How effective are 3PL & 4PL partnerships in the South African logistics supply chain

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HOW EFFECTIVE ARE 3PL & 4PL

PARTNERSHIPS IN THE SOUTH AFRICAN

LOGISTICS SUPPLY CHAIN

DAVID ROBERT McGARRIE Student No: 123831392

November 2003

Mini-dissertationsubmitted in partial fulfillmentof the requirements for the degree Masters in Business Administrationat the Potchefstroom Universityfor Christian Higher

Education

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C])edicated

to: rr'racey

~usse{{

JInd

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My deepest gratitude and appreciationgo to:

~ My study leader, Mr J.e. Coetzee for his invaluable assistance and guidance.

~ The Potchefstroom Business School for the insightful tuition and academic knowledge.

~ The members of my study group who guided me through on my shortfalls and supported when necessary.

~ All family, friends and colleagues for their interest throughout my studies.

~ To all the willing participants for their support and information.

~ My wife, Tracey, for her patience and understanding throughout the M.B.A. studies.

~ My children, Russell and Alana for putting up with Daddy's long periods of absence.

iii ACKNOWLEDGEMENTS

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HOW EFFECTIVE ARE 3PL & 4PL

PARTNERSHIPS IN THE SOUTH AFRICAN

LOGISTICS SUPPLY CHAIN

Outsourcing of logistical operations is becoming more and more frequent in order to address the needs of a company's supply chain as well as improving customer service and reducing operating costs.

The main objective of this study was to provide a guideline to Logistics and Supply Chain Managers on how to successfully implement an outsourcing (3PL/4PL) partnership, as well as identify the pitfalls that should be avoided during the implementation process.

To realise this objective an extensive review of the current literature was undertaken on the concept of logistics and the slpply chain and how the concept of outsourcing has influenced this concept. The literature presented the following results:

~ Logistics is often perceived as non-core business function to a company and hence suitable as an outsourcing option.

~ Outsourcing of the logistics function should be a strategic decision that offers both a reduction in costs as well as improvements in sales revenue and customer service.

~ Outsourcing is able to contribute value for a company through reduced

cost and increasedrevenueasVlellas improvedservicelevelsdue to the

specialist nature of the outsourcing partner.

iv ABSTRACT

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~ Some competitive advantage is possible when choosing a 3PLl4PL to operate your logistics function.

~ The 3PL industry is currently in a state of transition, with many smcjJer 3PL's consolidating their business efforts to form Lead Logistics Provider companies.

An empirical research on the South African perception of the 3PLl4PL industry was then conducted using a structured questionnaire. The results of the questionnaire providing an answer on the state of the 3PLl4PL industry in South Africa along with comments on how successful implementation differed from the failures.

From the literature review and the empirical research it was possible to establish recommendation on how to establish a successful outsourcing partnership with a 3PLl4PL, as well as a tool was developed to aid those companies that currently experience problems with their outsourcing partnership. While the outsourcing process is unique to every situation the guidelines offer a generic approach that prevents the prospective outsourcing company from falling into common pitfalls that often lead to failure of the partnership.

Keywords: Third party, 3PL, fourth party, 4PL, outsourcing, logistics, and

supply chain management

v ABSTRACT

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HOW EFFECTIVE ARE 3PL & 4PL

PARTNERSHIPS IN THE SOUTH AFRICAN

LOGISTICS SUPPLY CHAIN

Dedication

Acknowledgements Abstract

CHAPTER 1:

PROBLEM IDENTIFICATION& RESEARCH

PROPOPOSAL

1.1. INTRODUCTION AND BACKGROUND

1.2. PROBLEM STATEMENT

1.3. OBJECTIVES

1.4. MOTIVATION

1.5. METHODOLOGY AND LAYOUT

1.5.1. Chapter 1 - Problem Identification & Research Proposal 1.5.2. Chapter 2 - Literature Review

1.5.3. Chapter 3 - Empirical Study

1.5.3.1. Collection of raw data for the development of the evaluation model

1.5.3.2. 1.5.3.3.

Development of a model using the questioning technique Analysis of questionnaire outputs to determine if the

questionnaire accurately addresses the problem statement

TABLE OF CONTENTS -- - -ii iii iv 1 3 4 5 6 6 6 7 7 7 7 VI

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1.5.4. Chapter 4 - Recommendations and Conclusions 8 1.5.4.1. Utilise the questionnaire results to accurately determine the

suitability of 3PL & 4PL partnerships to various business sizes 8 1.6. CONSTRAINTS

1.7. LIST OF DEFINITIONS

CHAPTER 2: LITERATURE REVIEW

2.1. INTRODUCTION TO LOGISTICS 10

2.2. DEFINITION, MISSION AND OBJECTIVES OF LOGISTICS 11

2.3. IMPORTANCE OF LOGISTICS 16

2.3.1. Cost of the Logistics Activities is Significant 17 2.3.2. Globalisation of the Supply and Distribution Lines 18 2.3.3. Logistics Affects a Company's Strategic Decision Making 18 2.3.4. Customer Service Can Be Improved Through Logistics 19 2.3.5. Customers Increasingly Demand Quick Customised Response 20

2.4. SUPPLY CHAIN MANAGEMENT 20

2.4.1. Objective of Supply Chain Management 22

2.4.2. Functions of Supply Chain Management 22

2.4.3. Opportunities Derived Through Supply Chain Management 24 2.4.4. Benefits of Administrative Investments in a Global Supply Chain 27 2.4.5. Supply Chain Management as a Competitive Advantage 29

2.5. OUTSOURCING AND LOGISTICS 31

2.5.1. Outsourcing Relationships 33

2.5.2. Value Adding Categories of the Supply Chain 36 2.6. THIRD PARTY LOGISTICS (3PL)

2.6.1. Manufacturer/Distributor Requirements for a Lead Logistics

Provider (LLP's) 42

2.6.2. New Game-changing Technologies 43

2.6.3. Deep Pocketed Logistics Acquirers 43

2.6.4. Attraction of a Third Party Agreement 44

TABLE OF CONTENTS - -8 9 41 vii

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2.7. FOURTH PARTY LOGISTICS (4PL)

2.8. EFFECTIVENESS OF 3PL AND 4PL WORLDWIDE 2.8.1. Next Steps for 3PL's

2.9. CONCLUSIONS ON LITERATURE REVIEW

CHAPTER 3: EMPIRICAL STUDY

3.1. INTRODUCTION

3.2. COLLECTION OF RAW DATA FOR THE DEVELOPMENT OF

THE EVALUATION MODEL 55

3.2.1. Method of Choice for this Empirical Research 56 3.2.2. Identification and Selection of Possible Input Variabes 57 3.2.3. Determination of Populations and Sample Size 58

