FUNDAMENTALS OF LOGISTICS

CHAPTER 13: ORGANIZATION FOR EFFECTIVE LOGISTICS PERFORMANCE

Chapter Objectives

- Introduction
- Significance of logistics in the organization
- Organizational System or Positioning
- Stages of Functional Aggregation in the Organization
- Conclusion

Introduction

Organization structure helps in creating, implementing and evaluating plans. The organization
structure gives concrete shape to the organization. Basically it is a pattern in which various
parts or components are interrelated or interconnected. It prescribes the relationship among
various positions and activities.

Logistics is generally viewed as a facilitating or support function prior to the 1950s. The
organizational logistics responsibility is dispersed all through the firm. This resulted in
duplication and waste, with fragmentation and aspects of logistics related activities were
performed without any cross-functional co-ordination. The primary idea behind functional
aggregation was done with a belief that grouping all functions of logistics into a single
organization would increase the integration.

Basically, the organizational chart for a company represents a pyramid, which gives a clear
view of how and where everyone fits and also the reporting relationships.

Logistics significance is highlighted by the following concepts:

Structural Compression: The role of the chief logistics executive is changing and this ignites
the motivation for logistical structural compression. An environment with restricted head count
as well as intensive control of assets has enabled the senior logistics manager to emerge as
an important part of the firm’s continuous move towards gaining and maintaining customer
loyalty.

Centralization/Decentralization: An enterprise is considered decentralized if their basis of

function is autonomous. Every unit would be responsible for their own logistical planning as
well as its execution. A centralized organization has the opposite policy. A central
headquarters group directs logistical planning and execution. In today’s organization, which
is information-intense, the distinction between centralization and decentralization is becoming
hazy. Recent trends have seen a shift towards centralized organizations. But with the recent
developments in distributed information processing, a centralized logistics organization is no
longer required for efficient data processing. Logistical responsibility gets pushed down the
organization, as a result. Basically, there is a direct relationship between the desired degree
of centralization and the complete nature of business operations. Customers who desire a
host of products sold by different business units of a conglomerate

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have encouraged many cross-divisional or various business units. The availability of

information technology is considered a major benefit of decentralization.

To conclude, today’s organizations, which are agile simultaneously, enjoy both centralization
and decentralization.

Fig 10: Centralized and Decentralized Structures (Source: Satish Kapoor, Purva Kansal,
2003)

Line and Staff Distinction: Traditionally, line performed or executed day-to-day operations,
while the staff was engaged in planning. Today this distinction is no longer relevant. Logistics
managers in all levels are involving themselves in both planning and operations. Direct
involvement and assumption of responsibility with regard to the reason and methodology of
performing work is the key to a leading edge practice in logistics. One of the major reasons
for the elimination of line/staff distinction is the impact of logistics information systems. A
desired balance of the nature of work for line and staff needs to be communicated which
results in an organization which reflects the total employee resources dedicated to serve
customers through maximum integration.

In line organizations, logistics activities are centralized into departments and placed under the
responsibility of a single manager. Activities are divided on the basis of importance to the
achievement of the overall organization objectives. The manager is in the operational role. In
a staff organization, functions are more of planning and measuring nature. There is not much
requirement of reassignment of people. This type of structure can be implemented in a very
short time. A drawback is the resistance from line personnel who refuse to follow the logistics
manager and opts to follow their own views. An organization to have the best of both the
structures needs to opt for staff and line function organizations. Providing a structure for
logistics reduces the conflict among various activities of physical distribution. But this leads to
an additional functional area within an organization and thus interfunctional conflict increases.

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Fig 11: Combination of Line and Staff Organizational Structure (Source: Satish Kapoor,
Purva Kansal, 2003)

Distribution planning
and control

Matrix to Horizontal Structure: Under a functional structure, logistical activities like

transportation and warehousing are grouped into clusters and authority and responsibility
create a direct relationship. The matrix model of authority and responsibility has been gaining
a lot of popularity in service organizations like consulting and public accounting. The matrix
organization’s potential has gained a lot of interest as mangers are struggling with the
challenges of process management. A technical resource group, which can be deployed
geographically in order to satisfy line-unit requirements, is required by a matrix approach. This
approach helps in sharing scarce assets and technical resources on a flexible basis. It also
reduces the duplication of skilled personnel among business units. A horizontal organization
is a modern extension of a matrix approach. While an organization is restructured, the key
issue for the logistics managers is concerned as to how innovative he can make the new
structure.

Empowerment: The main concept in empowerment is the availability as well as willingness

of senior management to freely share the relevant information. Empowerment ranges from
accommodating all requirements of an order on a single call basis to an on the spot resolution
of discrepancies of delivery. An organization that is empowered allows middle- level
management to resolve problems as well as utilization of pro-active judgement. The response
speed shows the extent to which an organization is empowered. From logistics point of view,
empowerment makes it necessary for frontline managers to be positioned in order to complete
all the aspects of their respective work. Empowerment, to be effective in an organization,
requires fully established ways as well as means of gaining differential advantage.

Teaming: A self directed work team (SDWT) has originated from the idea that multiple
viewpoints are better than the one which have a long standing in administrative practice. The
SDWT is not structured typically for any specific assignment or problem solving. From logistics
point of view, a special purpose work group can be formulated in order to facilitate the
development of a new software application or for handling a unique requirement, like selecting
a new location for distribution warehouse. A self-directed team is unique in the way

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its performance is planned and executed. The team members are empowered to perform
whatever it takes so effectively as well as efficiently perform the designated work.

Strategic and Operational structure: Position of logistics in light of other enterprise

functions. Logistics is considered as a strategic element of the overall organizational structure
or an operational element. By this, its activities are spread under various other functions i.e.,
marketing, finance and production. If it is treated as a strategic element then various activities
of logistics need to be grouped together. In the recent times, logistics has become a strategic
department equivalent to marketing, production and finance as it helps in achieving
interdepartmental objectives and also helps increase customer satisfaction.

Stages of Functional Aggregation in an Organization

Stage I Organization

During the late 1950s and 1960s an initial attempt at grouping logistical activities had
emerged. Organizations with even minimal degree of formal unification have emerged only
after the senior management has become committed to the belief that improved logistics is
the result. Two or more logistics functions have emerged, which can be operationally grouped
without changing the overall organizational hierarchy to a great extent. Such an aggregation
initially has occurred both at the staff as well as line levels of the organization. During this
initial development stage, organization units were rarely engaged in the purchasing and
physical distribution integration.

Fig 12: Stage 1 Organization (Source: Bowersox & Closs, 2004)

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Stage 2 Organization

This stage of organization has begun to evolve with the overall enterprise gaining operational
experience with logistics and cost benefits. The position of logistics has been elevated to that
of a higher organization authority and responsibility. Positioning logistics at a higher
organizational level has increased the likelihood of strategic impact. Logistics has been
managed as a core competency due to the independent status given to logistics. The stage
2 organizations have been established as it was necessary to reassign functions and position
newly created organization at a higher level within the overall enterprise structure. Though
logistics has been given a lot of importance, the concept of a fully integrated system has not
yet been achieved. An important factor for this is the lack of cross-functional logistics
information systems. Another feature here is that the integrated physical and material
management has begun to be accepted among the financial, manufacturing, and marketing
counterparts.

