12
Logistics Outsourcing: An Emerging Trend
After reading the chapter, the students should be able to understand:
- Benefits of logistics outsourcing
- Types of logistics service providers (3PL and 4PL)
- Selection criteria for outsourcing partner
- Outsourcing value proposition
- Outsourcing contract term and condition
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. Using the strategic partnership of third-party logistics service providers, in integrated logistics, companies the world over reported gains such as reduction in logistics costs, logistics assets and order cycle time. Today, it is an accepted trend in the 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”1
—C. John Langley
12.1 CATALYSTS FOR OUTSOURCING TRENDS
Today, business organizations across the world are struggling to compete not only for growth but mere survival. The factors responsible for this are the liberalized economies of countries across the world, globalization of businesses and recessionary trends in the markets. Moreover, the customer has become more demanding and is looking more for value-added services from prospective suppliers, as he wants value for the money he is spending. In such a situation, business organizations across the world, after reviewing their business processes, are increasingly 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. The expert can do the job both cost-effectively and efficiently. Hence, a growing trend observable in the industry today is a “hollowing out” of corporations. In other words, the large companies are increasingly outsourcing non-core business processes and gaining operating efficiencies and effectiveness by engaging the services of experts in that particular field.
12.2 BENEFITS OF LOGISTICS OUTSOURCING
In a logistics operation considerable quantities of materials are required to be transported and stored at various locations. Raw materials and components are to be moved over long distances from vendor supply points to production centres. Starting from outsourcing of IT and HR functions, Indian corporations have come a long way and understood the value and benefits they get from outsourcing such functions, wherein they feel they do not have the required expertise. Logistics is one of the operations in which the majority of Indian business corporations do not have expertise. Hence, after the liberalization of Indian economy in 1991, when the heat of competition was being felt, outsourcing became a corporate mantra for building competitiveness. In the developed countries, logistics outsourcing is treated as a strategic solution to improve quality of service and reduce the cost of important non-core processes. Therefore, such processes are outsourced to logistic service providers having a core competency in their area of logistics. The storage service relates to materials that have to be stored for some time as raw materials and later as finished goods.
Finished goods have to be transported to the point of consumption. As the production and consumption cycles never match, storage becomes inevitable. But the stored inventories have to be judiciously controlled for their carrying cost that is a drain on the company’s profits. In such cases, the logistics service provider takes care of all hassles and ensures the availability of right product at the right place and at the right time. Logistics operation is a specialized functional area and the majority of marketing and manufacturing organizations have no expertise in it. Hence, the need to outsource operations to the expert in the field has to be taken seriously. The opportunity cost, which the traditional distribution system carries due to lost time in dealing with multiple vendors, transporters, C&F agents, freight forwarders, octroi authority and customs agents, is a major hurdle in the company’s overall competence. To overcome this hurdle and bring effectiveness and efficiency to the distribution system, outsourcing becomes necessary. The critical reasons why companies outsource logistics activities are:
- To focus on core competencies
- Resource constraints
- Cost saving resulting from better management of the supply chain
Figure 12.1 Evolution of logistics
- Cross-pollination of better available practices
- Wider geographical coverage
In highly competitive markets, logistics outsourcing provides the operational flexibilities to meet the changing needs of the customers. Logistics services can also be customized for major markets or key accounts. As organizing the logistics infrastructure is the service provider’s responsibility, the outsourcers need not have to worry about the assets becoming outdated. The switching over to a new logistics partner is possible due to the changing needs of customers. 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 to create infrastructure. The human resource requirement is minimized and is limited only to coordinating and monitoring the service provider’s activities. Therefore, leading firms hire the services of experts using best practices in the outsourced area, and there hired services are available at lesser cost.
12.3 THIRD-PARTY LOGISTICS
The trend of using a strategic partnership in integrated logistics has now become an accepted practice in the industry. These partners are called “third party service providers” or 3PL (short for third-party logistics) firms. These firms are external to the company and provide one or more aspects of their entire logistics service product portfolio. These logistics services can be provided on a 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, and so forth. However, the one who provides the total logistic services and offers entire logistic solutions to customer problems is called the “integrator.” The trends in the industry show a preference for integrated logistics solution providers, as the solution to several logistics problems can be had from a single source.
