This essay aims at understanding the various services, methodologies and investments that a Large Third Party Logistics provider infuse into their operations to achieve Economies of Scale which a customer would rather fail at in establishing the same in-house.
Rail Freight, Joint Ventures, Logistics e-services and Logistics Integrators, Intermodal transport system.
In the past few decades, multinational organisations have begun to realise the concept of Logistics operation. This recognition of logistics management has created a drastic shift from being a theory to extensively being used to add value and satisfy customer requirements. Organisations are consistently including logistics as one of their business strategies. Due to numerous aspects associated with the implementation, it has considerably increased the intricacy of logistics operations there by leading many companies to outsource their logistics operations to a third party who are be well versed with the anomalies associated with logistics operations. Complexities of global trade, increased competition worldwide, and continued downward pressure on prices and margins are urging companies to develop better logistics systems in order to fulfil the need for a high service level at a lower cost (Sheffi 1990; Wilding and Juriado 2004; Lieb 2008). These Third Party Logistics providers in short known as 3PL play a vital role in the logistic operations of the company forming strategic partnerships and maintaining a superior position over their competitors. The main motive for outsourcing would undoubtedly be to achieve flexibility, cost reduction, concentrate on their core operations, and focus on what they do best. Outsourcing non-strategic activities enables organizations to focus on core competencies and exploit external logistics expertise (Sink and Langley, 1997).
More and more companies are resorting to outsource their logistics operations to 3PL's. The main considerations that the customer would look into when choosing their logistics providers would be the type of services that they offer. Customers trying to outsource would not have the sufficient workforce, finance, and expertise to carry out their own logistics operations. 3PLs on the other hand have to compete among their own competitors. In order to stay in the business more and more third party logistics providers are looking ways to increase the number of customers. This is achieved by extending their services to different areas of supply chain. As explained by Nadpurohit (Dec/Jan 2010) in his presentation on "Third-party Logistics" the most common type of services provided by a large 3PL are categorised as shown below.
- Basic Services
- Value-adding Services
- Logistics Integrators
Warehouse management, order processing, & fulfilment, and transport carrier selection.
Shipment, Order consolidation, import/export customs, EDI, Cross docking... Etc.
Full responsibility for key supply chain operations (Replenishment, product returns, spare parts inventory replenishment) and rate negotiation.
Customers trying to implement Logistics operations into their system often end up spending more than what they had planned for, this is mainly due to their inexperience and their reach in the field of logistics. Due to this, customers always tend to outsource their logistics to larger 3PLs who have the expertise, various value adding services and the resources to carry out the operations. For freight transport through Roadways, trucks with high load carrying capacity, Longer Combination Vehicles (LCVs) or other wise known as Road Trains are used there by lowering their transport costs. For Rail Transport economical wagons, Permanently Coupled Trains operating between two customers greatly increases efficiency, likewise through the Sea use of high volume vessels operating between many ports reduces the unit cost of carriage. The efficient use of these transports allows 3PLs to take advantage of Economies of Scale there by lowering their Unit costs (Button; Hensher; Brewer, 2001). The general rule applying in bulk commodity logistics is to move the largest possible unit or quantity as far possible toward the next stage in production sequence before breaking the lot or load into smaller units (Sims, 1991).
3PLs form joint ventures to suit their needs so as to bring down the extra costs associated with providing services that are not easily achievable by them. In May 2009, Delta Airlines and Air France KLM group formed a joint venture allowing them to operate their freight services throughout the Trans-Atlantic region (Source: Delta Air Lines). This brought along more customers giving them more options, increasing the frequencies of the flights, allowing them to reduce their fares. This alliance helped them to conquer the Trans-Atlantic region through their freight carrier services positioning them above other major joint Venture groups. In October 2002, DHL sought to expand their network in Asia by forming a collaboration with Cathay Pacific for Express Air Cargo. These types of partnerships achieve economies of scale easily due to the lower operating costs, information sharing, improvement of their existing systems, also allowing them great flexibility to coordinate their operations and there by sharing their costs and revenues leading to economies of scale.
In 2000, UPS established an information system that allows its customers to calculate rates and check the schedule times for their freight on any digital wireless device in the US. They covered a wide network system and have heavily invested on their logistics information services alone. From a customer's point of view, it is not possible for them to do so due to finance constraints and lack of expertise. By outsourcing their logistics operations to a 3PL, customers enjoy the added advantage of sharing the risk and responsibilities associated with it. The involvement of these 3PLs with a variety of advanced technology, and proven methodologies to back them, their margins can be improved by reducing their overall costs and allowing them to attain Economies of Scale.
3PLs are constantly evolving to maintain a high level of service and customer satisfaction. Considering the ever-growing futuristic technologies, the larger 3PLs are trying to implement and utilize the vast resources starting with the World Wide Web. Providing customers with up to date information of their services by keeping them involved in their activities is one of the ways they try to gain their attention. A 3PL like DHL has launched numerous services like Logistics e-services: which allow their customers to access their information systems allowing them to have both control and visibility over their SCM networks. Exel Supply Chain Integrator (SCI)2, Exel Agile2, Exel iCIS2, these services add value to the system there by allowing the customer to have flexibility. Exel Supply Chain Network Fuels this initiation allows the customer as well as DHL to carry out a shared-user fuel delivery service. Exel has been constantly innovating and thereby achieving a strategic success. These services cannot be maintained or implemented by the customer mainly due to the costs involved in it and a customer cannot risk running these IT systems just for their logistics operations. Whereas it is possible by the 3PLs mainly because these systems help them to maintain their customers stay on track. Logistics systems and Inventory management systems are global in nature. This reduces the costs thereby increasing the economies of scale (Roger 2007). The cost of implementing these technologies into their systems is high but due to the prospect of obtaining high efficiency with these tools their standard costs decreases.
As a Third Party Logistics provider the faster and larger the growth, higher and more demanding will the customers be. In order to implement new systems and methodologies 3PLs invest heavily on highly skilled professional and their expertise. This is because professionals would be better qualified for the handling of these systems and ensuring that they run efficiently. Whereas individual customers trying to hire analyst to provide solutions in house would be risking themselves of losing the scope and get sidetracked from their main operations.
When it comes to bulky and heavy freight transport Rail freight is one of the cheapest modes used by 3PLs. Transport through Rail is carried out when the loads are heavy, bulky and are of low variety. The nature of Rail Freight is Lean, its highly efficient routes, fixed timings, and the low prices it offers contribute to its success. Shipping companies that are part of a 3PL are keen to use the services of Rail Freight. Shipping involves the transporting of goods geographically, thus combining a rail freight transport they can create an Intermodal Freight Transport system allowing them to access their customers. Energy sectors like coal power stations have heavily banked on the use of freight transport. Due to the high consumption of coal at the power stations, a constant supply of coal is of prime importance, coal being a high volume low variety product it is best suited to be transported in bulk through rail freights there by attaining economies of scale. Automotive industries like Jaguar along with NYK Logistics have infused Intermodal freight transport systems into their logistics, a new rail line was opened in 2001 allowing it to transport its Jaguar X-type cars directly to the ports. Cars intended for the non-European markets where transported through rail to Southampton and finally shipped to their destinations. This allowed them to get rid of around 40,000 truck journeys off the road. This increased their profit margins through logistical benefits and thereby making it sustainable and attaining economies of scale.