3PL practices in India

3PL Practices in India

Centre for Supply Chain ManagementManagement Development Institute

Gurgaon, India

SCM

Dr. B.S. SahayProfessor of Operations Management

Chairman, Centre for Supply Chain Management

Agenda for the Session

• Some Facts

• Business Challenges

• Why 3PL in India?

• 3PL Practices in India

• Conclusions and Recommendations

• What should be done?

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Financial Improvements

Financial IndicatorPercent

Improvement

Improvement in Sales Revenue 13.5%

Working Capital Improvement 12.3%

Capital Asset Reduction 9.2%

Production Cost Reduction 10.5%

Labor Cost Reduction 10.0%

ROA Improvement 10.0%

Logistics Cost Reduction 15.0%

Some Facts:

• Annual Plan Outlay : Rs. 1.13 Lakh Crores

• Fiscal Deficit : Rs. 1.35 Lakh Crores

(5.3% of GDP)

• Inventory tied up : Rs. 1.17 Lakh Crores

• Logistics Cost : 13.6% of our GDP

• GDP : Rs. 25.57 Lakh Crores

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Country GDP(billions)

Logisticsas %

of GDPAsian regionChina 345 14.5Japan 3363 10.5Korea 283 12.4Singapore 40 20.0Taiwan 148 13.5European regionFrance 1200 11.7Germany 1566 11.8Italy 1151 12.6Netherlands 286 12.2Spain 527 12.1UK 1015 12.2Sweden 237 12.7North American regionCanada 593 11.8Mexico 208 14.4US 5673 8.70

Logistics Cost

P a r a m e t e r s P r o d u c tQ u a l i t y

P r o d u c tD e s i g n

O n - T i m eD e l i v e r y

A f t e r - S a l e sS e r v i c e

M a n a g i n gD i s t r i b u t i o n

I n d i a 4 1 . 0 8 3 4 . 0 5 3 0 . 2 7 4 1 . 0 8 5 2 . 4 3

B r a z i l 5 2 . 3 9 5 6 . 6 2 3 6 . 3 4 3 9 . 1 5 5 1 . 8 3

T h a i l a n d 6 3 . 0 0 5 8 . 5 0 5 7 . 0 0 5 4 . 0 0 6 6 . 5 0

S o u t hK o r e a

6 0 . 7 1 4 8 . 5 7 5 9 . 2 9 4 7 . 1 4 5 7 . 1 4

C a n a d a 6 8 . 1 3 5 8 . 0 6 6 2 . 1 9 6 2 . 5 0 6 6 . 4 5

U S A 5 9 . 6 7 6 9 . 8 4 6 2 . 6 2 5 7 . 7 0 7 4 . 4 3

J a p a n 9 2 . 6 8 8 1 . 4 6 9 3 . 1 7 8 9 . 7 6 7 2 . 2 0

G e r m a n y 9 2 . 5 0 7 1 . 3 9 8 8 . 0 6 7 8 . 6 1 7 5 . 8 3

F r a n c e 5 5 . 9 4 6 6 . 9 6 4 4 . 6 4 4 5 . 5 6 6 6 . 0 9

N e t h e r l an d s

7 2 . 8 9 6 3 . 1 1 6 9 . 7 8 6 8 . 4 4 7 4 . 7 6

N o t e : C o m p a n i e s a r e r a t e d 0 = p o o r t o 1 0 0 = e x c e l l e n tS o u r c e : W o r l d C o m p e t i t i v e n e s s R e p o r t , 2 0 0 0

International Comparison of Customer Orientation

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Business Challenges

• Customer Expectation

• Shortening of Product Life Cycles

• World Competition

• Shareholder Accountability

• Competing Through Time

• Return on Investment

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SuppliersSupplier’sSupplier

CustomersCustomers/End users

Design Market

Acquire Convert Distribute

ControlMgmt

Information, product and fund flow (forward and reverse)

Company

Supply Chain Model

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Logistics Management

“Logistics Management is the process of

planning, implementing and controlling

the efficient cost-effective flow and storage of

raw materials, in-process inventory, finished goods, and related information

from point-of-origin to point-of-consumption

for the purpose of

conforming to customer requirement”.

SCM

Third Party Logistics

• A 3PL provider is a company which supplies /co-ordinates logistics functions across multiple links in the supply chain.

• The company acts as a ‘third party’ facilitator between seller/manufacturer (the ‘first party’) and buyer/user (the ‘second party’).”