3.2.3.1. Definition of statistics 58

3.2.3.2. Members of the sample 60

3.3. DEVELOPMENT OF A MODEL USING THE QUESTIONING

TECHNIQUE 61

3.3.1. Structure of the Questionnaire 61

3.4. ANALYSIS OF QUESTIONNAIRE OUTPUTS 62

3.4.1. Section 1 - Demographic Detail 65

3.4.1.1. Geographic dispersion of respondents 65

3.4.1.2. Industry sector of respondents 67

3.4.1.3. Company size 68

3.4.2. Section 2 - In-House Logistics or Outsourced 70 3.4.2.1. Number of respondents using a third party service provider 70 3.4.2.2. Percentage of logistics service outsourced 72

3.4.2.3. Annual logistics spend 74

3.4.2.4. Logistics services used by respondents 75

3.4.3. Section 3 - Use of Third Party Logistics Services 77

3.4.3.1. 3PL Transportation services 77 3.4.3.2. 3PL Warehousing services 79 3.4.3.3. 3PL IT services 81 TABLE OF CONTENTS - - --44 48 51 51 54 viii

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3.4.3.4. 3PL Manufacturing

3.4.3.5. 3PL Miscellaneous services 3.4.3.6. 3PL User IT services

3.4.4. Section 4 - Use of Fourth Party Logistics SeNces 3.4.4.1. 4PL Transportation management services 3.4.4.2. 4PL Warehousing distribution

3.4.4.3. 4PL IT services

3.4.4.4. 4PL Miscellaneous services 3.4.4.5. 4PL User IT services

3.4.5. Section 5 - Relationship with 3PLl4PL 3.5. SUMMARY OF EMPIRICAL STUDY

CHAPTER 4:

RECOMMENDATIONS AND CONCLUSION

4.1. INTRODUCTION

4.2. CONCLUSIONS ON LITERATURE REVIEW 4.3. CONCLUSIONS ON THE EMPIRICAL STUDY 4.3.1. Section 1- Demographic Detail

4.3.2. Section 2 - In-House Logistics or Outsourced 4.3.3. Section 3 - Use of Third Party Logistics Services 4.3.4. Section 4 - Use of Fourth Party Logistics Services 4.3.5. Section 5 - Relationship with 3PLl4PL

4.3.5.1. Reasons for success 4.3.5.2. Reasons for failure

4.4. RECOMMENDATIONS 107

4.4.1. How to Implement a Successful 3PLl4PL Partnership 108

4.4.1 .1. The selection phase 108

4.4.1.2. The integration phase 108

4.4.1.3. The management phase 109

4.4.2. How to Evaluate the Current Performance of a Company's 3PU4PL Partnership and Steps to Correct the Shortfalls 110

TABLE OF CONTENTS -- --82 83 84 86 86 87 89 90 91 92 98 100 100 102 103 103 105 105 106 106 107 ix

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4.5. CRITICAL EVALUATION OF THE STUDY 4.5.1. Primary Objective 4.5.2. Secondary Objective 112 112 112

4.6. RECOMMENDATIONS FOR FUTURE STUDIES 113

4.7. CONCLUSIONS 113

x

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Figure 1.1: Use of Third Party Logistics Providers 2 Figure 2.1: Logistics Interfaces with Marketing and Production 12 Figure 2.2: Logistics Components and the Supply Chain 14

Figure 2.3: The Logistics Planning Triangle 15

Figure 2.4: North American Logistics Costs: 1982 - 96 16 Figure 2.5: Impact of Supply Chain Management on Cash Earnings 17 Figure 2.6: Four Dimensions of Strategic Chain Management 19 Figure 2.7: Immediate Supply Chain for an Individual Firm 21 Figure 2.8: Possible Components in a Firm's Immediate Supply Chain 23

Figure 2.9: Marketing and Logistics Converge 30

Figure 2.10: The Outsourcing Relationship Continuum 34 Figure 2.11: Selection Diagram of Where to Perform Logistics Activities 35

Figure 2.12: Influences on Logistics Costs 38

Figure 2.13: Percentage of Customers Who Felt There Expectations

Were not met (By Industry Type) 45

Figure 2.14: 4PL Equity Venture in the Oil Industry 47 Figure 3.1: Distribution of the Respondents Origin 66 Figure 3.2: Graphical Representation of Split by Industry Sector 67 Figure 3.3: Distribution of Respondents by Company Size 70 Figure 3.4: Respondents Use of Outsourced Logistics Services 71 Figure 3.5: Distribution of Respondents by Percentage of Logistics

Services Outsourced 72

Figure 3.6: Percentage of Logistics Services Outsourced Relative to

Company Size 73

Figure 3.7: Percentage of Logistics Services Outsourced Relative to

Industry Type 73

LIST OF FIGURES

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Figure 3.8: Annual Logistics Services Spend 75 Figure 3.9: Logistics Services Used by Respondents 77 Figure 3.10: Comparison of South African vs. American (Lieb & Muller)

Use of 3PL Transportation Services 79

Figure 3.11: Comparison of South African vs. American (Lieb & Muller)

Use of 3PL Warehousing Services 80

Use of 3PL IT Services 82

Use of 3PL Manufacturing Services 83

Use of 3PL Miscellaneous Services 84

Use of 3PL User IT Services 86

Figure 3.16: Use of 4PL Transportation Management Services 87 Figure 3.17: Use of 4PL Warehousing Distribution Services 88

Figure 3.18: Use of 4PL IT Services 89

Figure 3.19: Use of 4PL Miscellaneous Services 90

Figure 3.20: Use of 4PL User IT services 92

Figure 3.21: Radar Chart of South African Companies Perceptions of

3PLl4PL Performance 95

Figure 4.1: 3PL Benefits - Companies Have Greater Gains When They

Outsource All Supply Chain Activities 104

Figure 4.2: Radar Chart for Plotting Scores of Current 3PLl4PL

Relationship 110

xu LIST OF FIGURES

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Table 2.1: Percentage of 3PL Use Outside the USA 49

Table 3.1: Distribution of Respondents 65

Table 3.2: Respondents Industry Sector 67

Table 3.3: Company Size by Number of Employees 68

Table 3.4: Company Size by Annual Turnover 69

Table 3.5: Respondents Using a Third Party Service Provider 71 Table 3.6: Percentage of Logistics Services Outsourced by Respondents72

Table 3.7: Annual Logistics Spend of Respondents 74

Table 3.8: List of Logistics Services Used by Respondents 76 Table 3.9: List of Third Party Transportation Services 78 Table 3.10: List of Third Party Warehousing Services Used 80

