SUPPLY CHAIN RELATIONSHIPS

LEARNING OBJECTIVES

§ Understand the types of supply chain relationships and their importance.

§ Describe a process model that will facilitate the development and implementation of successful
supply chain relationships.

§ Recognize the importance of “collaborative” supply chain relationships.

§ Define what is meant by third-party logistics (3PL) and know what types of firms provide 3PL
services.

§ Know what types of 3PL services are used by client/customer firms and what types of 3PL
providers are used.

§ Discuss the role and relevance of information technology-based services to 3PLs and their
clients/customers.

§ Know the extent to which customers are satisfied with 3PL services and identify where
improvement may be needed.

§ Understand some of the likely future directions for outsourced logistics services.

OVERVIEW

Introduction

This section focuses on two, highly related topics. The first is that of supply chain relationships in
general, with an emphasis on the types of relationships, the processes for developing and
implementing successful relationships, and the need for firms to collaborate to achieve supply
chain objectives. The second is that of the third-party logistics (3PL) industry in general, and how
firms in this industry create value for their commercial clients.

Logistics Relationships

Types of Relationships
There are two types of logistics relationships. The first is what may be termed vertical
relationships; these refer to the traditional linkages between firms in the supply chain such
as retailers, distributors, manufacturers, and parts and materials suppliers.

The second type of logistics relationship is horizontal in nature and includes those business
agreements between firms that have “parallel” positions. A horizontal relationship may be thought
of as a service agreement between two or more independent logistics provider firms.
 Intensity of Involvement

As suggested by Figure 4-1, the range of relationship types extends from that of a vendor to that
of a strategic alliance. In the context of the more traditional “vertical” context, a vendor is
represented simply by a seller or provider of a product or service, such that there is little or no
integration or collaboration with the buyer or purchaser.

Alternatively, the relationship suggested by a strategic alliance is one in which two or more
business organizations cooperate and willingly modify their business objectives and practices to
help achieve long-term goals and objectives.

Regardless of form, relationships may differ in numerous ways. A partial list of these differences
follows:

§ Duration
§ Obligations
§ Expectations
§ Interaction/Communication
§ Cooperation
§ Planning
§ Goals
§ Performance analysis
§ Benefits and burdens

S Most companies feel that there is significant room for improvement in terms of the relationships
N they have developed with their supply chain partners.

Model for Developing and Implementing Successful Supply Chain Relationships

Figure 4-2 outlines the steps in a process model for forming and sustaining supply chain
relationships.

Step 1: Perform Strategic Assessment. This first stage involves the process by which the
manufacturer becomes fully aware of its logistics and supply chain needs and the overall
strategies that will guide its operations.

Step 2: Decision to Form Relationship. Depending on the type of relationship being considered
by the manufacturing firm under consideration, this step may take on a slightly different decision
context. This decision comprises several drivers, e.g. asset/cost efficiency, customer service,
marketing advantage, profit stability/growth, and facilitators, e.g. corporate compatibility,
management philosophy and techniques, mutuality of commitment to relationship formation, size
and financial symmetry.

Step 3: Evaluate Alternatives. Using a methodology by which the apparent levels of drivers and
facilitators may suggest the most appropriate type of relationship to consider. If neither the
drivers nor the facilitators seem to be present, then the recommendation would be for the
relationship to be more transactional, or “arm’s length” in nature.

Step 4: Select Partner(s). While this stage is of critical concern to the customer, the selection of a
logistics or supply chain partner should be made only following very close consideration of the
credentials of the most likely candidates.

Step 5: Structure Operating Model. The structure of the relationship refers to the activities,
processes, and priorities that will be used to build and sustain the relationship.

Step 6: Implementation and Continuous Improvement. Once the decision to form a relationship
has been made and the structural elements of the relationship identified, it is important to
recognize that the most challenging step in the relationship process has just begun. Depending on
the complexity of the new relationship, the overall implementation process may be relatively
short, or it may be extended over a longer period of time.

