Chapter 11:
Logistics Relationships and
Third-Party Logistics
Learning Objectives -
After reading this
chapter, you should be able to do the following:
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Understand the importance of logistics
relationships and the types of relationships
that may be formed.
Be knowledgeable of a process model that
will facilitate the development and
implementation of successful supply chain
relationships.
Define what is meant by third-party logistics
(3PL), and know what types of firms provide
3PL services.
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Management of Business Logistics, 7th Ed.
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Learning Objectives
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Know what types of 3PL services are used by
client/customer firms, and know what types
of 3PL providers are used.
Appreciate the role and relevance of
information technology-based services to
3PLs and their client/customers.
Realize the ways in which 3PLs are involved
in global supply chain issues.
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Learning Objectives
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Know the extent to which customers are
satisfied with 3PL services, and understand
where improvement may be needed.
Recognize the importance of “collaborative”
relationships in the context of supply chain
management.
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Logistics Profile:
UPS Logistics Group
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UPS Logistics Group signed a five-year $150
million deal to manage National
Semiconductor’s global supply chain
distribution center in Singapore.
The DC uses radio frequency, bar-code
scanning, and web-based technology.
Fills >450K orders per year; receives 12 million
inbound chips daily; and ships four billion
products per year on sales of $2.1 billion.
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Logistics Relationships and ThirdParty Logistics: Introduction
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With more firms interested in working more
closely with their supply chain partners, high
priorities are:
 Developing and implementing successful
supply chain relationships;
 The need for collaboration to achieve
supply chain objectives; and,
 Value created by third-party logistics.
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Logistics Relationships:
Types of Relationships
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Vertical
 Refer to the traditional links between
supply chain members such as retailers,
distributors, manufacturers and suppliers.
Horizontal
 Firms that have parallel or cooperating
positions in the supply chain such as a
transportation firm and a warehousing firm
serving the same customer.
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Logistics Relationships:
Intensity of Involvement
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Vendor relationship shows little or no
integration or collaboration.
Strategic alliance shows full integration and
collaboration.
Partnership shows a customized relationship
that results in better outcomes than could be
reached separately.
Examine Figure 11-1 on the next slide.
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Figure 11-1
Relationship Perspectives
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Logistics Relationships:
Intensity of Involvement
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Regardless of form,
there are numerous
ways that the
relationships may
differ:
 Duration
 Obligations
 Expectations
Chapter 11
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Interaction and
Communication
Cooperation
Planning Goals
Performance
analysis
Benefits and
burdens
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Figure 11-2 Effectiveness of
Supply Chain Relationships
Percentage
50%
48%
42%
40%
30%
22%
21%
20%
23%
20%
10%
0%
7%
8%
2%
Poor
Fair
Suppliers
Chapter 11
Average
Good
4%
Exceptional
Customers
Management of Business Logistics, 7th Ed.
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Logistics Relationships:
Model for Developing and Implementing
Successful Supply Chain Relationships
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Six step process for forming and sustaining
supply chain relationships:
 Step One – Perform strategic assessment
 Step Two – Decision to form relationship
 Step Three – Evaluate alternatives
 Step Four – Select partners
 Step Five – Structure operating model
 Step Six – Implementation and continuous
improvement
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Figure 11-3 Process Model for
Forming Logistics Relationships
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Logistics Relationships:
Model for Developing and Implementing
Successful Supply Chain Relationships
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Step One – Perform strategic assessment
 Manufacturer becomes fully aware of its
logistics and supply chain needs and
overall strategies that will guide its
operations.
 This step is referred to as a Logistics Audit,
and will be covered in Chapter 14.
 Time spent at the outset is well spent.
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Logistics Relationships:
Model for Developing and Implementing
Successful Supply Chain Relationships

Step Two – Decision to form relationship
 When using an external supplier, will the
firm’s services be needed.
 If the firm has core competencies in the
area that external supplier provides, then
the firm can provide its own services.
 Using channel partners depends on
whether there are compelling drivers and
facilitators for partnerships are present.
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Figure 11-4 What Does It Take to
Have an Area of Core Competency?
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Management of Business Logistics, 7th Ed.