Table 3.11: List of Third Party IT Services Used 81

Table 3.12: List of Third Party Manufacturing Services Used 82 Table 3.13: List of Third Party Miscellaneous Services Used 83

Table 3.14: List of 3PL User IT Services 85

Table 3.15: Use of 4PL Transportation Management Services 87 Table 3.16: List of 4PL Warehousing Distribution Services 88

Table 3.17: Use of 4PL IT Services 89

Table 3.18: Use of 4PL Miscellaneous Services 90

Table 3.19: Use of 4PL User IT Services 91

Table 3.20: Rating of Relationship with 3PLl4PL 93

Table 3.21: List of Respondents Comments 96

xiii LIST OF TABLES

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-Append ix 1: Appendix 2: Appendix 3: Appendix 4: Appendix 5:

List of Companies Approached Introductory Letter of Intent Example of Questionnaire

Questionnaire for Measuring Existing 3PLl4PL Partnerships Radar Chart for Measuring Existing 3PLl4PL Partnerships

XIV

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1.1. INTRODUCTION AND BACKGROUND

To compete in the global market and be the leader in the marlet requires a company to have distinguishing QJality standards (Anong, 2003:2). Quality standards in the case of logistics require a company to maintain or increase customer service, whilst attempting to reduce costs.

As globalisation increases businesses are confronted with new strategies to improve their operational excellence, customer relations and supply chain integration. Supply Chain Integration is one of the areas that can have a great impact on the financial statements of a comrBny and customer satisfaction (Raubenheimer & Conradie, 2002:54).

Whether to develop a logistics/supply chain proces& or buy in an existing process, is a challenge facing many companies these days. One needs to decide on whether to develop the process in-house or outsource to specialists who already have the necessary competencies and processes working in a proven environment(Anonb,2001:1).

Increasingly, industry leaders are turning to third-party logistics providers, or 3PL's, who specialize in warehousing, value-added services, distribution services, and even global logistics rather than invest resources to support their own facilities (Anonb.2001:1). Both Lieb & Randall's (1996) North American Fortune 500 study, and Harring's (1996) study of UK companies us of 3PL's Gatorna (1998:426) show an

Chapter 1-Problem Identification & Research Proposal

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increasing trend between 1991 and 1995, with the number of companies making use of outsourced services almost doubling(Figure 1.1 refers).

Figure 1.1: Use of third party logistics providers

Percentage of surveyed Fortune 500 cOlTpanies

using contract logistics Percentage of UK companies using third-party

warehousing

1991 1994 1995 1994 1995

Adapted from Gatorna (1998:426)

Outsourcing of the logistics service has now become accepted practice

within most manufacturing organisations. Services such as warehouse management, shipping consolidation, information systems, fleet management, rate negotiation, and carrier selection a-ethose most likely to be outsourced. Increasingly, however, key supply chain activities such as customer spare parts and inventory supply and replenishment are being outsourced to third-party providers (Gatorna, 1998:426).

Outsourcing of non-core functions within the organisation has become the order of the day. Terms such as 3PL and 4PL partnerships have evolved within the Logistics supply chain environment to address this situation, but how effective are these partnerships?

3PL (third-party logistics) refers to the use of a third-party to operate the non-core functions which relate to the Logistics environment. A 3PL allows companies to get into a new business, a new market, or a new channel of distribution quickly, and to do so with a reatively limited outlay of cash(Anonb. 2001 :2).

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4PL refers to the use of a fourth party to coordinate the requirements of several primary clients and their use of 3PL partners by being a supply chain integrator. To its clients, it differentiates itself from other F L service providers by acting as the single interface between clients and the full scope of supply chain services(Gatorna, 1998:433).

Reducing the supply chain costs is achieved by "reducing effective labour cost of logistics staff and by economies ofscale and scope that can be realized by dedicated logistics service providers" (Gatoma, 1998:428). Gatorna (1998:428) suggests that thidparty service providers do not satisfy a firm's total corporate logistics requirements- few are able to cover the full range of supply chain requirements that include services such as logistics information technology development and management,

Seeking new ways to improve the thidparty relationship appears to be a continuous challenge for the logistics executives. The 4PL concept of managing logistics was born as a result of this. The 4PL organisation represents a solution that incorporates the advantages of both outsourcing and insourcing to plovide maximum overall benefit (Gatorna, 1998:430).

1.2. PROBLEM STATEMENT

The purpose of this study is to review how effective 3PL & 4PL partnerships have been within various organisationswithin South Africa. A measurement tool will be developed to validate the effectiveness of these partnerships and their suitability to the South African Small Medium, and Large business.

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Chapter 1 - Problem Identification & Research Proposal

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Subproblems

9 Studies undertaken in North America have presented conflicting results on the effectiveness of 3PL & 4PL partnerships (Gooley,

2002:l). In South Africa, there is currently no evidence thatsuch

a study has been undertaken.

9 As an outsider, 3PL's and 4PL's are not always given the right level of information necessary to undertake the business requirements appropriately.

9 Spoomet holds a monopolistic hold on railtransportation in South Africa and current trends indicate support from Government to move products from road transport to rail. Will Spoornet, as a third-party service provider, be able to handle this?

9 The Logistics/Supply Chain industty in South Africa is faced with a different labour force from that of North America. What do South African's have to doto be able to compete in the globalarena?

9 Government policy is being implemented to remove hazardous goods from road and enforce transportation via road. Heavy levies are also proposed for road users which will increase the transportation costs.

9 Changing environmental policies are increasing the cost of storage of products.

I

.3.

OBJECTIVES

The main objective of this study is to provide a guide to Logistics and Supply Chain Managers on h w to implement a 3PLl4PL partnership as well as list the pitfalls that need to be avoided during the implementation process. This will be determined by undertaking a study as follows:

9 Determine the current effectiveness of 3PL &4PL partnerships.

9 Determine what makes some partnerships successful and others fail.

9 Highlight the pitfalls and strengths of 3PU4PL partnerships.

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B

Provide a list of key factors necessary for successfully implementing a 3PU4PL partnership.

1.4. MOTIVATION

In South Africa, the trend of outsourcing the logistics supply chain activities has been around for more than ten years and is still growing in its use. Terms such as 3PL and 4PL partnerships are the norm within most industries. These terms have evolved from businesses devolving their non-core business to outsourced companies, in order that they can rather focus on their core operation. The belief is that the company should improve its core functions, and let outsourced specialist companies operate these nomcore functions more eficiently on their behalf. In Northern America, industries have seen a33% drop (Evans & Danks, 1998:19) in logistics costs and report improved customer service levels, and hence added value to the customer (Evans & Castek, 1998:60), through the use of an outsourced service provider.

Even though the above statements suggest huge potential savings, and improved quality (customer service), companies still require proof to support these statements. A company would generally look for answers to the following questions before making any decision to switch to a 3PLl4PL partnership:

B

What would the quantitativeand qualitative benefits be?

B

What risks are involved?

B

What is the cost of not undertaking a 3PLl4PL partnership?

Two studies have been conducted in Ameica, one by Georgia Institute of Technology, the other by University of Tennessee, Langley, on the current practices and future plans for use of thirdparty logistics services. One might suspect that they would reveal similarresults; however, they

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represent two sides of the same coin, providing differmt views of a single industry (Gooley, 2002:l). The question arises: Is the South African situation similar and also conflicting?

The application of a questionnaire among various businesses in South Africa seeks to provide answers to the previous questions. The questionnaire developed will attempt to achieve this by identifying operational successes/problems within varying business sizes and propose how effective these 3PL & 4PL partnerships have been as a result of splitting the nowcore logistics function from their business. The aim of this is to successfully guide companies through the pitfalls of 3PL/4PL partnerships in order achieve the optimum solution.

1.5. METHODOLOGY AND LAYOUT

1.5.1. Chapter 1

-

Problem Identification

8

Research Proposal

Chapter 1 undertakes to &velop the problem statement, s u b problems & hypotheses. It continues by outlining the project objectives and motivation for undertaking the study, and concludes with the research methodology approach and a list of definitions appropriate to undertake this minkdissertation.

1.5.2. Chapter 2

-

Literature Review.

An extensive study will be undertaken to dentify what current research has been carried out in this field and the opportunities that exist for further research. The chapter will give a detailed analysis of Logistics and Supply Chain Management and how the 3PL14PL partnerships have evolved. The chapter will conclude with an analysis of how well these concepts have been

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implemented through OIA the world based on current studies into their implementation.

1.5.3. Chapter 3

-

Empirical Study

Chapter 3 will open with a development of a toolfor measuring the effectiveness and efficiency of 3PLl4PL partnerships which will then be used to determine the effectiveness and efficiency of South African implementations of these concepts. The tool will then be offered to a number of companies from small firms to large organisations, in order to determine their perceptions of the concepts and their evaluation d their effectiveness and efficiency. The steps will be as follows:

1.5.3.1. Collection of raw data for the development of the

evaluation model.

Identify all possible input variables for the model. Test and select those variables that have a high influence on the model. Determine and collect the correct quantity of raw data that is required.

1.5.3.2. Development of a model using the questioning

technique.

Development of a questionnaire that adequately addresses the output requirements to determine h e effectiveness

of

the 3PL & 4PL partnership.

1.5.3.3. Analysis of questionnaire outputs to determine if

the questionnaire accurately addresses the problem statement

Determine which statistic type best shows the accuracy of the questionnaire. Evaluate the different

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Chapter 1 -Problem Identification & Research Proposal

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questionnaires and select that questionnaire architecture that reveals the best results.

1.5.4. Chapter 4

-

Recommendations and Conclusions

Recommendations and conclusions will be drawnup based on the literature study from chapter 2 and the empirical study conducted in chapter 3. From this a list of key factors needed to ensurethat the optimum benefits can be derived from 3PLktPL partnerships will be drawn up. The steps will be as follows:

1.5.4.1. Utilise the questionnaire results to accurately

determine the suitability of P L

8

4PL partnerships

to various business sizes.

Model the effectiveness of existing companies at operating 3PL & 4PL partnerships across various business sizes, and determine the key factors necessary to ensure that businesses that wish to undertake 3PL & 4PL partnerships receive the optimum benefits.

1.6. CONSTRAINTS

The scope of this mini-dissertation is constrained to boundaries of the South African overland logistics and supply chain.Al1 details relative to sea bound logistics and crossborder logistics supply chains will be excluded from this study.

All literature used for reference purpose will be chosen from the period January 1998 to November 2003.

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1.7. LIST OF DEFINITIONS

9

Logistics

The Council for Logistics Management defines Logisticsas that part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from the point of origin to the poinlof-consumption in order to meet customers' requiremerts (Ballou, 1 QQ9:6).

9 Supply chain management

The integration of key business processes from end user through original suppliers that provides products, services, and information that add value for customers and other stakeholders(Stock & Larnbert, 2001:54)

9 Outsourcing

Where a company completely devolves itself of responsibility for non core functions (Giles & Hancy, 1998:416).

9 Third party logistics (3PL)

The outsourcing of nomcore functions to a third party with the relevant experience skills base to undertake that function offering a cost benefit to the outsourcer.

9 Fourth Party logistics (4PL)

A fourth party in the logistics supply chain used to incorporate the advantages of both insourcing and outsourcing to provide maximum benefit to the outsourcer.

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2.1. INTRODUCTION TO LOGISTICS

The concept of Logistics is not a new topic. Since time in memorial, mankind has had to live with the challenge of consuming goods at their immediate location or moving them to a preferred site for stcrage and later use

-

food and other commodities were widely dispersed and often in abundance only at certain times of the year. Due to the limitations of transportation systems, this movement was often restricted by what the individual could move personaly, which forced the consumer to often live close to the source of production and consume only the narrow selection available with a short distance. While this may seem like the dark ages to most westernised countries, some areas of the world still consune and produce within a very limited geographic region. This type of economy results in low production efficiency and poorer economic standards of living (Ballou, 1999:3).

As logistics systems have improved, the geographic location of consumption and prochction has become more widely dispersed, with businesses often being established closer to their market rather than their raw material source. Efficient logistics systems allow world businesses to take advantage of the fact that lands and the people thatoccupy them are not equally productive. Logistics is the very essence of trade. It contributes to a higher economic standard of living for us all(Ballou, 1999:4-5).

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Chapter 2 - Literature Review

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Good management of logistics activities is therefore vital for ensuring a high-level economy. Our markets have become national and often international in size, yet production is often still concentrated to a relatively small area. Logistics activities act as the bridge between the producers and consumer markets.

Companies are increasingly mder pressure from both customers and shareholders and must seek ways in which they can increase their customer service, improve costs, and focus on improvements to their core competencies in order to gain competitive advantage and improve profitability. Globalisation and technological advances have made the market place increasingly competitive. Leading companies are striving towards a level of competency superior to their competitors. Therefore, improving the efficiency and effectiveness of the logisks activities should be including in the companies future strategic initiatives.