Finally, the future success of the relationship will be a direct function of the ability of the
involved organizations to achieve both continuous and breakthrough improvement.

Need for Collaborative Relationships

Collaboration may be thought for the benefit of all of as a “business practice that encourages
individual organizations to share information and resources.” Collaboration allows companies to
“leverage each other on an operational basis so that together they perform better than they did
separately.”

While this approach creates a synergistic business environment in which the sum of the parts is
greater than the whole, it is not one that comes naturally to most organizations, particularly those
offering similar or competing products or services.

Collaboration requires the following:

§ Parties involved to dynamically share and interchange information

§ Benefits experienced by parties to exceed individual benefits
§ All parties to modify their business practices
§ All parties to conduct business in a new and visibly different way
§ All parties to provide a mechanism and process for collaboration to occur

Third-Party Logistics—Industry Overview

Firms have directed considerable attention toward working more closely with other supply chain
participants, including customers, suppliers, and various providers of logistics services.

One way of extending the logistics organization beyond the boundaries of the company is
through the use of a supplier of third-party or contract logistics services.
Definition of Third-Party Logistics

A third-party-logistics firm may be defined as an external supplier that performs all or part of a
company’s logistics functions.

Depending on the firm and its positioning in the industry, the terms contract logistics and
outsourcing are sometimes used in place of third-party logistics. While some industry executives
take care to distinguish among terms such as these, each of these terms refers to the use of
external suppliers of logistics services.

Types of 3PL Providers

These providers include are transportation-based, warehouse/distribution-based, forwarder-

based, shipper/management-based, financial-based, and information-based firms.

Transportation Based: Its approaches to operations, management, and planning significantly

utilize and leverage information technologies.

Warehouse/Distribution Based: Traditionally, most warehouse/distribution-based logistics

suppliers have been in the public or contract warehousing business and have expanded into a
broader range of logistics services.

Forwarder Based: Essentially, these firms are non-asset owners, are very independent, and deal
with a wide range of suppliers of logistics services.

Financial Based: These firms provide services such as freight payment and auditing; cost
accounting and control; and logistics management tools for monitoring, booking, tracking,
tracing, and managing inventory.

Information Based: These resources effectively represent alternative sources for those in need of
purchasing transportation and logistics services, and they may be thought of as a newer,
innovative type of third-party provider.

3PL Market Size and Scope

Estimates of the global 3PL industry revenues for the year 2010 for North America at US $143.3
billion represents about one-quarter of the total estimated global spending of US $539.1 billion
where turnover growth has risen from US $30.8 billion in 1996 to an estimated US $121.6 billion
in 2010.

Third-Party Logistics Research Study – Industry Details

A significant ongoing research study is the Third party logistics: The state of logistics
outsourcing study by Dr. John Langly Jr. of Penn State. This study incorporates surveys of
global providers, focused interviews with experts, and workshops with customers to develop
insights into the current state of logistics.
Profile of Logistics Outsourcing Activities

A recent study showed that the logistics services most frequently outsourced are those that are
more operational, transactional, and repetitive in nature. Looking at the results over all of the
regions studied, the most frequently outsourced services include transportation (83%),
international transportation (75%), warehousing (74%), customs clearance and brokerage (70%),
customs brokerage (58%), and forwarding (53%).

Strategic Role of Information Technology

The most currently used services include transportation management and

warehouse/distribution center management (WMS), global trade management, yard
management, transportation sourcing, and transportation planning

Management and Relationship Issues

The need for competency as it relates to the formation and continuation of successful
relationships has become critical in today’s 3PL industry. Although both providers and users of
3PL services have been improving in their ability to create more productive, effective, and
satisfying business relationships, the media is replete with examples of failed relationships.

The two most prevalent 3PL selection factors were price of 3PL services and quality of
tactical, operational logistics services.

Successful 3PL relationships establish appropriate roles and responsibilities for both 3PLs and
client firms.

