Group Project (Written Report)

Outsourcing Logistics Services Including 4PL

Member Jing GE Li DING Namrin BUSSAYADILOKSKUL Lei ZHANG Binbin HAN Zhongkai CAI

Unit of Study: Lecturer: Submission Date:

TPTM6155, Logistics Management Dr. Shams Rahman 20 May 2004

TPTM6155, Logistics Management Group: C

Group: AEIOU-- An Excellent Integrated Operation Unit Group Project (Written Report): Outsourcing Logistics Services Including 4PL

SYNOPSIS Basically, people can do something best. Some people can do everything but people cannot do everything best. Because of this, thats why people outsource. Outsourcing logistics services is the activity that a company passes its logistics functions to a logistics provider to manage. Outsourcing logistics also created the terms, insourcing, third party logistics, fourth party logistics, and fifth party logistics. It is very useful to know about similarities and differences of those terms. As for the companies who realize that logistics tasks are not their core competency, they should learn about the impacts of outsourcing before making a decision to outsource. The impacts have both bright and dark sides. The process to select a third party logistics provider is not too complicated but there are many factors to be considered. In contrast, success in outsourcing like Nike, Hitachi, and General Motor is not simple and needs some strategies to build it up. There are some signs to advise that the outsourcing is still growing. Firstly, the logistics companies keep launching a new technology or new service for logistics outsourcing. Secondly, there are many reports about logistics partnership from time to time. Although logistics outsourcing is in trend, the companies that will use it should depend on whether they need it and it is worthwhile to do.

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TPTM6155, Logistics Management Group: C

Group: AEIOU-- An Excellent Integrated Operation Unit Group Project (Written Report): Outsourcing Logistics Services Including 4PL

TABLE OF CONTENTS 1. INTRODUCTION 2. DEFINITIONS OF LOGISTICS OUTSOURCING 3. TYPES OF OUTSOURCING LOGISTICS SERVICES 4. IMPACT OF OUTSOURCING LOGISTICS SERVICES ON COMPANIES 4.1 Advantages 4.2 Disadvantages 5. HOW TO SUCCEED IN LOGISTICS OUTSOURCING 5.1 How to Outsource Logistics Services Providers 5.2 Barriers to Logistics Outsourcing 5.3 Key Success in Logistics Outsourcing 6. FUTURE TRENDS 7. CONCLUSION 8. REFERENCES 1 1 3 4 4 7 7 8 9 10 11 12 13

9. APPENDICES 18 Appendix 1: Levels of Logistics Outsourcing Appendix 2: Four Components for 4PL Appendix 3: The Next Wave Appendix 4: Most Frequency Used Third Party Logistics Services 19972000 Appendix 5: Fiat Auto Reverses Its Outsourcing Strategy Appendix 6: Major Selecting Criteria Appendix 7: Percentage of Growth of Outsourcing Globally Reference Attachment

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TPTM6155, Logistics Management Group: C

Group: AEIOU-- An Excellent Integrated Operation Unit Group Project (Written Report): Outsourcing Logistics Services Including 4PL

1. INTRODUCTION In the past, a typical company will manage everything from purchasing and sales to delivery and post-sales service. The larger organisation can manage those activities better because they gain the economies of scales from processing those functions systematically. However, rivalry in business forces the organisations to squeeze all the costs beginning with marketing, production, human resources, and currently logistics. Hence, outsourcing logistics began. From study (Berglund et al., 1999), there are three waves in outsourcing logistics or third party logistics (3PL/TPL) market. In the 1980s or earlier, the first wave emerged is traditional logistics service providers (e.g. Exel in the UK). The second wave is, in the early 1990s, some network pla yers like DHL, UPS, and FedEx started to provide 3PL services. The third wave began in the late 1990s. The companies from other industries such as information technology and financial services entered the market and joined with the first and second wave companies. Nowadays, in the USA, the big 370 companies out of the countrys 500 largest manufacturers outsource (Barlas, 2002). The percentage has been developed from 65% in 2002 to be 83% in 2003 (Blanchard, 2003). The value of outsourcing including fourth party logistics (4PL/FPL) is around 3.5 percent of US$2 trillion (Morrison, 2001). The paper aims to present: 1) the holistic view of outsourcing logistics services; 2) the impact of outsourcing logistics services; and 3) how to succeed in logistics outsourcing. To clarify the readers understanding, outsourcing company, or company, or organization means the company who is looking for or using a logistics provider. Apart from part 2.2, the term, a logistics (service) provider, in this paper is used as a logistics provider, 3PL and 4PL. After introduction, in part 2, the definition of the logistics outsourcing is described. In part 3, the types of outsourcing logistics services are discussed. Then, the paper presents the impact of outsourcing logistics services in part 4. In this part, it is divided into 2 sections; advantages and disadvantages. In part 5, it is divided into 3 sections to elucidate how to succeed in logistics outsourcing. Future trends of logistics outsourcing are illustrated in part 6. The final part is the conclusion of this paper. In additions, there are logistics outsourcing examples inserted in each part on occasion. 2. DEFINITIONS OF LOGISTICS OUTSOURCING Outsourcing is a decision of a company about make or buy goods or services. As for logistics outsourcing, if the company operates logistics activities more cheaply than hires someone to manage it, the company should insource. However, if the company operates those activities more expensively than hires someone to do it, the company should outsource (Zineldin and Bredenlow, 2003). According to Stank and Maltz (1996), outsourcing logistics is the decision to buy

TPTM6155, Logistics Management Group: C

Group: AEIOU-- An Excellent Integrated Operation Unit Group Project (Written Report): Outsourcing Logistics Services Including 4PL

logistics services from external sources rather than operate in-house. Another explanation by Murphy and Wood (2004) is the process when an organisation allows a specialist company to provide its non-core activities. To understand profoundly in the outsourcing, there are five levels of logistics outsourcing (Bade et al., 1999). See Appendix 1. 1) In-house logistics, or insoucing logistics, or reverse outsourcing means that the company operates its logistics activities in-house. The company owns transport, warehouses, handling equipment, and others including staff to process the logistics functions. This traditional way can perform effectively and efficiently if the company pays attention (Langley et al, 2001; Wong et al, 2000; http://www.hoyer-group.com/logistikE/html/3pl4pl.html, n.d.). 2) Logistics service provider (LSP), or asset-based logistics (2PL) is the management of traditional logistics functions such as transport and warehouse. The company who does not own or have enough facilities and infrastructure may hire the LSP to provide the vehicles or the basic service. The major reason is to reduce the cost or capital investment (http://www.hoyergroup.com/logistikE/html/3pl4pl.html, n.d.; Langley et al, 2001). 3) Third party logistics (3PL/TPL), or forwarding logistics, or contract logistics. TPL in the original term means that using external organisations to perform logistics functions that can be the entire logistics process or selected activities (Lieb et al., 1993 cited in Skjoett-Larsen, 2000). Another explanation of 3PL by van Laarhoven et al. (2000) is activities carried out by a logistics service provider on behalf of a shipper and consisting of at least management and execution of transportation and warehousing for at least one year of cooperation on or off contract. The paper refers to Murphy and Poist in 2000 (pp.121) who defined 3PL as
A relationship between two parties or more which, compared with basic logistics services, has more customized offerings, encompasses a broader number of service functions and is characterized by a longer-term, more mutually beneficial relationship.

In some literature (Skjoett-Larsen, 2000; Moore, 1998), 3PL may be described as the same meaning as logistics alliance or strategic alliance that is a close relationship between a company and a logistics provider not only to operate the logistics tasks but to emphasize on sharing information, risks and benefits under long -period contract. 4) Fourth party logistics (4PL/FPL), or supply chain logistics, or lead logistics provider (LLP). FPL is an evolutional concept of 3PL for better service response, customisation, and flexibility (M2 Communication Ltd., 2004). FPL manages and runs complex logistics operations including resources, supply chain infomediary, control room, and architecture/integrator function. See Appendix 2 (Schwartz, 2003). According to Appendix 2, as a functional and operational integrator, 4PL is 2

TPTM6155, Logistics Management Group: C

Group: AEIOU-- An Excellent Integrated Operation Unit Group Project (Written Report): Outsourcing Logistics Services Including 4PL

related to and developed from 3PL by covering the broader scope including 3PL, Information Technology (IT) services, and business process management (Bade et al., 1999). See Appendix 3. In this paper, 4PL is defined as a single contact that manages and integrates all kinds of resources and oversees 3PL functions throughout the supply chain with the sense of global market, strategic advantages, and long -term relationship (Morrison, 2001; Bade and Mueller, 1999 cited in Skjoett-Larsen, 2000; Gattorna, 1998 cited in Sahay, 2003). 5) Fifth party logistics (5PL) is developed to serve the e-business market. Those 3PL and 4PL providers manage all the parties in the supply chain on ecommerce. The key to success in this area is the information technology and system (http://www.hoyer-group.com/logistikE/html/3pl4pl.html, n.d.; Barlas, 2002) 3. TYPES OF OUTSOURCING LOGISTICS SERVICES Logistics outsourcing has grown up rapidly during the last few years, which improves the development of outsourcing logistics services. Nowadays, there are many kinds of logistics services to supply the diverse requirement from any business. It is different from the past that not only have basic logistics services such as transport and warehousing but also complex and profound services been emerged. Learning about logistics services is useful for companies to consider which services are now available and which services they may need in the future. Outsourcing logistics services can be categorized into several types because, at present, no regulation specifies how many types of logistics services actually are. Different industries have different logistics management systems and they have different services to handle their supply chain management. This is why the types of outsourcing logistics services are not clear. According to Bask (2001), there are four different types of outsourcing logistics services: 1) general service, 2) routine 3PL services, 3) standard 3PL services, and 4) customized 3PL services. As for 4PL, the companies like TNT logistics or UPS Supply Chain Solutions can be a part of customized 3PL services (Schwartz, 2003). Meanwhile Berglund et al. (1999) separated the logistics services into 2 categories. One is value-added logistics service, and the other is basic logistics service. Nevertheless, Shanahan (2004) provides the types of logistics services in terms of practical use. The top five 3PL services used during 2000-2003 are freight payment, shipment consolidation, direct transportation service, customer brokerage, and warehouse management (Shanahan, 2004). In the logistics market, there are other services available. For instance, freight forwarding, carrier selection, rate negotiation, product returns, logistics information systems, contract manufacturing, order fulfilment, consulting services and so on (Aghazadeh, 2003). See Appendix 3. Thus, judging the types of outsourcing logistics services should be based on a particular view or scope. For example, if the boundary is the degree and depth of

TPTM6155, Logistics Management Group: C

Group: AEIOU-- An Excellent Integrated Operation Unit Group Project (Written Report): Outsourcing Logistics Services Including 4PL

logistics services, the types of logistics services by Bask (2001) should be applied. If the scope is the practical use, the types of logistics service by Shanahan (2004) should be selected Today, especially in the business that is full of information and technology, outsourcing is increasingly important to the success of a company. Consequently, many logistics companies have emerged and achieved huge success. For example, Redwood System (RS), as a dynamic 3PL provider, has been a fast-growing leader in the field of logistics management. As a full-service contract logistics management company, RS provides services relating to transportation management, inventory management, and value-added services. RS collaborates with other companies who are specialized in technology and software . The partnership pushes RS to be a leading 3PL company in the market (Aghazadeh, 2003). Another example from Joining a global network in 2001 is BOC Distribution Services (BOC) provides the new logistics service called DeliveryNet Solution to monitor the performance throughout the supply chain. However, innovation in outsourcing logistics is not the only thing that rapport the success of outsourcing companies but the quality and efficiency from logistics providers really matter to those companies. 4. IMPACT OF OUTSOURCING LOGISTICS SERVICES ON COMPANIES There are some factors that drive companies to outsourcing logistics services at the first beginning. Originally, the companies would like to reduce cost in logistics activities, they have limited investment for labours and equipment, and they are required to improve level of logistics services (van Laarhoven et al., 2000; Wong et al., 2000; Stank and Maltz, 1996) Outsourcing logistics generates several impacts on companies. In other words, those drivers are the advantages of outsourcing but outsourcing bring other benefits as well. However, there are some disadvantages that organisations should be aware. 4.1 Advantages 1) Cost Reduction Saving cost is the initial benefit that an organization will receive from outsourcing. Outsourcing logistics activities can reduce the cost of operations, inventory handling, transport, order cycle time and so forth (van Laarhoven et al., 2000; Jennings, 2002; Hannon, 2003). The logistics providers can save cost fo r the outsourcing company because they have sufficient and modern facilities and they gain the economies of scale by operating logistics functions for many companies. From research, the company can achieve average 9 percent for logistics saving cost (Jennings, 2002).

TPTM6155, Logistics Management Group: C

Group: AEIOU-- An Excellent Integrated Operation Unit Group Project (Written Report): Outsourcing Logistics Services Including 4PL

For example, Laura Ashley (LA) outsourced their distribution to FedEx. For the first year, FedEx saved LA of US$ 3 million in logistics and reduce LAs logistics cost by 10-12% approximately (Wong et al., 2000). 2) Service and Technology Improvement Sometimes, the qualities of logistics performance is the reason to outsource because some companies cannot provide proper service or cannot improve the service to their customers (van Laarhoven et al., 2000; Wong et al., 2000; Stank and Maltz, 1996). From doing so, the company also gain benefits from development of technology and improvement in services during outsourcing contract (Hannon, 2003; van Laarhoven et al., 2000; Jennings, 2002). Especially 4PL, it generates the superior management in supply chain and IT (Bade et al., 1999). Currently, 3PL and 4PL provide a variety of services from labour in warehouse to shipment monitor via satellite. For instance, Exel, a UK logistics provider, developed e-business application for Hitachis SAP R3 system to enable Hitachis customers in Europe to receive the products directly from the factory (Barlas, 2002). Another example is Menlo Logistics manages logistics functions for Sears and insures the quality improvement by agreeing to renegotiate theirs contract every year (Wong et al., 2000). 3) Strategic Flexibility Strategic Flexibility is a benefit that some companies overlook. Outsourcing logistics may increase the supply chain expertise of both service provider and service receiver. The receive r learns how to operate logistics while the provider learns about the nature of various businesses for potential customers in the future (Zineldin and Bredenlow, 2003; van Laarhoven et al., 2000; Jennings, 2002). Moreover, outsourcing improves and facilita tes the communication between manufacturer and customers (Menon et al., 1998). In addition, logistics provider is more flexible to support uncertainty in demand. As for 4PL, it has an interesting advantage to better customize the logistics service to suit a particular business (Celestino, 1999; Minahan, 1997). For example, Donaldson, a US manufacturer who wants to expand its market in Canada, sometimes has to make a prompt decision to complete its customers urgent requirements. The company outsources rather than maintain its own corporate logistics operations. Unicity Integrated Logistics was selected as its partner, 3PL, to solve such problems. Donaldson finally provides better delivery service and succeeds in Canadian market (Gooley, 1998). 4) Capital Investment Investment can be saved because the outsourcing company pays for service rather than purchases and maintains its assets. In some cases, the situation arises when labours cannot be diverted to an urgent work. One of the solutions is to increase the number of labours. However, the company may need labours

TPTM6155, Logistics Management Group: C

Group: AEIOU-- An Excellent Integrated Operation Unit Group Project (Written Report): Outsourcing Logistics Services Including 4PL

temporarily but the company may have to train them and carry the higher fixed cost. Sometimes, a company needs a unique asset for important task but the equipment is hardly used (Stank and Maltz, 1996; Wong et al., 2000). Hence, outsourcing logistics is a benefit to overcome limited budget problem and have an efficient and effective logistics process (van Laarhoven et al., 2000; Zineldin and Bredenlow, 2003; http://www.maxwell.co.nz/whyuse3.htm, n.d.). For example, it may not be feasible for a company to invest in new information systems or upgrade its existing systems (Simchi et al., 1999). Therefore, outsourcing can be the advantage for the company and the method to solve that problem. 5) Core Competency It is another benefit from outsourcing logistics services. As for manufacturers, retailers, and distributors, their core business is to produce or sell products. The customers perceive logistics as an adding value and competitive advantage activity only. Thus, finding a firm who provides a specific service as its core business will allow those companies to focus on their core competency (Mclvor, 2000; Boyson et al., 1999, Wong et al., 2000; Hannon, 2003; van Laarhoven et al., 2000; Zineldin and Bredenlow, 2003; Jennings, 2002). For instance, Simchi et al. (1999) stated that Ryder Dedicated Logistics and General Motors Saturn are a good example. Ryder fully takes care of Saturns logistics while Saturn concentrates on what it does best, that is, manufacturing. Another case by Johnson (1997), as a successful outsourcing pioneer, Nike only concentrates on four in-house areas: marketing, design, development and sourcing. Other things go to outside contractors. 6) Sharing and Reducing Risks Sharing and reducing risks are also the advantage for logistics outsourcing. The outsourcing company transfers, avoids, and eliminates risks because the logistics providers are specialists (Zineldin and Bredenlow, 2003; Hannon, 2003). They have experience to assess the uncertainty and catastrophes for logistics operations, and they have sufficient equipment and facilities to run logistics and supply chain process efficiently. The provider shares risk because it has to manage logistics function efficiently under limited cost. If providing logistics service fails, the provider will be infamous in its logistics market. Meanwhile the outsourcing company may lose and receive complaints from customers (http://accenture.ca/xd/xd.asp?xd=insights%5Cinsi_srsr.xml, n.d.) However, EKOL Logistics (http://www.ekol.com/4thdimension.html, 2003) believes that 3PL provider takes risks proportional to the quality of services undertaken while 4PL provider does not take any direct risks. FPL immediately transfers the liabilities to some 3PLs, and it primarily shares and is responsible for the risk load with binding contracts by acting as an intermediary only.