2.2. DEFINITION, MISSION AND OBJECTIVE OF LOGISTICS

Traditionally, logistics focused on the activities of transportation, warehouselinventory management, order processing and naterials handling (Figure 2.1 refers). These activities were often conducted by either the productionloperations function or the marketing function of a company. Marketing, distribution, planning, manufacturing, and the purchasing organisations along thesupply chain operated independently, having their own objectives which often conflict with each other.

As industry begun to understand the importance of logistics and the possible benefits that could be derived from the proper management thereof, the concept of business logistics management evolved as a separate entity within the company. Modern business logistics acts as the interface between marketing and productionloperations and has

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absorbed these activities into its function. Figure 2 below highlights the activities and how they interface.

FIGURE 2.1: Logistics Interfaces with Marketing and Production

LOGISTICS

>

Sample activities: ~ Transport ~ Inventory ~ Order processing ~ Materials handling PR(;)[)~110tU; OPE~",tQN.t$:_ <' oj Sampf~;;fct~h~i~

» C;W.:)fitY'

.' 'c;',

,\

).

p4;,. ~ Wm~~;.'%d'~~' .' ,,: '~f'iO'1!''t.;.."

/

Production-logistics interface

Adapted from Ballou, (1999:22)

MARKETING Sample activities: ~ Promotion ~ Market research ~ Product mix ~ Sales force management

"

Marketing-logistics interface

The interface and interaction between these activities is better known as integrated logistics management. The concept implies that better customer service and reduced distribution costs can only be achieved through teamwork, both inside the company and among all the marketing channel organisations (Kottler & Armstrong, 2001 :457). Companies are gaining benefits through strengthening their supply chain management, as it improves their connections with their partners, and highlights their

Chapter 2- Literature Review

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supply chain performance against competitors' supply chans (Kottler & Arrnstrong, 2001 :29-30).

Business logistics is a relatively new field within the integrated business environment when compared with financial, marketing and production. Logistics Management as we know it today has evolved through the developments made during military operations, a d most definitions of logistics have a military viewpoint. In 1962 the council of Logistics Management offered the following definition of Business Logistics(Ballou, l999:6):

Logitics is the process of planning, implementing, and controlling the efficient, cost-effective flow and storage of raw materials, i n process inventory, finished goods and related information from point of origin to point of consumption for the purpose of

conforming to customer requirements

The flaw in this definition is its exchsion of the services environment, and the recent explosion of information technology and strategic technology management The council of Logistics Management(Stock & Lambert, 2001:54) revised their definition of logistics in 1998 to include these two fadors, and state it as follows:

Logistics is that part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods, services, and related information from the point of origin to the poinCof-consumption in order to meet customers' requirements.

Ballou (1999:6) offers the following statement as the mission of logistics:

"The mission of logistics is to get the right goods or services to the right place, at the right time, and in the desired condition, while making the greatest contribution to the firm."

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Ballou (1999:22-23) characterises the objectives of the logistics practitioner and business logistics in general as follows:

» To develop a logistics activity mix that will result in the highest possible return on investment over time by influencing the impact of the logistics system design on the revenue contributions and the cost of the design.

» Highlighting the additional revenue that could be generated through incremental improvements in the qualty of customer service provided.

» Maximising over time the ratio of the annual revenue (due to the customer service level provided) less the operating costs of the logistics system to the annualized imestment in the logistics system.

Figure 2.2: Logistics Components and the Supply Chain

Material sources Inbound

transportation Outbound Production transportation Finished goods warehousing

/1li

...,

Customers Inventory locations

:

r-- I I I

.

i.~E3E3 E3

I~~

~~Prod"dl'"

~

-&

materials

!

I

:

m.

I . I . : Inventories

'~

1":0

:

in-process g>'/ . ..L ~, ii~ ~~ . "'" _.

:..tYtY<55~

"~

-ILJ I ~ ~i~i~h~~ ~o~~s_ _ ~

..

Adapted from Ballou (1999:309)

According to the Council of Logistics Management (Ballou, 1999:8), the components of a typical logistics system are (as shown in Figure 2.2 above):

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-D

customer service

D

demand forecasting

D

distribution communications

D

inventory control

D

material handling

D

order processing

D

parts and service support

D

plant and warehouse site selection (location analysis)

D

purchasing

D

packaging

D

return goods handling

D

salvage and scrap disposal

P traffic and transportation

D

warehousing and storage

Figure 2.3: The Logistics Planning Triangle

Facility location decisions I Inventory Transportation I decisions decisions I I

Adapted from Ballou (1999: 24)

As can be seen from these statements of definition, mission and objectives as well as the components thereof logistics is aimed at maintaining or improving customer service levels while reducing the operating costs and increasing the revenue derived from sales. The

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approach to logistics is focused on a triangle of decisions all influencing this customer service level (Figure 2.3 refers).

Planning these decisions is the key to improving the customer service levels while reducing costs and increasing revenue. Kottler & Armstrong (2001:457) agrees that only through harmonising all of the company's distribution decisions, will integrated logistics management be able to achieve its goal.

2.3. IMPORTANCE OF LOGISTICS

Ballou (1999:ll) implies that logistics is about creating value- value for customers and suppliers of the firm, and vdue for the firm's stakeholders In Logistics terms this value is created by time - when the customer wishes to consume - and place

-

where the customer wishes to consume.

Figure 2.4: North American Logistics Costs: 1982- 96

Logistics costs as percentage of sales One-thud reduction YEAR

Note: Logistics costs include: tinished goods transportation, warehousing, order entry / customer service, administration, and inventory carrying cost @ 18%

Adapted from Evans & Danks, (1998:19)

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Each activity in the supply chain contributes to the process of adding value, and it is the perception of the customer as to the worth of this value added. Managing this value adding in logistics is important for a number of reasons. Figure 2.4 above highlights the effect that North American logistics managers have had in improving their logistics costs.

2.3.1. Cost of the Logistics Activities is Significant

During 1998, the cost of U.S. business logistics systems was the equivalent of 10.6% of the gross domestic product (Foster, 1999: 1). Ballou (1999:12) describes these costs as substantial for most firms, ranking second only to the cost of goods sold (purchase costs). Value can therefore be added by minimising these costs and passingthe benefit to the consumers and shareholders.

Figure 2.5: Impact of Supply Chain Management on Cash Earnings

c

-Greater customer sewice

(i.e. higher market share, greater gross margins) -Greater product availability

-Lower cost of goods sold. transportation,

warehousing, material handlina and distribution .Lower raw materials and finished goods inventoly .Shorter 'order to cash'

-Fewer physical assets (e.g. trucks,

warehouses, material

Adapted from Evans & Danks, (1998:21)

Figure 2.5 describes the impact of managing these costs. Improved revenue through greater customer service levels and reduced costs

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through improved efficiency of transportation and materials handling will lead to increased profitability for industry. By reducing working capital through improved management of inventory and kss investment in capital intensive equipment like vehicles and warehousing, it is possible to free up more capital for investment in more productive equipment.

