The Positive and Negative Impact by Using Third Party Logistics

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June, 2007
ACKNOWLEDGEMENTS

I would like to express my gratitude to all those who helped me during the writing of this thesis. A special acknowledgement should be shown to Professor …., from whose lectures I benefited greatly. I am particularly indebted to Mr. , who gave me kind encouragement and useful instructions all through my writing. Finally I wish to extend my thanks to the library assistants who supplied me with reference materials of great value.

CHAPTER ONE: INTRODUCTION
1.1 Motivation of the Research
Nowadays, individual companies no longer compete with other stand-alone companies but supply chains compete against other supply chains (Christopher, 1997). The performance of the supply chain depends on the operations of all participants. The participants could include suppliers, manufacturers, carriers and retailers. If the participants work independently, supply chain costs and inefficiencies are likely to increase. The globalization of corporations has increased complexities and challenges in the supply chain. Strong competition, coupled with the factors stated, is motivating companies to build relationships with stake holders in the supply chain. As described by Christopher (1997), in such a network of participants and relationships, each partner adds value through specialization in an activity where it can provide differential advantage.

With this background, many companies are working to integrate their supply chain both up-stream and down-stream in order to improve visibility, reduce inventory and improve fulfillment. The companies are now targeting overall cost reductions in the complete value chain rather than in parts of the value chain. That is, they are shifting from local or silo optimization to global optimization of supply chains. This requires closer coordination and operational synergies amongst all the players in the value chain. 3PLs are increasingly playing a vital part in customers' supply chains which makes the study of relationships between 3PLs and customers important.

1.2 Research Aim and Research Focus
Based on the careful analysis about the nature of the third party logistics and manufacturing, combined with the actual case and related theories to do the research, we are expected to find out the relationship between the third party logistics and manufacturing. The main focus locates on the positive and negative impact when the third party logistics and manufacturing combine to come to use; also the problems when we analyze the study with China actual environment and the strategy that is expected to take are the important parts.

Research focus: the positive and negative impact of the third party logistics for manufacturing is the main focus, along with the implementation of the third party logistics in manufacturing in China.#p#分頁(yè)標(biāo)題#e#

1.3Definition of the Third party Logistics
A third-party logistics provider is a firm that provides outsourced or "third party" logistics services to companies for part or sometimes all of their supply chain management function. Third party logistics http://www.400190.com/dissertation_sample/Canada_Dissertation_Sample/providers typically specialize in integrated warehousing and transportation services that can be scaled and customized to customer’s needs based on market conditions and the demands and delivery service requirements for their products and materials.

Literally Third Party Logistics means “outsourcing of logistics”. Today the term is used in Europe in a much narrower context, although without a common definition of the term. In this study Third Party Logistics is defined as follows: Third Party Logistics imply a long term co-operation agreement between 2 firms, who consider each other as partners and where the solutions are elaborated jointly with the purpose to meet the demands of the transport buyers. Generally the target is to develop a business alliance which creates a win-win situation for both partners.

Hertz, and Alfredsson (2003) describe four categories of 3PL providers:

Standard 3PL provider: this is the most basic form of a 3PL provider. They would perform activities such as, pick and pack, warehousing, and distribution (business) – the most basic functions of logistics. For a majority of these firms, the 3PL function is not their main activity.

Service developer: this type of 3PL provider will offer their customers advanced value-added services such as: tracking and tracing, cross-docking, specific packaging, or providing a unique security system. A solid IT foundation and a focus on economies of scale and scope will enable this type of 3PL provider to perform these types of tasks.

The customer adapter: this type of 3PL provider comes in at the request of the customer and essentially takes over complete control of the company’s logistics activities. The 3PL provider improves the logistics dramatically, but do not develop a new service. The customer base for this type of 3PL provider is typically quite small.