An important issue relates to how customers think of their 3PLs and approximately two-thirds
of the customers think of their 3PLs as providers of tactical or operational services, while ap -
proximately one-third think of them as strategic or integrative.

Customer Value Framework

Participating executives provided continuing evidence of logistics and supply chain metrics
that provide tangible documentation of the benefits they have experienced from the use of 3PL
services.

Respondents in recent studies reported experiencing a number of problems. Cate gorically, their
responses tended to focus on several key areas of concern as follows:

§ Service-level commitments not realized

§ Time and effort spent on logistics not reduced
§ Cost reductions have not been realized
§ Cost “creep” and price increases once relationship has commenced
§ Unsatisfactory transition during implementation stage
§ Inability to form meaningful and trusting relationships
§ Lack of ongoing improvements and achievements in offerings
§ Lack of strategic management and/or consultative/knowledge-based skills
§ Lack of global capabilities

A Strategic View of Logistics and the Role of 3PLs

One major accomplishment of the past 10–15 years has been establishing the validity of the
logistics outsourcing model and specifically of the 3PL provider. There is also an increasing
acceptance of the 4PL model, likely growth in expenditures by current users of 3PL services,
and a growing sophistication in the outsourced business approaches that respond to a dynamic
set of customer logistics and supply chain needs.

Fourth-Party Relationships: Although it has been around for some time, the concept of
“fourth-party-logistics” (4PL) provider is becoming more evident in the business world.
Essentially a supply chain integrator, a 4PL may be thought of as a firm that “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.

Expected Growth in Customers’ Use of 3PL Services: One way to look at the future plans for
outsourcing is to ask users of 3PL services to estimate the expected three- to five-year growth
rate of outsourcing expenditures as a percent of overall logistics expenditures.

Logistics Outsourcing Model for the Future: Figure 4-13 suggests a possible future direction
for the further development of logistics outsourcing models. Proprietary provision of logistics
services, or insourcing, at the bottom of the diagram, the model evolves through several
successive stages. Included are basic services (e.g., transportation, warehousing, etc.), value-
added or third-party logistics services, lead logistics or 4PL services, and advanced services.

SUMMARY

 The two most basic types of supply chain relationships are “vertical” (e.g., buyer-seller)
and “horizontal” (e.g., parallel or cooperating).

 In terms of intensity of involvement, interfirm relationships may span from transactional to

relational and may take the form of vendor, partner, and strategic alliances.

 There are six steps in the development and implementation of successful relationships.
These six steps are critical to the formation and success of supply chain relationships.

 Collaborative relationships, both vertical and horizontal, have been identified as highly
useful to the achievement of long-term supply chain objectives. The “Seven Immutable Laws
of Collaborative Logistics” provide a framework for the development of effective supply chain
relationships.
 Third-party logistics providers may be thought of as an “external supplier that per-forms all
or part of a company’s logistics functions.” It is desirable that these suppliers provide multiple
services, and that these services are integrated in the way they are managed and delivered.

 The several types of 3PLs are transportation-based, warehouse/distribution-based,

forwarder-based, financial-based, and information-based suppliers.

 Based on the results of a comprehensive study of users of 3PL services in the United States,
over 70 percent of the firms studied are, to some extent, users of 3PL services.

 User experience suggests a broad range of 3PL services utilized; and the most prevalent are
transportation, warehousing, customs clearance and brokerage, and forwarding.

 While nonusers of 3PL services have their reasons to justify their decision, these same
reasons are sometimes cited by users as justification for using a 3PL.

 Customers have significant IT-based requirements of their 3PL providers, and they feel that
the 3PLs are attaching a priority to respond to these requirements.

 Approximately two-thirds of the customers suggest 3PL involvement in their global supply
chain activities.

 Although most customers indicate satisfaction with existing 3PL services, there is no
shortage of suggestions for improvement.

 Customers generally have high aspirations for their strategic use of 3PLs and consider their
3PLs as keys to their supply chain success.

 There is a growing need for fourth-party logistics relationships that provide a wide range of
integrative supply chain services.