7. Third-Party Provider

This is a case study of outsourcing logistics software to a company that can perform transportation scheduling and carrier selection more effectively and at a lower cost. Many companies choose third-party logistics (3PL) because they have more expertise and do more business with the carriers. This allows the 3PL to give a better freight rate. The 3PL also has longer standing relationships with the carriers, and this is important when a company needs to expedite merchandise or change existing routing.

So what are the advantages and technologies that a 3PL can offer that will improve the Transportation Management System (TMS)? There are incremental savings because of the 3PL’s economy of scale. For a firm to successfully utilize the benefits of a 3PL, exposure to a TMS package is necessary. The TMS program, combined with the 3PLs, offers a visual of the supply chain so that everyone is aware of the location of all the carriers in real time and knows when each will ship. The 3PL concept can be used for inbound transportation because the 3PL can plan the carrier’s deliveries with existing carriers and pool resources by combining existing shipments while lowering transportation cost.

A 3PL is the strategic formation of a partnership for risk reduction by focusing on core competencies, brand, customers, and new product introduction. Through the partnership some or all of the “nonstrategic activities,” such as delivery, transport, and storage, can be outsourced. A 3PL solution empowers customers to focus resources on exceptions and provide management with the tools needed to minimize transportation spending by providing the tools covered in the following sections.

These Green statistics for intermodal and rail shipments cannot be ignored. According to the U.S. Department of Transportation, between 1980 and 2006, vehicle miles traveled increased by about 100%, while highway lane miles increased only about 5% during the same period. An intermodal train removes more than 280 freight trucks from the highway—the equivalent of 1,100 automobiles.⁽¹⁾ Every container shipped by rail equals one less long-haul truck on the highway, easing congestion, reducing pollution, and saving energy. Railroads are the most fuel-efficient mode of surface transportation. Steel wheels moving on steel rails, combined with the lower aerodynamic drag of a single train pulling hundreds of loads of freight, provides inherent advantages for rail. In fact, rail is more than three times as fuel-efficient as long-haul trucks. Wherever possible, without sacrificing service to the customer, intermodal shipments should be used.⁽²⁾

The 3PL offers many options to enhance company productivity. The following services are some of the more important options to consider in increasing productivity.

The OSS can facilitate decision-making tasks between two companies, bridging the gap between any cultural, demographic, or logistical differences. The more tech-savvy the OSS, the greater the opportunity for in-house education opportunities. In the event of future issues, the employee who experienced the most direction from the OSS can be called on to problem-solve without having to seek additional onsite support.

• The warehouse location can be changed. The number of locations can also be visited. What are the results of this analysis on service, time of delivery, cost, and number of people needing to operate the system?

• A type of hub and spoke arrangement can be tested. Simulation of DRP arrangements can be run in this evaluation. (DRP is discussed later.)

• The mode of transportation can be analyzed for mode efficiency: Is it more efficient to ship by train, air, water, or a combination of those? Is it better to have LTL (less than truckload) or FTL (full truckload)?

• The freight can be merged with the other carrier’s clients. This is called consolidation. It is one of the great advantages of the 3PL. You can analyze when and where it is best to merge two, three, four, or more clients’ inventories to gain a competitive cost for the client. If it is possible to consolidate three clients, per-client shipping costs are cut by a third.

• The final assembly of a product can be postponed if necessary. The decision can be analyzed in a series of what-if scenarios. This offers a significant advantage in the number of end items to be stocked. It is now possible to build to the customer’s specifications depending on the assembly parts available. Stocking only what is necessary significantly cuts inventory costs and allows the company to meet each customer’s needs efficiently.

• The warehouse can receive merchandise and can fill the pending order from the receipts when there is an out-of-stock condition. This concept is called cross-docking. It can be used to add efficiency in the distribution center. In this system, the freight line notifies the receiver of the items to be received. This requires a series of combinations of EDI documents. An ASN tells the receiver of the item and quantity to be received, and an EDI 214 notifies the receiver of delivery time. Combining the receiver’s Usage and Demand file with the EDI documents allows employees to see all incoming shipments and available warehouse inventory and space. Cross-docking then gives notification of the low-inventory incoming receipts to the receiving department to schedule movement to shipping. This avoids the problem of trying to stock an item before it’s filled. This improves the level of service and cuts operation costs due to decreased double handling. In some cases the cost savings can be as much as 18% to 24%.