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

Third Party Logistics is to a greater extent defined by the interaction between the forwarding company and the transport buyer than by the functions, which the transport company carries out. The central issue in Third Party Logistics is the way in which the transport company defines its own role in the entire supply chain. A modern transport company which carries out Third Party Logistics, considers itself as a part of its customers’ supply chain and enters a partnership with the customer in order to develop the relations and the systems with the aim to improve the competition in the entire chain for mutual benefit.#p#分頁(yè)標(biāo)題#e#

Third Party Logistics and thus partnership is to be considered as human resource commitment and hard work, where continuous development and innovation is the way to obtain mutual benefits. Whether the warehouse function and other associate productive functions are placed with the transport company is not essential to the extent of Third Party Logistics. Often other motives decide whether the warehouse function is maintained in-house with the transport buyer. Further to be mentioned:
• The warehouse is placed in connection with the production, which is why outsourcing implies additional handling
• The buildings are already available and there is no alternative use. Whether it is a question of Third Party Logistics, is thus depending on the binding character of the co-operation.

There has been considerable interest worldwide in last few years in the growth of third party logistics providers. These firms typically provide some of the following services: warehousing operations, freight payments and auditing, carrier selection and rate negotiations. In addition, these firms may development information systems and manage inventory and customer order fulfillment (Boyson, 1999). The rapid growth of global markets has been followed by the birth of strategic channel intermediaries, such as foreign freight forwarders, non-vessel-owning common carriers, trading management companies, customs house brokers, export packers and port operators. Several recent studies have addressed the issue of growth in the 3PL market in detail. A study by Murphy and Poist (1998) provides a review and synthesis of research on this topic. They define 3 PL services in the following way:

“a relationship between a shipper and third party which, compared with basic services, has more customized offerings, encompasses a broader number of service functions and is characterized by a longer-term, more mutually beneficial relationship."

1.4 Current Status of the Third Party Logistics
One of the difficulties in estimating the size and scope of the 3PL industry is that it is difficult to draw the line between 3PLs, freight forwarders and carriers who are certainly logistics service providers. A recent study of shippers in Europe (KPMG 2000) makes the distinction between outsourcing and 3PL use based on the number of services outsourced. When this number is large, the company is using a 3PL; when only a few operations are outsourced in order to increase flexibility and reduce costs this is not considered 3PL.

A 3PL company normally provides process-based services rather than a function based logistics services, which generally aims at the integration and full control of a part or whole process of shipper’s 留學(xué)生物流管理dissertation定制logistics network. Indeed, the process expertise, as well as economies of scale, is 3PL’s core competencies. The services are usually customized to each particular shipper and the number of services being outsourced by shippers is significantly higher than for a provider of separate transportation or warehousing services only. The prerequisite for this is often an integrated information system, covering the whole logistics network. The past research also found the 3PLs often form strategic alliances with their customers with comparatively long-term arrangements, normally from 1 to 3 years by contract.#p#分頁(yè)標(biāo)題#e#

Generally, a 3PL company provides services including whole or at least part of the listed rather than focusing on a single function.
Transportation / Distribution
§ General Trucking Service (TL, LTL);
§ Intermodal Transportation service (rail, ocean, air freight);
§ Specialized Services (bulk, tank, hazardous material, refrigerated goods etc.);
§ Time-constrained services (JIT, over night, same day etc.);
§ Shipment tracking & tracing;
Warehousing / Distribution
§ Public / Contract / Regional warehouse;
§ Operation Technology (bar coding, radio frequency, VMI etc. );
§ Value-added services (cross-docking, freight consolidation, pick & pack etc.);
§ Order processing and fulfillment;
Custom Services
§ Custom Brokerage;
§ Duty Drawback;
Freight Finance Services
§ Freight Audit;
§ Freight Bill Payment;
IT Support
§ EDI capability;
§ Logistics information system & other software;
§ Web-based solution;
Product Support Services
§ Reverse logistics;
§ Value-added services (package, label, mark, test, assembly etc.);
Logistics Management / Consulting
§ fleet operation;
§ Distribution network design;
§ Carrier selection / negotiation / routing;
§ Facility location analysis / selection / design;
§ Inventory management;
 

Chapter Two: Literature Review
2.1 The Origin of the Third Party Logistics in developed country
Prior to 1978 the U.S. for-hire transportation industry was subject to significant economic regulation. Rates charged, market entry and exit and service levels were monitored by the Interstate Commerce Commission for trucking and rail and by the Civil Aeronautics Board for air freight. Since deregulation, third party logistics companies have emerged as providers of a wide variety of logistics and supply chain management functions.

