domestic and international freight transportation, customs brokerage, global logistics and supply-chain management services for a wide range of customers. Source: EGL (2006).

Expeditors International Expeditors facts and figures Head office: Seattle, Washington 3PL revenue: US$3,902 million (2005) Global coverage: 58 countries across North America, Europe, Asia, Africa, Latin America, Middle East, South Pacific Employees: 10,000 (2005)

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Facilities and resources: 226 locations Key services and products: Air and ocean freight forwarding, freight consolidation, customs brokerage and other added-value services Industry sector focus: Aerospace, automotive, chemicals, engineering/ construction, healthcare, high technology, retail Source: Expeditors (2006).

Expeditors background and activities Expeditors is a well-run, non-asset-based global logistics company whose services include vendor consolidation, air and ocean freight forwarding, customs brokerage, insurance, ocean consolidation, distribution and valueadded services (Expeditors, 2006). Its non-asset approach allows it to invest in the quality and development of its people and systems. The company seeks to grow organically, with very few acquisitions made since its inception in 1979. Expeditors is renowned in the financial services circles for its unconventional and entertaining Securities and Exchange Committee filings, which it is rumoured, are written by Peter Rose, the CEO (Wikipedia, Expeditors, 2006).

Expeditors history 1979: 1981:

1984: 1984: 1986: 1987: 1988: 1988: 1990: 1992:

Expeditors International of Washington, Inc, registers as a singleoffice ocean forwarder in Seattle, Washington. Expeditors embarks on its journey to becoming a global logistics company, when Peter J Rose, James L K Wang and Glenn M Alger join the company and open seven offices around the world, including Taiwan, Singapore and Hong Kong. Expeditors becomes a public corporation with stock traded on the NASDAQ. Toronto office is opened. Acquires a small export company in London and enters the European market. Opens first office in Malaysia. Plans expansion in the Far East, Europe and Australia. Peter J Rose, one of the founders, assumes the title of president and CEO. Brussels office is opened to become its first in continental Europe. Also opens offices in Kuala Lumpur and Jakarta. Opens five offices in Germany and first Middle East office in Saudi Arabia, bringing the number of offices worldwide to 48.

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1993:

Opens first office in China and is granted a rare class ‘A’ licence.

1994:

Opens distribution centres in Seattle, Chicago, Los Angeles, Miami, Newark, London, Rotterdam, Brussels, Hong Kong, Taipei and Singapore.

1995:

Enters Central and South America and expands in the Middle East.

1996:

Opens first offices in India, Pakistan and Bangladesh.

1997:

Opens offices in France.

1998:

ISO 9002 certification is achieved in 38 offices across the United States, Canada and Mexico, bringing the total number of Expeditors offices certified to this standard to 65 across 17 countries.

2004:

Peter J Rose, CEO, is named Executive of the Year.

2005:

Expeditors is named by Forbes as the Best Managed Transportation Company.

Source: Expeditors (2006).

FedEx Freight & Global Supply Chain Services FedEx facts and figures Head office: Memphis, Tennessee Parent company: FedEx Corporation 3PL revenue: US$3,645 million (Freight 2006) Parent revenue: US$32 billion (2006) Global coverage: North America, Mexico, Puerto Rico, Central and South America, the Caribbean, Europe and Asia Employees: Freight 27,000 employees; Supply Chain Services 600 employees Facilities and resources: Supply Chain Services – 40 warehouses with over 4 million sq ft; 750 vehicles; Freight – 324 service centres; 10,000 tractors Key services and products: Freight forwarding, domestic and international transportation management services, warehousing and distribution services, added-value services, including integrated fulfilment services and supply-chain consulting Industry sector focus: Apparel, automotive, computers and electronics, healthcare, industrial, retail Source: FedEx (2006).

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FedEx background FedEx Freight and FedEx Supply Chain Services are wholly owned subsidiaries of FedEx Corporation, mostly known for its parcels and packages services, using a large fleet of aircraft and local delivery vehicles. FedEx is a world-renowned brand and the FedEx logo has won awards. More recently the brand was featured in the film Castaway starring Tom Hanks, who played a FedEx executive who survived Robinson Crusoe style after his plane crashed. FedEx Supply Chain Services provides logistics services and has been formed from acquisitions including Roadway Logistics System and Caliber Logistics.

FedEx history FedEx was founded as Federal Express in 1971 by former US Marine Frederick W Smith in Little Rock, Arkansas. Two years later the business moved to Memphis, Tennessee, after a disagreement with Little Rock airport over facilities for the then embryonic business. The name FedEx was selected to represent a national market and assist in winning government contracts. The company started operations using 14 planes connecting 25 US cities, but went on to develop a hub and spoke distribution pattern, previously used by UPS in ground transportation. This later became the standard for air parcel distribution and enabled FedEx to become the leader in its industry. Additionally FedEx was the first cargo business to use jet planes for its services, allowing the company to grow significantly following the deregulation of the airline cargo sector. 1971:

Federal Express is founded in Little Rock.

1973:

Federal Express moves to Memphis.

1989:

Acquisition of Flying Tigers, an international cargo airline.

1994:

FedEx chosen as primary brand.

1998:

Acquisition of Caliber System Inc, which owns RPS, Roberts Express, Viking Freight and Caliber Logistics. Creates FDX Corporation, a global provider of transportation, e-commerce and supply-chain management services.

2000:

FDX Corporation name is changed to FedEx Corporation.

2001:

Acquisition of American Freightways, a less-than-truckload carrier in the United States, whose operations are integrated with Viking Freight to create FedEx Freight.

Source: FedEx (2006).

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FedEx operations and activities FedEx Freight is the US leader in next- and second-day regional LTL freight services, founded largely through the acquisitions of Caliber, American Freightways and Caribbean Transportation Services. FedEx Supply Chain Services has positioned itself as a strategic partner to customers wishing to outsource their supply chains, leaving them to concentrate on core activities. Like its parent company FedEx, it focuses on transportation and supply-chain solutions. As expected, other FedEx companies are given preference for transportation services. FedEx Supply Chain Services provides a full range of services, including freight management, transportation management and order fulfilment, supplemented by additional specialized and customized services, such as integrated fulfilment and returns management. These services are more fully defined below: ឣ

ឣ

ឣ ឣ

Freight management: FedEx manages freight forwarding and customs clearance and brokerage. Transportation management services: these include optimization and management of domestic and international shipments for all transportation modes. Order fulfilment: this comprises warehousing and distribution services. Specialist services: these include integrated fulfilment of inbound and outbound logistics, returns management and reverse logistics, and synchronized just-in-time delivery management to customers’ requirements.

Source: FedEx (2006).

J B Hunt JB Hunt facts and figures Head office: Lowell, Arkansas 3PL revenue: US$3,128 million (2005) Global coverage: United States, Canada and Mexico Employees: 16,370 (2005) Facilities and resources: Locations in more than 95 cities across the United States, over 10,000 vehicles and over 49,000 trailers or containers Key services and products: Trucking (road transportation) Source: Hunt (2006).

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J B Hunt background and operations Founded by Johnnie Bryan Hunt, J B Hunt Transport Services Inc, has grown to be one of the largest truckload carriers in the United States. Operating throughout the United States, Canada and Mexico, the company provides transportation services through its large numbers of trucks and trailers. Source: Hunt (2006).

J B Hunt history Following a variety of jobs from the age of 12 and a spell in the army, J B Hunt took a job selling and hauling lumber for his uncle. The following year, he started his first business, purchasing a livestock facility together with his cousin. Here J B met his future wife Johnelle DeBusk and five years later they married, after which he spent the next nine years in a driving job. In 1961, J B and Johnelle mortgaged their house and started a poultry litter business using rice hulls that were usually disposed of by farmers. Eight years later in 1969, J B Hunt Transport was established with five trucks and seven trailers. In 1983, the family sold the rice hull business to focus on transportation and in the same year J B Hunt Transport Services went public. J B retired as chairman of J B Hunt Transport Services in May 1995, and accepted the newly created position of senior chairman. Source: Hunt (2006).

Penske Logistics Penske facts and figures Head office: Reading, Pennsylvania 3PL revenue: US$3.7 billion, Penske Truck Leasing Company (2005) Global coverage: 300 logistics centres across North America, South America and Europe Employees: 20,000 (2005) Facilities and resources: 12,000 vehicles, 10 million sq ft of warehousing and cross-docking space Key services and products: Transportation, warehousing, inbound/ outbound and supply-chain management solutions Industry sectors: Aerospace, automotive, consumer packaged goods, healthcare, manufacturing and retail Source: Penske (2006).

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Penske Logistics background and activities Penske Logistics is a wholly owned subsidiary of Penske Truck Leasing. In 1988, General Electric became a partner in Penske Truck Leasing with Penske Corporation, with 79 per cent of Penske Truck Leasing owned by GE Capital (Foster and Armstrong, 2006). Penske Logistics is particularly strong in the automotive industry and also has a number of lead logistics provider (LLP) roles with customers (Foster and Armstrong, 2006). With its close ties to GEC, Penske applies engineering know-how and the latest technology to address complex logistics challenges, through combining Six Sigma quality processes and a clear focus on customer fulfilment (Penske, 2006). Its customers include some of the United States’s foremost corporations, including Ford, General Motors, Pepsi and Whirlpool (Penske, 2006). In September 2006, Penske announced a strategic alliance with ABX Logistics to provide integrated global supply-chain solutions for multinational corporations (Penske, 2006).

Penske history 1969:

Motor racing legend Roger Penske purchases MM Waterboro Inc, based in Reading, Pennsylvania and begins truck leasing business, Penske Truck Leasing. 1982: Forms joint venture with Hertz. 1986: Acquires Leaseway Truck Leasing. 1988: Forms partnership with GE Capital. 1995: Purchases Leaseway Logistics, forming Penske Logistics as a division of Penske Truck Leasing. 1997: Commences Europe operations. 1998: Forms joint venture with Cotia Trading in South America. 1998: Acquires Transportgroep van der Graaf in Europe. Source: Penske (2006).

C H Robinson Worldwide, Inc C H Robinson facts and figures Head office: Eden Prairie, Minnesota 3PL revenue: US$5.7 billion (2005) Global coverage: North America, Europe, Central and South America, Asia Employees: 5,700 (2006)

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Facilities and resources: 100 warehouses and cross-dock facilities Key services and products: Air and ocean freight forwarding, transportation management, warehousing and print logistics Industry sector focus: Agriculture, consumer goods, paper and printed materials retail, technology Source: Robinson (2006).

C H Robinson background C H Robinson Worldwide Inc is one of the United State’s leading non-assetbased third-party providers. The company, ranked second in the Transportation and Logistics Category of Fortune America’s Most Admired Companies in 2006, is a member of the Nasdaq-100. The company has a long history of being very profitable. Source: Robinson (2006).

C H Robinson history C H Robinson Company started in 1905, providing produce and general merchandise brokerage. As it expanded and its products moved further afield, it moved into transportation in order to ensure that perishable goods reached the market in good condition. The company entered the regulated trucking business in 1968 and later created ROBCO Transportation as an irregular route carrier. In 1976, Robinson became wholly owned by its employees and two years later The Fresh1® brand was introduced for its produce brokerage business. Following the 1980 deregulation of transportation in the United States the company was able to become a freight broker for all products. In 1986 C H Robinson became a totally non-asset-based logistics provider and 11 years later went public as C H Robinson Worldwide. Source: Robinson (2006).

C H Robinson operations and activities As a leading 3PL and freight broker, most of C H Robinson’s revenues come from road, rail, ocean and air transportation across the world, although its core business is in providing North American trucking and inter-modal services. With nearly 60 per cent of its revenues from food and beverage customers, C H Robinson has designed leading efficient consumer response and supply-chain management processes. The company also provides an LTL

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transportation website marketplace which allows for consolidation and cost reductions, through which around 12,000 shipments per day are executed. In line with its asset-free strategy, the majority of C H Robinson’s warehouse space is either leased or obtained from subcontractors.

Ryder Ryder facts and figures Head office: Miami, Florida Parent company: Ryder System Inc 3PL revenue: US$2,180 million (Supply Chain Solutions and Dedicated Contract Carriage) (2005) Parent revenue: US$4,741 million (2005) Global coverage: North America, Europe and Asia Employees: 16,500 Facilities and resources: 184 warehouses, 48,800 vehicles and 44,800 trailers Key services and products: Warehousing and distribution, transportation management, dedicated contract management, air and ocean freight forwarding, supply-chain consulting, added-value activities including equipment leasing, returns management and freight payment Industry sector focus: Aerospace, automotive, building materials, fastmoving consumer goods, healthcare, industrial, high technology, newspaper distribution, retail, utilities Source: Ryder (2006).

Ryder background and activities With one of the most recognizable brands in North American logistics, Ryder has been a leading provider of services for over 20 years. Following many years of providing dedicated contract management, Ryder’s product offerings include fleet-management solutions, including leasing, rental and programmed maintenance of trucks, tractors and trailers to commercial customers; supply-chain solutions, managing the logistics across the supply chain; and dedicated contract carriage (DCC), providing turn-key transportation services, including vehicles, drivers, routing and scheduling (Ryder, 2006). Ryder has expanded its logistics and supply-chain management capabilities in recent years through the Supply Chain Solutions business. Following a difficult financial period where the business posted losses, a new management team led by Greg Swienton brought

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Ryder into profit. This was partly achieved by focusing on profitable operations and countries and closing down loss-making operations.

Ryder history 1933:

James A Ryder starts company in Miami, Florida, with a black 1931 Model ‘A’ Ford as the first truck.

1939:

The fleet has expanded to 50 trucks.

1945:

Starts dedicated contract carriage for the Miami Herald.

1955:

Ryder Systems Inc becomes a publicly traded company.

1977:

Enters the Netherlands market, offering truck leasing.

1978:

James A Ryder, founder and chairman, retires.

1988 to 2000: Expands operations to Germany, Canada, the United Kingdom, Poland, Mexico, Argentina and Brazil. 1994:

Begins logistics management with acquisition of LogiCorp.

2001:

Acquires Singapore-based Ascent Logistics Pte Ltd.

2005:

Ryder opens the company’s smaller and more efficient new global headquarters in Miami, Florida.

Source: Ryder (2006).

Schneider National Inc Schneider facts and figures Head office: Green bay, Wisconsin 3PL revenue: US$3.5 billion (2005) (Datamonitor Computerwire, 2006) Global coverage: North America and Europe Employees: 20,000 (2006) Facilities and resources: Logistics operation across 36 locations in Canada, United States and Mexico, 14,000 vehicles, 40,000 trailers Key services and products: Transportation management, dedicated contract carriage, added-value activities Industry sector focus: Automotive, chemicals, consumer, healthcare, high technology, industrial, paper, retail Source: Schneider (2006).

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Schneider background Founded in 1935, Schneider National has become one of the United States’s leading transportation and logistics service providers. The privately owned company provides services to more than 75 per cent of the Fortune 500® companies and has partnerships with over 6,000 carriers. Its wholly owned subsidiary, Schneider Logistics, has built its reputation on its excellent automotive logistics and transportation capabilities, including the development of a multi-client network for automotive parts distribution. Schneider prides itself on its technological advances and since the 1970s has been a leading service provider in systems and technology. Source: Schneider (2006).

Schneider history 1938:

Al Schneider buys Bins Transfer & Storage and changes the name to Schneider Transport & Storage. 1958: Schneider is granted its first interstate authority and provides its first shipment for Procter & Gamble. 1961: Don Schneider, Al’s oldest son, joins the company. 1962: Schneider Transport logo is adopted. 1969: Purchases Kampo Transit, a regional milk and fuel oil hauler with 50 trucks. 1976: Schneider National Inc is formed as a holding company. 1981: Schneider granted 49-state authority allowing all commodities, except explosives and bulk, to be carried. 1983: Al Schneider dies. 1985: Schneider National Carriers is created from various businesses purchased in the 1970s and 1980s. 1986: Two-way satellite communication systems are installed in all 6,000 vehicles. 1993: Schneider Logistics Inc is created. 1994: Schneider Logistics is awarded the General Motors Service Parts Operation contract, the largest logistics contract of its time. 2005: Acquires American Port Services. Source: Schneider (2006).

Schneider operations and activities Schneider National, Inc, the leading provider of premium truckload and inter-modal services is North America’s largest private truckload carrier. It

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has a large fleet supplemented through the use of over 1,000 partner carriers. Its services include: ឣ ឣ ឣ ឣ ឣ ឣ ឣ ឣ ឣ

one-way transportation; inter-modal road and rail; dedicated transportation; bulk haulage; specialized transportation; transportation management; trans-loading services; international services; payment services.

Schneider provides a range of logistics services, including managing transportation onsite or offsite. Their international logistics services include trans-loading, customs brokerage and import/export services. Source: Schneider (2006).

UTi Worldwide UTi facts and figures Head office: Rancho Dominguez, California 3PL revenue: US$2.3 billion (2005) Global coverage: 58 countries across the Americas, Europe and Asia, plus 75 additional countries through independent agents Employees: 15,000 (2005) Facilities and resources: 120 logistics centres Key services and products: Air and ocean freight forwarding, contract logistics, distribution, customs brokerage and other supply-chain management services Industry sector focus: Apparel, automotive, chemical, high technology and pharmaceutical Source: UTi (2006).

UTi background and activities UTi Worldwide is a well-run, thrusting forwarder, founded by three South Africans in 1995 (Foster and Armstrong, 2006). The company is an international, non-asset-based global integrated logistics company providing forwarding and other supply-chain management solutions, including consulting, management of purchase orders and customized management services (UTi, 2006).

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Asia Pacific providers Introduction Reflecting the emerging nature of Asia’s economy, only four of the 3PLs on the top 25 list are based in Asia. As shown in Figure 4.11, leading providers such as Nippon Express, NYK and Kintetsu are leading the pack in Japan. However Japanese 3PLs have been slow to expand significantly into Western markets, with NYK’s approach being a notable exception buoyed by large patriotic Japanese companies, like Sony, which regularly use their fellow country provider rather than local alternatives. Japanese companies are however focusing their efforts in China. With the purchases of SembCorp and the Patrick Corporation by Toll, the Australian service provider has been propelled into a position as one of the leading Asian 3PLs. With a staff of around 30,000 employees, as shown in Figure 4.12, Toll is positioned to establish itself as a leading third-party provider across the region. Of course, Asian-based 3PLs face significant competition from European and US 3PLs who have been expanding into the region since the 1990s.

APL Logistics APL Logistics facts and figures Head office: Offices in Singapore and Oakland, California Parent company: NOL Group 3PL revenue: US$1.29 billion (2005) (NOL, 2006) Parent revenue: US$7.27 billion (2005) (NOL, 2006) Global coverage: 100 countries across Asia, Europe and the Americas Employees: 4,949 (2005) Facilities and resources: 300 offices Key services and products: Ocean and air freight forwarding, shipment consolidation and deconsolidation, customs management, regional warehousing and distribution networks Industry sector focus: Automotive, consumer durables and consumer packaged goods, consumer electronics and retail Source: APL Logistics (2006).

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14,000 11,838 12,000 10,000

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Figure 4.11 Top five 3PLs by revenue in Asia Pacific

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Toll

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Logistics All employee figures referenced to source under 3PL entries

Figure 4.12 Top five 3PLs by employees in Asia Pacific

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APL background and activities In 1997 NOL, Singapore’s national shipping line, bought America’s oldest shipping company, American President Lines (APL). APL was nearly double the size of NOL and nearly 150 years old, having been formed around the time of the Californian gold rush. The NOL Group now trades through two core businesses, APL, a container transportation company and APL Logistics, an international supply-chain business. NOL, an abbreviation for Neptune Orient Lines, was wholly owned by the Singapore government until it was publicly listed on the Singapore Exchange in 1981. Temasek Holdings, the Singapore government’s investment organization, is the biggest shareholder with 69 per cent (NOL, 2006). In addition to supplying conventional freight services, APL provides origin consolidation and vendor services, working closely with suppliers and providing local consolidation centres. They also provide manufacturing support from specialized facilities, supplying quality controlled parts and components to manufacturers on a just-in-time basis (APL Logistics, 2006). In December 2005, APL Logistics announced a joint venture with the UK contract logistics provider Christian Salvesen, aimed at providing integrated end-to-end supply-chain services (Christian Salvesen, 2006).

Kintetsu World Express Kintetsu facts and figures Head office: Tokyo, Japan 3PL revenue: Approximately US$2.6 billion (268,796 million yen) (2006) Global coverage: 33 countries across Asia, Europe and the Americas Employees: 6,625 (2006) Facilities and resources: 318 offices and operations Key services and products: Air freight forwarding, domestic and foreign trucking company agent, warehousing and transportation, customs agent Industry sector focus: Automotive, consumer goods, consumer electronics, high technology and pharmaceutical Source: Kintetsu World Express (2006).

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Kintetsu background and activities Kintetsu World Express Inc was formed in 1948 when the Operation Bureau of Kinki Nippon Railway Co Ltd began handling international air shipments, later becoming an approved IATA (International Air Transport Association) agency. In 1970 the Airfreight Operation Department was demerged from Kinki Nippon Tourist Co Ltd and was named Kintetsu World Express Inc, specializing in air freight. The company is essentially a freight forwarder that is slowly moving towards providing contract logistics activities such as warehousing, distribution and packing services. It has been expanding its ocean freight business since the mid-1990s and is now one of the leading NVOCC (nonvessel-operating common carrier) businesses in Japan. Source: Kintetsu World Express (2006).

Nippon Express Nippon Express facts and figures Head office: Tokyo, Japan 3PL revenue: US$11,838 million (excluding rail, heavy haulage and construction and other: US$4,487 million) (2005) Global coverage: 37 countries across Asia Pacific, Europe and the Americas Employees: 38,324 (2005) Facilities and resources: 1,100 service centres across Japan and 301 service centres worldwide Key services and products: Air and ocean freight forwarding, road freight transportation; warehousing and distribution; and removals transport for personal and commercial goods Source: Nippon Express (2006).

Nippon Express background and activities As one of the largest third-party providers in the world, the Nippon Express Group can trace its roots back to 1872, when it was founded under the name Riku-un Moto Kaisha (the Land Transport Company). Following its relaunch as a semi-government transportation enterprise in 1937, the

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business went through yet another transformation in 1950, with the passing of the Express Business Act, when the company was recognized as a legal corporation. In 2002 Nippon Express was responsible for all transportation work related to the hosting of the FIFA World Cup soccer tournament. In addition to the key logistics and supply-chain management services and products, Nippon Express provides added-value activities, including: ឣ ឣ ឣ ឣ ឣ

consultancy; kitting; bundling; customization; technical configuration.

Source: Nippon Express (2006).

NYK Logistics (including Yusen Air and Sea) NYK Logistics facts and figures Head office: Toyko, Japan Parent company: NYK Group 3PL revenue: US$3.3 billion (2005) Parent revenue: US$10 billion (20005) Global coverage: 34 countries across Asia, Europe and the Americas Employees: 17,000 (2005) Facilities and resources: 330 warehouse and office locations Key services and products: Air and sea freight forwarding warehousing and distribution Industry sector focus: Automotive, chemicals, consumer goods, consumer electronics, healthcare, industrial and retail Source: NYK Logistics (2006).

NYK background and activities NYK Logistics is a wholly owned subsidiary of NYK Group, which was founded in 1885. The logistics business includes NYK Logistics’ sister company Yusen Air & Sea Service. NYK is an acronym for Nippon Yusen Kabushiki Kaisha. NYK delivers seamless global logistics services supported by advanced logistics management and information technologies.

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NYK seeks to deliver full supply-chain management solutions, combining sea, air and land transport solutions with warehousing and distribution, working with customers like Casio, Isuzu, Hitachi, Sony and Yamaha. Recent acquisitions, including contract logistics providers New Wave (consumer and retail) and UCI (manufacturing and retail), have strengthened the business’s contract logistics capability. Source: NYK Logistics (2006).

Toll Toll facts and figures Head office: Melbourne, Australia 3PL revenue: US$6.45 billion (AUD8.6 billion) (2007 estimated including Semcorp) Global coverage: 17 countries across Asia Employees: 30,000 (2006) Facilities and resources: 670 sites throughout Asia, including 3 million sq m of warehousing Key services and products: Road, rail, air and sea transportation, warehousing and distribution, ports management and stevedoring Industry sector focus: Automotive, consumer goods, raw materials, oil and mining Source: Toll (2006).

Toll background and activities The Toll business, founded in 1888 by Albert Toll, has developed over the years to become one of Asia’s leading logistics service providers. In 1986, a management buyout team led by current managing director Paul Little and former chairman Peter Rowsthorn purchased Toll. Seven years later the company was listed on the ASX stock exchange. Since then, Toll has progressively developed its logistics business, and has made nearly 50 acquisitions since 1989. 2006 saw two significant acquisitions for Toll: Patrick Corporation, a container and stevedoring business with revenues of AUD3.7 billion, and SembCorp Logistics (SembLog), one of Asia’s leading logistics companies. Having borrowed money to complete the acquisitions, Toll is looking to sell some of its non-core businesses.

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Toll is now positioned as one of Asia’s leading providers of integrated logistics services. The company is focused on becoming an integrated logistics provider across Asia with a strategy built on owning and managing transport and logistics assets. Source: Toll (2006).

Summary The 3PL market is highly competitive with demanding customers that are challenging their providers to supply a wider range of solutions and greater geographical reach. The market is also highly fragmented and changing quickly. There is much consolidation, and the larger providers are getting bigger and more powerful, while the smaller providers are becoming increasingly marginalized. DHL Logistics is the largest 3PL by some margin, and while parcels operators UPS and FedEx are growing their global supply-chain capabilities, logistics providers like Kühne + Nagel and Schenker are also working hard to close the gap, as shown in Figure 4.13. Of the top 30 third-party logistics companies, Europe and the United States each have ownership of 13 of the businesses, as shown in Figure 4.14. However, the picture is more complete when the revenues for each region are analysed. As can be seen in Figure 4.15, more than half the total revenue of the top 30 providers comes from European companies. This is

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Figure 4.13 Largest 10 global 3PLs by revenue

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explained in that four of the top five 3PLs are based in Europe as shown in Figure 4.13, making the European region a powerhouse in global thirdparty logistics. After looking at the overall 3PL market and the growth predictions, this chapter reviewed the emerging global logistics providers, concluding that in fact very few currently have the coverage and scale to claim this title. The chapter then focused on the large and complex 3PL market of Europe, showing the strength of the German and Swiss operators. The following section analysed the US providers, showing a mix of 3PLs emerging from their express parent companies and others transforming themselves from their trucking legacies. Finally, the chapter reviewed the 3PLs from Asia Pacific. Led strongly by Japanese providers, many of which have risen from shipping backgrounds, Asian 3PLs have faced intense competition from European and US providers.

4 13

Europe USA APAC

13

Figure 4.14 Distribution by region of the largest (by revenue) 30 global 3PLs

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Euro Europe USAUSA

46.1

90.3

APAC APAC

Values converted into billions of US dollars All revenues referenced to source under 3PL entries

Figure 4.15 Revenue totals for the largest 30 global 3PL distributed by region

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5

Key drivers Introduction A large number of reasons are given for why companies either should or should not outsource their logistics operations – and the pluses and minuses of outsourcing may be viewed very differently, depending on which company you talk to and whom you talk to within that company! Very often, similar advantages are claimed for both third-party and ownaccount distribution operations. This might be expected in a conversation between a contractor and an own-account operator, but it is also heard in discussions between users. The truth is that this is an area of some controversy. Very often, and not surprisingly, it is the experience of a user company that colours the view it has of outsourcing. Where it works very well, companies will be keen and positive. Where there have been problems – and this is not uncommon – the views will be more negative. One other important factor is that outsourcing is not necessarily the right thing for all companies. There are some businesses that are better suited to keeping their logistics operations in-house. Thus, it is important to be able to assess the potential benefits and drawbacks of outsourcing with particular reference to each company that is considering the option. There are no hard and fast rules that will always apply. Some of the different aspects can be objectively assessed and quantified. Others are subjective, relating more to company convention and personal preference than to anything else. This chapter of the book considers the key drivers for outsourcing. It begins by putting the outsourcing decision and the reasons or drivers for outsourcing into the context of the company business and logistics environment: alternative channels of distribution are described, a series of channel objectives are defined and various different channel characteristics are outlined.

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Consideration is given to outsourcing in other industries and functions to see whether there are any lessons that might be learned. In particular, the main drivers for outsourcing the IT function are discussed. It will be seen that there are some reasons for IT outsourcing that are similar to those for logistics, and also some that are surprisingly different. A number of external drivers for outsourcing are reviewed, particularly globalization, supply-chain complexity, emerging markets and e-commerce. For some companies one or more of these aspects may be influential in providing an important reason for outsourcing all or part of their logistics operations. The importance of understanding and taking account of a company’s competitive advantage is also discussed, particularly the need to understand the balance between trying to achieve a cost or a service advantage. This will have a major impact on determining outsourcing objectives and requirements, and in identifying the preferred type of outsourcing relationship. The major logistics drivers for outsourcing are then described, together with a consideration of some of the drawbacks. Finally, there is a review of which factors seem to be most critical for the outsourcing decision. Several company case histories are included.

Outsourcing context Before we address what are considered to be the main drivers for outsourcing logistics operations, the overall context of the decision needs to be understood. For this reason, a number of different elements will be discussed, starting with the broad requirements for channel selection itself. Manufacturers and retailers need to understand the many different channels that are available to get a product to market. Outsourcing is one of many approaches that may be adopted. Also, before contemplating outsourcing as an option, a company needs to be clear what its key objectives are and which channel characteristics may impact on its decision. It is also worth taking a somewhat broader perspective to consider the more general points related to outsourcing – those that may not directly be of concern to logistics but which may be relevant in a broader context within a company. These are considered together with some external drivers that may be influential. It is also important to make the outsourcing decision within the context of the competitive advantage that a company enjoys, so that any such advantage is not sacrificed or diminished as a result of outsourcing all or part of the operation.

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Channel alternatives There are several alternative physical channels of distribution that can be used, and a combination of these may be incorporated within a channel structure. Figure 5.1 shows the manufacturer-to-retail environment, and illustrates the main alternative channels for a single consumer product being transferred from a manufacturer’s production point to a retail store or shop. The circles in the diagram indicate the times when products are physically transferred from one channel member to another. There are, of course, other channels that are used – channels from industrial suppliers to industrial customers, or channels that are direct to the final consumer – and these are discussed separately later in the chapter. The alternative channels in Figure 5.1 are outlined below.

Manufacturer direct to retail store The manufacturer or supplier delivers direct from the production point to the retail store, using its own vehicles. As a general rule, this channel is only

Retail store

Retail store Parcels carrier collect Retail store

Cash & carry Wholesale warehouse

Retailer’s warehouse

Retail store Broker

direct delivery Retail store Production

3PL service

Retail store

Manufacturer’s warehouse

Retail store Retail store

Figure 5.1 Alternative distribution channels for consumer products to retail outlets

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used when full vehicle loads are being delivered; thus it is quite unusual in today’s logistics environment.

Manufacturer via manufacturer’s distribution operation to retail store This used to be one of the classic physical distribution channels and was the most common channel for many years. Here, the manufacturer or supplier holds its products either in a finished goods warehouse, a central distribution centre (CDC) or a series of regional distribution centres (RDCs). The products are trunked (line-hauled) in large vehicles to the sites, where they are stored and then broken down into individual orders that are delivered to retail stores on the supplier’s retail delivery vehicles. All of the logistics resources are owned and operated by the manufacturer. Since the 1970s, the use of this type of physical distribution channel has declined in importance due to a number of developments in alternative channels of physical distribution. However, it is still commonly used by the brewing industry.

Manufacturer via retailer distribution centre to retail store In this channel, manufacturers supply their products to national distribution centres (NDCs) or RDCs, which are facilities run by the retail organizations. These centres act as consolidation points, where goods from the various manufacturers and suppliers are consolidated. The retailers then use their own delivery vehicles to deliver full vehicle loads of all the different manufacturers’ products to their own stores. In the United Kingdom this type of distribution channel grew in importance during the 1980s as a direct result of the growth of the large multiple retail organizations that are now a feature of the high street and of the large retail parks. Most retailers now use third parties to run these final delivery operations.

Manufacturer to wholesaler to retail shop Wholesalers have acted as the intermediaries in distribution chains for many years, providing the link between the manufacturer and small retailers. However, this physical distribution channel has altered in recent years with the development of wholesaler organizations or voluntary chains. These wholesaler organizations are known as ‘symbol’ groups in the grocery trade. They were generally begun on the basis of securing a price advantage by buying in bulk from manufacturers or suppliers. One consequence of this has been the development of an important physical distribution channel because the wholesalers use their own distribution centres and vehicle fleets.

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Manufacturer to cash-and-carry wholesaler to retail shop Another important development in wholesaling has been the introduction of cash-and-carry businesses. These are usually built around a wholesale organization; small independent shops collect their orders from regional wholesalers, rather than having them delivered. The increase in cash-andcarry facilities has arisen as many suppliers will not deliver direct to small shops because the order quantities are very small.

Manufacturer via third-party distribution service to retail shop Third-party distribution or the distribution service industry has grown very rapidly indeed in recent years, mainly due to the extensive rise in distribution costs and the constantly changing and more restrictive distribution legislation that has occurred. Thus, a number of companies have developed a particular expertise in logistics operations. As outlined in earlier chapters, these companies include those offering general distribution services as well as those that concentrate on providing a ‘specialist’ service for one type of product (such as china and glass, or hanging garments), or for one client company.

Manufacturer via small parcels carrier to retail shop Very similar to the previous physical distribution channel, these companies provide a ‘specialist’ distribution service where the ‘product’ is any small parcel. There was an explosion in the 1980s and 1990s of small parcels companies, specializing particularly in ‘next day’ delivery. The competition generated by these companies has been quite fierce.

Manufacturer via broker to retail shop This is a relatively rare type of channel, and may sometimes be a trading channel and not a physical distribution channel. A broker is similar to a wholesaler in that it acts as intermediary between manufacturer and retailer. Its role is different, however, because it is often more concerned with the marketing of a series of products, and not really with their physical distribution. Thus a broker may use third-party distributors, or may have its own warehouse and delivery system. The broker can provide an alternative physical distribution channel. The main alternative physical distribution channels previously described refer to those consumer products where the movement is from the manufacturer to the retail store. There are additional channels for industrial

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products and for the delivery of some consumer products that do not fit within the structure of the diagram because they bypass the retail store. They necessitate the consideration of different types of distribution channel.

Mail order The use of mail order or catalogue shopping has become very popular. Goods are ordered by catalogue, and delivered to the home by post or parcels carrier. The physical distribution channel is thus from manufacturer to mail-order house as a conventional trunking (line-haul) operation, and then to the consumer’s home by post or parcels carrier, bypassing the retail store.

Factory direct to home The direct factory-to-home channel is a relatively rare alternative. It can occur in the context of direct selling methods, often as a result of newspaper advertising. It is also commonly used for ‘one-off ’ products that are specially made and do not need to be stocked in a warehouse to provide a particular level of service to the customer.

Internet and shopping from home There is now an important development in shopping from home via the internet. Initial physical distribution channels were similar to those used by mail-order operations – by post and parcels carrier. The move to internet shopping for grocery products has led to the introduction of specialist home-delivery distribution operations. These are almost all run by thirdparty companies. In addition, it is now possible to distribute some products, such as music, software and films, directly, computer to computer.

Factory to factory/business to business The factory-to-factory or business-to-business channel is an extremely important one, as it includes all of the movements of industrial products, of which there are very many. This may cover raw materials, components, part-assembled products and so on. Options vary according to the type and size of product and order, may range from full loads to small parcels, and may be undertaken by the manufacturers themselves or by a third party. It can be seen from the list of alternative channels that the channel structures can differ very markedly from one company to another. The main differences are:

Key drivers ឣ ឣ

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the types of intermediaries (as shown above); the number of levels of intermediaries (how many companies handle the product?); the intensity of distribution at each level (are all or just selected intermediaries used at the different levels?).

An individual company may have many different products and many different types of customer. Such a company will therefore use a number of different channels within its distribution operation.

Channel objectives Channel objectives will necessarily differ from one company to another, but it is possible to define a number of general points that are likely to be relevant. These should normally be considered by a company in the course of its distribution planning process to ensure that the most appropriate channel structure is developed. The main points that need to be addressed are as follows: ឣ

ឣ

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ឣ

To make the product readily available to the market consumers at which it is aimed. Perhaps the most important factor here is to ensure that the product is represented in the right type of outlet or retail store. Having identified the correct marketplace for the goods, the company must make certain that the appropriate physical distribution channel is selected to achieve this objective. To enhance the prospect of sales being made. This can be achieved in a number of ways. The most appropriate factors for each product or type of retail store will be reflected in the choice of channel. The general aims are to get good positions and displays in the store, and to gain the active support of the retail salesperson, if necessary. The product should be visible, accessible and attractively displayed. Channel choice is affected by this objective in a number of ways: – Does the deliverer arrange the merchandise in the shop? – Are special displays used? – Does the product need to be demonstrated or explained? – Is there a special promotion of the product? To achieve cooperation with regard to any relevant distribution factors. These factors may be from the supplier’s or the receiver’s point of view, and include minimum order sizes, unit load types, product handling characteristics, materials handling aids, delivery access (for instance, vehicle size) and delivery time constraints. To achieve a given level of service. Once again, from both the supplier’s and the customer’s viewpoints, a specified level of service should be established, measured and maintained. The customer normally sees this as

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crucial, and relative performance in achieving service-level requirements is often used to compare suppliers and may be the basis for subsequent buying decisions. To minimize logistics and total costs. Clearly, costs are very important, as they are reflected in the final price of the product. The selected channel will reflect a certain cost and this cost must be assessed in relation to the type of product offered and the level of service required. To receive fast and accurate feedback of information. A good flow of relevant information is essential for the provision and maintenance of an efficient distribution service. It will include sales trends, inventory levels, damage reports, service levels, cost monitoring and other data.

These points all need to be addressed when a company’s distribution channels are designed and also, therefore, when a company tries to determine whether or not it should outsource any of its logistics operations. It is from assessing factors such as these that a company will be able to identify the main drivers that make outsourcing an attractive alternative for consideration.

Channel characteristics In association with the type of objectives outlined in the previous section, there are a number of important associated channel characteristics that also need to be considered. These characteristics are likely to affect the decisions that need to be made when designing a channel to be used in a distribution system, or when trying to identify any key outsourcing requirements. They can be summarized as follows.

Market characteristics The important consideration here is to use the channels that are the most appropriate to get the product to the eventual end user. The size, spread and density of the market is important. If a market is a very large one that is widely spread from a geographic point of view, then it is usual to use ‘long’ channels. A long channel is one where there are several different storage points and a number of different movements for the product as it is transferred from the point of production to the final customer. Where a market has only a very few buyers in a limited geographical area, then ‘short’ channels are used. Thus a company must identify what is appropriate for the market, what type of distribution channel is needed to support this channel and then, where appropriate, choose a suitable third-party service provider that can fulfil the requirements. A simple example of what are known as ‘long’ and ‘short’ channels is illustrated in Figure 5.2.

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Long channel Manufacturer’s warehouse

Retail shop

Manufacturer’s depot

Retailer ’s regional depots

Third-party central depot

Third-party regional depots

Short channel Manufacturer’s warehouse

Buyer’s factory warehouse

Figure 5.2 ‘Long’ and ‘short’ distribution channels

Product characteristics The importance of the product itself when determining channel choice should not be underestimated. This is because the product may well impose constraints on the number and type of channels that can be considered, and may well influence outsourcing requirements and opportunities. For example: ឣ

ឣ

ឣ

High-value items are more likely to be sold direct via a short channel, because the high gross profit margins can more easily cover the higher sales and distribution costs that are usual from short channels. In addition, the security aspects of highly priced items (such as jewellery, watches and CDs) make a short channel much more attractive because there is less opportunity for loss and theft than with a long channel. Because these products can bear a high distribution cost, there will be greater opportunities for outsourcing. Complex products often require direct selling because an intermediary may not be able to explain how the product works to potential customers. It is usually difficult to outsource the distribution of such products. New products are often distributed via a third-party channel because final demand is unknown and supply channels need to be very flexible to respond to both high and low demand levels. Existing own-account operations can seldom deal effectively with the vagaries of new product demand.

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Products with a time constraint need a ‘fast’ or ‘short’ channel, for obvious reasons; examples include bread, cakes and newspapers. Products with a handling constraint may require a specialist physical distribution channel, as is the case with frozen food, china and glass, or hanging garments.

Competitive characteristics Competitive characteristics that need to be considered concern the activities of any competitors selling a similar product. Initial channel decisions are whether to sell the product alongside these similar products, or whether to try for different, exclusive outlets for the product to avoid the competition. It may well be that the consumer preference for a wide choice make it necessary to supply the same outlets. Good examples include confectionery and most grocery items. Of particular significance, however, is the service level being provided by the competition. It is essential that channel selection is undertaken with a view to ensuring that the level of service that can be offered is as good as, or better than, that which is being provided by key competitors. This may well be the main area for competitive advantage, especially for those products where it is very difficult to differentiate on quality and price. So, any move from in-house to third-party distribution must be undertaken with a view to ensuring that there is no reduction in service level compared with the company’s major competitors.

Company resources In the final analysis, it is often the size and the financial strength of the company that is most important in determining channel strategy. Only a fairly large and cash-rich company can afford to set up a distribution structure that includes all of its own distribution and transport facilities. A company may like to do this because it feels that such a structure gives it greater control and can enable it, more easily, to provide the service it thinks its customers require. However, smaller and less financially secure companies may have to use intermediaries or third-party organizations to perform their distribution function because they do not have the financial resources to allow them to run their own distribution operations.

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211

Business drivers Why other functions outsource It is useful to be able to make comparisons with other industries and functions from outside the logistics environment to see if there are any lessons that might be learned. One such function is IT. Many companies now outsource their IT operations. It can be seen from a short review of the potential drivers for outsourcing IT that there are some similar reasons compared to logistics and some that are surprisingly different. The key drivers discussed below are drawn from Heywood (2001).

Improved cash flow This can occur sometimes when the service provider pays for assets that are transferred from the client. In IT, this might include facilities, hardware and equipment, and software licences. This is because the provider can then use these assets to help provide the agreed service. Heywood notes that in some instances, such cash injections are just another benefit from the many that outsourcing brings, but that in others, ‘the outsourcing deal appears to have mainly come about because of the client’s need for new short term funds’. This may certainly be an important driver for outsourcing some logistics operations. Indeed, the transfer of assets from client to third party is a very important aspect of logistics outsourcing because most in-house operations will have a great deal of cash tied up in depots, vehicles and other equipment.

The need to relocate The rapid growth in IT was reflected in a similar growth of IT departments, often leading to the need for relocation to bigger and better premises. Because of the difficulty of estimating exactly what the requirements might be, and because IT was seldom the core function of a business, many companies saw outsourcing as a sensible option. For logistics, the need to relocate can also be important, but usually for different reasons. Relocation in a logistics context normally means that a strategic study has indicated that demand and perhaps supply points have shifted such that existing depots are inappropriately located and that some need to be closed and other new ones opened. This is potentially an enormous cost to any company, as well as being potentially very disruptive to operations and service levels during the period of change. Thus, it may become both financially and operationally attractive to outsource.

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The need for system change The speed of development in both hardware and software systems has meant that companies have had to make very large-scale changes to their information systems. This occurred particularly with financial systems. Because IT outsourcing service providers made substantial investments in hardware, software, expertise and implementation experience, it soon became clear that outsourcing was a very attractive solution. This was endorsed by the lack of success of many companies that implemented systems themselves. This also applies in logistics, as many client companies have seen the opportunity to benefit from the systems and expertise that logistics service providers can offer with regard to certain leading-edge high-tech developments, particularly in IT and IS. Examples might include warehouse management systems (WMS), track and trace, and radio frequency identification (RFID).

Improvement consolidation Some companies have adopted the view that, although they have completed successful performance-improving projects in IT and have effective systems, this is a good time to outsource. This is because: ឣ

ឣ ឣ

What they have is appropriate for what they need – why not consider outsourcing now to see what it would cost to get the same service? Outsourcing at this stage will not give the service provider easy savings. It is difficult to constantly keep the systems up-to-date, so in a short period of time it will be a good time to outsource because new developments will soon be appearing and changes will need to be made.

This approach is probably not often taken as far as logistics is concerned, but it has its merits. For example, many companies do outsource their logistics because of operational or service deficiencies that they cannot or do not wish to solve within their own operations. This certainly makes it easier for potential service providers to identify the obvious improvements by which they can ensure that they can provide a better service and can also perhaps make a more than reasonable profit.

Release scarce resources Rapidly developing markets and technology create the need for constant change and mean that functional heads and their staff have to spend much of their time ‘fire fighting’ to initiate change and solve the associated

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problems. Outsourcing can alleviate this, allowing staff to concentrate on other, more strategic, issues. A similar advantage is identified by many managers in logistics.

Strategic reasons Outsourcing allows organizations to concentrate their resources on core functions because non-core operational functions are undertaken by an external specialist. This is a classic reason given by companies that outsource their logistics operations.

Risk reduction The fast rate of change in activity, legislation and, particularly, IT means that there is an increasingly high risk in any large business investment. Service providers, to a certain extent, can reduce this risk because they can spread the investment over a number of clients. This certainly hold true in logistics, and particularly so in the area of logistics IT and IS. However, there is a counter-argument concerning risk that is often used by those considering the outsourcing of their logistics operations. This is that there are other risks in outsourcing that need to be considered and assessed. These include, amongst others, the loss of direct control over logistics operations, the loss of direct contact with the customer at delivery points, and the risk of third-party failure with the dire consequences that that would bring. These points will be addressed later in the chapter when the main drivers and drawbacks of logistics outsourcing are reviewed in some detail.

External drivers In addition to the logistics-related drivers for outsourcing that will be discussed later in this chapter, there are also several external drivers that might influence a company towards outsourcing. Many of these can have a knock-on effect on a company’s logistics structure and operation. The most important drivers are outlined below.

Globalization One area of significant change in recent years has been the increase in the number of companies operating in the global marketplace. This necessitates a broader perspective than when operating as an international company. In

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the latter case, although companies may have a presence across a wide geographic area, this is supported on a local or regional basis through local or regional sourcing, manufacturing, storage and distribution. In the former, the company is truly global, with a structure and policy that represents a global business. Typical attributes will include: ឣ ឣ ឣ ឣ ឣ

global branding; global sourcing; global production; centralization of inventories; centralization of information.

However, these must coexist with the ability to provide for local requirements, such as electronic standards for electrical goods, language on packaging, and left/right-hand drive alternatives in the automotive industry. To service global markets, logistics networks become, necessarily, far more expansive and far more complicated. There is a continuing need to plan and manage logistics as a complete and integrated system, but to achieve this is far more difficult, and often the best solution is to outsource. Globalization is discussed in more detail in Chapter 1.

Complexity Linked closely to the globalization of business is the increase in the complexity of supply-chain management. As already indicated, globalization almost certainly leads to greater complexity. Complexity provides some significant implications for logistics operations, such as: ឣ ឣ

ឣ

ឣ ឣ ឣ

extended supply lead times; complex node management (including distribution centres, consolidation centres, cross-docking); extended and unreliable transit times, creating the need for greater visibility in the supply chain together with better information systems; multiple, single and inter-modal freight transport options; complicated freight cost options; production postponement with local added value (finishing, kitting, badging, tagging, etc).

In order to succeed in this new, more complex, environment, many companies choose to outsource their supply-chain management. This echoes the argument for concentrating on core competencies or key business areas, but it is also a direct result of the difficulty of setting up and running such convoluted and complicated supply chains. This too is discussed in more detail in Chapter 1.

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Emerging markets In the current business environment there are some very significant regional market developments. The most important is probably the Far East, in particular the opening up of China, which has seen astounding growth in both the supply of and the demand for many different types of product. There are obvious implications for logistics regarding the flow of products out of the Far East, whether raw materials, components or finished goods, and the inward flow of mainly finished goods into the region. The implication for logistics of these long supply chains was identified earlier in this chapter. Once again, a good solution for many companies is to outsource these operations because of the complexity of the flows, the difficulty of setting up in-house operations in these regions, and the risk of investing in organizations and structures that may not see the growth in supply and demand that is initially forecast. Also important is Eastern Europe. Here, from a Western European perspective, the sources and markets do not have the problem of distance, with the associated time constraints and supply-chain complexity. Nevertheless, there are still some real issues for logistics because of the poor transport infrastructure and the problem of initial low levels of supply and demand. So, again, there are good reasons for manufacturers and retailers to avoid the high risk and high cost of setting up in-house operations, making the outsourcing of these operations a natural and attractive alternative. Third-party providers are in a much better position to undertake investment because they can spread the costs across a number of different customers. This is discussed in more detail in Chapter 2.