3PL SERVICE PROVIDER FOR ONLINE FURNITURE MARKETING
www.furnitureontheweb.com is a division of On The Web Marketing Group, a privately held company that represents a variety of online companies and handles customer service, order processing and order fulfilment for these companies. Last Mile Logistics Group, Inc. (OTCBB: LMLG) is a third-party logistics provider (3PL) focused on servicing the “last mile” of transportation to customers. Companies outsource all aspects of the delivery order process to LMLG: local storage, scheduling, inside delivery, assembly and removal of packaging. LasMIle services covers the cross-dock, local transportation and assembly needs in the Mid-Atlantic region for FurnitureOnTheWeb.com. Combining the online order fulfilment expertise of Furniture On The Web with Last Mile Logistics Group’s last mile service capabilities offers customers in Maryland, Virginia, Washington, DC and Delaware an easy, cost-effective, high-service channel for purchasing furniture.
Last Mile Logistics Group provides superior service compared to basic freight delivery, and they schedule with customers to deliver goods at the best time, double-check to make sure that the customer is available for home delivery before arrival, and can even set up and install the delivered goods inside the home.
The 1990s witnessed the growth of 3PL firms, when corporations around the world began concentrating on the entire supply chain and realized that logistics is the key to the success of supply chain. They understood that the most important strategic utilization of logistics is improvement in customer service followed by gaining a market share and reduction in cost. The most important reason for the rapid acceptance of third-party logistics providers has been the quick gains for users of the services of 3PL firms. According to the surveys conducted by the 3PL firms during 1996 and 1998 in the United States, the early users of 3PL firms reported the following benefits:
- Logistics cost reduced by 7.8 per cent
- Logistics assets fell by 21.6 per cent
- Order cycle time reduced from 6.3 to 3.5 days
Initially, corporations were outsourcing only warehousing and transportation to 3PL firms, but as their confidence levels went up and benefits started accruing, the 3PL firms were invited to provide services in the areas of traffic management, multimodal transportation, freight consolidation, cross-docking, freight auditing, payment collections, and so on. More and more companies began using 3PL services as a source of strategic advantage with a view to achieving broader business objectives in addition to cost saving and cycle time reduction. Some of the broader objectives the corporations have in mind when going in for 3PL services are:
- Reduction in risk and liability
- Value-added services to customer
- Source of process improvement
- Wider market coverage
As this service industry is in a mature stage in the developed countries, there is stiff competition in this sector and consequently the 3PL firms are offering customized services in the niche markets. They are providing value-added services such as consignment tracking, real-time data access and analysis, cross-docking, assembly, and so on.
Table 12.1 Prominent Indian 3PL Service Providers
12.4 FOURTH-PARTY LOGISTICS
IT industry is playing a major role in logistics and supply chain management. Today, the integration of logistics, which is a complex exercise, is totally dependent on the support of IT. Third-party logistics suppliers are providing logistics solutions to their clients, based on their experience and domain knowledge that they have acquired and developed over the years in the logistics business. However, a new trend has emerged wherein the IT firms are providing logistics solutions built around domain knowledge provided by third-party logistics companies. This new breed of companies is the fourth-party logistics service providers or 4PL firms.
4PL—a term coined by the Anderson Consulting Company—is the next significant evolution in logistics management. It is slowly gaining ground internationally. According to 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.” However, the dividing line between 3PL and 4PL is very thin. The leading 3PL companies in the United States believe that 4PL is a hype created by management and IT consultancy firms to appropriate the best part of the logistics business that has been built by 3PL companies through relentless effort over the years. The genesis of 4PL lies in forming a collaborative relationship among various logistics service providers based on IT as the backbone. A network arrangement of this kind can be termed as 4PL, provided it fulfils the following requirements:
Figure 12.2 Outsourcing trends
- Covers the entire supply chain of the customer
- Collaboration between two or more logistics service providers on a resource-sharing basis to extend logistic solutions to a common customer
- Alliances to be led by integrator with IT-based and not asset-based service provider
- Flexible arrangement
For example, a 4PL company of fast moving consumer goods (FMCG) Indian manufacturer operating in the Indian and overseas markets, which needs 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.