Some 3PLs grew out of the shipper’s agents and freight brokerages that existed under regulation. The term freight broker applied to ICC licensed truck brokers that handled general commodity freight. These brokers acted primarily as marketing agents and load matchers for smaller trucking companies while shipper agents were intermediaries who bought large volumes of intermodal services from railroads and then sold these to shippers (Brown, 1984). Until very recently most 3PL companies originated from a parent transportation or warehousing company, many operating as subsidiaries to their parent company. Based on the ownership of transportation equipment or warehouse facilities, 3PL providers were historically divided into two categories: asset-based and non-asset based (Sheffi, 1990). Now the vast majority of 3PLs appear to be non-asset based, but working closely with asset based carriers or warehouse managers. These tend to be either management or knowledge-based consulting companies. Rather than handling the physical distribution themselves, these companies appear to focus on activities on strategic or tactical level.#p#分頁(yè)標(biāo)題#e#

During the past four or five years, with the rapid development of information technology and e-commerce, new types of third parties are emerging. These provide web based services and sometimes act as a mere information intermediary (sometimes referred to as infomediaries).

2.2 Key Features of the Third party Logistics
(1) Operation of systematical project
The significant difference existing between the third party logistics and traditional logistics is no longer do single logistics business of the customer enterprises, but do the logistics of customer enterprises as a systematical project. That means to contain all the elements related to logistics (packaging, storage, transportation, carrying and the route, etc.),to form logistics system. Emphasize from the angle of system integration to analyze the inter-action between each elements, individual effect of every element to the system, so as to reach the optimization of the whole system.

(2) Enjoying both resources and benefits
Forever reducing logistics cost, forever improving the logistics work efficiency, inputting the least to get the maximum revenue are the target of both customer enterprises and the third party logistics companies. The information in the information network built by the third party logistics is shared with both customer enterprises and the third party logistics. It is better for exchanging information, because of the non-block information flow; logistics could be operated in high efficiency. The higher the logistics working efficiency, the less the capital inputted, and the less the cost of logistics. It can be seen easily that both could benefit from the cooperation.

(3) Long-term cooperation
Because of the communion of resource and benefit between the third party logistics and customer enterprises, the buy-and-sell relationship has become the strategy alliance and fellow who grow up together. This can be seen from the following two points:
Point 1 is to grantee the stability and reliability of logistics system.
Point2 points out that because of the change of their relationship, the cooperation between them has become more intensive. In the process of cooperation, both sides could get better service and benefit. It not only simplifies the difficulty of management and operation, but also reduces the risk and cost. All these contribute to enterprises to strengthen their status in the market and the competition capability.

(4) General use standard for logistics facilities
Because customer enterprises entrust the third party logistics company with all their own logistics businesses, both enjoy the resources and benefits, they must take the same standard for exchanging information, use the same packaging facilities, use the same idea to management their logistics system. With the improvement and enlargement of the third party logistics services, general use standard for logistics facilities are much easier to achieve.

2.3 Background and Further Development of the Third Party Logistics #p#分頁(yè)標(biāo)題#e#
In order to satisfy the consumers, logistics is a logical process just as follows: the effective motivation (from the starting place to the consuming place) of the raw material, the midway stock, the final products, the related information; along with the planning, implementing and controlling of stocks. According to the different roles of logistics main bodies, logistics can be divided as the first party logistics (logistics for the sellers), the second party logistics (logistics for the buyers), and the third party logistics which occupy no place in the business chain, ( Leonard A Schlesinger. 2001) and has no proprietary of the goods from beginning to the ending.

