Transportation: A

Global Supply
Chain
Perspective, 10e
Chapter 9: Third Party
Logistics

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 Chapter Objectives (1 of 2)

By the end of this chapter, you should be able to:

• Understand the concept of third-party logistics and its role in the
movement of goods
• Identify the different types of third-party logistics service providers
• Describe the four types of transportation activities that are outsourced
• Discuss the reasons why companies seek integrated third-party
logistics services

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 Chapter Objectives (2 of 2)

• Understand the size and scope of the third-party logistics market

• Evaluate the reasons for outsourcing and the results achieved
• Summarize the process for outsourcing transportation and logistics
activities
• Appreciate the current challenges and competitive issues in the third-
party logistics industry
• Recognize the importance of information technology in managing
outsourced activities

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 Industry Overview

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 Definitions
• Wikipedia: an organization’s use of third-party businesses to
outsource elements of its distribution, warehousing, and fulfillment
services
• Inbound Logistics: Outsourcing all or much of a company’s logistics
operations to a specialized company
• LogisticsList: The function by which the owner of goods (client
company) outsources various elements of the supply chain to one
company that can perform the management function of the clients’
inbound freight, customs, warehousing, order fulfilment, distribution,
and outbound freight
• Council of Supply Chain Management Professionals: outsourcing all or
much of a company’s logistics operations to a specialized company
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 Role of Outsourced Logistics
Providers
• 1PL: Shipper or consignee
• 2PL: Individual, asset-based provider of logistics services
• 3PL: Firm that manages and/or provides multiple logistics services for
use by customers
• 4PL: Firm that provides broader scope of services to help manage
elements of supply chain
• 5PL: Companies that aggregate demands of 3PLs into bulk volumes to
negotiate better rates with airlines and shipping companies
• LSP: Logistics service providers can refer to any or all of the above

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Logistics Service Providers

Sources: MergeGlobal,
Containerization International,
Company Data, Robert W. Baird
& Co. estimates.

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 Types of 3PL Providers
• Resource Ownership
• Asset based
• Non-asset based
• Primary Service
• Transportation based
• Distribution based
• Forwarder based
• Financial based
• Information based

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 Asset-Based Providers

• Own assets and labor force needed to run transport and logistics
activities
• Examples: UPS, J.B. Hunt, Exel, Ryder, FedEx

• Advantages: readily available capacity, permanent employees, and

direct control of customers’ freight
• User concerns: potential bias toward 3PL’s internal resources in
developing solutions for customers

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 Nonasset-Based Providers

• Contracts with other firms to provide services rather than owning

required assets
• Examples: C.H. Robinson, XPO Logistics, Kuehne + Nagel, CEVA
Logistics
• Advantages: more flexible vs. asset-based 3PLs, unbiased decision
making
• User concerns: subject to competition for capacity from external
providers, more intensive relationship management required

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 Origins and Expertise

• Transportation-Based

• Distribution-Based

• Forwarder-Based

• Financial-Based

• Information-Based

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 Transportation-Based

• Business origin in freight movement

• Examples of 3PLs: UPS Supply Chain Solutions, FedEx Trade Networks,

Schneider Logistics Services, Damco (Maersk Group), BNSF Logistics
• Examples of services: move freight, manage transportation
operations, operate fulfillment centers, develop logistics solutions

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 Distribution-Based

• Business origin in the public or contract warehousing

• Examples of 3PLs: Exel (DHL Supply Chain), DSC Logistics, Saddle

Creek Logistics, DSV; Amazon rapidly developing 3PL like services
• Examples of services: Focus on inventory management, warehousing,
and order fulfillment, but may also provide transportation services

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 Forwarder-Based

• Includes freight forwarders, brokers, and agents that primarily

facilitate the flow of goods on behalf of customers
• Examples of 3PLs: C.H. Robinson Worldwide Inc., Hub Group Inc.,
Kuehne + Nagel Inc.
• Examples of services: arrange transportation services for LTL
shipments, air cargo, and ocean freight; facilitate international freight
movements