Fig 13: Stage 2 Organization (Source: Bowersox & Closs, 2004)

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Sub Sub Sub Sub

Functions

Stage 3 Organization

Emerged in the 1980s with the beginning of logistical renaissance. Grouping many logistical
planning and operational functions under a single authority and responsibility is the feature of
this organization.

Every area of logistics – purchasing, manufacture and physical distribution is given the
structure of a separate line operation. Operational responsibilities are well defined and thus

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it is possible to establish manufacturing support as a unit of operation similar to the purchasing

and physical distribution.

Logistical resource planning covers the full potential of management information to plan and
co-ordinate operations. Logistical resource planning facilitates integration.

Overall planning and controllership exist at the highest level of the organization. This
organization serves as a single source for guiding the efficient application of financial and
human resources right from sourcing of materials to customer delivery.

Fig 14: Stage 3 Organization (Source: Bowersox & Closs, 2004)

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Sub Functions

Logistical Operations
such as purchasing,

Manufacturing

Stage 4 Organization: A shift in the focus from function to process

A conventional organization had a vertical design. There were functions with clearly identified
tasks and within these functions there is a formal hierarchy that employees need to progress.
This approach had a shortcoming in the sense that it is inwardly focused and the primary
concentration is on the utilization of resources more than creating the outputs.

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Measuring the outputs of any business can be done only if these can be in terms of customer
satisfaction achieved at a profit. These outputs can be realized only when there is co-
ordination and co-operation horizontally across the organization. The materials and
information flows, which connect the customers with business and suppliers, have horizontal
linkages, which mirror these. These are basically the core processes of the business.

There are many challenges in managing logistics as a process. Efforts need to be focused
only on those activities, which contribute to customer value. Systems integration is required
to stimulate synergism. A shift from functional to process orientation, has both positive and
negative aspects. Positive aspects include general adoption of a process orientation builds on
the basic principles of integration. Shifting the emphasis from function to process means it will
be positioned as a chief contributor to all initiatives, which will focus on development of new
products, customer order generation, fulfillment and delivery. The negative aspect is a lesser
understanding of how the process will be performed and managed.

Stage 5 Organization Beyond Structure: Virutality and organizational transparency –

Extended enterprise.

An extended enterprise is a boundaryless organization where the internal functional barriers

are eroded favoring a horizontal process management. There is very little separation between
vendors, distributors, customers and the firm. A virtual organization exists without a formal
recognition. Basically it consists of an informal electronic network replacing the formal
hierarchical command and control in the structure. Key work teams may be linked
electronically for performing critical activities in an integrated fashion. Formal organizational
charts may not relate to the actual workflow.

Fig 15: Extended enterprise and virtual supply chain (Source: A.T.Kearney as quoted by
Martin Christopher, 2004)

Information flow

Funds Flow

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It is essential for the structure and strategy to be aligned for achieving the business objective
of superior customer service at lowest cost. A three-level framework can be adopted for
achieving this integration for a enabling a transition to a customer-oriented organization:

Conclusion

The revolution in information is making logistics managers reconsider the traditional

organizational logic. The idea of middle managers serving as guardians of information has
been replaced with a frontline workforce having access to the entire information. A continuous
redesign and re-engineering of the basic nature of work has made hierarchical organizations
modified to accommodate networking of information and self-directed work teams.

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CHAPTER 14: FINANCIAL ISSUES IN LOGISTICS PERFORMANCE

Chapter Objectives:

- Introduction
- Key Financial Metrics
- Supply Chain Performance Measures
- The Balanced Scorecard Approach
- Financial Gap Analysis
- Conclusion

The need for supply chain performance measures is to align activities and share joint
performance measurement information and to explain ‘line of sight’ within the chain. It is
required to allocate benefits and burdens resulting from financial shifts within the supply chain.

Financial performance has been the primary measure of success in most supply chains.
Financial issues also encourage cooperative behavior across corporate functions and chain.

It is required to establish dynamic supply chain performance measurements and

measurement-enabling systems to effectively manage supply chain operations and meet
financial and non-financial business objectives.
The link between efficient supply chain operations and financial performance can be deduced
by linking elements of balance sheets as well as income and cash flows to various supply
chain activities.

The criticality of feedback and reorientation makes measurement important. Setting

objectives, tolerance limits, developing action plans, allocating resources, assigning
responsibilities, implementing plans, and measuring performance for feedback and corrective
action are all part of a close looped supply chain management process

Factors, which contribute to a management’s need for new types of measures to manage,
supply chain:
 Lesser number of measures capturing the entire supply chain
 Going beyond internal metrics and taking a supply chain perspective
 Determining an interrelationship between corporate and supply chain performance
 The increasing complexity of supply chain management
 Requirement to align activities and share joint performance measurement information
for implementing strategy which helps in achieving supply chain objectives
 Encouraging co-operative behavior across corporate functions and across firms in the
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The following are the steps to develop good financial measures:

o Point-of-origin to point-of-consumption mapping of the supply chain

o Utilizing the customer-relationship management and supplier relationship management
processes to analyze links
o Develop customer and supplier P&L statements
o Re – align supply chain processes and activities to achieve performance objectives
o Compare shareholder value and market capitalization across firms with supply chain
objectives
o Replicate above steps at each link in the chain

Key Financial Metrics are as follows

Overall financial performance:

o Return on capital (investments and assets).
o Cash flow.
o Economic profit

These are further broken down into the following:

o Revenue growth
o Operating income margin (profitability)
o Capital utilization

1. Revenue growth: Revenue is the value of products and services sold. Revenue growth
measures the year-over-year percentage change in revenue. Important activities which
affect revenue are forecasting, supply chain responsiveness lead-time and availability of
new products.

2. Operating income margin (profitability): Measures the percentage of operating income

generated per unit of revenue. It is the revenue less total operating expenses, which is the
sum of the following three components.
• Cost of goods sold (COGS)
• Selling, General and Administrative Expenses
• Depreciation and Amortization
Calculated by taking the difference between percentage of cost of goods (services) sold
and percentage of selling, general and administrative expense.

3. Capital Utilization: Capital utilization can be broken down into the following: -

a) Cash operating cycle

b) Fixed asset utilization

a) Cash Operating Cycle: This is a key component of capital utilization, which measures
the number of days from the time a rupee is invested in inventory and the time it is

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converted back into cash with a profit. Cash operating cycle = Days in Inventory +
Days Sales Outstanding – Days Purchase Outstanding.

The three components are as follows:

 Days in inventory (DII): Inventory includes raw materials, work in progress and finished
goods. This measures the number of days of operations held in inventory.

 Activities in SCM that affect Days in inventory (DII) are as follows:

 Procurement: - Procurement practices like order frequency, special buys,
supplier discounts etc, have major impact on DII.
 Transportation management: - The mode of transportation affects inventory
through lead tomes, which impacts safety stocks, and inventory in transit.
 Warehouse management: Warehouse efficiency impacts Days in Inventory
through visibility and design. Poor visibility and design lead to higher inventory.
 Forecasting: A higher inventory is attributed to lower forecasting accuracy.
 Demand planning: - Better demand planning leads to lower inventory and less
capital blockage.
 Network design: More consolidated networks require less investment in
inventory.

 Days sales outstanding (DSO): Accounts receivable money owed to a company by its
customers. This measures the number of days on an average, which a company takes
to collect credit sales from its customers.

