Chapter 11:

Logistics Relationships and

Third-Party Logistics
Learning Objectives - After
reading this chapter, you should be able to
do the following:

 Understand the importance of logistics

relationships and the types of relationships that
may be formed.
 Be knowledgeable of a process model that will
facilitate the development and implementation
of successful supply chain relationships.
 Define what is meant by third-party logistics
(3PL), and know what types of firms provide 3PL
services.

Management of Business Logistics, 7th

Chapter 11 Ed. 2
Learning Objectives
 Know what types of 3PL services are
used by client/customer firms, and know
what types of 3PL providers are used.
 Appreciate the role and relevance of
information technology-based services
to 3PLs and their client/customers.
 Realize the ways in which 3PLs are
involved in global supply chain issues.

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Chapter 11 Ed. 3
Learning Objectives
 Know the extent to which customers are
satisfied with 3PL services, and
understand where improvement may be
needed.
 Recognize the importance of
“collaborative” relationships in the
context of supply chain management.

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Chapter 11 Ed. 4
Logistics Profile:
UPS Logistics Group
 UPS Logistics Group signed a five-year $150 million
deal to manage National Semiconductor’s global
supply chain distribution center in Singapore.
 The DC uses radio frequency, bar-code scanning,
and web-based technology.
 Fills >450K orders per year; receives 12 million
inbound chips daily; and ships four billion products
per year on sales of $2.1 billion.

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Chapter 11 Ed. 5
Logistics Relationships and
Third-Party Logistics:
Introduction
 With more firms interested in working
more closely with their supply chain
partners, high priorities are:
 Developing and implementing

successful supply chain relationships;

 The need for collaboration to achieve

supply chain objectives; and,

 Value created by third-party logistics.

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Chapter 11 Ed. 6
Logistics Relationships:
Types of Relationships
 Vertical
 Refer to the traditional links between

supply chain members such as retailers,

distributors, manufacturers and suppliers.
 Horizontal
 Firms that have parallel or cooperating

positions in the supply chain such as a

transportation firm and a warehousing firm
serving the same customer.

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Chapter 11 Ed. 7
Logistics Relationships:
Intensity of Involvement
 Vendor relationship shows little or no
integration or collaboration.
 Strategic alliance shows full integration
and collaboration.
 Partnership shows a customized
relationship that results in better
outcomes than could be reached
separately.
 Examine Figure 11-1 on the next slide.
Management of Business Logistics, 7th
Chapter 11 Ed. 8
Figure 11-1
Relationship Perspectives

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Chapter 11 Ed. 9
Logistics Relationships:
Intensity of Involvement
 Regardless of form,  Interaction and
there are numerous Communication
ways that the
relationships may
 Cooperation
differ:  Planning Goals
 Duration  Performance
 Obligations
analysis
 Expectations
 Benefits and
burdens
Management of Business Logistics, 7th
Chapter 11 Ed. 10
 Figure 11-2 Effectiveness of
Supply Chain Relationships
50% 48%
42%

40%
Percentag

30%
23%
22% 21% 20%

20%
e

8%
10% 7%
4%
2%

0%
Poor Fair Average Good Exceptional

Suppliers Customers

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Chapter 11 Ed. 11
Logistics Relationships:
Model for Developing and
Implementing Successful Supply Chain
Relationships
 Six step process for forming and sustaining supply
chain relationships:
 Step One – Perform strategic assessment

 Step Two – Decision to form relationship

 Step Three – Evaluate alternatives

 Step Four – Select partners

 Step Five – Structure operating model

 Step Six – Implementation and continuous

improvement

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Chapter 11 Ed. 12
Figure 11-3 Process Model for
Forming Logistics
Relationships

Management of Business Logistics, 7th

Chapter 11 Ed. 13
Logistics Relationships:
Model for Developing and
Implementing Successful Supply Chain
Relationships

 Step One – Perform strategic assessment

 Manufacturer becomes fully aware of its

logistics and supply chain needs and overall

strategies that will guide its operations.
 This step is referred to as a Logistics Audit,

and will be covered in Chapter 14.

 Time spent at the outset is well spent.

Management of Business Logistics, 7th

Chapter 11 Ed. 14
Logistics Relationships:
Model for Developing and
Implementing Successful Supply Chain
Relationships
 Step Two – Decision to form relationship
 When using an external supplier, will the

firm’s services be needed.

 If the firm has core competencies in the area

that external supplier provides, then the firm

can provide its own services.
 Using channel partners depends on whether

there are compelling drivers and facilitators

for partnerships are present.

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Chapter 11 Ed. 15
Figure 11-4 What Does It Take to
Have an Area of Core
Competency?

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Chapter 11 Ed. 16
 Logistics Relationships:
Model for Developing and
Implementing Successful Supply Chain
Relationships

 Drivers might include:  Facilitators might include:

 Corporate compatibility
 Asset/Cost efficiency
 Management philosophy and

 Customer service techniques

 Mutuality of commitment
 Marketing advantage  Symmetry on key factors

 Profit stability/growth
such as relative size, financial
strength, etc.