E-commerce and e-fulfilment One of the most dramatic developments in recent years has been that of the internet and the World Wide Web. Associated with this has been the increase in the opportunity for both business and consumers to purchase goods online from a variety of sources, whether traditional or new. As indicated in Chapter 3, internet shopping is now very common and this has resulted in a similar growth in the demand for the fulfilment (or e-fulfilment) of these internet orders. Internet access does provide a direct and instantaneous link from the customer to the selling organization, but the actual physical fulfilment must still be undertaken by more traditional physical operations. This often necessitates the introduction of a new means of physical distribution, because traditional channels are not appropriate for home delivery. The area as a whole is one that few internet companies wish to develop, and so there are big opportunities for 3PLs to specialize in

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e-fulfilment delivery operations and to offer these as value-added services together with the more traditional distribution functions. The particular reasons for outsourcing e-fulfilment can be summarized as: ឣ

ឣ

ឣ

ឣ

ឣ

ឣ

Lower set-up costs: outsourcing avoids the need to invest in distribution, so start-up cash can be concentrated into online business development. Very fast set-up of fulfilment capabilities: this allows companies to be able to support their online retailing business as soon as it starts operating, and thus avoid disappointing early customers through delivery delays and failures. Scale economies of shared facilities and transport: thus fulfilment can be economic despite initially low volumes and throughput. Lower operating costs: transport costs can be minimized if customer orders are consolidated with other users. Small companies face a difficulty in delivery operations known as the density problem, whereby they have insufficient delivery or order density in their network to make separate delivery operations viable. This applies particularly to online retailers, which virtually always start from a low business base when opening their online retail sites. Easier expansion of geographic coverage: this is a classic reason for outsourcing delivery transport in growing businesses, which applies equally to online retailers. Opportunity to benefit from value-added services: as summarized in Chapter 3, there are a multitude of value-added services that third-party providers now offer. Online retailers can use these at an early stage of their business operation. Typical examples might include track-and-trace of orders, returns and inventory visibility.

Size matters One key driver for outsourcing is that of size. As already indicated in the previous section on e-commerce and e-fulfilment, it is almost impossible for small companies that are trying to offer a broad geographic coverage to run their own transport operations cost-effectively. This is the density problem mentioned earlier. Basically, vehicles would have to travel uneconomically long distances between delivery drops. Thus, outsourcing into a multi-user third-party transport operation is the major alternative. A similar argument about size applies to warehouse operations. Here the cut-off points for outsourcing are slightly different, as Figure 5.3 indicates. Based on daily orders and volumes, a small company with limited orders, volume throughput and SKUs is likely to undertake its own storage operation: (a) in the diagram. This is because it does not have sufficient requirements to attract a reasonably priced alternative from a third-party provider.

Key drivers

Unit Cost

10,000

1,000

Multi-user outsourcing costs

In-house costs

217

(c) In-house or dedicated outsource

(b) Multi-user outsource

(a) In-house

ឣ

Volume per day

Optimal strategy

Figure 5.3 An indicator of when to outsource a warehouse or depot operation based on the size of the business

The overhead cost of setting up and managing the operation would be likely to make it unattractive. It is impossible to be precise as to when the cut-off occurs as this will be influenced by many other variables (space availability in the 3PL depot, opportunity to carry out more value-added (and profitable) services, prospects for future business and so on). Outsourcing becomes attractive when the business is large enough to bear a reasonable overhead cost and to start to benefit from the scale economies that a multi-user operation can offer: (b) in the diagram. This could continue through a fairly long phase of business growth, and the client could steadily move from being a small to a very big player for the 3PL. The next stage occurs when the business reaches sufficient size for the warehouse or depot to be run as an operation dedicated to the single business: (c) in the diagram. For many companies, this will be an opportunity to take the operation back in-house. Of course there may be many other reasons (as discussed in the final section of this chapter) why a company may choose to remain with outsourcing as the preferred business option.

Competitive advantage Attitudes towards distribution and logistics have changed quite dramatically in recent years. It had been a long-held view that the various elements

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within logistics have merely created additional costs for those companies trying to sell products in the marketplace. Although there is, of course, a cost associated with the movement and storage of goods, it is now recognized that distribution and logistics also provide a very positive contribution to the value of a product. This is because logistics operations provide the means by which the product can reach the customer or end user in the appropriate condition and required location.

Cost versus service advantage It is therefore possible for companies to compete on the basis of providing a product either at the lowest possible cost (so that the customer will buy it because it is the least expensive) or at the highest possible value to the customer (for instance, if it is exactly where and how the customer wants it). Some companies may, indeed, try to achieve both of these objectives. This is particularly important these days as there are many products that are not sold on the basis of their brand name alone but that are, in fact, like commodities sold on the basis of availability or price. This applies to many food products as well as technical products such as mobile phones and personal computers. These ideas are illustrated in Figure 5.4. This shows that a company may compete as a service leader, where it is trying to gain an advantage over its competitors by providing a number of key service elements to differentiate itself. Or it may compete as a cost leader, where it is trying to utilize its resources so that it offers the product at the lowest possible cost, thus gaining a productivity advantage. Examples of how this might be achieved are given in Figure 5.4. For a value advantage, this might include the provision of a specially tailored service or the use of several different channels of distribution so that the product is available in the marketplace in a number of different ways. It might include a guaranteed service level or a regular update on the status of orders. For a cost/productivity advantage, this will include a number of different means of cost minimization, such as maintaining very low levels of inventory and ensuring that all manufacturing and logistics assets are kept at a high utilization. A good knowledge and understanding of the competitive advantage that it is aiming to achieve is therefore essential when a company considers whether or not to outsource its logistics operation. It is also important to know this when comparing the final choice of the third-party providers during any selection process. Equally, it is crucial that the third-party provider is aware of what the client company is trying to achieve, so that a suitable tender can be prepared that is based on the client’s wishes for achieving competitive advantage and reflecting their needs for an appropriate cost and service balance.

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Cost & service leader Service leader

Cost leader

Commodity market

VALUE ADVANTAGE

COST/PRODUCTIVITY ADVANTAGE

Logistics leverage opportunities

Logistics leverage opportunities

     

   

tailored service distribution channel strategy reliability responsiveness information flexibility

capacity utilization asset turn low inventory low wastage

Figure 5.4 The logistics implications of different competitive positions

One size doesn’t fit all It should also be emphasized that for many companies it is necessary to develop differently configured logistics structures to cater for the variety of service offerings that they need to provide. It is now appreciated that a ‘onesize-fits-all’ approach to logistics is usually too limited, because suppliers need to take account of a range of different customer requirements and make sure that their competitive advantage is understood and applied in all market segments. As noted in a recent European Logistics Association survey: ‘One size fits all policies will rarely work when applied to modern, diverse service offerings…. Leading companies are segmenting their supply chains according to the service and cost needs of the customer’ (ELA and Kearney, 2004). The difficulty of establishing a one-size-fits-all solution is another point that both client and potential provider need to be aware of. There are likely to be some product groups, customer types or service demands that cannot be treated in the same way as is normal for most. Special systems and processes may be needed for these, or indeed they may have to be completely excluded from the agreed operation and catered for in another way. Clients should note that non-standard operations generally necessitate additional costs that the service provider will have to cover!

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One example of such an incompatibility in a single company, where a one-size-fits-all logistics solution is inappropriate, is summarized in Table 5.1. This company is a global manufacturer and distributor of high-value consumer products. In the UK, it has two major businesses: first, domestic retail to supermarkets, CTNs and similar outlets; and second, travel retail to airports, ferry ports and the like. It became increasingly evident to the company that the logistics equipment and process requirements used in its in-house logistics operation for the two different channels of distribution were incompatible, even though the physical nature of the product was basically the same. One obvious solution was to outsource one or even both of the operations. An initial summary of requirements for the two operations, as shown in Table 5.1, identified some major differences and underlines the need to be aware that a ‘one-size-fits-all’ solution may well be inappropriate. It is interesting to note the many different logistics elements that had very dissimilar requirements across the two businesses.

Table 5.1 Some major logistical differences in the main channels of an FMCG manufacturer and distributor Travel Retail

Domestic Retail

Product range/brands Brand variants

international high

domestic low

Packaging variants

high

low

SKU proliferation*

high (800+)

low (<150)

Order frequency

low

high

Lines per order

high

low

Quantity per line

low

high

Minimum order increment

case

pallet

Picking method

hand

automated (ASRS)**

Delivery expectation

next day

weekly

Drop points

<50

2000+

Delivery

LCL

FCL

Demographics

seaports/airports

major population centres

Demand

volatile – seasonal

stable – flat

Responsiveness

immediate

48–72 hour

Workload

variable

stable

*SKU = stock-keeping units ** ASRS = automated storage and retrieval system

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Assessing the importance of different supply-chain activities Any company that is considering outsourcing as an option would be wise to determine how important are its various supply-chain activities in terms of competitive advantage and core competence. Core competence is an aspect that will be considered in the next section of the chapter. One example of how this might look after such an assessment of key supply-chain activities is shown in Figure 5.5. The two axes represent competitive criticality and core competence respectively, with the four quadrants indicating: 1. 2. 3. 4.

Low competitive criticality and low core competence. High competitive criticality but low core competence. Low competitive criticality but high core competence. High competitive criticality and high core competence.

In the figure, the activities in Quadrant 1 represent activities that definitely should be outsourced; Quadrant 2 those that should be outsourced but with particular care as they are critical to competitive advantage; Quadrant 3 those that possibly could be outsourced but are a core competence that is important to the company; Quadrant 4 those that are both critical to competitive advantage and core competence so should remain in-house.

Supply-chain activities High

Core competence

Customer service

Warehousing

Customer delivery

Inventory control

Logistics value-added services

Order management

Inter-site transport

Low Low

Competitive criticality

Figure 5.5 The relative importance of some key distribution activities in relation to a company’s competitive advantage

High

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Logistics drivers and drawbacks There are a large number of advantages and disadvantages claimed for both third-party and in-house distribution. Some of these can be objectively assessed, while others are subjective, relating, perhaps, more to conventional viewpoints and personal preference than to anything else. Many of the key concepts concerning outsourcing have been discussed previously in this chapter, and thus a number of the main drivers have already been introduced. In order to present as complete a picture as is possible, these will be reiterated in this final section. The major drivers have been split into different categories as follows: ឣ ឣ ឣ ឣ

organizational; financial; service; physical.

Some of the issues that will be covered may apply more specifically to multiuser operations rather than to dedicated operations, or vice versa. As already indicated, generally a client requiring a dedicated operation is able to define and buy a specially designed service from the supplier, so many of the issues will not apply. Thus, it must be remembered that as well as the main decision whether or not to outsource, there is also a crucial decision for a company to make as to whether to use a dedicated or a multi-user operation. The decision, as so often in distribution and logistics, is a question of trade-off between cost and service. However, there are also other aspects that need to be considered.

Organizational factors One of the prime reasons quoted for outsourcing is the opportunity for users to focus on their core business or core competence, be this manufacturing or retailing. There are both organizational and cost benefits to be gained from this. Various benefits related to the saving of capital costs are discussed in the section on costs later in this chapter. The organizational advantages are more difficult to measure, but concern the opportunity for companies to streamline their organizations and particularly to concentrate their own management expertise in their core business areas. This reason is recognized by many third-party providers. Tom Engbers, director of sales with the Netherlands-based supply-chain management company Modus Media International, noted, ‘We let our clients focus on their core business and core competencies, while we do what we are good at

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– managing an integrated supply chain on behalf of our clients’ (Frontline Solutions, 2002). Jim Tompkins, CEO and founder of US consulting company Tompkins Associates, also emphasized the importance of focusing on core competencies. He recognizes that outsourcing may lower costs but thinks that its main goal is to focus management on core competencies. ‘For a retailer, those may be store management or branding, but not logistics or human resources and certainly not accounting.’ He had recently visited a company that planned to outsource distribution – until it realized that distribution was one of its core competencies, so he emphasized the need to ‘really understand what our core functions are and how they fit in’ (Traffic World, 2005). The use of a third-party company can provide the user company with access to wider knowledge. This may be through the opportunity to use leading-edge technology such as RFID (radio frequency identification), track and trace, GIS (geographic information systems), or through providing a broader management experience and knowledge beyond that of the company’s own industry. This will enhance the opportunities to improve the operation. Third-party distribution companies may lack the appropriate experience of client companies’ products and markets, although the growth in specialist distribution companies has helped to change this aspect. There may be an issue with cultural incompatibility between contractor and client. It is now recognized that company cultures can vary quite dramatically from one to another. It is important that there is no clash of culture in a contractor/client relationship because this may lead to problems in the way the operation is run. It is claimed that the use of third-party distribution can lead to a loss of control over the delivery operation. This may be important if logistics is seen as a major element of competitive advantage. Any lack of control can be reduced, however, by buying the right service at the outset, and by carefully monitoring the performance of the distribution company in terms of the service that it is actually providing. There may also be a loss of control over the company’s logistical variables if a third party is used. This means that the company is no longer in a position to define the number, type or size of distribution centres, or vehicle types and sizes, and so on. Once again, if this is important, the company must choose the third-party structure that suits it best, or of course it may choose a dedicated operation where these elements are provided exclusively for the company. Perhaps of greater concern, however, is that as the contractor owns the systems and logistics resources, the balance of power has shifted away from the user to the contractor.

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When moving from an own-account to a third-party operation, there is a loss of distribution and logistics expertise in the user company. This will make it more difficult for the user company to revert to an own-account operation should it so wish. Also, distribution and logistics expertise, if maintained within the client organization, will help to enable a better monitoring and assessment of the true performance of the contractor. The use of a third party can often mean the loss of direct influence at the point of delivery because the driver is delivering a number of different companies’ products. This can be an issue as the driver is very often the only direct physical link between the supplier and the customer. For multi-user operations this loss can be limited if a salesman is also used as a contact point. For dedicated operations this should not be an issue because the driver is only delivering for a single client company. Brand integrity cannot be guaranteed. This is not an issue for many companies, but one that is quoted by some. Using a third party means that the company does not have its own livery and brand name on a vehicle, so the value of advertising on a vehicle is lost. For dedicated contract distribution the livery is often used. There may be a problem with the confidentiality of information when using a third-party distribution service. This may arise because products can be mixed with those of competitors. This is an issue hampering the take up of 3PL services in the vast emerging logistics market in China since the barriers to entry for foreign 3PLs were relaxed.

Financial factors There are several financial and cost advantages claimed because of the elimination of asset ownership. In particular, there are capital cost advantages of using third-party distribution because the client company does not have to invest in facilities and resources such as distribution centres and vehicles, as it would for its own operation. Thus, the capital can be invested in more profitable areas of the business, such as new production machinery or retail stores. The managing director of a large manufacturer and supplier of building material to the construction industry noted: ‘one of the main reasons we chose to outsource our logistics function was to free up resource and capital, that would otherwise be tied up in distribution, to support our investment in manufacturing’. Improved cash flow can occur when the service provider pays for existing assets that are owned by the client company but are transferred to the service provider at the start of the contract. The client can then use this cash input to help in other parts of the business. Such a transfer of assets from client to service provider can be a very important aspect of logistics outsourcing because most in-house operations have a great deal of cash tied

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up in depots, vehicles and other equipment. Clearly, any transferable assets must be suitable for the operation that the service provider has planned. Associated with the elimination of asset ownership is that the reduction of ownership and responsibility for plant, property and equipment means that these items can be taken off the balance sheet. This may make the company more attractive from an accounting perspective, as fixed costs are converted to variable costs. A particular advantage for multi-user operations is the opportunity to benefit from cost savings through economies of scale. Many own-account operations are too small to be run economically in their own right. If a number of operations are run together by a third-party company, the larger system that results will be more economic because a single large distribution centre may replace the three or four sites used by the different smaller companies. This will provide cost savings through reduced overheads, better utilization of equipment and labour and so on. Linked closely to the previous point, and an advantage for multi-user distribution, is that third-party operations will provide day-to-day operating cost savings. This is because the various labour and equipment resources can be run more efficiently at the operational level. Third-party distribution allows for a clearer picture of actual operating costs. Payments need to be made on a regular basis, usually every month, and this makes the actual distribution costs very visible. Reporting systems are generally more transparent than for own-account operations. For individual client companies, there can be a cost advantage through a cost lag or cushion effect. This can occur when the effect of increased costs in various distribution elements, such as labour or fuel, are delayed before the third-party company can pass them on to the client – usually at the end of year contract review. This is particularly relevant in times of high inflation. It may be the case that the changeover costs of moving from own-account to third-party distribution are such that it does not make good financial sense. The most likely areas are the sunk costs of existing owned sites, any fixed low rents or, perhaps, any long-term leases on property that have to be paid. Also, some vehicles and equipment may be relatively new and of high value, but not usable in the operation that the service provider has planned.

Service factors It is a matter of some debate as to whether or not service levels are better or worse amongst third-party distributors than among own-account operators, but as a general rule service levels should improve following a move from in-house to outsourced operations. For dedicated operations, there should be no significant difference in service-level provision between an outsourced and an in-house operation,

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because the outsourced operation is an exclusive one and will be undertaking exactly the same business as the in-house operation. However, service-level improvement is often achievable through outsourcing because an in-house operation may suffer from inertia, making it difficult to identify and put into practice any potential service improvements. For multi-user operations, service should be better, because many thirdparty distributors make frequent and regular deliveries to their varied delivery points, which is more difficult for in-house operators to achieve due to lower demand; their vehicles would have to travel uneconomically long distances between delivery drops. This density problem was discussed earlier as a key issue for online companies trying to operate their own delivery fleets. Thus, outsourcing into a multi-user third-party transport operation should lead to improved service levels. Indeed, in remote rural areas especially, the use of a third party should greatly improve service levels because deliveries are likely to be much more frequent than a small own-account operation can economically undertake. The use of a third-party distribution operation should offer greater flexibility to the user company. This is particularly true as a company seeks to develop new products and services, and new markets. A company that intends to launch its products into a new geographic area will find it far more economical to use a third-party service provider rather than developing an expensive new logistics infrastructure in an area where initial sales are likely to be low and subsequent success for its products is not guaranteed. This has been seen, for example, by companies moving into the evolving markets of Eastern Europe. As a company introduces new products and services, it may find that they do not fit easily into its existing logistics structure. Third-party operations may fill these gaps more effectively. For example, many companies that now offer internet sales and home delivery outsource the physical elements of the operation to specialist home-delivery service providers. As indicated in a previous section of this chapter, third-party companies are able to offer a number of value-added services. These may provide a significant added attraction to user companies. For example, the use of a trackand-trace facility may be a competitive advantage that has a very positive impact for key customers. It is often thought to be easier to initiate logistics service improvements via a third party rather than through an own-account operation. This is because incentives for service improvement can be written into service contracts for third-party companies. These are likely to be performance-related incentives. Service-level improvement may be achieved through a multi-user thirdparty operation via more frequent delivery. As already indicated, the use of a third party can greatly improve service levels because deliveries are likely to

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be more frequent than can be undertaken by a small own-account operation.

Physical factors As businesses evolve, particularly in the context of both global sources and global markets, logistics and supply-chain structures have become very complex. This complexity may best be planned and managed by a third-party company that has a broad international experience of the many different logistics elements. This may involve longer travel distances, many different modes of transport, customs procedures, varied depot types and other complicating factors. The need to relocate logistics facilities can also be an important reason or opportunity for outsourcing. Relocation in a logistics context normally means that a strategic study has indicated that demand and perhaps supply points have shifted such that existing depots are inappropriately located and that some need to be closed and other new ones opened. This is potentially an enormous cost to any company as well as being potentially very disruptive to operations and service levels as the process of change takes place. Thus, it may become both financially and operationally attractive to outsource. For some companies, the move to a third-party operator provides a major opportunity to solve any industrial relations problems that might otherwise be difficult or costly to eradicate. Legislation such as the Transfer of Undertakings (Protection of Employment) Regulations in the United Kingdom has however diminished the potential impact of this aspect. Special vehicle characteristics may be required for some products and product ranges and these may not be available in some multi-user operations. Vehicle size, body quality, equipment and unit load specifications may all be affected, depending on weight/volume ratios and any ‘special’ product features. Once again, the use of a specialist third-party company could be appropriate. The drop characteristics or requirements of some products may be incompatible with those offered by some third-party operations. This may, for example, relate to the frequency of deliveries that are required (for instance, a frequent number of small drops for high-value items compared with occasional deliveries for low-value items) or the nature of the product itself (heavy products may require special unloading equipment). It is possible that some form of specialist distribution system can provide an appropriate alternative. The basic delivery system must be appropriate for the type of delivery required. One example of incompatible systems is delivering pre-selected orders using a van sales operation. In a van sales operation, the delivery-

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driver picks and assembles orders on the vehicle. This type of operation is totally inappropriate for the delivery of pre-selected orders where the picking and assembly of the orders has already been undertaken in the warehouse. Another example of incompatibility might be where a delivery assistant is used on the vehicle to help unload bulky or heavy products. It would be inappropriate to use this type of delivery system for standard products, where additional unloading assistance is not required. It is, therefore, important to ensure that products are not being distributed via incompatible delivery systems, as this can be both costly and inefficient. Some products may be incompatible, a particular problem being the danger of contamination caused by one product to another. If some food products are carried next to a product with a very strong smell, then they will easily absorb the smell and be spoiled. Many third-party companies solve the problem by the use of special sections in vehicles.

The critical factors of choice Before leaving the topic of the key drivers of logistics outsourcing, it is probably relevant to note that there is no one single answer to the question: what are the most important drivers? Clearly, this depends very much on the industry, company, market, product and any other of the many different features that can impact on defining a logistics structure. There is no simple solution. All of the many factors outlined in this chapter need to be considered. Depending on the situation faced by each individual company, some factors will be vital and others of no consequence whatsoever.

Choosing to outsource This section looks at some different studies that have been undertaken to help identify key drivers for outsourcing. There are the results of a broad survey and also provide examples of how individual companies have made this initial assessment. A list of the key drivers for outsourcing is taken from a survey conducted by Eyefortransport in 2005, and is shown in Figure 5.6. Perhaps not surprisingly, the two factors that are seen to be the most important are ‘reducing costs’ and ‘increasing customer satisfaction’. These two factors have generally featured at the top of most of the surveys that have been undertaken over the past 20 years or more. One interesting factor that is relatively new is the general concept of ‘improving supply-chain management’. This is fairly unspecific, but does perhaps indicate a need or desire to update and upgrade supply chains as a general requirement. Also of interest is the

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Case history: building materials A large manufacturer and supplier of building material to the construction industry made the decision to outsource its logistics operation. The company spent some time in identifying its rationale for outsourcing. This is summarized in Table 5.2. The major reasons quoted echo many of the main strategic drivers identified previously in this chapter: release of capital, focus on core competence, goal of increasing customer satisfaction. However, there are some interesting and very specific operational reasons as well: change from the existing ownerdriver model, and access to IT applications such as GPS and EDI. Table 5.2 Rationale for outsourcing from a large manufacturer and supplier of building material to the construction industry Business Area

Outsourcing Reasons

Financial

• need to reduce logistics costs to • release capital for manufacturing investment • • focus on core competences – on • the activities in the value chain where the company has a • distinct advantage • focus on manufacturing stability

Strategic

Success Factor reduce true cost of logistics and optimize capabilities visibility of costs senior management time to focus on manufacturing improved manufacturing performance – efficiency and reliability

• opportunity to gain a strategic advantage through a more efficient logistics system

Operational

• logistics business development capability – strategic planning, network optimization and event management • to achieve strategic and competitive advantage • owner-driver model needed to • successful implementation of be changed – unwieldy and employed-driver model inefficient • lack of logistics professionalism • professionalism and expertise to be introduced – fleet management, back office support • new processes to meet higher quality requirements • improve operational performance • poor service and quality levels • continuous improvement

• increase customer satisfaction through improved service levels, flexibility and responsiveness • implement performance measurement (KPIs) • increased fleet utilization and productivity

• limited IT capabilities • access to IT systems and • legislative pressures – digital applications – eg GPS, EDI tachographs and working-time • plans to ensure compliance directive implications with new regulations

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Reducing costs Increasing customer satisfaction Increasing speed of services Improving supply-chain management Reducing staff headcount Globalizing the supply chain Increasing efforts on core competence Lack of in-house skills 0

5

10

relevant

15

20

25

30

35

%

very important

Figure 5.6 Key drivers for outsourcing Source: Eyefortransport (2005)

appearance of ‘globalizing the supply chain’, which shows that a much broader view of logistics and supply-chain management is seen to be important, moving away from the more parochial or localized view that exists in many companies.

Case history: consumer electronics For a consumer electronics company the main reasons for outsourcing their national logistics operation were: ឣ

ឣ

Margin protection: in a market where profit margins are low, the company felt that they needed to reduce organizational costs, and distribution costs were the second-largest element after employee salaries. By outsourcing, the company hoped to: – free up the capital that was invested in the in-house operation (the operation was a relatively straightforward carton-based operation); – reduce the headcount associated with non-core activities. Improve service expertise: the in-house operation was treated as an overhead that could be called on by anyone whenever required (known as a ‘Martini service’ – anytime, anyplace, anywhere). This caused service issues and could be expensive at times. By outsourcing, the company hoped to: – have a dedicated fleet using fixed delivery days to maximize drop density (delivery reliability was an important service requirement, not speed of delivery) and reduce cost;

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– cut costs via a specialist multi-user delivery operation to remote geographic locations; – reduce storage costs via a multi-user facility; – improve service by adopting logistics IT systems used by the contractor.

Choosing between different providers In a broad context, however, it is quite illuminating to consider the critical factors that were highlighted in a survey a few years ago. This was aimed at identifying the most important or critical factors in deciding which thirdparty distribution company to use. Thus, it was a review of the key factors in choosing between different providers rather than in making the initial decision of whether or not to outsource in the first instance. There were both some expected and some unexpected results, as indicated in Figure 5.7. As might have been expected, both service and cost factors were high on the lists of the user companies that were surveyed. It is interesting to note that service factors came higher than cost factors, because, as will be described in Chapter 7 concerning the selection process, most approaches to selection tend to treat cost as the major criterion. When it comes to convincing boards of directors that a move to outsourcing should be adopted, it is the cost question that is usually considered to be the most important.

% of companies 98%

Service Quality of people

94%

Cost

90%

Countrywide capability

84% 84%

National transport capability

83%

Sector experience Dedicated service capability Size Shared-user capability

74% 45% 44% 42%

Figure 5.7 Critical factors in deciding which 3PL to use Source: P-E Consulting Triennial Survey

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Case history: confectionery A large manufacturer and distributor of confectionery products used an internal brainstorming session to identify a series of potential advantages and requirements when it was considering the opportunities for outsourcing its logistics operations. At the end of this process, each member of the brainstorming team was asked to assess the importance of each element by assigning a score between 0 and 5 (0 = not at all important, 5 = extremely important). The overall results produced a ranked order of importance for the key factors influencing the outsourcing decision and were representative across the management spectrum within the company. This was a powerful means of confirming the key advantages for outsourcing, as well as providing a basis for the main requirements to be considered in the eventual selection process. The results are shown in Table 5.3. Table 5.3 Ranked order of importance for the key factors influencing the outsourcing decision for a manufacturer and distributor of confectionery products Rank Category

Overall Score 4.83

1

Cost management (easier to control and deliver savings with outsourced logistics)

2

Delivery service (particularly OTIF)*

4.83

3

Logistics capability (internal management lacks some key logistics skills)

4.33

4

The right partner

4.00

5

Process alignment (essential to achieve this with any outsourcing partner)

3.50

6

Return on investment (opportunity to improve the ROI through reduced assets) New management skills (need for new skills to manage contractors)

3.17

8

Share price (concern that publicized poor supply-chain performance could adversely affect share price)

2.83

9

Strategy (logistics is not a key component of the business mission)

2.67

10

Ability to provide value-added services (particularly contract packing)

2.17

11

Reduction in the number of vendors (achievable if logistics in-house operation is outsourced)

2.17

12

Globalization (manufacturing globalization creates need for logistics outsourcing)

2.00

13

Increasing technology demands of customers (RFID and others)**

2.00

14

Corporate governance (importance of outsourcing functions where internal expertise is low) Outsource to get rid of a problem

1.83

7

15

* OTIF = on time in full ** RFID = radio frequency identification

3.00

1.00

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One other very interesting feature of the survey was the appearance of the ‘quality of people’ at second on the list, only just behind ‘service’. This may be rather unexpected on initial consideration, but it actually reflects a very major factor that only becomes apparent after the contract has begun operation. This is the importance of the quality of the management, including their ability to run the operation successfully on a day-to-daybasis, their flexibility, their problem-solving capability and their ability to work with the client. Note that this concerns the quality of the people who will run the operation, not the quality of those who are used by the provider to sell the proposal in the first place! Although not a key driver in the initial decision of whether or not to outsource, this aspect is very important once the contract is up and running, and should be featured strongly in the factors used for the assessment of the final choice of provider. Some of the other factors in the survey results were perhaps as expected. Although this survey was undertaken a few years ago it does raise some interesting issues concerning service, cost and the quality of people. The choice between operating in-house or outsourcing logistics thus needs to be carefully quantified and analysed. This should be undertaken with care, taking into account the key drivers identified as being crucial, and using a structured approach to assess the opportunities available. Such an approach is outlined and discussed in Chapter 7 of this book.

Summary This chapter has been concerned with identifying the key drivers for outsourcing. It began by putting the outsourcing decision and the reasons or drivers for outsourcing into the context of the company business and logistics environment. This was undertaken by a consideration of: ឣ ឣ ឣ

alternative channels of distribution; channel objectives; different channel characteristics.

Some general business drivers for outsourcing were reviewed, concentrating particularly on the example of the IT function. It was shown that there are some similar reasons for IT outsourcing compared to logistics and also some reasons that are surprisingly different. A number of external drivers for outsourcing were considered, namely: ឣ ឣ ឣ ឣ

globalization; supply-chain complexity; emerging markets; e-commerce.

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For some companies, any of these aspects might be influential in providing an important reason for outsourcing all or part of their logistics operations. The importance of a company’s competitive advantage was also discussed, particularly the need to understand the balance between trying to achieve a cost or a service advantage. This has a major impact on determining outsourcing objectives and requirements, and in identifying the preferred type of outsourcing relationship. The major logistics drivers for outsourcing were described, together with a consideration of some of the drawbacks. Finally, there was a review of the factors seen to be most critical for the outsourcing decision. Several company case histories were included to demonstrate the relative importance of the different drivers under different individual company circumstances.

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Current issues and influences Introduction Logistics is a good example of a business function under constant review and experiencing constant change. In recent years there have been very significant developments in the structure, organization and operation of logistics, notably in the interpretation of logistics within the broader supply chain. Major changes, some of which have also been discussed in Chapter 1, have included the increase in customer service expectations, the concept of compressing time within the supply chain, the globalization of industry – in terms of both global brands and global markets – and the integration of organizational structures. Many of these factors play a part in the determination of the key drivers of logistics outsourcing, as described in Chapter 5. In addition, there are a number of other influencing pressures that are now impacting on companies’ logistics systems. These are both external to logistics, such as deregulation, and internal, deriving from changes within logistics, such as improved handling or information technology. Pressure for change and development is also a major feature of logistics outsourcing. Some of this pressure for change comes from external influences and developments, but it has also arisen from the experience that users and providers have of existing arrangements and past relationships. This chapter considers the major current issues and influences on the development of logistics outsourcing. The chapter is divided into two sections. The first of these concerns external issues and influences on logistics and logistics outsourcing. These include:

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the external environment; manufacturing and supply; technology; retailing; the consumer.

The second section considers some of the main internal outsourcing issues that are currently important. Results from a couple of surveys are used to help highlight these issues, and then the major ones are reviewed and discussed. While the many elements introduced in this chapter are all, to a greater or lesser extent, important influences on logistics outsourcing, it should be remembered that the traditional key drivers for logistics, reviewed in Chapter 5, have always been cost versus customer service. This has not changed, as a recent survey confirms: see Figure 6.1.

External issues influencing logistics outsourcing The external environment Deregulation One key issue that has become increasingly important in recent years has been the development of a number of different economic unions (the European

cost Driver

service speed IT integration globalization other

0

20

40

60

Percentage of responses

Figure 6.1 The major forces driving logistics Source: Herbert W Davis & Co (2005)

80

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Union, ASEAN, NAFTA and others), as discussed in Chapter 2. Although the reason for the formation of these unions may be political, experience has shown that there have been significant economic changes, most of them beneficial to the areas concerned. One of the major consequences is deregulation within these internal markets, and this has a particular impact on companies’ logistics strategies. Within the European Union, for example, there have been significant advances in, amongst others: ឣ ឣ ឣ ឣ ឣ

transport deregulation; the harmonization of legislation across different countries; the reduction of tariff barriers; the elimination of cross-border customs requirements; tax harmonization.

Within logistics, this has led many companies to reassess their entire logistics strategy and move away from a national approach to embrace a new cross-border/international structure. As a result, there are many examples of companies that have significantly reduced distribution centre (DC) numbers and associated inventory and storage costs while maintaining or improving customer service. One major means for companies to implement this has been to outsource their logistics operations, rather than go through a difficult internal change in a business area that is not core and that is particularly complicated on a regional or global basis. However, there are some misgivings over the ability of many service providers to achieve successful continent-wide or global operations, because apart perhaps from the express parcels companies, few can demonstrate a real global coverage with their operations.

Environmental issues Another factor that has had a particular impact throughout the world is the rise in importance of ‘green’ or environmental issues. This has occurred through an increasing public awareness of the environment, but also as a result of the activity of pressure groups. The consequences for logistics are important. They include: ឣ

ឣ ឣ ឣ ឣ ឣ

the banning of road freight movements at certain times and days of the week; the attempted promotion of rail over road transport; the recycling of packaging; the ‘greening’ of products; the outsourcing of reverse-logistics flows; the design of products to facilitate repair, reuse, recycling and the minimizing of packaging.

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Several of these issues have had, and will continue to have, an impact on logistics outsourcing, particularly with respect to the development of new opportunities. Perhaps the most influential is reverse logistics, which can cover many different aspects. These include the return of recyclable packaging, the need to dispose of non-recycled packaging and the return of products for repair, reuse and recycling. These types of service were discussed in Chapter 3. It was noted that it is often very difficult to organize reverse logistics on outward-bound delivery vehicles because of the adverse effect on set delivery times to customers. Thus, many companies now consider the use of third parties to undertake these reverse movements, and some service providers have set up specialist operations for this. For many larger companies this has become more than an occasional requirement, and full-scale dedicated reverse-logistics operations are commonly provided by third-party operators. For most cities throughout the world, one very visible external impact is road congestion. The fact of severe traffic congestion may well have a very negative effect on some of the new concepts in logistics, and in particular the idea of just-in-time (JIT) and quick-response systems. Allied to this is the problem that most forecasts are for a significant increase in vehicle numbers at a time when, in most countries, there are very limited road-building programmes. Many Western countries try to reduce congestion through a combination of road tolls, truck bans, access restrictions, time restrictions and usage tax, all of which have an impact on logistics costs and performance. There is no generally accepted solution. Companies try to alleviate the problem through strategies such as out-of-hours deliveries, stockless depots and the relocation of DCs closer to delivery points. For third-party service providers, this does create an opportunity to offer some new services, such as satellite and stockless depot operations that are located close to large urban delivery areas. This close location enables a quick response to be given to shop stock replenishment requirements. One interesting development that has arisen partly as a result of the congestion issue is the use of sequencing centres by the automobile manufacturers to support line-side production. These were mentioned in Chapter 3. Examples are the sequencing centres that have been set up by TNT, Hays (since renamed ACR and acquired by Kühne + Nagel) and Ryder for Rover, General Motors and Nissan respectively. Line-ready production modules are supplied direct to the production line so that the relevant components can be introduced into the manufacturing process at exactly the appropriate time. The centres are often located on the manufacturer’s production site so that they can provide a guaranteed service of between 15 minutes and two hours, depending on the position on the production line to which delivery must be made. Their close location enables them to guarantee timely deliveries that are not adversely affected by road congestion. Some of these

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centres may also involve cross-docking, as this enables more streamlined operations to take place.

Labour and staff availability Recent rapid changes and developments in logistics thinking and logistics information technology have also contributed to another issue that has a significant impact on logistics. This is the problem of the restricted availability of suitable management and labour. The needs for a strategic view of logistics and for an appropriate understanding of the integrated nature of logistics are both important for managers who are operating in today’s supply-chain oriented networks. Many managers do not have the relevant experience or knowledge that provides this viewpoint because they have, for many years, worked in national rather than international supply chains, and also because their focus has generally been in an operational rather than a planning context. This applies to managers from both in-house and thirdparty operations. Add to this the rapid changes in technology, and it is understandable why there is such a shortage of managers with a suitably broad knowledge and experience. This problem is also reflected in the quality of labour available to work in the many different logistics and distribution functions. In particular, developments in the tools and technology of operational logistics have meant that the skill requirements have changed and that the necessary skill levels are much higher for some logistics jobs. There are also labour shortages in some geographic areas and for some specific logistics jobs, such as transport drivers.

Supply-chain vulnerability In the past few years there have been a number of unpredictable and unexpected events such as natural disasters, terrorist attacks, corporate failures and industrial disputes that have resulted in, among other things, serious disruptions to supply-chain and logistics activities. These events have highlighted the vulnerability of many supply chains and have shown that there is a risk to many supply-chain and logistics operations that may not have been adequately addressed. Many of these events are not directly related to the supply-chain operations that are affected. For example, in the United Kingdom, a rise in the price of fuel led to the blockading of fuel depots by the drivers of commercial vehicles who were concerned about their livelihood. This created a shortage of diesel for delivery transport which in turn produced a general shortage of food because the food could not be delivered to shops and supermarkets. Vulnerability has become more of an

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issue as the complexity of supply chains has increased dramatically in recent years. Thus, appropriate risk assessment techniques and contingency plans have been developed to enable supply chains to be more resilient. Thirdparty logistics organizations (3PLs) therefore need to be aware of any potential vulnerability likely to be associated with their clients’ operations and to ensure that they have appropriately addressed any potential risks. Some users will undertake risk assessment exercises before they take on a new contractor, to ensure that any areas of potential vulnerability are covered by appropriate contingency plans. In Chapter 7 there is an example of a risk assessment methodology commonly used for outsourcing. There have also been examples of companies moving to a single source for the supply of a key component, only to find that the supplier becomes insolvent and cannot supply the component and that production at the client company’s plants is disrupted or halted. For similar reasons, there is some concern amongst users of 3PLs over outsourcing their logistics operations to a single provider. Any severe problem to a 3PL could cause the shutdown of the complete logistics operation, which would be potentially disastrous for the user company. Thus, some very large users prefer to split the outsourcing of their operations between two or more different providers.

Manufacturing and supply There have been many important developments in supply or inbound logistics, and in manufacturing planning. These have resulted from both technological and organizational changes. Within the context of raw material sourcing and production these include: ឣ

ឣ

ឣ

ឣ

ឣ

ឣ

New manufacturing technology (CIM, etc): this can accommodate more complex production requirements and more product variations. New supplier relationships: with the emphasis on single sourcing and lean supply enable suppliers and buyers to work more closely together. Focused factories: these concentrate on fewer sources but necessitate longer transport journeys. Global sourcing: this emphasizes the move away from local or national sourcing. Postponement: the final configuration of a product may be delayed to enable reduced stock-holding of finished goods in the supply chain. Co-makership: the development of partnerships between supplier and buyer can help take costs out of the supply chain through quality and information improvements. This represents a positive move away from the more traditional adversarial relationship that has been common between buyers and suppliers.

Current issues and influences ឣ

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241

Co-location: this entails the joint physical location of supplier operations on or next to customer production sites.

These developments have implications for both in-house and outsourced logistics operations. In particular, such changes have increased the scope for 3PLs to extend the breadth and depth of their offerings. For example, the introduction of postponement in supply chains has enabled 3PLs to introduce specialist niche services that cater specifically for post-production assembly and distribution in most major markets.

Product range and characteristics Associated with many of these developments has been the impact of changes in product range and characteristics. Typical examples include the shortening of product life cycles (personal computers have about a sixmonth life cycle, and mobile phones become outdated in even shorter periods), the extended product range that is expected by customers and provided by suppliers, and the increase in demand for time-sensitive products – especially fresh and prepared foods. These developments are all likely to pose added logistics problems with respect to the impact on stock levels and in particular the speed of delivery required. Once again, there is potentially a twofold impact for 3PLs. The first is the opportunity for additional value-added business. This has, for example, been a factor in the grocery industry with such developments as composite depots, compartmentalized vehicles, reverse logistics and preretailing operations, amongst others. The second issue for 3PLs is to ensure that existing outsourced logistics operations that they run are suitably streamlined to take account of these important changes to product range and characteristics.

Lean manufacturing and the agile supply chain The results of a worldwide benchmarking programme in the automotive industry were published in The Machine that Changed the World (Womack, Ross and Jones, 1990). It identified huge opportunities for closing the gap between the best in the world and other manufacturers. The approach that was developed became known as lean manufacturing, and is based on the Toyota system of production management. The five principles of lean thinking concentrate on the elimination of waste, and are as follows: ឣ

Specify what does and does not create value from the customers’ perspective and not from the perspective of individual firms, functions and departments.

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Identify all the steps necessary to design, order and produce the product across the whole value stream so as to highlight any non-value-adding waste. Enable those actions that create value to flow without interruption, detours, back-flows, waiting or scrap. Only make what is ‘pulled’ by the customer order, just in time. Strive for perfection by continually removing successive layers of waste as they are uncovered.

Lean thinking owes a lot to the philosophy of just-in-time and is an extension of this type of approach. A development of lean thinking is the concept of the agile supply chain, taking the idea from its manufacturing base to include the whole supply chain. The emphasis is on the need for companies to work together across the supply chain in order to fulfil customers’ requirements, and to be flexible in the way that they are organized for production and distribution. This will allow them to be responsive to any changes in customer requirements. The concept is one that recognizes the key importance of the final customer, and strives to set up a system and structure that can service customer requirements in the most effective way. Agility is, therefore, about the development of a strategic structure and operation that allows for a rapid response to unpredictable changes in customer demand. Two dictionary definitions serve to emphasize the difference between lean thinking and the agile supply chain: Lean: having no surplus flesh or bulk. Agile: quick in movement, nimble.

Some of the reasons for the need for agility in the supply chain are: ឣ ឣ

ឣ

ឣ

the dramatic shortening of product life cycles, as already described; the rapid increase in the variety of final products in terms of colour and style refinements; the build-up of stock, which can quickly become obsolete in traditional supply chains when demand requirements change so rapidly; developments in direct selling and buying – notably via internet shopping – that mean that customer expectations of acquiring the most up-to-date products have become even greater.

The agile approach to supply-chain management aims to create a responsive structure and process to service customer demand in a changing marketplace. Key characteristics of an agile approach are: ឣ ឣ

Inventory is held at as few levels as possible. Finished goods are sometimes delivered direct from factory to customer.

Current issues and influences ឣ

ឣ ឣ

ឣ ឣ ឣ

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Replenishment at the different levels in the supply chain is driven by actual sales data collected at the customer interface. Production is planned across functional boundaries. Supply-chain systems are highly integrated, giving clear visibility of inventory at all levels. Minimum lead times are developed and used. The principles of the postponement of production are practised. The majority of stock is held as work in progress awaiting final configuration, which will be based on actual customer requirements.

For 3PLs, this means, in particular, that they need to be aware of the changing demands and requirements of an agile operation. This will apply if they intend to set up and run agile multi-user operations as well as if they have dedicated clients that wish to move to a more agile approach in their supply chains. Third-party suppliers are unlikely to be responsible for a complete supply chain (although those proposing the move to fourth-party logistics would hope otherwise, as discussed in Chapter 9), but their part of a company’s operation may well be a crucial element of any supply chain that is redesigned to be agile. For a depot operation, for example, this would involve the design of a physical and information system with a greater level of flexibility. This might include a modular building design, to simplify any need for periodic expansion; very versatile equipment that can be adapted to many different uses; more flexible working hours to cater for sudden peaks; and reengineered processes and systems to cope with unplanned eventualities. Such changes would be required to accommodate any unexpected growth or sudden surges in demand volumes and to allow for the picking, packing and despatch of any rush orders. Special facilities might also be required to cater for any special requests, such as item picking for some high-value stock-keeping units (SKUs) and for the packing of items into special retail presentation packs for certain customers.

Factory-gate pricing Factory-gate pricing (FGP) is another initiative which is intended to reduce logistics costs: in this case, the cost of suppliers’ inbound transport that is incurred while delivering to customers’ manufacturing sites or distribution centres. Traditionally, many products, particularly industrial components and raw materials, have been delivered direct to customers using the suppliers’ own transport or a third party contracted to the supplier. This approach disguises the real transport cost to the buyer because it is included within the cost of the product. Now, some buyers are purchasing products ‘at the factory gate’ (or ‘ex works’ in import/export Incoterm terminology),

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which excludes any transport cost and makes the price of the product transparent. The buyer can then decide whether to ask the supplier to deliver, with the transport cost indicated separately, or to collect the product using its own resources, or third-party resources that it controls. FGP provides an opportunity for companies to reduce transport costs by improving the utilization of their own, or their outsourced, transport operations because collections can be made using returning empty delivery vehicles. This alternative approach also gives the buyer much more control over when goods are received and how much is received. This can help it to avoid stock-outs of essential products, and also to ensure that it does not become unnecessarily overstocked with any products. Many companies that have adopted a broad FGP policy have done so by using a 3PL to undertake all the collections of the products that they buy. Many of these contracts also include a number of value-added services, such as stock control, delivery scheduling and progress chasing, which gives the 3PL greater opportunities to undertake some of the more profitable logistics functions.

Logistics technology Most logistics-related issues and considerations that have an impact on outsourcing were introduced and discussed in Chapter 5, when the main drivers of outsourcing were outlined. There are, however, a few very important issues concerning logistics technology that are considered in this section. The main ones are the development of freight exchanges and the use of radio frequency identification (RFID) tagging.

Freight exchanges One interesting innovation in logistics is the development of freight exchanges, which are online transaction systems for shippers and carriers that enable online freight purchasing. Basically, they are internet-based trading mechanisms that facilitate the matching of shipper demand with carrier availability. They range in complexity from simple electronic bulletin boards (these allow shippers and carriers to post their needs, manually compare the two lists and then contact each other) to sophisticated algorithms (these identify suitable matches through the filtering and comparison of rates, carrier performance, service offering and equipment types). Almost all of the sites use some form of bidding process. This is likely to be a ‘reverse auction’, where a carrier makes a bid to provide the transport for a particular freight movement and this bid stands until, and unless, another carrier comes in with a better (that is, a lower) offer. There is a time

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deadline after which no more bids will be accepted. The reverse auction process tends to be liveliest shortly before the time deadline is reached. Figure 6.2 provides a summary of some of the major differences between freight exchanges. It indicates the various mechanisms that are used for establishing rates (bulletin boards, auctions, aggregation and so on), the different modes considered, the different types of owner and the matching processes. Many such exchanges have been born and have expired in just a few years. Initially, it was thought that these exchanges might take the place of the contract arrangements made between many shippers and carriers, but it is apparent that most contracts need to be negotiated face to face, and that isolated internet contact on its own is insufficient. Thus, freight exchanges are far more appropriate for the occasional ‘spot’ hiring of vehicles on a noncontract basis. There is possibly some scope for the use of freight exchanges in the early stages of the outsourcing selection process, specifically when putting together a request for information (RFI) (see Chapter 7) in order to develop a shortlist of suitable 3PLs to take to the final tendering stage. Also, where a company prefers some form of consultancy support to undertake the selection process, some freight exchanges can offer useful advice and

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Figure 6.2 The different characteristics that distinguish freight exchanges from each other

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suitable processes to help accomplish this successfully. It must also be remembered, of course, that freight exchanges work with a limited number of transport contractors (those that have signed up to the site), so this will pose an immediate restriction on the number of contractors that have the opportunity to be considered for the shortlist. Thus, freight exchanges are ideal for organizing ‘spot’ or occasional transport requirements but not for complicated long-term service contracts. An up-to-date list of exchanges can be found by interrogating search engines, such as Google, using ‘freight exchanges’ as the key words. Some sites provide very useful demonstrations of how they can be used.

Radio frequency identification (RFID) Another very important development is the use of radio frequency identification tagging (RFID). This technology enables automatic identification through the use of radio frequency tags, data readers and integrating software. A tag has a microchip and an antenna that can store and transmit data, and it can be fixed to individual products or unit loads. Tags can be active (send a signal) or passive (respond to a signal). The reader retrieves the data and sends it to the software, which can then interface with other logistics information systems. The potential of RFID is now much greater because of a number of factors: ឣ ឣ ឣ

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Prices of both tags and readers have fallen dramatically. A number of leading grocery retailers have started to introduce tagging. The performance of the tags has improved substantially in terms of better and faster data transmission. There is a greater requirement for tags, especially for the tracing of products for consumer protection and brand integrity.

RFID tagging is still more expensive than bar-coding, but the differential is fast reducing and the opportunities for RFID tagging are much greater. A tag can hold substantial amounts of data, has read and write capabilities, does not require line of sight reading but can be read via proximity, is fully automated and virtually error free, is more durable and can operate in harsh environments. The feasible advantages from their use are numerous and help to indicate the vast potential for the technology in logistics. Some examples are: ឣ ឣ

tracking raw materials and work-in-progress through manufacturing; tracking finished goods and unit loads in DCs: this could reduce labour time and costs through automated check-in, order shipment verification and stock checking;

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tracking finished goods and unit loads to shops or customers: this should enhance service provision through more accurate and timely information on order status; tracking reusable assets such as pallets and roll cages: this should provide significant increases in asset utilization by reducing asset cycle time and enabling better asset management.