 Activities in SCM that affect DSO: -

 Fill rates: - Low fill rates always lead to higher account receivables and days
sales outstanding.
 Shipment integrity: - Poor shipment integrity leads to higher DSO.
 Invoicing accuracy: - Discrepancies and incomprehensible invoices lead to higher
DSO.
 Poor communication: - Poor communication between shipping and invoice leads
to higher DSO.
 Days purchase outstanding (DPO): Accounts payable money, which a company owes
to suppliers and vendors. This measures the number of days on an average a company
takes to pay its debts.

 Activities which affect Days Purchase Outstanding:

 Procurement terms: Procurement managers generally trade-off purchase price

for credit terms to purchase goods and services at the lowest total cost.

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 Payment practices: - Paying on the exact date of an invoice compared to fixed

date (paying quickly) impacts DPO. Paying on fixed days reduces DPO and cash
flow.

b) Fixed Asset Utilization: - Measures the amount of revenue generated per unit of currency
invested in net property, plant and equipment. It is computed by dividing Revenue by Net
property, plant and equipment. Net property, plant and equipment include assets like
manufacturing facilities, warehouses and corporate offices.

o Activities in SCM that affect fixed asset utilization: -

 Transportation management: - For a company managing its own fleet activities such
as load management, routing and scheduling impact the size of the fleet required
which is relative to shipments and in turn fixed asset utilization.
 Warehouse management: - Impacts fixed asset utilization through automation,
physical layout, and other activities.
 Network design: - Lesser investment in distribution assets is required by more
consolidated networks.
 Selective outsourcing: - Outsourcing of manufacturing, warehousing and
distribution facilities increases fixed asset utilization.

Supply Chain Performance Measures are as follows

1. The Supply Chain Council’s SCOR Model

The Supply-Chain Operations Reference-Model (SCOR) has been developed and endorsed
by the Supply Chain Council. This is a process reference model that is used as cross-
industry standard diagnostic tool in supply chain management. This enables users to
address, improve and communicate supply chain management parties within all parties in
the chain.

The SCOR model describes the business activities that are associated with all the phases
in satisfying the customer demand. This model has been very successful in providing a basis
for supply chain improvement for global projects.

This model also provides guidance about the types of metrics which might be used for
obtaining a balanced approach in measuring one’s overall supply chain. The model
advocates a set of supply chain performance measures that are a combination of cycle time,
cost, quality and asset metrics.

At the core level of the SCOR model is a four-level pyramid that guides supply chain
members on the road to integrative process improvement.

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Level One defines the scope and content for the SCOR model. This level broadly defines four
key supply chain process types (i.e., plan, source, make, deliver and return). This is the point
at which supply chain competitive objectives are established.

Plan
Processes that balance aggregate demand and supply to develop a course of action which
best meets sourcing, production and delivery requirements. Under this process the
company should assess supply resources, aggregate and prioritize demand requirements,
plan inventory, distribution requirements, production, material and rough-cut capacity of all
products and all channels. Long-term capacity and resource planning, product phase
decisions are taken in this phase.
Source
Processes that procure goods and services to meet planned or actual demand. Under this
process-sourcing infrastructure is managed. Various activities like vendor certification and
feedback, sourcing quality monitoring, vendor contracts are conducted. Also activities
involved with receiving of material such as receive, inspect, hold and issue material are
under taken here.
Make
Processes that transform products to a finished state to meet planned or actual demand.
This process is concerned with production, execution and managing “make” infrastructure.
Specifically under production execution activities like manufacturing, testing, packaging,
holding and releasing of product are undertaken here.
Deliver
Processes that provide finished goods and services for meeting planned or actual demand,
typically including order management, transportation management, and distribution
management.

Return
This consists of processes associated with returning or receiving returned products for any
reason. These processes extend into post-delivery customer support.

Level Two defines the 26 core supply chain process categories which have been established
by the Supply Chain Council with supply chain partners can jointly present their ideal or actual
operational structure. At this stage, each SCOR process can be further described by process
type:

Planning: This process aligns expected resources to meet expected demand requirements.
The planning process involves balancing aggregated demand and supply, considering
consistent planning horizon, and contributing to the supply-chain response time.

Execution: This process is triggered by planned or actual demand that changes the state of
material goods. The process involves scheduling or sequencing, transforming the product
and moving product to the next process.

Enable: This process prepares, maintains, or manages information or relationships on which

planning and execution processes rely.

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Level Three provides partners with information useful in planning and setting goals for supply
chain process improvement.

Level Four focuses on implementation of supply chain process improvement efforts.

Fig 1: SCOR Model supporting Horizontal Process Integration (Source: www.supply-

chain.org)

Return Plan
Delivery Plan
Production Plan
Sourcing Plan

2. The Logistics Scoreboard

This approach to measuring supply chain performance was developed by Logistics Resources
International, a consulting firm specializing in supply chain. The company recommends the
use of an integrated set of performance measures falling into the following general categories:

o Logistics financial performance measures (e.g., expenses and return on assets)

o Logistics productivity measures (e.g., orders shipped per hour and transport container
utilization)
o Logistics quality measures (e.g., inventory accuracy and shipment damage)
o Logistics cycle time measures (e.g., in-transit time and order entry time)

3. Activity Based Costing Technique

The Activity-Based Costing (ABC) approach was developed to overcome some of the
shortcomings of traditional accounting methods in linking financial measures to operational
performance.

The method involves breaking down activities into individual tasks or cost drivers, while
estimating the resources (i.e., time and costs) needed for each one. Costs are then allocated
based on these cost drivers rather than on traditional cost-accounting methods, such as
allocating overhead either equally or based on less-relevant cost drivers. This

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approach allows one to better assess the true productivity and costs of a supply chain
process.

Activity – based costing techniques tend to fall into one of three major categories:

Diagnostic: - Provides snapshot cost information at widely spaced intervals of typically three
to six months apart. Critically needed information such as activity costs, output costs,
resource consumption, activity consumption etc.

Reengineering: - The activity analysis attempts to identify the performance of any non- value
added activities.

Integrated cost management system: Most mature forms of activity based costing. They
differ from the above because they are updated frequently, fully relational, flexible to
changes, have automated feeds from other systems, and have on-line reporting and query
capabilities.

Fig 2: Steps in ABC Costing

4. Economic value-added Analysis (EVA)

This measure has been developed by Stern, Stewart & Co. It attempts to quantify value
created by an enterprise on the basis of operating profits in excess of capital employed
(through debt and equity financing).

Some companies are starting to use measures like EVA within their executive evaluations.
Similarly, these types of metrics can be used to measure an enterprise’s value-added

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contributions within a supply chain. Economic-value added metrics are less useful for
measuring detailed supply chain performance and more useful while assessing higher-level
executive contributions. They can be used, however, as the supply chain metrics within an
executive-level performance scorecard, and can be included in the measures recommended
as part of The Logistics Scoreboard approach.

The Balanced Scorecard Approach

Developed at the Harvard Business School, the balanced scorecard is a comprehensive, top-
down view of organizational performance with a strong focus on vision and strategy. It is
founded upon the idea that financial measurements being important for corporate
performance tend to be retrospective in nature.

