3pl Practices In India

3PL Practices in India Dr. B.S. Sahay Professor of Operations Management Chairman, Centre for Supply Chain Management

SCM

Centre for Supply Chain Management Management Development Institute Gurgaon, India

Agenda for the Session • • • • • • SCM

Some Facts Business Challenges Why 3PL in India? 3PL Practices in India Conclusions and Recommendations What should be done?

Financial Improvements

Financial Indicator Improvement in Sales Revenue

13.5%

Working Capital Improvement

12.3%

Capital Asset Reduction

SCM

Percent Improvement

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

SCM

Logistics Cost Country

SCM

Asian region China Japan Korea Singapore Taiwan European region France Germany Italy Netherlands Spain UK Sweden North American region Canada Mexico US

GDP (billions)

Logistics as % of GDP

345 3363 283 40 148

14.5 10.5 12.4 20.0 13.5

1200 1566 1151 286 527 1015 237

11.7 11.8 12.6 12.2 12.1 12.2 12.7

593 208 5673

11.8 14.4 8.70

International Comparison of Customer Orientation Parameters

Product Quality

Product Design

India

41.08

34.05

30.27

41.08

52.43

Brazil

52.39

56.62

36.34

39.15

51.83

Thailand

63.00

58.50

57.00

54.00

66.50

South Korea

60.71

48.57

59.29

47.14

57.14

Canada

68.13

58.06

62.19

62.50

66.45

USA

59.67

69.84

62.62

57.70

74.43

Japan

92.68

81.46

93.17

89.76

72.20

Germany

92.50

71.39

88.06

78.61

75.83

France

55.94

66.96

44.64

45.56

66.09

Netherla nds

72.89

63.11

69.78

68.44

74.76

Note: SCM

Source:

O n - T i m e A fter-Sales M a n a g i n g D istribution Delivery Service

Companies are r ated 0=poor to 100=excellent World Competitiveness Report, 2000

Business Challenges • Customer Expectation • Shortening of Product Life Cycles • World Competition • Shareholder Accountability • Competing Through Time • Return on Investment

SCM

Supply Chain Model Company Design Supplier’s Suppliers Supplier

Acquire

Market

Convert

Mgmt

Distribute

Customers

Control

Information, product and fund flow (forward and reverse) SCM

Customers/ End users

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’).” SCM

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 SCM

Research Methodology Consultation

Available World-wide Surveys

Indian Economic Scenario

Design of Survey Questionnaire

Academic Study – India’s competitiveness, Global Supply Chain/logistics/ 3PL scenario

Pilot Survey

Identification Companies Administration of Questionnaire

Data Analysis Questionnaire Modification

Administration of Questionnaire (by Post & Personal Visits) Data Sorting & Evaluation Interaction with Respondent

Non response bias & Data Analysis

Tabulation of Survey Findings

SCM

Research Conclusion

Participation by Ownership 126 valid responses, 112 Users, 14 3PL providers

Public Sector 3%

Private 34%

Public Limited 63%

SCM

Participation by Turnover > 1000 cr 18%

< 50 cr 22%

500 to 1000 cr 11% 50 to 100 cr 13%

100 to 500 cr 36%

SCM

Participation by Industry Automotive

27.5

Engineering

22.9

Others

21

Chemicals/ Fertilisers

7.3

Metals

4.6

FMCG

4.6

Textiles/ Apparel

3.7

Services

3.7

Telecommunications

2.8

Transportation

SCM

1.8 0

5

10

15

20

Percentage of Respondents

25

30

Themes •

• • • • • • • • • SCM

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

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 SCM

Theme 1: 3PL for Corporate Growth Reasons for Outsourcing Logistics cost reduction

80.6

Focus on core competencies

76.0

Improved customer services

71.3

Improve return on assets

68.2

To increase inventory turn

60.6

Productivity improvement

56.5

Imbibe more flexibility in operations

46.1

Access to emerging technology

45.3

Access/ Expansion to unfamiliar market

35.9

Diverting capital investment

SCM

24.5 0

20

40

60

80

Percentage of Respondents

100

Theme 1: 3PL for Corporate Growth Improvement in Business Objectives by using 3PL Improve on time delivery