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 Financial-Based

• Specialize in monetary issues and financial flows in the supply chain

• Examples of 3PLs: Cass Information Systems, CT Logistics, US Bank

(Syncada), enVista, TranzAct Technologies, GE Capital
• Examples of services: freight rating, freight payment, freight bill
auditing, accounting, freight visibility, electronic payment, carrier
compliance reporting, freight claims

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 Information-Based

• Digitized activities that were previously performed manually or

required the use of licensed software
• Examples of 3PLs: Descartes Systems Group, Transplace, MercuryGate

• Examples of services: Online freight brokerage services, cargo

planning, routing & scheduling; Internet access (pay per use) to TMS,
WMS, performance management tools

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 3PL Services and Integration
Figure 9-2: 3PL Primary Transportation Offerings
Freight Movement Freight Management
• For-hire carriage • Carrier selection, routing, and scheduling
• Contract carriage • Contract compliance
• Expedited service • Performance analysis
• Time definite service • Freight bill auditing and payment
• Intermodal service • Transportation management systems
Intermediary Services Specialty Services
• Surface forwarding • Dedicated contract carriage
• Air forwarding • Drayage
• Freight brokerage • Pool distribution
• Intermodal marketing • Merge in transit
• Shippers associations • Household good movement

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 Intermediary Services
• Surface forwarding – Pick up, assemble, and consolidate shipments,
then hire carriers to transport and deliver the consolidated shipments
• Air forwarding – Consolidate small shipments for long-haul
movement, primarily using major passenger and freight airlines
• Freight brokerage – Represent carrier seeking freight or shipper
seeking capacity
• Intermodal marketing – Act as facilitators or arrangers of rail
transportation service
• Shippers associations – Nonprofit transportation membership
cooperatives arrange for the domestic or international shipment of
members’ cargo

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 Specialty Services
• Dedicated contract carriage – Serve as a customer’s private fleet with a
customized turnkey solution
• Drayage – Specialize in short-haul movement of intermodal containers from
origin to ocean ports and rail yards and then to their ultimate destination
• Pool distribution – Move a large quantity of product in bulk to a specific
market or regional terminal to be offloaded and sorted by customer
• Merge in transit – Unite shipments from multiple suppliers at a specified
merge point located close to the end customer
• Last mile delivery – A new breed of last mile service providers, covering the
final dock-to-door or store-to-door delivery with value-added services such
as inside delivery, product assembly, installation, and testing

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 3PL User Overview

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 Reasons for Outsourcing (1 of 3)
Cost and Revenues
Table 9-3: Global Logistics Costs and Third-Party Logistics Revenues (US$ Billions)
2020 3PL
2020 Logistics (% Logistic Revenue 2020 3PL
Region GDP of GDP) Cost (%) Revenue
North America 24,152.1 8.4% 2,025.5 13.2% 267.4
Europe 19,123.8 8.6% 1,653.7 10.5% 173.8
Asia Pacific 30,301.6 12.9% 3,896.9 10.0% 389.9
South America 2,833.4 12.1% 343.8 9.1% 31.4
Remaining
Regions/ 8,163.9 14.4% 1,172.2 8.5% 99.3
Countries
84,574.
Grand
Source: Total
Armstrong & Associates, 2021. 10.8% 9,092.1 10.6% 961.8
8

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Reasons for Outsourcing (2 of 3)
U.S. Spending ($billons)