Financial metrics typically tell how an enterprise has performed, but give little indication as to
how it will perform. A true balanced scorecard must include metrics that provide both historical
and future insights. Thus, a scorecard must be comprised of both leading and lagging
indicators. Leading indicators drive performance, whereas lagging indicators are actually
results of past performance. For example, in a logistics analysis system, ‘customer complaints’
is a lagging indicator, while ‘on-time delivery’ is a leading indicator.

More than just a measurement system, the Balanced Scorecard is a management system that
channels core competencies and emerging technologies toward strategic goals and business
objectives. Four categories or “perspectives” to align individual, organizational and cross-
departmental initiatives for meeting objectives are utilized.

To achieve ‘balance’ the methodology prescribes the strategic assessment of four

perspectives: financial, customer, internal, and innovation and learning.
 Financial perspective
 Customer perspective
 Internal business perspective
 Innovative and learning perspective

The balanced scorecard approach compels supply chain managers to abandon the belief that
traditional financial and operational measures are sufficient for strategic supply chain analysis.
To develop an effective scorecard, management defines the organization’s vision and goals.
Next, while keeping organizational structure in mind, they must decide which supply chain
strategies will lead to successful goal attainment. These strategies are then translated into
specific tactical performance driving activities. Finally, metrics are established for each
activity. Once a vision, and subsequent strategy have been developed, the individual metrics
– or vital signs –are integrated at relevant places.

The four main key elements in SCM are Supply Chain Operational Efficiency, Optimization of
Supply Chain Cost, Customer Satisfaction and Continuous Improvement of Supply Chains.
On the other hand the four key perspectives in Balanced Scorecard are Internal
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Business Perspective, Financial Perspective, Customer Perspective and Learning and

Growth perspective. Henceforth there is an opportunity to integrate and measure the four key
elements of Supply Chain through the four perspectives of Balanced Scorecard.

1. Supply Chain efficiencies of waste reduction, time compression, flexible response and
unit cost reduction directly correspond to the Internal Business perspective of Supply
Chain cost of ownership, Supply Chain cycle efficiency, Number of choices/Average
response time, Percentage of Supply Chain target costs achieved respectively.
2. The Customer benefit goals of improved product/service quality, improved timeliness,
improved flexibility and improved value translate into customer benefit measure of
number of customer contact points, relative customer order response time, customer
perception of response flexibility and customer perception of derived value of the
Balanced Scorecard.
3. The third dimension of financial goals of higher profit margins, improved cash flow,
revenue growth and high return on assets translate into the metrics of profit margin by
supply chain partner, cash to cash cycle, customer growth and profitability and return on
supply chain assets respectively which is the Financial Perspective of the Balanced
Scorecard.
4. Finally the supply chain improvement efficiencies of product/process innovation,
partnership management, information flow and threats and substitutes is represented by
the metrics of product finalization points, product category commitment ratio, number of
shared data area and local data set and performance trajectories of competing
technologies.

The above approach illustrates how measures and metrics in the areas of planning, sourcing,
make/assembly decisions, delivery, and customer service level, have been integrated
successfully in the balanced scorecard framework.

The approach has many advantages, in terms of emphasizing the inter-functional and inter- firm
nature of supply chains and recognizing the need to ascertain the extent to which firms
effectively work together and the extent to which functions must be coordinated and integrated.
Also, the framework increases the chance that a “balanced” management approach is indeed
practiced within firms and among the supply chain partners.

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Fig 3: Balanced Scorecard

Financial

Internal
Customer Vision and
Business
Strategy Process

Learning and
Growth

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Fig 4: Linking Supply Chain Management Framework to the Balanced Scorecard (Source:
Publication on Balanced Score Card tool as Supply Chain Measure, Dr N. Chandrasekaran &
Varun Kumar Jha)

SCM Goals
 Waste Reduction
Business Process
 Time Compression
Perspective
 Flexible response
 Unit Cost Reduction

Customer Benefits
 Improved product or
service quality Customer Perspective
 Improved timeliness
 Improved flexibility
 Improved value

Financial Benefits
 Higher profit margin
 Improved cash flows Financial Perspective
 Revenue growth
 Higher return on assets

SCM Improvement
 Product/process
innovation Learning and Growth
 Partnership management Perspective
 Information flows
 Threats/substitutes

Financial Gap Analysis:

Though supply chain management has the potential to improve the three drivers of financial
performance namely growth, profitability and capital utilization, financial gaps still arise.

A number of reasons for financial gaps exist a few of which are as follows:

 Many senior level executives continue to view SCM as a tactical back-room cost-
center activity. Thus it is not being given so much of importance.

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 SCM drives performance throughout the enterprise. Thus, SCM strategic and tactical
decisions cannot be made in a vacuum.
 Lack of appropriate performance measurement
 Proper Information Systems not in place
 Lack of collaboration with supply chain partners.

Process of calculating gaps:

Step 1: - Calculate value of gaps in key financial metrics

SCM drives key financial metrics like revenue growth, percentage cost of goods sold, and
days in inventory (DII). The values of the gaps may be based on benchmarks from
competitors, industry aggregates, historical performance, and aspirations derived from
business intelligence tools. They can be measured using a variety of value-based financial
measures such as free cash flow, economic profit and stock price.

The values of the gaps are an effective means of communicating to the organization the need
or change and the potential value of improved SCM. Like all financial analysis, great caution
should be used when interpreting the results of the gap analysis.

Techniques for analyzing gaps:

The following are the techniques for analyzing gaps:

Benchmarks
Target Company’s measures are compared to other companies, which may be from inside or
outside the Target Company’s industry. Additional benchmarks could be from industry or other
aggregates.

Percentage Gap Analysis

Target Company’s performance is measured in percentage terms.

Valuing the gap

Each gap is converted into an annual cash flow measure. This measure by how much
annual cash flow would increase if the gap were completely closed.

The gaps are also converted into a stock price benefit if Target Company is publicly traded.

The size of the gaps provides a guide to which ones to be attended to first. The largest gaps
and the ones to examine first are revenue growth, operating income margin and days in
inventory

Step 2. Link gaps in financial metrics to SCM business processes and strategies
The next step in this approach is to link gaps in financial metrics to SCM-related business
processes and strategies such as sales mix, pricing strategies and outsourcing trends.

For example, a gap in profitability related to percentage cost of goods sold can be mapped to
an SCM-related process such as distribution and logistics, which, in turn, is linked to a key
activity such as warehouse management. Warehouse management is related to tasks such

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as receiving, put-away, pick, pack, and ship, and to key performance indicators (KPIs) such
as labor costs, average time per pick, and pick accuracy. This mapping provides a better
understanding of the cause-and-effect relationships between SCM business activities and
financial performance.

Step 3.: Map SCM Initiatives to Financial Performance Gaps

Linking gaps in financial metrics to SCM business processes and strategies are used as the
foundation for exploring SCM solutions that improve the SCM – related business processes
and strategies underlying the gaps in the key financial metrics. This provides a logical
methodology for identifying specific areas of opportunity. It also provides a disciplined
approach for estimating the monetary benefits and understanding of the critical success
factors and risks of SCM solutions.

Improvements in SCM business processes and strategies typically cannot completely close
financial performance gap. But this can make a significant contribution for many companies.