86.7

More specialized logistics expertise

85.3

Reduced cycle time

79.8

Improve focus on core activities

79.7

Operational cost reduction

76.4

Enhance geographic reach

61.3

Differentiation from competitors

56.7

Facilitate growth

56.1

Strategic/ operational flexibility

SCM

54.0 0

20

40

60

80

Percentage of Respondents

100

Theme 2: 3PL A Critical Link to SC Improvement of the Functions in Selection of 3PL Customer service

65.8

Sales

64.3

Purchasing

60.9

Finance

50.6

Marketing

50.6

Manufacturing

44.0

Information systems

37.5 0

SCM

20

40

60

Percentage of Respondents

80

100

Theme 2: 3PL A Critical Link to SC Minimally important 5%

Unimportant 2% Very important 19%

Indifferent 26%

Important 48%

SCM

Theme 2: 3PL A Critical Link to SC Role of 3PL Services Providers as in Supply Chain Integration

Less than expected 6% Indifferent 15%

No benefit 3%

More than expected 10%

Expected 66%

SCM

Theme 3: Logistics Activities Outsourced Reduce Costs Increase Market Coverage

Globalize Business Operations Why to Outsourcing Logistics?

Customer Satisfaction SCM

Flexibility in Operations

Focus on Core Competency

Theme 3: Logistics Activities Outsourced Logistics Activities Outsourced Outbound transportation

55.7

Inbound transportation

52.2

Customer clearing & forwarding

51.5

Import/ Export management

34.5

Outbound warehousing

33.9

Inbound warehousing

29.5

Labelling & Packaging

29.0

Fleet management & Consolidation

28.6

Order picking

27.0

Inventory management

SCM

23.5 0

10

20

30

40

Percentage of Respondents

50

60

Theme 3: Logistics Activities Outsourced Major Reasons for not using 3PL Services Inability to respond to changing needs

84.6

Poor infrastructure of providers company

84.0

Lack of grasp of business goals

82.3

Unreliable promises from providers

81.3

Concerns about capability of providers

77.4

Fear of leakage of important information

76.1

Difficulty in gauging cost saving with 3PL

75.9

Lack of confidence in provider

75.4

Non compatibility of IT systems

68.6

Difficulty to manage and change provider

68.5

Fear of loss of control

68.5

Fear of retrenchment

SCM

26.4 0

10

20 30

40 50

60 70

Percentage of Respondents

80 90

Theme 4: Logistics Cost • • • • • • •

SCM

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

Theme 4: Logistics Cost Major Components while measuring the Logistics Cost Transportation management

72.9

Inventory management

62.6

Warehousing and distribution centre management

37.4

Customer services cost

33.6

Order management and processing

25.2

Packaging

25.2

Production scheduling

23.4

Purchasing (excluding raw material cost)

SCM

20.6 0

10

20

30

40

50

60

Percentage of Respondents

70

80

Theme 4: Logistics Cost Logistics Cost as Percentage of Gross Sales 20-50% 2%

>50% 3%

10-20% 17% 0-5% 39%

5-10% 39%

SCM

Theme 4: Logistics Cost Percentage of Logistics Outsourced to 3PL providers

>80% 60-80% 7% 8%

40-60% 14%

20-40% 7%

0-20% 64%

Theme 5: Factors for 3PL Selection • • • • • • • • • • • SCM •

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 Workforce

Theme 5: Factors for 3PL Selection Cost of 3PL services

63.1

Reliability

62.2

Core competencies of 3PL provider

61.0

Responsiveness and service quality

45.8

Service capability of provider

37.9

Technological competencies of provider

25.4

Breadth of services provided

23.9

Geographical location

20.0 0

20

40

60

80

SCM Percentage of Respondents

100

Theme 5: Factors for 3PL Selection 3PL Contract / Agreement

• • • • • • • • • • SCM •

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

Theme 5: Factors for 3PL Selection Parameters used in 3PL contracts Penalties for non performance

63.7

Performance measures

62.6

Roles and responsibilities

61.5

Expectations of both parties

61.5

Service level

59.3

Service costs

59.3

Quality requirements

49.5

Periodical review of agreement

48.4

Flat rate pricing

40.7

Information exchange procedures

31.9

Transaction based pricing

29.7

Issue resolution mechanism

28.9

Percent gain-sharing provision

6.6 0

10

20

30

40

50

Percentage of Respondents

60

70

Theme 6: Implementation Issues Critical Success Factors in Implementing 3PL Services