• Shipments can be merged to create full truckloads. This is called merge-in shipment, which can be performed on a series of LTL shipments to create an FTL full-truckload scenario. Management can merge other customers in the scenario to make the overall shipment less for each customer.

• The receipts can be simulated by the 3PL so that it is already on the truck and moving to the destination prior to the order trigger. This is called continuous move because the receipts are already moving to their destinations. It helps cut down the lead time to the customer because the product does not have to be picked and packed at the supplier’s site.

• The retailers can control their own routing. This is called dynamic routing. It is a new form of routing that has a lot of merit. The routing technique can be utilized when the retailer has a series of pickups scheduled before the final long haul. For instance, it could come into play if the retailer needs to pick up at three locations and the shipments have been cubed by the 3PL. The 3PL knows that at the last pickup point it will have achieved a maximum cube to create a full load shipment to the final destination. This again utilizes an additional EDI document, 753. The retailer sends a vendor the 753 request for routing information to cross-check the weight, cube, and quantity. If everything can be shipped, the EDI document 754 is issued with the routing instructions given to the retailer’s private fleet.

The vendor picks up the first shipment at point A. The total cube of the shipment is 35%. The next shipment is picked up at point B and now the total cube is 80%. The last shipment is picked up at point C and now the trailer has achieved 98% cube. It is ready to go the distance to the retailer.

• The network dynamics can be checked in real time. What if there is a road closing or a natural disaster? What does this do to the route analysis? What if a supplier is holding a shipment to load the merchandise? What does this do to the overall delivery time? Will customers be closed at the end of the daily run? In an event-driven evaluation like the one given previously, it may be necessary to bring in more carriers to help eliminate some of the obstacles and deliver on time.

• The company’s fleet of incoming and outgoing carriers can be viewed on a computer. This is called supply chain visibility. This makes the system more dynamic because management knows where each carrier is in real time. The ship-to-arrival times also help the customer tell the buyer when the goods will be in stock. This is a great aid to CRM programs. The one customer service person at the desk can answer these kinds of questions accurately.

• The warehouse can use the 3PL’s Carrier-Approved Shippers List to find the best carrier for their needs. This is a list of all the carriers the 3PL has partnered with. The 3PL may have a certified arrangement with some of the carriers such that they can deliver at a faster pace and at the least cost of delivery. In a certification agreement, the number of times the delivery meets the criteria is measured and agreed on. Consolidation helps the selected vendor expand their business, which improves service and lowers costs. In seeking a competitive edge, companies should consider consolidating wherever possible so that each helps the other grow.

• The freight payments can be automated by using the 3PL. With the use of the EDI transaction set 210, it is possible to automate a common execution platform across multiple facilities and various back-end systems. The Transaction Set 210 is the Motor Carrier Freight Invoice. This is probably one of the biggest advantages of a 3PL. The OSS has the time and incentive to create payment programs that would be far superior to the programs currently in use by the organization. Freight payment is arduous because each item requires rating by weight, class, hazard category, and distance. The regulations and classes may change or have new modifications. It takes a very well-trained individual to track this for the final freight payment. This is where the 3PL can really offer an advantage.

• The 3PL system can be used as a Web-based or cloud-based solution. The advantage of this is that the programs can be run at any location. They can be run from mobile devices and any phone can have apps to run a 3PL query.

• The 3PL system can show the firms’ benchmarks and Key Performance Indicators (KPI). To justify the cost of any new technology, its success must be measured. The KPI is the major communication tool to be used with the management team to communicate successes. The KPI could measure the percentage of on-time deliveries. The metric is what management is trying to attain: for instance, greater than 80% on-time deliveries. Benchmarks in the system are a series of steps to the final metric. To achieve greater than 80% on-time shipments is impossible so it’s necessary to set a benchmark at 70%. The benchmark measures success to the final metric. As long as the staff produces above the benchmark, management is pleased. They can measure the heartbeat of the organization in a real-time environment and know immediately when the system is not running correctly or is surpassing expectations.