The third party logistics provides its professional logistics services through the cooperation with the first party logistics or the second party logistics. The third party logistics does not own goods, nor involve in merchandise. (JuIien Brame, David Simchi-Levi. 2001) It provides the systematical, individual and informational logistics agent service, which is restricted by contract and based on alignment.

In the early stage of logistics, most companies not only did operation and marketing but also owned the truck team, storage. (Hokey Min. 2001) The operation model is “big and integrated” and “small and integrated”. So, logistics means costly and capital intensive activity for enterprises. Transportation, storage of material and products and production distribution cost much space, many facilities and personals, and also need the support of software and hardware in computers. ( Brown. R 2001) Because of the current environment restriction of resource, how to improve the utilization rate has become the precondition for the survival of enterprises. Many manufacturing enterprises come back to their key businesses. They concentrate their minds on product innovation, manufacture, marketing and the other businesses in which they have competed advantages.

With the development of market competition and deviance of work in the society, many enterprise owners realize that they are not skilled at transportation management and storage management. They begin to leave those businesses, which is not mastered well by them such as transportation and storage, to other enterprises. And so, the third party logistics has come to birth, and has become the cosset of both western theory and operation.

In the modern sense of the third party logistics, it is an industry that has only approvingly 10 to 15 years’ history (Donald Bowersox, David Close, Omar K. Helferich. 2001). As a newly raised field, the third party logistics industry has already occupied a significant proportion in many countries. In the countries of the European Union, the third party logistics basically occupies a proportion of 10% to 35% in the whole logistics market; while in (Lieb, R.C. and Peluso, L. 2000b), 57% of the whole logistics work is done by the third party logistics; in Japan who has the best development of socialized distribution, the third party logistics industry has a proportion of 80% in the whole logistics market. (Nault, B.R., and M.B. Vandenbosch 2000) Through some investigations, we can see that in the first ten years, after coming in the 21 century when China has become a member of WTO, the increase rate of the third party logistics services will be above 10%, while in the period of 2002-2005, the increase rate will reach up to 25% or above every year.#p#分頁(yè)標(biāo)題#e#

2.4 Current Status of the Third Party Logistics in Developed Countries
Third Party Logistics has gained a higher profile in recent years as a result of the factors described earlier in this paper. As single-competency providers have expanded their offerings, the number of 3PLs has proliferated. The market remains open to small logistics players (Chee and Graeve, 2003). The low growth market for parcel carriage, growing at a rate of 4% per annum is dominated by a few players but there are no significant share holders in highgrowth (15 to 25% per annum) warehousing, transportation management, air/ocean freight forwarding, and dedicated contract carriage (Gordon, 2003). 3PLs have been expanding their global operations and services and this has resulted in a number of mergers and alliances such as that of Keuhne & Nagel- USCO, UPS - Fritz and Exel - Mark VII.

Many sources believe the US-based 3PL market is still growing. The same is true for Europe and world-wide. According to Armstrong & Associates Inc. (Burnson, 2000), a Wisconsin-based consulting firm that has tracked the 3PL industry since 1980, third party logistics was an approximately $46 billion market in U.S. by the end of 1999, an increase of 16.5% compared to the previous year. According to the same study, the net profitability was 5%, net 3PL revenue was $25 billion. Leahy et al (1995) estimates that the 3PL industry will grow to $50 billion by 2000.

The size of 3PL companies varies greatly. In the US alone there are hundreds of small logistics management companies with annual revenues of less than $10 million as well as logistics subsidiaries of large national carriers with annual revenues of several hundreds of millions of dollars. Armstrong divides the market into three tiers. At the top level, companies like Ryder, C.H. Robinson, and Menlo Logistics report revenues of several hundred million dollars; 3PLs in the second tier have revenues of less than $100 million but are large enough to afford the best software. The third tier includes hundreds of brokers and small management companies with gross revenues in the range of $10 million to $20 million.

http://www.400190.com/dissertation_sample/Canada_Dissertation_Sample/Sources indicate that there are several hundreds of 3PL companies that are operating currently in the United States. Menon et. al.(1998) quoted a directory list of more than 1500 3PL providers in Canada, Mexico and the United States. “Logistics World” put together a list of several hundred 3PLs in 1998. Another source from Armstrong & Associates Inc. listed over one hundred 3PL providers together with dozens of software and e-fulfillment providers. The list of 3PL companies is growing and new forms of operation are emerging.