2.3.2. Globalisation of the Supply and Distribution Lines

With the advent of the global econony, companies have developed new markets and source their goods from cheaper countries. Political arrangements to promote cross border trading such as NAFTA, EC92, and South Africa's NEPAC have encouraged the new markets and better sources. As transportation costs become a larger part of the logistics cost breakdown through these lengthened supply and distribution lines, more focus is needed on how to improve these costs and maintain service levels. Lengthened lines lead to longer deliveries and this increases stock holding costs through the need for increased inventory levels - management of this is critical to maintain cost levels, especially with the emphasis on changing to "Justin-time" manufacturing (Ballou, 1999: 12).

2.3.3. Logistics Affects a Company's Strategic Decision Making

Improved management of logistics costs provides a company with an opportunity to differentiate its products from those of its competitors, and affect the customer service levels which they are able to offer. Figure 2.6 demonstrates the strategic issues which the Logistics Manager is faced with when making decisions. It is these issues that have dictated a company's change from functional silos and reorganising around 'core' logistics related processes (Gatoma, 1999:l).

The increasing exchange rate fluctuations in South Africa has provided many companies with opportunities to enter new markets (particularly the export market) as a result of their cost differentiation, however, when the rate lowers as it has in the past few months, Logistics managers are

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faced with new challenges like changing the storage location or seeking new transportation options, etcetera.

Figure 2.6: Four Dimensions of Strategic Supply Chain Management

.

Supply chain integration strategy

Evans and Dank,(1998:24)

2.3.4. Customer Service can be Improved Through Logistics

In order to increase value in the eyes of the customer, logistics needs to focus on improving the time and place values in products- having the

products where the customer wants them, and when he wants them. Many companies have gained a competitive advantage by having stocks available and at the right location to meet customer needs. Decisions like storage location and size are critical to mproving customer service value, and offer the company and opportunity to formulate a marketing strategy. A company's marketing strategy is determined by four groups known as the "four P's": product, price, place and promotion (Kottler & Armstrong, 2001 :67).

Logistics affects the place group, and influences the decisions relative to the channel, coverage, location, inventory level, and transportation, that can offer the company a competitive advantage through improved customer service levels.

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2.3.5. Customers Increasingly Demand Quick Customised Response

Fast food retailers, automated banking, and overnight package delivery are prime examples of customers changing needs, and how industry has changed to meet this need. Customers are increasingly demanding products within 24 hour delivery, and havingcharacteristics to meet their needs

-

those companies willing to meet this challenge through

e

commerce, increased inventory holding, and knock down kits which allow for some form of customisation, are gaining the upper hand(Ballou, 1999: 14). While these changes often incur higher costs, the potential for higher profits more often make this option enticing to the companies. Supply chain managers are now faced with new challenges in order to reach the appropriate channel decisions that suit these changilg needs. The resulting decisions often impact or are driven by a company's marketing strategy.

2.4. SUPPLY CHAIN MANAGEMENT

Business logistics management is better known as Supply Chain Management. Supply chain management is a hot topic in business today. The idea is to apply a total systems approach to managing the flow of information, materials, and services from raw materials suppliers through factories and warehouses to the end customer. The term supply chain comes from a picture of how organisationsare linked together as viewed from a particular company (Chase, Aquilano & Jacobs 2001 :332). Figure 2.7 below illustrates a typical supply chain for an individual firm.

A supply chain is a network of facilities and distribution options that perform the functions of procurement of raw materials and consumables, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers (Figure 2.7 refers). Supply chains exist in both the services industry as well as in

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manufacturing organisations. The complexity of the supply chain varies greatly from industry to industry and company to company.

Figure 2.7: Immediate Supply Chain for an Individual Firm

Warehousing Warehousing Transportation Customers

t

Information Flow

ru

7

Transportation A

-

_Material_Flow

Warehousing Transportation VendorsiPlantsiPorts

Adapted from Ballou, (1 999:8)

Stock & Lambert (200154) defines supply chain management as follows: "Supply chain management is the integration of key business processes from end user through original suppliers that provides products, services, and information that add value for customers and other stakeholders"

This definition can be expanded to include the systematic, strategic c e ordination of the traditional business functions within a particular company and across businesses within the supply chain, for the purposes of improving the longterm performance of the individual companies a d h e

supply chain as a whole(Anon,, 2003:14).

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Supply chain management (SCM) is particularly important in mature and declining markets and during periods of economic slowdown, when market growth can not conceal inefficient practices. It is also critical in new-product and market development, when organisation is making decisions related to supply chain configuration (Stock & Lambert, 2001:55).

Supply chain management is no longer a matter for the operation& and functional areas of a firm

-

today it is a strategic issue demanding top- level management attention. A firm's supply chain performance often dictates the difference between business prosperity and failure (Anon,, 2003:14).

2.4.1. Objective of Supply Chain Management

The objective of SCM is to maximise competitiveness and profitability for the company as well as the whole supply chain network, including the end customer. Consequently, supply chain process integration and reengineering initiatives shculd be aimed at boosting total process efficiency and effectiveness across members of the supply chain (Stock &

Lambert, 2001:59).

2.4.2. Functions of Supply Chain Management

Supply chain management consists of two broad categories- strategic and operational - which are expanded into eight key business pocesses (Stock & Lambert, 2001 54):

D

Customer relationship management

D

Customer service management

D

Demand management

D

Order fulfilment

>

Manufacturing flow management

D

Procurement

D

Product development and commercialisation

D

Handling of returns

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Supply chain management revolves around four major decision areas: a. Location decisions

b. Production requirements c. Inventory decisions

d. Distribution network requirements

It's principals lie in the physical supply channel (matehls management), referring to the time and space gap between a firm's immediate material sources and its processing points, and the physical distribution channel, referring to the time and space gap between the processing points and the customers (Ballou, 1999:9). As these two channels are similar in nature and activities, industry has integrated these two functions to form the concept of business logistics. Figure 2.8 describes how the components of logistics interact in these two channels.

Figure 2.8: Possible Components in a Firm's Immediate Supply Chain

Business Logistics (Supply chain management)

.

Physical Distribution Physical Supply

(Materials management) P Transportation P Inventow maintenance 9 Order processing P Product schedulimg P Protective packaging P Warehousing P Materials handling

*

Information maintenance Customers Transportation Inventory maintenance Order processing Acquisitions h t e c t i v e packaging Warehousing Materials handling Information maintenance

4

-

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- --- - -- - Plants1 Operations 4 Sources of supply

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A supply chain is a cyclical system that covers the entire process of how organisations produce and deliver their products and services to their customers. It includes a company's suppliers, who provide the basic raw materials; the distributors who get products to the wholesale or end user customer; and the retailer, who in many cases offers the organisation's product to the consumer or business customer, (Anon,, 2001:l).

The supply chain covers all the traditional organizational activities associated with the production and sales process, including:

9 Sourcing of raw materials

9 Processing customer orders

9 Inventory management

9 Production planning

9 Distribution and warehousing

9 Customer sales and service.

Chase et a/. (2001:332) claim that many companies are achieving significant competitive advantage by the way they configure and manage their supply chain operations. Effective supply chain management ( S M ) is no longer a luxury

-

it's an essential tool for success in both the B2B and B2C markets. An organsation that can order raw materials from its suppliers in the right amounts at the right time can be more efficient in its manufacturing process. In tun, a carefully planned manufacturing process results in reduced waste on the factory floor or fewer wasted hours for a service provider.

2.4.3. Opportunities Derived Through Supply Chain Management

Supply Chain Management provides an opportunity for an uganisation to improve its operating margins, while delivering better, more responsive service to the customer. The long list of benefits possible through effective supply chain management includes

9 Faster time to market

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9 Lower development costs

9 Common business framework with partners

9 Rapid exchange of information

>

Availability of analytic and management tools

9 Reduced inventories

9 Assured delivery schedules.

The informational linkages between suppliers, manufacturers/service companies, distributors and custoners can be complex

-

making the use of Internet-based solutions virtually mandatory. Eliminating the significant costs embedded in inventories and warehouses by developing closer links between actual consumption and productionis the new focus within industry. Maintaining databases containing information on what has been purchased by specific customers; it is now possible to forecast demand and set stock levels accordingly. The customer service department typically wants to increase inventory and distrbution centers in order to be more responsive to customer needs, while the financial department looks at inventory and warehousing as cost enters that should be reduced (Anon,, 2001:2). For the Supply Chain Manager, this dilemma must be managed and optimised to meet both the needs of customer service while maintaining better inventories.

Today's SCM systems cover the entire production and sales cycle in a collaborative process with both customers and suppliers (Gooley,

1998:2):

9

Collaborate with customers to forecast demand

9 Prepare a demand plan

9 Match the demand to supply

9 Allocate supply to customers

>

Commit the supply and promise orders

9 Deliver to customers

9 Collaborate with customers to forecast the next round of demand.

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Several challenges face the implemntation of an SCM system including the need to develop faster, more consistent, and much more interactive processes with their supply chain partners. The tools available to Logistic Managers to address this challenge are(Gooley, 19982-3):

9 Back-end systems: Legacy enterprise systems that handle order processing, inventory, and receivables management for both buyers and suppliers.

9 Customer relationship management (CRM): Activities related to developing and retaining customers by establishing ard maintaining customer satisfaction.

9 Direct procurement: Purchasing raw materials and parts needed for manufacturing finished goods.

9 Electronic commerce: Any of the various computer and telecommunications methods of conducting inte~company business transactions.

9 Electronic data interchange (EDI): The paperless, electronic exchange of documents such as purchase orders, shipment authorizations, invoices and shipment notices.

9 Enterprise relationship management (ERM): An integrated information system that s e w s the "front office" departments, such as sales, marketing and customer service.

9 Enterprise resource planning (ERP): A software application that seeks to effectively plan and control all of the tasks involved in fulfilling customer orders from order placement through manufacture and shipping. It integrates accounting, inventory, engineering and process, as well as customer information.

9 Just In Time Manufacturing (JIT): A Japanese management philosophy that has been applied to meet consumer demands with minimum delays.

9 Materials requirements planning (MRP): Managing the materials required to produce products. This includes collecting,

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inventorying and distributing parts in the most coskeffective and efficient means possible.

D

Parts warehousing: Maintaining a supply of missiorwritical parts at a customer's site or in a central depot for delivery on an as needed basis.

D

Supply chain planning (SCP): Activities such as creating a set of suppliers, responding to buyer forecasts, or generating internal forecasts of usage.

b

Universal description, discovery and integration (UDDI): A platformindependent, open framework for describing services, discovering businesses, and integrating business services using the Internet.

2.4.4. Benefits of Administrative Investments i n a Global Supply Chain

Improvements in the management of materials and product flows could have resulted from substantial improvement and innovation in the field of data processing and information management. Better use of computer systems and appropriate programs has assisted distribution and logistics managers to increase the speed and accuracyin to order to improve their operation (Fawcett, McLeish & Ogden, 19926-7).

Don Brenchley, director of Collaborative Projects, recently described the need for retailers and suppliers to work together. As retailers battle amongst themselves to grow their sales revenues and raise margins, they are focusing more closely on the components that comprise their opportunity: lost sales, cost reductbns and inter-company processes (Anon,,

2002:30). In order to sell more, companies must sell better,

therefore they need a deeper understanding of consumer needs,need to develop more efficient relationships with their suppliers, and improve process productivity.

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Warehouse Management Systems (WMS) can deliver warehouse productivity improvements of around 30% per annum,which is achieved through:

9 More orders shipped per day

>

Improved stock accuracy

>

Greater service guarantees to the customers.

Cost savings can also be achieved though both improved warehouse productivity and the better deployment of labour. This includes(Anon,, 2002:30):

9 Real-time order picking for faster turn around

9 Constant item monitoring to ensure product availability at all times

9 Detailed productivity data through the use of associated technology

9 Mobile computers facilitate reaCtime management of material, work in process and finished goods

>

Productivity increases because operators receive the latest work instructions and information updates

Another focus area identified in a Logistics news article is that of transportation management. It offers solutions used by industry leaders to cut the fat, including: automated load tendering, webbased trackingttracing of shipments, a system to measure carrier perfamance, invoice less freight payment, proactive transit damage programmes and outsourcing the processing of returns (Anon,, 2002:2-3). Transportation management encompasses three disciplines which should receive attention:

>

Optimise the mode selection by pmling orders and shipment consolidation

9 Optimise the inbound freight operation as vendors often build these costs as an additional charge which offers the benefit of reducing inventory, improving visibility and controlling inbound materials;

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P Synthesis operations with supply chain partners both up and down the supply chain, by working with suppliers and distributors to maximise leverage and payback opportunities.

An important aspect in inventory control and supply chain management is the sharing of privileged information with suppliers via the Internet. By using the Internet to share data like production forecasts, CAD drawings, and terms and conditions with suppliers, cycle times could increase together with greater operating efficiencies (Anon,. 2002:15).