TPTM6155, Logistics Management Group: C

Group: AEIOU-- An Excellent Integrated Operation Unit Group Project (Written Report): Outsourcing Logistics Services Including 4PL

4.2 Disadvantages Although outsourcing logistics services generates a large number of advantages to the organization, some disadvantages are appeared in the outsourcing process. 1) Loss of Control over the Supply Chain According to Howarth et al. in 1995, the smaller the level of dependency, the less the potential loss of decision-making authority. The company takes the risk of dependence on the logistics provider and loses the control over the logistics and service process when the logistics functions are outsourced to the logistics provider such as 3PL, 4PL (Tagliapietra et al., 1999). If there is an error or mistake on logistics operations, the company will be affected directly but cannot fix the problem itself because the company allocates the task to the logistics provider. See example in Appendix 5 about reverse outsourcing of Fiat Auto. 2) Cost Awareness Not only is it very difficult to estimate the cost of outsourcing process but also the outsourcing company underestimates the cost of that. The company often realizes about the setup cost, researching and selecting process, timeconsuming cost and so on when overall outsourcing costs have noticeably escalated. These existing hidden costs should be considered and compared with the benefits and cost reductions before starting to outsource (Wang and Regan, 2003; Barthelemy, 2001). 3) Lack of Improvement and Innovative Ability The innovative ability of logistics in the company may be impaired because the company lacks logistics skills by transferring the task to 3PL (Earl, 1996). Also, during the outsourcing contract period, the logistics provider primarily focuses on costs instead of the creativity (Wang and Regan, 2003). Thus, the provider is likely to improve the amount of cost rather than develop the total operations. 4) Human Resource Issues Usually the outsourcing implies a reorganization of the work and may sometimes not be accepted by management and staff who see the logistics provider like 3PL or 4PL as an interferer (Tagliapietra et al., 1999). Therefore, the contracting company should train, educate, and help the employees to adjust themselves to the new environment, the business strategies, and new methodologies. 5. HOW TO SUCCEED IN LOGISTICS OUTSOURCING The first factor that helps companies to be successful in outsourcing begins with how to select the third or fo urth party logistics provider. The second factor is to know the key success or management techniques to operate the outsourcing successfully and maintain that success. 5.1 How to Outsource Logistics Services Providers

TPTM6155, Logistics Management Group: C

Group: AEIOU-- An Excellent Integrated Operation Unit Group Project (Written Report): Outsourcing Logistics Services Including 4PL

The number of outsourcing steps is not as important as the method of those. Based on Aghazadehs view (2003), there are five steps of the logistics outsourcing process. Step 1: Making the Decision First of all, the company has to decide whether it needs to outsource logistics functions. There are some signs to tell the company that it should outsource. For example, late shipments cost the company and customers extra money, the linking problem occurs among many departments, and the information technology fails to track the shipment movement (Minahan, 1997). Also, the company has to ask all departments to share their opinions. If the answer is yes, the company has to evaluate and examine their strengths and current operations in their suppliers, warehousing, distribution, and so forth (Aghazadeh, 2003; Celestino, 1999). Step 2: Evaluating the Operations and Developing Criteria and Objective After evaluating the companys operations, the company will see their weakness and set the objective and goal to improve their service and operations. It is important to identify what the company wants to avoid the risk of unwanted logistics services and cost (Celestino, 1999; Minahan, 1997). In addition, the company needs to establish the criteria that logistics providers should meet (Aghazadeh, 2003). According to the research from Menon et al. (1998), the five major selecting criteria that the company should consider are: 1) on-time shipment and deliveries 2) meet or exceed promises, 3) availability of top management, 4) superior error rates, and 5) responsiveness to unforeseen problems (See Appendix 6). Nevertheless, the survey team was surprised that the cost concern was out of the top ten criteria. However, it is believed that low cost issue may take part if the company is in medium or small size (Minahan, 1997). Step 3: Making the List and Sending Letters Next, the company has to make the possible logistics providers list. In this step, the listing may be founded on the size of the potential provider and the company, the capability of the provider, the specialty and timeframes of the provider (Minahan, 1997; Celestino, 1999). Then, the company should send their letters the potential 3PLs. Meanwhile, the company has to prepare a request for proposal (RFT) to be sent to top 3 list. RFI may take time to complete but the company should not invest too much time on this step. Furthermore, the detail of RFI should include the services required, the desire term of contract, the company profile, customer information requirement, and other relevant information (Is third party logistics in your future?, 2000; Aghazadeh, 2003). Step 4: Consideration and Selection

TPTM6155, Logistics Management Group: C

Group: AEIOU-- An Excellent Integrated Operation Unit Group Project (Written Report): Outsourcing Logistics Services Including 4PL

After receiving the reply from potential providers, the company has to visit the 3PL, learn from those 3PLs customers experience and their performance to the customers who have a similar business to the company, and ask the questions to the logistics provider and the company itself. For instance, does the provider understand the companys industry?, who are the other customers?, does provider inventory management meet the companys current and forecasted?, how flexible are the providers?, and can the 3PLs provide customized reporting? (Is third party logistics in your future?, 2000; Minahan, 1997; Celestino, 1999; Aghazadeh, 2003). After considering everything, the company chooses the logistics provider and sign a contract. To start the first outsourcing, the company may begin with a small part of logistics but not too small until it cannot generate the saving scale (Minahan, 1997; Celestino, 1999; Aghazadeh, 2003). Step 5: Beginning the New Partnership While the company begins to work with the chosen logistics providers, they should collect details, ask questions, communicate on a regular basis, and ensure that both companies meet their satisfaction (Aghazadeh, 2003). These steps are technically suitable for outsourcing 3PL. To choose 4PL provider, the company might also apply those stages. However, step 2 and step 4 may take longer time to process because 4PL needs closer relationship to design and manage all the process of logistics activities. Also, 3PL relationship may begin at the first place, and then, it can be developed to be strategic alliance relationship or 4PL later. 5.2 Barriers to Logistics Outsourcing Although the organisations follow the steps of outsourcing logistics services and select the appropriate providers, the organisation may fail after starting the operations. The reasons why outsourcing strategy fails are: 1) inadequate measurement, 2) insufficient information and communication, 3) inadequate trust, 4) loose commitment, 5) fuzzy goals and changes, and 6) dissatisfactory performance (Bowersox and Closs, 1996; Ackerman, 1996). For instance, basically, the logistics provider and the contracting company are two separate companies. Thus, the information asymmetry inevitably exists in outsourcing process. In some cases, if the logistics provider has not completed information about the company, the provider might not offer the cost structure that will be matched well with the companys requirement (Wang and Regan, 2003). Also, the information system that is provided to the outsourcing company cannot be utilized properly because lack of training (Langley Jr. et al., 2001). Therefore, the companies have to consider the other factors to achieve the success during outsourcing logistics service. 5.3 Key Success in Logistics Outsourcing

TPTM6155, Logistics Management Group: C

Group: AEIOU-- An Excellent Integrated Operation Unit Group Project (Written Report): Outsourcing Logistics Services Including 4PL

Although interest in logistics outsourcing is increasing, companies and logistics providers face many challenges in establishing successful logistics outsourcing (Moore, 1998). The success keys in logistics outsourcing after selecting the 3PL or 4PL are as follows: 1) Trust Trust is the beginning and one of the most significant factors to succeed in outsourcing logistics because the companies have to share information, benefits, and risks to each other (Tate, 1996). After trust is settled, the human issues should be less troublesome. Because of trust, the logistics company gains a chance to improve its service level and develops the relationship for long period especially strategic alliance and 4PL (Schwartz, 2003; Murphy and Poist, 2000; Whipple and Frankel, 2000; Howarth et al., 1995; Jonsson and Zineldin, 2003; Tate, 1996; Moore, 1998). 2) Performance Evaluation Performance measurement is one of the major factors to measure the success and maintain the achievement after outsourcing starts. The companies outsource logistics services to improve their operations and service or to reduce the cost. If the performance is not satisfied, the outsourcing can be ceased or failed because the objective of outsourcing is not achieved. To maintain the alliance and succeed in the long term, it is necessary to measure or evaluate the performance regularly (Jonsson and Zineldin, 2003; Whipple and Frankel; 2000; Murphy and Poist, 2000; van Laarhoven et al., 2000). 3) Sharing Information and Communication It leverages the efficiency and effectiveness in logistics outsourcing because both partners know what they want and provide the relevant information. Lack of information and communication can fail the outsourcing especially in strategic alliance and 4PL (Murphy and Poist, 2000; Whipple and Frankel, 2000). 4) Top Management Top management can help the staff to overcome the reluctant situation by showi ng the concrete goal and support. Lack of support from top management will discourage the operations levels decision in management, sharing information, and communication (Whipple and Frankel, 2000; Murphy and Poist, 2000, van Laarhoven et al, 2000). 5) Clear Goal, Vision and Roles Goal, vision and roles are required to protect confusion between staff and staff, and between two organisations (van Laarhoven et al, 2000; Whipple and Frankel, 2000; Murphy and Poist, 2000). Thus, the goals, roles, and vision should be clarified at the early stage and updated from time to time to prevent the risks that the partners may work in the different directions (http://www.transportstudier.dk/udgivelser/pdf/3.part_sum.pdf, n.d.)

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TPTM6155, Logistics Management Group: C

Group: AEIOU-- An Excellent Integrated Operation Unit Group Project (Written Report): Outsourcing Logistics Services Including 4PL

Moreover, other key success can be relationship commitment (Moore, 1998; Tate, 1996), sharing benefits and risks (Murphy and Poist, 2000; Tate, 1996), flexibility (Tate, 1996), etc. Both sides may have to adopt these issues in their considerations. There are some examples from companies who are successful in logistics outsourcing. To begin with, Penske Logistics, the 4PL company that sources suppliers for Nikes line of golf club, is the example of trust. The company requires trust from Nike to manage and integrate the flow of operations and information (Schwartz, 2003). As for 3PL relationship example, Yamaha Motor Group has outsourced APL Logistics as its 3PL to manage warehousing and transport for 10 years. The secret of long-term relationship is understanding and support from top management and evaluating performance on the regular basis (Trunick, 2004). Another case is the strategic alliance between Laura Ashley (LA), a home furnishing company, and Federal Express (FedEx). The top management of LA played an important role to outsource its whole distribution department to FedEx. The performance and relationship between them had been satisfied until LA had the organisational change. This change caused the different goals and the outsourcing alliance had to be ceased before the contract was terminated (Wong et al., 2000; Dornier et al., 1998). 6. FUTURE TRENDS Outsourcing logistics keeps increasingly growing. As for 3PL market, Aghazadeh (2003) stated that it is growing by 18-22 percent annually. Neverthless, Hamilton (2003) assessed that 3PL market is in mature level and because the cost saving and some strategic advantages do not highly affect the total performance of the outsourcing companies. Similarly, Foster (1999) agreed that outsourcing has not really improved logistics activities substantially. Both authors including Schwartz (2003) thought that the next wave of outsourcing is 4PL that will manage logistics tasks, improve the service level of 3PL, and show how much 4PL impact on (improve) the logistics performance. Interestingly, the successful 4PL companies develop from 3PL companies (e.g. Federal Express Supply Chain Services, TNT Logistics, and UPS Supply Chain Solutions)(Schwartz, 2003). Foster (1999) and M2 Communication Ltd. (2004) also asserted that 4PL will grow up well if the outsourcing companies are successful with 3PL. If outsourcing logistics to 3PL fails, it is more difficult to hand more tasks and responsibilities to 4PL to manage. Logistics outsourcing trends to grow much more in international market after it has been expanded domestically for years (Morrison, 2001a; Wong et al., 2000). Globally, in 2002, outsourcing grows for 43% in North America and for 51% in Western Europe and in 2005-2007, outsourcing is estimated to grow to 60% in North America and 74% in Western Europe (Hannon, 2003). See Appendix 7. Not only does 3PL grow up but 4PL is also likely to expand cross countries (Skjoett-Larsen, 2000). It was expected that 4PL market in Western Europe will increase from EUR 4.7 billion in 2002 to about EUR 13 billion by 2010 (M2

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TPTM6155, Logistics Management Group: C

Group: AEIOU-- An Excellent Integrated Operation Unit Group Project (Written Report): Outsourcing Logistics Services Including 4PL

Communication Ltd., 2004). Also, Armbruster (2002) interviewed Kuehne & Nagels chief executive that 4PL trends to grow in logistics business during this decade. FPL will be the next trend because it implements up-to-date computer and information technology especially visibility or real-time knowledge (Schwartz, 2003). Therefore, it can be controlled from any part in the world. Correspondingly, 5PL trends will grow continuously because the market is international in terms of cyber space. However, 5PL will be highly affected if the computer technology and e-business are not always in demand. 7. CONCLUSION Logistics outsourcing has another name so called 3PL. Originally, outsourcing logistics is to hire a logistics company to work for a company to handle warehousing and transportation. TPL can actually manage more functions including inventory and order processing or all logistics activities and look forward to long -term relationship at least 1 year. Meanwhile 4PL requires longer period of cooperation and trends to integrate the whole supply chain for a company. As for 5PL is a 3PL on e -business. New logistics services are appeared now and then because the development of technology and computer system. Also, the companies are likely to pay attention to what they do best so they sometimes avoid operating some activities but hiring a logistics provider to work instead. The company will be benefited from outsourcing in terms of cost reduction, core business focus, strategic advantages, investment saving, service and technology improvement, etc. However, the company may lose control and ability in logistics tasks, have to consider about cost of outsourcing, and should be careful about human resources. To be successful in outsourcing logistics, the company should learn and consider how to select a logistics provider carefully. Next step is working together. Both sides need support from top management and have to share information, risk and rewards, mutually trust, always update vision and goals, evaluate their performance regularly, and so forth. With the development of computer and information technology, it is useful for logistics providers to improve their performance and potentially save operations cost in long run. Due to the growth of society and globalisation, 3PL and 4PL are still increasingly required (Morrison, 2001a). Next generation of outsourcing seems to be 4PL. However, the growth of 4PL depends on the achievement of 3PL because if people cannot work successfully in small job, it seems impossible to do well in big job.

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8. REFERENCES 2. English summary: Aim of the project in 1996 and 1997 Institut for Transportstudier carried out a study about third party logistics in Denmark (n.d.), The Danish Transport Council and Danish Freight Forwarders Association, pp.16-30. Retrieved: 4 April, 2004, from http://www.transportstudier.dk/udgivelser/pdf/3.part_sum.pdf Ackerman, K.B.1996, Pitfalls in logistics partnerships, International Journal of Physical Distribution and Logistics Management, vol.26, no.3, pp.35-37. Aghazadeh, S. 2003, How to choose an effective third party logistics provider, Management Research News , vol. 26, no. 7, pp. 50-58. Armbruster, W. 2002, Cover Story: 4PL, JOC Week, 24 June 2002, vol.3, no.25, pp.11-13. Bade, D., Mueller, J., and Youd, B. 1999, Technology in the next generation of supply chain outsourcing - leveraging capabilities of fourth party logistics, Ascet, 15 April, 1999, vol.1. Retrieved: 28 March, 2004, from http://www.ascet.com/documents.asp?d_ID=229 Bade, D.J. and Mueller, J.K. 1999, New for the millinium:4PL, Transport & Distribution, February, pp.78-80 in Skjoett-Larsen, T. 2000,Third party logistics-from an interorganizational point of view, International Journal of Physical Distribution and Logistics Management, vol.30, no.2, pp.112-127. Barlas, D. 2002, Outsourcing logistics: As 3PL increases in importance, providers are expanding e-business services, Line56 Magazine, February, 2002. Retrieved: 19 April, 2004, from http://www.line56.com Barthelemy, J. 2001, The hidden costs of IT outsourcing, Sloan Management Review, vol.42, no. 3, pp. 60-69. Bask, A.H. 2001, Relationships among TPL providers and members of supply chains -strategic perspective, Journal of Business & Industrial Marketing, vol.16, no.6, pp.470-486. Berglund, M., van Laarhoven, P., Sharman, G., and Wandel, S. 1999, Thirdparty logistics: Is there a future?, International Journal of Logistics Management, vol.10, no.1, pp.59-68. Blanchard, D. 2003, Balance of power, Logistics Today, December Supplement, pp.4.

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Bowersox, D.J. and Closs, D.J. 1996, Logistical Management: The Integrated Supply Chain Process, McGraw-Hill, NewYork. Boyson, S., Corsi, T., Dresner, M., and Rabinovich, E. 1999, Managing effective third party logistics relationships: What does it take?, Journal of Business Logistics, vol.20, no.1, pp.73-100. Celestino, M. L. 1999, Choosing a third-party logistics provider, World Trade, July, vol.12, no.7, pp. 54-56. Cifferi, L. 2004, Fiat Auto reverse its outsourcing strategy, Automotive News, 9 February 2004, vol.78, no.6079, pp. 24N. Dornier, P., Ernst, R., Fender, M., and Kouvelis, P. 1998, Global Operations and Logistics: Text and Cases, John Wiley, New York. Earl, M.J. 1996, The risk of outsourcing IT, Sloan Management Review, vol. 37, no. 3, pp. 26-32. EKOL Logistics 2003, 4th Dimension. Retrieved: 27 March, 2004, from http://www.ekol.com/4thdimension.html Foster, T. 1999, 4PLs: The next generation for supply chain outsourcing?, Logistics Management and Distribution Report, vol.38, no.4, pp.35. Gattorna, J.L. 1998, Strategic Supply Chain Management: Best Practice in Supply Chain Management, Gower Publishing, Aldershot in Sahay, B.S., 2000, Supply chain collaboration: The key to value creation, Work Study, vol.52, no.2, pp.76-83. Gooley. T.B., 1998, Logistics boosts Donaldson's Northern Exposure, Logistics Management and Distribution Report, May, vol. 37, no. 5; pp. 56-59. Hamilton, S. 2003, Has logistics outsourcing reached its limits?, Transport Topics, 29 September 2003, pp. 7. Hannon, D. 2003, Outsourced logistics merit a second look in down economy, Purchasing, March, vol.132, no.5, pp.24S1-24S4. Howarth, C.S., Gillin, M., and Bailey, J. 1995, Strategic Alliances: ResourceSharing Strategies for Small Companies, Pitman Publishing, Melbourne. Hoyer, (n.d.), 3PL/4PL. Retrieved: 5 April, 2004, from http://www.hoyer-group.com/logistikE/html/3pl4pl.html

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Is third party logistics in your future? 2000, Modern Materials Handling, December, vol. 55, no. 14, pp. S3-S15. Jennings, D. 2002, Strategic sourcing: benefits, problems and a contextual model, Management Decision, vol.40, no.1, pp.26-34. Johnson, M. 1997, Outsourcing in Brief, Butterworth-Heinemann, Oxford. Joining a global network 2001, Frontline Solutions Europe, June, vol.10, no.5, pp.26. Jonsson, P. and Zineldin, M. 2003, Achieving high satisfaction in supplier-dealer working relationship, Supply Chain Management: An International Journal, vol.8, no.3, pp.224-240. Langley Jr., C.J., Allen, G.R., and Tyndall, G.R. 2001, Third-Party Logistics Study: Results and Findings of the 2001 Sixth Annual Study Cap Gemini Ernst and Young. pp.1 -28. Retrieved: 18 April, 2004, from http://www.us.cgey.com Lieb, R.C., Millen, R.A. and Wassenhove, L.V. 1993, Third -party logistics services: a comparison of experienced American and European manufacturers, International Journal of Physical Distribution & Logistics Management, vol.6, no.23, pp.35-44 in Skjoett -Larsen, T. 2000, Third party logistics-from an interorganizational point of view, International Journal of Physical Distribution and Logistics Management, vol.30, no.2, pp.112-127. M2 Communication Ltd. 2004, Fourth party logistics: Fourth party logistics transforms logistics from a cost proposition to a value proposition M2 Presswire, 24 February, 2004, pp.1. Mclvor, R. 2000, A practical framework for understanding the outsourcing process, Supply Chain Management, vol.5, no.1, pp.22. Menon, M.K., McGinnis, M.A., and Ackerman, K. B. 1998, Selection criteria for providers of third -party logistics services: An exploratory study, Journal of Business Logistics, vol. 19, no. 1, pp. 121-137. Minahan, T. 1997, Want to outsource logistics? Heres what you should know, Purchasing, Oct 9, vol. 123, no. 5, pp. 59-60. Moore, K.R., 1998, Trust and relationship commitment in logistics alliances: A buyer perspective, International Journal of Purchasing and Materials Management, Winter, vol.34, no.1, pp.24-37.

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Morrison, M. 2001, Redefining 4PLs in the Global Marketplace, Logistics Quarterly, Summer, vol.7, no.2. Retrieved: 15 April, 2004, from http://www.lq.ca/issues/summer2001/articles/article04.html Morrison, M. 2001a, Scope Needed for Global Supply Chains, Logistics Quarterly, vol.7, no.4. Retrieved: 21 March, 2004, from http://www.lq.ca/issues/winter2001/articles/article10.html Murphy, Jr., P.R. and Wood, D.F. 2004, The supply-chain concept, Contemporary Logistics, 8 th ed., Pearson Education International, London. Murphy, P.R. and Poist, R.F. 2000, Third-party logistics: Some user versus provider perspectives, Journal of Business Logistics, vol. 21, no.1, pp. 121-134. Outsourcing - Shared Risks and Shared Rewards (n.d.), Accenture in Canada http://accenture.ca/xd/xd.asp?xd=insights%5Cinsi_srsr.xml Schwartz, E. 2003, The logistics handoff, InfoWorld, November 10, vol.25, no.44, pp.53-58. Shanahan, J. 2004, 3PL roles continue to grow, Logistics Management, February, vol. 43, no.2, pp.39-42. Simchi, D., Kaminsky, P. and Simchi, E. 1999, Designing and managing the supply chain - Concepts, Strategies, and Case Studies, Irwin McGraw-Hill. Skjoett-Larsen, T. 2000,Third party logistics-from an interorganizational point of view, International Journal of Physical Distribution and Logistics Management, vol.30, no.2, pp.112-127. Stank, T.P. and Maltz, A.B. 1996, Some proposition on third party choice: Domestic VS. International logistics providers, Journal of MarketingTheory and Practice, Spring, vol.4, no.2, pp.45-54. Tagliapietra, S., Platan, P., Li, N.S., and Schneider, R. 1999, Gaining competitive advantage through outsourcing, Business Logistics, May, 1999. Retrieved: 24 April, 2004, from http://www.peterplatan.com/DOC/Outsourcing.pdf Tate, K. 1996, The elements of a successful logistics partnership, International Journal of Physical Distribution and Logistics Management, vol.26, no.3, pp.7-13. Trunick, P.A. 2004, The secret of your 3PL success, Logistics Today, February, vol.45, no.2, pp.16-20.

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Van Laarhoven, P., Berglund, M., and Peters, M. 2000, Third-party logistics in Europe- five years later, International Journal of Physical Distribution and Logistics Management, vol.30, no.5, pp. 425-442. Wang, C. and Regan, A.C. 2003, Risks and reduction measures in logistics outsourcing. Retrieved: 24 April, 2004, from http://www.its.berkeley.edu/publications/ITSReviewonline/spring2003/trb2 003/regan-outsourcing.pdf Whipple, J.M. and Frankel, R. 2000, Strategic alliance success factors, Journal of Supply Chain Management, Summer, vol.36, no.3, pp.21-28. Why use 3 rd parties to provide your warehousing, n.d., Retrieved: 27 March, 2004, from http://www.maxwell.co.nz/whyuse3.htm Wong, Y., Maher, T.E., Nicholson, J.D. and Gurney, N.P. 2000, Strategic alliances in logistics outsourcing, Asia Pacific Journal of Marketing and Logistics, vol.12, no.4, pp.3-21. Zineldin, M. and Bredenlow, T. 2003, Strategic alliance: synergies and challenges , International Journal of Physical Distribution and Logistics Management, vol.33, no.5, pp.449-464.

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9. APPENDICES

Appendix 1: 3PL/4PL: Levels of Logistics Outsourcing Source: http://www.hoyer-group.com/logistikE/html/3pl4pl.html, n.d.

Architecture/Integrator Change leaders -Supply-chain visionary -Customer relationship manager -Deal-maker -Supply-chain engineer -Project manager -Service, systems, and information integrator -Innovator Supply-chain infomediary Information nervous system -IT system integration -IT infrastructure provision -Real-time data tracking -Data conversion -Technical support

Control room (Intelligence) Decision-makers -Experienced logisticians -Multiple 3PL managers -Optimisation engines and decision support -Neutral positioning -Continuous improvements

Resource providers Assets -Transportation -Warehouse, property facility -Manufacturing -Procurement services -Co-packing services

Appendix 2: Four Components for 4PL Source: Accenture cited in Schwartz, 2003. 18

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Appendix 3: The Next Wave Source: Bade et al., 1999

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Appendix 4: Most Frequency Used Third Party Logistics Services 1997-2000 Source: Northeastern University and Anderson Consulting, cited in Aghazadeh, 2003

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Fiat Auto reverses its outsourcing strategy Luca Cifferi. Automotive News Detroit: Feb 9, 2004. Vol. 78, Iss. 6079; pg. 24N, 1 pgs .
Abstract (Article Summary)

Fiat Auto SpA is reversing a decade-long strategy of extensive outsourcing in an attempt to gain more control over its manufacturing process. From 1993 to 2002, Fiat Auto sold many components plants, several stamping activities, and its suspension operation. Under new CEO Herbert Demel, the company has rehired 3,071 people working on assembly line maintenance in Italian and Polish car plants.
Full Text (635 words)

Copyright Crain Communications, Incorporated Feb 9, 2004

TURIN, Italy - Fiat Auto S.p.A. is reversing a decade-long strategy of extensive outsourcing in an attempt to gain more control over its manufacturing process. In the last 14 months, Fiat Auto has retaken control of some customer service, dealer training, die construction and assembly line maintenance operations. It is considering transferring more employees from Fiat group service companies back into Fiat Auto. And it is negotiating with several suppliers about repurchasing parts operations. A limiting factor will be how much capital financially troubled Fiat Auto can generate. The only area of operations that won't be brought back in-house is the suspension business it sold to group subsidiary Magneti Marelli in 1999 and 2000. From 1993 to 2002, Fiat Auto sold many components plants, several stamping activities and its suspension operation. It subsequently contracted to buy parts from the new owners. Fiat Auto transferred 21,000 employees to 75 other companies, according to the European Industrial Relations Observatory, a network of European research institutes. Outside services Fiat Auto also outsourced many functions on the services side, including inbound and outbound logistics of assembly plants, spare parts warehouses, plant maintenance and its administration sector. As Fiat Auto CEO, Paolo Cantarella oversaw the automaker's extensive outsourcing program from 1990 to 1995. Cantarella also applied the philosophy to the Fiat group when he was promoted to group CEO in 1996. Cantarella wanted every operating company to concentrate on its core business only. He outsourced activities wherever there was a specialist willing to take on the role. He believed these specialists could do tasks faster and more cost-effective than employees working within the larger

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automaker. Cantarella's dream was to have independent suppliers building complete bodies-in-white. Fiat Auto would be responsible only for engine and transmission production and final assembly. Cantarella also was convinced that creating single-service companies serving the entire group could let them better focus on their jobs - and attract new clients outside the group. That part of the plan never materialized. Cantarella's central-service companies attracted few outside clients and still work almost exclusively for Fiat group subsidiaries. With Fiat Auto losing money, control over its operations slipping and little value being added by the network of supplier and service companies, executives realized a change was in order. Giuseppe Morchio, who became Fiat group CEO last year, favors more vertical integration within the group. But Fiat Auto CEO Giancarlo Boschetti already had begun to reverse the outsourcing strategy in late 2002 with what he called "a selective insourcing." He strengthened Fiat Auto's r&d by hiring 100 young engineers. And he regained direct control of the customer call center as well as the dealer and service training staff. 3,071 people rehired Under new CEO Herbert Demel, who took over Fiat Auto last November, the company has rehired 3,071 people working on assembly line maintenance in Italian and Polish car plants in December. Between 1998 and 1999 those employees had been transferred to Fiat group subsidiary Comau. Comau created a sister company, Comau Service, to handle maintenance for Fiat. Fiat Auto has not decided whether to also regain control of maintenance in other foreign plants from Comau. In late 2003, Fiat Auto repurchased from Comau its Mirafiori, Italy, plant die construction operations. It did not disclose details of the internal transaction. Fiat Auto is negotiating with suppliers to regain control of stamping activities at the Rivalta, Pomigliano and Cassino plants in Italy. Several suppliers including Stola and Magnetto of Italy and First Alpin of Austria bought the operations from Fiat Auto.
Cantarella favored outsourcing. Demel brought workers back. From 1993 to 2002, Fiat Auto sold many components plants, several stamping activities and its suspension operation. [Sidebar]

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TPTM6155, Logistics Management Group: C Going in-house Fiat Auto oversees Customer service call center Die construction Assembly line maintenance Dealer training [Author Affiliation] Luca Cifferi AUTOMOTIVE NEWS EUROPE

Group: AEIOU-- An Excellent Integrated Operation Unit Group Project (Written Report): Outsourcing Logistics Services Including 4PL

Appendix 5: Fiat Auto Reverses Its Outsourcing Strategy Source: Cifferi, 2004.

No. Items Factor 1 Factor 2 1 On-time shipment and deliveries 0.7200 0.2498 2 Meet or exceed promises 0.6554 0.2734 3 Availability of top management 0.6033 0.1732 4 Superior error rates 0.6015 0.3329 5 Responsiveness to unforeseen problems 0.3841 0.0922 6 Creative management 0.2059 0.8594 7 Financial stability 0.2008 0.6311 8 Meet performance and quality requirements 0.3486 0.4824 Factor 1 is the most significant criteria to select a logistics provider. The factor 2 is the second most significant criteria to select a logistics provider. Appendix 6: Major Selecting Criteria Source: Menon et al., 1998.

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Appendix 7: Percentage of Growth of Outsourcing Globally Source: Hannon, 2003

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