• 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 SCM

Theme 6: Implementation Issues Critical Success Factors in Implementing 3PL Services Well defined system

73.4

Close working relationship

73.3

Strong performance review

67.8

Clear demarcation of responsibility

64.7

Well defined requirements

62.4

Top management involvement

52.3

Cross functional team

43.6

Joint team for management

36.6

Tiered structure

24.6 0

10

20

30

40

50

60

Percentage of Respondents

70

80

Theme 6: Implementation Issues Major Challenges in Implementing 3PL Services Controlling cost

54.3

Maintaining customer service level

53.9

Communication

34.8

IT integration

32.9

Demarcation of responsibility

30.7

Information sharing

28.8

Monitoring performance

28.0

Reaching service definition

17.3

Convincing internal personnel

16.0 0

10

20

30

40

Percentage of Respondents

50

60

Theme 6: Implementation Issues Users & Providers Perception Controlling costs

5

Customer Service

Information Sharing

4 Reaching Service Definition

3

Gain Sharing

2 Convincing Internal Personnel

Communication

Demarcation of Responsibility

IT Integration Monitoring Performance

SCM

User

Provider

Theme 6: Implementation Issues Users & Providers Perception

Major Challenges in implementation of contract

SCM

Controlling costs Maintaining customer service level Gain sharing mgmt Communication IT integration Monitoring performance Demarcation of responsibility Convincing internal personnel Reaching service definition Information sharing

Mean score (5 very important) User Provider Perception Perception 4.26 4.60 4.16 4.30 3.20 3.13 3.89 4.10 3.67 3.56 3.70 4.00 3.65 3.89 3.28 4.22 3.47 3.44 3.74 4.30

Theme 7: Management & Partnerships Management Involvement in Partnerships 40.6

Top management

62.9

Middle management

38.0 35.6 35.6

Lower management

18.3 28.8

Divisional level

39.3

Corporate level

41.0

CEOs

40.3

47.9

49.2 0

10

20

30

At partnership

40

50

As of now

Percentage of Respondents

60

70

Theme 7: Management & Partnerships Perception of Top Management Performance of 3PL Providers

Indifferent 13%

Ineffective 1%

Effective 69%

Very effective 17%

Theme 7: Management & Partnerships How Companies perceive 3PL Services

Collaborative 14%

Non contractual 9%

Contractual 77%

Theme 7: Management & Partnerships Perception of Relationship with 3PL Providers 6.8

Willing to make long term relations

93.2 14.4

Possess high level of integrity

85.6

15.1

Committed to us

84.9 16.2

Do not make false promises

83.8 20.7

Concerned about us

79.3 23.8

Loyal to us

76.2 30.6

Share risks and rewards

69.4 45.2 54.8

Alter facts slightly to get advantage

69.5

Breach agreement to their benefit

30.5 0

20

40 Agree

60

80

Disagree

Percentage of Respondents

100

Theme 7: Management & Partnerships User & Provider perceptions of their relationships

Relationship Perception Do not make false promises Share risks and rewards Concerned Committed Loyal Willing to make long term relations Alter facts slightly to get advantage Breach agreement to their benefit

SCM

Mean score (1 - strongly agree) User Provider Perception Perception 2.76 2.33 3.09 2.33 2.80 1.92 2.51 2.00 2.71 2.33 2.31 1.50 3.22 2.82 3.82 3.55

Theme 8: 3PL Performance Evaluation Performance Measures commonly used

• • • • • • • • • SCM

On time shipment Inventory accuracy Customer complaints Shipping errors Backorders Warehouse cycle time Total order cycle time Stock outs Fill rates

Theme 8: 3PL Performance Evaluation Use of Joint Teams and Partnership Levels

55.0

Non-contractual

45.0

55.0

Contractual

45.0

15.4

Collaborative

84.6 0

10

20

30

40

Have joint teams

50

60

70

Do not have joint teams

Percentage of Respondents

80

90

Theme 8: 3PL Performance Evaluation User Perceptions of Performance measures Customers' complaints On time shipment Shipping errors Inventory accuracy Total order cycle time Stock outs Backorders Fill rates Warehouse cycle time Volume of Rs. Shipped 0

SCM

20

40

60

Percentage of respondents

80

100

Theme 8: 3PL Performance Evaluation User - Provider Perceptions for Performance Measures On time shipment 5