Lieb and Peluso (2000a) and Lieb and Randall (1997) found that most of 3PLs had initiated services in the early 1980s, a later study by Murphy and Poist (1998) confirmed this point, finding that nearly two-thirds of the U.S. based 3PLs were founded after 1980, the date of the deregulation of the U.S. air freight, truck and rail industries. The overall market for 3PLs remains in transition, driven by changes in customer needs and values and the expansion of service offerings to include e-commerce and other information technology capabilities. Several indicators suggest that the industry is not yet stable: there is no universally accepted definition for 3PL companies; there are no clear market leaders; the service menu is changing rapidly; there is a transition taking place from transportation based 3PL to warehouse and distribution oriented companies; and, new forms of 3PLcontinue to emerge.#p#分頁(yè)標(biāo)題#e#

The use of 3PL services is heavily industry dependent. The study by Lieb and Randall showed that the automotive, grocery, high tech/computers industry use 3PL services most commonly. The other users include consumer, chemical, and medical device industry.

2.5 Current Status of the Third Party Logistics in Developing Countries
The more than two decades of economic reform and transition to market economy has brought China unprecedented economic expansion. China is now the world’s largest manufacturing base, and is closing in on becoming the world’s largest market. To a large extent, the further growth of China’s economy will hinge on the ability of logistics service providers to offer cost-effective and efficient supply chain management. With the economic expansion and China’s accession into WTO, the logistics industry in China is set to take off.

We have already witnessed a raped transition in the logistics industry in China, from an industry dominated by a few big state-owned enterprises as recently as a decade ago, to the emergence of domestic and foreign third party logistics service providers, as well as lots of small-scale local service providers which sometimes consist of two people with one truck. The word “logistics” now pops up everywhere on billboards and in daily newspapers, and is one of the hottest words in China. The infrastructure in China has improved dramatically. New modern facilities such as airports, ports, highways, logistics parks and warehouses are being built at a record setting pace. Companies have invested extensively in information technologies and software. But while these are without a doubt important signs for the future of China’s logistics industry, it will be governed by many other important factors, most of which cannot be grasped by the casual observer. To better understand the future of China’s logistics industry requires a deeper look into various key components of the industry. These include: corporate structure, finance, services, operations, management, information technology, customer relations and policy issues.

Although 3PLs control a small share of the overall logistics market in China, they are growing in importance for multinational companies and organizations looking to set up or expand operations on in China. 3PLs are essentially supply chain managers who subcontract some of their logistics requirements to container lines, trucking firms and airfreight companies. Many own assets such as distribution centers, warehouses and trucking fleets, and a growing number of providers are expanding to offer across-the-board services. For consumer goods companies looking to move their product into or around China, outsourcing to a 3PL can mean lower supply chain costs.

According to Morgan Stanley, while 3PLs currently handle just 16% of final products in China, more foreign and local 3PLs will enter the market over the next five years. The emerging 3PL industry in China may be categorized into four types:#p#分頁(yè)標(biāo)題#e#

• Large SOEs (such as Sinotrans, COSCO and China Post) with extensive transport and warehousing assets, broad national networks, and strong relationships with central and provincial governments. These firms already enjoy a monopoly in several areas of trucking, shipping and postal services.

• Medium-sized domestic logistics providers (generally privately owned), which focus on one or two key industries.