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Research Objectives

• To know the scenario of 3PL Practices in Indian Industry

• To identify Critical Factors for evaluation, selection and relationship management with 3PL providers

• To provide a benchmark for Indian firms looking to optimise their logistics operations

• To project the future trends of 3PL services in India

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Research MethodologyConsultation

Design of Survey Questionnaire

Pilot Survey

Data Analysis

Questionnaire Modification

Administration of Questionnaire (by Post & Personal Visits)

Data Sorting & Evaluation

Non response bias & Data Analysis

Tabulation of Survey Findings

Research Conclusion

Interaction with Respondent

Available World-wide Surveys Indian Economic Scenario

IdentificationCompanies

Administration of Questionnaire

Academic Study –

India’s competitiveness,

Global SupplyChain/logistics/ 3PL scenario

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Participation by Ownership

Private 34%

Public Sector 3%

Public Limited63%

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126 valid responses, 112 Users, 14 3PL providers

Participation by Turnover

< 50 cr22%

50 to 100 cr13%

100 to 500 cr36%

500 to 1000 cr11%

> 1000 cr18%

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Participation by Industry

1.8

2.8

3.7

3.7

4.6

4.6

7.3

21

22.9

27.5

0 5 10 15 20 25 30

Transportation

Telecommunications

Services

Textiles/ Apparel

FMCG

Metals

Chemicals/ Fertilisers

Others

Engineering

Automotive

Percentage of Respondents

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Themes• 3PL as a Strategic Tool for Corporate Growth• 3PL: A Critical Link to Supply Chain• Logistics Activities Outsourced• Logistics Cost• Selection of 3PL provider• Implementation Issues• Evaluation of 3PL Providers• Performance Measurement• e-Logistics• Future Trends in 3PL

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Theme 1: 3PL for Corporate Growth

• Corporate Focus– Higher Profitability

– Increased Sales and Market Share

– Enhanced Customer Service

– Reduced Costs

• Highly Competitive Situation– Focus more on Core Activities

24.5

35.9

45.3

46.1

56.5

60.6

68.2

71.3

76.0

80.6

0 20 40 60 80 100

Diverting capital investment

Access/ Expansion to unfamiliar market

Access to emerging technology

Imbibe more flexibility in operations

Productivity improvement

To increase inventory turn

Improve return on assets

Improved customer services

Focus on core competencies

Logistics cost reduction


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Reasons for Outsourcing



54.0

56.1

56.7

61.3

76.4

79.7

79.8

85.3

86.7

0 20 40 60 80 100

Strategic/ operational flexibility

Facilitate growth

Differentiation from competitors

Enhance geographic reach

Operational cost reduction

Improve focus on core activities

Reduced cycle time

More specialized logistics expertise

Improve on time delivery


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Improvement in Business Objectives by using 3PL

Improvement of the Functions in Selection of 3PL

37.5

44.0

50.6

50.6

60.9

64.3

65.8

0 20 40 60 80 100

Information systems

Manufacturing

Marketing

Finance

Purchasing

Sales

Customer service

Percentage of RespondentsSCM

Theme 2: 3PL A Critical Link to SC

Indifferent26%

Important48%

Minimally important

5% Very important19%

Unimportant2%

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Role of 3PL Services Providers as in Supply Chain Integration

Less than expected

6%

Indifferent15%

Expected66%

More than expected

10%

No benefit3%

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Why toOutsourcing

Logistics?

Globalize Business

Operations

Focus on Core CompetencyFlexibility in

Operations

Customer Satisfaction

Reduce Costs

Increase Market

Coverage

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Theme 3: Logistics Activities Outsourced


23.5

27.0

28.6

29.0

29.5

33.9

34.5

51.5

52.2

55.7

0 10 20 30 40 50 60

Inventory management

Order picking

Fleet management & Consolidation

Labelling & Packaging

Inbound warehousing

Outbound warehousing

Import/ Export management

Customer clearing & forwarding

Inbound transportation

Outbound transportation


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Logistics Activities Outsourced

Major Reasons for not using 3PL Services

26.4

68.5

68.5

68.6

75.4

75.9

76.1

77.4

81.3

82.3

84.0

84.6

0 10 20 30 40 50 60 70 80 90

Fear of retrenchment

Fear of loss of control

Difficulty to manage and change provider

Non compatibility of IT systems

Lack of confidence in provider

Difficulty in gauging cost saving with 3PL

Fear of leakage of important information

Concerns about capability of providers

Unreliable promises from providers

Lack of grasp of business goals

Poor infrastructure of providers company

Inability to respond to changing needs



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Theme 4: Logistics Cost

• Transportation costs• Inventory Carrying Costs • Order-Processing• Losses• Packaging• Handling & Warehousing Costs • Customers’ Shopping

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20.6

23.4

25.2

25.2

33.6

37.4

62.6

72.9

0 10 20 30 40 50 60 70 80

Purchasing (excluding raw material cost)

Production scheduling

Packaging

Order management and processing

Customer services cost

Warehousing and distribution centremanagement


Transportation management


Major Components while measuring the Logistics Cost

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Logistics Cost as Percentage of Gross Sales

0-5%39%

5-10%39%

10-20%17%

20-50%2%

>50%3%


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Percentage of Logistics Outsourced to 3PL providers

0-20%64%

20-40%7%

40-60%14%

60-80%8%

>80%7%


Theme 5: Factors for 3PL Selection• Core Competencies of 3PL Provider• Cost of 3PL Services• Information Handling Capability / Compatibility• Breadth of Services Provided• Past Experience of your Industry• Technological Competencies of the Provider• System Flexibility & Capacity• Safety & Insurance Cover / Programs• Geographical Location & Spread• Company Reputation• Responsiveness & Service Quality• Management Structure & Quality of WorkforceSCM

20.0

23.9

25.4

37.9

45.8

61.0

62.2

63.1

0 20 40 60 80 100

Geographical location

Breadth of services provided

Technological competencies of provider

Service capability of provider

Responsiveness and service quality

Core competencies of 3PL provider

Reliability

Cost of 3PL services


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Theme 5: Factors for 3PL Selection

3PL Contract / Agreement

• Expectations of both parties• Penalties for non-performance• Roles & Responsibilities• Cost Structure• Quality requirements• Service Levels • Performance Measures• Periodical reviews• Issue resolution mechanism• Information exchange procedures• Profit / gain sharing provision SCM



6.6

28.9

29.7

31.9

40.7

48.4

49.5

59.3

59.3

61.5

61.5

62.6

63.7

0 10 20 30 40 50 60 70

Percent gain-sharing provision

Issue resolution mechanism

Transaction based pricing

Information exchange procedures

Flat rate pricing

Periodical review of agreement

Quality requirements

Service costs

Service level

Expectations of both parties

Roles and responsibilities

Performance measures

Penalties for non performance


Parameters used in 3PL contracts

• Well defined requirements

• Close working relationship

• Top management involvement

• Clear demarcation of responsibilities

• Joint (cross-functional) team for management

• Well laid down system

• Strong performance review

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Theme 6: Implementation IssuesCritical Success Factors in Implementing 3PL Services

Critical Success Factors in Implementing 3PL Services

24.6

36.6

43.6

52.3

62.4

64.7

67.8

73.3

73.4

0 10 20 30 40 50 60 70 80

Tiered structure

Joint team for management

Cross functional team

Top management involvement

Well defined requirements

Clear demarcation of responsibility

Strong performance review

Close working relationship

Well defined system


Theme 6: Implementation Issues

Major Challenges in Implementing 3PL Services

16.0

17.3

28.0

28.8

30.7

32.9

34.8

53.9

54.3

0 10 20 30 40 50 60

Convincing internal personnel

Reaching service definition

Monitoring performance

Information sharing

Demarcation of responsibility

IT integration

Communication

Maintaining customer service level

Controlling cost



Users & Providers Perception

SCM

2

3

4

5Controlling costs

Customer Service

Gain Sharing

Communication

IT Integration

Monitoring Performance

Demarcation of Responsibility

Convincing Internal Personnel

Reaching Service Definition

Information Sharing

User Provider


User

Perception

Provider

PerceptionControlling costs 4.26 4.60

Maintaining customer service level 4.16 4.30Gain sharing mgmt 3.20 3.13

Communication 3.89 4.10

IT integration 3.67 3.56Monitoring performance 3.70 4.00Demarcation of responsibility 3.65 3.89Convincing internal personnel 3.28 4.22

Reaching service definition 3.47 3.44

Information sharing 3.74 4.30

Mean score (5 very important)Major Challenges in implementation

of contract

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Theme 6: Implementation IssuesUsers & Providers Perception