Volume of Rs. Shipped

4.5

Customers' complaints

4 3.5 3

Fill rates

Inventory accuracy

2.5

Backorders

Total order cycle time

Shipping erors

Stock outs

SCM User Perception

Provider Perception

Theme 8: 3PL Performance Evaluation • 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

SCM

Theme 9: Performance Measurement Impact of use of 3PL on Firms

Negative 2%

Very negative 1% Very positive 14%

Average 29%

Positive 54%

Theme 9: Performance Measurement Use Perception of Performance Measures Customer complaints

85.7

On time shipment

80.7

Shipping errors

80.0

Inventory accuracy

75.6

Total order cycle time

56.7

Stock outs

55.9

Backorders

52.4

Fill rates

49.1

Warehouse cycle time

45.4

Volume of Rs shipped

42.1 0

20

40

60

Percentage of Respondents

80

100

Theme 10: E-Logistics Improvement of IT Integration when evaluating and selecting the 3PL service provider

Very important 21%

Not important 11% Less important 13%

Moderately important 29%

Important 26%

Theme 10: E-Logistics IT based services important for 3PL contract implementation Shipment tracking/ tracing

66.2

Warehouse management system

62.2

Transportation management system

57.3

Supply chain planning system

53.3

International documentation

48.5

Supplier management system

48.3

Freight payment/ accounting

40.9

Company website

38.7

EDI

38.4

Import/ Export applications

36.9

Internet order management

34.8

B2B e-market/ trading exchange

32.3 0

10

20

30

40

50

Percentage of Respondents

60

70

Theme 10: E-Logistics Companies with e-commerce system in place or plan to have it

Yes 23%

Plan to have 25%

No 52%

Theme 10: Future Trends in 3PL Activities planned to be outsourced

Reverse logistics

57.4

Inbound warehousing

55.8

Inventory management

54.4

Distribution

54.3

Order processing

53.7

Information technology

53.2

Order picking

52.4

Outbound warehousing

48.2

Labelling & Packaging

46.8 0

10

20

30

40

50

Percentage of Respondents

60

70

Financial Improvements

Financial Indicator Improvement in Sales Revenue

13.5%

Working Capital Improvement

12.3%

Capital Asset Reduction

SCM

Percent Improvement

9.2%

Production Cost Reduction

10.5%

Labor Cost Reduction

10.0%

ROA Improvement

10.0%

Logistics Cost Reduction

15.0%

Comparative Analysis Parameter

USA

India

Usage of 3PL

71%

55%

Common activities outsourced

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%) Reasons for not outsourcing

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%

SCM

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 SCM

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

SCM

– – – –

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

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) SCM

Conclusions & Recommendations • Company should focus on outsourcing 3PL services like inventory management, order processing, labeling & packaging and reverse logistics

SCM

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...

SCM

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.

SCM

Logistics Sourcing Spectrum 100% insourced All logistics functions conducted in-house

Client Logistics operations

Part of SC outsourced to an external provider

3PL

Client

3PL Client 4PL

SCM

100% outsourced

3PL

3PL

4PL: long term contract, equity or JV

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. SCM

4PL Set-up Primary Client Contribution: • • • • •

Start-up equity Assets Working capital Operational expertise Operational staff

Primary Client(s) SCM

3PL Providers Contribution: • Transportation Services • WH facilities

4PL Organisation

Partners Contribution: • • • • • • • •

Set-up equity Logistics strategy IT development Customer service management Supplier management Logistics consultancy Best practices

Partner(s)

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

SCM

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

4PL : Primary Client Model Client limited in numbers

Primary Client

Client

Client

4PL Organisation

Service provider

SCM

Service provider

Service provider

External service provider

4PL : Industry Solution Model Product manufacturers

Service provider

Company 1

Distribution service manager

Client Company 2

4PL Organisation

3PL Provider

Company 3

SCM

Pharmaceutical Industry

4PL : SC Partners Model Suppliers Aluminium can Mfr.

Glass Mfr.

Service providers

Manufacturers 4PL Organisation

Primary Client

Soft drink mfr.

SCM

3PL provider

Logistics manager

Beverage Manufacturing Industry

Participation • A total of 163 responses consisting 142 Users and 21 providers Participation by Equity Stake

MNC stake 44% Domestic 56%

Participation by Ownership

Public Limited 64%

Private 33%

Public Sector 3%

SCM