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