The fleet should experience a 9% decrease in the mileage for the inbound freight. The saving will be incurred by the consolidation, network optimization, merge-in transit, and multimodal technology. Normally, a 3PL can show a substantial savings in fuel costs, and even reduce fuel costs by 40%.⁽²⁾

For the case of inbound transportation, the mileage of all the carriers into the warehouse is much greater. The best option in some cases is to use a TMS system to control the outbound transportation. This requires a lot of rescheduling and adjustments in routing, which can change frequently, to meet the customer needs. A 3PL is not recommended because it’s imperative to keep close communication with the customers. It is unwise to outsource this area because customer service should remain the responsibility of the distributor. A 3PL was used for the inbound traffic from the suppliers to the distribution centers. The 3PL’s job is to minimize the freight cost and mileage. This should be reflected in a lower cost of goods sold and fewer inventories needing to be stored if the lead time is decreased.

The merge-in-traffic reduces the miles traveled per year by 1%. This is a lower figure than normal because of the frequent increase in lead times. The fleet runs at 6,800,000 gallons per year and at 6 miles per gallon. The fleet runs 40.8 million miles per year. The Lean Cost Savings is the cost of diesel, which is 6,800,000 gallons per year, × $3.12 per gallon used × 1.0% savings = $212,160 saved in gasoline.

The consolidation reduces the miles traveled per year by 6%. The fleet runs at 6,800,000 gallons per year, and at 6 miles per gallon the fleet travels 20.4 million miles per year. The Lean Cost Savings is the cost of diesel, which is 6,800,000 gallons per year, × $3.12 per gallon used × 6% savings = $1,387,200 saved in gasoline.

Reduced fuel rate cost would be 3% because of the better rates with the partnered carriers. The old fuel cost of 6,800,000 gallons per year × $3.12 per gallon = $10,608,000, making Lean Savings 3% × $10,608,000 = $318,240.

Lead times for transportation were reduced by four hours on average. This is due to the combination of better route optimization and network optimization programs. For every day the lead times were reduced, the inventory was reduced by 2.2%. The half-day reduction equates to a 1.1% reduction in inventory. The old inventory balance after the ERP contribution is $194,040,000. The new inventory is at 1.1% savings: $191,905,560. This is a $2,134,000 reduction in inventory. The carrying cost reduction is 26.6% × $2,134,000 = $567,761 reduction in carrying cost. The freed-up cost of capital is 2% × $2,134,000 = $42,688 increase in capital. The new inventory is at $191,905,560. Finally the new turns are $931,000,000 / $191,905,560 = 4.85.

Summary of Lean Savings of the 3PL:

• Network optimization = $424,320 per year.

• The merge-in traffic = $212,160 saved in gasoline.

• The consolidation routine = $1,387,200 saved in gasoline.

• The reduced fuel rate cost = $318,240 saved in gasoline.

• The lead times reduction:

• Reduced lead times reduce the inventory by a 1.1% savings from the old inventory of $193,740,860 to a new inventory of $2,134,440.

• Carrying cost reduction = $567,761.

• Freed-up cost of capital = $42,688.

• The new turns are $931,000,000 / $191,608,860 = 4.86 turns.

Total Lean Savings is $2,952,369.

• Obsolete inventory cost reduction is 9% of inventory reduction = $191,880.

• This represents $207,870 that would have been thrown away or put into a landfill.

• The savings in gasoline and CO₂ emissions. One of the primary determinants of carbon dioxide (CO₂) emission from mobile sources is the amount of carbon in the fuel. Carbon content varies, but typically average carbon content values are used to estimate CO₂ emissions.

• Table 4-10 is used to calculate the carbon footprint:

• CO₂ emissions from a gallon of diesel are 2,778 grams × 0.99 × (44 / 12) = 10,084 grams = 10.1 kg/gallon = 22.2 pounds/gallon

• This shows a carbon footprint of 22.2 pounds/gallon × 6,800,000 gallons used per year = 75,480 tons of CO₂ extracted into the air for the entire fleet per year.

• The 3PL techniques save 75,480 tons of CO₂ × .09 = 6,793 tons of CO₂ from being released into the atmosphere. In this case, the savings is 9%.

• The Green Savings of 3PL:

• Damaged inventory cost represents .75% of $2,132,000 inventory = $15,990.

• Obsolete inventory cost reduction is 9% of inventory reduction = $191,880.

• The route optimization techniques save 6,793 tons of CO₂ from being released into the atmosphere.

• The Green Savings is 19 trucks × 9,600 cars × 5 days × 51 weeks = 107,712,000 fewer cars on the road per year.

• Total Green Savings is $208,090 per year for the 3PL.

Total savings for the 3PL Lean and Green program is $3,160,459.

⁽²⁾ http://www.penskelogistics.com/newsroom/2010_4_22_logistics_sustainability.html.