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 Reasons for Outsourcing (3 of 3)
3PL Logistics vs. In-House Logistics
Table 9-4: Reasons for and Against 3PL Use
Reasons for Using 3PL Services Reasons Against Using 3PL Services
Opportunity for cost reductions Logistics is a core competency of company
Ability to focus on core competencies Cost reductions would not be experienced
Opportunity to improve customer service Control over outsourced function would diminish
Improve return on assets Service level commitments would not be realized
Increase in inventory turns Company has more expertise than 3PL providers
Productivity improvement opportunities Logistics is too important to consider outsourcing
Generate logistics process flexibility Outsourcing is not a corporate philosophy
Access to emerging technology Global capabilities of 3PL need improvement
Expansion to unfamiliar markets Inability of 3PLs to form meaningful relationships
Ability to divert capital investments Issues related to security of shipments
Sources: B. S. Sahay and Ramneesh Mohan, “3PL Practices: An Indian Perspective, International Journal of Physical Distribution & Logistics
Management, Vol. 36, No. 9, 2006; Georgia Tech and Capgemini LLC, Eleventh Annual 3PL Study, 2006; and Inbound Logistics, “Leave IT to
Your 3PL”, May 2018 (available at https://www.inboundlogistics.com/articles/3pls-technology-4-reasons-to-outsource).

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 Primary Activities Outsourced
Outsourced Logistics Services Percentages of 3PL
Table 9-5: Users
Activities Domestic Transportation 73%
Outsourced Warehousing 73%
to 3PLs International Transportation 65%
Customs Brokerage 54%
Freight Forwarding 52%
Freight Bill Auditing and Payment 35%
Cross-Docking 35%
Reverse Logistics (defective, repair, return) 33%
Product Labelling, Packaging, Assembly, Kitting 25%
Order Management and Fulfillment 21%
Transportation Planning and Management 19% Source: The 24th
Inventory Management 17% Annual Third
Information Technology (IT) Services 15% Party Logistics
LLP (Lead Logistics Provider) / 4PL Services 15% Study, 2020, C.
3PL Provided Supply Chain Consulting Services 11% John Langley Jr.,
Service Parts Logistics 11% Ph.D., Penn
State University
Customer Service 11%
and Infosys.
Fleet Management 9%
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 Establishing and
Managing 3PL
Relationships

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3PL Relationship Development
Process
Source: C. John
Langley Jr., Ph.D.,
Penn State
University, and
Capgemini LLC. All
rights reserved.
Reprinted with
permission.

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Step 1: Perform Strategic Assessment

• Focuses on understanding transportation and logistics

needs and the overall business strategies
• Overall role of transportation and logistics in supporting business
goals and objectives
• Transportation and logistics needs assessment
• Strategic environmental factors and industry trends
• Current logistics network and the firm’s positioning in supply
chains
• Key performance measurements, target, and current vs. desired
performance gap
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 Step 2: Decision to Form
Relationship (1 of 2)
• Evaluate whether transportation and logistics has core competency in
terms of expertise, strategic fit, and ability to invest; the absence of
any of these may suggest that the use of 3PL services is appropriate
• Drivers: Compelling reasons to partner
• Asset/Cost efficiency
• Customer service
• Marketing advantage
• Profit stability/Grow

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 Step 2: Decision to Form
Relationship (2 of 2)
• Facilitators: Supportive corporate environmental factors
• Corporate compatibility
• Management philosophy and techniques
• Mutuality of commitment to relationship
• Symmetry on key factors

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 Step 3: Evaluate Alternatives
• Uses drivers and facilitators to identify the most appropriate type of
3PL relationship
• Transactional or “arm’s length” relationships
• Drivers not present
• Facilitating factors not present
• Structured, formal relationship
• Share common drivers
• Facilitating factors present

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 Step 4: Select Partners
• Partner should be selected only after the credentials of the top 3PL
candidates are closely considered
• Key Actions
• Interact with the final candidates on a professionally intimate
basis
• Achieve consensus on the final selection from all involved
executives
• Establish consistent understanding of the final selection and
what is expected from the chosen service provider

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 Step 5: Structure Operating Model
• Clarify each party’s
responsibilities, activities,
processes, and priorities that will
drive day-to-day operations
• Suggested operating model
elements
• Trust and commitment
• Planning
• Contract style
• Joint operating controls
• Scope of the
• Communication
relationship
• Risk/Reward sharing
• Financial investment
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 Step 6: Implementation and
Continuous Improvement
Duration of the overall
implementation process
depends on the
complexity of the new
relationship, and
continuous improvement
is key to the future
success of the
relationship
Source: Adapted from Ray A. Mundy, C. John Langley Jr., and
Brian J. Gibson, Continuous Improvement in Third Party
Logistics, 2001. Used with permission.