Unlike the traditional methods that focus on reduction in operational cost and asset transfer, 4PL works in the following four ways:
- Increases revenue
- Reduces cost
- Reduces working capital
- Reduces fixed capital
4PL is an emerging trend and there are very few 4PL firms operating across the world. A complex model, 4PL offers greater benefits in terms of economies of scale. Recently, Hewlett Packard (HP) has appointed Circle International (CI) as their 4PL partner in the Asia Pacific region. CIoperates from their 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.
12.5 SELECTION OF SERVICE PROVIDER
The decision on the selection of the service provider is a strategic one and it has long-term effects on the customer service capabilities of the organization. In the Indian context, majority of corporations still have a traditional outlook and want to perform all management functions by themselves, without losing control over any of the operations or passing confidential information on to a third party. In such cases, the organizations will have to change their outlook and policy regarding the involvement of a third party in their operations.
Due to the competitive pressure, more and more corporations are now opting for logistics outsourcing to take cost out of the supply chain and enhance customer service capability. Service provider selection process is described in Figure 12.3.
Figure 12.3 Logistics service provider: Selection process
12.6 VALUE-ADDED SERVICES
Due to stiff competition for differentiation in the logistics industry, the service providers are now offering their clients some additional services, besides the regular logistic service offerings. The addition covers a whole gamut of specialized and customized processes, which are available to the customers. Some of the value addition functions are discussed below.
Cross-Docking
Cross-docking 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
Reverse logistics covers the re-transportation (to the manufacturer) and documentation of rejected or damaged goods at the customer end. It involves repacking, consolidation excise and sales tax clearance, and re-crediting per requirements of the customers.
Assembly
The manufacturers want service providers to prepare a kit consisting of the manufactured and bought out items which will go directly to the point of sale or use. This is required at the time of joint product offerings by two companies at the time of promotional campaign or to avoid the extra multiple transportation cost.
Special Packing
This includes seaworthy packing for sea transportation, shrinkage packaging or packing in varieties for specific customer groups or markets.
Logistics Audits
To conduct regular audits or audits-on-demand by the customer to identify problems, bottlenecks, or deficiencies in the logistic supply chain and suggest logistic solutions.
12.7 LOGISTICS SERVICE CONTRACT
Corporations are outsourcing logistics operations to 3PL or 4PL firms to obtain cost and service benefits for building competitiveness. In addition to this, the other expectations are value addition in customer value delivery process, diversion of risk and reduction of liabilities. The service supplier has to organize assets, add manpower, hire facility on lease or purchase it outright. In certain situations, the commitments on the part of the service supplier are expensive. The service supplier shall ask for risk coverage by way of higher service charges, and contract for a longer period. Similarly, the outsourcing firm shall guard its interest by imposing a penalty in the event of non-deliverance of the promised service benefits resulting in customer complaints and erosion of the customer base. For safeguarding their interests and maintaining a smooth relationship, the outsourcing firm and the service provider usually enter into a contract or legal agreement that is binding on both of them. The following are the major points covered under such an agreement:
- Date and place of the agreement
- Names and addresses of the contracting parties
- Scope of service
- Geographical coverage
- Logistical services (in full or in part)
- Management and usage of customer’s existing logistic assets
- Payment terms
- Delivery requirements
- Extra services from service providers
- Charges of the service offered
- Value proposition by service provider
- Damage liability
- Loss (due to fire, pilferage, rains, accident, floods, act of nature, negligence, aging, and so on)
- Insurance
- Damage calculations basis
- Demurrage due to delays in loading and unloading
- Consequential damages
- Responsibilities
- Employees
- Assets management (office, facilities, equipment, and so forth)
- Warehouse management
- Inventory management
- Transportations
- Communication
- Performance measurement criteria
- Risk sharing
- Termination of contract
- Notice for claims and filing suits
- Authority for settling dispute
- Notice period
- Governing laws
Legal experts and top-level management executives are involved in the preparation of documents. In many cases, those who were involved in negotiating an agreement are transferred or leave the organization during the term of the agreement, leaving it to their replacements to interpret the terms and conditions of the agreement in their own way. Thus, a wrong interpretation may sometimes result in breaking the partnership. However, a precise and well-written agreement will often encourage healthy relations between the outsourcer and the service provider. For a sample agreement see the annexure to this chapter.