Fig 5: Financial gap analysis

Financial
Performance Gaps

Operating Cash Operating Human

Growth Cycle
Capital
Utilization

Business Strategy Gaps Business Process Gaps

SCM Initiatives to Close Gaps

Conclusion

Organizations need to maximize profitability at each link in order to increase the overall
profitability. It is not enough for management to just identify metrics, but they have to be
developed for their situation. In fact standard metrics can be developed in spite of different
supply chain settings. Most of the performance measures called supply chain metrics are
nothing more than logistics measures that have an internal focus and do not capture how the
firm drives value or profitability in the supply chain. The goal should not be to identify specific
metrics, but to provide the framework that allows management to develop the best

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metrics for their situation. By maximizing profitability in each link, supply chain performance
migrates towards management’s objectives and maximizes performance for the whole.

It may be possible to conclude that standard metrics can be developed irrespective of

the different supply chain settings.

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CHAPTER 15: INTEGRATED LOGISTICS

Chapter Objectives:

Introduction
Imperatives for successful integrated logistics
Need for Integration
Activity Centers
Barriers to Internal Integration
Hierarchy of Logistics Integration
Complete Systems Perspective
Conclusion

Logistics links an enterprise with its customers and suppliers. Information flows through the
enterprise from and to customers in the form of sales activity, forecasts and orders. Such
information is refined into specific manufacturing and purchasing plans. A value-added flow
of inventory is initiated as products and materials are procured. This ultimately results in
transfer of ownership of finished products to customers.

Supply chain integration focuses on defining key linkages across functional areas both within
and among companies partnering along a supply chain. Integrated logistics is a process-
oriented integrated approach to procure, produce, and deliver products and services to
customers.

Fig 6: Logistics Management

Outbound Logistics

Inventory

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The following are the imperatives for successful integrated logistics:

 New Culture: Enabling employees to adapt to the new operating realities in cross-supply
chain collaboration are a key component of integrated logistics. Core capability teams,
which consist of professionals, must be focused on key integrated logistics activities,
which synchronize activities across the entire supply chain. Senior executives entrusted
with the task of integration and synchronization has to articulate the strategy for a new
cross supply chain culture, which will be shared by all partners.

 Agreements on cost-sharing and revenue-sharing: Building a benefit structure balancing

rewards with each partner’s understanding of their contribution is important for maintaining
close partnering relationships. A generally agreed upon framework for equitable revenue
and cost sharing amongst all participants is necessary. Analyzing the supply chain
economics examines the role and costs of each of the different participants of the supply
chain. Detailed practices and performance metrics will help in understanding the
participant’s competitive advantage.

 Establish Transparency: Establishing of an integrated logistics system is challenged by

participants’ unwillingness to forgo any degree of control, which is a symptom of lack of
trust. This lack of trust will hinder acceptance of integrated logistics while lack of standard
communication and business processes will hinder implementation.

Need for Integration

A significant feature of a responsive organization is the priority the organization attaches for
integration. Not only integration within the organization but also integration upstream with
suppliers and downstream with distributors and customers is important. There is also a lot of
emphasis on linking organizations through information. Information systems nowadays drive
companies to reconsider their relationships with customers and suppliers. Process integration
is achieved through logistics integration, which means both upstream and downstream
integration. The objective in an extended enterprise is creation of an ‘end-to- end’ process so
that innovative products are created and delivered at higher levels of quality and in lesser time
frame to markets. This is achieved through the following means:

Rationalization of supply base: Companies try to rationalize their supply base by reducing the
number of suppliers. In fact, companies are looking at these suppliers to provide systems
rather than components. Companies are basically trying to rationalize their supply base. For
example: the automotive sector is trying to integrate tier 1, tier 2 and tier 3 suppliers.

Centralized inventory: The extended enterprise not only includes upstream suppliers but also
the downstream flow of finished products through dealer networks. Traditionally, when dealers
did not have the product demanded by customers, they used to swap this with another dealer
who had that product variety in stock. Today, enterprises have centralized inventory and also
take responsibility for its management. The dealers have only demonstration models; they
have on-line access of the enterprise supply system and can give the customer an immediate
confirmation about the availability of the product of their

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choice and when it can be delivered. For those products not available from stock, dealers
enter order directly into the production schedule and the product required is made to order.

Integrated Information Systems: The benefits of a fully transparent information system are
being considered with the use of Electronic Data Interchange (EDI) together with the growing
acceptance of ‘just-in-time’ philosophy. Suppliers can now manage the flow of materials into
the plant on the basis of advance notification of a company’s production schedule. With
integrated information systems, there are no manual orders, invoices or delivery notes. A
single source of information provides the basis for a timely physical response, which
automatically triggers payment to the supplier.

Supplier Development Programmes: Supplier development has replaced the traditional

purchasing function. A cross functional team of specialists work closely with suppliers and
seek improvements in supplier processes as well as in the interfaces with the enterprise’s
processes.

Supplier involvement: Innovations in industries are supplier originated. By bringing suppliers

closer to the process of new development, it has been found that innovation can be embodied
in new products continually and simpler cost effective designs can be created.

Activity Centers in integrated logistics

Refers to the activities that make up business logistics. These are studied in the following two
categories:

Key Activity centers: These are the activities forming the core of logistics function and also
take place in every logistics channel. These are as follows:

Customer Service Standards: The customer has become more and more demanding in overall
performance terms. The manufacturer needs to create a competitive advantage on the basis
of customer-service. Co-operating with marketing to determine customer needs and wants
determine the customer response to service and set customer levels.

Transportation: This is one of the most expensive activity centers in logistics. It is concerned
with movement of raw materials to the plant and semi-finished goods or finished goods to the
market. Any problems in the transportation service can result in the company holding inventory
for more days than planned for. An efficient transportation planning and management is a pre-
requisite function of logistics.

Inventory Management: The operational aspects of logistical management are concerned with
movement and storage of materials and finished goods. Logistics operations start with the
initial shipment of material from a supplier and finalized when a manufactured or processed
product is delivered to a final customer. As material gains value at every step of its conversion
into finished inventory, work-in-progress inventory needs to be moved to support final
assembly for supporting manufacturing. A meaningful value-addition is done only when the
final ownership is transferred to customers wherever specified. For better understanding of
the inventory it is divided into the following three areas:

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 Physical Distribution: Concerns with movement of a finished product to customers. Here,

customer is the final destination of a marketing channel. Availability of a product is a key
part in the marketing efforts of every participant. A major part of the overall marketing effort
will be lost unless a proper assortment of products is delivered efficiently wherever
needed. Time and space of the customer service becomes an integral part of marketing
through the process of physical distribution. The common feature of all physical
distribution systems is that they link manufacturers, wholesalers, and retailers into
marketing channels that provide product availability as a key aspect of the overall
marketing process.

 Manufacturing Support: This area focuses on managing work-in-progress inventory as it

flows between various stages of manufacturing. The overall concern of manufacturing
support is the method by which production occurs. Manufacturing support is different when
compared to physical distribution. Physical distribution attempts servicing the desires of
customers and thus needs to accommodate uncertainty of consumer and industrial
demand. Manufacturing support involves movement requirements under the control of the
manufacturing organization.

 Procurement: This area focuses on with purchasing and arranging the inbound movement
of materials, parts or finished goods from suppliers to assembly plants or retail stores. It
involves availability of the desired material wherever needed.

All the above three areas of inventory flow in logistics overlap in a typical enterprise.
Looking at each as an integral part of the overall value-adding process gives an
opportunity for capitalizing on the unique attributes of everything while facilitating the
overall process. A major concern area for integrated logistics is co-ordination of overall
value added movement. All these three areas combine to provide an integrated
management of materials, work-in-progress and finished products moving between
various locations.