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Logistics Relationships:
Model for Developing and Implementing
Successful Supply Chain Relationships
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Drivers might include:
 Asset/Cost efficiency
 Customer service
 Marketing advantage
 Profit stability/growth
Chapter 11
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Facilitators might include:
 Corporate compatibility
 Management philosophy
and techniques
 Mutuality of
commitment
 Symmetry on key
factors such as relative
size, financial strength,
etc.
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Logistics Relationships:
Model for Developing and Implementing
Successful Supply Chain Relationships

Step Three – Evaluate alternatives
 Measure and weigh drivers and facilitators.
 Decide on type of relationship.
 Match manufacturer’s needs with
capabilities of each potential partner.
 Involve other functional managers in the
overall selection process.
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Logistics Relationships:
Model for Developing and Implementing
Successful Supply Chain Relationships

Step Four – Select partners
 Made only after close consideration of the
credentials of the most likely candidates.
 Interact with and get to know the final
candidates on a professionally intimate
basis.
 Attempt consensus to maximize “buy-in”.
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Logistics Relationships:
Model for Developing and Implementing
Successful Supply Chain Relationships
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Step Five – Structure operating model
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Planning
Joint operating controls
Communication
Risk/Reward sharing
Trust and commitment
Contract style
Scope of the relationship
Financial investment
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Management of Business Logistics, 7th Ed.
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Logistics Relationships:
Model for Developing and Implementing
Successful Supply Chain Relationships

Step Six – Implementation and continuous
improvement
 Depending upon the complexity of the
relationship, the implementation period
may vary in length.
 Future successes will be a direct function
of the ability of the partners to achieve
both breakthrough and continuous
improvement.
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Third-Party Logistics:
Industry Overview
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Firms have directed considerable attention to
developing supply chain relationships.
Many companies have been in the process of
extending their logistics organizations into
those of other supply chain participants and
facilitators.
One way of accomplishing this extension is
through the use of a supplier of third-party or
contract logistics services.5
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Figure 11-5 Implementation and
Continuous Improvement
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Third-Party Logistics (3PL):
Definitions
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3PLs are external suppliers that perform all or
part of a company’s logistics functions,
including:
 Transportation
 Warehousing
 Distribution
 Financial services
Terms contract logistics and outsourcing are
sometimes used in place of 3PL.
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Third-Party Logistics (3PL):
Types of 3PL Providers
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Transportation-Based
Warehouse/Distribution-Based
Forwarder-Based
Financial-Based
Information-Based
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Third-Party Logistics (3PL):
Types of 3PL Providers
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Transportation-Based
 Services extend beyond transportation to
offer a comprehensive set of logistics
offerings.
 Leveraged 3PLs use assets of other firms.
 Nonleveraged 3PLs use assets belonging
solely to the parent firm.
 Ryder, Schneider Logistics, FedEx Logistics,
and UPS Logistics are examples of 3PLs.
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Third-Party Logistics (3PL):
Types of 3PL Providers
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Warehouse/Distribution-Based
 Many, but not all, have former warehouse
and/or distribution experience.
 Transition to integrated logistics has been
less complex than for the transportation
based providers.
 DSC Logistics, USCO, Exel, Caterpillar
Logistics, and IBM are examples of
warehouse/distribution-based 3PLs.
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Third-Party Logistics (3PL):
Types of 3PL Providers
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Forwarder-Based
 Essentially very independent middlemen
extending forwarder roles.
 Non-asset owners that capably provide a
wide range of logistics services.
 AEI, Kuehne & Nagle, Fritz, Circle, C. H.
Robinson, and the Hub Group are
examples of forwarder-based 3PLs.
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Third-Party Logistics (3PL):
Types of 3PL Providers
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Financial-Based
 Provide freight payment and auditing, cost
accounting and control, and tools for
monitoring, booking, tracking, tracing, and
managing inventory.
 Cass Information Systems, CTC, GE
Information Services, and FleetBoston are
examples of financial-based 3PLs.
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Third-Party Logistics (3PL):
Types of 3PL Providers
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Information-Based
 Significant growth and development in this
alternative category of Internet-based,
business-to-business, electronic markets
for transportation and logistics services.
 Transplace and Nistevo are examples of
information-based 3PLs.