12.8 CRITICAL ISSUES
After liberalization of the Indian economy in 1991, entrepreneurial activities in India grew manifold. Many foreign companies began their trading activities on the Indian soil to get a share of the large, untapped Indian market. As a result, the heat of competition is being felt across all sectors of the economy. To counter competition, business organizations stared reviewing their business processes to deliver value to their customers and develop the competitive advantage. Many of them started outsourcing the non-core-competency areas to the experts who promised to do the job at reduced cost and simultaneously bring effectiveness and efficiency to the operations. As many of the Indian firms today are in the learning phase of outsourcing, they ignored certain critical issues and the result was the dissolution of the partnership with the logistics service supplier within a short time, forcing them to look for other options. The following are some of the major issues that need to be addressed and examined before deciding on 3PL or 4PL partners:
- Switching cost
- Degree of control
- Human and electronic interface
- Tuning logistics services to the needs of channel partners
- Degree of outsourcing
- Legal aspects
Switching Cost
Outsourcing the logistic service results in the reorganization of the existing assets (warehousing and transportation fleet, if any) of the company to get attuned to the working methodology of the service provider. This includes:
- Management of existing assets fully or partly by the service provider
- Deployment of the existing assets on lease to the service provider
- Divesting the existing assets and fully switching over to the usage of logistics infrastructure provided by the service provider
In each of the above cases, a high element of risk is involved. Although outsourcing of services reduces the logistical cost substantially, switching over to another service provider or to the original system, in case of a partnership breakup, will cause bigger losses in terms of time in stabilizing the new system, fall in customer service below the customers’ expectation level during the transition period and erosion of customer base due to an element of unreliability experienced in the service by clients.
Degree of Control
The outsourcing firm has to be particular about the degree of control that it has on the activities of service providers to get from them the service desired by the end user. Direct control over the activities of the service provider’s employees is not possible, but the outsourcing firm should ensure the timely availability of information to monitor the activities. It is better to develop a system that enables the firm to have the required information without involvement of the service provider’s employees.
Human and Electronic Interface
For organizations in partnership, proper coordination through an intelligent interface is essential to work smoothly to achieve their common goal. As work culture differs in different organization, there is a mismatch in the degree of empowerment of employees, speed and flexibility in making decisions, precision in operations, technologies used and access to confidential information. There are numerous examples of failures in other areas such as acquisitions and mergers, because of a mismatch of culture and also due to some of the factors indicated above. Hence, a proper interface between the employees of two organizations is essential to resolve issues that crop up on account of miscommu-nication or misunderstandings. For example, empowering the service provider to make decisions (with proper guidelines) on damaged goods during transit shall reduce delays that would otherwise occur if the decisions were made through joint inspection by the customer and the manufacturer. Such prompt decisions help build the confidence of the customer in the service level of the supplier. However, the job of coordinators from both the organizations is very crucial in formulating the policies and guidelines for efficient coordination between the outsourcing firm and the service provider to ensure smooth operations. The coordinator should be empowered to make on-the-spot decisions to resolve issues before they assume an ugly shape leading to a slew of customer complaints.
Then, a problem may arise out of the mismatch of technologies being used at the outsourcing firm and at the service provider’s end. For example, most third-party service providers of foreign origin in India have expertise in EDI, but unfortunately a majority of Indian firms (baring the MNCs and large business houses) do not have a proper interface to take advantage of the latest EDI technology. The result is a performance that is well below the outsourcing firm’s expectations at the time of the alliance agreement. Similarly, the differentials in technologies used in communications, material handling, storage arrangements and inventory management may create delays, errors and mistakes resulting in the performance that is far below the expected level.
Tuning Logistics Services to the Needs of Channel Partners
Logistics service standards need to be quantified according to the requirements of channel members, who in turn service the end users/consumers. For efficient channel management, logistics acts as a key enabler. In fact, channel and logistics management should go hand in hand for an effective and efficient physical distribution system. Meshing channel and logistics management requires good coordination and an intelligent interface. As pointed out by Rosenbloom (1999), there are four major areas of interface between channel and logistics management:
- Defining logistics standards as required by channel members
- Designing logistic programs as per the standards
- Implementation of programs
- Monitoring of programs
Any logistics program that is beyond the demand of channel members creates a mismatch in the system and invariably increases the cost of operations without any tangible benefits. Marketers or manufacturers should determine the type and level of logistic service required by each of their channel members such as wholesalers, distributors and retailers. For example, ITC, an Indian cigarette giant, serves the pan (betel) shop (1,00,000 nos.) twice a day through its wholesalers, considering their daily sales and financial capacity to purchase goods against cash. As against this, the large distributors are served once a week with supplies from the factories by the truckload. The proper implementation of the designed logistic programs as per the standard required will enhance the confidence level of channel members to provide better services to their clients. For such programs to be efficiently implemented through logistics service providers, who are invariably not so conversant with the company’s channel culture and channel policy, an intelligent interface for the integration of the service provider with the channel structure will be required. At last the monitoring of these programs through periodic audits becomes necessary for synchronizing the operations to achieve the common goal. A mismatch shall be a case for breaking the partnership.
Degree of Outsourcing
A business organization resorts to logistics outsourcing in totality or part depending on the following:
- Existing logistics infrastructure of the company
- Company’s product portfolio
- Management policy for third-party involvement
- The anticipated benefits
The limited involvement of the logistics service provider may be only for regional operation or for transportation or for warehousing, but it will come in the way of identifying the source of mistakes in the event of complaints at the customer end. In such cases, it is better to have an action plan for troubleshooting of anticipated problems. Areas of responsibilities and authority should be clearly demarked at both the outsourcer’s and the service provider’s end. Hence, with a greater degree of involvement of the service provider, he should be given a free hand in complaints resolution and curtailment decisions. He should be given access to the company’s knowledge pool, if required, even though the firm feels some information is secret and needs to be closely guarded. If this is not done, it will become a roadblock to customer satisfaction.
Legal Aspects
Reverse logistics policy guidelines have to be prepared to sort out the excise and sales tax problems relating to rejected goods at the customer end during warranty period, or goods wrongly dispatched, or return of goods damaged during transit. The responsibility and authority of the persons (from both the organizations) who are required to deal with government authorities in such situations will have to be clearly demarked to avoid falling into a legal “trap.”
12.9 OUTSOURCING—VALUE PROPOSITION
Logistics service providers help a business corporation to achieve two goals: to reduce operating cost and to increase revenue. As the service provider organizes the required logistics assets, the investment in owning the logistic assets on the part of customer is reduced. This in turn allows the firm to invest in more productive activities and get more returns on the remaining assets and enhance the return on stockholders’ investment. The alliance with the service provider will free the company’s manpower for more productive work and to concentrate on core competency areas to get more returns. The firm gains more knowledge because of acquaintance with and exposure to the best available practices and technologies used by service providers. With these value propositions, the decision on logistics outsourcing can be justified.
SUMMARY
In recent years, there has been a significant shift in the balance of power between the consumers and the organizations providing them products and services. Business the world over is struggling for competitiveness in a rapidly globalizing economy. The heat of competition is being felt in all areas of the economy. As a sequel to this, business organizations have started reviewing their business processes to develop the competitive edge. The solution lies in reducing cost and enhancing customer service. Due to the competitive pressure, corporations started outsourcing non-core operations to outsiders who are experts in doing that job with efficiency, effectiveness and at reduced cost. The service provider is the third party in the seller-customer link and is capable of fulfilling the changing needs of the customer with his expertise and experience. These service firms have their core competency in the logistics operation. The third-party service providers (3PL firms) are either “wholesaler,” that is, expert in one area of logistics, such as warehousing, transportation, inventory management, or “Integrators“ who provide comprehensive logistics service solutions for the entire supply chain. The benefits of outsourcing logistics are many—cost reduction, enhanced customer service, reduction in liability and risk, wider coverage, and so forth. The new emerging trend in logistics outsourcing is fourth-party logistics. A 4PL firm 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. The genesis of 4PL lies in forming a collaborative relationship among various logistics service providers based on the IT backbone. The selection of service provider is an elaborate and comprehensive exercise for the corporation. The selection depends on the objectives to be achieved, service provider’s capability, expertise, past experience, customer base, infrastructure, technology base and reliability. The partnership is formed with a written contract, which can be honoured in a court of law. The other critical issues to be considered while forming an alliance are the switching cost, existing channel integration, degree of control and legal aspects. Management’s decision on outsourcing can be justified by value proposition, that is, the benefits the corporation gains on many fronts such as cost reduction, higher return on investments, utilization of freed manpower for more productive work, and a clear focus on the core competency area.
REVIEW QUESTIONS
- “Logistics outsourcing will considerably enhance the competitiveness of the organization.” Discuss.
- What is third-party logistics? Explain its role in today’s context.
- Discuss the various critical issues which are to be addressed before business process is outsourced.
- Why do corporations outsource the logistics function and what benefits do they get?
- “Fourth-party logistics is an extension of third-party logistics with value addition.” Comment.
INTERNET EXERCISES
- A vast array of services and industry solutions are available from UPS Supply Chain Solutions for gaining a competitive edge. Study the solutions for logistics outsourcing at http://www.ups-scs.com/support/logistics-outsourcing.html
- “Building value in logistics outsourcing is the future of the logistics service provider industry.” Study this paper published by IBM Business Consulting Services. www-.ibm.com/industries/travel/doc/content/bin/Building_Value_in_Logistics_Outsourcing_FINAL_060207.pdf
BIBLIOGRAPHY
Analytical Services. 2002. ‘Third Party Services:
An Analysis.’ Logistics Focus. 1 (2). www.logisticsfocus.com
Barthelemy, J. 2001. ‘The Hidden Costs of IT Outsourcing’ Sloan Management Review 42 (3): 60–69.
Blanchard, Benjamin S. 1999. Logistical Engineering and Management. Englewood Cliffs, NJ: Prentice-Hall.
Bowersox, D.J. and D.J. Closs. 1996. Logistical Management. New York: McGraw-Hill.
Chopra, Sunil and Peter Meindl. 2001. Supply Chain Management. New Delhi: Pearson Education.
Cooper, James. 1994. Logistics and Distribution Management. London: Kogan Page.
Earl, M.J. 1996 ‘Risks of Outsourcing IT.’ Slaons Management Review, 37 (3): 26–32.
Grubic, Joe. ‘Global Logistics, Leveraging Logistics Outsourcing Relationships.’ http://logistics.about.com/library/uc040303a.htm
Huang, Diana and Mark Kadar. 2002. ‘Third-Party Logistics in China: Still a Tough Market.’ Logistics Focus. 2 (1). www.logisticsfocus.com
Jayram, K. 1998. ‘Logistics Support for Empowerment.’ Indian Management 37 (12).
Keebler, James S. and David A. Durtsce. 2001. ‘Logistics Performance Measurement and 3PL Value Proposition’ Logistics Quarterly 7 (2).
Logistics Focus. 2002. 1 (2): 7.
Logistics 97. Conference Proceedings, pp. 1–6.
1. Richardson, Helen. July 1992. ‘Outsourcing: The Power Worksource, Transportation and Distribution.’ 1.
Rosenbloom, Bert. 1999. Marketing Channels. Orlando, FL: Harcourt Brace College Publishers, pp. 399–423.
Sangam, V.K. 18 April 2005 ‘Challenges in Managing the 3PL Relationship.’ http://ilscm.vu.edu.au/feature/id/6
Shukla, Seema. 2000. ‘When Four’s Company—A Full Circle.’ Dossier Economic Times (11 February).
Sople, V.V. 2002. ‘Logistics Outsourcing in India—Some Issues.’ National Logistics Conference, Hydrabad, 23–24 February.
Thomas, Craig. May 2004. ‘3PL Premier for Business Success.’ OutsourcingCentral.com, www.ltdmgmt.com
Thompkins, James A., and Dale Harmelink. 1994. The Distribution Management Handbook. New York: McGraw-Hill, pp. 29.1–29.16.
APPENDIX
A Draft Agreement Between the 3PL Service Provider and the Manufacturing Firm Outsourcing the Logistic Services
This agreement effective from the 1st day ofJanuary 2002, is entered into, in Mumbai, by and between Hanuman Logistics Services Ltd, C/11, Meghdoot, Bandra-Kurla Complex, Mumbai 400 051, here-inunder called the “Third Party”, and Ram Pharmaceutical Ltd, A-2, MIDC, Chakala, Andheri (E), Mumbai 400 093, hereinunder called the “Customer.”
Whereas, Customer desires the third party to perform logistics management services; and whereas, Customer desires that the third party perform such functions on the terms and conditions expressed herein.
Customer and Third Party hereto agree as follows:
1. SCOPE
Third party shall provide the logistics services such as:
- Transportation of the manufactured material from Customer’s manufacturing works located at A-2, MIDC Chakala, Andhei (E), Mumbai 400 093, to the five hub warehouses and twelve satellite warehouses.
- Packaging of the manufactured material in the unitized packages at the warehouse hubs.
- Inventory management at all the hubs and satellite warehouses.
- Documentation at hub and satellite warehouses for material movement.
- Liaison with local government authority.
2. TRANSPORTATION
- Primary Transportation Third party shall be responsible for organizing the primary transportation of material from customer’s factory warehouse to the hub warehouses located at Chennai, Delhi, Chennai, Kolkatta and Nagpur. Third party shall organize for closed container trucks depending on the load available. Customer shall decide the sizes of the container trucks required to accommodate the given load. The customer shall accumulate the material for full-load volume of the given truck size and then call the lorry. The third party shall charge for the waiting time of the truck beyond two hours of the arrival at the factory. The freight rates applicable for the given size of truck to the given destination are as indicated in Chart 1. These freight rates as agreed are fixed for one year, i.e. from 1 January 2002 to 31 December 2002.
- Secondary Transportation For transportation of the material from hubs to satellite warehouses, the third party shall coordinate the transportation through their local area offices. The types of vehicles shall be open trucks, LCVs, or three wheelers etc., depending on the load and the frequency of delivery. The satellite warehouses to be covered are Ahmedabad, Allahabad, Bangalore, Bhopal, Bhubaneshwar, Coimbatore, Hyderabad, Indore, Jaipur Jalandhar, Patna and Pune. The freight rates applicable shall be as agreed by customer’s regional office in the respective regions with third party’s local office. These rates will be fixed for one year, for the type of vehicle asked for. In case of full-load trucks, the waiting charges for vehicles shall be as mutually agreed by Customer’s regional office with third party’s local office. As in most cases, the consignments shall be in part loads and the full capacity of the vehicles will not be used, the rates agreed on the consignment-weight basis shall be applicable. However, third party shall be responsible for picking up the material within three hours of intimation to the customer’s local sales office.
3. WAREHOUSING
- Hub Warehouses The existing warehousing premises owned by the customer will be used as hubs for material distribution. The management of these hubs shall be the third party’s responsibility. The hubs’ premises shall be exclusively used for Customer’s product storage. Third Party will not use these premises at any point of time for storage of produce or products of other makes. Third party shall be responsible for:
- Space allocation for storage of products.
- Layout of warehouse for ease in material movement.
- Material handling during loading and unloading and goods movement within the warehouse premises.
- Replenishment of the inventory to maintain the minimum level of stock for each item as agreed.
- Generation of invoice and related delivery/dispatch documents (for records, audit and statutory requirements).
- Inventory records and documentation for inflow and outflow of material.
- Reporting inventory position to HO at the end of the every working day.
- Data entry in the online system within an hour of transaction.
- Preparation of reports required by the local government authority.
- Physical checking of inventory every month.
- Payment of operating and utility charges.
For warehousing and inventory services, Customer shall pay to Third Party the services charges of 2.25 per cent of the sales generated from the respective warehouse hubs.
- Satellite Warehouses Third party shall be responsible for organizing and maintaining the satellite warehouses at Ahmedabad, Allahabad, Bangalore, Bhopal, Bhubaneshwar, Coimbatore, Hyderabad, Indore, Jaipur Jalandhar, Patna and Pune. Third party is free to use its own premises or get it on hire. However, Customer shall pay to third party Rupees 5 (five) per sq ft per month for the area of the warehouse engaged. The area of warehouse required shall be mutually decided by third party’s local office and Customer’s local regional office. Over and above the floor charges, Customer shall pay to third party 1.75 per cent of the sales generated in the respective satellite warehouses for their services listed in 3.1.
4. PACKAGING
At the warehouse hubs, for distribution of material to the satellite hubs, services of third party may be called for repacking of material as per the instructions of the satellite warehouses. The Customer shall pay to third party Rupees 2.5 per pack up to 10 kilograms weight and Rupees 5 for pack above 10 kilograms. However, the maximum weight of any pack should not exceed 20 kilograms. Third party shall organize the material used for the packing and shall be charged extra based on actual consumption. Third party shall maintain the record for the same.
5. DELIVERY REQUIREMENTS
Third party shall be responsible for the stipulated delivery period for transport of material from factory to warehouse hubs as per the agreed time frame. The deviations beyond two days will be allowed to the extent of 3 per cent of the total trips effected during the month. For the above 3 per cent, a penalty of … per cent of the value of the goods (loaded in truck) per day shall be applicable. For delivery performance as per stipulated time frame without any default third party shall be paid a bonus of … per cent on the total freight bill. This is applicable for both primary and secondary transportation. Third party shall be responsible for generating this report in coordination with the regional office on a monthly basis.
6. TRANSIT DAMAGES AND INSURANCE
All Materials leaving the factory premises shall be insured by the Customer. Third party shall be responsible for transit damages. The transit risk shall be shared 50–50 per cent by both Customer and third party. The damage compensation shall be settled every month end. Third party shall handle all the insurance claims. Third party shall be responsible for collecting and returning the damaged material to the factory at its own cost.
7. MATERIAL RETURN
Third party shall be responsible for the return of material that has crossed its date of expiry. Third party shall maintain the record and every fortnight generate the report for such material. However, third party shall follow FIFO or any suitable system of inventory control to reduce the quantum of obsolete material. Obsolescence beyond 1 per cent of the sales generated shall attract penalty, which shall be mutually decided after investigation. For the return of material (excise-paid goods) third party shall be fully responsible for generating the proper documentation and authorization of concerned persons. Returned material without documentation shall not be accepted in the factory.
8. PAYMENTS
For the services rendered by third party, Customer shall make the payments as follows:
- Freight The freight charges shall be settled on the 7th day of every month for transportation services deployed during the previous month. Third party shall be responsible for generating the report and getting it tallied with the one generated by Customer at HO. Third party shall maintain the proper record for payment claims.
- Warehousing For both management services at the hubs and total warehousing services at satellite warehouses, third party shall be paid on the basis of compensation indicated in clause 3.1 and 3.2.
- Penalties, Claims and Bonuses These will be settled at the end of every quarter.
9. COMMUNICATION
Third party shall communicate to the customer at the end of every working day regarding actual performance. The oral communication should conform to the written one which is to be sent within 24 hours. Being factory, hubs and satellite warehouses are connected online, Third party shall be responsible for data entry in the system within one hour of the material in- and outflow from the respective places. Third party should ensure that online inventory records are updated for the stock review timings of 1200 hrs, 1500 hrs and 1800 hrs at HO.
10. DISPUTE SETTLEMENT
Any dispute shall be settled in the court of law as per the governing laws applicable in the respective Indian States.
11. TERMINATION OF CONTRACT
Both Customer and third party are free to terminate the contract with at least three months notice in advance. The termination shall be in force only after the claims and dues from either side are paid and settled either mutually or through the court of law.