By linking members of the supply chain using advanced information systems and technology, and sharing data, a company may also be to further increase its customer service levels, lower its supply chain costs, and improve its return on assets.

2.4.5. Supply Chain Management as a Competitive Advantage

Brand value and proprietary technology no longer guaranteesales; they only provide a firm foundation on which market success is built. Real competitive advantage comes from a combination of loyal consumers, committed customers and a superior supply hain (Christopher, 1998:273). Figure 2.9 below demonstrates the interplays of these three key competitive elements.

These elements are highly interconnected and interdependent, yet companies are finding that thesupply chain can provide them with an as yet untapped source of additionaladvantage (Christopher, 1998273).

The past decade brought a significant emphasis on the integration of the total supply chain, with particular reference to production in orderto align supply with demand (Anok, 2002:30).

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Figure 2.9: Marketing and Logistics Converge

-Brand values -Corporate image

-Benefit focused

---Customer value _{Supply chain}

effectiveness -Costs of ownership -Value-adding relationship -Service quality -Low-cost supplier -Reduced asset base -Quick response

Adapted from Christopher, (1998:273)

Supply chain management is one of the few remaining areas in industry where significant savings Cal be made (Anong, 2003:2). By integrating the operations and systems between industries and their importers and exporters, economies can be achieved through:

~ Functional integration ~ Inventory optimization

~ Better use of carrier facilities ~ Risk sharing

~ Use of advanced international financing instruments.

Effective supply chain operations can offer the end user reduced costs, increased service and assistance with compettive advantage (Hunter, 2003:13). Hunter's research on how to mitigate risk in the suppy chain implies that:

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>

30-50 % of cost can be locked in poor management of the supply chain, and therefore capitalizing on the opportunities holds the key to the nation's relative prosperity;

D

companies that insist on living with inefficient supply chains m q be happy to do so;

D

success in South Africa is too often determined by the few for the few;

N

High inflation and lending rates have become the norm, and are stifling prosperity and growth.

The aims of supply chain management are aptly summarked by three words: better, faster, & closer (Christopher, 1998:273).

2.5. OUTSOURCING AND LOGISTICS

Chase et a/. (2001 : 339) define outsourcing as the act of moving some of a firm's internal activities and decision responsibility to outside providers, with the terms of their agreement established in a formal contract. They explain that Outsourcing goes beyond the more common purchasing and consulting contracts because not only are the activities transferred, but also resources that make the activities occur, including people, facilities, equipment, technology, and other assets, as well as the decisions over certain elements of the activities as transferred. Outsourcing represents an opportunity that should be considered in both supply chain design and evaluation of existing supply chains(Stock & Lambert, 2001:60).

Outsourcing is increasingly being recognised as a useful strategic tool with which to reduce costs and increase profitability, gain competitive advantage and increase customer service. A well managed outsoucing agreement offers a company an opportunity to gain in markets that would otherwise be uneconomical. Outsourcing should however be viewed as a long-term approach in order to gain most benefit. It is however not

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always the answers to every companies bgistical nightmares and is fraught with problems, most particularly in the sensitive issue of employees and their future engagement with the company.

Supply chain activities are well suited to the outsourcing option. These activities are often considered as cost centres draining investment capital and resources which could be better spent on more productive manufacturing equipment (Giles and Hancy, 1998:417). Numerous alternative suppliers are available in the market to address the needs of a company in its supply chain activities.

Management of Supply chain activities emphasizes service quality and excellence, and a company is faced with several critical decisions on whether to contract out these services or not. Arguments can be put forward to support either of the two alternatives and there are benefits and disadvantages connected to both. It is crucial that both the advantages and the potential pitfalls associated with outsourcing are fully considered in order to gain additional insight into what neds to be done to ensure the success of the project, and be aware of areas that may need further investigation.

Outsourcing the logistics function is an alternative to total ownership of the logistics capability and the need for an extensive logstics organisational structure (Ballou, 1999:627). Traditionally logistics takes part between two parties

-

the producer and the consumer/receiver. When a producer decides to outsource the logistics service, a new role player, the third-party, becomes involved. Outsourcing is a business tool and like all tools, must be properly managed to achieve the desired results and avoid failure and the potential pitfalls.

Ballou (1999:627) states that some firms choose to share their logistics capability with other firms or to contract for the logistics activities to be performed by firms specializing in providing such services, called third

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party providers. He continues that outsourcing the logistics function offers a number of benefits like:

9 Reduced cost and lower capitalexpenses

9 Access to technology and management skills not currently available in the company

9 Improved customer service by exploiting existing skills

9 Competitive advantage through increased market penetration

9 Increased access to information for planning

9 Reduced risk and uncertainty

Reduced capital expense and the chance to improve customer service levels at a lower cost are often the primary advantages to companies outsourcing their logistics service, however the potential loss of control over critical logistics activities often results in these advantages not being realised (Ballou, 1999:627).

2.5.1. Outsourcing Relationships

Outsourcing of the minor logistics function is not a relatively new concept

-

many companies have made use of the likes of UPS for smd packaging, or public warehousing for storage of goods, and occasionally used a common carrier like Spoornet for the tsnsportation leg. Ballou (1999:632) suggests that a primary reason for a company to outsource all or some of its logistics activities is that the thirdparty provider is more efficient because logistics is its primary business and logistics is not the core competency of the buying firm. Agreements or relationships commonly use between a company and its service providers are as follows (Figure 2.10 refers):

9 Transaction-by-transaction based;

9 Formal contract of at least one year;

9 Partnership with both benefits and risk sharing

P Partnership with the sharing of facilities

P Partnership with formal sharing of information

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It is critical that the strategic nature, potential benefits and problems of outsourcing are identified and understood, and that considerable time and effort are spent on ensuring successful implementation of the outsourcing process. Figure 2.10 below describes the general types d relationship available between the company and its outsourced service provider.

Ballou (1999:628) tells us that deciding whether to perform the logistics function in-house or to seek other arrangements is a balance of two factors: how critical logistics is to the success of the firm and how competent the firm is in managing the logistics function. When logistics is a key strategy for a company with low competency in logistics management, finding a suitable partner may provide the benefits listed above.

Figure 2.10: The Outsourcing Relationship Continuum

Strategic Alliance

A planned ongoing relationship where both parties have needs that the other can fulfil and both firms share values, goals, and corporate strategies for mutual benefit

Contract Logistics

A specifically defined relationship that is contractually oriented and dependent on the supplier meeting the shipper's performance goals Transactions

A relationship built on a single event, or a series of separate single events

Successful outsourcing relationships are identified by the following criteria:

~ A clear and concise outsourcing contract;

Chapter 2 - Literature Review

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