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Chapter 11 Ed. 17
Logistics Relationships:
Model for Developing and
Implementing Successful Supply Chain
Relationships
 Step Three – Evaluate alternatives
 Measure and weigh drivers and facilitators.

 Decide on type of relationship.

 Match manufacturer’s needs with capabilities

of each potential partner.

 Involve other functional managers in the

overall selection process.

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Chapter 11 Ed. 18
Logistics Relationships:
Model for Developing and
Implementing Successful Supply Chain
Relationships
 Step Four – Select partners
 Made only after close consideration of the

credentials of the most likely candidates.

 Interact with and get to know the final candidates

on a professionally intimate basis.

 Attempt consensus to maximize “buy-in”.

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Chapter 11 Ed. 19
Logistics Relationships:
Model for Developing and
Implementing Successful Supply Chain
Relationships
 Step Five – Structure operating model
 Planning
 Joint operating controls
 Communication
 Risk/Reward sharing
 Trust and commitment
 Contract style
 Scope of the relationship
 Financial investment

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Chapter 11 Ed. 20
Logistics Relationships:
Model for Developing and
Implementing Successful Supply Chain
Relationships

 Step Six – Implementation and

continuous improvement
 Depending upon the complexity of

the relationship, the implementation

period may vary in length.
 Future successes will be a direct

function of the ability of the partners

to achieve both breakthrough and
continuous improvement.
Management of Business Logistics, 7th
Chapter 11 Ed. 21
Third-Party Logistics:
Industry Overview
 Firms have directed considerable attention to
developing supply chain relationships.
 Many companies have been in the process of
extending their logistics organizations into those of
other supply chain participants and facilitators.
 One way of accomplishing this extension is through
the use of a supplier of third-party or contract
logistics services.5

Management of Business Logistics, 7th

Chapter 11 Ed. 22
Figure 11-5 Implementation
and Continuous Improvement

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Chapter 11 Ed. 23
Third-Party Logistics (3PL):
Definitions
 3PLs are external suppliers that perform all
or part of a company’s logistics functions,
including:
 Transportation

 Warehousing

 Distribution

 Financial services

 Terms contract logistics and outsourcing

are sometimes used in place of 3PL.

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Chapter 11 Ed. 24
Third-Party Logistics (3PL):
Types of 3PL Providers
 Transportation-Based
 Warehouse/Distribution-Based
 Forwarder-Based
 Financial-Based
 Information-Based

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Chapter 11 Ed. 25
Third-Party Logistics (3PL):
Types of 3PL Providers
 Transportation-Based
 Services extend beyond transportation to offer

a comprehensive set of logistics offerings.

 Leveraged 3PLs use assets of other firms.

 Nonleveraged 3PLs use assets belonging solely

to the parent firm.

 Ryder, Schneider Logistics, FedEx Logistics, and

UPS Logistics are examples of 3PLs.

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Chapter 11 Ed. 26
Third-Party Logistics (3PL):
Types of 3PL Providers
 Warehouse/Distribution-Based
 Many, but not all, have former warehouse

and/or distribution experience.

 Transition to integrated logistics has been

less complex than for the transportation

based providers.
 DSC Logistics, USCO, Exel, Caterpillar

Logistics, and IBM are examples of

warehouse/distribution-based 3PLs.

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Chapter 11 Ed. 27
Third-Party Logistics (3PL):
Types of 3PL Providers
 Forwarder-Based
 Essentially very independent

middlemen extending forwarder roles.

 Non-asset owners that capably provide

a wide range of logistics services.

 AEI, Kuehne & Nagle, Fritz, Circle, C. H.

Robinson, and the Hub Group are

examples of forwarder-based 3PLs.

Management of Business Logistics, 7th

Chapter 11 Ed. 28
Third-Party Logistics (3PL):
Types of 3PL Providers
 Financial-Based
 Provide freight payment and auditing,

cost accounting and control, and tools

for monitoring, booking, tracking,
tracing, and managing inventory.
 Cass Information Systems, CTC, GE

Information Services, and FleetBoston

are examples of financial-based 3PLs.

Management of Business Logistics, 7th

Chapter 11 Ed. 29
Third-Party Logistics (3PL):
Types of 3PL Providers
 Information-Based
 Significant growth and development in

this alternative category of Internet-

based, business-to-business, electronic
markets for transportation and logistics
services.
 Transplace and Nistevo are examples

of information-based 3PLs.

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Chapter 11 Ed. 30
 On the Line:
Trade Team
 Excel, the largest provider of brewery distribution
services in Great Britain, and Bass, the industry’s
low-cost producer, formed Trade Team, the UK’s
leading independent logistics provider to the
beverage industry.
 Annual sales of $200 million; 280 million gallons of
beer and other beverages to over 27,000 retail
customers; 40-50% market share.
 Has capability to move other products.