Information Flow and Order Processing: Completing activities of the order cycle are very
important in customer service. A lot of management attention is being given to activities
involved in processing orders. An effective order processing system should have an effective
order status reporting system also.

Support Activity Centers: These are the activity centers necessary for achieving synergy in
key activity centers. This category includes:

Warehousing: Storing goods that are waiting for sale. This function is necessary as there is
rarely a match between production and consumption. Organizations choose between
warehouses and distribution centers. Distribution centers are larger, automated warehouses
designed to receive goods from various plants and suppliers.

Material Handling: Efficient material handling methods in warehouses can improve customer
satisfaction by decreasing the damage in handling, maintaining the quality of storage,
facilitating order processing and moving the right goods at the right time to make them
available to the right customers. Costs are also reduced through proper material handling
techniques.

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Information: Information collection, storage and handling are necessary for achieving higher
customer service. Information enables reducing the gap between actual and benchmark and
also assists in strategy formulation – a key activity in logistics.

Packaging: Packaging protects the goods and acts as a source of information for customers.
It is also used as a marketing tool to attract customers. The concept of packaging has paved
way to ‘Unitization’, where various package are handled together as one unit. Example:
Palletization.

Fig 7: Logistics Integration (Source: Bowersox & Closs, 2004)

Customers Physical Manufacturing Procurement Suppliers

Support

Barriers to Internal Integration

Implementing internal logistics integration is not possible in a vacuum. There are certain
barriers to integration, which are as follows:

Organization Structure: The traditional organization structure prevents implementation of

any cross-functional process being implemented. Traditional structure is to divide authority
and responsibility according to functional work. Organizations are generally concerned with
achievement of functional excellence and this structure can hinder success of the goal of
integration – which is co-operation among functional areas. Also, managers are usually
rewarded for achieving functional excellence. Successful integration of logistics process
requires managers to look beyond their organizational structure and facilitate cross- functional
co-ordination. This may not be possible by creating a new organization structure. Thus,
regardless of whether organizational structure is realigned or not, organizations dealing with
cross-functional matters are required for successful integration of processes.

Ownership of Inventory: Inventory can facilitate a specific function to achieve its mission. A
traditional approach to ownership of inventory is to maintain adequate supply for gaining ease
against demand and operational uncertainty. Availability of inventory also results in economy
of scale. While such practices create benefits, they also have a related cost. The critical issue
is cost-benefit relationship.

Measurement systems: Traditional measurement systems make cross-functional co-

ordination difficult. A new scorecard needs to be developed for facilitating integration of
logistics functions. The measurement system must facilitate logistics managers to view their
specific functions as part of a process and not just stand-alone activities.

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Transfer of knowledge: Ability to share experience is an additional barrier. Failure to transfer

information or knowledge tends to nurture functional orientation by development of specialized
employees. Many firms also fail to develop procedures and systems to transfer cross-
functional knowledge. When work is done in a series of processes and involves many
employees, transfer of this type of knowledge and experience is difficult.

Information Technology: IT acts as a key resource to achieve integration. IT applications

need to be designed along organizational lines. Databases are mostly limited to specific
functions are not easily accessed on a cross-functional basis. Data warehouses have
emerged due to the need to share information. Schemes to transfer information are required
to be developed as existing applications can serve as a barrier to process integration as critical
data cannot be shared readily.

Hierarchy of logistics integration:

 Competencies: For long-term survival, a wide variety of competencies are required. A firm
will excel in a few of these, which are referred to as core competencies.

 Performance Cycle: A structure integrating all aspects of logistical operations linking

procurement, manufacturing, support and physical distribution.

 Function: These are traditional areas of logistics specialization, which are essential for
operational excellence. They need to be viewed as integral parts of the overall logistical
competency and not as unique areas of performance.

 Sub functions: Specific jobs within functions, which need to be performed within functions
for satisfying logistical requirements.

Complete Systems Perspective for Logistics

This concept is a cost-service integration, backed by an integrated logistics network, which is

aimed at minimizing the total cost of distribution at a given level of customer service. The main
components are as follows:

Perspective of total cost: The cost of logistics includes various logistics activities such as cost
of planning and managing range of logistics activities such as transportation, finished goods
distribution, receipt, inspection and storage of goods etc. All functions necessary for
converting inventories and satisfying customers have a cost. An individual cost control
perspective should be avoided and the overall cost of all logistics elements need to be
considered simultaneously. This is referred to as tackling the cost of logistics as a whole, while
trying to tackle the primary function of logistics system i.e. to perform the function assigned to
the system in a most cost effective manner. In fact, the total cost perspective is an important
component of logistics.

System Perspective: This concept is an extension of the logistics concept and is a key for
managing logistics function. This total system perspective of logistics is time consuming but
results in reduction of inefficient logistics systems as a whole. The total system of logistics
also has a number of sub-systems such as transportation, warehousing, inventory

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management etc. A number of techniques and objectives that are stated beforehand have
been designed so that each of these activities is conducted in an optimal manner. A proper
balance between these activity centers is necessary to reduce the total cost of logistics.

Trade-offs: This refers to the evaluation of the cost of each system component with the
objective of determining a combination of components providing a minimum total cost for a
specified level of customer service. Trade-off takes place when management incurs cost in a
particular activity center as part of the strategy to achieve benefits from another activity center.

Intra – activity trade-off occurs when trade-offs occur within an individual activity of the
logistics system. An example can be a decision to use one’s own transportation instead of a
public transportation.

Inter-activity trade-off occurs between various activities of logistics system. Management

prepares itself to bear the increased cost of one activity center so as to get the profits from
another. For example, using airfreight can increase transportation cost but would result in a
reduced inventory and warehousing cost.

Inter-functional trade-off occurs between the logistics system and other functional areas of the
firm. A trade-off is made between various functions. For example, the packaging structure for
a company was changed from conventional vacuum packs to a different shape to suit the
structure of the product.

Inter-organizational trade-off is a category between manufacturer and other organizations

involved in creating utilities for the manufacturer. The manufacturer has to be concerned with
the members of the distribution channel and should try maintaining relations with these
members.

Managing the supply chain as a network

The firm is at the center of an inter-dependant network that competes as an integrated supply
chain against the other supply chains. Managing such a competitive structure requires various
skills and priorities. A focus on the network management as well as upon internal processes
is necessary to achieve market leadership. The following are the most significant issues in
such an environment:

 Collective development of strategy: In the traditional view, members of a supply chain

never considered themselves as part of a marketing network and so never shared their
strategic thinking with each other. A higher level of joint strategy development is required
for network competition to be truly effective. Network members must collectively agree
to strategic goals for the network and the means of attaining them.

 Open communication: The advent of information technology is making the exchange of

information between supply chain partners very easy and this has been one of the most
powerful drivers of change in the marketing networks.

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 Benefits for partners: There is a growing realization between network partners for co-
operation that usually leads to improved performance. Another issue is how the results
of that improved performance can be shared amongst the various players. All partners
must benefit and be better off due to co-operation.