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Strategic Needs of 3PL
Users

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 Strategic Needs of 3PL Users

• Strategic innovation
• Technological strength
• Capacity access
• Talent availability
• Omni-channel agility
• Sustainability expertise
• Future requirement

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3PL Versus Private Carrier

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 Private Trucking Costs

• Important operating costs

• Driver cost
• Over-the-road drivers paid based on total mileage, single or
double trailers, fringe benefits
• City drivers paid based on hourly rate, fringe benefits
• Fuel cost
• Fuel mileage of vehicles is important
• Justification of special equipment to enhance fuel efficiency

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 Private Trucking Equipment (1 of 2)
Table 9-7: Equipment Selection Factors and Implications
Selection Factor/Characteristics Equipment Implication
• Two basic Shipment Size Vehicles That Can Haul 80,000 lbs
Large Size Shipment (> 35,000 lbs) Vehicles That Can Haul 30,000 lbs
equipment Small Size Shipment (< 10,000 lbs)
questions: Product Density High Cube Capacity Vehicles (Trailers That
• Low Density (< 15 lbs/feet cubed) Are 110 Inches High, 102 Inches Wide,
• What type of • High Density (> 15 lbs/feet and 57 Feet Long)
cubed) Normal Cube Capacity
equipment Length of Haul Gasoline Powered
• < 75,000 Miles Annually Diesel Powered
should be • > 75,000 Miles Annually Diesel Powered with Sleep Cells
selected? • Trips > 1,000 One-Way Miles
City Operations Gasoline Powered
• Should this Intercity Operations Diesel Powered
equipment be Terrain Higher-Powered Engines
• Mountainous Lower-Powered Engines
purchased or • Level
leased? Special Needs Refrigerated Trailers
• Controlled Temperature Power Tailgate
• Customer Required Unloading

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 Private Trucking Equipment (2 of 2)

• Two basic types of lease arrangements:

• Full-service lease
• The leased vehicle plus operating support services
• Popular for leasing trucks and tractors that require maintenance
and other services
• Finance lease
• A means of financing equipment
• Common for leasing trailers that require little maintenance
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 Organizing the Private Fleet

• A cost-constrained fleet
• Avoid intra-organizational conflicts caused by incompatibility of
departmental (user) demands and the private fleet goals
• A profit-center fleet
• Eliminate user’s misconception that private trucking is free
transportation
• Position in the organization
• Centralized
• Decentralized
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 Regulations

• Private carriers are exempt from

federal economic regulations in
the United States, but subject to
federal and state safety
requirements
• Driver qualifications • Vehicle inspection and
• Driving practices maintenance
• Vehicle parts and accessories • Hazardous materials
• Accident reporting transportation
• Driver hours of service • Vehicle weight and
dimensions
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 Eliminating Empty Backhaul (1 of 2)

• Trip leasing
• Lease agreement between a private carrier and another firm or
another private carrier.
• A single trip of no more than 30 days
• The private carrier responsible for licensing & recordkeeping
• A copy of trip lease agreement must be carried in the vehicle
during the trip

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 Eliminating Empty Backhaul (2 of 2)

• Exempt commodities
• Examples of exempt commodities:
• Agricultural products (grain, fruits, vegetables)
• Horticultural goods (Christmas trees)
• Newspapers
• Used shipping containers

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 Summary

Click the link to review the objectives for this presentation.

Link to Objectives

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