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On the Line:
Trade Team
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Excel, the largest provider of brewery
distribution services in Great Britain, and Bass,
the industry’s low-cost producer, formed Trade
Team, the UK’s leading independent logistics
provider to the beverage industry.
Annual sales of $200 million; 280 million gallons
of beer and other beverages to over 27,000
retail customers; 40-50% market share.
Has capability to move other products.
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Third-Party Logistics Research
Study: Industry Details
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Of 93 responding executives, 71 percent
indicate a current or possible use of 3PLs.
Overall percentage of companies using 3PLs
is steady, but the computer and peripheral
and consumer products industries tend to
exhibit higher use (90 and 85 percent,
respectively).
Less use in automotive, chemical and retail
(50 to 60 percent usage range).
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Third-Party Logistics Research
Study: Industry Details
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Outsourced logistics services include:
 Warehousing (73.7%)
 Outbound transportation (68.4%)
 Freight bill auditing/payment (61.4%)
 Inbound transportation (56.1%)
 Freight consolidation/distribution (40.4%)
 Cross docking (38.6%)
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Figure 11-6 3PL User/Nonuser
Experience, 1996-2001
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Management of Business Logistics, 7th Ed.
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Table 11-1
Shippers Using More than Five 3PLs
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Table 11-2 Third-Party Revenues
Estimated at $56.4 Billion in 2000
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Table 11-3 Top Six Outsourcing
Logistics Services: 2001
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Figure 11-7 Nonuser Respondents:
Rationale for Not Using 3PL Services
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Table 11-4 Information Technology-Based
Services: Current Percent versus Future Percent
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Management of Business Logistics, 7th Ed.
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Figure 11-8
Sources of Information Technology
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Management of Business Logistics, 7th Ed.
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Figure 11-9 3PL Customer Use of Industry
Vertical Procurement Markets
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Management of Business Logistics, 7th Ed.
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Figure 11-10 3PL Customer Use of
Transportation/Logistics Electronic Markets
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Figure 11-11 3PL Involvement in Outsourcing:
Who Is Responsible for Implementation?
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Management of Business Logistics, 7th Ed.
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Figure 11-12 3PL Customer Evaluation of
Outsourcing (Yearly Comparisons)
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Figure 11-13
3PL Factors for Selecting and Evaluating 3PLs
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Management of Business Logistics, 7th Ed.
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Third-Party Logistics Research
Study: Industry Details
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Quantifiable measures of 3PL success:
 Logistics costs reduced by 8.2 percent.
 Logistics assets reduced by 15.6 percent.
 Average order cycle length changed from
10.7 to 8.4 days.
 Overall inventories reduced by 5.3 percent.
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Third-Party Logistics Research
Study: Industry Details
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Reported problem areas:
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Service level commitments not realized.
Strategic management skills lacking.
Cost reduction goals not realized.
Cost “creep” and price increases occurring.
Improvements and achievements lacking.
Control of outsourced functions diminished.
Consultative, knowledge-based skills lacking.
Technology capabilities not being delivered.
Time and effort spent on logistics not reduced.
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Figure 11-14
How Respondents View Providers of Third-Party
Logistics Services
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A Note on Fourth-Party Logistics
(4PL): The Next Evolution?
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Thought of as supply chain
integrator, 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.”12
4PLs manage and direct the activities of
multiple 3PLs, serving as an integrator.
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Figure 11-15
Fourth-Party Logistics (Registered Trademark of
Accenture, Inc.)
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Need for Collaborative
Relationships13
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Supply chain relationships are most effective
when collaboration occurs.
Collaboration is facilitated by the ability of the
supply chain partners to readily access and
exchange information over the Internet.
Table 11-5 lists the “Seven Laws of
Collaborative Logistics” and is a guide to
establishing and maintaining collaborative
logistics networks.
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Management of Business Logistics, 7th Ed.
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Table 11-5
Seven Laws of Collaborative Logistics
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Management of Business Logistics, 7th Ed.
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Chapter 11:
Summary and Review Questions
Students should review their knowledge of the
chapter by checking out the Summary and Study
Questions for Chapter 11.
End of Chapter 11 Slides
Logistics Relationships and
Third-Party Logistics