Theme 7: Management & Partnerships

49.2

47.9

39.3

62.9

40.3

41.0

28.8

35.6

38.0

40.6

35.6

18.3

0 10 20 30 40 50 60 70

CEOs

Corporate level

Divisional level

Lower management

Middlemanagement

Top management

At partnership As of now


Management Involvement in Partnerships


Effective69%

Indifferent13%

Ineffective1% Very effective

17%

Perception of Top Management Performance of 3PL Providers


Contractual77%

Non contractual9%

Collaborative14%

How Companies perceive 3PL Services


54.8

69.4

76.2

79.3

83.8

84.9

85.6

93.2

69.530.5

6.8

14.4

15.1

16.2

20.7

45.2

30.6

23.8

0 20 40 60 80 100

Breach agreement to their benefit

Alter facts slightly to get advantage

Share risks and rewards

Loyal to us

Concerned about us

Do not make false promises

Committed to us

Possess high level of integrity

Willing to make long term relations

Agree Disagree


Perception of Relationship with 3PL Providers

User Perception

Provider Perception

Do not make false promises 2.76 2.33Share risks and rewards 3.09 2.33Concerned 2.80 1.92Committed 2.51 2.00Loyal 2.71 2.33 Willing to make long term relations 2.31 1.50Alter facts slightly to get advantage 3.22 2.82Breach agreement to their benefit 3.82 3.55

Relationship Perception

Mean score (1 - strongly agree)

User & Provider perceptions of their relationships

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Theme 8: 3PL Performance EvaluationPerformance Measures commonly used

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• On time shipment

• Inventory accuracy

• Customer complaints

• Shipping errors

• Backorders

• Warehouse cycle time

• Total order cycle time

• Stock outs

• Fill rates

Use of Joint Teams and Partnership Levels


84.6

45.0

45.0

15.4

55.0

55.0

0 10 20 30 40 50 60 70 80 90

Collaborative

Contractual

Non-contractual

Have joint teams Do not have joint teams

Theme 8: 3PL Performance Evaluation

User Perceptions of Performance measures

0 20 40 60 80 100

Volume of Rs. Shipped

Warehouse cycle time

Fill rates

Backorders

Stock outs

Total order cycle time

Inventory accuracy

Shipping errors

On time shipment

Customers' complaints

Percentage of respondentsSCM


2.5

3

3.5

4

4.5

5

On time shipment

Customers' complaints

Inventory accuracy

Shipping erors

Stock outsTotal order cycle time

Backorders

Fill rates

Volume of Rs. Shipped

User Perception Provider PerceptionSCM

User - Provider Perceptions for Performance Measures


• About 40% have ranked customer service amongst the top 3 as a reason for using 3PL services

• Close to 30% of customer service personnel are involved in selection of 3PL providers

• More than 80% of respondents use on time shipment and customer complaints as a significant performance measure

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Impact of use of 3PL on Firms

Positive54%

Average29%

Very negative1%

Very positive14%

Negative2%

Theme 9: Performance Measurement

Use Perception of Performance Measures

42.1

45.4

49.1

52.4

55.9

56.7

75.6

80.0

80.7

85.7

0 20 40 60 80 100

Volume of Rs shipped

Warehouse cycle time

Fill rates

Backorders

Stock outs

Total order cycle time

Inventory accuracy

Shipping errors

On time shipment

Customer complaints


Theme 9: Performance Measurement

Improvement of IT Integration when evaluating and selecting

the 3PL service provider

Not important11%

Less important13%

Important26%

Moderately important

29%

Very important21%

Theme 10: E-Logistics

IT based services important for 3PL contract implementation

32.3

34.8

36.9

38.4

38.7

40.9

48.3

48.5

53.3

57.3

62.2

66.2

0 10 20 30 40 50 60 70

B2B e-market/ trading exchange

Internet order management

Import/ Export applications

EDI

Company website

Freight payment/ accounting

Supplier management system

International documentation

Supply chain planning system

Transportation management system

Warehouse management system

Shipment tracking/ tracing



Companies with e-commerce system in place or plan to have it

No 52%

Plan to have25%

Yes23%


Activities planned to be outsourced

46.8

48.2

52.4

53.2

53.7

54.3

54.4

55.8

57.4

0 10 20 30 40 50 60 70

Labelling & Packaging

Outbound warehousing

Order picking

Information technology

Order processing

Distribution


Inbound warehousing

Reverse logistics


Theme 10: Future Trends in 3PL

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Financial Improvements

Financial IndicatorPercent

Improvement

Improvement in Sales Revenue 13.5%

Working Capital Improvement 12.3%

Capital Asset Reduction 9.2%

Production Cost Reduction 10.5%

Labor Cost Reduction 10.0%

ROA Improvement 10.0%

Logistics Cost Reduction 15.0%

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Parameter USA India

Usage of 3PL 71% 55%

Warehousing (73.7%) Outbond Transportation (55%)