• Logistics divisions of manufacturers and processors, primarily providing services to internal customers, but sometimes offering 3PL services to outside companies. The Shanghai Fruit Distribution Center 留學(xué)生dissertationis an example of a subsidiary company that has sought to internalize logistics needs. However, as an SOE, the division is struggling to update its facilities and compete with private counterparts.

• Foreign logistics providers, including multinational firms, new Wholly Foreign Owned Entities (WFOEs) and smaller firms working in niche markets.

China’s leading 3PLs are large foreign companies licensed to operate as WFOEs. Also growing in importance are foreign companies that are currently restricted to operating as joint-venture partners or through free-trade zones (FTZs). In 2001, the government of Shanghai’s Pudong New Area lifted all restrictions on warehousing and logistics companies setting up operations in the Wai Gao Qiao Bonded Zone, equalizing their position with trading companies in the the zone. Foreign companies are now allowed to operate these warehouses themselves to store a wide variety of raw materials, parts and other finished goods for onward sale and shipment into China. In Wai Gao Qiao, foreign operators generally maintain high-standard warehouses at their manufacturing facilities, which can double as regional distribution centers. A growing number of providers are “one-stop-shops” that offer wide-ranging import distribution services that extend beyond logistics.

By 2004, all of these firms will be permitted to operate as WFOEs, and will be free to offer a wide array of services, provided they obtain the necessary licenses. An outline of the status of the different services and their licensing authorities is given below.

Table 2. Regulatory framework for foreign participation in distribution
Sub-sectors Foreign participation Authority for license approval
International freight forwarding Regulated MOFTEC
Airfreight forwarding Regulated CAAC, MOFTEC
Logistics center Encouraged MOC, MOFTEC
Domestic trucking Regulated MOC, MOFTEC
Consolidation Regulated MOC, MOFTEC
Warehousing Encouraged MOC, MOFTEC
Customs brokerage Heavily Regulated CGA, MOFTEC
Shipping line Regulated MOC, MOFTEC
Airline Heavily Regulated CAAC, MOFTEC
Source: Hong Kong Trade Development Council, EIU

From the logistics provider’s standpoint, both foreign and local 3PLs are faced with two choices in the growing commercial economy: invest up front in a national network and wait for clients to come; or claim national coverage and struggle to meet subsequent client demand. Most 3PLs outsource most of their logistics operations to local firms, encouraging 3PLs to choose the second option. In the short term, that choice is more palatable, allowing businesses to oversee operations without having to invest heavily in equipment and personnel upfront.#p#分頁(yè)標(biāo)題#e#

However, 3PLs offering domestic supply chain management face a hard sell in China because their high costs put them out of reach of most local companies. Based on the table above, it is evident that 3PLs also fall between the cracks of China regulatory bureaucracy, at least for the time being.

2.6 Third Party Logistics and Intermodal Transport: A Case Study
Xintiantian Distribution Center, a subsidiary of Shanghai Food Group, is one such distributor that entered into a three-way joint venture with Shanghai’s Dazhong (a trucking/transportation company) and Mitsui O.S.K. Lines, a Japanese distributor, on October 1, 2003. Xintiantian is a typical example of a delivery center that evolved from a larger SOE and now offers specialized logistics services. Xintiantian provides refrigerated storage and distribution services, with 12,000 tons of cold storage capacity (or 4% of Shanghai’s total 325,000 ton cold storage capacity). The aggregate cold storage capacity of http://www.400190.com/dissertation_sample/Canada_Dissertation_Sample/Shanghai Food Group and its subsidiaries amounts to 130,000 tons, or 40% of Shanghai’s total. Xintiantian offers three basic services: cold storage, simple manufacturing (including packaging and labeling) and delivery of refrigerated goods to retail outlets. The company services a variety of foreign and domestic clients, including hypermarket chain Metro and convenience store chain Alldays. A synchronized computer system allows Xintiantian, its suppliers and store branches to view the status of orders in real time. The company presently has a registered fleet of about 40 refrigerated trucks (some equipped for transportation of frozen goods and some for fresh or perishable goods).

Chapter Three: