itl lecture-23 & 24 (global logistics & outsourcing)

07/06/10 1

By :

Prof. Amit Kumar

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“Logistics has advanced from warehousing and

transportation to boardrooms of the successful leading

companies across the world. Due to increasing

importance of business logistics, it becomes necessary

for the student pursuing management education from

IILM- Graduate School of Management, to understand

logistics, its basic framework and practical utility.”

IILM-GSM

Importance of this course

International Trade Logistics

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Course: International Trade Logistics

1. Logistics - At the Centre of World Trade

2. Supply Chain Management

3. Warehousing: A Role Beyond Storage

4. Material Handling & Storage System

5. Inventory Management

6. Transportation: Backbone of Logistics

7. Logistics Packaging

8. Logistics Information System

9. Global Logistics & Outsourcing

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International Trade Logistics

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IILM-GSM

International Trade Logistics Global Logistics & Outsourcing

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Contents• Catalysts for Outsourcing Trends• Benefits of Logistics Outsourcing• Evolution of Logistics• Third Party & Fourth Party Logistics• Selection of Service Provider• Value Added Services• Indian 3PL Service Providers• Why Global Logistics?• Global Logistics Challenges• Strategic Issues & Managing Global Logistics• Case Study: A Draft Agreement Between the 3PL Service

Provider and the Manufacturing Firm Outsourcing the Logistics Services

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• To survive in today’s competitive markets, companies are focusing on their core competencies and adopting outsourcing as a strategic solution to improve quality of service and reduce cost of important as well as non-core processes.

• Today, it is an accepted trend in industry to form a collaborative relationship with the logistics service provider for knowledge-based supply chain integration that rests on IT as the backbone.

“Logistics outsourcing is an important driver of top-line growth and corporate strategy.”

Introduction: Logistics Outsourcing

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• Today, business organizations across the world are struggling not only for the growth but mere survival. The factors responsible for this are:

The liberalized economies of the countries across the world

Globalization of businesses Recessionary trends in the markets

• Moreover, customer has become more demanding and looking more for value-added services from suppliers.

Catalysts for Outsourcing Trends

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• In such situation, organizations are realizing that cost cutting and differentiation in value delivery system are solutions to the current problem.

• This can be achieved through outsourcing the non-core operations to experts in the field and concentrating on core business areas.

A growing trend observable in the industry today is a ‘hollowing out’ of corporations.

Catalysts for Outsourcing Trends

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• Logistics is one of the operations in which the majority of Indian business corporations do not have expertise.

• In the developed countries, LO is treated as a strategic solution to improve quality of service and reduce the cost of important non-core processes.

• The critical reasons are: To focus on core competencies Resource constraints Cost saving resulting from better management of the

supply chain Cross-pollination of better available practices Wider geographical coverage

Reasons for Outsourcing Logistics Activities

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1. In highly competitive markets, Logistics Outsourcing provides the operational flexibility to meet the changing needs of the customers.

2. Logistics services can also be customized for major markets or key accounts.

3. The requirement of funds for investment in transportation fleet, warehouses, handling equipment and storage arrangement is absolutely eliminated and the responsibility falls on the service provider.

4. The human resource requirement is minimized and is limited only to coordinating and monitoring the service provider’s activities.

Benefits of Logistics Outsourcing (LO)

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Evolution of Logistics

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In-house Logistics

Operations

3PL

4PL

CustomerPreferringInsourcing

CustomerOption forOutsourcing

Customer forBusinessAlliance

Warehousing

Transportation

Inventory

Order Processing

IT Firms

3PL Firms

Consultant

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• These firms are external to the company and provide on stand-alone or an integrated basis.

The stand-alone operator is called a ‘wholesaler’, who extends only one type of service in which it has expertise. It may be any of such services as warehousing, transportation, inventory management, packaging or so forth.

But one who provides the total logistic service and offers entire logistic solutions to customer problems is called the ‘integrator’.

• The 1990s witnessed the growth of 3PL firms, when companies around the world realized that logistics is the key to the success of supply chain.

Third Party Logistics

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• The most important reason for the rapid acceptance of 3PL providers has been the quick gains for users of the service of 3PL firms.

• According to the surveys conducted by the 3PL firms during 1996 and 1998 in the US, the early users of 3PL firms reported the following benefits:

Logistics cost reduced by 7.8 percent Logistics assets fell by 21.6 percent Order cycle time reduced from 6.3 to 3.5 days

• Soon 3PL firms started providing more services in the areas of traffic management, multimodal, freight consolidation, cross-docking and payment collections.

Third Party Logistics

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1. Aegis Logistics

2. DTDC

3. First Flight

4. AFL Ltd

5. DHL

6. Dynamic Logistics

7. FedEx Ltd.

8. Gati

9. Logistix Ltd

10.Mahindra Logistics

11.Total Logistics

12.TVS

3PL Service Providers in India

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13.TNT Global Express

14.Blue Dart

15.Safexpress

16.Ashok Leyland

17.Agarwal P & M

18.Essar

19.Tata

20.OM Logistics

21.Miebach Logistics22. Transport Corporation of India

23.Western Arya

24. Reliance Logistics

Evolution of Logistics

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In-house Logistics

Operations

3PL

4PL

CustomerPreferringInsourcing

CustomerOption forOutsourcing

Customer forBusinessAlliance

Warehousing

Transportation

Inventory

Order Processing

IT Firms

3PL Firms

Consultant

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• IT industry is playing a major role in logistics and SCM.• A new trend has emerged wherein the IT firms are

providing logistics solutions build around domain knowledge provided by 3PL companies.

• The new breed of companies is the 4PL firms.

4PL- a term is coined by the Anderson Consulting Company- is the next significant evolution in the

logistics management. It is slowly gaining ground internationally.

Fourth Party Logistics

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According to the Anderson Consultants,

“4PL 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”.


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For example, A 4PL company of FMCG Indian manufacturer operating in the Indian and overseas markets, which need

to integrate its entire logistics operations handled by different 3PL firms in different geographical areas assigned

to them, shall design and operate one single central information system instead of the different systems in

different areas by each 3PL firms.

A 4PL firm fulfils all the different needs of the client from a single source instead of getting into

multiple 3PL alliances to achieve through multiple sources objectives.


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Recently, Hewlett Packard (HP) has appointed Circle International (CI) as their 4PL partner in the Asia Pacific region. CI operates from the central hub

located in Singapore, where it buys and stocks HP’s inventory requirement in the region.

The network of warehouse hubs, spread across the countries in the region, takes care of the distribution. The local HP office in the country draws its inventory requirements by

buying from the CI local hub.

HP does not block its funds in inventory. Thus 4PL provides logistic services by blocking its own money in someone

else’s products and components.


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Selection of Service Provider

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High Logistics costLonger order cycle timeIncreased customer complaintsReverse logistics

Define Logistics Problem

TransportationWarehousingPacking, InventoryMaterial handling, Storage

Identify Problem Areas

Cost s & Complaints reductionPerformance cycle compressionJIT delivery, Route selectionFreight optimization

Establish Objectives

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Selection of Service Provider

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Establish Objectives

IntegratorWholesalerConsultants

Search for Service Provider& Solicit Proposals

Credentials & Technology BaseLogistics InfrastructureExperience & Customer BaseCost of ServiceReliability, Government liaison

Proposal Evaluation &Service provider Selection

Cost s & Complaints reductionPerformance cycle compressionJIT delivery, Route selectionFreight optimization

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Value-Added Services

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Cross-Docking:• It means elimination of storage time in the logistics process.

• The material that arrives at the warehouse hub from various vendors is break-bulk, assorted, consolidated and repacked to dispatch to the customers.

• The storage time is less than 48 hours.

Customs Clearance:• This involves the responsibility of complete documentation and

customs clearance for imports and exports of goods.

Reverse Logistics:• It covers the re-transportation (to the manufacturer) and

documentation of rejected or damaged goods at customer end.


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Assembly:• The manufacturers want service providers to prepare a kit

consisting of the manufactured and bought out items which will go directly to point of sale or use.

• This is required at the time of joint product offerings by two companies at the time of promotional campaign.

Special Packing:• It includes seaworthy packing for sea transportation,

shrinkage packaging or packing for specific markets.

Logistics Audits:• To conduct regular audits or audits-on-demand by the

customer to identify problems or deficiencies in the logistics supply chain and suggest logistic solutions.


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• The globalization has created opportunities for doing business beyond the national boundaries of a country.

• Due to rapid advancement in ICT during the last decade, the world has become a global village in real sense.

• As business continues to globalize, attention has increasingly turned to logistics operation. The speed and efficiency of the movement of goods across national boundaries are important issues.

As a consequence of globalization, managing logistics at the global level poses a challenge of considerable

complexity.

Why Global Logistics?

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Global Logistics Challenges

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Parameters Domestic Logistics

Global Logistics

Performance Cycle

Shorter Longer (due to greater distance, customs clearances, more intermediaries, more use of slow sea travel)

Documentation Simple Complex (for customs, banking and foreign exchange clearance requirements)

Alliances Few (3PL firms) Multiple (on global front with logistics service providers, distributors and manufacturers)

Information flow

Simple Multiple channels, varied standards, alternative languages

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• Transportation mode plays a vital role in the movement of cargo within or between countries.

• Normally, cargo is moved using three modes of transportation, e.g. road, sea and air, depending on cost, urgency and the destination.

In Indian subcontinent, the road is an important mode of cargo movement across India, Pakistan,

Bangladesh and Bhutan.

The railway is the important mode in Europe because of the availability of a modern and efficient train

system.

Global LogisticsSelection of the Transportation Mode

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For selection of the transportation mode, logistical

managers should have the following considerations:

• Location of market• Speed of cargo movement• Cost of transportation• Reliability of mode


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Location of Market:• Most important factor in deciding the transportation

mode.• For shipping goods from India to the Middle East

markets, the best and most convenient mode is: Sea for bulk cargo (steel, food grains, ores,

minerals and chemicals, automobiles and so on) Air for the high-value cargo (jewellery, electronic

goods, office equipment and so forth)


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Speed of Cargo Movement:• Second important factor is speed, when the cargo is

required urgently or in the shortest delivery time. • Floricultural and horticultural products, which are

perishable in nature, are directly sent by air to destination. Obviously, the cost of air transportation is very high and should be evaluated and justified considering the criticality of the need in terms of time and opportunity cost.

Roses produced at various farms near Pune, India, are sent to Mumbai airport in temperature-controlled vans to be airlifted directly to Holland and the Middle East

in order to reduce the spoilage.


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Cost of Transportation:• This is directly proportional to the speed of travel.• Air transportation is costliest. However, air cargo needs

less packaging due to less handling, no exposure to hazardous storage because of shorter journey period.

• On the other hand, good packaging is required for sea cargo to withstand the hostile storage, travel and handling conditions during the long journey.


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Reliability of Mode:• In India, air accounts for less than 1% of the total cargo

movement, while rail 35%, road 39% and sea 24%.• Each of the modes is associated with some hazards and

so there is no ideal mode of transportation.


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Comparative Hazards of Transportation Modes

Air Sea Road/Rail

Variation in changes in temperature and pressure

Water DamageCorrosive atmosphereWave impactsHostile storage condition

ShocksVibrationsCareless HandlingImpacts due to breakingTransshipments

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Following are some options for firms to plan their logistics

for truly global operation:

1. The firm may concentrate their manufacturing and sourcing at a few locations, despite selling their products across global markets,

For example, BMW and Thomson. The major focus of these companies is on outbound logistics for

distribution of finished products in global markets.

Global Logistics: Strategic Issues

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2. The next category of firms includes those that manufacture at one place and sell their products in the global markets.

These are the companies manufacturing very high value products such as aircrafts and defence products. They source their raw material and

components from all over the world. The major focus is on outbound logistics.


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3. Companies in this category manufacture mass-consumed low-value product such as soft drinks.

Firms like McDonalds, Coca Cola and Pepsi adopt this strategy of supplying to the market from local manufacturing plants.

The products are sold within 200 kilometers of the plants. Beyond a particular distance the logistical cost makes the finished product uncompetitive.


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4. The fourth category includes companies that source from and distribute to many locations. They focus on both inbound and outbound logistics.

Some examples are the Japanese car and consumer electronics manufacturing companies such as

Honda, Toyota and Sony, and so on.


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itl lecture-23 & 24 (global logistics & outsourcing)

Leadership & Management