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Chapter 11 Ed. 31
Third-Party Logistics
Research Study: Industry
Details
 Of 93 responding executives, 71 percent
indicate a current or possible use of 3PLs.
 Overall percentage of companies using 3PLs
is steady, but the computer and peripheral
and consumer products industries tend to
exhibit higher use (90 and 85 percent,
respectively).
 Less use in automotive, chemical and retail
(50 to 60 percent usage range).

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Chapter 11 Ed. 32
Third-Party Logistics
Research Study: Industry
Details
 Outsourced logistics services include:
 Warehousing (73.7%)

 Outbound transportation (68.4%)

 Freight bill auditing/payment (61.4%)

 Inbound transportation (56.1%)

 Freight consolidation/distribution (40.4%)

 Cross docking (38.6%)

Management of Business Logistics, 7th

Chapter 11 Ed. 33
Figure 11-6 3PL User/Nonuser
Experience, 1996-2001

Management of Business Logistics, 7th

Chapter 11 Ed. 34
Table 11-1
Shippers Using More than Five
3PLs

Management of Business Logistics, 7th

Chapter 11 Ed. 35
Table 11-2 Third-Party
Revenues Estimated at $56.4
Billion in 2000

Management of Business Logistics, 7th

Chapter 11 Ed. 36
Table 11-3 Top Six
Outsourcing Logistics
Services: 2001

Management of Business Logistics, 7th

Chapter 11 Ed. 37
Figure 11-7 Nonuser
Respondents: Rationale for Not
Using 3PL Services

Management of Business Logistics, 7th

Chapter 11 Ed. 38
Table 11-4 Information Technology-Based
Services: Current Percent versus Future
Percent

Management of Business Logistics, 7th

Chapter 11 Ed. 39
Figure 11-8
Sources of Information
Technology

Management of Business Logistics, 7th

Chapter 11 Ed. 40
Figure 11-9 3PL Customer Use of
Industry Vertical Procurement
Markets

Management of Business Logistics, 7th

Chapter 11 Ed. 41
Figure 11-10 3PL Customer Use of
Transportation/Logistics Electronic
Markets

Management of Business Logistics, 7th

Chapter 11 Ed. 42
Figure 11-11 3PL Involvement in
Outsourcing: Who Is Responsible for
Implementation?

Management of Business Logistics, 7th

Chapter 11 Ed. 43
Figure 11-12 3PL Customer Evaluation of
Outsourcing (Yearly Comparisons)

Management of Business Logistics, 7th

Chapter 11 Ed. 44
Figure 11-13
3PL Factors for Selecting and Evaluating
3PLs

Management of Business Logistics, 7th

Chapter 11 Ed. 45
Third-Party Logistics
Research Study: Industry
Details
 Quantifiable measures of 3PL success:
 Logistics costs reduced by 8.2 percent.

 Logistics assets reduced by 15.6 percent.

 Average order cycle length changed from

10.7 to 8.4 days.

 Overall inventories reduced by 5.3 percent.

Management of Business Logistics, 7th

Chapter 11 Ed. 46
Third-Party Logistics
Research Study: Industry
Details
 Reported problem areas:
 Service level commitments not realized.
 Strategic management skills lacking.
 Cost reduction goals not realized.
 Cost “creep” and price increases occurring.
 Improvements and achievements lacking.
 Control of outsourced functions diminished.
 Consultative, knowledge-based skills lacking.
 Technology capabilities not being delivered.
 Time and effort spent on logistics not reduced.

Management of Business Logistics, 7th

Chapter 11 Ed. 47
Figure 11-14
How Respondents View Providers of Third-
Party Logistics Services

Management of Business Logistics, 7th

Chapter 11 Ed. 48
A Note on Fourth-Party
Logistics (4PL): The Next
Evolution?
 Thought of as supply chain
integrator, a firm that
“assembles and manages the
resources, capabilities, and
technology of its own organization with
those of complementary service providers to
deliver a comprehensive supply chain
solution.”12
 4PLs manage and direct the activities of
multiple 3PLs, serving as an integrator.

Management of Business Logistics, 7th

Chapter 11 Ed. 49
Figure 11-15
Fourth-Party Logistics (Registered
Trademark of Accenture, Inc.)

Management of Business Logistics, 7th

Chapter 11 Ed. 50
Need for Collaborative
Relationships13
 Supply chain relationships are most effective
when collaboration occurs.
 Collaboration is facilitated by the ability of
the supply chain partners to readily access
and exchange information over the Internet.
 Table 11-5 lists the “Seven Laws of
Collaborative Logistics” and is a guide to
establishing and maintaining collaborative
logistics networks.

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Chapter 11 Ed. 51
Table 11-5
Seven Laws of Collaborative
Logistics

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Chapter 11 Ed. 52
 Chapter 11:
Summary and Review Questions

Students should review their knowledge of the

chapter by checking out the Summary and
Study Questions for Chapter 11.