There a clear potential for the use of RFID in logistics, and as such, there are some important implications for third-party service providers. These opportunities are discussed in detail in Chapter 9, where the future of outsourcing is reviewed.

Improving asset utilization Within the aegis of logistics, one distinctive feature of recent years has been a concentration on improving asset utilization. As discussed in previous chapters, this has been demonstrated in many ways: in grocery distribution with the building of composite distribution centres and the use of compartmentalized vehicles; the identification of return loads for delivery vehicles; and the development of shared-user contract distribution. One grocery multiple retailer in the United Kingdom has integrated its entire transport operation so that all transport is centrally planned. This includes supplier deliveries and collections, primary movements between and to DCs, final delivery and packaging returns. The system uses linked technology: routing and scheduling software, GPS, incab communication and so on. Although this is a complicated and timeconsuming operation to plan and implement, the company has seen major improvements in the utilization of tractors, trailers and drivers, as well as a reduced impact from the problem areas of increased congestion, working time legislation and driver shortages. This move to improve asset utilization is very relevant to the concept of outsourcing and is proving to be a significant area of opportunity for 3PLs in their search for additional contracts and additional clients.

Retailing There have been several trends in the retail sector that have had and will continue to have an impact on developments in logistics and the supply chain. Many of these logistics-related changes have emanated from the grocery multiple retail sector, which continues to play a major role in introducing innovative ideas. These changes have all had an influence on logistics strategies and operations.

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Inventory reduction One of the changes with the most far-reaching implications has been inventory reduction within the retail supply chain, which has evolved from a combination of different policies. These policies include: ឣ

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The maximization of retail selling space: an important retailing policy has been the move to maximize selling space in stores in order to increase sales opportunities. This has usually been achieved at the expense of shop stockrooms, leaving nowhere for stock to be held in a shop except on the shop floor. This can have significant implications for the fast and effective replenishment of store inventory. The reduction in DC stock-holding: this has been undertaken in order to promote cost-saving through reduced inventory levels in the supply chain. A direct consequence has been to put additional pressure on the accuracy and speed of inventory replenishment systems. The reduction in the number of stock-holding DCs: many companies have reduced the number of stock-holding depots in their logistics structure as a result of cost-saving exercises that involve depot rationalization and a move to stockless depots. JIT philosophies and concepts: some manufacturing concepts such as justin-time have been applied to the retail sector. This has been achieved through the use of a number of developments in information technology, particularly electronic point of sale (EPOS) systems, which provide a much more accurate and timely indication of stock replenishment requirements at shop level. Vendor-managed inventory policies: in the United States and elsewhere, a number of companies have adopted vendor-managed inventory policies whereby the supplier rather than the retailer is responsible for shop stock replenishment. Finally, many retail operations have also adopted policies to streamline the activities within the retail environment through the movement of activities back into the DC (labelling, unpacking and so on).

The consequences of these many developments are that stocks and buffers in retail stores have been reduced or eliminated in favour of the continuous flow of products into the stores. This necessitates more responsive delivery systems, more accurate information and more timely information. Thus logistics operations must perform with greater efficiency but with fewer safeguards. This has opened up real opportunities for 3PLs to specialize in shop stock replenishment through the development and use of new information systems to improve functions such as inventory management, inventory replenishment and vehicle scheduling. Such an area of expertise

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links well with the current and established outsourcing staples of warehousing and delivery transport.

On-shelf availability The out-of-stock problems created by inventory reduction at retail outlets has highlighted a number of other related issues. These are classified under the title of ‘on-shelf availability’ or ‘the last 50 metres’. In its simplest definition, this refers to the ability to provide the desired product in a saleable condition when and where the customer wants it. This definition describes the effect of the problem, but in fact there are many interrelated causes throughout the supply chain that can create it. Product availability tends to reduce as the product moves through the supply chain. Institute of Grocery Distribution (IGD) research (2005) indicates that manufacturers achieve about 98 per cent availability, which reduces to 95 per cent in retailers’ DCs and to about 90 per cent by the time the product reaches the shelves in the shop. Poor in-store execution can create shortages, because of the lack of replenishment staff in shops, insufficient shelf space or ineffective stock management at the shop. It is estimated that loss of sales can be quite significant because, although some shoppers will delay purchase or purchase a substitute, most are likely to buy the product from another store. Seven areas for improvement in supply have been identified, the two most important being measurement and management attention. The others are improving replenishment systems, merchandising, inventory accuracy, promotional management and ordering systems. These are areas which require collaboration from the different players in the supply chain and so provide further opportunities for 3PLs.

The consumer Home shopping Linked directly with retailing operations is the gradual move to non-store shopping or home shopping. This phenomenon has been relatively common in the United States and Europe for several years through the use of direct selling and mail-order catalogues. Home shopping has now achieved ‘breakthrough’ levels in the grocery sector among others, and made significant inroads into more conventional retail shopping. The means for such a change have been through the development of home computers, automatic banking and, of course, the internet, including the widespread availability of broadband.

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This major move to non-store or home shopping has for many years always been ‘just around the corner ’. With significant advances in the spread of home computers and free use of the internet, it is now reasonable to say that its time has arrived. The major consequence for logistics and for logistics outsourcing is the parallel increase in home delivery, or e-fulfilment as it is sometimes called. In some sectors (such as white goods, brown goods), home delivery has been common practice for several years, but the advent of home shopping has substantially increased the demand for the home delivery of many other types of goods. The rapid growth in online selling companies such as Amazon means that home shopping is now very common, with all the implications for logistics that e-fulfilment will bring. There are clearly significant opportunities for third-party contractors and a growing number have begun to specialize in home delivery.

Home delivery It is relevant to differentiate between home shopping and home delivery. Home shopping refers to the different ways of shopping for and ordering products from home. Home delivery refers to the physical delivery of the product to the home. The growth of home delivery has led to the need for some fundamental changes in logistics operations that wish to serve the home market. The very nature of the final delivery operation to the home can be dramatically different from a standard delivery operation, and home-delivery requirements are likely to affect other elements in the supply chain. Typical implications are: ឣ

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Shops become showrooms where stock replenishment is no longer an issue. There is a major increase in direct home deliveries, where restricted delivery time windows, often during the evening, have an impact on delivery vehicle utilization. New distribution systems emerge (small deliveries on small vehicles into residential areas, community depots and so on). Existing delivery systems may have new opportunities (postal service, doorstep milk delivery). Customer ordering systems may become linked directly to manufacturers’ reordering systems; There is a high rate of returns; outside the grocery sector, this can vary between 30 and 50 per cent.

Those companies involved in grocery home delivery, for example, have had to develop specialist small vehicles that allow them to deliver different types of grocery products: ambient, fresh, chilled and frozen. A number of

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logistics solutions are still used for the storage and picking elements. The option of building specialist home-delivery depots has generally not been successful. Most operations either stock and pick within designated areas of existing DCs or pick from the large retail hypermarkets. Internet orders tend to be small, with few order lines and few items per line; they are generally for individual items rather than whole cases. Thus the picking workload is much greater for a given throughput of goods, compared to a standard operation. Picking solutions vary. For lowthroughput operations, picking is likely to be undertaken using multiple order picking on compartmentalized picking trolleys. Thus, up to 20 orders may be picked at the one time by the picker. In high-throughput operations, zone picking can be used whereby a tote bin representing a single order is transferred via a conveyor to the different picking zones until the order is completed. In some instances, batch picking may be used via a conveyor to an automated high-speed sorting system that sorts the final orders. Other types of technology may also be used, such as pick-to-light and dynamic pick faces for slow-moving lines. Some problems have already been identified, such as the number of picking errors that can occur in this type of single item picking operation, damage to the product and the less-than-perfect quality of some fresh food items. As companies become more familiar with and practised in these operations, these problems are reducing. As well as delivery to the householder by means of conventional systems, another solution that has been considered is the provision of secure boxes outside or attached to the domestic property. As the average grocery delivery is likely to contain some chilled and some frozen goods, this approach may pose problems for the grocery sector. It is an option, however, that will circumvent the issue of restricted delivery times and so will be attractive for many types of home delivery. Alternative points of delivery such as the place of work or the petrol station have also been tried with varying degrees of success. Picked and packed goods are delivered to these premises to await customer collection. An interesting implication for home delivery is that delivery drivers may require a different skill set to undertake their work. They will, for example, need to have very good interpersonal skills, as they are dealing face to face with customers in their homes. If the goods being delivered require installation, then the drivers will need appropriate training. This will have implications for recruitment and training. There are significant opportunities for 3PLs to move into e-fulfilment and home delivery, and several have taken up the opportunity. The different reasons for outsourcing e-fulfilment were outlined in Chapter 5 in the section on e-commerce and e-fulfilment. For some of the new early entries, involvement has been problematic due to the steep learning curve required

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to set up and run these new operations, and because of the initially slow development in the demand for home delivery. For some established service providers, such as the parcels operators, it has been a more fruitful market because they have started from a position of strength due to the existing business that they have. In summary, the increasing home-delivery expectations of customers and the competition in the marketplace has led to pressure on 3PLs to provide more effective and efficient e-fulfilment service offerings. These consist of existing challenges that have become even more important as well as new challenges that are specific to e-fulfilment. More important existing challenges include: ឣ

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reliable delivery that hits limited delivery windows for every order that is placed; reduced time available to react to order fulfilment; vastly increased order reliability and order picking accuracy.

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a variety of delivery options to consumers; the development of effective picking operations for few or single item orders; detailed delivery window/time availabilities for consumers.

Thus, 3PLs moving into the growing area of e-fulfilment are entering an area of service provision that requires an improvement to existing operations as well as the development of new types of value-added services.

Internal outsourcing issues In this section of the chapter, the main internal issues concerning outsourcing are reviewed and discussed. Initially, the results of a survey are used to help highlight what are seen to be the chief areas for concern from the users’ point of view. The 3PL viewpoint is considered near the end of the chapter. In between, a number of the key points are discussed.

Major outsourcing concerns: a user perspective In recent years there has been concern expressed by the users of third-party service providers that they are not being given the expected levels of service and business benefits. There is disappointment that agreed service levels are not maintained, that costs are higher than estimated with no evidence of clear year-on-year cost reduction, and that the quality, commitment and ability of the people used to manage their operations are insufficient. These

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and other concerns have been expressed in a number of published surveys. One such survey that was published recently (Eyefortransport, 2006a) assessed the most likely factors that could cause an outsourcing strategy to fail. The results are indicated in Figure 6.3. The survey produced some interesting results, and echoes the output from many similar surveys undertaken in the past. The biggest problem was seen to be the inefficient management provided by the team put in to run a contract (mentioned by 50 per cent of the respondents). This is an issue that many users recognize, but find very difficult to eliminate. It is a familiar claim that 3PLs produce dynamic and effective negotiating teams when it comes to tendering a proposal and winning a contract, but that these people are never the ones that will run the operation on a day-to-day basis. It is not an easy problem to solve. Members of a negotiating or selling team are probably not interested in subsequently running the operation. It is not their forte – and they are probably paid more than an operational manager might expect! It can only be recommended that in the final negotiating phase of a contract the proposed managers are introduced to the new user and are assessed by them for their acceptability to run the operation. This should always be a specific part of the selection process, and is included in the recommended approach that is found in Chapter 7. There can, of course, be no guarantee that the chosen managers will continue to run the operation for any specific length of time. The third most important factor to come out of the survey is a culture clash between the user and the selected contractor (32 per cent). This may well be tied in with the previous problem concerning inefficient management, since the one often leads to the other. Nevertheless, the issue of clashing company cultures has been recognized for several years, and it is an issue that should also be addressed in the outsourcing assessment procedure (again see Chapter 7).

Inefficient management Hidden costs Clashing company cultures Latent information asymmetry Performance monitoring and evaluation Loss of logistics innovative capacity Loss of control over the 3PL Dependence on the 3PL Others 0

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Figure 6.3 The most likely factors that could make an outsourcing strategy fail Source: Eyefortransport (2006a)

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The second most important issue is hidden costs (39 per cent). This may occur for several reasons. It may be that the service provider has failed to cost the operation adequately and, on finding elements of additional cost, feels that the user should cover them. It may, of course, be the fault of the user as a result of failing to describe or include some of the unusual features of an operation in a tender. It may also be the result of the continually changing environment in which logistics must work. It is rarely, if ever, possible to forecast the way demand volumes or service requirements will develop over time. The growth of just-in-time logistics is a good example of this. Thus, the expectation on both sides must be that unplanned or hidden costs will arise. Within reason, both partners need to recognize this and to include some type of contingency arrangement in the contract that enables any issues to be addressed sensibly. The next two most important factors both relate in some way to problems with information. These are ‘latent information asymmetry’ (30 per cent), which alludes to the differences that occur between the user and provider companies’ information systems, and ‘problems in evaluating and monitoring 3PL performance’ (27 per cent). This latter point is often caused by the rigidity of a 3PL’s information system as far as performance monitoring is concerned. Many systems are set up to provide certain performance reports (which may not be exactly what the user requires) but are not capable of offering even simple revisions of report output. This again is an area that needs to be investigated at the time of the selection process.

Building closer partnerships As a solution to some of these issues that have affected the relationship between users and their third-party service providers, there has been a move to promote more of a partnership approach. One of the aims is to create a more positive and cooperative alliance between the user and the contractor, and to eliminate the combative culture that has evolved in some relationships. Historically, many relationships have been very much contract-driven, with both user and third party at times squabbling over the small print of a contract to the detriment of the overall operation and of the business relationship itself. The ideal is for a constructive alliance where both parties work together to identify ways of improving service and reducing costs. The Eyefortransport.com survey attempted to identify the most popular methods by which users could, or had tried to, enhance their outsourcing relationships. The major means that were quoted very much reflect the move to more of a partnership approach, as Figure 6.4 shows. The two main methods were to enhance communication at all levels and to establish well-defined requirements and procedures.

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Enhancing communications at all levels Establishing well-defined requirements and procedures Enhancing the resource dedication and reducing uncertainty Others 0

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Figure 6.4 How could you or have you enhanced your logistics partnerships? Source: Eyefortransport (2006a)

It would seem that building closer partnerships is the key to making outsourcing work. As already indicated, the traditional method adopted by some users is a slavish contract-oriented approach, to the exclusion of all else. This is likely to lead to problems that are difficult to solve, and eventually result in the breakdown of any reasonable working relationship. Such a combative arrangement is probably unrealistic for many large and complicated operations if a real and positive working relationship is the goal. These days the world changes at such a fast rate that it is very optimistic to think that a realistic contract can be put in place without suitable clauses that accept that such changes do happen. Ultimately, perhaps, the aim must be to identify and to drive towards a relationship that will be beneficial to all. This is not to say that a sound contract is not essential; it is merely recognizing the difficulty of precisely second-guessing every possible eventuality. Relationships between customer and 3PL are explored in more detail in Chapter 8.

The need for flexibility Very much related to the previous section concerning the importance of building closer partnerships is the need for flexibility, as this is crucial if better working relationships are desired. As already indicated, it is important to appreciate the fluid nature of business and the speed at which change can occur. This includes changes in the business cycle, changes in company personnel and changes in companies, as mergers and acquisitions take place. Both users and 3PLs need to be aware of any developments that might be affecting the performance of the contractual agreement, and to recognize and implement any alterations that are necessary to keep the outsourced operation working satisfactorily. In a recent article that considered the business imperatives of outsourcing (Tompkins, 2006), it was

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noted that outsourcing relationships needed to be flexible and to react proactively to change. This should include: ឣ ឣ

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a willingness to change direction when and where necessary; an acceptance that changes need to be incorporated within existing arrangements; a recognition that customer demands do change over time and that any working agreements need to adjusted accordingly; positive support in implementing any process developments.

It is important that any changes are measured and documented, and that any impacts on operating cost and performance are monitored. This accentuates the need for an appropriate cost and performance monitoring system that not only measures against budget and against contractual cost and performance agreements, but also provides an indicator of change and the implications of change. In Chapter 8, there is a further discussion on the metrics required for the monitoring and control of outsourced logistics operations. This need for flexibility is particularly acute when a new venture is tried. A good example is the outsourcing of home-delivery operations. Although there is useful history in some of the more traditional home-delivery operations such as mail order, for many new internet-based home-delivery operations it is difficult to pre-guess the details of their likely final requirements and costs. This was clearly shown in the initial stages of grocery home delivery, as the case history demonstrates. Most of the cost problems were a result of unexpected issues, whilst others problems included driver quality and availability, poor information and transport planning issues.

UK grocery home delivery, city/urban area, 2003 Initial problems and issues: ឣ

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customer complaints averaging 20 per cent per day (mainly order accuracy errors); redelivery costs approx £130 per day (of which transport = £20 to £30); mobile phone costs approx £1,000 per year per vehicle; parking tickets approx £20 per week per vehicle; damage costs approx £100 per week per vehicle (18 per cent VOR on average) (includes ‘image’ damage such as bad scratches); driver shortages; poor-quality drivers;

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driver security in some areas; system information problems (manual information system): – re-keying; – errors; – poor volume information. poor delivery location information (leading to delays in delivery, unnecessary mileage and so on); irregular routes (resulting in delays in delivery, unnecessary mileage and so on); driver breaks and rest issues (difficult to take account of these in the route planning); poor vehicle utilization (small fleets as there were only store-based vans).

Incentivized contracts One means of creating more constructive partnerships has been the use of incentivized contracts. Here, the contract is drawn up with clearly defined opportunities for the service provider to identify and introduce methods of service improvement or cost reduction. The key is that the service provider is rewarded for identifying these improvements. In more traditional contracts that are not incentive based, it is not in the interest of the service provider to introduce cost savings because the cost plus a management fee payment structure means that this would have the effect of reducing the income that the contractor receives. Thus, it has become more common to use an open-book contract that includes cost reduction or performance-related incentive clauses. These should provide a shared benefit, and the contractor is tasked with identifying areas for improvement. In the open-book contract the client company pays for the entire operation plus a management fee to the contractor, but benefits are accrued by both parties based on the incentive for the provider to identify and implement cost savings or operational improvements. This type of arrangement is usually used for completely dedicated operations. Performance is monitored against a budget that is agreed between the contractor and the client.

The need for true pan-European and global third-party providers One issue that is commonly quoted by large international companies is the lack of true pan-European and global third-party companies. Currently, all but the largest of the third-party providers can only offer a partial service

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across regional boundaries, having to subcontract or establish cooperative arrangements with other contractors. However, as previously indicated, most of the large express parcels companies can demonstrate a real global coverage with their operations. As manufacturers and retailers have moved towards global businesses, they have developed an expectation that there should be global logistics companies to support them. It can be argued that some integrated global contractors have begun to evolve over the past few years. Chapter 4 provides a description of these major players. The issue of the need for global service provision by 3PLs was emphasized in a conference report entitled Sourcing in Low-Cost Countries (Eye forprocurement, 2006). This is a survey of over 200 procurement professionals involved in global sourcing, so it is concentrated on inbound rather than outbound logistics requirements. Some key results showed that respondents recognized the importance of logistics in effective global sourcing: ឣ ឣ

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Thirty per cent saw logistics as a major element of total sourcing cost. Forty-five per cent felt that the increasing complexity of transport and logistics operations was the overall second biggest obstacle to successful global sourcing (the first was poorly developed infrastructures). Two of the major three risks when sourcing in low-cost countries were also logistics-related. These were the unreliability of delivery (at 48 per cent) and the questionable safety and security of supply chains (at 29 per cent). The other was the unreliability of quality (at 51 per cent).

The rapid increase in sourcing and offshore manufacturing and assembly in the East has now led to the realization that there is an equal need for streamlined supply chains that can provide appropriate customer service direct to the marketplace, wherever that might be. Traditionally, a typical movement of a part manufactured in China and delivered to a customer in the United States might take up to 10 or more different companies to provide all of the supply-chain services required. These might include a transport company in China, a consolidator in Hong Kong, another transport company to move the container, a forwarder to undertake the export arrangements, a shipping company, a customs broker, another transport company, a de-consolidator, yet another transport company, a 3PL for storage and a final transport company for delivery. Companies such as UPS have now developed a one-tomany global service that alleviates the need to deal with a series of companies and allows a client to use just one (Manufacturer, 2005a). In addition to a more straightforward physical supply-chain arrangement, this also allows for complete end-to-end visibility of stock throughout the supply chain. Another example is APL Logistics, which manages the international supply chain of PJH Group, the United Kingdom’s leading DIY distributor of bathrooms, kitchen furniture and associate appliances. APL Logistics manages vendors, consolidates shipments in Asia, and ships through to

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destination at PJH’s network of eight distribution centres throughout the United Kingdom. A key benefit for PJH is APL Logistics’ ability to provide visibility of stock levels at all points in the supply chain, especially at origin. An APL director notes that ‘Many companies have gone offshore to source products. Their first objective was to realize a lower cost of production. The next step is to fine-tune the supply chain to get the most out of their businesses’ (Manufacturer, 2005a). In considering the use of 3PLs in China, Paul Clifford of Mercer Management Consultants comments that ‘3PLs need to provide global reach with localized excellence.’ He notes that, ‘today’s major multinationals from the United States, Europe and elsewhere tend to work in China with global 3PLs. The Chinese 3PLs are more likely to have Chinese customers. However, some multinationals are beginning to deal directly with Chinese 3PLs. That trend is likely to grow. If a 3PL cannot provide a strong service in China – these days that means far into China’s interior – it may find itself vulnerable to other providers with a stronger Chinese presence’ (Kerr, 2005). The Tendeco case history provides another example of global logistics outsourcing.

Tendeco, United States Kenakore Solutions runs the supply chain for Tendeco’s aftermarket automotive supply business. The selection of Kenakore was made from a wide field of 3PL competitors on the basis of cost, focus, flexibility, compatibility and technical infrastructure. The company now has a 100 per cent bar-coded environment that helps ensure high inventory accuracy while real-time processing delivers faster market response. The 3PL consolidates bulk product from Brazil, Korea, Germany and Canada, and optimizes inventory for shipment to hundreds of customers worldwide. Inventory shrinkage has improved and the company is filling more than 98 per cent of orders within 48 hours. The company notes that ‘Our relationship is really a partnership.’ To safeguard customer commitments and optimize inventory levels, the 3PL coordinates supply line variations from global, domestic and regional sources to ensure on-time production and shipment. It consolidates product from multiple sources so customers get a single, complete shipment rather than multiple partial shipments. It accommodates special requests such as kitting, assembly, labelling, packaging and private branding. Source: Manufacturer (2005b).

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Service providers are insufficiently proactive For many years, major users have indicated very strongly that service providers are insufficiently proactive in their approach to contracted operations – that they only aim to provide the minimum and fail to enhance the operations for which they are responsible. Some of the typical failures that have been claimed for some third-party contracts include: ឣ

ឣ

ឣ

ឣ

ឣ ឣ

ឣ

ឣ

ឣ

Contracts and arrangements require substantial senior management time to coordinate and review. There is an inability to broaden the service offering and increased customer service requirements cannot be maintained. There are limited skills in the planning and replenishment processes (such as demand and inventory planning). The focus is mainly on transactional and execution processes (such as order picking, warehousing and transportation). There is a lack of network (re)design and management capabilities on a global or even continental level (for example, across the European Union). There is a lack of IT and change management capabilities. Contractors are often activity-driven (for example, invoicing for space occupied or shipments delivered), as opposed to being value-driven (for example, management of the total supply-chain costs). The nature of contracts is such that third-party providers will concentrate on asset utilization to reduce their own costs rather than on developing a customer-focused approach to logistics. Third-party providers cannot contribute to opportunities to optimize operations over the wider supply chain. By their very nature, contractors are more likely to be concerned with one-off cost savings than with continuous improvement, which is what users are most concerned about.

There is undoubtedly some truth in the list of failures laid at the door of 3PLs, but in their defence, most service providers claim that they are seldom given the opportunity to develop new ideas and offer improvements, because users are not prepared to give them adequate information about their complete supply chains. One solution that would help to alleviate some of these problems is the development of a partnership approach between users and providers. This was mentioned earlier in this chapter, and is discussed in more detail in Chapter 8. One of the aims that was outlined was to create a more positive and cooperative alliance between the user and the contractor, and to eliminate the combative culture that has evolved in some relationships.

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One further development that is aimed at avoiding such problems is the concept of fourth-party logistics (4PL). A 4PL is 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. The main differences from a 3PL are: ឣ

ឣ

ឣ

ឣ

ឣ

4PL arrangements seek to create value above and beyond the basic operational services. 4PLs orchestrate the strengths of the different service providers that are used to operate the client company’s supply chain. 4PLs’ business arrangements allow customers to really refocus on their core business. Arrangements focus on value creation: increased service levels, reduced cycle times, reduced supply-chain costs. Typically, there is likely to be a global reach (regional in some cases) across multiple organizations in order to unlock value from within the supply chain.

The development and use of 4PLs is described in Chapter 9.

A more rigorous selection of contractors An important development for most major users has been the introduction of a much more rigorous selection process for choosing a contractor. This has occurred for several reasons, but the main one is the perceived lack of success of some outsourcing arrangements. This dissatisfaction was reviewed earlier in this chapter, where it was noted that many users were concerned that they were not being given the levels of service and business benefits that they had expected and that there was insufficient quality, commitment and ability amongst the 3PL personnel that were used to run their operations. A user survey (Figure 6.3) also indicated that the management provided by the 3PL team put in to run a contract was often perceived to be inefficient, that hidden costs were an important issue and that there could be a culture clash between the user and the selected contractor. A rigorous approach to contractor selection can help to eliminate problems such as these, and many companies now take much more time and much greater care with the process. There is now a clearly laid-out process for contractor selection, which most large companies adhere to. A typical approach is described in detail in Chapter 7. There are many ways in which adopting such an approach can be beneficial and can help to ensure that a suitable contractor is selected. One example can be drawn from an internet retailer looking for a contractor to undertake its e-fulfilment. It used

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a formal selection exercise, part of which was to identify precisely its key efulfilment delivery requirements. It then used an RFI process to identify which of the many contractors that claimed to offer full e-fulfilment services could actually provide what it required. There were some very diverse results, which indicated that even in a very specialist area of logistics, such as e-fulfilment, there are some significant differences between company service offerings (see Table 6.1). This approach helped to ensure that only fully capable companies were shortlisted for the long process of final selection and negotiation. The use of a more rigorous selection process also raises another issue, which is that this type of process is thought by 3PLs to be very restrictive, and one of the main reasons for the inability of 3PLs to provide a more creative and successful contract relationship. The selection process is said to prevent the development of viable strategic partnerships and co-venturing initiatives, because it is outdated and inappropriate for such cooperative arrangements. For example: ឣ ឣ ឣ

It ignores total costs. Its aim is to drive down suppliers’ margins. It is an over-engineered process that does not allow for innovative solutions.

Table 6.1 A review of e-fulfilment specialists and their delivery services E-fulfilment Turnover Company (£m)

Next Day Delivery

2 to 3-day Delivery

2-man Delivery

Warehousing Returns Capability Capability

H A

£40 £70

y y

n n

n n

y n

y y

C

£110

y

n

y

n

y

D

£123

y

n

n

n

n

F

£231

y

y

n

y

y

O

£500

y

y

y

y

y

E

£4,700

y

y

y

y

y

B

n/a

y

y

n

y

y

G

n/a

y

y

y

y

y

I

n/a

n

y

n

y

y

J

n/a

y

y

n

n

n

K

n/a

y

y

n

y

n

L

n/a

y

y

y

n

y

M

n/a

n

y

y

y

y

N

n/a

y

y

n

y

y

Source: Dialog Consultants (internal report)

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It has an over-rigid format. It has extensive legal phrasing. It is a very expensive process for the contractor. It does not allow for total supply-chain solutions.

One of the consequences of a rigorous selection process might, therefore, be the lack of proactivity that contractors show in their relationship with their clients. This was discussed in the previous section of this chapter. One potential solution is to ensure that contractors have suitable incentives to ensure that they are constantly working to identify and implement improvements in the operations under their control.

Major outsourcing concerns: a 3PL perspective A recent European survey (Eyefortransport, 2006a) identified some interesting major challenges for European 3PLs. The main results are shown in Figure 6.5. This highlights some of the key outsourcing issues from the 3PL perspective, rather than from the user perspective, which is the norm for most outsourcing surveys. There are some interesting results. The main issue is one that has been at the top of most 3PL lists for many years. This is the problem that 3PLs have of maintaining profits under price pressure from customers. In the survey, up to 79 per cent of the respondents felt that this was a big or a very big challenge. It reflects the view that margins are very low in the logistics outsourcing industry. This is particularly true of the traditional operations and services that are offered by 3PLs, namely storage and transport. Where 3PLs have invested in some of the value-added services that some clients require, the problem is not so great.

maintaining profits under price pressures from customers relationship with customers consistently delivering the latest cutting-edge technology globalization of 3PL market competing with giant global 3PLs international security initiatives emergence of 4PLs/LLPs increasing amount of M&A activity in Europe not a challenge a small challenge an average challenge a big challenge a very big challenge

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Figure 6.5 Major challenges for European 3PLs

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A second issue that also scores very high in the survey is the relationship that 3PLs have with their customers. Up to 78 per cent of the survey respondents feel that this is a big or a very big challenge. This is a particularly interesting result because it is also an area that is seen to be a big issue from the client company perspective, as discussed earlier in this chapter (see Figure 6.3). The clients’ view was that the main issues from their perspective were first, inefficient management, and then, clashing company cultures. The whole issue of the relationship of 3PLs with their clients is clearly one that needs to be carefully addressed by both parties. A number of different approaches that might be considered were reviewed in the previous section in this chapter and are discussed in more detail in Chapter 8. Another issue that concerns European or regional 3PLs is the requirement for and introduction of global outsourcing. The survey results show that 68 per cent of the respondents feel that the globalization of the 3PL market – the need to provide delivery services in new geographic regions – is a big or a very big challenge, and that 54 per cent feel that competing with giant global companies is a big or a very big challenge. The first of these concerns probably reflects the fact that most 3PLs are not in a good position to invest in these new markets. This perhaps endorses the customers’ view that many 3PLs are rather conservative in their approach, but it is a conservative approach to investment and risk rather than a failure to recognize these new opportunities that is the issue. This is driven by low margins and by the fact that a mistake can easily wipe out any profits. The second concern is a more natural one that indicates a worry over increased competition from established and successful large players in the outsourcing market.

Solving the structural issues of 3PLs The major issues that affect 3PLs in their relationship with their clients have been highlighted in this chapter, and strategically they can be summarized as the lack of: ឣ ឣ ឣ ឣ ឣ ឣ ឣ

a total supply-chain perspective; visibility along the supply chain; measurement along the supply chain (cost and performance); open systems; technical vision; flexibility; tailored structures and systems.

Most of these issues have, of course, been cited as different ways in which it is thought that 4PLs can help to improve outsourcing for client companies. A 4PL can provide a user with an overall supply-chain-wide solution by

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incorporating the resources and expertise of any number of third parties to best effect. The 4PL would be involved in both the design and management of a client’s logistics system and would act as a coordinator for many different types of service, which may include distribution, information systems and financial services among other functions. The main impetus is for the overall planning to be outsourced and for the complete supply-chain operation to be included within the remit of the 4PL. The main advantages of using a 4PL are listed below, and it can be seen that many of them address the key issues raised earlier in this chapter. A much more detailed discussion of the development and use of 4PLs is presented in Chapter 9. The advantages of using a 4PL are: ឣ

ឣ

ឣ

ឣ

Addressing strategic failures: – minimizing the time and effort spent on logistics by the user; – a fourth-party organization forming a single point of contact for all aspects of logistics; – the management of multiple logistics providers being handled by a single organization; – allowing for provision of broader supply-chain services (IT, integration strategy and so on); – ability of a fourth-party organization to source different specialists with best-in-class credentials. Addressing service and cost failures: – the freeing of the user company’s capital for core/mainstream use by selling assets; – the continuous monitoring and improvement of supply-chain processes, performance and costs; – the benchmarking of different supply-chain processes against worldclass companies; – the continuous monitoring and reassessment of service-level achievements; – the development and use of core expertise from all logistics participants. Addressing operational failures: – the fact that a new entity makes it easier to eradicate old industrial relations issues; – potential in a new entity for the transfer of selected personnel; – ability to establish a new and more flexible working environment; – opportunity to create a new company ‘culture’. Additional benefits: – provision of ‘knowledge management’, ‘the bringing together and effective sharing of knowledge among the identified stakeholders’;

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– provision of supply-chain accountability for achieving desired performance; – the provider assuming risk on behalf of the user in return for a share of the profit.

Collaborative groups for global outsourcing One interesting development aimed at solving some of the problems that are faced by 3PLs is the idea of introducing collaborative groups. The principal objective is to improve the performance of global and regional logistics operations through action-based teams linking together companies that have a particular dependence on logistics as a key contributor to their business needs. These teams should involve both users and traditional logistics service providers, and enablers such as IT and information systems (IS) companies. The market opportunities of global/regional sourcing, branding, manufacturing and inventory holding need to be supported by more robust and more efficient supply-chain and logistics operations. This has not really materialized through traditional logistics outsourcing, despite the promise of harmonization and simplification that was expected from developments such as the European Union. Also, although total supply-chain solutions using the 4PL concept may be the answer for some companies, there are others that are concerned that this approach means that they lose too much of their business power, responsibility and control. A solution may, therefore, be to organize collaborative projects that allow users, providers and enablers to work together to develop suitable one-stop shops for the provision of global/regional logistics solutions where the output is for more simple, reliable, effective and efficient supply-chain and logistics operations. This is likely to be organized for specific industrial sectors, and would eventually operate as a series of commercial partnerships to the mutual benefit of all participating companies. The idea is too new for any practical examples to have been assessed so far, but it will be interesting to see if there is progress over the next few years.

Summary In the first major section of this chapter the external issues and influences on logistics and logistics outsourcing were discussed. These included influences from: ឣ ឣ

the external environment; manufacturing and supply;

Current issues and influences ឣ ឣ ឣ

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technology; retailing; the consumer.

In the second section, the results from a couple of surveys were used to help highlight the main internal issues with outsourcing. The major issues that were reviewed and discussed were as follows: ឣ ឣ ឣ ឣ ឣ ឣ ឣ ឣ ឣ

building closer partnerships; the need for flexibility; incentivized contracts; the need for true pan-European and global third-party providers; the failure of service providers to be insufficiently proactive; a more rigorous selection of contractors.; change management issues for outsourcing; solving the structural issues of 3PLs; collaborative groups for global outsourcing.

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7

The selection process Introduction One factor that has become very clear over recent years is the need for careful selection and management of service providers. This chapter describes an approach for the selection of service providers, and explains the detailed steps that are required from the initial scoping of outsourcing requirements through to the final negotiation and contract agreement. In addition, the main content of a typical contract is outlined.

General approach In order to ensure that all of the many different aspects of contractor selection are adequately addressed, it is advisable to adopt a general, step-by-step approach. Such an approach to this process is outlined in Figure 7.1 and is discussed in detail in the rest of this chapter. This guide describes the different stages that must be followed to ensure that all of the important elements are considered. It is typical of the approach that is used by most major companies contemplating the use of a third-party service provider to undertake all or part of their logistics operations. It is important to adopt a clearly defined process that is well planned, has clear objectives and is adequately resourced, so that the many key stages can be successfully completed. Figure 7.1 shows that the first two stages of the selection process should involve an internal assessment of the need for and requirements of outsourcing. The aim is to ascertain from the outset that it is an appropriate option and to identify which of the many different parts of the company’s operations should be considered suitable for outsourcing. The next stages are concerned with an initial review of services and potential providers of these services – to provide a shortlist of interested parties that are able to

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Identify potential service providers Produce RFI and shortlist

Identify type of service required

Review scope for outsourcing

The service provider selection must follow a clearly defined process with a well-planned approach, clear objectives and an adequate level of skills and resources.

Prepare and issue RFP

Tender evaluation and comparison

Manage ongoing relationship

Mobilize and implement

Contractor selection and risk assessment Contract determination

Figure 7.1 Key steps of the contractor selection process

offer the particular services that are required. The most common features of the selection process come next: the preparation and issue of an invitation for contractors to tender for the work in question, the production and return of the quotations by the contractors, and the evaluation and comparison of these. This is usually perceived to be the major part of the selection process, and is frequently treated as the final stage, but in fact there are still some key steps that need to be taken. A risk assessment exercise should be undertaken to identify any potential problems and issues. Linked to this, the final contract has to be formulated and agreed. Finally, the implementation and management of the outsourced operation should be carefully planned and monitored.

Detailed steps Review the scope for outsourcing There are a number of key questions that need to be considered as a first stage in the selection process. Although outsourcing a logistics operation is

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very common practice, it is not necessarily the best solution for all companies. Essentially, a scoping review should take place to address the five key ‘W’ questions, as follows:     

Why outsource? Whether outsourcing is the right step to be taking? What are the key requirements? Where are the boundaries? Which outsourcing approach to adopt?

Why outsource The main drivers for outsourcing were addressed in Chapter 5, and identifying which of these drivers are relevant to a company should be the starting point of any review of the scope for outsourcing.

Whether outsourcing is the right step to be taking A company needs to be sure that outsourcing is the right step for it to be taking. Some key questions are outlined in Table 7.1. These endorse the need for a company to have a true understanding of its own operation and the associated costs. A company should be wary of taking the decision to outsource just because it has some apparent logistics cost or service issues. One clear option for such a company is to find out why there is a problem and to try to solve it internally, if this is feasible. It has been noted by Jason Richardson, the president of business research firm Cutting Edge Inc, that, ‘the first assessment decision should not be “what should we outsource” but rather, “should we outsource at all”’ (quoted in Avagliano, 2004). Also, if the main reason is to cut costs, then a company must be certain that it understands the true cost of its existing operation so that it can make meaningful comparisons with any proposals that are put forward. ‘The operation… has to be in a good operational state. It is no good outsourcing a mess, all you will get back is a different mess’ (Rutter and McGinley, 2001). If the main reason is to improve customer service in a particular way, then the company must be sure that the chosen contractor can provide the competitive advantage that makes this service improvement feasible.

What are the key requirements? Thus, a company needs to understand why it is making the decision to outsource. One excellent reason for identifying this it to provide some clear objectives that can be used to establish the basic requirements for

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Table 7.1 Outsourcing is not for everyone Is outsourcing the right step to be taking? Some key questions are: Internal

External provider

Do we understand the true in-house cost that can be compared with outsourcing options? What risks are there with outsourcing? What competitive advantage is expected from outsourcing? Do internal processes need to be fixed before outsourcing? Does capability exist to manage the 3PL? Does the third party provide competencies lacking internally? Does the third-party provider have a portfolio of clients that can be leveraged to gain efficiencies for our business? What ‘best practices’ can the provider quickly apply to our business?

outsourcing and that can subsequently be used to assess the various alternative proposals put forward by prospective contractors. These objectives should become clearly identifiable requirements that are used as decision criteria in the selection process. Table 7.2 provides an example from a leading commercial vehicle spare-parts company showing that the company first identified five key influencing factors and then used these to support its eventual contractor selection process. The thinking behind each of these key factors is as follows: 



Cost of contract: there is an expectation of savings without a reduction in the service level. Financial probity of the company: it is essential to ensure that the contractor is in a stable financial position, because any possible financial issues that might lead to insolvency could prove to be disastrous in the future to the user company. In 2002, United Carriers went into liquidation. This only became apparent to its users when the company was made insolvent,

Table 7.2 An example of key influencing factors for outsourcing used in the selection process Five key influences on contractor selection for a leading commercial vehicle spare parts company     

Cost of the contract Financial probity of the 3PL Corporate culture Market credibility Commitment to service

These key requirements should become a core element of the selection process.

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and it left several companies in great difficulty because they were unable to use their stock, which was held in some multi-user depots. Corporate culture: to ensure that the chosen 3PL fits with the modus operandi/business approach of the user company. It is essential there is no clash of corporate culture that might lead to strained management relationships. Market credibility: that the use of the 3PL will not upset the perceptions of customers and adversely affect the reputation of the user company. Commitment to service: important to most companies and sectors, but absolutely paramount to spare parts, where service excellence, reliability and flexibility are all vital.

It is worth emphasizing at this early stage how important it is for the client company to become aware of the type of relationship that it wants from an outsourcing partner. The requirements of the preferred relationship should have a key impact on the criteria that are chosen to help evaluate and select a partner. Relationships can range from very hands-off, contract-driven agreements to strategic partnerships. In the former, the emphasis is on agreeing a set of rules and monitoring these, with perhaps penalties or benefits according to tight service and cost targets; in the latter both client and service provider work together to identify (and benefit from) opportunities for cost and service improvement.

Where are the boundaries? A further scoping decision concerns the extent of the operation that is to be outsourced. The basic question is, what should be outsourced and what should be kept in-house? For most companies there is a broad continuum of possibilities, ranging from, say, just the outsourcing of the delivery transport operation to the outsourcing of the whole supply chain. Figure 7.2 gives a summary of this outsourcing continuum. The two extremes shown within the continuum diagram are those of total internal asset management and total external asset management: that is, keeping everything in-house compared with outsourcing everything. Some of the alternatives within these extremes are indicated, but there are many more that might also be considered. Some of the various advantages and disadvantages related to these options are also indicated in Figure 7.2, and these have been discussed in detail in Chapters 3 and 5. It is essential for the success of the user–provider relationship that the boundaries between the outsourced and the in-house operation are clearly defined, to avoid any misunderstandings during the tendering process, and to avoid any potential conflict over operational responsibilities when the contract is underway.

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The outsourcing continuum Total internal asset management  Full-building ownership  Internal workforce  Own transportation management

 Internal building  Contract  Lease building  Full outsource of warehouse  Internal specific functions labour workforce (eg packaging, postponement,  LTL, TL storage, transportation  Internal building  Combine inwarehousing,  Internal WMS, house workforce transportation) shipment and contract systems

Some outsourcing

No outsourcing Advantages  Fine-tune operations and procedures  Control of customer service

Disadvantages  Large capital investment  Workforce management  Loss of scale economies

Advantages  Reduced or limited capital investment  Manage within your core competencies  Flexibility

Disadvantages  Less control  Possible mixed labour issues

Total external asset management  No asset management  No labour management  Order management

Full outsourcing Advantages  No asset or labour management  Highest flexibility  Limited capital investment

Disadvantages  Less control  Less visibility to customers

Figure 7.2 The outsourcing continuum

Which outsourcing approach to adopt At a very early stage in the selection process it is sensible for a company to undertake a broad strategic review of the likely distribution structure that it will be looking for. Many companies might complete this as a matter of course when taking their initial decision over whether or not they should continue as own-account or go the third-party route. It is also very useful to help clarify the type of service that might be required. Is a dedicated or a multi-user approach the most suitable? It is often argued that the strategic review is an unnecessary step because the service providers will be expected to devise their own recommended structure. Although this will be the case, it is still a good idea for the user company to undertake this review for the following reasons: 





To help identify the type of outsourcing approach to adopt: at its most obvious, is a dedicated or a multi-user operation preferable? To provide a clearer idea of what the main requirements are: it is far easier to assess the different quotations made by the third-party companies if the user already has a good understanding of what the operation should look like. To help in the eventual preparation of the invitation to tender: in requesting the third party to quote, it will be necessary to provide a great deal of data

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and information on which it can make its analysis. It is useful to use this data to undertake a strategic review to identify likely solutions. To clarify key activities: certain activities will be outsourced, whilst others will be kept in-house. A strategic review will help to identify those elements of the business that should be considered by the third party. It will also help to clarify exactly where the line is to be drawn between outsourcing and own-account. Clarification of these areas of interface at an early stage is crucial. To enable a ‘long list’ of potential contractors to be drawn up: the information from a strategic review will help to identify which contract companies are the most appropriate for consideration in the selection process. This will help to ensure that time is not wasted holding preliminary discussions with companies that are unlikely to be able to offer appropriate services.

Identify the type of service required Once the decision has been made that all or part of the business is to be outsourced, the next step is to determine which of the many services offered by third-party providers are likely to be required. The main types of service were described in detail in the second part of Chapter 3. The scoping exercise discussed previously in this chapter should provide the major input into this decision-making process. One major question is whether the user company should choose a dedicated operation or join a multi-user operation where resources will be shared with other user companies. For some companies there may not be a clear option, and they may decide to ask the shortlisted service providers to quote on the basis of both of these different types of operation. At a similar level of importance is the question of which parts of the operation should be outsourced. Traditionally, in logistics, the main components to be considered have been either the depot operation and/or the delivery transport operation. In recent years, and as the continuum of Figure 7.2 demonstrates, there are many other aspects that might be outsourced, such as packaging, postponement/assembly or returns. The main components can also be broken down into separate parts consisting of those that are to be kept in-house and those that are to be outsourced, such as for delivery transport: drivers only, vehicles only, maintenance only, or any combination of these. The most important factor is that the providers are clear about the basis on which they should be quoting for the work, so that they don’t base all of their effort and analysis on determining a solution that is inappropriate to the user.

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Identify potential service providers The next step in the selection process is to draw up a ‘long list’ of potential contractors that might be suitable as potential service providers. The aim behind this is to identify a large number of service providers that are capable of undertaking the business, and then to draw up a suitable shortlist. This should consist of those that both show an ‘expression of interest’ and also are able to meet any important qualifying criteria and so provide a costeffective and service-proficient solution. Taking an extreme case, for example, there is no point in negotiating with companies that specialize in small parcels delivery if it is a full-trailer-load service that is required. It is neither feasible nor sensible to have a large number of potential contractors provide a full tender. This is because the tender preparation and evaluation process is a very time-consuming and expensive one for both the contractors and the user company. Information on contractors can be obtained very readily from the trade press, where there are many articles to be found that review the service providers and comment on the latest contracts (see, for example, Distribution Business, Logistics Europe). In addition, there are websites available that summarize the major contractors together with their resources and specialization (www.3PLogistics.com). A typical long list might have 20 to 30 contract companies.

Undertake the request for information process (RFI) and then shortlist Each potential contractor that appears on the long list should be contacted with a brief description of the likely requirements. There are two aims to this part of the selection process. The first is to ascertain whether the contractor would be interested in tendering for the business. (There are several reasons that a company might not want to quote for the business: it may not have the resources to undertake the operation, the work might be insufficient for a large-scale operator, the sector might not be one the company wants to operate in, or other reasons.) It is useful to be able to identify and eliminate these companies before entering into the next stage of the selection process. The second aim is to identify whether or not it would be appropriate to include the company on the shortlist of contractors. In other words, the user company decides which of those companies that are interested should be taken to the next stage of tendering for the business. Some may be eliminated because they appear to be too small, do not adequately cover the distribution area, cannot provide suitable reference sites, and so on.

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This description is often known as the request for information (RFI). The RFI should be a concise document consisting of key information, as follows: 1. Introduction and confidentiality clause; the confidentiality clause is used to protect the confidentiality of the information that is supplied and also the confidentiality of the fact that the operation is being considered for outsourcing. 2. Description of the company – operation and product overview. 3. Description of opportunity: – overview of strategy and likely requirements; the provision of a clear description of exactly what the user company wishes to outsource, including top level data to enable the contractors to get a feel for the size of the operation; – contractual relationship; here, for example, an indication by the user company of its preference for a dedicated or multi-user style of operation. 4. The selection process: – procurement process; including, most importantly, the timescale of the procurement process and any timed deadlines that have to be met; – key selection criteria: the important elements on which the suitability of the potential contractors will be assessed for inclusion in the next phase of the selection process. 5. Content of response; the information that the service provider must supply in its response to the RFI. 6. Format of response; a clear and precise format is important to ensure that all of the responses can be easily compared with each other so as to simplify the drawing up of the shortlist of companies to take forward to the next phase. It is worth emphasizing at this stage that the US Outsourcing Institute highlights four key elements that they feel are essential to the choice of a suitable outsourcing partner (Avagliano, 2004). These are:    

industry expertise; reliability; flexibility; trust.

Robert Williams of LPC International has the following suggestions for companies that are looking for a suitable outsourcing partner: A rigorous procedure should be followed to identify providers which: • have experience of the services and volumes of work that you plan to contract out

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• • • •

have adequate resources to support the contract are financially strong have appropriate IT systems are prepared, if necessary, to take over your resources and labour force as part of the contract • have a strong management team. (Williams, 2003)

It is useful for any company that is planning to outsource to build up its own list of essential requirements at the outset of the selection process. These can then be included in the RFI and thus help in the identification of possible suitable partners at an early stage – or at the least help in the process of weeding out unsuitable participants. Responses to the RFI and other factors should be evaluated against key selection criteria to enable a shortlist of from 5 to 10 contractors to be drawn up. Selection of the key potential providers might be on the basis of:   

  

written response to the RFI; assessment of supporting documents; current client list – perhaps looking for similar operations that demonstrate that the contractor has suitable experience, or identifying competitors that already use the contractor and so eliminating them as potential operators; contact with current clients, which might include a visit to them assessment of broad capability; financial probity of the company.

Preparation of request for proposal (RFP), invitation to tender (ITT) or request for quotation (RFQ) Objectives of RFP The major part of the contractor selection process revolves around the provision of detailed data and information to the shortlisted companies, which they then use to develop a plan and to cost the proposed operation. These responses are then compared by the user company to enable it to identify one or two companies with which to complete the final negotiations. This process is based on a very important document, known as the request for proposal (RFP), invitation to tender (ITT) or request for quotation (RFQ). There are four main objectives for the RFP from the user company viewpoint: 

To provide a specification of business requirements to selected vendors in a standard format: the business and operational requirements must be clearly described using appropriate descriptions and data.

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To facilitate objective comparison of proposals: this is best pursued by the use of a standard format response or standard pro forma. Thus, all contractors must respond in the same way to enable ease of comparison and to eliminate (or at least minimize) errors of comprehension and understanding due to the different presentation of the proposals. To maintain an equitable flow of information across all tendering companies: the aim is that all contractors should receive exactly the same information so that all their quotes are based on identical information. This applies to any supplementary information that is supplied after the initial RFP. To establish total confidentiality rules: this is a two-way street because the confidentiality rules should cover both the data that is given to the contractor in the RFP and also the data and ideas that will be provided by the contractor in the response.

Several points bear emphasis from these objectives. These appear to be quite obvious, but they are nevertheless essential and create significant problems if they are not adhered to. The first is the need to ensure that all quotations are made using exactly the same data and information, otherwise it is impossible to make realistic comparisons of the responses from the different contractors. Second, the idea of a standard response format will significantly simplify the process of comparison. There are also some specific uses for the RFP from the point of view of the contractor. A user company should bear these in mind when putting an RFP together. They are to enable the contractor to: 









design a logistics system to perform the task and meet the service requirements; determine all of the many resources that are required to run the operation (personnel, property, vehicles, plant and equipment); estimate the costs and hence decide on the structure and level of the rates to be charged; be clear which distribution components are to be provided by the contractor and which by the user company; be clear which information systems need to be provided and specify them in detail.

Data requirements It is evident from these requirements that a great deal of very detailed data and information should be included in the RFP. A typical RFP structure might be as listed below, but the precise content will vary according to the company, operation and contract requirements:

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1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.



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Introduction, including confidentiality clause. Background to operating company. Business description. Data provided with the invitation to tender. Physical distribution specifications. Information systems. Distribution service levels and performance monitoring. Assets currently employed in distribution operations. Risk assessment and transfer. Industrial relations. Business relationship: contract type and contract management relationship. Charging structure. Terms and conditions. Environmental issues. The selection process, including key selection criteria. Response format. Criteria for award of contract. Timescale and method of submitting clarification questions regarding the RFP. Deadline for submission of a response to the RFP. The proposed start date for the contract after award.

The data to be provided with the RFP should be at a sufficient level of detail to allow the contractor to undertake an adequate analysis to calculate the resources required to run the operation and to identify all the associated costs. As might be imagined, this is a lot of data! It is usually supplied using an electronic format, typically spreadsheet based. Actual data requirements will vary depending on the services and operations required, but typical logistics data are likely to include those elements outlined in Table 7.3. It is worth appreciating that most 3PL providers will use a variety of specialized computer software packages to help in the design process (depot location, warehouse design, routing and scheduling), and that the data to be provided will be input into these packages.

Pricing and charging structures There are several different types of pricing or charging structure that might be adopted, and the RFP has to indicate very clearly which of these, if any, is to be used by the contractor. The choice of these is the prerogative of the client, but in some instances low volumes of business that have to fit into a multi-user operation may offer less scope for some of these to be used. They can be broadly categorized as follows:

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Table 7.3 Typical logistics data requirements for the RFP Storage and Order Picking

Delivery

Receipt number of suppliers extent of palletization notice given for time of delivery extent of inspection or check dealing with returns

Despatch outlets including location defined by post code, etc delivery quantity by location peak variations

Stock profile number of lines stock volumes activity levels normal storage levels peak levels and duration of peak

Delivery constraints on delivery times problems at specific locations delivery methods

Throughput seasonal/daily variations in volumes

Service service level requirements

Order picking order transmission procedure order volumes including seasonal and daily variations service time cycles from receipt to delivery lines per order and total quantity per order including peak variations

Others returns repacking, stock checking telesales, ordering, promotions etc







Unit price or fixed price agreements. An agreed unit price is paid for the services provided. This is generally a sum of all operating costs (including overheads, facilities and profits) divided by the number of units handled or transported. This might be cost per case, cost per mile, cost per drop or other rate, or a combination of these costs, depending on the services being offered. The advantages of this approach are that it is easy to understand, flexible and visible (the price charged varies in accordance with the volume throughput).This is the traditional method of third-party payment and is common for low-volume business. Hybrid unit price agreements. These are based on a unit price but also include guarantees for specified volume throughput, resource usage and so on. This ensures that seasonal effects or unexpected demand fluctuations do not penalize the contractor, which might otherwise result in the contractor having resources that are underutilized. This approach allows for the unit price to be reduced by degrees as throughput increases. Cost-plus arrangements. These provide for the payment of an agreed fee for the facilities used and the services provided. Thus, the client meets

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the actual costs of the operation. A pre-set profit margin for the contractor is added to this, which may be either a flat fee or a percentage of the costs incurred. A major advantage to this approach is that the costs are visible to the client company, making it easier to budget internally. One major criticism of cost-plus is that it offers no incentive for the contractor to enhance the operation through productivity improvements. Indeed, any trimming of costs would lead to a reduction in payments to the contractor if the profit arrangement were based on a percentage of costs. Suppose, for example, that an electrical company has a cost-plus arrangement with a third-party contractor. To overcome the inherent disadvantages of this type of contract, additional measures include: – shared incentives on transport and warehouse productivity improvements (in this case a 50/50 split for any successful economies); – a minimum and maximum level of profit (minimum as a guarantee for the contractor, maximum to protect the user company in an environment of a growing business); – clearly defined contractor management that aims to reduce costs incurred and to monitor spending levels; – contractual agreement to undertake joint cost-reduction initiatives. Open-book contract/management fee. As the name suggests, an open-book contract is one where the client company pays for the entire operation plus a management fee to the contractor. This type of arrangement is usually used for completely dedicated operations. Performance is monitored against a budget that is agreed between the contractor and the client. The danger with this type of arrangement is that it may compound any inefficiencies that are built into the original agreement. It is now common to include costreduction or performance-related incentive clauses to provide a shared benefit where the contractor identifies improvements. Evergreen contracts. These contracts are for no defined length of time. A fixed price structure and specific performance requirements are agreed for a 12-month period. Performance is then monitored against the agreed key performance indicators (KPIs). Notice to terminate the contract of, say, six months can be given by either side. The idea of these contracts is to eliminate the very stressful and time-consuming re-negotiation that often occurs at the end of each contract period with traditional contract arrangements.

It is also possible to use a mixture of these arrangements. One European company adopted a three-phase approach, as follows:

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1. First year: a cost-plus, fixed management fee – to enable the operation to ‘bed in’ or settle down. It is optimistic to expect a newly created operation to run smoothly, as planned, straight from Day One. 2. Second and subsequent years: open-book, cost-plus, incentivized management fee – has allowed the operation to settle, but the company expects to see, and benefit from, operational savings. 3. Second and subsequent years: in addition, an agreed continuous improvement programme, which provides a positive (and written down) agreement to improve service and reduce costs. Linked to these structures there are a number of associated charging and non-charging mechanisms that can be used. Their use will vary according to the type of service that is purchased. They can be categorized as: 



Charging: – annual rate negotiation; – failure penalties; – shared savings incentives; – payment for shrinkage; – agreement over extra-ordinary costs (fuel surcharges). Non-charging: – specified service targets (minimum, normal); – continuous service monitoring using KPIs; – regular meetings; – regular management information.

Over the past few years there have been developments in the introduction and use of incentive-based payment systems linked to KPIs. These alternative approaches and methods of monitoring and control are discussed further in Chapter 8, which looks at outsourcing management.

Preferred response to RFP Response pro formas should be included in the RFP to ensure that contractors respond in such a way that comparisons can easily be made. These can then be evaluated against set goals, business metrics, costs and any other particular selection criteria. As already discussed, it is extremely difficult to make meaningful comparisons between tenders if all the responses are constructed to a different format. As well as a clearly defined format for the numerical response, many companies ask the service provider to identify specific elements on which they expect detailed information to be provided. These might include:

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the resources and facilities to be used; contract management and supervision; information systems – data processing and communications; security, insurance, stocktaking procedure and the like; structure and level of charges and procedure for price increases; penalties (if any) for premature termination of contract; invoicing and payment; draft outline contract, conditions of carriage or conditions of storage; project management/transfer/implementation.

These allow for a more qualitative assessment of the various responses, which can be used in conjunction with the quantitative evaluation from the numerical, costed proposals.

Tender evaluation and comparison Tender evaluation is usually undertaken with a view to identifying key data and information from the tenders submitted and then drawing comparisons between the different submissions, hence the importance of using a response format that is straightforward for the contractor to use. Comparisons should be both quantitative and qualitative: the former mainly assess the relative costs of the different solutions, while the latter include a consideration of all the non-quantifiable aspects that may be relevant.

Quantitative assessment For a typical warehouse and delivery transport proposal, the main cost elements include the costs of storage, delivery transport, information systems, administration, overheads and management fee, depending on the extent of the logistics operation to be outsourced. Costs may be expressed as totals for the operation as a whole or as unit cost per pallet stored, case delivered and so on. It is useful, for comparative purposes, to ask for a breakdown of the costs for each of the key logistics components. Some key considerations are: 



Compare quotations on a standard basis: as already indicated, the use of a response pro forma should ensure that all of the different proposals are presented in the same way, with all of the respective costs included in the same categories by each contractor. Be clear what has and what has not been included: there are usually some elements on the periphery of the operation that may be included in the proposal by some contractors, but may be ignored by others. Examples are ‘other’ work and collections.

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Be sure to clarify any qualifications that may be included in the quotation: these may be caused by problems the contractor had in interpreting the specification, which lead to qualified statements about what is included in the proposal. Examples are ‘returns will be dealt with as they arise’ (but who pays?), ‘missed deliveries will be re-delivered at the earliest opportunity’ (but is this next day, next time a vehicle is in the area? And who pays?). These need to be clarified and/or eliminated. Beware of imponderables: these are statements such as ‘costs will be finalized following the outcome of likely future rent reviews’. Check that service levels are clearly going to be met: this is particularly important where a multi-user operation is planned. Normally any new user has to fit in with existing multi-user transport operations and service levels. The lowest price may not be the best: this is because it may only be achievable by compromising some of the essential requirements of the initial RFP. Use the qualitative, non-quantifiable aspects of the assessment to help clarify this.

Qualitative assessment Non-quantifiable factors that might be considered could cover many different aspects. The ones to use are those that are seen to be important to the user company. For one company these might be environmental or people-related. For another they might be more concerned with ease of management and control. Such factors could include:   



     

 

the quality of the proposal; the extent to which the proposal meets the RFP requirements; views on the extent to which it is felt that the proposed physical system can perform the required tasks; views on the extent to which it is felt that the proposed resources are appropriate to the task and the system; whether levels of utilization, productivity and cost are realistic; how appropriate the cost is to the recommended design; the overall design of the information systems; strategies for future enhancement of the operation; environmental policy; the culture of the company – whether it fits with that of the user company; the quality of the contract management team; staff training.

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Method of qualitative assessment It is appropriate to adopt a structured assessment of the contractors’ tender submissions. The factors to be included should be determined at the outset and should be identified in the original RFP. An evaluation matrix is a structured assessment of the main factors involved. Such a matrix can be categorized between, say, operational, financial, service and contractor-related factors. Each key element within these categories can be listed and given an appropriate weighting that reflects its importance to the company. An example of this is shown for a European company that uses the internet to sell wine throughout Western Europe. Stock is held in a central national warehouse for each country. There are two main offerings, which include standard single-bottle-type cases and bespoke mixed cases. Customization of these bespoke cases is carried out at each national stockholding warehouse. A parcel carrier performs nationwide customer order delivery. In addition to product review and ordering facilities, the website provides other exciting functionality, such as a customer wine cellar where customers can maintain a record of the wine they have tasted and how they rated it. Each case of mixed wines contains taster notes, and on occasions there are promotional items in the cases. The scope of the contractor’s role is to provide the following services:   

 

processing of customer orders; replenishment and management of stock to company guidelines; picking, packing and preparation of customer orders ready for collection for distribution; management of returned product; provision of management information of high integrity to enable the company to manage its supply chain.

An example set of assessment criteria for this outsourcing requirement is shown in Tables 7.4 and 7.5. Each responding tender is then scored against all the different factors. An overall total for each tender will then provide a comparative measure to help differentiate between the various tender submissions. A summary of the steps in this process is shown in Figure 7.3. Another method that can be adopted is what is sometimes known as the ‘traffic-light’ approach. This can be used on its own or as a precursor to the evaluation matrix. For this method, the key factors are categorized according to their importance to the user company. The categories are ‘must haves’ (sometimes known as ‘showstoppers’), which are essential requirements for the user company, ‘should haves’, which are important but not

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Table 7.4 Tender evaluation matrix (1) Criteria

Description

Weighting Within Criteria

Final Weight

Operational (30%)

Process orders (velocity, responsiveness)

25%

7.50%

Picking activities

20%

6.00%

Packing activities

20%

6.00%

Stock management replenishment

25%

7.50%

Reverse logistics

10%

3.00%

Financial (15%) Cost/price

35%

5.25%

Insurance

15%

2.25%

Payment terms

15%

2.25%

Open-book policy

35%

5.25%

Score

Total

Table 7.5 Tender evaluation matrix (2) Criteria

Description

Weighting Within Criteria

Final Weight

Service (30%)

Order readiness (time)

25%

7.50%

Order accuracy (fulfilment)

25%

7.50%

Service level (min stock out)

25%

7.50%

Order tracking & inventory visibility

25%

7.50%

Reputation (previous experience)

10%

2.50%

Financial coverage

10%

2.50%

Asset ownership

5%

1.25%

Client list, customer relationship

5%

1.25%

Contractorrelated (25%)

Management & organization 15% (culture, people)

3.75%

Innovation and flexibility

5.00%

20%

Score

Total

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Table 7.5 continued Criteria

Description

Weighting Within Criteria

Final Weight

Operational strategy & policy

20%

5.00%

IT compatibility

15%

3.75%

Score

Total

crucial requirements, and ‘nice to haves’, which are interesting additional ideas raised by the contractor in the proposal. The idea of the traffic light is that any absolutely essential requirement that is not adequately addressed by the contractor in the proposal is given a ‘red light’ and the proposal is immediately deemed to be unworkable and so is eliminated. Other factors may then be treated in a similar fashion to the approach adopted for the evaluation matrix. The main traffic lights are: Red: Must haves: If these requirements are not satisfactory then the proposal is discarded outright.

Prepare a matrix with a list of selection criteria

Criteria

Give a weighting to each criterion based on the relative importance Description

Discuss criteria & weightings with the selection team and moderate them to produce a balanced scheme Weighting

Score

Total

Score each proposal for each criterion, putting the agreed scores into the matrix

Operational

Financial

Service

Contractor-related

Review result to ensure that it is appropriate

Determine the total weighted score for each proposal (sum of the weighted scores)

Figure 7.3 Summary of the tender evaluation process

Scores are based on a scale of 1 (worst) to 5 (best) with the proposals being ranked

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Amber: Should haves: Although some of these requirements may not be present in the proposal, their omission is insufficient to completely negate the proposal. These requirements should be evaluated using an appropriate assessment system as previously described. Green: Nice to haves: Not included in nor a key part of the original RFP but these might be interesting and relevant ideas introduced by the contractor in the proposal, and should be considered where appropriate in the evaluation process. The absence of any of these has no immediate impact on the acceptance or otherwise of the proposal.

Contractor or partner selection The use of a structured approach for the assessment of the different tenders makes the final selection process a distinctly simpler task because the main points for comparison are much clearer. The most favoured contenders can then be investigated further through visits to reference sites, if that was not undertaken in the tender evaluation phase, and through preliminary negotiations. For large dedicated contracts it is likely that two or three preferred service providers will be identified, one of which is likely to be the first choice at this stage. These can then be taken forward for much more rigorous negotiation to ensure that the detailed elements of the proposal are satisfactory and to identify further opportunities for enhancing the contract arrangements.

Final stages of selection The selection process has now, therefore, entered the final stages. These are set out in Figure 7.4. These stages are very much concerned with the development and agreement of the final contract, so it is important to ensure that suitable representation is included in the team. The final selection process needs to be undertaken by an experienced team that has all the relevant negotiating skills. Thus it should include representatives with legal, procurement, human resource and logistics operational skills. Negotiations are likely to be a fairly long and drawn-out process because they entail the review and agreement of all the detailed aspects of the operation and the associated business arrangements, as well as the development of the contract. The results of all the negotiations need to be documented and agreed by all parties.

Identify any gaps or areas of concern As Figure 7.4 indicates, after a suitable negotiating team has been agreed, the next step is to identify any gaps or areas of concern that need to be

The selection process

Agree required participants for negotiation phase (Operations, Legal Advice, External Consultant?)

Review preferred and reserve vendors initial draft contract and identify gaps and areas of concern. Confirm pricing and RFP details

289

Create a list of negotiation opportunities (Demands and Wishes) from gaps

Negotiate with preferred vendor on all functional aspects and gain agreement on pricing

Sign contract

Prepare and check the finalised Contract



Amend draft contract to reflect results of the negotiation phase

Undertake Risk Assessment

Figure 7.4 The final stages of contractor selection

addressed. Some of these might have arisen out of the tender evaluation stage and some are likely to arise from the chosen contractor’s initial draft contract. In particular, the key pricing and service elements should be reconfirmed. The result of these preliminary discussions and evaluations should be a list of key negotiating opportunities. These then need to be pursued until all the operational, service and pricing issues have been satisfactorily addressed, taking care to record all changes with reference to the original tender proposal.

Risk assessment The next stage concerns risk assessment, and it is one that many companies often neglect due to the time pressures that build up because of the need to finalize arrangements as quickly as possible. The lack of time is a common problem that produces the greatest pressure at the end of the selection process. As one survey found: ‘51 per cent of companies questioned responded that they would have preferred more time to plan’ (Controller’s Report, 2001). Risk assessment is undertaken in order to identify any factors that might be a major issue either at the time of the change-over to contract distribution (such as the loss or transfer of personnel or facilities) or during the operation of the contract (such as delivery failure). There are three main categories of risk in outsourcing that are often considered. These are:

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Operational/service risks: relating to the provision of services; these are generally internal factors related to the client company (for instance, a change in demand levels, new product introduction) or the operation (information system failure, vehicle breakdown). Business risks: relating to the contractor ’s business – insolvency, tax problems and so on. External risks: relating to external factors that might affect the operation, such as fire or ‘acts of god’.

The overall aim of the risk assessment process is to confirm that all of the contract arrangements are acceptable and to identify any issues that require either immediate attention or future consideration. Issues tend to concern key service requirements and operational performance rather than costs. The output from the process is to rewrite the contract where necessary and to agree any contingency arrangements that need to be put in place to cover potential future problem areas. The process is usually undertaken in the format of a brainstorming session, which should include personnel from both the client and the contract companies. In this context, risk can be measured by assessing the likelihood of an event occurring together with the impact that the event may have. Each event is marked from, say, 1 to 10, and the risk is the product of these two numbers. Figure 7.5 summarizes this approach. Measure Risk =

likelihood

× x

impact

0 : not relevant

0 : no effect

2 : very unlikely

2 : insignificant effect

5 : average chance

5 : average effect

8 : very likely

8 : very disruptive

10 : absolutely certain

10 : complete disruption

Example event depot fire labour dispute vehicle failure

likelihood 1 3 8

impact 10 8 1

Figure 7.5 Operational risk assessment: measurement of risk

product 10 24 8

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The method is fairly straightforward, consisting of the following steps: 1. Compose assessment teams from contractor and client company. 2. Identify events (strategic, tactical and operational). All events with a potential risk, however small or large, should be listed separately. 3. Brainstorm events, assess likelihood and impact and agree risk potential for all events. 4. Take appropriate action: – Identify changes required for operational issues and include these in the contract. – Set up contingency plan for any important high-impact events. – Reject contract if any potential problem cannot be resolved.

Calibre of key operational personnel One key element that should also be considered at this stage is the calibre of key operational personnel. Almost all of the contacts made with the contractor during the selection phase are likely to be with head office and sales project teams. These people will not be responsible for the day-to-day running of the contract. Logistics is very much a ‘people’ business, and the client company needs to be more than happy with the managers that will be in charge. Thus, it is vital to meet the operational personnel who will be managing the outsourced operation and to be satisfied with their competence and abilities.

Development cycle During final negotiation it is important to be aware of the different phases that a contract relationship might take during the years that it might be operating. These are often termed the development cycle. The development cycle reflects the evolutionary process of many contract arrangements, and this needs to be recognized in the planning process and reflected in the contract. There are three different stages: 1. Initial set-up. The contractor takes over an existing operation with all its inherent problems and physical assets. The major aim is to keep the operation running efficiently during the changeover period. This provides an opportunity for and recognition of the need for a ‘beddingin’ period at the start of a new partnership. It might typically cover the first year of an operation. 2. Medium term. Here, the two parties enter into a more clearly defined agreement over three to five years, looking for opportunities for performance improvement and cost reduction.

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3. Longer term. In the longer term, the contractor may, for example, identify the possibility of taking on additional third-party work in association with an existing dedicated operation. This will occur as market opportunities arise and as scope for cost reduction by better asset utilization becomes apparent. It is essential that any benefits that arise are mutual to the contractor and the original user, and that the user is protected in terms of service and cost, as well as market competition. This stage of the cycle has become known as the development of shared-user opportunities. It is unlikely to arise with very large dedicated operations. The complete development cycle is unlikely to occur for all contract arrangements, but it will occur for some. It is important that the opportunities for potential future developments of this nature are borne in mind and are taken into account during the preparation of any initial contract.

TUPE Another important element in the change to a new contractor is the question of responsibility for existing staff. Legislation, particularly the UK Transfer of Undertakings: Protection of Employment (TUPE) Regulations, ensures that care must be taken to respect the employment rights of current staff. The TUPE regulations grew out of the Acquired Rights Directive, which is EU legislation. The real implications of this legislation are at times unclear because periodically it has been reinterpreted, and this process of reinterpretation continues. The main requirement is that if employees are transferred to a new contractor, the new contractor must honour the existing terms and conditions of employees. Thus, the key issues are that all staff should transfer on existing contracts and that all the associated liabilities should transfer with the staff. Any dismissals at the time of the transfer of business will be treated as unfair unless an economic, technical or organizational (ETO) reason can be shown to have occurred. This means that an acceptable reason must demonstrate that a change in the workforce requirements has taken place. So TUPE applies if it is a relevant transfer. The key question is, what is a relevant transfer? A relevant transfer is broadly one that is ‘the same business in different hands’ or ‘the transfer of an economic identity retaining its identity’. The consequence is that whenever a new contractor takes on an operation, it must be clear where the responsibility lies for any labour-related issues such as the payment of any redundancy payments. There are useful articles published periodically in the logistics press (Szymankiewicz, 2005) and some valuable websites that provide up-to-date information on the existing position of TUPE with respect to logistics outsourcing (www.CIPD.co.uk, www.dti.gov.uk).

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The contract The contract contains a large amount of detailed information and requirements. It will include a comprehensive specification of the services that are to be provided, the associated tariffs and the obligations of the parties concerned. It is usually based around the tender document that was originally submitted, but of course will include any changes that have resulted from negotiation and risk assessment. It is usually recommended that companies draft their own contract document, and this is certainly advisable for complex operations. There are a variety of independent standard documents that can be used directly or that can provide a basis for drawing up a new document. It is strongly advised that the user company should not adopt a contract that has been specifically devised by the contractor.

Detailed points Some of the detailed points from the key areas are outlined here under the four headings of initial contract, cost-related/tariff structure, service-related factors, and administrative and other.

Initial contract 







Takeover of warehouse sites – which are acceptable/unacceptable; – procedures for takeover. Takeover of vehicles and capital equipment: – which vehicles and equipment are included; – how they are valued. Takeover of personnel: – which, if any, are transferred; – the financial basis; – terms of employment; – pension rights; – other related factors. Redundancy agreement: that agreement will be negotiated as necessary by the client, the basis of this agreement, and so on.

Cost-related/tariff structure 

Capital/investment costs (vehicles, warehouse equipment, hardware, etc) and return on investment.

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Operational costs (including rent, building services, staff, transport running costs, administration, insurance) and cover for operational costs. Management costs and expenses (proportion of contractor head office cost – diminishing short to medium term, and including project work and time related to contract). Cover risk/make profit – should be taken into account by return on investment and operational cost cover and length of formal contract.

Service-related factors 





Service requirements: – definition of service to be provided; – indication of main areas, including delivery zones and service levels (for example, once a week), delivery/collection times, cut-off points for receipt of information at depots, special orders and how to deal with them, emergency orders and how to deal with them. Service-related aspects: – preferred vehicle specification; – vehicle livery; – driver uniforms. Service/performance measurement: – measures, report format and so on; – damages, late delivery, refusals and so on.

Administrative and other 







Information systems: – formal means of communication; – operating requirements (order processing systems procedures, stock control and so on). Administration/liaison: – head office (planning); – regional (liaison); – specific feedback (PODs, stock control and so on). ‘Prospective’ agreement: – regular sight of client’s business plans (with respect to the distribution operation); – one to three-year horizons; – delivery point openings and closures, product mix and so on. ‘Retrospective’/inflation clause – to allow for regular (annual) readjustments where estimates are sufficiently different from actual results to warrant financial adjustment (demand levels, product mix and so on).

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Fuel surcharge mechanisms. Penalty/termination clause: – in the event of premature termination by either party; – to cover, for example, the risk of ‘unusable’ assets specially taken on for the operation.

The specification will necessarily be very detailed. Typical components that need to be considered are shown above, although within a contract they would be at a greater level of detail. They will vary considerably from one contract to another, depending on the breadth of the operational coverage and the type of contractual arrangement. It is common practice to include the tender response from the contractor, as this contains a description of the operational elements. The measures by which operational performance is to be assessed may also be included. It is also common practice to include operational and technical schedules as appendices, as they can be amended more quickly and easily during the life of the contract. A guideline blank contract is available from the Chartered Institute of Logistics and Transport (www.ciltuk.org.uk).

Service-level agreement A service-level agreement will be an important part of the contract. It will identify all the key performance measures related to the provision of customer service and will indicate the levels of service that have been agreed.

Cost and tariff structure A cost and tariff structure will be indicated. This may take a variety of forms and will, of course, depend on the precise payment method that has been agreed. Those elements that need to be covered are indicated above. Important considerations will be the costs of any additional activities that are to be included as exceptional payments (such as product returns), costs that are beyond the control of the contractor (such as fuel price increases and inflation) and any productivity targets or opportunities. The length of a contract can vary from six months to five years. Three to five-year contracts have become the norm for dedicated operations because of the amount of capital required for investment in depot and transport facilities and equipment. As a final part of the preliminary adoption process, the chosen contractor should be subjected to detailed scrutiny and contractual due diligence. It is important that a client company takes great care with this investigatory

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phase. Elements to cover should include: a review of industry sources, talking to existing clients, a thorough investigation of financial health, internal management capability, strategic direction, IT capabilities, security and labour relations.

Summary This chapter has described an approach to the contractor selection process. As discussed throughout the chapter, it is very important that a carefully structured process is followed to ensure that all essential considerations are covered. The main task is to put together a detailed invitation to tender, which can be used by the contract companies to prepare a suitable proposal for their running of the operation to be outsourced. Tender proposals are then carefully evaluated and compared so that the most suitable contractor can be identified. After detailed final negotiations and assessment are completed, a contract should form the basis for a provider–user relationship that can be carefully managed by the user, but allows opportunities for continuous improvement.

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Outsourcing management Introduction The management of outsourcing arrangements is fundamental to the success of the relationship between the third-party logistics provider (3PL) and the customer. All too often both the service provider and/or the client do not fully appreciate the need for sound management. Their roles in ensuring a successful relationship are essential. While it is, of course, the responsibility of both parties to make the relationship work, each organization must play its own part. This chapter defines the need for managing an outsourced contract, including the causes and implications of failure, looking at the responsibilities of each party. It then examines the key factors required in managing a successful relationship, including partnership and collaboration, the engagement model, continuous improvement and communications. For almost all new outsourcing arrangements, the initial issue after the contract has been successfully negotiated is the successful implementation of the operation. This process is discussed. Whether you are running a logistics operation as an in-house manager or as a third-party contract manager, the basic reasons for monitoring the operation are very similar: to measure whether the operation is meeting set service levels at an acceptable cost. There are also some special metrics that the 3PL may need to provide the client company. The various reasons for monitoring are reviewed. A formal approach to the management and monitoring of logistics and distribution operations is outlined. There are several techniques that can be used, and these are discussed. There are also a number of different methods

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that can be adopted to determine appropriate goals. These range in sophistication from very simplistic internal ‘year-on-year’ comparisons to quite detailed externally related engineered standards. These alternatives are described. Most well-developed systems are internally budget-oriented, but are also linked to external performance measures. A typical logistics operational planning and control system is outlined. In addition, this is developed within the context of a specific approach for a client’s monitoring of a 3PL. For most logistics operations it is possible to identify certain key measures that provide an appropriate summary measurement of the operation as a whole and of the major elements of the operation. These key performance indicators (KPIs) are considered in some detail, and a number of case histories are presented with particular reference to the monitoring of outsourced logistics operations. The final part of the outsourcing process is, therefore, to ensure that the contractor is adequately managed. This is a key consideration that is sadly neglected by some users. The signing of the contract should not be seen as the end of the outsourcing process. It is vital to continue to control and monitor the 3PL to ensure that the overall business and operational objectives are achieved. As will be stressed during this chapter, the 3PL has a very active role to play in this process.

Need for management Customer and 3PL relationships In the 2005 Third-Party Logistics study across 1,091 companies from a variety of industries, 88 per cent of those surveyed reported their relationship with their service provider as successful (Langley and Capgemini, 2005). This would suggest that in most cases at least the basic management is in place and working satisfactorily. However, although a majority of customers are satisfied with their 3PLs, they are continually demanding broader service offerings (Langley and Capgemini, 2005). Additionally, from a 3PL perspective 88 per cent, albeit acceptable, certainly provides opportunities for improvement. Indeed, the 88 per cent was split: 65 per cent ‘somewhat successful’ and 23 per cent ‘extremely successful’ (Langley and Capgemini, 2005). The study also examined the key expectations that customers placed on 3PLs. Langley and Capgemini found that these were: ឣ ឣ ឣ

superior service and execution; trust, openness and information sharing; solution innovation and relationship re-invention;

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ongoing executive level support; service offerings aligned with customer strategy and deep industry knowledge.

In turn the 3PLs expectations of customers were: ឣ ឣ ឣ ឣ ឣ

mutually beneficial, long-term relationships; trust, openness and information sharing; dedicating the right customer resources at the right levels; clear service-level agreements (SLAs); fiduciary responsibility and overall fairness in pricing.

The study concluded that the key factor in determining a successful relationship was whether customer expectations were properly aligned with the 3PL business model and relationship structure. Further, the study found that 71 per cent of customers viewed the 3PL as a ‘tactical service provider’ and only 23 per cent as a ‘logistics strategist’ (Langley and Capgemini, 2005). However when the customers were asked whether ‘using 3PL providers is a key to satisfying our company’s customers’, 56 per cent responded positively (Langley and Capgemini, 2005). This suggests that although the basic relationship is satisfactory, the customers are demanding more from their 3PLs, which are not responding quickly enough. The conclusion is that, although relations are satisfactory, there is still much to be done and that both parties desire a more collaborative and strategic relationship. One of the reasons this has not happened is that customers see the issue as the 3PLs’ responsibility, and vice versa. In truth of course it takes two parties to really work hard to make any form of relationship work. The prize for both customers and 3PLs is significant. Customers can improve their supply chains, thereby providing opportunities for cost reductions and service improvements. In turn, 3PLs can move to a more strategic level, helping in the retention of business and the development of value-added services and solutions.

Why 3PL relationships fail An article on a Kühne + Nagel website (2006b) reported that a Warehousing Education and Research Council (WERC) pamphlet showed that 55 per cent of logistics outsourcing relationships are terminated after three to five years. Study of the potential reasons, shown in Table 8.1, illustrates that these reasons are varied and may be the responsibility of the 3PL, the customer and indeed in some cases both of them.

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Table 8.1 Why 3PL relationships fail Customer

Third-party Provider

Inaccurate operational and volume information from customer

Not pushing back during negotiation, design and implementation phase

Inappropriate resources to manage 3PL

Over-promising

Not setting clear or realistic expectations

Not understanding customer’s requirements

Poor implementation

Poor implementation

Relationship focused entirely on cost reduction

No continuous improvement

No clear SLA in place

Poor service levels and performance

Outstanding 3PL performance not rewarded

Lack of IT or technical support or commitment

3PL just thought of as another supplier

Not behaving as part of the customer’s supply chain

Both parties’ responsibility Unclear contract No performance-measurement programme Poor implementation Poor communication

Customer issues Inaccurate operational and volume information from customer The seeds for poor relationships can be sewn in the early stages, including the RFQ (request for quotation) stage. If the customer knowingly or otherwise provides inaccurate operational or volume data to the 3PL, this will of course lead to incorrect operational design and/or costs being submitted. This will probably not manifest itself until after operations have started but quite quickly thereafter the symptoms will become apparent. In this situation it is quite common for both sides to blame the other for the problems.

Inappropriate resources to manage 3PL Although it is difficult to obtain specific statistics in this area, it is generally acknowledged that allocating inappropriate or indeed insufficient resources to manage 3PLs is a significant reason for relationship failure. Kühne + Nagel’s article on 3PL failures reports that Michael F Corbett, co-founder of the Outsourcing Institute, lists the failure to put the appropriate resources in

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place to manage the provider relationship as the number one reason for why outsourcing deals do not succeed (Kühne + Nagel, 2006b). There is certainly a danger that customers nominate the people who were managing the in-house operations to manage the 3PL. There are two issues with this. First, these people may be accomplished operators but not skilled in relationship management and often have no experience of managing 3PLs. Second, they are often too close to the operational side of the business and become too involved in every decision made by the 3PL. Both of these issues provide a poor base for a good-quality relationship and both sides become frustrated.

Not setting clear or realistic expectations Customers who do not set clear or realistic expectations are not being fair to the 3PL nor indeed themselves. If they do not set clear expectations, standards and measurements of what they consider to be success in the relationship, then it is likely that the relationship will fail. Equally outsourcing relationships will fail due to unrealistic expectations where the demands of the customers are unreasonable given the pricing or contract in place.

Poor implementation This issue is also discussed as the potential fault of the 3PL, and indeed of both parties, later in the chapter. If an implementation fails then it sets the relationship off on a very bad footing, which frequently cannot be recovered. Certainly, the customer can cause an implementation to fail by not putting sufficient resources into the project or not allowing for proper planning or transition from the in-house to the outsourced operation. Not making operatives available for sufficient training is frequently an issue for start-up projects. If system interfaces are being completed, then the customer needs to ensure that its IT teams have the appropriate time available for the development and testing of the EDI flows which will become fundamental to the new processes and operations.

Relationship focused entirely on cost reduction Focusing on cost reduction alone can produce all the wrong behaviour from the 3PL. It may sacrifice quality or some other service to reduce the costs and satisfy the customer ’s requirements. Equally, unless there are very clear ways to measure or calculate savings, the relationship will fail as each party can feel cheated by the other.

No clear SLA in place Not having a clear service-level agreement (SLA) in place can cause a relationship to degenerate. The customer perceives that the 3PL is not

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delivering the service expected and in turn the 3PL believes it is. Because there is no clear document that spells out exactly what service is expected, there is no objective way to resolve the concerns and the relationship suffers.

Outstanding 3PL performance not rewarded Relationships between customer and 3PL can suffer if the 3PL and its staff do not feel rewarded or recognized for outstanding performance. From a corporate perspective, rewards can be created by building in value-share opportunities into the agreement. Not doing this leaves the 3PL staff thinking they get no thanks for going the extra mile and eventually stops them trying. For a 3PL employee, excellent performance can be rewarded through such initiatives as recognition, awards and dinners. What is important is that the employees of the 3PL, who are effectively an extension of the customer, feel valued and rewarded at the appropriate time. The effect of not doing this is potentially a de-motivated workforce.

3PL just thought of as another supplier Treating your 3PL as just another supplier is a recipe for trouble. Mike Duciewicz, vice president, supply-chain management for Ricoh Corporation, a manufacturer and distributor of office equipment, says in a report published by Modern Materials Handling, ‘A third-party logistics provider cannot be thought of as just another supplier. They have to be thought of as an extension of your company’ (Modern Materials Handling, 2003). The danger of not doing this is that the 3PL behaves like a supplier, as opposed to being part of the customer’s business.

3PL issues Not pushing back during negotiation, design and implementation phase Kühne + Nagel’s very open article on 3PL failures provided an example of a large contract that it won, even though it was not allowed to visit the site or talk to management prior to putting the proposal forward. Once up and running, the relationship failed within a year. Kühne + Nagel recognized that it was its mistake for not pushing back and insisting on being given the opportunity to understand every aspect of the operation. In its view third parties must bear the burden for ensuring new relationships get off to a good start, recognizing, in fact, that many buyers of 3PL services do not deal with outsourcing and start-ups routinely. The logistics services provider must recognize when it is heading in the wrong direction and it must be

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prepared to push back on the customer to ensure that all appropriate information is available (Kühne + Nagel, 2006b).

Over-promising Over-promising by 3PLs appears to be one of the most significant reasons that relationships break down. Often they are too eager to win business and either over-promise or, just as seriously, under-price. Whichever, the implications are clear: the customer believes that it has bought against a set of expectations against which the 3PL cannot deliver. Often the third party cannot provide the expected or promised results because it did not set realistic expectations for the customer. The 3PL is sometimes so involved in winning the business that it does not consider all the costs and operational components required to deliver the service. This can mean that it takes on the new business without the appropriate resources to both implement and operate the contract effectively.

Poor implementation Getting off to a poor start dangerously undermines the relationship between customer and 3PL. In reality of course the responsibility for implementation is a team effort, but the 3PL has a clear responsibility in this area. The implementation project is a good indication of how a 3PL relationship will develop down the road. Get it right and it lays a good foundation for the future. Get it wrong and it is extremely difficult to get back onto a sound footing. Project planning is fundamental to a successful project in addition to strong project management methodology and reporting. 3PLs must carefully manage any changes in the scope of the project, clearly setting out the implications to the customer of each change. IT interfacing and implementation of new systems are a key part of many outsourcing projects and often their importance is under-rated. The implementation phase is the ideal time to build relationships across the two organizations. However if the implementation is poorly executed, relations will not be built and the situation may be irretrievable. If the 3PL is not clear about the specific requirements and service levels against which it needs to deliver, the implementation will be flawed and invariably cause operational problems.

No continuous improvement When the initial period of service improvements and savings have been achieved, customers expect to see their 3PL provide continuous improvements across their services and operations. Indeed, as concluded in the Langley and Capgemini study (2005), customers are looking for their 3PLs to move from their perceived position as tactical providers to take more of a strategic role through developing and investing in the expansion of services

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and in the ease of integration. Failure to have a formal continuous improvement infrastructure in place results in a stagnant relationship, making it highly likely that at contract renewal time the incumbent 3PL will not be considered.

Poor service levels and performance Obviously, failure to achieve agreed service levels will leave a customer feeling extremely dissatisfied with a 3PL. Service levels, cost reductions and commitments that are not met will be seen as a clear sign of failure by the customer. In extreme cases this can be taken as breach of contract and the appropriate steps taken. 3PLs have a responsibility to the customer and its shareholders to deliver what they have promised. Failure to do this can end in a lost contract.

Lack of IT or technical support or commitment Customers are demanding more sophistication from their 3PLs, including investment in IT and new technologies such as RFID. Seventy per cent of respondents surveyed in the 2005 Third-Party Logistics study (Langley and Capgemini, 2005) see the 3PL relationship, including IT services, as tactical. Those surveyed saw the need for the development of such applications as supply-chain planning, supplier management and customer order management, together with the ability to act as an information integrator. In essence, it is necessary for the 3PL to become more strategic in nature. 3PLs who fail to make this investment will increasingly see themselves excluded from renewals and tenders.

Not behaving as part of the customer’s supply chain The 3PL must see itself as an integral part of the customer’s supply chain and business to be successful. If it behaves as if it is outside the customer’s business, then it will be seen as such by the customer. The 3PL should have strategies and plans that attempt to link its activities and services inextricably with the customer’s supply chain, and should work hard to make this appear seamless. Failure to do this will be seen by the customer as the 3PL not supporting its strategy and plans and could have serious implications for the relationship.

Both parties’ responsibility Unclear contract Although it is not positive to manage a relation through a legal contract, it is good practice to have a contract that clearly documents what is agreed and

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also what is disagreed to provide a good foundation for the relationship. The contract should address all potential issues together with the relevant remedies. This should help to avoid ambiguity in the future relationship. When there is lack of clarity, both parties can become confused as to their position in the relationship, which in turn can lead to inefficiency.

No performance-measurement programme Both parties are responsible for setting up a performance-measurement programme that clearly identifies jointly agreed standards of performance and how each will be measured. The customer should demand regular reporting from the 3PL and in turn 3PLs should ask for regular performance reports from their clients. Failure to do this will mean that they will not resolve issues until it is too late.

Poor implementation Poor implementation has already been discussed under the customer and 3PL sections; however the more likely reason for poor implementation is that both parties have played a part in its failure. V K Sangam from Massey University notes in his article ‘Challenges in managing the 3PL relationship’ (2006) that the implementation process is very tricky and needs active cooperation and coordination by both parties. He goes on to suggest that such projects should include ‘system (IT) integration, customisation of operating procedures, adapting to the service measures, understanding the exceptions management process, defining the escalation process etc.’ (Sangam, 2006). Further, he comments that all these activities need a dedicated team and that although many see the project as the responsibility of the 3PL company, it is in fact a team effort.

Poor communication As with any relationship, good communication is vital to its well-being. In turn poor communication will sour a relationship quickly. It should be frequent and both ways. Both parties should also remember that listening to the other is an essential part of good communication. Poor communication causes inefficiency and mistrust. With the need for the 3PL to work so closely with its customer, any problems with communication will almost certainly cause the relationship to fail.

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Managing the relationship Partnership and collaboration Partnership The 3PL/customer relationship is one where ‘partnership’ (albeit rather a hackneyed term now) can provide the basis for the business relationship. In a Global Logistics & Supply Chain Strategies article entitled ‘Finding value in mature outsourcing relationships’ (Murphy, 2006), Jimmy Rodriguez, chief commercial officer at California-based ServiceCraft Logistics, says: If you understand the customer’s business model, the markets and geographies it wants to penetrate, the verticals it wants to target, its different manufacturing options and so on, you can continue to find low-hanging fruit. But if your relationship is just as a vendor of logistics services, you hit a brick wall.

Adding that partnerships are a two-way street, he further comments, ‘The partnership has to be on both fronts. The customer has to allow the service provider to become an intricate part of its business and look beyond the services it currently is providing’ (Murphy, 2006). Good partnerships will encourage the sharing and joint development of a strategic vision. Not only does a customer get the benefit of the 3PL’s thoughts and experiences, it also achieves the 3PL’s buy-in for the realization of the vision.

Collaboration To become a true partner requires a high degree of trust and collaboration. In his 2006 article ‘Leveraging logistics outsourcing relationships’, Joe Grubic, senior manager of global logistics with Nortel Networks, writes that the degree of trust in a relationship determines the level of flexibility a customer will allow the 3PL in operating to the best of its capability. Grubic argues that this flexibility is necessary to deliver best-in-class processes and solutions and in turn achieve the required performance and cost objectives. Clearly, a change to an outsourced service does not happen overnight (albeit some seem to think it does!); in truth it is more of a journey that starts with the implementation itself and then goes through a series of maturity phases. Whilst working in a collaborative manner during the definition of the initial road map from the existing to the desired vision is important, this approach is equally important as the relationship matures. A good collaborative approach will support business change and challenges, allowing both parties to review continually the current state against the vision and to agree actions to be taken to stay on course.

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In the 2005 Third-Party Logistics study, (Langley and Capgemini, 2005), Niek Visarius from Rockwell Automation states that he had started the relationship with his 3PL with a very strict service-level agreement, but over time there had been a shift to a more strategic relationship. This had enabled Rockwell to share its five-year plan with the 3PL so that the latter could ‘collaborate with us on how to architect the best supply chain solution’.

Outsourcing not abdication There can be a temptation, when outsourcing, to think that all problems with logistics or supply-chain activities have gone away to the 3PL. Whilst a number of the problems may now be the responsibility of the 3PL, others still remain firmly the responsibility of the customer, and indeed there are new issues to do with how the relationship is managed. In an article for Global Logistics & Supply Chain Strategies, entitled ‘In managing outsourced relationships, there are no simple solutions’ (Bowman, 2006), Tom McKenna, senior vice president of logistics engineering with US-based Penske Logistics, says that outsourcing will not work unless the customer stays deeply involved. Certainly it is important that customers stay involved but they should focus on managing the 3PLs and not controlling them. The customer should not need to be involved in every decision taken by the 3PL – that is what the 3PL is paid to do. However, a good customer will want to collaborate around those activities that directly impact on service and where there is a touch-point with their business. For example in the transfer of customer orders from the customer ’s enterprise resource planning (ERP) system into the logistics provider ’s warehouse management system, customers will want to ensure that there is a full audit trail and exception reporting, and expect to be notified immediately of any issues. They will also require regular meetings and reporting against which they can monitor the 3PL’s performance.

Case history: Smith & Nephew Smith & Nephew is a British-based global manufacturer and supplier of wound-care and medical device products to medical distributors and healthcare organizations. In 2000, the US-based division that supplies wound-care products moved its order fulfilment to a distribution centre in Atlanta. Due in part to its experience in medical distribution, Smith & Nephew appointed logistics provider APL to manage the operation. However, because of the somewhat stringent handling requirements

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demanded by the US Food and Drug Administration and other regulatory bodies, Smith & Nephew did not just hand over all the responsibility for the logistics programme to APL. The customer retained control of all traffic and routing decisions, including carrier selection, and for a short while even kept a traffic clerk to carry out everyday tasks such as document preparation and delivery scheduling. It also remained closely involved in stock auditing, cycle counting and quality assurance. Smith & Nephew manages the ongoing outsourcing arrangement through formal quarterly reviews of key performance metrics. David Blythe, logistics manager of Smith & Nephew, who made the outsourcing decision, believes the philosophy of outsourcing is one of tight control. ‘You must really stay engaged with your 3PL to make it successful,’ he says. ‘If you go hands-off, the relationship typically has the chance of going astray.’ Source: Bowman (2006)

Engagement Account management Account management is important for a number of reasons. First, executed correctly, it can help in the retention of customers. Second, it can lead to more business with the client, potentially leading to improved profits for the 3PL. However, good account management also focuses on identifying benefits for the customer. By helping the customer to improve its operations, costs or sales, the 3PL is adding value. Part of account management is ensuring that staff are aligned across the various levels of the organization as shown in Figure 8.1. In Robert Bowman’s article entitled ‘In managing outsourced relationships, there are no simple solutions’ (Bowman, 2006), Bob Bianco, president and chief executive officer of Menlo Worldwide Logistics, says that it is imperative to align the respective personnel of a 3PL and its customer at multiple levels. In addition to the tactical staff to run the operation, the relationship also needs strategic thinkers who can demonstrate what Bianco refers to as ‘thought leadership’. To do this he believes that the senior 3PL management need an understanding of the account’s long-term business needs. Like many 3PLs, Bianco believes that there needs to be a single ‘champion’ of the relationship within the customer’s organization. Menlo also holds quarterly executive reviews, often involving the customer’s top management, to review progress and discuss strategy (Bowman, 2006).

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CEO Supply chain/ logistics director

Supply chain/ logistics management

Supply chain/logistics planning & sales orders supervision

Customer

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CEO 3PL account director

Operations management

Logistics operations supervision

3PL

Figure 8.1 3PL account engagements

Implants Third-party providers have seen the opportunity for embedding implants into their customers operations for some time now. There is no better way to thoroughly understand the drivers for a customer ’s business than to provide an implant working side by side in a planning or other supplychain role. In Bowman’s article (2006) about managing outsourced relationships, Expeditors is reported to have its own people inside the operations of more than 100 customers, while Menlo is reported to have people at the customers’ facilities, or their staff at its own, in 90 per cent of its contracts. Of course the danger of implants is that they can ‘go native’ and assume the role of the customer if they are not well managed and motivated.

Integrated systems Part of the engagement between a 3PL and its customer is the way the data flows between them. It is essential in operations of any scale to tightly integrate the 3PL systems (usually warehouse or transport management systems) with the client’s ERP system. Many 3PLs have invested in integration software that allows them quickly and reliably to connect the various systems. High levels of integration allow not just high volumes of

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data to be passed between companies, but also at a very high speed. The process is extremely reliable, with leading integration platforms having audit techniques that can signal an alert if messages leave one system but are not received or processed in the other. In an article entitled ‘Finding value in mature outsourcing relationships’ by Jean Murphy (2006), Mike Pilver, vice president of global automotive sales at APL, says: ‘Integrating and interfacing with SAP systems is another area where we have found savings.’ He goes on to say: ‘If there is a disconnect between the customer’s material ordering system or procurement system with the supplier, and yourself as the 3PL, additional costs are built in because you are getting information hand-offs that are manual.’

Continuous improvement Sector expertise One of the factors that 3PLs bring to their customers is expertise in the industry sector concerned. This provides the opportunity to help clients understand industry best practices and to provide benchmarking data. Further, as mentioned in Jean Murphy’s article entitled ‘Finding value in mature outsourcing relationships’ (2006), Ryder reported that it continuously looked at what it had learned from other industries to provide ideas for its customers. The article cites an example where the company had modified several techniques from the automotive sector, such as sequencing, and applied them to consumer electronics. A point that must be made, however, is the issue of client confidentiality, which can sometimes stop 3PLs from sharing such information.

Process improvement Customers want to see continuous improvement in processes in order to benefit cost and service. This is the case because cost and service are the number one and two factors why customers decide to use a 3PL provider, as recorded in the 2005 Third-Party Logistics study undertaken by Langley from Georgia Tech University and Capgemini (Langley and Capgemini, 2005). In Murphy’s 2006 article, Joe Gallick, senior vice president of sales at Penske Logistics, says that process improvement is one of the ways that Penske uses ‘to take a relationship further and excavate deeper into the [customer ’s] supply chain to find more efficiencies’. Furthermore, as a General Electric (GE) company, Penske often uses the ‘Six Sigma’ methodology as the foundation for this activity. Gallick also comments, ‘We don’t necessarily look at the processes we are providing, but rather at adjacent processes that are either inputs or outputs to what we do. Then we work to

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take out defects or speed up cycle times’ (Murphy, 2006). He goes on to say that changes in processes that provide a significant improvement enable Penske to drive down cost or improve service levels, both of which get noticed by the customer.

Innovation The Langley and Capgemini 2005 Third-Party Logistics study (2005), clearly states that customers are seeking more solution innovation from 3PLs. Innovations such as voice picking and RFID are the sort of solutions that customers are looking for to enhance their operations. These two examples are examined in more detail:

Voice picking Voice picking has brought about significant improvements in productivity in a number of cases. Scott McWilliams, CEO of US-based Ozburn-Hessey Logistics, says in Jean Murphy’s 2006 article that once Ozburn-Hessey implemented voice picking for a client, the technology ‘has improved our efficiency substantially within that facility’. He goes on to say, ‘There definitely is a correlation between the amount of creativity we can bring to the table and the amount of information a customer is willing to share with us.’

RFID RFID, as discussed in more detail in Chapter 9, has become a hot topic since Wal-Mart stated its intention to use it across the entire supply chain. This does, however, provide another opportunity for 3PLs to develop new ways to support customers better. Like a number of 3PLs, including DHL, US-based Ryder has responded to this opportunity by opening a RFID laboratory. Chuck Lounsbury, senior vice president of Ryder, says in Murphy’s article about value in outsourcing relationships (2006), ‘We can demonstrate the use of passive and active tags at the pallet and carton levels, and even down to “eaches”, with applications in both the back room and the front room.’ Furthermore, some 3PLs have been piloting RFID with their customers. DHL has been piloting trials with Metro in Germany and the House of Fraser in the United Kingdom and China (Victoria University, 2006). Meanwhile Kühne + Nagel has been working with Wal-Mart and Siemens (m.logistics, 2006).

Communication Almost certainly the key ingredient for ensuring a good relationship between provider and customer is communication. Of course communi-

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cation is the responsibility of both parties in the relationship, and to ensure good levels of communication they both need to provide channels for this to happen. In Murphy’s 2006 article, Joe Gallick says he believes that regular meetings provide a forum for both parties to discuss the opportunity for additional work outside the explicit services included in the contract. ‘When we bring an idea to a meeting with a business case and an engineering solution and an ROI expectation, we know it is being presented to a level where it will be considered,’ says Gallick. ‘If we have done a good job in selecting the companies we partner with, these opportunities will always emerge as the relationship matures.’ In the same article Dave Lamolinara, vice president of business development at TNT Logistics in the United States, says, ‘It is important to regularly communicate with your customer so as to stay aware of how its business may be changing and how that impacts its needs and priorities,’ adding, ‘We need to make sure we are in tune with that so we can readjust or recalibrate our own goals and objectives. It helps avoid surprises.’ Penske’s Gallick also sees regular meetings as an opportunity to understand the customer’s strategic vision and how the 3PL can impact on the operating metrics that support the vision. He says, ‘It also is the best time to learn from the customer, at the strategic level, what their vision is, where they are taking the company and what factors may change their business going forward’ (Murphy, 2006).

Case history: Yamaha and APL Yamaha Motors Corporation and APL Logistics have been working together for over 30 years. Interestingly, Tom Wade, Yamaha logistics manager, and Bob Gaughan, group general manager and head of APL’s Atlanta operation, have been key players in the relationship for over 20 years. Possibly more incredible is that the arrangement has until recently operated under a 30-day renewable contract. Yamaha’s Wade believes that flexibility is the key reason for the success of the relationship. ‘What we have found with APL is a continued willingness to develop new aspects of their business and new valueadded services,’ says Wade. As with most companies there have been many changes in Yamaha’s business over the last 30 years or so, but in Wade’s words, ‘APL Logistics management has been very consistent and energetic in providing whatever services Yamaha needs and in realizing that those needs continually change as our business changes. There is a lot of understanding of our business and business practices.’

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An example of how APL Logistics has been flexible in responding to changes is Yamaha’s opening of two US manufacturing facilities in 1985. APL now brings raw materials and complete knocked down (CKD) products from rail heads to Yamaha’s factories and distributes finished product to its regional distribution centres. Prior to this, Yamaha had imported all of its products. Wade explains, ‘We still are a large importer, but what changed is that APL Logistics expanded tremendously into domestic transportation for us. We originally started with one product and we now produce four very distinct products.’ Wade concludes, ‘APL has adapted to all of this very, very well.’ Source: Murphy (2006).

Implementation planning Importance of implementation For almost all new outsourcing arrangements, the initial issue after the contract has been successfully negotiated is the successful implementation of the operation. As with any large business project it is essential to identify and agree a project plan so as to ensure that responsibilities are clear and that there is a feasible timetable for implementation. A typical implementation plan will need to identify the tasks for both the user and the contractor organization, including contingency planning. The aim is to effect a smooth transition from the old to the new contract. From the user perspective it is vital to ensure that there is clear visibility of the implementation process. A team that includes both user and contractor staff needs to be established and this team needs to meet on a regular basis to monitor and discuss progress. Detailed project plan activity charts should be used. It is often said that the real work begins once the contract has been signed, and the work required to create a practical operation from a conceptual document is not to be underestimated. An appropriate provider representative or representatives should be included in all client planning meetings, especially where strategy and performance is reviewed and this may impact on the new operation. By the same token, the provider should be responsive to any changes that are requested by the client, and should communicate and discuss any implementation issues as they arise. There are a number of potential pitfalls that might occur during the implementation process, and some major examples are shown in Table 8.2. Note that these can originate from the client as well as the provider!

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Table 8.2 Potential pitfalls that might adversely impact the successful implementation of an outsourcing operation Client-initiated Problems

Contractor-initiated Problems

Unrealistic goals at start-up

Failure to manage expectations

Delaying or failing to finalize the contract

Not having executive support

Making last-minute requests, setting up new expectations, moving up the start date

Making last-minute decisions and changes

Poor decision-making mechanisms

Delaying or failing to finalize the contract

Maintaining a hands-off attitude

Not dedicating the implementation team to a sole project

Poor internal employee communications

Not developing agreed start-up and steady-state metrics

Not accepting any responsibility in the implementation process

Not measuring performance accurately (or at all) during start-up

Misinterpretation of the service agreements and the associated metrics

Not communicating metrics to employees

Using metrics as a whip rather than a tool for managing the relationship

Not being proactive with communication, thus forcing the client to initiate meetings, etc

Reacting too severely to the first quality breakdown

Failing to adjust processes and retrain staff as operational changes and quality issues arise

Expecting total adherence to the contract agreements on the first day of implementation

Lack of awareness of regional HR issues, such as employee quality, availability and cost

Internal team not capable or not totally committed to the implementation

Moving to steady-state operation before implementation phase is fully completed

Source: based on Tompkins (2006).

Client perspective One key issue that can arise from the client is the adoption of unrealistic goals for the start-up of the operation. There are always going to be teething problems as the operation beds down, so the provider cannot be expected to hit all the key targets and achieve all the key metrics from Day One. Suitable goals need to be determined with a gradual, but agreed, timetable to meet full operational requirements. Poor decision making can also have an adverse effect on successful implementation. This might include delays to the contract finalization, last-minute changes, the moving of the start date or

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inappropriate mechanisms for making decisions. Clients can also be prone to sitting back and letting implementation take place without providing sufficient input or taking appropriate responsibility. This is a classic problem, and one that re-emphasizes the need for a client to work together with the 3PL to make sure that the contract is implemented successfully. Finally, the metrics that are used to measure the operation can be a problem if the client misinterprets them or uses them as a whip to punish the contractor rather than as an aid to help manage and improve the operation.

Contractor perspective There are also a range of contractor-initiated problems, as Table 8.2 illustrates. A classic communication issue is the failure to manage the client’s expectations. If problems, errors and delays occur, then it is essential that the client is made aware and kept up to date with any changes and developments. Failure to do this is exacerbated if there is an insufficiently high level of executive support from the provider to help explain and alleviate problems. Similar to some of the client issues are poor decision making, which might include delays to the contract finalization or last-minute changes to the physical or operational processes. The lack of appropriate metrics can, of course, be an issue, as can the failure to measure performance accurately for feedback to the client. Table 8.3 outlines a summary of problems, lessons learnt and remedies recommended from one such sourcing implementation project. It covers a number of key issues and provides some useful advice on how to avoid some typical implementation problems. Part of the implementation process is likely to include the preparation of new administrative, safety and service procedures, which will be incorporated in an operations manual. It is also strongly recommended that prior to, or during, the implementation phase the 3PL and the client go through the contract in detail to ensure that each operational requirement is being suitably addressed. The transition plan should reflect these requirements, and any issues that cannot be agreed at operational level should be taken up during regular discussions between the senior management of the client and the provider. Another important aspect, as already indicated, is to develop and agree suitable metrics that enable accurate measurement of the operation. These should include measures that are relevant to the transition from the existing operation to the new one. Ideally, metrics for implementation and for the finalized operation should be developed and agreed during the contract negotiation period, although this is not always undertaken in time! These metrics are, in any case, likely to need some adjustment during the implementation phase because it is virtually impossible to derive a completely suitable set of metrics for an operation when it is only in its planning stage.

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Table 8.3 Project problems, lessons and remedies Problem

Lessons Learnt

Remedies

Issues were not properly addressed because project leaders did not challenge their teams regarding key aspects

Project management approach of client and provider needs to focus more on and address key details

Hold regular project review meetings at management level. Also hold progress meetings of key staff to identify and resolve key issues

Project review meeting minutes did not include sufficient detail

Issues were raised for action, but were actually overlooked

3PL to keep detailed minutes of all meetings and identify action points and issues

Staff lacked sufficient understanding of the operational requirements

Initial training took place, but procedures and systems changed before operational start-up

Prepare operational procedures in advance, with a process to redefine these. Update operators with additional training

Lack of a detailed transfer plan

Transfer focused on clearing old DCs and not on activating new ones

Transfer plan satisfied client requirements but not 3PL requirements. Future plans to be initiated and agreed by both

Team planning, but project databases and files not updated regularly

Team planning is a good idea, Need to link updating to the but will only succeed if regular team meetings and everything is kept up to date minutes

Fear of failure

Undue stress was placed on completing on time, which led to reluctance to be open about problems and delays

Problems to be highlighted in management meetings and recorded in minutes as action points

WMS did not meet functionality

Development emphasis was on systems perspective rather than operational functionality

Operational functionality to take precedence in future developments

IT systems not given sufficient time for development and testing

Time pressures caused failure Future implementation to to recognize real completion prioritize testing before system problems goes operationally live

Warehouse staff lacked sufficient knowledge of the operation

Operational procedures had insufficient detail and were not communicated well to staff

Operational procedures to be related to local conditions and to form basis of training

Local management lacked experience and competence to run complex operations

Operational complexity underestimated by management. 3PL to include training in implementation plan

Ensure training covers all operational and management levels

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Table 8.3 continued Problem

Lessons Learnt

Remedies

Local project team reluctant to accept external advice and inputs

3PL failed to accept external consultant as project leader

Project management structure to be clarified and agreed at outset

Local 3PL senior management lacked operational understanding of requirements

Local 3PL senior management need to be involved in implementation

Local 3PL senior management to be involved at all stages of implementation and start-up

Warehouse space overestimated and layout inappropriate

Too much reliance on existing Use warehouse simulation and operation during planning. provide process to update 3PL Also subsequent reduction in on changing requirements inventory not advised to 3PL

General communication between players included ‘good news’ only

Project suffered through lack of visibility of problems

Problems and issues to be acknowledged, reported at regular meetings and acted on

Warehouse not ready in time for operations

3PL underestimated operational complexity

Audit of warehouse readiness to be undertaken throughout project

Information systems not ready in time

Systems functionality insufficient and inadequately tested

Ensure reporting of delays at meetings and introduce plan for effective testing

Lack of provision of basic information

Information provided was not up to date/revised

Meaningful information to be identified and provided as agreed

Lack of KPI information

No KPIs provided during early operational phase

KPIs to be set up and available from operational outset

The importance of project implementation A severe discontinuity in parts supply leading to one week of lost car production was a problem faced by UK automotive company MG Rover when it switched its 1400 million contract for parts logistics from its longterm partner Unipart to Caterpillar Logistics. The original operation provided a parts supply service of 98 per cent availability to the Rover dealer network. After the changeover this fell to below 95 per cent, even dipping to 90 per cent at times. The company had anticipated problems at the change to a new service provider, but these were more severe than anticipated, and they were compounded by a change in the supplier base in the UK and the migration to a modern IT system. Twenty-five years’ worth of processes and relationships had to be dismantled.

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A lack of staff time dedicated to the project by the new service provider was a factor, plus MG Rover’s apparent lack of understanding with regard to its new third-party partners. This last issue occurred because Unipart had been running the highly profitable parts business for so long that MG Rover had lost deep knowledge of its supplier base and its supply operation. This was a classic case of gaining great economies of scale from outsourcing logistics, but also of losing control of the relationships and operations involved. The main lesson is that ‘any switch over of core logistics systems is a sensitive and difficult operation. Such a crucial change has to be a relatively slow and painstaking process, with plenty of testing and dummy trials.’ It cannot be assumed that everything will go perfectly, ‘... because it won’t. Do not be ambitious. The can-do mentality is fantastic, but on something as fundamental as this type of change you have to be really realistic about the time frame. You need to work very carefully with both parties... to ensure there are no misunderstandings that can occur between them. The way in which you monitor, and measure the milestones along the way is critical to the way the implementation goes.’ Taking the outsourced logistics route did eventually lead to significant benefits for MG Rover and the company became very happy with the service it received from the new service provider. (Manufacturer, 2003)

Why monitor outsourced logistics operations? Whether one is running a logistics operation as an in-house manager or as a third-party contract manager, the basic reasons for monitoring the operation are very similar: to measure whether the operation is meeting set service levels at an acceptable cost. The major difference is that for an outsourced operation there will be certain selected metrics that will need to be provided to the client company. These metrics will also be used to confirm to the client that the operation is being well run and that service levels are being met, but in addition will relate particularly to the servicelevel agreement and the main outsourcing contract. To establish an effective system for cost and performance monitoring and control there is a need to identify some overall guidelines or aims that the system is designed to fulfil. For in-house operations these are likely to reflect major business objectives as well as more detailed operational requirements. Thus it is important to be aware of the role of logistics and distribution within the context of the company’s own corporate objectives. It is also essential that the control system reflects the integrated nature of logistics within an organi-

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zation. For outsourced operations, the contractor is likely to concentrate its monitoring on the more detailed operational aspects. Some fairly specific objectives need to be identified that relate to the logistics operation. A major feature is likely to be measuring actual progress against a plan. Typically this will be to monitor the budget in a way that identifies whether some change from plan has taken place but also provides a usable indication of why actual performance or achievement does not reflect what was originally planned. Another feature may well be to highlight specific aspects or components of the system that need particular attention. Care needs to be taken in identifying any broader objectives. They need to be meaningful. Examples that fail the test include: ឣ

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‘The aim for distribution is to minimize costs.’ Is this to be at the expense of customer service? There needs to be a clearly identified relationship between cost and service requirements. ‘The level of service is “as soon as possible”.’ What does this really mean? Are all orders treated the same? How do we treat customers with specific delivery window requirements? What happens with urgent orders?

Examples of more relevant objectives are: ឣ

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to provide accurate, relevant and timely information on key areas of logistics cost; to provide accurate, relevant and timely information on key areas of operational performance and to make operational adjustments as necessary; to provide accurate, relevant and timely information on customer service levels; to provide regular information to the client as agreed.

Overall the information must be quantitative and comparative wherever possible, relating to the set objectives.

Different approaches to cost and performance monitoring The monitoring and control of logistics and distribution operations is often approached in a relatively unsophisticated and unplanned way. Control measures are adopted as problems arise, almost as a form of crisis management. It is important to adopt a more formal approach, although this should not necessitate a complicated format. There are several systematic approaches that have been developed with a varying degree of

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sophistication and detail. There are some very obvious similarities between these different approaches, as can be seen from the following descriptions:

Balanced scorecard The balanced scorecard was initially put forward by Kaplan and Norton in 1996. It is a broad business approach that translates the strategic mission of a business operation into tangible objectives and measures. KPIs are developed to represent a balance between external measures for shareholders and customers, and internal measures of critical business processes, innovation and learning. This structure is shown in Figure 8.2. The financial perspective concerns the relationship with shareholders and is aimed at improving profits and meeting financial targets. The customer perspective is designed to enhance customer relationships using better processes to keep existing customers and attract new ones. The internal element is to develop new ideas to improve and enhance operational competitiveness. Innovation and learning should help to generate new ideas and respond to customer needs and developments. A series of critical success factors are identified that relate directly to the main business perspectives. These are then used as the basis for creating the critical cost and performance measurements that should be used regularly to monitor and control the business operation in all the key areas identified. Some typical measures are shown in Figure 8.3 under the appropriate scorecard categories.

Market situation, product strategies, competitive environment Strategic business objectives

Shareholders

Customers

Management process

Ability to progress

Financial perspective

Customer perspective

Internal perspective

Innovation & learning

Critical

success Critical

factors measurements

The balanced scorecard

Figure 8.2 The balanced scorecard Source: based on Kaplan and Norton (1996)

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Financial measures Sales growth % Market share by D s Investment (% of sales) Revenue per employee ROCE

Internal process measures On-time delivery Quality improvement Stock turn Order-picking accuracy

Customer measures Customer acquisition Customer retention Customer satisfaction The perfect order

Innovation & learning measures Employee retention Employee satisfaction Employee productivity New product introduction Training achievement

Figure 8.3 Balanced scorecard: typical measurements

SCOR model The SCOR model (supply-chain operations reference) is an important approach that has been developed as an aid to cost and performance monitoring. It is a hierarchical model, consisting of four different levels: competitive advantage, strategy implementation and process definition, detailed process elements, and implementation. It is very much a process-oriented approach, where the initial aim is to benchmark, refine and improve key operational processes, and then to identify and introduce key measures that monitor set cost and performance targets. Eventually, the major company performance attributes are identified and the appropriate metrics are developed. A typical example of this performance metric development is shown in Table 8.4. SCOR metrics are generally arranged under a number of categorizations. There are many different individual measures that come under the different categories. The main categories are: Assets Cost Data Flexibility Inventory

(such as capacity utilization, equipment availability) (inventory holding, invoicing) (forecast accuracy, visibility) (order, returns) (availability, obsolescence)

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Orders Productivity Time

(fulfilment accuracy, invoice errors) (direct versus indirect labour, vehicle subcontracting) (order cycle time, on-time delivery)

This is a particularly useful approach for third-party companies to adopt for their contract operations because it covers the key logistics elements and should fit well with typical client-company approaches.

Integrated supply-chain approach An integrated supply-chain approach can be used. This recognizes that a total systems approach can be adopted for the whole business or supply chain, and that any performance metrics should be developed on this basis. This, again, is a process-oriented approach that attempts to enable cost and performance monitoring to be based on a horizontal view of a business rather than the traditional, vertical, silo-based functional structure that is traditionally used. This approach to the development of supply-chain metrics is outlined in Figure 8.4. Table 8.4 SCOR: Typical performance metric development Performance Attributes

Attribute Definition

Metrics

Supply-chain delivery reliability

The performance of the supply chain in delivering against the perfect delivery criteria

Delivery performance Picking accuracy Perfect order fulfilment

Supply-chain responsiveness

The speed at which the supply chain provides products to the customer

Order fulfilment lead time Ease of order placement

Supply-chain flexibility

The agility of the supply chain Supply-chain response time in responding to marketplace Production flexibility changes to gain or maintain competitive edge

Supply-chain costs

The costs associated with operating the supply chain

Supply-chain asset management

The ability to manage assets to Capacity utilization support customer satisfaction Equipment utilization

Cost of goods sold Supply-chain management costs Value-added productivity

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Customer need identified

Order capture

Order entry

Time:

Order approval & confirmation

Delivery

Invoice & collection

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Customer need met

Supply-chain response time

Financial (costs):

Total logistics costs Value-added per employee

Financial (assets):

Cash-to-cash cycle time Asset turns

Quality:

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Faultless order selection Faultless Invoices

Customer satisfaction: Delivery-to-customer request date

Figure 8.4 Integrated supply-chain metrics Source: from PRTM study (no date)

This type of framework can be used initially to help identify required outcomes that need to be measured, and then subsequently for establishing any relevant diagnostic measures. Suitable and accurate diagnostic measures are essential to enable the reasons for any problems to be identified and then rectified. This is a vital element of good cost and performance monitoring that is often neglected. Some examples are indicated in Table 8.5. Table 8.5 Integrated supply-chain metric framework Metric Type

Outcomes

Diagnostics

Customer satisfaction/quality

Perfect order fulfilment Customer satisfaction Product quality

Delivery-to-commit date Warranty costs, returns and allowances Customer enquiry response time

Time

Order fulfilment lead time

Source/make cycle time Supply-chain response time Production plan achievement

Costs

Total supply-chain costs

Value-added productivity

Assets

Cash-to-cash cycle time Inventory days of supply Asset performance

Forecast accuracy Inventory obsolescence Capacity utilization

Source: from PRTM study (no date).

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This approach may be over-elaborate for some outsourced operations, particularly where there is only a limited breadth of outsourcing, such as just the storage or just the delivery transport. The ‘metric type– outcomes–diagnostics’ model shown in Table 8.5 can, however, usefully be adapted for some outsourced operations.

Operational approach A simple and straightforward operational approach is sometimes the most appropriate to follow for small to medium-sized companies and also for many outsourced operations. This is as follows: 1. 2. 3. 4. 5. 6.

Determine scope of logistics activities. Identify organization and departmental objectives. Determine operating principles and methods. Set productivity and performance goals (using standards and the like). Measure and monitor performance. Take corrective action if necessary.

The scope of distribution and logistics activities will, of course, vary from one operation to another as will the extent of integration. Because of this, it is impossible to identify a standard system that can be adopted generally. First of all, the scope of activities that need to be considered should be determined. For outsourced operations this can be very straightforward because it is likely to be all of the activities included in the contract. This usually means the traditional components of logistics: trunking (line-haul), distribution centre operations, local delivery and so on. More detailed departmental objectives should be defined. These will include such areas as stock-holding policies by individual line or product group, customer service levels by product, by customer type or by geographical area, delivery transport costs, and utilization and performance. Operating principles and methods need to be clarified with respect to the different logistics components, such as trunking (line-haul) and delivery transport, and warehousing resources and usage, together with implications for seasonality and other factors. These will provide the basis for establishing realistic and relevant measures. Productivity and performance goals should then be set in relation to the detailed operational tasks that are performed and with respect to the overall output requirements for the integrated logistics system as a whole. These should cover all the essential aspects of the physical distribution system. It is often easier to categorize these under the major sub-systems of warehousing (order picking performance, labour utilization, cost per case and so on); transport (such as vehicle utilization, cost per mile/km, fuel

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consumption); and administration/stock-holding (customer orders received, stock-outs, percentage of orders fulfilled and similar elements). Goals should be set based on some acceptable standards or comparative information. There are several different approaches used by organizations, and these are discussed below. They include: ឣ ឣ ឣ ឣ ឣ

measuring cost and performance against historical data; measuring against a budget plan; developing physical or engineered standards; using industry standards; benchmarking against ‘best practice’.

For outsourced operations, goals and associated metrics are likely to be based on the contract and service-level agreement. Finally, key indices and ratios need to be developed to allow for appropriate monitoring and control to be undertaken (for instance, actual work against planned work, cost per case, cases per hour, tonnes per journey). These need to be representative of the distribution operation, and they should be capable of clearly identifying why a deviation has occurred as well as whether a deviation has occurred.

What to measure against? As already indicated, there are a number of different approaches that can be adopted to determine appropriate goals. These range in sophistication from very simplistic internal ‘year on year’ comparisons to quite detailed externally related engineered standards. Most well-developed systems are internally budget-oriented, but are also linked to external performance measures.

Historical data Systems that merely compare overall activity costs on a period-by-period basis may not be providing any useful information that can be used to monitor operational performance. For example, a measure may indicate that the cost of logistics for a company has reduced as a percentage of total revenue for this year compared with last year. Without any background to this measure it is impossible to be sure whether or not this is an improvement in terms of logistics performance.

Budget Almost all companies will have a budget plan, and this should include a breakdown of the logistics costs in appropriate detail – an activity budget.

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A traditional means of monitoring an operation is, therefore, to evaluate the cost of the logistics operation in relation to the expectations of the budget plan.

The ‘activity’ concept The budget approach has been developed in a variety of ways to enable more sophisticated and more meaningful measures to be created. The ‘activity’ concept means that the budget – and the measurement process – can identify and differentiate between functional activities (warehouse, transport and so on). For in-house operations this can also, and perhaps more importantly, cross core business-oriented activities. This might, for example, be by product group or by major customer, thus allowing for very detailed measurements reflecting the integrated nature of the logistics activities under scrutiny.

Flexible budgeting An additional development is the concept of flexible budgeting, which recognizes one of the key issues of monitoring: the need to be able to identify and take account of any changes in business volumes. This is particularly important in the logistics environment, where any reductions in volume throughput can lead to the underperformance of resources. The concept is based on the premise that budgets are put together with respect to a planned level of activity. The fixed, semi-variable and variable costs appropriate to that level of activity are identified, and form the basis of the budget. If activity levels fluctuate, then the planned budget is flexed to correspond with the new conditions. Thus semi-variable and variable costs are adjusted for the change. In this way the change in cost relationships that results from a change in the level of activity is taken into account automatically, and any other differences between planned and actual cost performance can be identified as either performance or price changes. This approach is particularly applicable to logistics activities as there is very often a high fixed cost element, and any reduction in levels of activity can increase unit costs quite significantly. With a fixed (ie non-flexible) budget system it can be difficult to identify the essential reasons for a large variance. To what extent is there a controllable inefficiency in the system and to what extent is there underutilization of resources due to falling activity? A typical example is the effect that a reduction in demand (throughput) can have on order picking performance and thus unit cost. A flexible budget will take account of the volume change and adjust the original budget accordingly. This idea can be very important for outsourced operations, whereby a

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drop in activity or throughput levels can lead to a reduction in earnings from the client (if earnings are based on actual throughput), but the cost of allocated resources still need to be met.

Variance analysis Finally, an effective budget measurement system will incorporate the idea of variance analysis. In the context of logistics activities, variance analysis allows for the easier identification of problem areas as well as providing an indication of the extent of that variance, helping the decision process of whether or not management time should be assigned to solving that particular problem. As indicated earlier, an effective system will indicate whether a variance has occurred, the extent of that variance and also why it has occurred with respect to performance/efficiency change or price/cost change (or a mixture of both). Variance analysis is best used within the context of a flexible budget because the flexible budget automatically takes account of changes in activity.

Engineered standards A number of companies use internally derived measures for certain logistics activities through the development of engineered standards. This involves the identification of detailed measures for set tasks and operations. The means of determining these measures is a lengthy and often costly process involving the use of time and work study techniques. When suitable and acceptable standards have been agreed for specific tasks, then a performance monitoring system can be adjusted to allow for direct measurement of actual performance against expected or planned performance. The advantage of using engineered standards is that each task is measured against an acceptable base. A monitoring system that measures against past experience alone may be able to identify improved (or reduced) performance but it is always possible that the initial measure was not a particularly efficient performance on which to base subsequent comparisons. Apart from cost, a potential drawback with engineered standards is that the initial time or work study data collection is difficult to verify. There is no certainty that an operative who is under scrutiny will perform naturally or realistically (whether consciously or subconsciously). Many logistics tasks do lend themselves to the application of engineered standards. Most warehousing activities fall into this category – goods receiving, pallet put-away, order picking, etc, as well as driver-related activities – vehicle loading, miles/kms travelled, fixed and variable unloading. An outline example is given below:

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Developing standards for delivery transport: an example Standard costs can be related to measured or standard times. These should cover the three main operations: ឣ ឣ ឣ

running/driving time (speeds related to road types); selection and delivery time (fixed and variable); distribution centre/loading time.

Standard time journeys can then be built up. These can be incorporated with standard costs to give a standard cost per minute. Thus, the planned and actual performance is linked, and variance analysis can be undertaken. This provides for a stronger system of control. Using engineered standards can be particularly useful in an outsourcing environment, because measures can be created that enable the client to get a much clearer view of how the operation is performing. The major drawback is the initial cost of establishing accurate standards.

External standards and benchmarking Another approach to cost and performance measurement is to make comparisons against industry norms. The intention here is that a company’s performance can be compared with similar external operations and standards, making comparison more realistic and therefore more valuable. For some industries, such as grocery retailing, these measures are fairly readily accessible through industry journals and associations. Examples of typical measures include order picking performance (cases per hour) and delivery cases per journey. Some of the largest manufacturers and retailers that outsource to several different contractors use this concept to allow them to make detailed performance comparisons between the various depot operations. Thus they draw up ‘league tables’ of their depots based on their performance against an industry standard and comparing each depot and 3PL against the others. This can create a useful incentive for the different operations as they strive to maintain or improve their respective positions in the ‘league’. Some of the potential difficulties of this approach are discussed at the end of this chapter in the section on ‘influencing factors’. A further development is the idea of ‘benchmarking’. Here, the aim is to identify appropriate ‘world-class’ or ‘best-in-class’ standards across a whole range of different organizations and operations. This enables a company’s performance to be compared with the very best in any industry. It is a broader concept than merely identifying variations in performance, the intention being to identify the reasons why a certain operation is the best

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and to establish ways and means of emulating the operation. A number of ‘benchmarking’ clubs have been formed to this end.

An operational planning and control system The budget can, therefore, be used as the basis for providing quantitative objectives for the relevant elements to be monitored within the logistics operation. Linked to this should be any appropriate internal (engineered) or external standards that are deemed to be important measures of the business. The operating plan can be drawn up on the basis of the above factors to indicate the operational parameters or cost centres. This will show how costs are to be split by period (week or month), by functional element (such as fuel or wages), by logistics component (storage, local delivery and so on) and by activity (major customer, product group or other type). Within a third-party multi-user environment, one obvious category would be the different client companies that are catered for within the operation. The plan should also show which key business performance indicators are to be used (for instance, tonne/miles (kms) delivered) and demonstrate how they are linked to set standards. The operating control system involves the process of identifying whether the operating plan has been adhered to – what deviations have occurred and why – so that remedial action can be speedily taken. Figure 8.5 outlines this process. In measuring these deviations it is important to be aware of three major causes of deviation. These are: ឣ

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changes in the levels of activity (ie less work is available for a fixed capacity – labour or equipment); changes in efficiency or performance (ie the resource, labour or equipment has not performed as expected); changes in price (ie the price of an item, say fuel, has increased so costs will increase).

It is particularly vital, in a third-party environment, to be able to identify which type of deviation is creating any apparent inefficiencies, because this is likely to have a significant impact on who bears the responsibility. Initially this will impact on rates and charges, but an inability to identify and agree on deviation responsibilities can lead to severe problems within working relationships and ultimately to the absolute breakdown of the client–contractor partnership.

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1 Set standards: (actual achievements measured against these)

5 Any acute deviations identified, examined and explained

2 Actual costs and other data recorded and apportioned to cost centres 4 Actual costs and performance compared to budget costs and standards set

3 Actual costs summarized

Figure 8.5 An operating control system

Key indices and ratios need to be developed to allow for appropriate monitoring and control to be undertaken (for example actual work against planned work, cost per case, cases per hour, tonnes per journey). These need to be representative of the logistics operation, and they should, of course, be capable of clearly identifying why a deviation has occurred as well as whether a deviation has occurred.

An approach to monitoring a 3PL Main methods As already discussed in previous sections of this chapter, there are a number of different ways of monitoring a logistics operation and most of these are appropriate for both in-house and outsourced operations. These are usually linked to the twin goals of cost and service performance achievement or improvement. In addition, there are a number of other monitoring activities that are more specific to outsourced operations. Linking these together, the main methods for monitoring and controlling a 3PL are therefore likely to include:

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Monitoring against the contract. Monitoring against the service-level agreement (SLA): The service-level agreement should identify key performance measures and link the supplier’s payment to performance against them (see case history for typical SLA content). Budgetary control: this was described extensively in an earlier section of this chapter. Management information and metrics: see later in this chapter for detailed examples. Review meetings: a series of meetings to enable performance review and to investigate variance analysis. Depending on the issues involved, meetings will vary with regard to regularity, personnel and so on (strategic: quarterly, senior management; operational: weekly, supervisors). Activity forecast/redefine targets: recognizing the dynamic nature of most businesses, and the need to reassess accordingly. Audits through open book: as required according to the contract agreement. Incentivization of the management fee: incentive or penalty programmes to be activated on the basis of service performance. Constructive review process to include continuous improvement: interpretation of KPIs to identify and enable continuous improvement; integrated approach to performance improvement, including both supplier and customer processes.

Service-level agreement (SLA) Typical content SLAs should summarize the contract obligations and are usually a part of the initial contract agreement. They are likely to include all aspects of outsourcing provision and, as well as being a definition of the service that is to be provided, they should specify the level of service to be achieved. Both contractors and users should be involved in drawing up the SLA. Typically, an SLA will include: ឣ ឣ ឣ ឣ ឣ ឣ ឣ ឣ ឣ

a description of the service to be provided; service standards that are to be met; client and provider responsibilities; provisions for compliance (legal, regulatory and so on); monitoring mechanisms and reporting requirements; dispute resolution procedure; compensation for service-level failure; performance review procedure and timetable; revision procedure for activity or technical change.

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An overall approach An overall approach to outsourcing management is summarized in Figure 8.6. This shows the four key stages in setting up and running a system to manage the outsourcing relationship, encompassing the main methods discussed throughout this chapter. The stages are: ឣ

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Set goals/establish KPIs: this concerns the determination of goals, as required, with respect to the contract, the SLA, the budget and any incentivization. These are then converted into appropriate metrics within the management information system (MIS). Track performance: involving the monitoring of the MIS and appropriate key metrics, regular review meetings at different hierarchical levels and frequencies, activity levels, open-book audits. Identify opportunities: including both operational readjustments (personnel, facilities and others) and future strategic and tactical improvements. Review and refine: implementing strategic, tactical and operational improvements, adjusting and re-setting KPIs as necessary.

Typically, a manager is nominated from within the user organization to be responsible for the management of the contract. The manager’s objectives

1 Set goals and establish KPIs: •Contract-related •Budget •MIS

4 Review and refine: •Operations •Strategic improvement •KPIs

Manage Manage the the outsourcing outsourcing relationship relationship

3 Identify opportunities: •Operational readjustment •Future improvement

2 Track performance: •Metrics •Meetings •Activity levels •Audits

Figure 8.6 An overall approach to outsourcing management

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are likely to be to ensure that cost and service targets are met and to develop opportunities and initiatives for continuous improvement. This will be achieved through the use of suitable metrics. The use of a nominated manager brings both focus and accountability to the outsourcing arrangement, as well as providing the contractor with a main point of communication. This manager is likely to meet with the contractor for regular reviews. As well as reviewing cost and service performance, these meetings should consider any operational difficulties that are at issue and look forward to future forecasts of changes in activity that might impact on the operation. As already indicated, the relationship that is developed should not just consider how well the contractor is complying with the contract arrangement, but should also look to identify opportunities for the continuous improvement of the operation through better service performance at lower costs. This is often associated with the use of incentives linked to the management fee. For any new contract it is important to introduce all of the relevant processes for outsourcing management, so that the 3PL can be monitored and managed effectively. Many successful relationships reflect this and they also support the need to treat outsourcing more as a partnership than as a strict contract-driven arrangement. The experience of one large user company shows this, as indicated in the case history.

Petrochemical company: converting from in-house to outsourcing For this company, its first foray into outsourcing was on the basis of a cost-plus contract that provided for no input from its managers. This led to problems such as: ឣ ឣ ឣ ឣ

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In the renegotiation of a subsequently successful contract with another 3PL, the key areas for success were seen to be: ឣ ឣ

There was an active role in implementation by the user company. Communication with the contractor – a partnership approach was adopted.

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The fee was a partly incentivized management fee, not cost-plus. A detailed cost budget and monitoring system were included. Management responsibilities were clearly defined. Relevant management information systems were developed and used.

Longer-term contract management Even where original contractual criteria are being met, support can become ineffective because the original contract has steadily become irrelevant. Relations inevitably deteriorate. Roger Cox, Gartner vice president, noted in 2003 that: It’s not unusual to see outsourcing deals where the metrics are being met, but where the client’s perception is that the deal is useless. That’s because the deal has been structured wrongly… We see people signing long-term deals, but with very short-term business requirements. (Cox, 2003)

More sophisticated business-analysis tools can be used to apply greater scrutiny. But the real solution is for a client to motivate the outsourcer to invest its own resources in developing the client’s infrastructure. As a consequence of these problems and as a means of resolving them, a number of collaborative outsourcing management techniques have been developed. These include: ឣ

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Competitive benchmarking: here, performance is compared with competitors in functions controlled or heavily influenced by the outsourcer (for example, call centre response times, transactionprocessing costs). The outsourcer gets paid by results, encouraging it to invest in efficient technologies. Profit sharing (‘gain sharing’): bottom-line targets are agreed (for instance profitability levels on certain functions) and the outsourcer takes a share of the profits or gains over the target. This technique can be quite complex in practice and time consuming to set up and operate. An example of this is Accenture and AT&T, where Accenture gets paid in part on the pre-tax profitability of the elements of AT&T’s business that it manages. This obviously requires a very clear agreement on how the figures are produced. ‘We’ve had to refine our measurement processes, and it was a bit of a challenge to refine them in such a way that both parties would be treated fairly,’ says Mike Tempora of AT&T.

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Special purpose financial vehicle: essentially, this is a subsidiary or joint venture specially created to deliver the services to the client. ‘This can help to ring-fence the budget, but it can be a retrograde step [if it is necessary to] separate out the contract from the rest of the client’s business activity,’ writes Tom White, a member of Siemens Business Services. Self-funding project or ‘pay as you save’: in this example, customers ask providers to break down projects into pieces that produce measurable cost savings. The idea is that these savings will allow them to fund the projects.

Provider management strategy A medium-sized company in the building industry has set up a provider management strategy to help take their current outsourcing arrangement with a 3PL to the next level. Its strategy includes: ឣ

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workshops with the provider to investigate the relationship between cost and service performance in order to ensure that future asset replacement programmes are aligned and to enable the company to improve its understanding of the relationship between service and cost; a process improvement programme; the definition and agreement of a clear set of cost and performance KPIs for the operation; the introduction of a reward and penalty incentive into the contract on the basis of the agreed KPIs; sharing forecasts and strategic review information with the provider; the incorporation of the provider into their local service and quality review framework. a policy of persuading the 3PL to invest in advanced IT solutions that will enhance their operational performance.

Detailed metrics and KPIs Cost and performance metrics For most logistics operations it is possible to identify certain key measures that provide an appropriate summary measurement of the operation as a whole and of the major elements of the operation. These are very often

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called key performance indicators (KPIs). Detailed measurements (or metrics) are likely to differ from one company to another, depending on the nature of the business. Measures are generally aimed at providing an indication of the performance of individual elements within an operation as well as their costeffectiveness. In addition, the overall performance or output is often measured, particularly with respect to the service provided, the total system cost and the return on capital investment. KPIs can be categorized in a number of different ways, but an effective measurement system will cover all of the major operational areas within a business. A typical categorization might be: ឣ

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Financial KPIs: return on investment (ROI), return on capital employed (ROCE), stock turn. Customer KPIs: new customers, lost customers, on time in full (OTIF). Sales KPIs: total volume, total value, sales per customer. Process KPIs: productivity, efficiency. People KPIs: labour turnover, training, average length of service. Supplier KPIs: OTIF, cost per piece.

It is also worth emphasizing the importance of hierarchy in a performancemeasurement system. Figure 8.7 shows how a manufacturer of household products uses a hierarchical model to drill down to the much more detailed measures that are used to assess the more detailed operational aspects of its business. For a 3PL, the range and level of KPIs that are used for any one operation are, of course, dependent on the extent of outsourcing that they are operating for the client. Appropriate KPIs will be selected accordingly and will also be based on contract and SLA requirements, as indicated earlier in this chapter.

Customer service metrics Customer service elements Customer service elements can be classified in a number of ways, but one is by multifunctional dimensions. The different components of customer service are classified across the whole range of company functions, to try to enable a seamless service provision. Time, for example, constitutes a single requirement that covers the entire span from order placement to the actual delivery of the order – the order cycle time. One of the main benefits of this approach is that it enables some very relevant overall logistics measures to be derived. The four main multifunctional dimensions are:

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mainly financial measures: organizational health and alignment with business plan

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Supply Manuf- Distribacturing ution Process performance measurement Individual people measures

indicators of whether or not function is meeting its commitment Service measures of whether processes are acting correctly across function specific objectives and goals

Figure 8.7 Hierarchical structure of a measurement system used by a household goods manufacturer ឣ ឣ

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time – usually order fulfilment cycle time; dependability – guaranteed fixed delivery times of accurate, undamaged orders; communications – ease of order taking, queries response; flexibility – the ability to recognize and respond to a customer ’s changing needs.

Each of these dimensions can be broken down into further detailed elements. This has been undertaken for time in Figure 8.8. The total order fulfilment cycle time has been split into the five main time-related components from order receipt to final delivery, plus a preliminary step from order placement to order receipt, which is not considered by some companies because it is deemed to be part of the customer’s ordering process. When identifying and measuring order fulfilment cycle time it is important to be able to break it down to all of the key components. Thus, if there is a customer service problem it can be measured and traced quickly and easily, and the actual detailed problem can be identified and remedied. It is important that 3PLs understand this type of breakdown because it may be necessary to provide such detailed information to clients if customer service issues arise. There are many different elements of customer service, and their relevance and relative importance will vary according to the product, company and market concerned. For a 3PL operation, as with operational cost and

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Total order fulfilment cycle time is … the time from order receipt to final delivery

The time from placing the order to order receipt

The time from order receipt to order entry The time from order entry to allocation for picking The time from allocation for picking to actual picking The time from actual picking to despatch from depot

The time from despatch from the depot to delivery to the customer

Figure 8.8 The constituent parts of total order fulfilment cycle time

performance metrics, not all of these elements will be included, depending on the extent of the outsourcing.

Customer service measures There are also many different measures of customer service that might be used. The most important message is that whatever measures are used, they must reflect the key service requirements for the customer in question. This is not always as obvious as it might seem. One particular example is that of order fulfilment. It is possible to measure this in a number of different ways: ឣ

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the number of orders completely satisfied, say 18 out of 20 over a period (90 per cent); the number of lines delivered from a single order, say 75 out of the 80 lines requested (94 per cent); the number of line items or cases delivered from a single order, say 75 out of the 80 lines requested, but only 1,400 of the 1,800 total line items (78 per cent); the value of the order completed, say N750 of the N900 order (83 per cent).

Any or all of these might be used and there is no right or wrong one. The most appropriate is the one that best suits the operation in question. For a 3PL, the customer service measure should be as agreed in the SLA.

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There are other measures that can be made. These measures might, for example, be aimed at assessing the timeliness of delivery operations. Many express parcels companies set great store by the speed of their delivery operations, and calculate in detail the time taken from receipt of order or parcel collection to final delivery. This idea is also used for conventional operations. Thus, order fulfilment can also be measured with respect to the order cycle time or the actual lead time from the receipt of the order to its final delivery to the customer. For a typical stock order this will be made up of the following discrete times: ឣ ឣ ឣ ឣ

order receipt to order entry; order entry to allocation for picking; allocation to despatch; despatch to delivery.

Some companies now recognize what is called ‘the perfect order’. This is a measure that attempts to take into account all of the main attributes that go towards the completion of an order that absolutely satisfies customer requirements. This is sometimes known as OTIF. The key components are: ឣ ឣ ឣ ឣ

delivered complete to the quantities ordered; delivered exactly to the customer’s requested date and time; no delivery problems (damage, shortage, refusal); accurate and complete delivery documentation.

There are also several variations of ‘the perfect order ’ to include such elements as accurate invoicing. Whatever is included, perfect order fulfilment can be measured as: number of perfect orders perfect order fulfilment = × 100 per cent total number of orders Both clients and providers must ensure that appropriate customer-servicedriven measures of performance are used, and that they reflect the real standards that they are aiming to achieve. Some of these ask severe questions of logistics operations, especially if any discrepancies are assessed cumulatively (which they should be for realistic measurement). Thus, if they include orders received on time orders received complete orders received damage-free orders filled accurately orders invoiced accurately

actual actual actual actual actual

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the actual customer service measure achieved is (95 × 98 × 99 × 97 × 94) = 84 per cent. This is not as good as it first looks when considering each measure individually. For a more detailed description of customer service logistics read Chapter 3 in The Handbook of Logistics and Distribution Management (Rushton, Croucher and Baker, 2006).

Typical metrics Rather than providing a general list of different metrics, typical detailed and key operational measures are summarized in a number of case histories. These cover customer service requirements, a multi-site delivery transport operation, a warehouse operation and a 3PL internet operation. Both the warehouse and the transport examples indicate adherence to the principle of the hierarchical nature of information requirements.

For a supplier of consumables, major customer service measurements are: ឣ ឣ ឣ ឣ ឣ ឣ

percentage of orders satisfied in full; percentage of items supplied at first demand; percentage of overdue orders; number of stock-outs; orders delivered within set lead times; percentage of deliveries outside fixed delivery windows/times.

For a grocery multiple retail operation, these measures are designed to assess the performance of the delivery transport system. They are aimed at measuring the cost-effectiveness of the operation and also the quality of service. Note the hierarchical approach, and also that there are no costrelated measures at the lowest level. This approach can be used for in-house or outsourced operations. The levels and associated measures are: ឣ

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Director/head office (strategic planning and control): – ROCE; – cost per case (divisional); – cost per vehicle (divisional); – cost per value of goods delivered; – cost as a percentage of company sales. Site managers (management control): – cost per mile or kilometre; – cost per vehicle; – cost per roll pallet; – average earnings per driver;

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– maximum earnings per driver; – maintenance costs per vehicle. Transport manager (operational control): – cost per mile or kilometre; – cost per case; – cost per vehicle; – cost per roll pallet; – cost per journey; – roll pallets per journey; – journeys per vehicle; – damage repairs per vehicle; – miles (kilometres) per gallon (litre) per vehicle; – damages in transit and cases delivered; – percentage cases out of temperature; – percentage journeys out of schedule. Supervisors: – overtime hours as percentage of hours worked; – contract vehicles as percentage of vehicles; – percentage of vehicles off the road; – percentage of drivers absent; – percentage vehicle fill; – percentage of vehicles over weight; – percentage of breakdowns; – average hours worked per driver.

These are the information requirements for a fast-moving consumer goods (FMCG) manufacturer and supplier at three levels, related to the company’s warehouse operations in terms of performance measurements and operating ratios. Although designed for an in-house operation, the majority of the metrics would be suitable for an outsourced operation. ឣ

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CEO: – profit; – return on investment; – growth; – stock turnover; – distribution cost; – sales value. Distribution director: – service achievement; – cost-effectiveness; – capital employed; – stock turnover by site; – storage cost per unit;

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– warehouse handling cost per unit; – overall labour efficiency. Warehouse manager: – inventory level; – stock availability; – operating cost; – operating productivity; – actual hours; – standard hours (stock receiving and location, order picking, packing, despatch); – warehouse cost per unit (order); – stock turnover.

This example illustrates the development of metrics for a 3PL provider planning to operate a warehouse and storage operation for an online retailer. Table 8.6 Client Commercial Objectives

Supporting Logistics Goals

Metrics

To offer an exceptional To maintain product integrity level of product throughout storage, handling, quality compared with packing and delivery competitors

Breakages Storage temperature and humidity conditions

To offer exceptional levels of service in order to establish a strong reputation in a new market

To exceed average order processing times for the recommended product range Continuous improvement in picking accuracy and order fulfilment To process standard range products to allow all incoming product to be picked and despatched on the same day To maintain stock levels and avoid stock-outs of recommended products via proactive inventory management

Order fulfilment rate Order fill rate Line fill rate Receipt processing rate Stock-outs

To return a reasonable profit, even during start-up when customer demand is yet to grow

To manage costs within the agreed framework and assumptions, and provide opportunities for year-on-year cost savings

Total cost per case delivered

To grow the business To provide consistently high quickly into additional performance across all markets by European markets sharing best practice between operations

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The presentation of metrics A good cost and performance monitoring system will cover all of the major elements of a business operation, but, aside from the importance of the accuracy of the data, it will only be effective if it is presented in a usable and clear format. A number of companies have developed very visual output to try to achieve this. This output is often displayed within depots to enable staff to see how the operation is performing week on week. Figure 8.9 shows a measurement dashboard that represents the output data very visually. The main KPI is that of order fulfilment. This order fulfilment measure is calculated from a number of supporting measures that are also visually represented. Thus, any underachievement in the overall order fulfilment measure can easily be compared to the supporting measures to identify where the problems have occurred so that remedial action can be taken.

Influencing factors As discussed in an earlier section, many monitoring systems are developed with a view to using them to enable comparisons to be made between different distribution centre operations. Some companies will do this across their own operations. It is also common practice for some of the major users of dedicated contract operations to compare how well one contractor is performing against the others. If this is the major use of a monitoring system then it is essential that there is a broad understanding of any different operational factors that might influence the apparent effectiveness or efficiency of one operation compared to another. Thus, a number of operational influencing variables can be identified, and may need to be measured, to enable suitable conclusions to be drawn and explanations given for any comparative assessments. Any number of these may be relevant, but typical examples are: ឣ

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Throughput variability (by day): this is likely to affect labour and equipment utilization. Product profile: some products are more difficult to select or handle than others; demand for certain products quite often varies in different geographic areas. Order profile: orders with many line items take longer to pick than singleline orders; some depots may have a greater proportion of customers that have predominantly single-line orders. Store profile: sites serving mainly small stores may expect to have less efficient picking operations than those serving large stores.

Figure 8.9 A measurement dashboard 31

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Store returns: this will influence workloads, especially where returns have to be sorted, checked and returned to storage. Special projects (promotions, alternative unitization): these will create additional work. Equipment specification: specialized equipment may be essential for some product types, but is also likely to be underutilized. Regional distribution centre (RDC) design: building shape, mezzanines and other features have a big impact on picking locations and therefore on picking performance. Employee bonus schemes: these may differ from one 3PL to another, and they will certainly influence picking rates. Methods: different operational methods (such as secondary sorting) will influence productivity. Local labour market: staff availability, quality and the need for training will vary geographically and will affect warehouse performance. Regional cost variations: there are large geographic variations in the cost of labour, rent and rates. Staff agreements: some, such as guaranteed hours, can affect productivity and utilization figures. Unit definitions: ‘case’ sizes and types may be very different at different sites.

Did we get it right? For a client company, in the medium to long term, the certain answer to the question ‘did we get it right?’ is: no. This could be for a variety of different reasons. It may be because the selection process was ineffective, because the actual requirements were not made sufficiently clear at the outset, or because the provider misinterpreted or misjudged what was required. It may have been a combination of factors such as these. However, one certain reason is because it is impossible to be able to predict exactly what will be required over the period that a contract is set to run, especially as this is typically for five years. This is because of the fast rate of change of all aspects of business: product life cycle, shortening product life, new products, patterns of demand, customer types, information systems, logistics technology – the list is endless. Thus, it is essential for both clients and providers to make due allowance for this when running and managing contracts. This final section of the chapter briefly considers the implications of the question – did we get it right? – from two standpoints. The first is a discussion and assessment of the real cost of outsourcing. The second is a plea for the continuous review and reassessment of all contracts.

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The real cost of outsourcing One aspect of outsourcing that is rarely considered is that the assessment of potential outsourcing costs prior to the contract being awarded fails to include all of the costs that will be involved. Equally, few, if any, companies undertake post-outsourcing reviews to investigate the extent to which the new outsourcing operation has met the cost savings and service benefits that were promised. There are many examples of client companies that ‘feel’ that the savings and improvements are not as expected, but it is a brave manager who will allow a detailed investigation of what was and was not successful and whether planned cost savings were actually realized.

A framework for outsourcing cost assessment One such study was undertaken at Cranfield University (Brewster, 2003). The overall aim was to devise a framework to enable the organization that was studied to understand the true potential costs of outsourcing in advance, and also to assess the success of each outsourcing project. This was achieved through a before and after review of a number of completed outsourcing projects. The output from the work could then be used by the company to help in the assessment of the potential of all new projects. A very detailed survey was undertaken internally so that before and after comparisons could be made on four different logistics projects. It should be noted that the survey was set up and administered on the basis of a ‘noblame’ policy so that respondents could feel free to offer their true opinions. An example of one key finding indicates how useful the results were. It was discovered that a number of additional tasks were now undertaken by existing company management to help to support the now outsourced functions. None of these had been included in the initial cost/benefit assessment of the outsourcing projects. Some of these were: ឣ ឣ ឣ ឣ ឣ ឣ ឣ ឣ ឣ ឣ ឣ

audits; scrap control; lean material advice; engineering change supervision; additional management and liaison; response to trade union issues within the service provider; direct management of areas of the outsourced business; additional management review time; greater interface with legal departments; high involvement in all material issues with all of the providers; lack of responsibility/ownership on behalf of the service providers.

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A framework for outsourcing cost assessment was developed from the results of the work. This consists of the recognition of a four-stage process flow for outsourcing costs as shown in Figure 8.10. In most current outsourcing assessments the third element, the cost to outsource, is usually the only one that is realistically addressed in the cost analysis of the selection process. This is clearly the area that is likely to involve the greatest costs, but for some operations, the other three elements may also have an impact. If that impact is correctly assessed and included in the overall selection costing process, it may be that a different provider would have been chosen, or, perhaps a more likely outcome, that outsourcing may not have been undertaken at all.

The detailed costs For companies considering a move to outsourcing, a review of all of the potential costs of outsourcing should be made. The broad framework outlined in Figure 8.10 can be used to ensure that all key cost areas are included. The framework can be exploded to indicate the detailed cost elements, as outlined below.

Outsourcing planning cost In terms of the costs to plan the outsource operation, the main topic headings are: ឣ ឣ ឣ ឣ ឣ ឣ

labour relations; planning/strategy; contractual issues; logistical implications; systems; wider operational issues;

Cost to plan outsource

Cost of transition to provider

Cost of operation

Flow of the outsourcing process

Figure 8.10 The four stages of outsourcing costing

Costs post outsource to provider

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materials handling; quality; service.

Within each of these subject headings there are a number of sub-topic issues that can have measurable cost implications.

Cost of transition The cost of transition can be broken down into two major elements: labour costs and operational costs. Both costs are associated with the transfer from in-house to provider over a given period of time. These will include expenses such as overtime cover to support transition, the costs to support the provider in the changeover period, additional inventory requirements, inventory write-off, training of remaining in-house staff, impact on profit, and the moving and transfer of equipment, material, products and information.

Cost of operation The cost of the operation includes the usual costs and benefits that are defined during the request for proposal, the tender proposal and the subsequent negotiating stages that the client organization should go through during the selection process. These were covered in Chapter 7.

Post-outsourcing cost The post-outsourcing cost can also be broken down into major topic headings, as follows: ឣ ឣ ឣ ឣ ឣ ឣ

management of operations; performance measurement; internal operation effects; quality; service provider effects; intangibles.

What the client organization should expect to gain from reviewing this area of the process is to understand the implications of the operation once it has been outsourced and what activities and associated costs it has to take on as a consequence of outsourcing. These may not be obvious at the outset, but should be considered carefully. The costs for management of the operation include the resources required to manage the progress and achievements of the outsourced operation and what costs should be allocated to this resource.

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Performance measurement is aimed at the area of monitoring the performance of both the operation and the provider (as they may not necessarily be measured in the same way). This will include the costs of managing this process, and the cost of any process that is required should performance fall below required levels. The internal operational effects concern the impact of those areas retained within the client’s organization, especially those at the boundaries of the new outsourced operation. These impacts may include areas of finance, inventory, economies of scale, logistics or manufacturing. Effects on quality might occur through a variety of aspects of the outsourced operation. Any costs will result from the resources that are required to solve and monitor problems and any new quality systems that must be put in place. The service provider effects are concerned with the implications for future change and how these will impact on the contract and the relationship with the contractor. This is a very difficult area to identify and to allocate costs for. It might include elements such as the need to develop the operational approach, changes to methodology, changes in volumes among a range of others. It is also an opportunity for the client organization to look to the future and plan a more long-term operation, rather than just reviewing the short-term needs of the business. The need for this type of continuous review is discussed in the next section of this chapter. Other more intangible costs that should be considered post-outsourcing might include accountability, vulnerability, control, risk and business aims: basically, those aspects associated with the strategic viability of the outsourcing process.

Continuous review The need for some type of continuous review was introduced in the previous section of this chapter. This really recognizes the need for a continuing alignment between the service provider and the client company’s ongoing requirements. As already noted, the almost constant change in all aspects of business makes such review essential. Part of the outsourcing management and monitoring process should include a continuous reassessment of the contract arrangement to ensure that it is still providing value to the company. Outsourcing arrangements usually require some adjustment after the first year because an initial bedding-in process has taken place. However, they should also be reviewed annually to make sure that they meet the ongoing requirements. It is now widely thought that, for a typical five-year outsourcing contract, there is likely to be a need for substantial readjustment after about three years. If this is recognized by both parties, then a great deal

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of aggravation and angst can be avoided if the agreement is changed at this stage rather than running its full term under the original, but outdated, conditions. This might impact on service levels, delivery requirements and pricing. There are a number of different pointers that might herald this need for change. They include: ឣ ឣ ឣ ឣ

a backlog of change requirements; an interest by the client company in finding a new provider; major areas of service not being required; customer satisfaction on certain performance measures starts to fall. (Goldstein, 2004)

To aid the process of continuous review, services and costs can be benchmarked against industry best practice. Also, customer satisfaction surveys, service delivery assessments and service-level reports can be used to identify changing trends over time. This type of due diligence can be very beneficial. Services can be re-aligned to meet changing needs, costs and service levels can be revised to reflect changing market conditions and a greater flexibility can be built into the client–provider relationship, helping to minimize conflict.

Summary In this chapter, the causes of relationship failures and the importance of introducing correct processes and resources have been reviewed. The failure of 3PLs and their customers were explored and the areas for which both parties clearly have a joint responsibility were considered. The factors for successful partnership and collaboration, the engagement model, continuous improvement and communications were examined in some detail. The processes for implementation planning were reviewed. The basic reasons for monitoring a logistics operation – whether in-house or outsourced – were seen to be very similar: to measure whether the operation is meeting set service levels at an acceptable cost. Some specific methods for monitoring the 3PL in an outsourced operation were outlined. A formal approach to the monitoring and control of logistics and distribution operations was outlined. The different techniques that can be used were discussed. These were: ឣ ឣ

the balanced scorecard; the SCOR model;

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an integrated supply-chain approach; an operational approach.

The various methods to help determine appropriate monitoring goals were also outlined. These include: ឣ ឣ ឣ ឣ

historical data; the budget; engineered standards; external standards and benchmarking.

It was concluded that most well-developed systems are internally budgetoriented, but are also linked to external performance measures. A typical logistics operational planning and control system was outlined. In addition, this was developed within the context of a specific approach for a client’s monitoring of a 3PL. Some addition aspects relating to this included monitoring against the SLA and the contract, as well as some innovative approaches to longer-term contract management. Key metrics that might be used were considered in some detail and a number of case histories were presented with particular reference to the monitoring of outsourced logistics operations. Finally, the results of a study that was undertaken to identify the broader costs of outsourcing was reviewed, and some of the implications from this were outlined.

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4PLs and beyond Introduction Fourth-party logistics (4PL) has been hailed as the future for supply-chain management outsourcing. However, this asset-free approach, which delivers a complete supply-chain solution focused on value creation, has struggled to take hold. Fourth-party logistics was created by Andersen Consulting (since renamed as Accenture), which in the 1990s developed a new supply-chain business model. Andersen defined 4PL as an integrator that brings together the resources, capabilities and technology of both its own organization and other organizations to design, build and run complete supply-chain solutions. Indeed ‘4PL’ was actually registered as a trademark by Andersen in 1996. In this chapter the 4PL model is examined and compared with 3PL and lead logistics providers (LLPs). The question of whether 3PLs or consultants are best placed to adopt the model is assessed. The reasons for choosing a 4PL solution, including the key drivers, are also reviewed, together with the 4PL value proposition. The reality and development of 4PL is explored, looking at how 3PLs are attempting to migrate to this model and some of the constraints and issues that have arisen. Finally, the future of outsourcing in general is considered, together with the key influences likely to affect its future.

Understanding 4PL 3PL versus 4PL Although there is a view that 4PL is a refinement of 3PL, in fact there is a very significant difference between the two models. A 4PL is non-asset-

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based, unlike a 3PL, which is generally seeking to fill its asset capacity of distribution centres, vehicles and freight. Historically, 3PLs have operated vertically across the supply chain, providing services in warehousing, transportation and other logistics activities. In contrast the 4PL works horizontally across the whole supply chain and uses the services of 3PLs to provide end-to-end solutions for customers. Typically, the 4PL only owns IT systems and intellectual capital, and is therefore asset light. This allows it to be neutral in terms of asset allocation and utilization, with the ability to manage the supply-chain process irrespective of which carriers, forwarders or warehouses are used. Thus, the 4PL does not have to consider using its own assets, but can take the shipper’s perspective, using the best operators for the different logistics requirements. The 4PL focuses on satisfying and retaining its customers by understanding the complexity of the customers’ requirements and providing endto-end solutions based on sound processes that address its customers’ overall supply-chain needs. To achieve this, the 4PL positions itself as an extension of the customer. Figure 9.1 summarizes the major components provided by 4PLs in the key areas of integration, control, information and physical resources as well as financial support and services. It is argued by some that 4PLs have stepped into the vacuum created by 3PLs, due to the inability of 3PLs to step beyond their traditional warehousing

     

Supply-chain visionary Multiple customer relationship Supply chain re-engineering Project management Service integrator Continuous innovation

    

Experienced logisticians Optimization engines Decision support Neutral positioning Continuous improvement

Supply-chain Info-mediary

     

IT system integration IT infrastructure provision Real-time data tracking Convert data to information Provide info to point of need Technical support

Resource providers

   

Transportation Warehousing Manufacturing (outsourcing) Procurement service

4PL

Finance

Architect/ integrator

Control room (intelligence)

Figure 9.1 Four key components of 4PL

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and transportation role. Indeed, 3PLs usually focus on servicing functions such as warehousing, transport or freight, whereas the 4PL targets the logistics or supply-chain process as it affects the customer’s entire business. Furthermore, 4PLs focus on delivering value to their customers through the re-engineering of the entire supply-chain process and by providing coordinated services through the most appropriate provider. In reality, however, there are hardly any true 4PLs; a growing number of 3PLs are trying to reinvent themselves into this model, but are still shackled by their assets. The few 4PL operations that have been run by consultants have seemingly lacked the strength of execution required. In truth it may be that some form of joint venture with a 3PL and consultant can provide the best of both worlds.

The difference between a 4PL and an LLP Many people interchange the terms 4PL and LLP. In fact there are a number of key differences between the two. It has already been noted that a 4PL is concerned with the management of the complete supply chain, as opposed to a 3PL, which is responsible for executing the logistics elements of the supply chain. Indeed, a 4PL typically contracts with several 3PLs to undertake the logistics operations. LLP is somewhat of a hybrid between the 3PL operational and the 4PL management responsibility. With LLP, the LLP service provider (usually a 3PL) is given a broad remit for the management and execution of a client’s logistics activities, with the expectation that part of the activity will be managed using the LLP’s resources and capacity. The balance, which usually represents activities that the LLP is less well equipped to perform, is contracted out to other 3PLs. In some cases, LLPs are asked to take on some planning activities, but this does not usually extend to the entire supply chain. However, LLPs are frequently expected to have responsibility for coordinating the logistics activities and undertaking such items as transport and network planning. In effect, the LLP model seeks to achieve the best of both 3PL and 4PL by having the logistics performance as the responsibility of one organization, the LLP, which is given a clear incentive to provide high-quality services at low cost. In addition, the LLP acts as a single point of contact or ‘one stop shop’ for costs and service levels.

3PLs versus consultants 4PL is not exclusively used in the supply-chain industry; service providers such as IT providers, ‘e’ marketplaces and financial institutions already use the basis of the 4PL model to provide services. Within the supply chain, 3PLs have been trying to recreate themselves as 4PLs but have come

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up against competition from consultants, who often have the edge in respect of IT systems, process re-engineering and intellectual property. Indeed, arguably it is easier for the asset-free consultants to move into the role of 4PL than for 3PLs who have a credibility issue, especially with their need to utilize their assets. Leading 3PLs are seeking to address this by recruiting new talent through hiring and via alliances. The 3PLs are increasingly bringing supply-chain engineers into their businesses, together with MSc, MBA and PhD graduates, in order to lift their intellectual credibility and increase their focus on supply-chain consultancy, management and systems. In practice, it may well be that a combination of 3PL and consultant is best placed to provide a true 4PL service, through the creation of a joint venture or other alliance. There are signs that the larger IT companies also see 4PL as a potentially lucrative market. An example is IBM’s announcement, in 2005, that they had established a supply-chain optimization and management business.

Managing versus execution 4PLs are primarily responsible for the management of their customers’ supply chains. While this involves responsibility for execution activities, these are actually carried out by their subcontractors. The 4PL focuses on supply-chain strategy, planning, optimization and management. However, the 4PL provider must have both strategic and tactical capabilities. Furthermore, it must also have sufficient logistics experience to understand the operational requirements and challenges in order to develop the processes, systems and people necessary. Additionally, it needs the capabilities to plan and optimize across the demand, supply, inventory and distribution activities. These planning activities necessitate the need for world-class IT systems, which are examined later in this chapter.

The 4PL model Classically, the management of the supply chain is segmented into a number of layers: strategy setting and planning, tactical planning, operational scheduling and execution. A company would normally manage the strategy setting and planning of its business, perhaps supported by consultants. It would also be responsible for the tactical planning and usually the operational scheduling, leaving the 3PL to manage the execution layer. However, as shown in Figure 9.2, the true 4PL is capable of managing across all these layers to provide a full end-to-end supply-chain management service. In order to enable this, the 4PL operating model is constructed to support activities and functions such as:

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supply-chain engineering; business process re-engineering; IT services and systems capable of connecting to customers and other supply-chain partners (including design of an open systems framework, build, implementation and run activities); sales and operations planning; call centres; distribution management; procurement; customer support; invoice management; other back office services such as administration, human resource management, finance and legal support.

Managing across all these activities is a coordination and controlling layer, often referred to as a control tower or controlling interface. This layer not only provides the overall coordination and management of the daily activities but also provides the interface to the customer. This includes providing such services as: ឣ ឣ ឣ

visibility and alerting across the supply chain; key performance indicators (KPIs) and other operational reporting; problem resolution and liaison regarding supply-chain optimization.

A key part of a 4PL’s offering is the analysis of supply-chain processes, the redesign and optimization of the supply-chain network and the provision of the supporting information flow. Detailed consulting services include: ឣ ឣ

inventory versus transportation optimization; the identification of optimal transportation modes;

Responsibilities 4PL model

4PL

Traditional model

Supply-chain management layers

Consultants/ business

Strategy setting & planning

Business

Tactical planning Operational scheduling

3PL

Figure 9.2 The 4PL model

Execution

Key components Direction, business model, objectives Demand, supply & inventory planning Customer order mgnt, distribution scheduling Inbound, warehousing, transportation, shipping

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sourcing locations and arrangements; delivery frequencies; business processes re-engineering.

At an execution level, 4PLs would specifically provide the management of 3PLs and as such are responsible for assigning shipments, and arranging storage and warehousing, using the most efficient and best-value carriers and warehouse providers.

Shared risk and reward and measurement Because the success of the 4PL and its customer is mutually entwined, it is usual to create a contract that provides for shared risk and reward. In order to ensure that the focus of the 4PL is aligned with the objectives of the customer, there is often a value share arrangement in place. This provides for a share of the total value created to be passed to the 4PL. These gain share agreements can be based on saving costs, exceeding key performance requirements and increasing revenue. Some arrangements specifically focus the 4PL on identifying and implementing improvements that drive customer and financial benefits. Equally the 4PL will have to share in the risks of the supply chain, including investment, performance, operational costs and inventory losses. Overall this enables 4PLs to achieve higher margins than 3PLs, but there are higher risks. Typically the customer and the 4PL will agree on metrics and key performance indicators, usually benchmarked to industry standards or top performers, against which regular performance measurements can be made. These metrics will normally be contained in a service-level agreement (SLA) which ensures that the objectives of the customer are aligned with the expectations from the 4PL. Typical measurements used include: ឣ

Operational and administrative indicators: – inbound material lead times; – inbound finished goods volume; – stock accuracy; – customer order fulfilment lead times; – stock availability to meet demand; – on-time in full (OTIF) deliveries; – stock turns; – complete order-to-cash cycle time; – customer complaints and damage claims; – rejected invoices by customers; – claims processing timescales; – systems uptime.

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Costs: – total warehousing/stockholding costs and expressed as costs per unit; – total transportation costs and expressed as costs per unit; – total logistics costs and expressed as costs per unit; – total variable costs and expressed as costs per unit; – total management fee (margin). Results of customer service performance satisfaction surveys conducted by the customer.

Because the rewards and risks for 4PLs are linked intrinsically to the measurement of performance, the customer and 4PL usually conduct a series of reviews. These typically range from weekly, through to monthly and quarterly with more senior supply-chain and logistics managers. In addition annual, bi-annual or quarterly reviews are held with senior management. As well as reviewing the performance of 4PLs, these meetings also assess the suitability of the various measures, and develop agreed cost and productivity improvement targets and initiatives. If there is a gain or value share agreement in place, this will be agreed at such meetings. The meeting will also consider financial penalties where 4PL performance has not met predetermined targets. An annual review is also held where the current year is reviewed and targets and budgets for the following year are discussed and agreed.

Importance of information As has already been highlighted above, information and the management of data and knowledge is vital to the 4PL model. As has already been mentioned, it is usual for the information technology that supports the supply chain to be provided by the 4PL. In recent years 3PLs have been developing their information technology (IT) platforms and capabilities, such that the bigger, more sophisticated players are now equipped with industry-strength best-of-breed systems and technology. It is important for the 4PL to be able to integrate easily with all the parties in the supply chain and to use proactively all the data that exists within the various execution systems. This usually involves having an integration platform that allows data to be exchanged across the various parties in the supply chain. A visibility and event management system will provide the customer, and its suppliers, visibility to purchase orders down to item-level detail. In addition the event management capability will provide the 4PL with early warnings that planned events either have not or will not occur, so that the necessary action can be taken. This allows for proactive management of the supply chain, ensuring that the most appropriate action is taken.

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Choosing a 4PL provider Reasons for outsourcing to a 4PL There are a multitude of reasons that companies consider outsourcing their supply chains to 4PLs, some of which are similar to those reasons previously considered in Chapter 5 for outsourcing logistics to 3PLs. Reasons include globalization, margin erosion and pressure on costs, all of which are prompting manufacturers to examine how they can leverage more value from their supply chains. The reasons are discussed below. Moreover, a 4PL can provide additional benefits to a 3PL. For example, while 3PLs can provide cost reductions, the ability of 4PLs to consolidate all the logistics and supply-chain needs for a customer can provide even greater savings, through leveraging scale and reducing overheads. Certainly there is a view that there is future growth in the 4PL market. Frost and Sullivan predict that the global 4PL market will grow from approximately N4.7 billion in 2002 to around N13 billion by 2010 (Frost and Sullivan, 2004).

Key drivers and benefits The stimulus Given the investment necessary to transform a supply chain, the 4PL solution is especially interesting to companies that are not in a position to make such an investment themselves. Start-up companies or those with financial constraints see the 4PL model as way of achieving supply-chain efficiencies whilst not having the investment burden. Additionally, rapid growth that causes stress and changes to the supply chain provides a stimulus to companies to examine the 4PL option. They often see the 4PL route as a way of addressing their supply-chain pressures, without the need to divert management attention from their core business. Furthermore, companies can avoid spending investment on the supply chain rather than on new product development or sales and marketing activities. The 4PL is also often seen as an agent of change, coordinating and initiating the transformation necessary to redesign and manage the entire supply chain to drive efficiencies and customer service improvements.

Globalization and complexity A key driver for the appointment of a 4PL is globalization. Globalization has already been mentioned on several occasions in the book, for example in Chapter 1, but this section seeks to understand its impact on the 4PL market.

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As market barriers and import tariffs are lifted and manufacturers take advantage by moving their production to low-cost countries, supply chains are becoming longer and more complex. These manufacturers are seeking service providers that can support their businesses across a vast geography, in support of local and international logistics and transportation, as well as additional services such as customs and tariff management. While this is theoretically achievable by means of engaging a variety of 3PLs or contracting with one of the larger global 3PLs, the complexity of managing the overall supply chain remains. Additionally, manufacturers’ global and pan-regional supply-chain requirements have become ever more demanding; they expect not only strategic and global solutions but also lowest cost. Increasingly, 3PLs are struggling to match these expectations and manufacturers are seeking a different model to address their needs. With its single face to the customer and total responsibility and accountability for the management of the supply chain, 4PL is becoming appealing to some manufacturers. Furthermore, customers are seeking partners who can transform their supply chains into agile and responsive demand-led models. This requires the supply chain to be planned, optimized and managed as a single entity, with components such as procurement, production and distribution being synchronized and aligned to the company’s sales and inventory policies. Re-engineering involves the review of the entire business process, including back office services such as finance and human resource management. Additionally, the 4PL is seen as non-asset based and therefore can be neutral in the selection of carriers and 3PLs. At a management level this includes the appointment and integration of 3PLs or other contractors into the newly developed, synchronized and integrated supply chain. The 4PLs’ more integrated approach and management across the entire supply chain allows for this complexity to be managed more efficiently, and should not just enable cost advantages but in addition provide service and overall supply-chain improvements. These in turn can generate increased sales and revenue, which together with reduced costs becomes a powerful incentive for potential customers. Another significant opportunity is shorter times to market for new products, a key requirement for the automotive, high-technology and fashion industries.

Key sectors The sectors that are most likely to appoint 4PLs are the automotive, high-technology and fast-moving consumer goods (FMCG) industries. Large companies in these sectors, whose supply chains have become increasingly global, generally consider their logistics functions as core to their business and use the supply chain as a point of differentiation.

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Companies in these sectors are seeking supply-chain partners who can enhance the competitiveness of their supply chains in a pan-continental or global arena.

Issues with choosing a 4PL Companies in some sectors do not wish to outsource their supply chains, either because they see the supply chain as a key differentiator or because their scale of operations means they have the ability to match the skills and capability of a 4PL. Examples include larger retailers like Wal-Mart and Tesco, together with manufacturers like Dell, all of which have the scale and expertise to manage their own supply chains to the highest standards. These companies tend to focus their attention on reducing logistics and operating costs, and seek to outsource selective logistics activities as commodities. While some companies may accept that the 4PL model can make their supply chain more competitive, they recognize that they must be willing to lose some control. Further, many companies are extremely reluctant to allow others to manage their supply chains – and in particular to have access to their supply-chain data, which they have traditionally seen as being extremely valuable in its own right. The extent of the investment required to transform a supply chain can often be substantial. Although the benefits can be very significant, the size of the investment can often be a barrier. For a company to invest tens of millions, even if the projected savings are in hundreds of millions, is a huge decision to make. Alongside the investment there is a significant risk in such a complex supply-chain re-engineering project. In addition, some companies struggle to accept the concept of value or gain share with the 4PL and seek to operate the relationship as they would with a 3PL. The customer is often reluctant to agree that a significant percentage of savings are shared with the 4PL. Customers must accept that a move to a 4PL model means that they will relinquish the direct control of their operations and lose their relationships with 3PLs and other providers. For some this is a real leap of faith and there needs to be significant trust between the two parties. Furthermore, customers have concerns that, once established, it will be extremely difficult to withdraw from the 4PL model. All the processes and systems will have been established and developed by the 4PL, which will own the commercial relationships with the 3PLs and carriers. In summary, the barrier to exit is significant and potential customers have to consider a 4PL relationship as a long-term investment, both in terms of financial and management commitment.

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Risks and issues A significant issue in 4PL relationships is that although companies often achieve good returns on the investment in the first two or three years, returns wane after that initial period. Additionally, it becomes more difficult to identify and track all the savings and benefits, and companies can end up consuming large amounts of time and effort trying to do just that. Companies also feel that, over the longer term, they risk losing key knowledge about their supply chain and how it affects the business. They can feel particularly vulnerable because they no longer own the data. In an effort to reduce overheads, companies often do not allocate enough or suitably skilled staff to properly manage the relationship with the 4PL. Furthermore, there can be difficulties with the relationships between the two parties, especially around metrics or how benefits are measured and what constitutes an equitable share of the value created.

The 4PL perspective Value proposition This section explores the 4PL value proposition and how the offering is differentiated from a 3PL and an LLP. There is a vital need for the 4PL to demonstrate its added value over and above the 3PL and LLP models. 3PLs and LLPs deliver solutions across a well-defined part of the supply chain, and usually in specific elements of logistics activity. Normally LLPs, never mind 3PLs, do not get involved with wider supply-chain responsibilities, like inventory planning and supply-chain optimization. A 4PL has to demonstrate its ability to deliver more value, and also that it can provide leading-edge thinking, capabilities and information technology. It must move the service provider relationship from a ‘cost-plus’ approach to a collaborative position. There needs to be an agreement with the customer from the outset about what is to be achieved and what long-term objectives there should be. The 4PL must be able to establish tailored solutions to meet the specific needs of each customer. Finally, the 4PL must show that it understands that the success of the customer’s supply chain is achieved through processes, people and technology.

Value The 4PL model is not just to seek cost reductions, but instead to seek ways in which overall shareholder value can be provided by driving increases in revenue. Customers are seeking reduced operational costs of non-core

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activities, improved customer service levels and an overall reduced cost to market. This includes the leveraging of the supply chain to accelerate the speed of launching new products and stimulating market penetration. As has already been discussed, the 4PL approach usually relies on significant investment by the customer and therefore the 4PL must ensure that the ‘prize’ that is identified is large enough and sufficiently tangible to attract the customer. Additionally, the 4PL needs to demonstrate that it can sustain its investment and continue to generate benefits after the initial cost savings have been achieved. Overall, the 4PL must position itself as an organization that truly shares in both the risk and the rewards.

Across the supply chain The 4PLs’ integrated approach to managing the overall supply chain is a key part of the value proposition. Unlike 3PLs, they are not wholly focused on logistics tasks but instead are looking across all of the processes that impact the supply chain. The concept of business process re-engineering and optimization is important to this offering. A 4PL seeks to make cost, service and velocity improvements to the supply chain by looking across its entirety and optimizing across all aspects including the physical network, suppliers, inventory and carriers. Of course, it is important that a 4PL can demonstrate expertise in a particular industry sector in order to be able to develop customized solutions to meet the needs of specific customers. Companies are now realizing that it is increasingly important in the global economy to focus on both core and non-core activities, including the management of an extended supply chain, in order to remain competitive. These companies will typically be shipping manufactured goods from Asia or some other low-cost region into the key consumer markets of North America or Europe. The management of foreign suppliers and the process of managing purchase orders via ocean carriers or 3PL freight forwarders, and the linking of these processes to the logistics activities at the destination, are very challenging. It is certainly difficult for many companies to track and manage the movement of each purchase order end-to-end across the supply chain. This complexity is extremely difficult for many companies and the 4PL role, acting across this entire supply chain, can be a catalyst for addressing this. The 4PL approach is to review and if necessary redesign the process. A 4PL should develop performance metrics to measure and monitor the entire supply chain and all the parties that contribute to it. This would typically include exception reporting against operations and shipment milestones. This allows for action to be taken to resolve issues and for the ongoing monitoring and improvement of the performance of service providers and carriers across the supply chain. The 4PL may decide that particular focus

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needs to be put on a specific service provider or carrier in order to improve certain service issues. This coordinated and complete approach is designed to identify problems in the supply chain and establish improved processes and practices in a collaborative and proactive way. Furthermore, the 4PL should work closely with the customer’s suppliers to establish improved processes, through the use of their practical experience of working in Asia or other low-cost economies. For example, the 4PL should ensure that there are logistics personnel in the supplier country, working in the same time zone and speaking the same language as the customer’s suppliers. With a clear understanding of the customer’s objectives and requirements, the 4PL can work with the suppliers to review the service and processes and ensure that they fit into the overall supply-chain processes. The 4PL can provide each supplier with the processes and technology to allow them to integrate seamlessly into the supply chain. It should establish relationships with the suppliers and effectively represent the customer in respect of the supply chain.

Neutrality The neutrality of the 4PL is also a key value proposition. This means that the 4PL can clearly demonstrate that it has the customer ’s best interest at heart. In effect it is an extension of the customer, seeing the supply chain from the customer ’s perspective. From this position, the 4PL can have a complete understanding of the intricacy of the customer ’s business and supply-chain requirements, in order to drive forward with leading-edge, bespoke solutions. Furthermore, the 4PL should identify metrics and value share in order to underpin and focus the relationship with its customer. This should also ensure that the 4PL and the customer ’s objectives are completely aligned and that both parties have a clear incentive to work together to achieve their goals.

Trading partner The 4PL can position itself as a trading partner on behalf of the customer, linking together the customer ’s suppliers and customers with the 3PL providers and carriers. This allows for the 4PL to be clearly seen as the single point of contact and accountability for the supply chain by the customer, a key reason why many companies seek to appoint a 4PL. The 4PL should be able to build close relationships with all of the participants along the supply chain, in order to ensure synchronization of the processes and operations. The 4PL should typically work with the ocean carriers, consolidators, forwarders or 3PLs that the customer uses. This means that the customer

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does not risk having to change all the providers in the supply chain in order to use the 4PL services. However the 4PL would have the responsibility for monitoring supply-chain performance for all parties involved. To be truly successful, a 4PL needs to have a collaborative approach to working with its customer and the various parties across the supply chain. In effect it is the ‘go-between’ in the relationship with the customers and their suppliers. Certainly the 4PL is positioned to manage what is often considered to be the most important relationship – that with the customer.

Information technology The 4PL model recognizes the need for information technology in managing the overall process and supply chain. This means that a 4PL must make a considerable investment in a suite of systems. As shown in Figure 9.3, these systems and capabilities include the full array of options needed to provide supply chain and stock planning, the management of operations, finance and human resources, as well as a visibility and event management system to support supply-chain management. The execution systems are likely to include: ឣ ឣ ឣ ឣ

WMS (warehouse management system); TMS (transport management system); OMS (order management system); freight system.

Visibility & event management

3PLs & carriers

Suppliers

Customers

Integration layer

Execution systems eg WMS, TMS, OMS, freight

Finance system

Planning systems, strategic & operational

Master data warehouse

Figure 9.3 IT systems architecture

Project control system

Customer management systems

HR system

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Certainly a leading-edge purchase order system would be required in order to complete purchase orders online and issue them to suppliers, allowing access in a multitude of languages. These systems and the planning and back office systems may be provided through an ERP system, such as those supplied by SAP or Oracle. All of these systems are connected through an integration layer, which not only integrates all internal systems but also provides connectivity to customers, the customer’s suppliers and indeed any other third party across the supply chain, including 3PLs. Such an integration platform enables communication via electronic data interchange (EDI) in XML or some other form, whilst less sophisticated partners or suppliers can send a flat file using a web browser front end. Because of the amount of data that has to be exchanged, it is vital that the integration layer provides automatic or semi-automatic data transfer processes to all parties involved across the supply chain. A key requirement of integration is to understand clearly the business process that is being supported and ensure that the data exchanged is synchronized with this process and any other data being received or sent. In essence this complex management of the data and the business processes is an essential 4PL offering. Data is vital to the 4PL model and it is therefore necessary to ensure that there is a single version of the truth. A data warehouse should be used and populated with all the required data, thus providing a single synchronized version of all the data in the supply chain. It is important for 4PLs to manage the data across the supply chain to allow intelligent, timely and appropriate decisions to be made. In this respect the visibility and event management systems are vital. They monitor all parties’ activities across the supply chain and compare them with the plans created. This allows for deviations to be alerted to the appropriate management team so that action can be taken to resolve them. Additionally, having visibility of all inventories across the supply chain provides customers with the confidence that the 4PL service is working. For the 4PL itself it means that less insurance stock is required because the inventory can be seen moving through the supply chain. For both the customer and 4PL, clear visibility brings lower costs overall, quicker lead times to market and improved fulfilment rates.

The reality and development of 4PL Despite a number of significant reasons for the 4PL model to be seen as attractive, the fact remains that in practice there have been few true 4PL relationships. In truth, much of what the 3PLs refer to as 4PL is in fact either

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LLP (lead logistics provider) or asset-free logistics management, neither of which really addresses the core of the 4PL model. It would appear that in reality there are no such entities as pure 4PLs. It may well be that it is impossible for a single company to provide a 4PL service in its purest form. Furthermore, many companies are unwilling to risk losing control of their supply chain by outsourcing to a 4PL. Others who like the concept do not want to be the first to try it! There is much speculation regarding why the 4PL concept was developed, with some cynics believing that the consultancies were looking for ways to produce ongoing revenues over and above their project work. It is more likely that the consultancies saw a market opportunity for 4PL as both business process re-engineering and 3PL management combining to provide a single accountable supplier to meet the customer’s needs. Some 3PLs question the need for the consultant 4PL role. They see the LLP or integrator role that a number of 3PLs provide as addressing the needs of customers. However, others in the logistics and consultancy world question whether customers are truly happy with this approach, and point back to the original 4PL model as a probable answer. A number of 3PLs are attempting to position themselves as 4PLs, and indeed some of them question the practical difference between a 4PL and LLP. For these 3PLs the key role of a 4PL is as an outsource manager and single accountable point of responsibility for the logistics activity of a business. Indeed most of the 4PL roles played by 3PLs are in this vein and are more like LLPs in that they use a degree of their own assets and resources, supplemented by contractors. Whether some 3PLs have the ability to migrate to a 4PL role is still debatable. However, a more interesting question may be whether there is really the need for a true 4PL or whether the 3PL/LLP/4PL compromise is what customers actually want. The extension of Accenture into the 4PL role has been a significant change for the company. Normally used to providing consultancy services, up to the point of delivering a strategy and a set of recommendations, as a 4PL it is also responsible for executing across the supply chain. In many respects consultants have struggled with the execution layer, often lacking the experience to successfully manage activities and exceptions across the supply chain. Accenture’s 4PL model involves groups of companies, usually from the same industry sector, who outsource all their non-core activities including IT and the supply chain to the 4PL, thereby providing the scale to allow significant cost reductions. In some ways the 4PL model is still evolving. Those that do position themselves as 4PLs have developed from either consultancies or 3PLs, and both of these legacies have issues. The consultants are strong on strategy, process re-engineering and systems development and integration, but often lack the practical execution experience to run a supply chain successfully. The 3PLs,

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in contrast, are more comfortable in their execution role and often lack strategic, process and systems expertise. One possible solution is to have a joint venture company of consultant and 3PL, which can combine these strengths and cancel out the deficiencies. In practice the two make odd bedfellows, having a different culture and approach to business. What is starting to emerge is that the larger 3PLs are recruiting consultancy-calibre individuals into their businesses in order to address their lack of capabilities from within. The appointment of Jon Bumstead, one of the creators of the 4PL model at Accenture, by Exel (since acquired by Deutsche Post World Net) as strategy director is a fine example of this. Most 3PLs see the transition to 4PL as a gradual evolution, and also believe that there is less of a gap to bridge than the consultancies would suggest. Many see LLP as a point along the journey. To move towards the 4PL model, 3PLs not only have to address the strategic and process capability issue but also the information technology (IT) requirement. In order to be able to operate as a true 4PL, it will be necessary for 3PLs to invest heavily in IT, something that traditionally most have failed to do. Jon Bumstead, formerly of Accenture and now strategy director with DHL Logistics (post Exel acquisition) believes that it is a big stretch for a 3PL to be able to provide a full range of 4PL services and in particular make the required investments in systems and technology (Bumstead and Cannons, 2002). Certainly, to succeed in this, 3PLs must be able to break out of the ‘costplus’ mentality and establish an appropriate shared risk and reward style contract. Equally, the customer will have to recognize that the 3PL is no longer simply providing logistics services, many of which have been commoditized over recent years, and be prepared to reward the new 4PL service appropriately.

The emerging 3PL players and the future for 4PL Driven by their geographical footprint and scale, the large parcel carriers are well positioned to migrate towards the 4PL space. The likes of DHL, UPS and FedEx appear to be developing capabilities that point to this positioning. Activities like supply-chain synchronization, trade duty management, planning and procurement, all underpinned by sophisticated IT systems, are being marketed by the big three. In their slipstream are the likes of TNT, Kühne + Nagel, Con-way and Schneider Logistics, all of whom claim to have 4PL operations. The likely future for the 4PL model is that the larger 3PLs, in their search for added value, will continue to acquire the capabilities and skills, together with the required investment in IT. Whilst this may never quite achieve the original Accenture vision of 4PL, by providing the necessary IT systems together with a broad range of logistics and supply-chain services, this will take the 3PLs

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beyond the LLP model and transform them into more complete supply-chain integrators. This may well be more appealing for some industries, especially for those where there is global complexity in supply chains that are not considered as a core differentiator to the business. This new breed of 4PLs will probably seek to provide a significant proportion of the services from within their company assets, but would also expect to outsource niche operations and geographic regions to local best of breed providers. In effect, they will become the super providers, part 3PL, part LLP and part 4PL, where coverage, scale and the ability to invest is king.

Case history Con-way Inc has established a joint venture with General Motors (GM) called Vector SCM, one of the largest 4PL contracts to date, and generally thought to be the most successful. The reported US$6 billion start-up was designed to handle all of GM’s outsourced logistics, providing a single point of coordination for scores of 3PLs. GM owns 20 per cent of the joint venture and Con-way Inc, trading as Menlo, is rewarded through a gain share arrangement, whereby the 4PL savings are audited and agreed to by GM. Interestingly, in June 2006 GM announced that it wanted to exercise its right to enter into discussions with Con-way to purchase the remaining 80 per cent share in Vector SCM. GM reported that, as part of its turnaround plan, it had made the strategic decision to exercise more direct control over its logistics activities. Con-way has commented that it intends to continue to provide 4PL services through the Menlo brand (Con-way, 2006).

The future for outsourcing and 3PLs This section examines the future for outsourcing and 3PL providers. The future for the 4PL model has already been discussed, and it is somewhat uncertain; however it does appear that businesses are seeking offerings that are more strategic and collaborative. Although companies are becoming more focused on cost, they are also seeking a more integrated and strategic approach from their 3PLs. In addition, customers are looking for addedvalue services such as ‘order to cash’, inventory financing and contract manufacturing. Businesses will continue to aim for efficiencies in supplychain management as competitiveness increases and longer supply chains bring ever more complexity. Information technology will continue to develop, especially around communications and integration of data. RFID

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will take on a more important role in the future. Increased globalization will continue to create consolidation amongst both customers and 3PL providers alike. Logistics providers will seek to develop new solutions around such items as inventory financing, co-packing, contract manufacturing, inventory management and other value-added services. Customers will continue to demand a high degree of flexibility from 3PLs, seeking to be able to adjust their operations in line with the supply-chain demands of their business. This, together with the fact that some smaller businesses are now moving production to lower-cost regions, means that 3PLs need to develop more flexible shared-user facilities in these countries.

Core 3PL offerings Among the several different outsourcing studies that have been produced in recent years, the 2005 10th annual study of third-party logistics, undertaken by C John Langley Jr of the Georgia Institute of Technology, supported by Capgemini, DHL and SAP (Langley and Capgemini, 2005), identified that price had become the most important reason for the selection of a 3PL provider, for the first time in 10 years. Price had overtaken the importance of value-added services, reflecting the pressure for reducing logistics costs in the supply chain. The continued importance of price is reflected in most surveys of the reasons for outsourcing (see Chapter 5). However, companies are also demanding more strategic offerings, including 3PLs adopting the role of integrator. The Langley study, which surveyed 1,091 logistics and supply-chain executives across the three major regions of the world, also highlighted the fact that the ability of 3PLs to provide core services was considered more important than the delivery of value-added services during the selection stage. This reflects the need for 3PLs to maintain their attention on their basic offerings as well as the new value-added opportunities. With over two-thirds of respondents from manufacturing, including the automotive, chemical, consumer goods, food and beverage, hightechnology and electronics, life sciences (pharmaceutical) and retail sectors, the study also stressed the importance of technology as a part of the 3PL offering. With 90 per cent of respondents in agreement that IT capability is a key part of 3PL provider capabilities, just over a third (38 per cent) were satisfied with the IT provided by their 3PLs. The poor view of 3PLs’ IT capability may well be down to a lack of investment by many, although the larger providers are beginning to realize that IT is a vital part of their service offering. Indeed some are becoming aware that it can become an important differentiator. These leading 3PLs see the opportunity to leverage IT both to enable low-cost standard solutions and to provide the opportunity for them to fully integrate with their customers.

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Financial and procurement services Financial Many companies are increasingly looking for their 3PL to take on responsibility for end-to-end solutions, including financial services such as freight payment, invoice processing and factoring. Freight payment requires that the carriers’ invoices are checked for accuracy and then settled. Invoice processing is becoming popular as the scale and automated approach of 3PLs can be leveraged by customers to reduce the unit cost of processing. Furthermore, some companies are starting to ask their 3PL to take responsibility for inventory, including the full financing and ownership of stock. Removing stock from the balance sheet is a strong motivation for many companies, especially manufacturers and importers. There is a view that by integrating both logistics and the financials, 3PLs can offer an added-value service that can actually achieve significant improvement in providing customer value. Certainly, 3PLs are starting to develop financial offerings, often partnering with a financial institution. However, 3PLs are still generally risk adverse and there are currently only a few examples of these services in use.

Procurement The procurement of non-core production items, such as promotional materials, consumables and spare parts is increasingly becoming an area of interest for companies seeking to reduce their costs. These items now represent a significant amount of a company’s procurement activity and spend, especially in developed countries where manufacturing is declining. The larger 3PLs are in a unique position to leverage this spend on behalf of their customers, using their global footprint and supply-chain expertise to generate efficiencies by combining logistics and freight management with expert procurement services (Logistics Europe, 2005). This approach can provide a number of potential benefits for customers. Apart from the obvious cost savings through economies of scale and smarter procurement, customers can minimize their procurement risks, especially if they are setting up in a new geography or emerging economy. This procurement activity can also be linked to logistics and freight movements and the whole end-to-end supply-chain activity can be coordinated and synchronized.

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Case history 4CX was created as a joint venture between Exel (since acquired by DPWN and renamed DHL Logistics) and 4C Associates, a leading specialist procurement consultancy. The partnership, which has offices in the United Kingdom, France, Greece, Ireland, Spain and Hong Kong, already manages in excess of 1100 million annual spend (Logistics Europe, 2005). 4CX was established to provide customers with an integrated sourcing and supply-chain solution to enable substantial cost savings across a range of non-core goods. By leveraging DHL’s global reach and supplychain expertise together with 4C’s global purchasing scale, 4CX is able to deliver significant cost savings through the efficient purchasing of goods and services, together with effective management of the risks associated with global sourcing (4CX, 2006).

Small and global We have already seen how the phenomenon of the globalization of companies, examined in previous chapters, has mostly been led by tier-one large businesses. However, what is now emerging is the globalization of tiertwo and three company supply chains, as they seek to remain competitive with their larger counterparts. These companies have the same requirements as their larger competitors but lack the scale even to attempt to manage the end-to-end global supply chain. Such businesses want to be able to take advantage of a 3PL’s scale, geographical coverage and information technology in order to take the cost advantages of moving manufacturing abroad, without the need to make significant investments. Furthermore, they expect the 3PL to have the local offshore contacts with carriers and maybe even with suppliers. This requirement provides 3PLs with both an opportunity and a challenge. They certainly see the revenue streams from these customers as welcome top-line growth. However, most of their operating models set up in Asia have been established to support tier-one, large manufacturers. The smaller companies require a different service, often involving the development of shared-user operations and consolidation centres in countries of origin. On the other hand the potential margin for 3PLs from these smaller companies could be more attractive than from their larger rivals.

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Information technology The growing importance of IT has been mentioned a number of times previously. As we have already seen, the 2005 10th annual study of third-party logistics (Langley and Capgemini, 2005) demonstrated that while 3PL customers saw IT as important, nearly two-thirds (62 per cent) were dissatisfied with the IT service provided. It is clear that as companies require more end-to-end services from 3PLs, they also need a broader and more sophisticated range of IT services. The 2005 survey identified the top three future requirements of IT services as being radio frequency identification (RFID), internet-based transportation/logistics markets and supplier management systems (Langley and Capgemini, 2005).

RFID There has been much hype about this over the last few years. RFID is a sophisticated automatic data capture and identification technology, whereby small RFID tags that contain data are read by readers using radio signals. As a result tags can be read from or written to, without line of sight. A typical RFID installation consists of tags, antennae and readers, with the data managed via integration software. There are two types of tags: passive tags use the readers’ energy to transmit a signal; whilst active tags have their own energy source. Depending upon the technology used and the environment, tags can be read from a distance of up to 1.2 m for passive tags and over 10 m for active tags. This technology allows data to be read from and/or written to the tags, which are often applied to cartons or embedded in packaging. As pallets of cases pass through a reader’s field, the tags can be read virtually instantaneously, with little opportunity for error. There are also tags that can be written to, once only, known as write once read many (WORM) tags. As improvements in performance and costs have been made, RFID has started to become more viable for large-scale operations. Driven mostly by the larger retailers, led by Wal-Mart, Tesco and Metro, almost every medium and large-sized company in the Western world has explored the possibilities and opportunities of the use of RFID. However, despite its great promise, RFID has yet to deliver real value into the supply chain. Mostly because of the immaturity and cost of the technology, including lack of clarity around standards, it has been extremely difficult for many companies to generate a compelling business case for RFID. The retailers’ business case is largely based on in-store efficiencies around inventory management and shelf filling, providing a reduction in out-ofstocks and added security for high-value goods. RFID in retailing relies on the suppliers to attach tags to pallets and cases, and even potentially to individual items in some instances. Almost all the large retailers are conducting

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RFID trials of some sort or other. Wal-Mart has been the most aggressive, setting schedules for its suppliers to apply RFID tags, although timescales have been lengthened as suppliers have struggled with technical and cost issues. The consumer packaged goods suppliers have struggled to establish clear business cases, largely due to the existing efficiency of the physical supply chain. Warehouses that are fully equipped with radio frequency (RF) scanners to read product bar codes and fully automated warehouses already provide a high degree of accuracy and visibility of stock. Given the cost of RFID in warehousing, the return on investment is low when compared with the current efficiencies. In order to comply with the requirements of the retailers, many consumer manufacturers have adopted, or are planning, a ‘slap and ship’ approach to RFID, whereby the tag is applied at the point of despatch from the supplier’s warehouse, providing no value to their own supply chain. There has been a degree of consumer concern regarding the privacy of the data collected through the RFID processes. In response, the RFID industry has developed a ‘kill switch’ in its chip specifications, allowing the retailers to permanently disable the tag at the point of sale. The future of RFID is largely dependent on continuing to improve the technical performance together with reducing the costs of tags, both of which are steadily happening. Potentially RFID is of use across the entire supply chain as shown in Figure 9.4. This visualization of how and where RFID could be used in the future shows examples of the types of processes within the supply chain that could benefit from its deployment. Productivity across manufacturing and warehousing can benefit from the automation and speed of data capture, reduced manual handling and the reduction of consumables. Traceability across the supply chain could be made much more accurate and easier to achieve through the use of item level tracking, enabling effective and efficient product recalls to be performed. Ever an issue for retailers, shrinkage could be reduced by building in rules and alerts in the managing software that could communicate to store detectives that unusual quantities of items had been removed from shelves. Finally, RFID could provide service improvements through more detailed and accurate inventory management, providing improved decision making.

4PLs and beyond

RFID

Automatic despatch scanning

RF

Automatic vehicle identification

Automatic warehouse control RF ID

RF ID

ID

Tags are built into the individual items or packaging

RDC

Automatic despatch scanning RF

Automatic scanning of goods at till

RFID tags used as security device on highID value goods RF

ID RF RF

ID

ID

Automatic road toll payment RFID

Manufacturing process

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RF ID

RFID

Automatic waste identification for recycling

Store Automatic shelf readers alert replenishment requirements

Retail store stock automatically updated

Figure 9.4 Possible futures for RFID

Marks & Spencer RFID trial The British department store Marks & Spencer has been conducting a business trial of RFID in its clothing supply chain since 2004. Starting with an item-level RFID trial on men’s suits across nine stores, the technique is steadily being rolled out across its 53 sites. The trial is designed to demonstrate the impact of RFID on customer service, focused on ensuring that a range of sizes and styles is available for customers. For the trial, items with complex sizing requirements, such as men’s suits, will be tagged. The tags contain a number unique to each garment, which they transmit when the products are scanned during the stocktaking process. The next phase of the trial, which commenced in spring 2006, will see the RFID chips integrated into the existing paper barcode label, which details the size and cost of the item. These tags will be applied at source by the manufacturer. The scanned data is automatically sent to the central stock database where a comparison with the stock profile for the store produces a replenishment order. BT has been selected as the main contractor to work alongside Intellident Ltd (Marks & Spencer, 2006).

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Summary In this chapter, the 4PL model was examined and compared with 3PLs, LLPs and consultants. The reasons that companies choose a 4PL solution were reviewed and the key drivers were identified. The 4PL value proposition was also discussed, providing the 4PL perspective. The chapter then explored the reality and development of 4PL, demonstrating that in fact there are few true 4PL operations in place. This section also looked at how 3PLs are seeking to adopt or move towards this model, including some of the constraints and issues. The final part of the chapter looked at the future of outsourcing including the key influences for its future. This looked at new services such as financial solutions and the development and importance of information technology. RFID was considered, and although it has had a slow start it is likely that it will have a place in managing supply chains of the future.

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Abbreviations 3PL 4PL ALC APAC ASEAN ASRS BPM CAGR CDC CEO CIM CKD CPFR CPG CTN C-TPAT DC DCC DIY DPWN ECR EDC EDI ELA EMEA EPC EPOS ERP ETO EU

third-party logistics fourth-party logistics Australian Logistics Council Asia Pacific Association of South East Asian Nations automated storage and retrieval system business process management compound annual growth rate central distribution centre chief executive officer computer integrated manufacturing complete knocked down collaborative planning, forecasting and replenishment consumer packaged goods confectioners, tobacconists and newsagents Customs Trade Partnership against Terrorism distribution centre dedicated contract carriage do-it-yourself Deutsche Post World Net efficient consumer response European distribution centre electronic data interchange European Logistics Association Europe, Middle East and Africa electronic product codes electronic point of sale enterprise resource planning economic/technical/organizational European Union

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FAA FDI FGP FMCG FTL GBD GDP GDS GIS GPS I2M IATA ICT IGD IMF IS IT ITT JIT KPI LLP LSP LTL M&A MD MIS NAFTA NDC NFC NHS NVOCC OEM OMS OTC OTIF PC RDC RF RFI RFID RFP RFQ ROCE

Abbreviations

Federal Aviation Administration foreign direct investment factory-gate pricing fast-moving consumer goods full truck load global business dialogue gross domestic product global data synchronization geographic information system global positioning system inbound to manufacturing International Air Transport Association information and communication technology Institute of Grocery Distribution International Monetary Fund information systems information technology invitation to tender just in time key performance indicator lead logistics provider logistics service provider less than full truck load mergers and acquisitions managing director management information system North American Free Trade Association national distribution centre National Freight Corporation National Health Service non-vessel-operating common carrier original equipment manufacturer order management system over the counter on time in full personal computer regional distribution centre radio frequency request for information radio frequency identification request for proposal request for quotation return on capital employed

Abbreviations

ROI SCM SCOR SKU SLA TEU TMS TUPE VMI W3C WEEE WERC WMS WTO

ឣ

return on investment supply chain management supply-chain operations reference stock-keeping unit service-level agreement 20-foot equivalent unit, standard measure for containers transport management system Transfer of Undertakings (Protection of Employment) vendor-managed inventory World Wide Web Consortium Waste Electrical and Electronic Equipment (EU directive) Warehousing Education and Research Council warehouse management system World Trade Organization

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Kaplan, R S and Norton, D P (1996) The Balanced Scorecard, Harvard Business School Press, Cambridge, Mass Kenco Logistics (2006) Kenco Group Inc [Online] www.kencogroup.com [accessed 9 September 2006] Kerr, J (2005) Choosing the right 3PL in China, Logistics Management, May Kintetsu World Express (2006) Kintetsu World Express Inc [Online] www.kwe.co.jp/en/index.html [accessed 10 September 2006] Kühne + Nagel (2006a) Kühne + Nagel International AG [Online] www. kn-portal.com/about/ [accessed 6 October 2006] Kühne + Nagel (2006b) Third Party Failures: Why are they such a secret? Kuehne + Nagel [Online] http://logistics.kuehne-nagel.com/ ThirdPartyFailures.cfm [accessed 21 October 2006] Lam, W (2006) China’s encroachment on America’s backyard, China Brief, 4 (23), 24 November 2004, Jamestown Foundation [Online] www. jamestown.org/publications_details.php?volume_id=395&issue_ id=3152&article_id=2368903 [accessed 28 October 2006] Langley, J C and Capgemini (2005) 2005 Third-Party Logistics, Results and Findings of the 10th Annual Study, Capgemini Langley, J C (2006) 11th Annual Third-Party Logistics Study 2006, Georgia Institute of Technology, Capgemini, DHL & SAP [Online] http://3plstudy.com/?p=home [accessed 29 October 2006] Lieb, R and Bentz, B A (2004) The Use of Third Party Logistics Providers by Large American Manufacturers: The 2004 survey, Northeastern University Boston, Accenture, 1 September Logistics Europe (2005) The next big thing..., Jon Bumstead, director of strategy, Exel, September Maersk (2006) AP Mølle–Maersk A/S [Online] http://shareholders. maersk.com/en/FinancialReports/ [accessed 6 October 2006] Maersk Logistics (2006) AP Møller–Maersk A/S [Online] www.maersk logistics.com/ [accessed 6 October 2006] Manda, S (2006) Third Party Logistics: The way forward for Indian logistics market, 4 July 2006), Frost & Sullivan [Online] www.frost.com/ prod/servlet/market-insight-top.pag?docid=74102578 [accessed 28 October 2006] Manufacturer (2003) The secrets of outsourcing, The Manufacturer, March [Online] www.themanufactures.com/uk/content/2603/The_secrets_of_ outsourcing [accessed 16 March 2007] Manufacturer (2005a) Logistics and the supply chain, The Manufacturer (US Zone), November [Online] www.themanufacturer.com/us/detail.html? contents_id=3841 [accessed 29 December 2006] Manufacturer (2005b) Outsourcing ‘points of pain’ in the supply chain, The Manufacturer [Online] www.themanufactures.com/us/content

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Robinson (2006) C H Robinson Worldwide, Inc. [Online] www.chrobinson.com/ [accessed 10 September 2006] Rushton, A, Croucher, P and Baker, P (2006) The Handbook of Logistics and Distribution Management, Kogan Page, London Rutter and McGinley (2001) Outsourcing: look before you leap, Global Inventory, October, pp 6–14 Ryder (2006) Ryder System, Inc [Online] www.ryder.com/index.shtml [accessed 8 October 2006] Sangam, V K (2006) Challenges in managing the 3PL relationship About, Inc [Online] http://logistics.about.com/od/thirdparty/a/uc041805_3.htm [accessed 21 October 2006] Schenker (2006) Schenker AG [Online] www.schenker.com/ [accessed 6 October 2006] Schneider (2006) Schneider National Inc [Online] www.schneider.com/ [accessed 10 September 2006] Singapore Economic Development Board (2006) Looking Ahead: Manufacturing in 2018, 1 October 2005 [Online] www.sedb.com/ edb/sg/en_uk/index/news_room/publications/singapore_investment/sing apore_investment9/looking_ahead_manufacturing.html [accessed 28 October 2006] Supply and Demand Chain Executive (2005) IBM introduces supply chain outsourcing offering, Supply and Demand Chain Executive [Online] www.sdcexec.com/online/article.jsp?id=7073&siteSection=16 [accessed 31 December 2005] Szymankiewicz, J (2005) TUPE or not TUPE, that is the question, Focus, December, pp 53–54 TDG (2006) TDG plc [Online] www.tdg.eu.com/ [accessed 6 October 2006] Terreri, A (2006) US and Canada: Partners in trade, Inbound Logistics, July 2004 [Online] www.inboundlogistics.com/articles/features/0704_ feature04.shtml [accessed 28 October 2006] Thayer, A M (2002) Drug deal-making dynamics, change, Chemical and Engineering News, 80 (4), pp 37–44 Thiel (2006) Thiel Logistics [Online] www.thiel-logistik.com/ index.php?home=1 [accessed 7 October 2006] Times (2006) Gridlock strangles the UK economy, Times Online 15 October [Online] http://business.timesonline.co.uk/article/0,,9077–2404088,00.html [accessed 28 October 2006] TNT (2006) TNT Holding B.V. [Online] www.tntlogistics.com/ [accessed 6 October 2006] Toll (2006) Toll Holdings Limited [Online] www.toll.com.au/ [accessed 14 October 2006] Tompkins, J A (2006) The business imperative of outsourcing, Industrial Management, January/February, pp 8–12

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389

Index 3M 108 3PL (see third-party logistics) 4PL (see fourth-party logistics) 4C Associates 372 4CX 372 ABX Logistics 140, 153, 186 Accenture 334, 352, 367, 368 access to wider knowledge 223 account management 308–09 acknowledgments 30 acquisition and mergers 39–41, 47, 52, 70, 83, 89, 137, 140, 142, 143, 144, 147, 150, 153, 154, 158, 160, 162, 163, 164, 165, 166, 167, 168, 169, 179, 181, 183, 184, 189, 197, 368 ACR 140, 161, 162, 163 (see Hays and Kühne + Nagel) activity budgeting 326 Adams 41 added value (see value added services) Adidas 92 administrative issues for the contract 294 Aeon 83 aerospace 80, 94 third-party provider focus 142, 173, 177, 178, 181, 185, 188 Africa 51, 63, 86 (see also Europe, Middle East and Africa) third-party provider focus 144, 166, 167, 168, 180 agile supply chain 241–43

agriculture 96 third-party provider focus 187 Ahold 26, 37, 81, 98 air 76, 94 air cargo (see freight, air) air connectivity 94 Air Express International (AEI) 144, 145 Air France 56 air freight (see freight, air) air parcels 148, 183 (see also freight, air) air services 57 air shipments 195 aircraft 49, 148, 177, 183 airline 147, 183 cargo sector 183 airports 63, 71, 76, 94, 97, 157, 183 Aitena 153–54 Algeria 51 Allan, John 143, 146 Allied Carpets 41 Alza 40 Amazon 250 American (see Americas) Americas 17, 71–81, 103 (see also United States) apparel 36, 80 automotive sector 32, 40, 80 Carrefour 27 Central 23, 39, 46, 103 consumer packaged goods (GPG) 41

390

ឣ

Index

Dell 25 fashion industry 36 high technology sector 80 Latin 18, 20, 21, 23, 31, 32, 36, 38, 41, 44, 46, 63, 71, 77–81 Nokia 44 North 18, 20, 22, 23, 24, 36, 38, 44, 76, 87, 88, 103, 363 pharmaceutical 80 Proctor & Gamble 31 retail 36, 38, 80 textiles 80 third-party provider focus 146–49, 168, 178, 180 third-party providers 175–91 Wal-Mart 39 American President Lines 194 (see also APL) Andersen Consulting 352 (see also Accenture) A.P. Moller – Maersk Group 163 apparel 23, 36–37, 74, 80, 89, 92, 100 (see also fashion sector and textiles) third-party focus 163, 166, 167, 182, 191 APC 93 APL Logistics 90, 129, 140, 155, 192–94, 258–59, 307–08, 310, 312–13 approach, to monitoring a 3PL 330–35 to outsourcing 273–74 to outsourcing management 332–34 areas of concern 288–89 Argentina 26, 27, 39, 79, 80, 189 Armstrong & Associates reports 17, 73, 137, 175 Asda 41 Asia 20, 21, 23, 27, 32, 37, 41, 44, 46, 51, 52–53, 60, 62, 63, 103, 137, 140, 155, 160, 162, 163, 165, 166, 168, 171, 178, 180, 182, 186, 188, 191, 363, 372 (see also Asia-Pacific) Asian (see Asia) Asia-Pacific (APAC) 16, 18, 24, 44, 81–103, 136, 158, 192–8, 199 (see also Asia and Far East) assembly services 130

assessing the importance of different supply chain activities 221 asset dedication 122 asset free 181, 187, 188, 191, 352, 355, 360, 367 asset light 353 asset management 108–09 asset recovery 43, 354 asset utilization 247, 353, 355 improving 247 Aston Martin 40 AstraZeneca 41 ASX stock exchange 197 AT & T 334 Auchan 41, 57, 85, 89 Austria 61, 65, 66, 67, 156, 168, 170 Australia 82, 99, 100–01, 102, 103, 140, 161, 171, 172, 181, 192, 197 Australian Logistics Council (ALC) 103 Freight Transport Logistics Industry Action Agenda 103 Australasia 100–03 automated (see manufacturing and warehousing) automotive sector 17, 23, 32–33, 39–40, 51, 52, 83, 93, 98, 140, 259, 360, 370 4PL 360 Canada 76 cars 21, 26, 32, 40, 51, 62, 72, 83, 87, 92, 93, 98, 147 developing new 26 producing 32 China 89 Eastern Europe 70 India 92–93 Japan 83 Mexico 80 Poland 70 Singapore 95 Slovakia 67, 71 Spain 64 Thailand 98 third-party provider focus 142–97 Toyota 26, 32 Turkey 69, 71 United States 73, 76 awards 36, 143, 161, 182, 183

Index B2B (business-to-business) 28, 206 B2C (business-to-consumer) 28–29 badging 130 Bahrain 50 balanced scorecard 320–21 Baltic States 70 Barcelona 63 El Prat airport 63 Bax 140, 168, 169, 177 Bayer 41 Bayer Consumer Care 41 Beck and Call 133 Belgium 47, 53, 55, 56, 58, 59, 60, 61, 91, 153, 158, 169 Ben & Jerry’s 41 benchmarking 4PL 357 competitive 334 monitoring 328–29 retailers 38 benefits of outsourcing 110 Benelux 47, 58–60 third-party provider focus 155, 156, 163, 170 Benetton 92 Best International Logistics Initiative award 143 Bibby Distribution 154–55 Bilbao port 63 Billa 70 biotech (see healthcare sector and pharmaceutical) BMW 26, 32, 40, 62 BOC Group 160 (see also Gist) bonus schemes 345 brands 31, 36 (see also global brands) automotive 40 consumer products 41, 92 DHL 143–44 fashion and luxury 57 FedEx 183 integrity 224 Menlo 369 own label 36, 52 Procter & Gamble 31 Ryder 188 The Fresh1® 187

ឣ

391

UPS 147 Brazil 25, 39, 78–79, 80, 189 breadth of outsourcing 105–110 break bulk 112 Breyers 41 Bristol–Myers Squibb 40 British (see United Kingdom) broker distribution channels 205 budget 325–26 building closer partnerships 254–55 building materials: case study 229 building specialization 119 Bulgaria 69, 70 Bumstead, Jon 368 Burberry 36 business drivers for outsourcing 211 risks 290 strategy 6 Business Express 133 business process management (BPM) 34 Cadbury Schweppes 41 call centres 25, 106, 116, 356 Caliber Logistics 183 calibre of key operational personnel 291 Canada 22, 39, 46, 48, 71, 75–77, 78, 80, 182, 184, 185, 189 Calgary 77 Port of Vancouver Toronto 76, 181 Toronto Pearson International 76 Capgemini 18, 19, 137, 370, 373 capital cost 224, 293 cargo (see freight) Carrefour 26, 27, 36, 37, 41, 51, 57, 70, 80, 81, 83, 85, 87, 89, 96, 98, 99 cars (see automotive sector) Casino 85, 98 cash and carry channels of distribution 205 cash flow improvements 211, 224 Caterpillar Logistics 178, 317–18 Celestica 35 Central America (see Americas, Central)

392

ឣ

Index

Central Europe (see Europe, Central) centralization of information 214 centralization of inventories 214 changeover 225 as a critical factor 231 costs 225 detailed for outsourcing 347–49 economies of scale 118, 225 four stages for outsourcing 347 fixed, converted to variable cost 225 framework for assessing costs 346–47 hidden 254 intangible 349 lag 225 leader 218–19 metrics 336–37 minimization 208 monitoring 319–25 of management 348 of operation 348 of planning outsourcing 347–48 operating savings 225 plus arrangements 280–81 post-outsourcing 348–49 productivity advantage 219 real, of outsourcing 346–49 related issues for the contract 293–94 reduction 113, 228–30, 301 structure 295–96 transition 348 variations 345 versus service advantage 218–19 channels, alternative distribution 203–07 ‘long’ and ‘short’ 208–09 of an FMCG company 220 of distribution 203–10 characteristics 208–10 objectives 207–08 one size doesn’t fit all 219–20 characteristics that distinguish freight exchanges 245 charging mechanisms 282 charging structure for outsourcing 279–82

Chartered Institute of Logistics and Transportation (CILT) 295 chemicals 49, 84 petrochemicals 87 third-party provider focus 154, 155, 156, 165, 170, 174, 181, 189, 191, 196 Chile 27, 80 China 9–10, 20, 21, 23, 25, 26, 27, 31, 32, 34, 36, 39, 44, 46, 52, 53, 58, 60, 61, 64, 65, 67, 68, 72, 73, 74, 75, 78, 79–80, 81, 82, 83, 84, 85, 86, 87–90, 91, 92, 94, 95–96, 97, 99, 100, 101, 102, 103, 167, 181, 192, 258–59 China Certified Professional Logistician Qualification Training 89 China Federation of Logistics and Purchasing 89 choosing between different providers 231–33 choosing to outsource 228–31 Christian Dior 57 Christian Salvesen 117, 140, 155, 194 Chrysler 40 (see also DaimlerChrysler) Circle International Group 180 Cisco 60, 179 Client perspective on implementation 314–15 clinical trials 33 clothing 36, 50, 69, 72, 89 (see also apparel and fashion sector) Coca-Cola 34, 60, 62, 81 Colgate Palmolive 34, 73, 81 collaboration 306–08 collaborative, groups for global outsourcing 266 outsourcing management techniques 334–35 collections 114 co-location 240 Colombia 27, 80 Columbia Sportswear 57 co-makership 240 commitment to service 271–72 commitment 271–72 importance of 113 levels 207–08 measures 338–40

Index metrics 336–340 supply chain 304 communication 69, 83, 311, 369 (see also information and communication technology) fast 23 infrastructure 88 poor 305 speed 28 systems 134 company culture 253 resources 210 competitive advantage 217–21 benchmarking 334 characteristics 210 criticality 221 positions 219 complex products 209 complexity 9, 214, 227 components 23, 28, 29, 30, 31, 32, 44, 76, 81, 83, 92, 93, 96, 98, 100, 169, 194 (see also materials) composite depots 122 Confederation of British Industry 55 confidentiality of information 224, 278 configuration of a logistics company 107 consignment, size of 122 consolidation 98, 137, 370 across sectors 19, 39–41, 370 across third-party provider industry 140, 150, 171, 198, 370 centres 55, 372 delivery of supply chain value 42 deconsolidation 97, 150, 165, 169, 192 greater emphasis on 37 improved 212 international supply chain 42 of loads 118 of warehousing and deliveries across multiple manufacturers 34 services 97, 123–24, 145, 165, 169, 181, 188, 192, 194 vendor 181

ឣ

393

consultancy 31, 145, 148, 149, 157, 177, 179, 182, 188, 191, 196, 352, 354–55, 367–68, 372, 376 consumables customer service measurements 340 consumer brands 31, 92 consumer demand 21, 26 consumer–driven supply network 31 consumer electronics 25, 93 (see also electronics) case study 230–31 televisions 21 consumer goods 26, 31, 370 (see also consumer packaged goods) manufacturers 23, 31, 51, 54, 70 RFID 374 third-party provider focus 142–97 consumer packaged goods (CPG) 33–34, 41, 51, 54, 62, 70, 73, 81, 98, 105, 220, 360 (see also consumer goods) industry consolidation 41 measuring warehouse operations 342–43 consumer, the 29, 31, 60, 72, 249–52 confidence 98, 101 demand 21 markets 83, 103, 363 population of Indonesia 99 container 22, 75, 142, 165, 184 business 197 fill rates 42 line 164 logistics 144 market 163 port(s) 87 service 164 shipper 164 shipping 22 transportation company 155, 194 content of the book 12–15 context of outsourcing 202–10 continuous improvement 303–04, 310–11 review 349–50 construction 83, 91, 154, 178 third-party provider focus 181 container-load shipments 142

394

ឣ

Index

continuum of logistics services 108–10, 272–73 contract 137, 145, 160, 161, 172, 183, 190, 293–96, 357, 368, 369 basis 123 distribution 9 hire of vehicles 114 incentivized 257 logistics definition 3 management 297–352 one-off 123 open book 38, 54 specifics 110 spot 123 unclear 304–05 contract logistics providers (see thirdparty providers) contractor (see third-party providers) control loss of 223 system 329–30 control tower 356 Con-way (formerly CNF) 178, 368, 369 (see also Menlo Worldwide) co-packing 33, 55, 370 third-party provider services 145, 158, 159 core business 6, 9, 222–23 core competencies 6, 9, 221, 222–23 corporate culture 223, 253, 271–72 Cosco Group 90 cost (see costs) costs, 4PL 357–66 actual operating 225 air freight 22–23 balance with service 117–19 benchmark 38 competitive 52 control 40 hidden 254 impact of globalization 33 increasing 85 increasing fuel 50, 54, 56 inventory 24, 29, 34, 55 LLP 354 logistics 29, 88, 361, 370 material 41

measurement of 358 ocean freight 22–23 of British traffic congestion 55 of capital 224 operational 38, 42, 44, 357, 361, 362 optimised 37 origin 24 pressure on 359 product 42, 51 reason not to outsource 19 reduction of 23, 35, 39, 41, 52, 57, 62, 89, 91, 93, 136, 360, 370, 371 retailers 38, 57, 74 RFID 373–74 shipping 92 supply chain 44 transport 22, 23, 55 cost-plus 368 Costa Rica 80 Costco 83, 85, 87 country economic and trading information 46–103 CPFR (collaborative planning, Forecasting and replenishment) 34 credit control 106 critical factors of choice for outsourcing 228–33 Croatia 70 cross-border services 73 traffic 149 transactions 21 cross-docking 37, 97, 112, 121, 150 third-party provider services 150, 154, 186 CTNs 220 C-TPAT (Customs Trade Partnership against Terrorism) 76 cultures 21, 47, 149, 368 cultural incompatibility 223, 253, 271–72 current issues and influences 235–68 customer (see customers) customers 4PL focus on delivering value to 354 4PL objectives aligned with 364 and 3PL relationships 298–99

Index balance with costs 117–19 complaints and damage claims 357 connectivity to supply chain partners 356, 366 dedicated warehouse 54 demand 29, 30 demanding 198, 370 enquiries 106 extension of 353, 364 facing logistics operations 113 fulfilment 186 global 136 interface to 356 integrate with 370 investment by 363 issues 300–02 KPIs 336 management of customer’s supply chain 355 minimise their procurement risks 371 orders 106–08 order fulfilment lead times 357 relationships 264, 365 rejected invoices by 357 responsive to demand 29 retaining 353 increasing 228–30 performance surveys 358 see information technology as important 373 seeking added value services 369 service 30, 231, 375 (see also service) improvements 359, 363 service measurement 31 success of 362 usage of third-party providers 73 value 371 customs agent 194 brokerage 137, 147, 149, 165, 180, 181, 184, 191 clearance 55, 98, 145, 184 compliance consulting and management 149, 192, 360 consolidation 145 tariff management 360 Cyprus 69

ឣ

395

Czech Republic 26, 27, 51, 64, 65–66, 69, 70, 158, 160, 161 D.Logistics 156 Dacher 62, 156–57 Daimler-Benz 40 DaimlerChrysler 32, 62, 73, 93 dangerous goods 145 Danone 62 Danzas Air and Ocean 144, 145 (see also DHL) dashboard for KPI measurement 343 data requirements for RFP 278–79 dedicated operations 54, 116–19, 123–24 third-party provider services 154, 158, 159, 173, 174, 188, 189, 191 defence industry third-party provider focus 154, 173 definitions 3–5 delivery 33, 51, 85 alternatives for home 251 cycle 31 data 280 drop characteristics 227 frequency 226–27, 357 home 148 loss of influence 224 just in time 184 of documents 144 of value added services 370 operations 105–06 services of e-fulfilment specialists, a review 262 speed of 122 supply chain delivery times 23 system 227–28 times 89 to the door of the customer 29 to the retailer 33 windows 113, 251–52 delivery transport (see secondary transport and transportation) Dell 25, 35, 74, 93, 361 Delphi 93 Deloitte 23, 24, 26 demand 25, 29, 30, 31, 32, 34 consumer 21, 26

396

ឣ

Index

data 31 global 26 led process 35 model(s) 29, 30 planning 32, 35, 44 pull 29, 32, 35, 173 replenishment 31 retail 30 strategies 31, 38 supply and 29, 31 variable manufacturing 44 Denmark 157, 158, 163, 164 depot relocation 227 deregulation 236–37 design issues 302–03, 345 destination management 8 detailed metrics and KPIs 335–45 Deutsche Bahn 140, 168, 169, 177 Deutsche Bundesbahn 169 Deutsche Post World Net (DPWN) 17, 77, 83, 140, 142–6, 147, 162, 368, 372 (see also DHL) developing automotive 71 countries 20, 21, 23, 24, 26, 28, 34, 38, 41, 44, 100 economies 50–51, 65, 71, 79, 96, 103 fashion 71 markets 26, 34, 41, 46, 51, 70, 80, 167 regions 20, 81, 95 textile 71 world 21 developing logistics market 71 developing new companies 65 developing ports 87 developing private sector 69 developing standards for delivery transport 328 developing third-party provider outsourcing markets 149 developing services by third-party providers 153, 160, 168, 358, 368 development cycle of contractor selection 291–92 development, of products 26 deviations measurement 330 DFDS Transport Group (see DSV A/S)

DHL 44, 62, 140, 142–46, 311, 368, 370, 372 (see also Deutsche Post World Net and DHL Logistics) DHL Danzas Air & Ocean (see DHL Logistics) DHL Exel Supply Chain (see DHL Logistics) DHL Freight (see DHL Logistics) DHL Global Forwarding (see DHL Logistics) DHL Logistics 17, 90, 137, 142–6, 150, 157, 198, 368, 372 (see also DHL and Exel plc) DHL Solutions (see DHL Logistics) did we get it right 345–50 difference between dedicated and multi–user operations 116–19 different approaches to cost and performance monitoring 319–25 different types of outsourced operations 116–19 distribution 21, 150, 175 activities 221, 355 Calgary 77 central 60, 92 centre 54, 352 dedicated 54 definition 3 design 345 European (EDC) 47, 52, 57, 60, 150 management 85, 356 market 83, 150 network 54 European 52 sector 60 reduction in numbers 248 service parts logistics 43 strategic hub 95 synchronised 360 systems 29 technical 145 third-party providers focus 137–97 Wal-Mart 39, 74, 77 distribution depot operation 111 multi-client operations 120–21 distribution by region of the largest (by revenue) 30 global 3PLs 199 distributed by region, revenue totals for the largest 30 global 3PL 200

Index distribution of Europe’s top 13 logistics providers by head office location 149 distribution of Europe’s top logistics providers by revenue 152 DIY (do-it-yourself) sector 74, 258–59 third-party provider focus 157 document management third-party provider service 156 Doosan Corporation 87 Dow Jones Transportation Average 179 downstream 107 drinks industry, third-party provider focus 166 driver skills for home delivery 251 drivers 188 drivers and drawbacks for outsourcing 222–28 key, for outsourcing 201–35 logistics, financial factors 224–25 logistics, organisational factors 222–24 logistics, physical factors 227–28 logistics, service factors 225–27 shortages 55, 74 drop characteristics 227 DSV A/S (DFDS Transport Group A/S and Frans Maas) 140, 157–58, 172 DuPont Pharmaceuticals 40 duty 24 management 368 dynamic pick faces 251 eBay 29 e-commerce 10–11, 28–9, 183, 215–16, 354 e-fulfilment 10–11, 133, 215–216, 251–52 selection process 261–62 specialists, review of service offerings 262 Eastern Europe (see Europe, Eastern) economic unions 236–37 economies of scale 39, 40, 118, 225, 371 ECR (efficient consumer response) 34, 187 EDC (European distribution centre) 47, 52, 57, 60, 150

ឣ

397

EDI (electronic data interchange) 28, 30, 358, 366 EGL Eagle Global Logistics 180 Egypt 27 electronics industry 34–35, 43, 60, 62, 69, 70, 72, 83, 85, 87, 93–94, 96, 98, 100 (see also high technology sector) third-party provider focus 147, 155, 161, 163, 167, 168, 171, 182, 192, 194, 196, 370 elimination of waste 241–43 El Salvador 78 e–markets 28–29 Emery Air Freight Corp. 179 (see also Con-way) emerging markets 9, 215 employee bonus schemes 345 engagement 308–10 engineered standards 327 enhancing logistics partnerships 255 environmental best practice 5 issues 131, 237–39 EPC (electronic product codes) 34 EPOS (electronic point of sale) 30, 248 equipment specification 345 ERP systems 52, 366 Estonia 69 Euromonitor 38 Europe 11, 22, 36, 46–47, 51, 52, 56, 57, 58, 60, 61, 62, 63, 83, 88, 92, 103, 136, 144, 175, 178, 180, 181, 182, 185, 186, 188, 189, 191, 192, 194, 195, 196, 198, 199, 363 (see also Europe, Middle East and Africa and European Union) automotive sector 32, 40, 52, 80 businesses 18 Carrefour 26 Central 51, 150, 170 consumer packaged goods (CPG) manufacturers 41 distribution centres 47, 51, 57, 60, 150 Eastern 9–10, 20, 23, 24, 34, 36, 38, 41, 46, 47, 51, 52, 57, 62, 64–71, 103, 150, 155, 159, 162, 163, 164, 170

398

ឣ

Index

economy 63 freight transport sector 50 growth in exports and imports 20 Germany 47 healthcare 52 logistics market 46–47 manufacturers 52 markets 46, 57, 60, 70, 150 Nokia 44 outsourcing markets 63 outsourcing rates 47 pan-European distribution networks 52 percentage of logistics outsourced by country 48 pharmaceutical 52 retail 26, 38, 41, 51 road transport network 153 routes 87 sea cargo 60 supply chains 51 third-party provider(s) 47, 52, 63, 71, 136, 142–46, 149–75 total logistics spend by country 48 transportation hubs 58 WEEE (waste electrical and electronic equipment) 42 Western 18, 23, 24, 36, 38, 50, 60, 63, 70, 72, 93, 101, 150 roads 50 Working Time Directive 55 Europe, Middle East and Africa 17, 46–71 (see also Europe and European and European Union) Dell 25 European (see Europe) European Commission (see European Union) European Free Trade Area 78 European Railway Agency 50 European Recycling Platform 160 European Union (EU) 20, 22, 48, 49, 50, 55, 58, 59, 61, 62, 65, 66, 67, 68, 69, 72, 150 (see also Europe and Europe, Middle East and Africa) European Commission report 50 key export partners 49, 50 Working Time Directive 55

evaluating tenders 283–88 evaluation matrix 285–88 event logistics 153 event management 358 software 25 system 358, 365–66 tools 24 evergreen contracts 281 excess storage 111–12 Exel Logistics 6, 140 Exel plc 43, 44, 77, 83, 137, 140, 142, 143, 144, 146, 147, 158, 162, 368, 372 (see also DHL Logistics and Ocean Group) Expeditors International 180–82 expectations unclear or unrealistic 301 exports (see imports and exports) express parcel companies 140, 142, 143, 144, 169, 171, 172, 199 express services 123–24 third-party provider services 160 external asset management 108–09 drivers of outsourcing 7–11, 213–16 environment 236–40 issues influencing logistics outsourcing 236–52 risks 290 FAA (Federal Aviation Administration) 148 facility relocation 227 factoring 371 factory 30 (see also manufacturing) automotive 32, 80 Dell 74 expensive space 44 Intel 100 migration to low cost economies 23 (see also manufacturing, migration to low cost economies) Nokia 44 Procter & Gamble 31 factory gate pricing 51, 243–44 factory-to-factory 206 factory-to-home 206 Far East 9–10 (see also Asia Pacific)

Index fashion sector 23, 36–7, 57, 60, 71, 100, 360 (see also apparel) third-party provider focus 142, 163, 166, 167, 170 fast moving consumer goods (FMCG) (see consumer packaged goods) FedEx 90, 140, 142, 175, 182–84, 368 Feminax 41 final selection process 288–92 financial benefits 357 commitment 361 constraints 359 institutions 354, 371 KPIs 336 logistics factors 224–25 penalties 358 probity 271 services 371 solutions 376 special purpose vehicle 335 support 353 finished goods 21, 22, 24, 35, 42–43, 96, 100 distribution by third-party provider 178, 179 measurement of inbound 357 finished product (see finished goods) First World War 169 five principles of lean thinking 241–42 fixed cost, converted to variable cost 225 fixed price agreements 280 fleet management 114 flexible budgeting 326–27 flexible manufacturing 30–31 flexible packaging services 42 flexible supply chain 30 flexibility 226, 243, 255–57 Flextronics 35 FM Logistics 158–59 FMCG (see consumer packaged goods) focused factories 240 Fomento de Construcciones y Contratas 153 (see also Aitena) Ford 32, 40, 93, 147, 186, 189 forecasts 29, 31

ឣ

399

for contract logistics outsourcing market 88 for foreign direct investments in Brazil 79 for logistics industry in Malaysia 96 for outsourced logistics market 47 for road freight 54 for size of the freight market in Australia 102 for Thailand economy 98 for UK logistics outsourced market 54 for world trade growth 20 foreign direct investment (FDI) 69, 79, 88, 91, 92 fourth–party logistics (4PL) 128–29, 261, 352–69 3PLs versus consultants 354 advantages 265–66 choosing a 4PL provider 359–61 definition 3, 128 difference between a 4PL and an LLP 354 emerging 3PL players 368 four key components a 4PL must assemble 353 future for 368 importance of information 358 information technology 365 issues with choosing a 4PL 361 IT systems architecture 365 key drivers and benefits 359–61 key sectors 360 managing versus execution 355 model 355 neutrality 364 perspective of 362–66 reality and development of 366 reasons for outsourcing to 359 rewards and risks 357, 358, 363 risks and issues 362 third-party provider services 174, 179 trading partner 364 value proposition 362 value share 358 versus 3PL 352

400

ឣ

Index

Foxconn (see Hon Hai Precision Industry) framework for integrated supply chain metrics 323 for outsourcing cost assessment 346–47 France 27, 37, 41, 44, 47, 53, 55–57, 58, 59, 61, 63, 64, 65, 67, 68, 80, 87, 137, 149, 150, 155, 156, 158, 159, 160, 163, 165, 166, 172, 182, 372 France Telecom 56 stock exchange 166 Frans Maas 140, 157–58, 159 freight (including forwarding) 102, 140, 143, 144, 162, 352, 354, 371 (see also international freight transportation and transportation) air 16, 22–23, 71, 76, 98, 137, 140, 143, 144, 145, 156, 157, 159, 160, 162, 163, 167, 168, 170, 177, 179, 180, 181, 187, 188, 191, 192, 194, 195, 196, 197 consolidation 145 exchanges 244–46 forwarding 16, 17, 42, 83, 92, 140, 144, 354 definition 4 ground 180 market 83 integrated freight and logistics 144 management 8, 11, 57, 371 multiple options 9 network 140 ocean 22, 137, 142, 145, 162, 167, 170, 180, 181, 187, 188, 191, 192, 195 (see also freight, sea) costs 22 dangerous goods 145 market 23, 137 payment 371 rail 50, 74, 92 rates 42 road 50, 54, 73, 74, 103, 149, 175 sea 16, 22–23, 50, 60, 98, 143, 145, 147, 153, 157, 158, 159, 160, 162, 164, 165, 167, 168, 169, 173, 196, 197 (see also freight, ocean)

services 53 system 365 third-party provider services 142–98 transport (see transportation) Freight Transport Logistics Industry Action Agenda 103 freightquote.com 29 freightpro.com 29 fuel 49, 190 dependent on imported 83 price rise 50, 54, 56, 74, 99, 239 shortages 148 surcharge 295 subsidizing domestic 99 Fujitsu 83 fulfilment (see order fulfilment and efulfilment) gain sharing 334 Gap 36 gaps and areas of concern 288–89 garments 36, 37, 51, 375 (see also apparel and fashion sector) hanging 165 (see also garments) GATT (General Agreement on Tariffs and Trade) 22 GEFCO 140, 159 Genco 42 general haulage (see transportation) General Electric (GEC) 80, 186, 310 General Motors (GM) 32, 40, 73, 93, 130, 179, 186, 190, 238 Geodis 160 geographic coverage 11 German State of Lower Saxony 40 Germany 25, 37, 39, 40, 44, 46, 47, 53, 55, 56, 57, 58, 59, 61–62, 63, 64, 65, 66, 67, 68, 72, 79, 88, 92, 96, 101, 102, 137, 164, 169, 170, 177, 199 third-party provider focus 149, 150, 153, 156, 159, 160, 162, 168, 169, 170, 172, 181, 189 Gillette 26, 41 GIS 223 Gist 117, 140, 160–61 Glaxo Wellcome 80 global, (see also globalization)

Index 3PLs 257–59 branding 214 consumer 33–34 drivers 19–44 freight management 11 industry sectors 32–41 market 16, 26, 40 outsourcing 264, 266 production 214 providers 257–59 sourcing 214, 240 global brands 19, 26, 147 BMW 26 Gillette 26 Nike 26 Nokia 26 Sony 26 UPS 147 Global Business Dialogue (GBD) 28 Global Data Synchronisation (GDS) 34 global trade 19–23 agreements 22 globalization 8–9, 16, 21–23, 44, 213–14, 359, 370, 372 (see also global) 4PL 359 Australia 102 electronics industry 34 France 57 healthcare sector 33 high technology sector 34 impact on complexity 20, 24, 26, 33, 34, 51, 359–60, 363, 369 information technology 373–75 manufacturing 57 of manufacturers 42–43 of trade 136 pharmaceutical industry 33 small and global 372 the supply chain 230 Good Humor 41 Goodyear 57 goods 20, 21, 28, 48, 49, 51, 57, 72, 77, 88, 145, 372 (see also consumer packaged goods and finished goods) bulk 166 commercial 195

ឣ

401

dangerous 145 high value 373 in transit 24, 37 perishable 187 returned 42 security of 76 sourcing of 163 special services for capital 156 temperature controlled 145, 166 volume of, economic indicator 54 Greece 372 grocery 21, 28, 37, 38, 51, 57, 83, 85 (see also retail) distribution 133 home delivery 250–51, 256–57 Group Mulliez 41 gross domestic product (GDP) 19, 20 Australia 100 Belgium 59 Brazil 78 Canada 75 China 87 Czech Republic 65 European Union 48 France 55 Germany 61 Hungary 67 India 90 Indonesia 98 Japan 82 Kühne + Nagel 161 Malaysia 95 Mexico 77 Netherlands 58 New Zealand 101 Poland 64 Singapore 93 Slovakia 66 South Korea 86 Spain 62 Taiwan 84 Thailand 97 Turkey 68 UPS 146 United Kingdom 53 United States 71 groupage services 123–24 Guatemala 78

402

ឣ

Index

handling constraints 210 handling equipment 119 Hays 130, 140, 238 (see also ACR and Kühne + Nagel) healthcare sector 33, 40, 52, 64, 307–08 (see also pharmaceutical industry) third-party provider focus 142, 147, 154, 156, 158, 160, 162, 167, 168, 177, 181, 182, 185, 188, 189, 196 Heineken 41 Hewlett-Packard (HP) 35, 36, 57, 80, 85, 160, 179 high technology sector 17, 34–36, 43, 60, 70, 73, 76, 80, 83, 85, 87, 89, 93, 94, 95, 96, 97, 98, 100, 108, 360 fourth-party logistics (4PL) 360, 370 third-party provider focus 142–94 high value products 209 historical data 325 perspective 5–7 Hitachi 98, 197 Holland (see Netherlands) home appliances 80 home delivery 132–33, 250–52, 256–57 Home Depot 73, 74, 80 home shopping 206, 249 (see also mail order and e-fulfilment) Hon Hai Precision Industry 35, 85 Honda 32, 40, 83, 93, 155 Honduras 78 Hong Kong 82, 84, 86, 88, 90, 94, 95, 97, 181, 182, 372 Hornbach 70 House of Fraser 311 Hugo Boss 36 Hungary 23, 66, 67–68, 69, 70, 71, 156, 160 Hunt, Johnnie Bryan 185 hurricanes Katrina and Rita, impact on US retail sector 74 hybrid unit price agreement 280 Hyundai 32, 87, 93 i-hubs 44 IATA (International Air Transport Association) 195 IBM 16, 35, 60, 80, 179, 355

IMF (International Monetary Fund) 21 impact of an event 290 on outsourcing 7 implants 309 implementation importance of 313–14, 317–18 issues 302–03 planning 313–18 poor 301, 303, 305 imports and exports 19 Australia 101–02 Benelux 58 Belgium 59 Brazil 78–79 Canada 75–76 China 52, 88–89 Czech Republic 65–66 France 55 Germany 61 growth, slowest 20 Hungary 67 India 90, 93 Indonesia 99 Japan 82–83 Malaysia 95–97 Mexico 77–78 New Zealand 102 Poland 64 Singapore 94 Slovakia 66 South Africa 51 South Korea 86 Spain 62–63 Taiwan 84–85 Thailand 97–98 Toys’R’Us 75 Turkey 68 United Kingdom 53, 55 United States 72–73 improved consolidation 212 improved cash flow 211 in-house 17, 38, 47, 54 inaccurate information 300 inbound 178 components 23 congestion 74

Index goods 57, 357 logistics 132, 170, 171, 173, 184, 185 materials 22, 24, 29, 30, 52, 357 product 52, 55 supply chain 51 to manufacturing (I2M) 33, 35, 43–44, 145 incentive-based payments 282 incentives, performance related 226 incentivized contracts 257 incompatible products 228 India 10, 20, 21, 23, 25, 32, 34, 37, 44, 46, 81, 90–93, 101, 103, 167, 182 Indonesia 27, 46, 81, 82, 96, 98–100, 103 industrial sector 51, 56, 59, 69, 76, 81, 82, 89, 93, 102, 140 third-party provider focus 154, 156, 158, 159, 160, 161, 162, 165, 170, 171, 173, 174, 178, 179, 183, 188, 189, 196 industrial relations problems 227 inefficient management 253 inflation clause 294 information asymmetry 254 centralization 214 confidentiality 224 feedback 208 inaccuracies 300 integrated systems 128 management 134 support 106 technology (see information and communication technology) information and communication technology (ICT) 19, 21, 22, 23, 27–29, 37, 39, 43, 85, 93, 96, 353, 355, 356, 358, 362, 365–66, 367, 368, 369–70, 372, 373–75, 376 (see also systems and technology) integrated information systems 128 logistics systems 309–10 integration platform 358 IT providers 354 IT systems architecture 365 lack of infrastructure 28

ឣ

403

RFID 373–75, 376 solutions 11 system change 212 technical support 304 why outsource 211–13 information brokers 25 information technology (see information and communication technology) initial contract 293 initial set up of contract operation 291 innovation 311 Institute of Grocery Distribution (IGD) 161, 249 integration hub 36 integrated services 57 integrator 352, 367, 369, 370 Intel 80, 93, 100 Interbrew 41 Intermarché 57 internal asset management 108–09 internal operational costs 349 international 3PL services 17, 191 (see also international supply chain) international capital flows/investment 21, 99 international cargo airline 183 international companies/business 90, 93, 191, 194 international express/parcels 144, 147 international freight transportation 83, 145, 180 (see also freight and transportation) air 158, 173, 195 management 73, 175, 181, 183 road 60 sea 158, 173 international supply chain 42, 194 (see also international 3PL services) International Telecommunications Union 28 international third-party providers 92 international trade 20, 21, 22 China 88 management 147, 149 internet 10, 27, 28, 29, 133, 206, 242, 251 based transportation market 29, 373

404

ឣ

Index

inventory 24, 30, 38, 355, 360, 363, 371 (see also stock) centralization 214 control 97 excess 84 financing 369–70, 371 holding costs 24, 29, 34, 55 increasing 74, 75, 84 losses by third-party provider 357 management 55, 112, 370, 371, 373, 374 optimize 33, 55, 355, 356, 363 outsourcing 112 pipeline 128 planning 362 planning and the supply chain 128 policies 360 reduction 19, 29, 31, 42, 44, 93, 247–48 third-party provider focus 173, 180, 370, 371 turnover 25 vendor managed inventory (VMI) 34, 35, 44, 52, 180, 248 Nokia 44 versus transportation optimisation 356 visibility 24, 35, 366 invitation to tender (ITT) (see RFP and RFQ) invoice 30, 371 management 356 processing 371 Ireland 53, 59, 372 third-party provider focus 155, 160, 169 ISO 9001 162 Isuzu 40, 197 issues and influences 235–268 IT (see information and communication technology) Italy 44, 47, 53, 55, 56, 57, 58, 59, 61, 63, 64, 65, 66, 67, 68, 149 third-party provider focus 160, 163, 172 Ito-Yokado (7-eleven) 81, 83, 85, 87, 89, 96, 98

Jaguar 40 Japan 32, 39, 40, 46, 72, 75, 78, 79, 81–83, 84, 86, 88, 92, 94, 95, 96, 97, 99, 101, 102, 103, 140, 192, 194, 194, 195, 196, 199 JIT (just-in-time system) 30, 35, 156, 184, 194, 238, 248 Johnson & Johnson 40 Johnson Controls 93 joint venture 117, 121, 335 Jordan 51 KANBAN 30, 32 Kenya 51 key performance indicators (KPIs) 330, 332, 335–45, 356 (see also monitoring and metrics) Kingfisher 41 Kintetsu World Express 90, 140, 192, 194–45 kitting 34, third-party provider services 145, 179, 196 Korea, South 20, 26, 27, 39, 46, 81, 82, 84, 86–87, 88, 94, 96, 99, 101, 103 Kraft 34 Kroger 37, 73 Kühne + Nagel 90, 137, 140, 143, 150, 161–63, 198, 311, 368 (see also ACR and Hays) Kuwait 51 Kyocera 83 labelling 115 labour availability 239 labour market 9, 345 lack of appropriate experience 223 Lacoste 57 Land Rover 40 landed costs 24 last 50 metres, the 249 LastMinute.com 29 Latin America (see Americas, Latin) Latvia 69 lead logistics provider (LLP) 352, 354, 362, 367, 368, 369, 376 third-party provider services 162, 173, 186

Index lean 29, 39 Leclerc 57 Less-developed countries (see under developed countries) Less-than-container-load 142 Levi Strauss 36, 92 Lex Transfleet 114 LG Electronics 93 life cycle of products, shortening 241, 242 likelihood of an event 290 Lidl 52, 62 line feed 35 line sequencing 32, 33 third-party provider service 169 Lithuania 69 load utilization 118 local added value 9 logistics 1–3, 16, 45, 74, 103, 136–41 apparel 37 automotive 32, 52, 62, 63, 93 configuration of a company 107 consolidation of business sectors impact 39 consumer packaged goods (CPG) 34, 62, 73 contract logistics 140, 143 costs 29, 34, 57, 62, 88, 358, 361, 370 (see also costs) data requirements for RFP 280 definition 4 drivers and drawbacks for outsourcing 222–28 efficiency 26 expertise, loss of 224 facility relocation 227 fashion 37 fourth-party logistics (4PL) 352–69, 376 functions outsourced in Europe 8 General Motors 369 global 16, 17, 18, 85, 89, 95, 150, 179, 180, 181, 196, 199 global in-house spend versus outsourced 17 global provider 142, globalization 21, 32 healthcare 33, 63

ឣ

405

inbound 132 integrated 42, 82, 95, 102, 144, 371 lead logistics provider (LLP) 354, 362, 367, 376 lean logistics 73, 241–43 loss of expertise 224 major forces driving 236 market 16–19, 45, 46–103, 137, 373 NHS 145–46 Nokia 44 outsourced operations monitoring 318–19 outsourcing 17–21, 38, 39, 46–8, 54, 56–57, 59, 62, 70, 73, 81, 83, 87, 88, 102, 136–37, 149 physical 105–06 drivers 227–28 principles 241–42 processes 105–06 (see also process) retail 38, 57, 62, 73, 98 reverse logistics 42, 57, 145, 170, 179, 184 road haulage 54 service parts (see service parts logistics) service provider definition 4 services 19, 33, 42, 82, 368 spare parts third-party provider focus 156, 169, 171, 173 structure 105–10 systems 43, 368 technology 244–47 thinking 5 third-party providers 17–19, 25, 32, 33, 34, 37, 38, 39, 47, 52, 55, 56–57, 62, 63, 73, 83, 88, 89–90, 92, 93, 95, 97, 98, 100, 103, 136–200, 368 Wal-Mart 39, 77, 83 London Stock Exchange 155, 175 long distribution channels 208–09 long list of contractors 275 longer term contract management 334–35 loss of control 223 loss of influence at the point of delivery 224 Louis Vuitton 57

406

ឣ

Index

low cost sourcing 258 (see also manufacturing) LSP definition 4 (see also third-party provider) The Machine that changed the World 241 Madrid port 63 Madrid’s Barajas airport 63 Maersk Logistics 140, 163–65, 166 mail order (see also home shopping) channels of distribution 206 main methods for monitoring 330–31 major concerns a 3PL perspective 263–64 a user perspective 252–63 major forces driving logistics 236 Malaysia 27, 32, 81, 94, 95–97, 99, 100, 103, 181 Kuching International Airport 97 Malta 69 management 297–351 fee 38, 54, 281, 358 issues of inappropriate resources 300–01 need for 298–305 staff, restricted availability 239 Managing Automation Progressive Manufacturer Supply Chain Mastery Award 36 managing the relationship 306–13 Mango 70 manufacturer to retail channels 203–06 manufacturers (see manufacturing) manufacturing 18, 21, 23, 26, 29, 30, 31, 34, 35, 36, 37, 43, 44, 55, 57, 81, 87, 91, 359, 370, 371, 372 (see also factory) and supply 240–41 apparel 36, 92, 100 automated 23 automotive sector 32, 40, 51, 52, 62, 80, 83, 89, 92–93, 173 branded drugs 33 Brazil 79 Canada 76 China 83, 88, 89, 96, 100

collaborative outsourcing techniques 334–35 consumer goods 51, 52, 54, 70, 73, 81, 98, 374 contract 35, 369–70 costs 294, 348 Dell 25, 361 demand driven 25 efficiency 43 electronics industry 34, 35, 83, 85, 87, 94, 96 European 52 fashion 36, 100 flexible 30 flexible packaging services 42 France 56–57 generic drug 33 global 24, 32, 44, 71, 79, 80, 81, 89, 100 global and pan-regional supply chain requirements 360 globalization of 34, 42, 43 healthcare 40 high technology sector 23, 34, 83, 87, 89, 94, 96, 97, 100, 240 inbound to (I2M) 35, 43 third-party provider focus 145 India 91, 92 Hitachi 98 lean 241–43 low cost 9 Malaysia 96–97 Managing Automation Progressive Manufacturer Supply Chain Mastery Award 36 Motorola 35 moving to low cost economies 19,20, 21, 23–5, 26, 37, 53, 55, 57, 60, 69, 70, 79, 81, 83, 100, 103, 150, 360, 372 (see also low cost sourcing) Nokia 35, 44 OEM (original design manufacturers) 35 outsourcing 36–37 packaging 42–43 parks 90 personal computers 35

Index pharmaceutical 33 plant 29, 31, 80 Procter & Gamble 31 production and assembly 130 production postponement 9 productivity 374 RFID 374–75 sector 18 Singapore 94–95 South East Asia 100 supply chains 34 support 8 textiles 92 Taiwan 85 Thailand 98, 100 third-party logistics support 156, 166, 171, 173, 177, 179, 185, 194, 197, 360 tough attitude of 46 United Kingdom 53, 55 United States 74 variable demands 44 Vietnam 100 margin 56, 57, 136, 137, 357, 358, 372 automotive sector 32 erosion 359 improved 55 pressure 23 retailers 42 market characteristics 208–09 credibility 271–72 Marks and Spencer 36, 70, 92, 117, 129, 161, 375 mass customisation 31 materials 30, 177, 179, 187, 188, 197 costs 41 inbound 22, 24, 29, 30, 44, 52, 357 promotional 371 raw 24, 59, 83, 96, 101 supply 35 Mauritius 23 maximization of retail selling space 248 Mazda 40 measure of risk 290 measurement 4PL 357–58, 362, 363

ឣ

407

customer service 31 dashboard 343 external standards for 328–29 hierarchical structure of a measurement system 337 importance of ICT 28 influencing factors for 344–45 of sea freight 22 perfect order 31 measures for monitoring 325–29 medical devices 80 Menlo Worldwide Logistics 178, 308, 369 (see also Con-Way) merchandising 116 metals 20, 49, 50 method of qualitative assessment 285–88 metrics and KPIs 335–45 (see also key performance indicators) cost and performance 336–37 customer service 336–40 for 3PL provider 342 presentation of 344 typical 340–43 Metro 26, 37, 62, 81, 83, 89, 92, 311, 373 Mexico 22, 26, 27, 39, 48, 71, 72, 73, 75, 76, 77–78, 79, 80, 92, 182, 184, 185, 189 midiData 175 Middle East & Africa 17, 25, 44 (see also Europe, Middle East & Africa) Middle East 50, 63, 181 (see also Middle East and Africa) migration of workers 21 migration of manufacturing (see manufacturing, moving to low cost economies) MG Rover 317–18 (see also Rover Group) mobile asset management 114 mobile phone industry 26, 35 Modus Media International 222–223 monitoring 3PL performance 254, 330–35 and the balanced scorecard 320–21 and the SCOR model 321–22 did we get it right 345–50 different approaches to 319–25

408

ឣ

Index

key performance indicators (KPIs) 343 (see key performance indicators and measurement dashboard) objectives 319 order fulfilment 337–38 of outsourced logistics operations 318–19 Montsanto 40 Morocco 51 Morrison 41 Motorola 35, 80, 93 MSAS 140 (see also Ocean Group plc) multi-client and multi-user operations 11, 116–19, 120–21, 123–24 multi-temperature vehicles 113 multi-user operations 11, 116–19 ‘must have’ 285–87 NAFTA (North American Free Trade Agreement) 22, 71, 73, 76, 78 national multi-client distribution operations 121 National Carriers 6 National Freight Corporation (NFC) 6, 140, 143, 144 need for flexibility 255–57 for IT system change 212 for pan-European and global 3PLs 257–59 to relocate 211 negotiation 302–03 Nestle 34, 62, 81, 155 Netherlands 37, 47, 53, 56, 58, 59, 60, 61, 63, 65, 67, 79, 90, 149, 165, 169, 171, 172, 189 third-party provider focus 161 Netto 52 new markets 9 new products (see products, new) New Zealand 101–03 New Wave Logistics 197 (see also NYK Logistics) News International 171 ‘nice to have’ 288 niche services 130 Nigeria 79

Nike 26, 92, 179 Nikon 83 Nippon Express 90, 137, 140, 143, 192, 195–96 Nissan 26, 32, 40, 130, 238 node management 9 NOL (Neptune Orient Lines) Group 192, 194 (see also APL) non-charging mechanisms 282 non-quantifiable factors 284 non-standard operations 126 non-standard products 126 non-store shopping (see home shopping) Nokia 26, 35, 44, 85 Norbert Dentressangle 165–66, 172 Nortel Networks 306 North Africa 51, 158 North America (see Americas, North) NVOCC (Non Vessel Operating Common Carrier) 195 NYK Logistics 140, 192, 196–97 Oades, Stewart 155 objectives of monitoring 3PLs 319 objectives of RFP 277–78 obsolescence 29 ocean carriers 363, 364 ocean consolidation 181 ocean freight (see freight, ocean) Ocean Group plc 140, 143, 144 (see also Exel plc) ocean shipping company 167 Oceania 51, 167 occasional use of outsourcing 125–27 OEM (original equipment manufacturers) 23, 35 Office Depot 80 off-shoring 4 oil and gas 20, 49, 50, 84, 98, 99, 140, 161, 178 third-party provider focus 155, 161, 167, 174, 197 Oman 50 one-off transactional contract 123 online communication systems 134 on-shelf availability 31, 249 on-time in full (OTIF) 357

Index one size doesn’t fit all 219–20 open book 7, 38, 54, 281 operating control system 330 cost savings 225 costs, actual 225 operational 3PL versus 4PL 354–55 4PL 354–62 approach to monitoring 324–25 costs 38, 41, 42, 44, 294, 357, 362 efficiencies 39 measurement 357 performance 38 planning and control system 329–30 reporting 356 risk 290 operations 104–35 opportunities for growth 11 order 30, 31 acknowledgement 30 ‘configure-to-order’ HP 36 consolidation 11 cycle times 34 fulfilment 184 cycle time 337–38, 339 lead times 357 measurement of 337–38 physical 10 lead times 24 management 145, 179, 363 system 365 perfect order 31 picking data 280 picking for home delivery 251 profile 344 purchase 365 receipt 106 replenishment 375 system 365 to cash 357, 369 visibility 358 Oracle 366 order management system (OMS) 365 organisational logistics drivers 222–24 origin 42, 372 consolidation services 194, 372 costs 24

ឣ

409

management 8 other standard outsourced operations 115–16 outbound logistics finished goods 24 third-party provider services 184, 185 to customers 33 to developed markets 23 outsourcing 16, 20, 32, 33, 38, 39, 45, 47, 73, 103, 352, 376 (see also thirdparty logistics and third-party providers) 3PL (third-party logistics) 369 4PL (fourth-party logistics) 352, 359, 367 abdication 307 apparel sector 36–37 Asia-Pacific 17, 37 (see also Asia) Australia 102 automotive 33, 52 benefits of 110 Benelux 60 boundaries of 110, 272–73 Bulgaria 70 business strategy 6 Canada 77 channels of distribution 203–10 China 36, 60, 88 collaborative management techniques 334–35 concerns user perspective 252–63 3PL perspective 263–67 consumer packaged goods (CPG) 51–52 context 202–10 continuum of services 108–10, 272–73 Croatia 70 cross-docking 112, 121 dedicated operations 116–19, 123–24 definition 4 did we get it right 345–50 distribution centres 54 electronics sector 35 emergence of 5–6

410

ឣ

Index

Europe 63, 149 functions outsourced in 8 external drivers 213–16 fashion sector 36–37 fourth-party logistics 352, 359, 367 France 56–57 future for 369 global 263–64, 266 healthcare sector 33, 52 high technology sector 35 impact on 7 India 91 internal issues 252–66 international distribution 121 issues 235–67 Japan 83 joint venture 117, 121 key drivers for 201–35 Latin America 17 logistics 16, 20, 39, 73, 83, 87, 149, 359, 369 operations monitoring 318–19 logistics market 46–48, 54, 56, 60, 61, 62, 63, 70, 71, 73, 77, 81, 83, 87, 88, 102, 103, 136–37, 149–50 management 297–351 overall approach to 332–34 manager 367 manufacturers 35, 36, 37, 60 market 16, 20, 56, 63, 73, 83 multi-client and multi-user operations 11, 116–19, 120–21, 123–24 niche services 130, 369 non-core activities 367 North America 17 occasional use 125–27 open book 54 operations 104–35 opportunities for growth 11 other standard operations 115–16 other than logistics functions 211–13 overall approach to 332–34 packaging and unitization 114–15 packaging services 42 pharmaceutical sector 33, 52 planning cost 347–48

pricing and charging structure for 279–82 real cost of 346–49 reasons for 370 reasons for not 19 retail 38, 51, 54, 57 road haulage 54 Rumania 70 Russia 70 satellite depots and operations 121 scope 2, 105–10, 269–74 sector drivers 51–52 selection process 110, 261–63, 268–97 services 104–35 Singapore 95 South Korea 87 Spain 63 standard types of operation 110–16 stock and inventory 112 study 370 supply chain 1–3, 5, 7, 16, 20, 39, 127–29, 184, 359, 361, 367 supply chain management 352 third-party logistics 369 transport 113–14, 122–24 transportation 39, 54 types of operation 110–16 Ukraine 70 United Kingdom 54 United States value added services 129–34 Wal-Mart 39, 77 warehousing and storage 111–12 Western Europe 17, 150 what are the key requirements 270–72 where are the boundaries 272–73 whether outsourcing is right 270 which approach to adopt 273–74 overpromising 303 Ozburn–Hessey 311 P&O Nedlloyd 140, 163, 164, 165, 166 (see also Maersk Logistics) P&O Trans European 175 packaging 33, 34, 42–43, 97, 114–15, 119, 373

Index third-party providers services 145, 156, 179 packaging returns services 131, 238 pallet configurations 34 rainbow 34 RFID 39, 373 Panalpina 140, 166–67 Panama Canal 74, 75 pan–European and global 3PLs 257–59 partnerships 254–55, 260–61, 272, 306–08 parts logistics (see service parts) Patrick Corporation 140, 192, 197 ‘pay as you save’ 335 penalty clause 295 Penske Logistics 140, 153, 185–86, 307, 310–11, 312 people KPIs 336 quality of 231–33 Pespi–Cola 34, 73, 186 ‘perfect order, the’ 31, 339–40 performance 4PL 358, 363 Australia economic 103 customer service 358 exceeding 357 investment 357 key indicators (KPI) 356, 357 LLP 354 logistics 354 measurement 305, 349, 357, 363 metrics 335–36 monitoring 319–25, 365 not rewarded 302 of third-party providers 363 operational 38 poor 304 related incentives 226 RFID 373–74 Singapore economic 94 supply chain 365 UK economic 54 peripheral geographic areas 126 personal care products (see also consumer packaged goods)

ឣ

411

third-party focus 154, 158, 163, 166 personal computers (PC) 25, 28, 35 (see also high technology) personal goods 195 personnel calibre of 291 takeover of 293 TUPE (see Transfer of Undertakings: Protection of Employment) Peru 80 petrochemical company 333–34 Pfizer 40, 57, 80 Pharmacia & Upjohn 40 Pharmacia Corporation 40 pharmaceutical industry 33, 40–41, 49, 52, 60, 80, 87 (see also healthcare sector) third-party provider focus 142, 154, 191, 194, 370 Philips 57, 80 physical logistics 105–06 physical logistics drivers 227–28 pick (see order picking) pick-to-light 251 PJH Group 258 planning and control systems 329–30 for implementation 313–18 plant (see manufacturing, plant) point of delivery, for home shopping 251 point-of-sale 132 Poland 26, 27, 51, 64–65, 66, 69, 70, 150, 158, 160, 169, 189 politics 21 poor communication 305 implementation 301, 303, 305 performance 303 service levels 304 Porsche 40 Portugal 63 third-party provider focus 154, 155, 156, 160 POSCO 87 postponement 9, 42, 177, 179, 240 potential pitfalls affecting successful implementation 314

412

ឣ

Index

Power Logistics 43 Pratt & Whitney 57 preferred response to RFP 282–83 pre-retailing 132 presentation of metrics 344 pre-wholesaling 33 pricing and charging structure for outsourcing 279–82 primary transport 113 process (see also logistics processes) improvement 310–11 KPIs 336 Procter & Gamble 31, 34, 41, 73, 81, 190 procurement 29, 95, 146, 356, 360, 368, 371–72 product (see products) products 21, 25, 29, 34, 59, 66, 72, 76 agricultural 101, 102 availability 34, 37, 38, 42 bar codes 374 characteristics 209–10, 241 competitive 33 complex 32, 209 consumer 52, 81 costs 51 lower 42 dairy 49 deliver 44 digital convergence of 34 electronics 93 export 83 finished 43 flow 24 global brands 26 handling constraints 210 healthcare 33, 40 Hewlwtt-Packard (HP) 35 higher value 23 inbound 55 from China and Asia 52 into US ports 74 incompatibility 228 inspection 115 IT 93 labelling 115 landed cost 24 life cycle 91, 241, 242

lower value 22, 23 manufacture of 20, 30 marketing 43 miniaturization 34 move to marketplace 23, 26 new 26, 29, 34, 35, 40, 209, 359, 360, 363 development 26, 34 NHS (National Health Service) 146 over the counter (OTC) 41 packaging 42 programmes 26 postponement 42 (see also production, postponement) preparation 115 private label 52 Proctor & Gamble 31 profile 344 range 241 recalls 374 re-engineering 131 recycling of 42 replenishment 30 retail 30, 37–38, 51 returns 42, 131 RFID 374 sold via internet 29 sourcing 20 supply of 31 third-party provider 142–49, 153–75, 177–91, 192–98 time-constrained 210 value 209 visibility of 33 wood pulp and paper 49 Wal-Mart 39 production 31, 93 automotive 98 components 93 chemicals 84–85 facilities 89 high quality 89 low cost 89 move to lower cost countries/regions 23, 32, 51, 52, 70, 83, 85, 150, 360, 363, 370 (see also manufacturing, moving to low cost economies)

Index new processes 102 non-core items 372 synchronised 360 production and assembly 42, 130 production lines 29, 44 automotive 32 efficient use of 30 long runs 30 short runs 31 staging and line feed 35 production postponement 9 (see also product, postponement) productivity 44, 72, 85, 358, 374 profile order 344 product 344 store 344 profit sharing 334 profits, difficulty for 3PLs 263–64 project implementation 317–18 problems and lessons 316–17 self funding 335 Promodes 41 promotions 33, 34, 127 ‘prospective’ agreement 294 provider management strategy 335 providers, insufficiently proactive 260–61 PSA Peugeot Citroen 32, 40, 159 Puerto Rico 39, 182 pull (see demand) purchase order management 191, 363 order system 365–66 visibility 358 purchased products 29, 30 Qatar 51 qualitative assessment 284–88 quality costs 349 of people/labour 231–33, 239 quantitative assessment 283–84 quality control 37, 42, 55 third-party provider services 194 quick response (QR) 238 quota(s) 22

ឣ

413

quotation comparisons 283–88 rail 16, 50, 74, 76, 92, 145, 147, 148, 159, 160, 168, 169, 173, 187, 191, 195, 197 (see also railways) railroad cars 147, 159 Railpart 155 railways 79, 87, 89, 92, 99, 140, 149, 169 (see also rail) Belgian Railways 153 Deutsche Bahn A.G. 177 European Railway Agency 50 German Railways 169 Ralf Lauren 36 real cost of outsourcing 346–49 raw materials 24, 59, 83, 96, 101, 179, 197 recycling 42–43, 131, 160, 238 (see also reverse logistics) European Recycling Platform 160 reduction in DC stockholding 248 in number of stockholding depots 248 in shop stockholding 248 of inventory 248–49 redundancy 293 (see also TUPE) re-engineering of the order to delivery cycle 31 processes 355, 356, 357, 363, 367 the supply chain 354, 356, 360, 361 Reebok 60 refurbishment 127, 131, 238 regional multi-client distribution operations 120 relationships customers and 3PLs 298–99 why they fail 299–306 release of scarce resources 213 relocation 211 Renault 32, 40, 56 Renault-Nissan 32 Rennie 41 repacking services 131 replenishment 30, 31 against real demand 30 KANBAN 30

414

ឣ

Index

of manufactured or purchased products into the retail market 30 order 375 requirements 270–72 identification of gaps 288–89 resource levels 125–26 resources inappropriate to manage 3PL 300–01 response proforma 282 response times 43 response to RFP 282–83 responsive demand led models 360 responsive supply chain(s) 30 ‘retrospective’ clause 294 retail 19, 26–27, 30, 36, 37–39, 51, 54, 57, 60, 62, 70, 73, 74, 75, 77, 80, 81, 83, 85, 87, 88, 89, 91, 92, 96, 98, 99, 100, 103, 136, 247–49, 361, 370, 373–74 (see also grocery) Aeon 83 Ahold 26, 37, 81, 98 Allied Carpets 41 Asda 41 Auchan 41, 57, 85, 89 B2C business to consumer 28 Benelux 57 Billa 70 brand 36 own label 36, 52 Burberry 36 buying organisations 89 Carrefour 26–27, 36, 37, 41, 51, 57, 70, 80, 81, 83, 85, 87, 89, 96, 98, 99 Casino 85, 98 channels of distribution 203–06 China 88–89 consolidation 41 Costco 83, 85, 87 Daiei 83 delivery to 33, 51 demands 33 developing market destinations 27, 51, 70, 80, 81, 100, 103 DIY centres or home centres 74 e-fulfilment selection 261–62 France 57 Gap 36

global 27 Group Mulliez 41 Home Depot 73, 74, 80 Hornbach 70 Hugo Boss 36 India 91–92 Indonesia 99 Ito-Yokado (7-eleven) 81, 83, 85, 87, 89, 96, 98 Japan 83 Kingfisher 41 Kroger 37, 70 Lidl 52, 62 Mango 70 Malaysia 96 Marks and Spencer 36, 70 Metro 26, 37, 62, 81, 83, 89, 92, 373 Mexico 80 Morrison 41 Netto 52 point of sale material 132 pressure on suppliers 33, 41, 51 pre-retail activities 42 pre-retailing 132 Promodes 41 Ralf Lauren 36 reverse logistics 42 RFID 373–75 Safeway 41 Sainsbury 41 Sears Roebuck 73, 179 selling space 248 South Korea 87 Taiwan 85 Tesco 26, 36, 37, 41, 51, 70, 81, 83, 85, 87, 96, 98, 361, 373 Thailand 98 third-party providers 37, 51, 70, 85 third-party provider focus 142–196, Toys’R’Us 75 United Kingdom 54 United States 73 Wal-Mart 26, 33, 36, 37, 41, 73, 74, 77, 80, 81, 83, 87, 89, 361, 373 return loads 113 returnable packaging 127 return on capital 29

Index return on investment 362 returns 24, 42 (see also reverse logistics) management 43 processes 42 third-party provider services 171, 184, 188 reverse logistics 11, 42, 57, 105–06, 115, 127, 131, 238 (see also recycling) third-party provider services 145, 160, 170, 174, 177, 179, 184 reverse auction 244–45 RF (radio frequency) scanners 374 RFI (request for information) 245, 262–63, 275–77 RFID (radio frequency identification) 34, 39, 161, 223, 246–47, 304, 311, 369, 373–75, 376 British Telecom (BT) 375 Marks & Spencer trial 375 possible futures for RFID 375 RFP (request for proposal) 277–83 objectives 277–78 data requirements 278–79 information inaccuracies 300 pricing and charging structures 279–82 preferred response 282–83 RFQ (request for quotation) (see RFP) risk 95, 294, 357–58, 361, 362, 363, 365, 366, 368, 372 adverse 371 assessment 289–91 mitigate 20, 38 reduction 213 trade with China 46 road congestion 238 road freight transport (see road transportation and transportation) road transportation 16, 50, 57, 76, 79, 92, 145, 148, 157–8, 161, 169, 170, 174, 184, 187, 197 (see also transportation) Canada 76 cargo 145 congestion 50 cross border 16 domestic 16

ឣ

415

freight 50, 54, 73, 74, 103, 144, 149, 158, 159, 174, 175, 179, 195, haulage 54–55 India 92–93 Inter/multi-modal road and rail 74, 76, 77, 145, 187, 190, 191 international 60 network 153, 159 road networks 92 United Kingdom 54–55, 144 Road Haulage Association 55 UK Road Haulage Market Research report 54 United States 73–74, 103 Roadway Logistics System 183 Roche 80 Roche Consumer Health 41 Rockwell Automation 307 Romania 23, 27, 69, 70, 156, 158, 160 Rose, Peter 181, 182 Rotterdam 58, 60, 165, 182 Rover Group 40, 130, 173, 238 Russia 10, 44, 64, 65, 66, 67, 68, 70, 158 Ryder 130, 140, 188–89, 238, 311 Saab 40 Safeway 41 Sainsbury J 41 sales and operations planning 356 sales KPIs 336 Samsung Group 87 Sanmina-SCI 35 SAP 52, 366, 370 Sara Lee 73 satellite depots and operations 121, 238 Saudi Arabia 44, 50, 82, 86, 99, 181 scale economies 11 scarce resources 213 Schenker Logistics 62, 137, 140, 150, 168–69, 177, 198 Schering AG 41 Schneider National 189–91, 368 scope of outsourcing 2, 105–10, 269–74 SCOR model 321–22 sea connectivity 94 sea ports 62 sea freight (see freight, sea)

416

ឣ

Index

sea trade 76 sea transportation (see transportation, sea) Sealand Corporation 164 Sears Roebuck 73, 179 seasonal peaks 125–26 Seat 40 Second World War 21, 22, 81, 148, 164, 169 secondary transport 113, 119 measures 340–41 sector expertise 310 third-party provider focus 136–200 secure boxes for home delivery 251 Securicor Cash Services (SCS) 114 Securicor Omega 144 (see also DHL) selection process 110, 261–63, 268–97 the contract 293–96 detailed steps 269–92 general approach 268–69 TUPE 292–93 self funding project 335 SemCorp Logistics 140, 192, 197 service 231, 364 (see also customer service) 4PL 355, 363, 364, 366–69 balance with costs 117–19 end-to-end supply chain management 355 leader 218–19 levels 225–26, 304, 354 logistics drivers 225–27 performance measurement 294 providers, insufficiently proactive 260–61 requirements 274, 294 risk 290 versus cost advantage 218–19 service level agreement (SLA) 295, 301–02, 331, 357 service parts logistics 24, 43, 142, 145, 148, 169, 172, 178 third-party provider services 142, 145, 148 service provider (see third-party providers) services 17, 19, 20, 21, 22, 25, 28, 31, 33, 34, 35, 36, 42–45, 48, 49, 52, 53, 54,

57, 70, 71, 73, 79, 83, 89, 91, 95, 97, 98, 100, 104–35, 353, 354, 356, 360, 370, 371, 372, 373, 374, 376 4PL 365, 369–70 third-party provider services 136–200 set-up costs 11 set-up times 11 shared reward 368 risk 357, 368 savings 361 shared-user 52, 54, 57, 117, 158, 173, 174, 370, 372 ship papers by aeroplane 144 shipments 24, 25, 34, 37, 77, 142, 144, 184, 188, 190, 195, 363 consolidation 192 shippers 23, 74, 140, 164, 169, 353, 357 shipping 24, 36, 37, 100, 140, 162, 165, 173, 363 companies 140, 144, 153, 163, 164, 165, 167, 169, 194, 199 fast times 85 high costs 92 lines 94, 164, 194 network 140 services 52 ships 87, 144, 164 shopping from home (see home shopping, mail order, e-fulfilment) short distribution channels 208–09 ‘should have’ 288 ‘showstoppers’ 285 Siemens 62, 311 Singapore 20, 35, 81, 90, 93–95, 96, 97, 99, 100, 101, 140, 167, 181–82, 189, 192, 194 Singapore Government 194 Singapore Exchange 194 single sourcing 240 six sigma 310 size of consignment 122 size of operation matters 216–17 size, one doesn’t fit all 219–20 SK Corporation skills, for home delivery drivers 251 Skoda 40

Index Slovakia 26, 27, 65, 66–67, 69, 70, 71, 158, 160 Slovenia 69, 70 small parcels distribution channels 205 Smith and Nephew 307–08 SmithKline Beecham 40 SNCB Holding 153 Snecma 57 Solectron 35 solving structural issues of 3PLs 264–66 Sonic Air 148 Sony 26, 80, 85, 160, 192, 197 sourcing 37, 41, 92, 163, 214, 240, 357, 372 from developing countries 38 in low cost countries 258 South Africa 51, 191 Motor Industry Development Program 51 South America (see Americas, Latin) South Korea 20, 26, 27, 39, 46, 81, 82, 84, 86–87, 88, 94, 96, 99, 101, 103 Southeast Asia 84, 85, 87 Southern California major port congestion 74 Spain 44, 47, 53, 55, 56, 57, 58, 61, 62–64, 68, 78, 149, 153, 372 logistic activities zones 63 third-party provider focus 154, 155, 160, 169 spares parts, factors for outsourcing 271–72 special projects 345 special purpose financial vehicle 335 specialization in dedicated operations 118–19 specialist distribution operations and services 120, 130 specific stock responsibility 112 speed of delivery 122 spot hire 123, 126–27, 246 Sri Lanka 23 staff agreements 345 staff availability 239 standard costs 328

ឣ

417

standard types of outsourcing operation 110–16 stock 24, 30, 37, 39, 366, 371 (see also inventory) accuracy 357 allocation 108 availability 108, 357 build up 242 database 375 financing and ownership of 371 holding costs 358 out-of 373 outsourcing 112 planning 365 profile 375 replenishment 248 raw material 24 responsibility 112 turns 357 visibility of 374 stock-holding reduction in DC 248 stock-holding reduction in retail stores 248 stock take process 375 stockless depots 238 storage 16, 37, 85, 91, 97, 154, 174, 190, 280, 357 (see also warehousing) store profile 344 store returns 345 strategic planning 128 strategic review 273–74 strategy 4PL 355, 367 Australian logistics industry 103 Cadbury Schweppes 41 Christian Salvesen 155 C.H. Robinson 188 Deutsche Post World Net (DPWN) 146 Procter & Gamble 31 reduction of inventories 29–31 demand models 29 flexible manufacturing 30 retailers 38 third-party provider services 149 Toll 198 structural issues of 3PLs 264–66 sub-assembly 32

418

ឣ

Index

Subaru 40 Sun Microsystems 60 supermarket(s) (see retail) supplier 30, 31, 32, 33, 35, 39, 44, 51, 80, 194, 358, 363, 364, 365, 366, 367, 372, 373–74 consolidation 181 KPIs 336 management 42, 373 Nokia’s 44 rationalisation 30 relationships 30, 35, 240 services 194 Unipart Group 173 Wal-Mart’s 39 supplier park 32 supply 29, 30, 31, 32 and demand 29 supply chain 1–3, 5, 16, 31, 32, 36, 45, 52, 136, 370 4PL 352–69 activities and their relative importance 221 agile 241–43 agility 37, 62, 360 apparel 36–37, 51 approach to monitoring 322–24 Asia 37 automotive 32–33, 39–40, 62, 95, 179 awards 36, 161 complexity 20, 23, 24, 31, 33, 34, 35, 37, 39, 43, 51, 52, 62, 360, 361, 368, 369 configuration 107 consolidation services 37, 42 consolidation of business sectors impact 39–41 consumer packaged goods (CPG) 34 coordination 35 costs 23, 33, 35, 44, 52, 55, 62, 74, 370, 371 delivery times 23 delivery cycle 31 Dell 25, 35 demand model(s) 29–30, 35 design 11, 145 developing,

countries 34, 38, 88–89, 91–93, 94–95, 360 regions 34, 38 efficiency 34, 39, 360, 369 electronics 34 end-to-end 37, 42, 53, 155, 194, 255, 363, 371, 372 european business(es) 18 event management 24, 358 fashion 36–37, 51 fourth-party logistics 352–69 General Motors 179 Gillette 41 global 24–26, 32, 33, 42, 73, 95, 102, 136, 147, 153, 360, 361, 368, 372 globalization 21 healthcare 33, 52 high technology 34, 62, 95 Hewlett-Packard 35–36 IBM 35 improvements 34, 38–39, 54, 360 inbound to manufacturing (I2M) 44, 145 inbound to retailer 51, 55, 74 integrated supply chain management 145, 155 approach to monitoring 322–24 metrics 323 integrated supply and demand model 31 international 42 international transport 73 inventory reduction 31, 34, 42, 44 lead logistics provider (LLP) 354 management 1–3, 5, 7, 24, 37, 127–29 improving 228–30 manufacturing 34, 35, 89 market 16 migration of manufacturing 23 Motorola 35 national 33 networks 74, 89 NHS 145–46 Nokia 35, 44 operations 20 optimisation of 35, 37, 54, 55, 157, 355, 356, 360, 362, 363

Index order cycle times 34 outsourcing 16, 18–20, 35, 39, 73, 352, 367 outsourcing market 19–20 pan-regional 43, 360, 361 partners 24 pharmaceutical 33, 52 planning 355, 365, 368 processes 52, 102, 354, 362, 364, 365, 374 Procter & Gamble 41 product availability 34, 42 costs 42 development 34 rail 50 redesign 41, 52 reengineering 35, 354, 356, 361 reinvention 35 review 24 retail 38–39, 51, 74, 89, 161 reverse logistics 42, 145, 174, 177 RFID 39, 373–74 savings 36 service parts logistics 43, 145, services 19, 42–44, 136, 145, 147–48, 155, 157, 353, 370 speed 37 spend 16, 35 strategic tool 33 strategies 23, 355 suppliers 35 synchronised 360, 364, 366, 368, 371 third-party providers 19, 20, 24, 25, 31, 32–33, 35, 37, 38, 39, 42, 50, 52–53, 55–56, 73, 95, 103, 136–200, 353–55, 365, 369–71 transformation of 35, 361 value 42 Vector SCM 179, 369 vendor management 42 visibility 9, 24, 35, 52, 53, 179, 356, 366 vulnerability 239–40 Wal-Mart 38, 75 Zara 36 supply lead times 9 supply network 31

ឣ

419

Suzuki 40 Switzerland 145, 150, 156, 161, 166, 170, 199 SWX Swiss Exchange 167 system change (IT) 212 systems 30, 37, 42, 43, 52, 85, 181, 190, 353, 355, 356, 357, 358, 361, 365–66, 367, 368, 373 (see also information and communication technology) systems integration 28, 44 EDI 28, 30, 358, 366 XML 366 tagging (see RFID) Taiwan 35, 81, 82, 84–85, 88, 94, 96, 181 takeover of operations 293 tariff structure 295–96 TDG plc 169–70 technology, provision of 11 (see also technology) technology 21, 25, 32, 34, 186, 190, 352, 358, 364, 370 (see also information and communication technology and technology provision of) RFID 161 technology sector (see high technology) telecommunications third-party providers focus 147, 173 telesales 106, 116 televisions 21 (see also consumer electronics) temperature controlled 145 Tendeco 259 tender evaluation and comparison 283–88 matrix 286–87 process 283–88 termination clause 295 Tesco 26, 36, 37, 41, 51, 70, 81, 83, 85, 87, 96, 98, 361, 373 TEU (twenty foot equivelant) 22, 94, 162 textiles 49, 69, 71, 74, 80, 85, 89, 92 (see also apparel) Thailand 26, 27, 46, 81, 94, 95, 96, 97–98, 99, 100, 103 Thales 56 The Daiei Inc. 83

420

ឣ

Index

The Economist 44 The Linde Group 160 (see also Gist) Thiel Logistics AG 170 third-party logistics (3PL) (see also thirdparty providers) 10th annual study of third-party logistics 370, 373 account engagements 308–09 concerns user perspective 252–54 3PL perspective 263–64 and 3PL relationships 298–99 definition 5 issues 302–04 monitoring and evaluating performance 254, 330–35 objectives of monitoring 319 over-promising 303 partnerships 254–55, 260–61 providers 275 selection procedure 268–97 structural issues 264–66 third-party providers (3PL) 6, 17, 18, 19, 20, 21, 23, 24–25, 31, 33, 34, 35, 37, 38, 39, 42, 43, 44, 45, 47, 51, 52, 54, 55, 56, 57, 60, 61, 62, 63, 64, 70, 71, 73, 74, 77, 81, 83, 85, 89, 93, 95, 136–200, 369 (see also LSP definition) 3PL global solutions quadrant 142 3PL versus 4PL 352 Asia Pacific providers 192–98 top five 3PLs by employees in Asia Pacific 193 top five 3PLs by revenue in Asia Pacific 193 core 3PL offerings 370 distribution by region of the largest (by revenue) 30 global 3PLs 199 establishing capabilities in Latin America 71 European providers 149–75 distribution of Europe’s top logistics providers by revenue 152 distribution of Europe’s top logistics providers by number of employees 152 evaluating performance 254

failure of relationships 299–305 financial and procurement services 371–72 global providers 141–49 global solutions quadrant 143 growth of the 3PL market 137–40 inappropriate resources to manage 300–01 insufficiently proactive 260–61 logistics service providers by employees 139 logistics service providers by revenue 138 key steps of contractor selection process 269 major challenges 263 management 297–352 market 73, 91–92 overall 3PL market 136–37 pan-European and global 3PLs 257–59 perspective on implementation 315–17 provider management strategy 335 revenue totals for the largest 30 global 3PL distributed by region 200 selection 261–63, 268–97 services 18 sub-contractors 136, 158 the future for outsourcing and 3PLs 369 United States providers 175–91 largest (by revenue) US third-party providers 176 largest (by revenue) US third-party providers, showing number of employees 176 view of RFP 278 three-shift system 113 throughput variability 344 Thyssen Haniel Logistic 153 (see also ABX Logsitics) Tibbet and Britten 77, 140, 144 (see also Exel plc) Timberland 60 time constrained products 210

Index definite services 130 sensitive products 241 TNT Logistics 90, 130, 132, 134, 137, 143, 166, 171–73, 238, 312, 368 Toll 192, 197–98 Tompkins Associates 223 Toronto Pearson International Airport 76 total external asset management 108–10 total internal asset management 108–10 total order fulfilment cycle 338 Toyota 32, 40, 83, 241–42 Toys ‘R’ Us 75 track and trace 57 tracking 246–47 trade 23, 46, 47, 49, 136 Australia 101 barriers 22 Belgium 59 Brazil 79 Canada 76 China 88–90 European Union 49 India 91–93 Indonesia 100 Japan 83 Latin America 79–80 Mexico 78 Netherlands 58 New Zealand 102 Singapore 95 Taiwan 84–85 Thailand 97 United States 72–73 world 16, 20–22, 44, 48, 88, 163 trade agreements 22, 78, 98 trade deficit 20, 72, 101 trade-offs, between cost and service 117–19 trade-offs between dedicated and multi-user distribution services 117–19 trade tariffs 22, 91, 360 ‘traffic light’ approach 285–88 Transhipment 55, 112 transit times 9

ឣ

421

transport (see transportation) transportation 16, 21, 23, 24, 29, 33, 50, 57, 70, 137, 352, 354, 356 (see also freight and international freight transportation) air 89, 157, 187, 197 automotive 190 Canada 76–77 China 90 costs 11, 22, 55, 123, 358 cross border 16 definition 5 deregulation 6 Dow Jones Transportation Average 179 domestic 90, 175, 180, 182 e-commerce 29, 188, 373 European 50, 58, 159, 165 express 160 FTL, full truck load 145 Forbes Best Managed Transportation Company 182 freight 50, 180, 195 multiple options 9 French 57, 166 general haulage 123–124 global 179 groupage 160 hub 58 India 92 infrastructure 9, 76, 89 integrated 33 international 60, 73, 83, 175, 180, 182, 360 distribution operations 121 Japan 83 LTL (less than truckload) 145, 184, 187 management 17, 29, 73, 167, 168, 175, 177, 184, 187, 188, 189, 191 system 365 milk 174 networks 52, 59 ocean 187 (see also transportation, sea) Ontario Ministry of Transportation 76 operations 216

422

ឣ

Index

outsourcing 38, 54, 113–14 primary 113 rail 16, 50, 76, 90, 148, 169, 187, 197 retail 38, 57 road 16, 50, 60, 76, 148, 159, 162, 169, 184, 187, 195, 197 return loads 113 sea 157, 187, 197 (see also transportation, ocean) secondary transport 113, 119 measures 340–41 Singapore 95 third-party provider services 142–98 ‘trucking’ 39, 73–74, 98, 140, 175, 179, 187, 194, 199 United Kingdom 54 United States 39, 175, 187 Wal-Mart 39 transportation.com 29 ‘trucking’ (see transportation) trunking (see primary transport) types of outsourcing operation 110–16 of service required 274 typical metrics 340–41 Tunisia 51 TUPE (Transfer of Undertakings: Protection of Employment (UK) regulations) 227, 292 Turkey 23, 27, 68–69, 71, 92, 172 tyres 60 third-party providers focus 171 UCI 197 (see also NYK Logistics) Ukraine 70 under-developed countries 21 Unilever 34, 41, 81, 98 Unipart Group 173 Unipart Logistics 173, 317–18 unit definitions 345 unit loads 115, 119 unit price agreements 280 United Arab Emirates (UAE) 50, 82, 90, 97 United Carriers 271 United Kingdom (UK) 37, 39, 41, 44, 46, 47, 53–55, 57, 58, 59, 61, 63, 64,

65, 67, 68, 72, 75, 90, 101, 102, 137, 140, 142, 144, 145, 149, 154, 155, 160, 161, 162, 163, 165, 169, 171, 172, 173, 174, 189, 194, 375 NHS (National Health Service) 145–46 NHS (National Health Service) Supply Chain 145–46 TUPE (Transfer of Undertakings: Protection of Employment (UK) regulations) 227, 292 UK Government’s Department of Health 145 United Nations 22 United States (of America) (US) (USA) 22, 25, 29, 32, 35, 37, 39, 41, 42, 44, 46, 48, 53, 55, 56, 57, 58, 59, 60, 61, 63, 66, 67, 68, 71–75, 76, 78, 79, 80, 82, 83, 84, 86, 88, 90, 91, 92, 93, 94, 96, 97, 98, 99, 101, 102, 103, 140, 144, 156, 164, 165, 168, 172, 182, 185, 190, 192, 198, 199 East Coast ports 74, 75 North Carolina 74 Port of Houston 74 third-party providers 146–49, 175–91, 192, 198 West Coast shipping delays 74, 75 unitization 114–15 UPS 140, 142, 147, 149, 183, 198, 258, 368 (see also UPS Supply Chain Solutions) UPS Supply Chain Solutions (SCS) 90, 146–49, 175 (see also UPS) upstream 107 Uruguay Round of GATT 22 US–Canada Free Trade Agreement (FTA) 76 USCO 162 user/third-party concerns 252–54 UTi Worldwide 191 utilization of assets 247 utilization of loads 118 Valencia 63 value-added services 10, 17, 33, 37, 42, 43, 55, 57, 70, 129–34, 137, 226, 241

Index third-party provider services 142–98, 362, 368, 369, 370, 371 value/differential advantage 219 4PL 352, 354, 357–58, 361, 362–66, 376 lower inventories 42 Procter & Gamble 31 RFID 373 third-party providers 42, 371 ‘value chain’ 24 value, high product 209 value of automotive component production 93 value of consumer electronics exports 93 value of Exel 143 value of exports 79 value of logistics market 16–17, 73, 88 value of Great British Pound value of ICT market 27 value of imports 72 value of logistics outsourced 16, 17, 46, 54, 64, 71, 73, 88 value of South African Rand 51 value of world trade 20, 22 value share 54, 357–58, 361–62 variance analysis 327 Vector SCM 179, 369 (see also Conway) vendor (see supplier) vendor managed hubs 44 vendor managed inventory (VMI) (see inventory, vendor managed) Venezuela 80 vehicle characteristics 227 fleet management 114 maintenance 114 specialist 113 specification 113 takeover 293 utilization 113 Vietnam 23, 81, 100 visibility 9, 24, 30, 33, 35, 37, 43, 44, 52, 53, 356, 358, 366 and event management system 358, 365 real time 37

ឣ

423

third-party provider focus 179 via RFID 374 Visteon 93 voice picking 311 Volkswagen 40, 62, 80, 172 Beetle 80 Volvo 40 vulnerability 239–40 ‘W’ questions 270–74 Walls 41 Wal-Mart 26, 27, 33, 36, 37, 39, 41, 73, 74, 77, 80, 81, 83, 87, 89, 311, 361, 373, 374 warehouse (see warehousing) warehousing 16, 17, 24, 30, 33, 34, 36, 38, 39, 55, 57, 60, 64, 77, 81, 89, 92, 95, 97, 98, 137, 142, 145, 148, 150, 153, 154, 155, 156, 157, 158, 159, 160, 161, 162, 163, 165, 166, 167, 168, 169, 170, 171, 173, 174, 175, 177, 178, 179, 182, 184, 185, 187, 188, 192, 194, 195, 196, 197, 353, 354, 357, 358, 374 (see also storage) break bulk 112 China 90 cross-docking 112 dedicated 54 distribution depot operation 111 excess storage 111–12 India 91 management system 365 measurements 341–42 outsourcing 111–12 operations 216–17 performance 342–43 picking 29 service types 120–22 shared user 52, 158, 173, 174 takeover 293 third-party provider facilities and services 142–98 transhipment 112 Warner-Lambert 40 waste, elimination of 241–43 WEEE (The Waste Electrical and Electronic Equipment) 42, 131–32 weekly demand peaks 126

424

ឣ

Index

Wellcome 40 Western (see also Europe, Western) business 23 component suppliers 32 markets 37 world 21, 28 what are the key requirements 270–72 what to measure against 325–29 where are the boundaries 272–73 whether outsourcing is right 270 which approach to adopt 273–74 white and brown goods 132–33 wholesaler channels of distribution 204–05 why 3PL relationships fail 299–305 why monitor outsourced logistics operations 318–19 why outsource 270, 201–35 Wilson Logistics Group 172 Wincanton 140, 174–75

work in progress 24 world trade 16, 20–21, 22, 44, 48, 163 China 88 world merchandise trade 20 World Trade Organization (WTO) 22, 28, 36, 81 China 90 World Wide Web Consortium (W3C) 28 Xerox 80 Yamaha 197 Yamaha Motors 312–13 Yemen 51 Yusen Air and Sea 196 (see also NYK Logistics) Zara 36 Zip Project 129 Zumwinkel, Klaus 146