Notes on Global Logistics Intermediaries and Outsourcing

Definition of Logistics

  • Logistics is the science or art that coordinates activities to deliver the right product in the right quantity at the right time. Core activities include: Transportation, Forecasting, Warehousing, Materials handling, Packaging, Information processing, Finance\text{Transportation},\ \text{Forecasting},\ \text{Warehousing},\ \text{Materials handling},\ \text{Packaging},\ \text{Information processing},\ \text{Finance}.

  • Focus: align supply with demand, optimize flow of goods and information.

International Logistics Function

  • Demand forecasting

  • Order management

  • Packaging and labeling

  • Documentation

  • Customer service

  • Parts & service support

  • Production scheduling

  • Procurement

  • Returned products management

  • Inventory management

  • Transportation management

  • Materials handling

  • Warehouse & distribution center management (hub management)

  • Salvage & scrap disposal

  • Distinguish inbound vs outbound logistics activities; overall logistics management.

Key Logistics Goals

  • Rapid responses to changes in market or customer needs

  • Minimize variance (e.g., delivery time, inventory levels, and expenses)

  • Movement consolidation: aggregate smaller shipments into larger ones

  • High quality in logistics services and products

  • Life-cycle support: repairs, reuse, recycling, or disposal along with delivery

Global Logistics Issues to Overcome

  • Longer and less consistent response times; longer distances

  • Ocean shipments slower and less consistent than land/air

  • Additional documentation (e.g., letters of credit, customs clearance)

  • Order completeness and shipping accuracy

  • Higher costs of back orders and expedited shipments

  • Shipping errors lead to expensive routing/replacement

  • Higher shipping damages

  • Harsh/variable global environment (infrastructure, road conditions, transport types)

Logistics Intermediaries

  • Freight Forwarder (FF):

    • Most common international logistics intermediary

    • Handles international distribution and supply channel responsibilities

    • Services: daily pickup, distribution, global multi-carrier shipping, documentation, consolidation of freight from multiple shippers, bulk freight space booking

    • Example: UPS acquisition of Fritz (one-stop FF & customs brokerage) (www.ups.com)

  • NVOCC (Non-Vessel Operating Common Carrier):

    • Also called consolidators or NVOs

    • Provides scheduled ocean service without operating ships

    • Leases containers and sells space for LCL shipments

    • Integrates solutions for global freight transport; examples of industry activity (e.g., KN-Portal acquisition of ACR Logistics in 2006) (www.kn-portal.com)

  • Other Intermediaries/Roles (often taken by 3PLs):

    • Export Management Companies (EMC)

    • Export Packers

    • Customs House Brokers

    • Publication Distributors

    • Goods Surveyors

    • Parts Banks

    • Container Leasing Companies

    • Export Trading Companies (ETC)

3PL and 4PL

  • Third-Party Logistics (3PL):

    • Takes over some or all logistics functions and performs them

    • Can be specialized (airmail, road transport, warehousing) or multipurpose (full function)

  • Fourth-Party Logistics (4PL):

    • Logistics specialist/consultant that oversees the entire logistics operation and subcontracts parts

    • Often called 3PLs with subcontractors; typically charges a fee for coordination rather than markup

Functions of a 4PL

  • Integrate and manage the logistics network across regions

  • Connect with 3PLs globally

  • Globally integrated information network

  • Business process redesign

  • Manage customer service levels

  • Differentiate through unique value added services compared with traditional 3PLs

  • Concept: global Manufacturer/Retailer ⇄ LLP/4PL ⇄ 3PLs (transport, warehousing, shipping, airline) to deliver end-to-end service

Global Logistics Outsourcing

  • Globalization drives growth in global logistics

  • Firms increasingly rely on global logistics service providers for global reach

  • IT integration, co-location, and capital/infrastructure investments cement relationships

  • Close collaboration between firms and providers

Benefits of Logistics Outsourcing

  • Improved business focus on core competencies

  • Access to greater leverage through larger volumes handled by providers

  • Access to current logistics technology; providers stay ahead in tech and adapt to client needs

  • Improved service to customers (e.g., supply chain visibility)

  • Better sourcing and ability to rapidly expand global sourcing without building internal infrastructure

  • More efficient warehousing for rapid replenishment (closer to clients) at lower cost via providers

  • Greater workforce flexibility and easier scaling of expertise

Potential Risks for Logistics Outsourcing

  • Loss of control over parts of the function

  • Potential misalignment if contractor interacts directly with customers

  • Possible inefficiency if contractor underperforms

  • Need for clear objectives and defined scope; require objective measurement systems

Summary of Key Trends in Global Logistics (I)

  • Integrated supply chains: competition on cost and lead time drives value-added services (e.g., 4PL) and closer collaboration

  • Globalization: growth in China/India; low-cost manufacturing expansion; 3PLs expanding via subsidiaries/JVs

  • Outsourcing: high-value industries focus on core business; opportunities in electronics, pharmaceuticals, etc.

Summary of Key Trends in Global Logistics (II)

  • Fewer suppliers: big firms consolidate to improve quality and oversight

  • Concentration of ownership: mergers create mega corporations; 3PLs must work with large clients

  • Inventory reduction strategies (VMI/JIT) to survive downturns

Summary of Key Trends in Global Logistics (III)

  • Security concerns: tracking and traceability to prevent theft and mitigate disruptions

  • Environmental concerns: green logistics and carbon credit considerations; eco-friendly packaging and transport

  • Direct and small deliveries: rise of e-commerce and door-to-door delivery

  • Postponement: near-customer distribution facilities to delay final customization

Learning Outcomes (Reinforcement)

  • Know the logistics intermediaries used and their functions (e.g., 3PLs)

  • Understand benefits and risks of outsourcing logistics

  • Discuss how trends in global logistics affect 3PLs and firms