Outbound Transportation (68.4%) Inbound Transportation (52%)

Freight bill payment (61.4%) Custom clearing and forwarding (51%)

Inbound warehousing (56.1%)

Control would diminish (63%) Poor infrastructure of provider (81%)

Costs would be reduced (63%) Inability to respond to changing needs (81%)

Service commitment would not be met (48%)Unreliable promised from providers (80%)

Logistics is a core competency (44%) Concerns about capability of providers (77%)

Necessity of e-commerce 72% 67%

Collaborative relationship 82% 14%

Gain sharing is important for relationship 80% 6.60%

Common activities outsourced

Reasons for not outsourcing

Comparative Analysis

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Conclusions & Recommendations

• 55% companies use 3PL services in India one form or the other compared to 75% globally

• 3PL is the future, should be seen as a support to corporate growth

• Close to 60 % of 55% uses transportation and custom clearing & forwarding

• Of the rest 45%, 75% do not use 3PL services because they are not sure of provider’s capability

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Conclusions & Recommendations• Selection of proper 3PL provider is a must

where top management should be involved at contract stage to avoid conflicts later on.

• Contracts are used more to avoid risks rather than to develop relationship

• 3PL providers feel that– Users are unwilling to share information

– Do not show commitment towards the relationship

– Do not want to share rewards

– Do not show interest in continuing the relationship

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Conclusions & Recommendations• View 3PL as an equal partner • Collaborative relation is a foundation for

success for 3PL services• Gain sharing between Users and providers• Use of IT in 3PL services is very low both by

user and provider

• Lower involvement of junior management staff during implementation process (only 18% showing high involvement)

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Conclusions & Recommendations• Company should focus on outsourcing 3PL

services like inventory management, order processing, labeling & packaging and reverse logistics

Drawbacks of 3PL• Still requires top management's time to manage

relationships & resources

• Unable to cover full range of SC requirements e.g. logistics information, tech development...

• Lack of shared goals...

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Fourth Party Logistics : 4PL

The Fourth Party Logistics organization

is one of the intermediate stages along the

logistics sourcing spectrum

that combines the benefit of

outsourcing and insourcing.

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Logistics Sourcing Spectrum100% insourced

100% outsourced

Client

Client

Client

4PL

3PL

3PL

3PL

3PL

Logistics operations

All logistics functions conducted in-house

Part of SC outsourced to an external provider

4PL: long term contract, equity or JV

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4PL : differs from 3PL...• The 4PL organization is often separate entity

established as a joint venture or long term contract between a primarily client and one or more partners.

• It acts as single interface between the client and multiple logistics service providers.

• All aspects of the client’s supply chain are managed by the 4PL organisation.

• It is also possible for a major 3PL provider to form a 4PL organisation within existing structure.

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4PL Set-up

Partner(s)Primary Client(s)

4PL Organisation

3PL Providers Contribution:

• Transportation Services

• WH facilities

Primary Client Contribution:

• Start-up equity• Assets

• Working capital• Operational expertise

• Operational staff

Partners Contribution:

• Set-up equity

• Logistics strategy

• IT development

• Customer service • management

• Supplier management

• Logistics consultancy

• Best practices

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4PL : Key Characteristics• Hybrid organisation formed from a number of different

entities

• Typically established as a JV or long term contract

• Responsible for management and operation of entire supply chain

• Continuous flow of information between partners and 4PL organisation

• Potential for revenue generation

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Client limited in numbers

Primary Client

External service provider

4PL Organisation

Client

Service provider

Service provider

Service provider

Client

4PL : Primary Client Model

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4PL : Industry Solution Model

Product manufacturers Service provider

4PL Organisation

Client

Company 1

Company 3

Company 2

3PL Provider

Distribution service manager

Pharmaceutical IndustrySCM

4PL : SC Partners Model

Suppliers

Primary Client

Beverage Manufacturing Industry

4PL Organisation

Glass Mfr.

Logistics manager

Soft drink mfr.

3PL provider

Aluminium can Mfr.

Service providersManufacturers

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Participation

• A total of 163 responses consisting 142 Users and 21 providers

SCM

MNC stake44%

Domestic56%

Participation by Equity Stake Participation by Ownership

Public Limited

64%

Private 33%

Public Sector 3%

3PL practices in India

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