Conclusion

A key to logistics integration is the transparent flow of information from one end of the chain
to the other. Supply chain partners are able to respond more rapidly to known demand with
lesser inventory and hence lower cost by sharing information. A responsive supply chain is
highly integrated. They integrate internally across functions and externally integrate with
suppliers and downstream customers. A lot of companies are attempting to become more
agile and responsive due to an encroached functional structure. They have a fragmented
approach to the marketplace and thus manage functions rather than processes. It is also
difficult for firms like these to reflect external integration when they lack internal integration.
Companies that have got over this are now looking to design close linkages with their supply
chain partners.

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CHAPTER 16: ROLE OF 3PL & 4PL

Chapter Objectives:

- Introduction
- First Party Logistics
- Second Party Logistics
- Third Party Logistics: Functions, Advantages, Essential characteristics
- Fourth Party Logistics: Features, Advantages
- Selection of a Service Provider
- Key Trends in Logistics Outsourcing

Logistics involves getting the right goods to right place at the right time at the right cost in the
right condition. To survive in today’s highly competitive markets, companies are focusing on
their core competencies to adopt outsourcing as a strategic solution to improve quality of
service and also reduce cost of key and non-core activities. An accepted trend today is to form
a collaborative relationship with logistics service providers on the basis of the backbone of
information technology, for integrating knowledge based supply chain.

Business organizations across the world are struggling for competitiveness for both growth
and survival. Customers are demanding more and more value-added services from
prospective suppliers for the amount spent. Business organizations have started reviewing
business processes and realized that cost cutting and differentiating in value delivery systems
is essential. Focusing on core business areas can be done through outsourcing non-core
operations to experts in the field.

Logistics operations are an area of specialized function and a majority of marketing and
manufacturing organizations do not have the requisite expertise in housed. Thus, there is a
requirement for outsourcing operations to experts in the field. It has become an accepted
practice to use strategic partnerships that are known as ‘third party service providers’ in
integrated logistics.

Most companies consider using the services of a 3PL in their supply chain operations when
they realize that it is essential in providing efficient and effective competitive customer service
which requires huge investment and is difficult to develop on their own.

Outsourcing has the following advantages:

1. Focus on core competencies

 Management is freed from repetitive/mundane tasks, reduces investment and
generates cash.
 Organization can concentrate on core competencies.

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2. Organizations can adopt “best-in –class” practices.

 Vendors have considerable strength and focus on outsourced processes. To
remain competitive, they are continuously looking to improvise their services and
adopt best practices to make them more efficient.
 This helps organizations achieve faster, efficient, effective and more economical
business process.

3. Organizations become more competitive

 Can respond more effectively to changing demands.
 Allows companies to gain more scalability.
 Outsourced activities allow companies to have greater leverage in responding to
changes and to gain market access, expand.

4. Reduced cost and advanced technologies

 Vendors often implement latest technologies to make their processes and services.
Companies can take advantage of these technologies, which they might not be
always able to do if they were conducting activity in-house.
 Vendor’s economies of scale helps drive down overall cost in the system, thus
enabling companies to realize more productivity and efficiency.

Fig 8:Difference between various logistics service providers

Managing the entire

supply chain
4 PL
Managing complex
Supply chains
3 PL

Traditional transportation
2 PL and warehousing function

Own operating of
1 PL logistics by producer

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First Party Logistics

First Party Logistics are companies, which do their own logistics activities.

Second Party Logistics

Second party logistics people provide their own assets such as truck owners, warehouse
operators etc.

Third Party Logistics

Third party Logistics Provider (3PL) performs logistics services on behalf of another company.
3PLs provide the management skills along with the physical assets, labor, and systems
technology to provide professional logistics services, relieving companies of the responsibility
of performing these services themselves. 3PL's typically can provide transportation,
warehousing, pool distribution, management consulting, logistics optimization, freight
forwarding, transportation management, rate negotiations, cost evaluations, and contract
management services.

3PL is the function by which the owner of goods outsource various elements of the supply
chain to one 3PL company that can perform the management function of the clients inbound
freight, customs, warehousing, order fulfillment, distribution, and outbound freight to the clients
customers. 3PL is a service provider who gives service for one or more portfolios of services
in stand alone or integrated manner with own or leased or contracted assets or services.

A 3PL can also be described as a contract logistics service provider who manage
inventory/material flow between companies and encompasses all processes and activities
such as transportation, warehousing, documentation.

Common 3 PL functions are as follows:

1. Transportation Management
 3PLs fleet (or alliance partners) offer optimized network to serve their customers.
 3PLs plan load management, routing, equipment and driver management by
Shipment Management System (SMS).
 SMS can be effectively integrated with Warehouse Management Software (WMS),
to provide integrated logistics solutions concepts such as multi-stop workload or less
than truckload which are often used to serve customers better.
 Multi-vendor consolidation reduces overall costs. Full truckload economies can be
used to combine freight from different vendor to common destinations.

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2. Warehouse management
 3PLs run and manage warehouses using Warehouse Management Systems, radio
frequency scanning, and bar code labeling
 3PLs manage and track the movement of goods from initial receipt to outbound
shipment. Real time, periodic and accurate information can be provided to manage
inventory and demand better.
 Additional services such as advanced shipment notifications can be generated to inform
the retail partners in the supply chain.

3. Packaging
 3PLs often have ability to do final product packaging in their warehouse, thus eliminating
the need to ship product to off site packaging companies. This in turn means reduced
product handling, reduced cycle time and reduced costs.
 3PLs can offer variety of packaging services like custom pallets, display shippers, inserts
and coupons, labeling and printing, repackaging / conversion and also wrapping and
bundling.

Advantages to companies by using 3PL services: -

 Focus on core competencies: Outsourcing enables companies to focus on the core
businesses and strengths. The companies limited resources can be saved and the
company can remain focused on what it can do best.
 Lower Investment: Organizations can outsource and save a large amount required for
building logistics assets, networks and facilities such as warehouses. As an alternative
for these investments, the companies can outsource these requirements by outsourcing
and investing in their core processes.
 Enhanced technological capabilities and flexibility: Utilization of technological
capabilities has enhanced the efficiency of logistics operations. But, it may not be
feasible always for companies to invest in newer systems or upgrade their existing
systems. However, deploying third party logistics providers can insure against such
technological changes. 3 PL often invest in such technologies for providing competitive
services.
 Best practices: Outsourcing logistics to third party logistics enables companies to
implement best practices and also allows organizations to achieve best performance.

Essential characteristics of a 3 PL

 Solutions Orientation
 Logistics Know-how
 IT Capability
 Management and organizational Skill
 Innovativeness
 Independent and best of breed approach

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Fourth Party Logistics

Information technology plays a key role in logistics and supply chain management. In fact
logistics integration, which is a complex exercise, is completely dependent on IT support.
Third party logistic suppliers provide logistics solutions to clients on the basis of their domain
knowledge they have acquired over the years. 4 PL companies provide logistics solutions
built around the domain knowledge provided by third party logistics companies. Thus 4 PLs
have emerged out of the vacuum created by 3PLs.

Fourth Party Logistics (4PL) is the integration of all companies involved along the supply
chain. 4PL is the planning, steering and controlling of all logistic procedures (for example
flow of information, material and capital) by one service provider with long-term strategic
objectives. Fourth-party logistics (4PL) has evolved as a breakthrough supply chain solution
comprehensively integrating the competencies of third party logistics (3PL) providers,
leading edge consulting firms and technology providers.

4 PLs see the process and what is required for the process to succeed. A 4PL is a supply
chain manager & enabler who assemblies and manages resources, build capabilities and
technology with those of complimentary service providers. They act as the first point for
delivering unique and comprehensive supply chain solutions. 4PL leverages combined
capabilities of management consulting and 3PLs. They act as an integrator assembling the
resources, capabilities, and technology of their own organization and other organizations to
design, build and run comprehensive supply chain solutions. 4 PL is an emerging trend and
it is a complex model and offers greater benefits in terms of economies of scale.

Features of a 4 PL:

o Covers the customer’s entire supply chain

o Collaboration between two or more logistics service providers on a resource-sharing
basis for extending logistics solutions to a common customer.
o Flexible arrangements

The following are the requirements of a 4 PL:

 3PL cost advantage are one time achieved through the contract process
 Performance and competency across the logistics network
 Logistics planning and consulting
 IT support
 Operative and administrative logistics functions
 Customer Relationship Management
 Linking analytical capabilities with strong implementation and operational capabilities
 Building a high level of customer confidence in outsourcing and its solutions
 Offering transparent and flexible win-win contracts

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Advantages to companies using 4PL services: -

 Reduced inventory and cycle time.

 Improved delivery performance.
 Lower supply chain cost.
 Improved order fulfillment, capacity utilization.
 Overall productivity.

4 PL attempts to do the following to create value by:

 Reduction of complexity/eliminate redundancy.

 Economics of scale
 Tailor made solutions
 Improved customer service at reduced cost.
 Access to new technology.

Selection of a Service Provider

Selection of a service provider is a strategic one and has long-term effects upon the customer
service capabilities of an organization.

Major issues to be considered before deciding on a 3PL or 4PL partner:

 Switching cost: Outsourcing logistics services results in reorganizing the existing assets
of a company in tuning with the working methodology of the service provider. It includes
activities such as management of existing assets, fully or partly to the service provider,
deploying existing assets on lease to service provider and divesting existing assets and
completely switching over to the usage of a logistics infrastructure by the service provider.
A high degree of risk is involved in each of the activities. Though outsourcing reduces cost
substantially, switching over to other service providers in terms of poor customer service
during the period of transition and stabilizing new system will cause more loss.

 Degree of control: The firm, which is outsourcing needs to be particular about the degree
of control over activities of the service provider, for getting the desired service by the end
user. It is not possible to have direct control over the activities of the service provider but
the service provider should ensure timely availability of information to monitor activities.

 Degree of outsourcing: The following factors influence an organization’s logistics

outsourcing in part or in total:
- Existing logistics infrastructure of the company
- Policy of management for third party involvement
- Anticipated benefits
- Product portfolio of the company
The areas of responsibility and authority both at the outsourcer’s and service
provider’s end must be clearly differentiated.

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 Channelizing logistics services to suit the needs of channel partners: Logistics

service standards are to be quantified as per requirements of channel members who
service the end users or consumers in turn. Logistics acts as a key enabler for efficient
channel management. Channel and logistics management must go together for effective
and efficient physical distribution system.

 Interface: Suitable co-ordination through an intelligent interface is necessary for proper

working of two organizations together in partnership. A match of cultures is essential.
Proper interface between employees of both organizations is very important for
formulating policies and guidelines for smooth operations of the outsourcing firm and
service provider. Mismatch in technologies used at the two ends may result in problems
too. Differences in technologies used in communication, material handling, storage,
inventory management may cause delays and errors resulting in performance below the
expected level.

Key Trends in Logistics Outsourcing

The following are some of the important observations from logistics outsourcing

1. Adoption of Internet, ERP, SCP and SCE technologies continues to accelerate

 Many ERP systems are used for financials, payroll and HR, but not for core operations.
 Most ERP systems lack logistics service provider-specific functionality forcing the use
of customised solutions.
 Need to increase intelligence and productivity of ERP by adding Internet communication
technology, Supply Chain Planning and Supply Chain Execution components
 ROI from these technologies is often unclear.

2. Global visibility has now become a basic requirement

 Customers desiring to decrease transport costs, increase delivery reliability and cross-
docking activity, and shorten cycle times are demanding end-to-end visibility of goods.
For example: Shippers not only want to be able to track their goods via the Internet but
also to receive automatic notification when a shipment is deviating from its schedule.
 Logistics service providers need to build or buy Inventory Visibility in the Supply Chain
to meet this requirement.

3. Most carriers and 3PLs in India are unprepared to move from a transaction-based
customer relationship to strategic supply chain partnerships with customers.

 Shippers expect their logistics providers to help them improve supply chain processes
and increase revenues.

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 Customers will succeed via mass customisation and Web commerce initiatives.
Logistics suppliers need to respond to such initiatives.
 SCM IT tools will help in facilitating of cross-docking, delayed allocation, in-transit
merge, postponed assembly and other value-added services, increasing their
customers' supply chain agility and velocity.
 Innovators will use IT to move beyond tactical logistics to influence product and
procurement strategies.

4. Ability of matching market Demand with available Supply

 Leveraging suppliers’ distribution systems and collaborating closely with them to

ensure seamless information flow across the supply chain.
 Using tactical initiatives such as sales promotions and pricing changes to shift
demand towards in-stock products and accessories.
 Usage of scientific tools for better demand forecasting.

5. Outsourcing of non-core activities

 Increasing number of organisations are now outsourcing their non-core activities to

specialist logistics service providers for whom it’s their core business.
 Past cost centres have now become present profit centres and the focus has turned
to innovation and continuous improvement.

Fig 9: A holistic view of 3 PL and 4 PL

3 PL Service Providers

- Greater Functional Integration

- Broader Operational Autonomy

Business

4 PL 3 PL Providers

IT Service Providers

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Conclusion

Third party logistics service providers have the core competency in a particular area of
logistics such as warehousing, transportation, inventory management etc who provide
comprehensive logistics service solutions for the entire supply chain. A new and emerging
trend in outsourcing is the Fourth Party Logistics who assembles and manages the resources,
capabilities and technology of its own organization with those of complimentary service
providers to deliver a comprehensive supply chain solution. A management’s decision to
outsource can be justified by its value proposition or the benefits. By outsourcing, the
company gains on many fronts such as cost reduction, higher return on investments, utilization
of manpower for more productive work and a clearer focus on core competency area.

Bibliography

a) Bowersox and Closs, Logistical Management, the Integrated Supply Chain Process,
Tata McGraw Hill, New York, 2000.
b) Burt, Dobler, Starling, “World Class Supply Management, the key to supply chain
management”, Tata McGraw Hill, New York, 2003.
c) Martin Christopher, “Logistics and Supply Chain Management, Strategies for Reducing
Cost and Improving Service”, Pearson, New Delhi, 2004.
d) Edward Frazelle, “Supply Chain Strategy, The Logistics of Supply Chain
Management”, Tata McGraw-Hill, 2004.
e) Robert B. Handfield, Ernest L. Nichols, Jr., “Supply Chain Redesign, Transforming
Supply Chains into Integrated Value Systems”, Pearson, New Delhi, 2003.
f) Mohanty and Deshmukh, Supply Chain Management, Theories & Practices, Biztantra,
New Delhi, 2005.
g) Satish Kapoor and Purva Kansal, “Marketing Logistics, a supply-chain approach”,
Pearson, New Delhi, 2003.

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