Presentation on

Outsourcing - 3PL / 4PL Challenges

Industry 2.0 Conference

Arif A. Siddiqui
General Manager
February 8, 2005
 Content

• Understanding the Outsourcing Landscape

• Establishing the Outsourcing Strategy

• Case Study 1 - Consumer Durable

• Case Study 2 - Hi-tech

• Challenges

3/23/2005 confidential 2
 Content

• Understanding the Outsourcing Landscape

• Establishing the Outsourcing Strategy

• Case Study 1 - Consumer Durable

• Case Study 2 - Hi-tech

• Challenges

3/23/2005 confidential 3
 Landscape

Integrated
Supply Chain
Management

Logistics
Globalization Outsourcing

Contract
Transportation/
Distribution

1985 - 1995 1995 - 2000 2000 +

Single function Integrated multi-functions

Transactional Strategic partnerships

Local, regional Global, door-to-door
coverage
Asset heavy, process Information/knowledge focus,
execution integrated IT solutions
80% of Fortune 500 Manufacturers use 3PL services accounting to 40% of the logistic
outlay. This is likely to reach 50% by 2006
3/23/2005 confidential 4
 Logistics Today

Logistics Then Logistics Today

Orders Predictable Variable, Small Lots

Order Cycle Time Monthly or Fortnightly Weekly or Daily

Customer Channel End Customer

Customer Service Time Reactive, Rigid Responsive, Flexible

Replenishment Scheduled Real Time

Distribution Model Supply Driven, Push Demand Driven, Pull

Demand Stable, Consistent More Cyclical

Shipment Type Bulk Smaller Lots

Destinations Major Towns - Concentrated Geographically Dispersed

Warehouse Type Go-downs Custom Built

Source: Logistics The way it is today - Sajal Kabiraj

3/23/2005 confidential 5
 Asia-Pacific Logistics Overview

Mature Unique Mid-Level Developing

l Hong Kong l China l Malaysia l Sub-Continent
l Singapore Thailand l Vietnam
Markets

l Japan l Indonesia l Cambodia

l Australia l Philippines l Laos
l New Zealand
l India l Myanmar
l Korea
l Etc
l Taiwan

l Developed l Rapid l Developing l Poorer

Characteristics

Logistics Development sophistication infrastructure

l High Competition l Undeveloped l Increasing l Lower
l High Service domestic mkt.. competition competition
l Regulatory
levels l Increasing l Increasing
hurdles
l Lead time service levels service levels
l Ownership
pressure l High Growth l Varied Growth Issues
l Lower Growth l High Growth

3/23/2005 confidential 6
 Outsourcing in India

• Emerging Trends
– Current India Logistics Market approximately Rs. 40,200 crore (Euro 6.7 bn) *

– In-sourced Logistics accounts for 45%

– Out-Sourced Logistics forecasted to increase

• Driving factors
– Supply Chain Management - Not a core competency

– Changes in Regulatory Framework (e.g. Free Trade Zones, Exemptions,

Customs EDI, VAT, etc.)

– Supply Chain integration intra-entities

– Emergence of Global Logistics Service Providers

– Improvement in infrastructure

Source: *ATKearney Estimate

3/23/2005 confidential 7
 Extent of Outsourcing in India

Importance Rating and Extent of Outsourcing of Logistics Activities (2001)

Source : Third Party Logistics Practices: An India Perspective, B. S. Sahay and Ramneesh Mohan
3/23/2005 confidential 8
 Content

• Understanding the Outsourcing Landscape

• Establishing the Outsourcing Strategy

• Case Study 1 - Consumer Durable

• Case Study 2 - Hi-tech

• Challenges

3/23/2005 confidential 9
 Outsourcing Strategy

Develop a business case Select a service providers

3/23/2005 confidential 10
 Business case

What to
Why outsource?
outsource? How to
outsource?

3/23/2005 confidential 11
 Why to outsource?

Developing a business case helps logistics managers to determine if the decision

has strategic, financial and operational justification

Fin ct
an ors
Fa

cia
l
l
Strategic Factors

Re duce
l

du
Re

ce capi
Focus on core competencies

co tal
l

sts req
l Improve customer service
l Enhance flexibility

uir
em
Operational Factors

en
ts
l Improved process execution
l Improved technology
 What to outsource?

Dimension Transportation Distribution Import/Export

l Network design l Facility design l Coordination of

Planning

l Carrier contracting l Project management global freight

movements
l Shipment
optimization

l Carrier selection/ l Core warehouse l Customs clearance

Execution

tendering activities l Freight forwarding

l Shipment tracking l Value added
l Freight payment services

3/23/2005 confidential 13
 How to outsource?

Potential
Partner
Capabilities

Implementati
Perform Decision to Evaluate Structure
Select Partner on &
Strategic form Alternative Operating
Continuous
Assessment relationship Options Model
Improvement

Company
Needs &
Priorities

3/23/2005 confidential 14
 Vendor Selection

Geographic
Growth Value
Management
Integrated (3PL/ 4PL)

Jack of One-Stop
All Trades Shop

tyle
Service Providers ntS Functional
Scope of Service me
e Growth
g
ana
M
Local National
Expert Operator
Multi-vendor Management
Niche (Transporter/ Landlord)
Local Service Providers National
Geographic Breadth

3/23/2005 confidential 15
 Content

• Understanding the Outsourcing Landscape

• Establishing the Outsourcing Strategy

• Case Study 1 - Consumer Durable

• Case Study 2 - Hi-tech

• Challenges

3/23/2005 confidential 16
 Scope

• Warehousing - 20 locations

– Finished Goods

– Project Material

• Primary Transportation

• Secondary Transportation - Inter-city/ inter-region

• Secondary Transportation - Intra-city

3/23/2005 confidential 17
 Existing - SCM Model

Limitations
One region of Customer
• Push Model resulting in huge inventory
Imports across the system and sub-optimal
FTL
IBST LST billing Dealer/ utilization of warehousing space
Warehouse Distributor/
FTL EXPRESS
Import s1 Customers • Low inventory information visibility due to
Locations
decentralized system
• High logistics cost due to movement to
Imports and from multiple warehouses to same
Factory/
FTL market
Plant Dealer/
IBST Warehouse LST Billing
Distributor/
FTL 2 EXPRESS • Factory feeding the market directly
Customers
leading to longer lead-time
CST Billing
• Port of clearance not completely in
EXPRESS
alignment with cost and consumption
Imports Domestic market
MULTIPLE
VENDOR AND TRANSACTION TRANSACTION • Lack of standardization resulting in
WAREHOUSES IN DISTRIBUTION MODE DISTRIBUTION MODE
THE SAME REGION longer lead-time for policy roll-outs, MIS
generation, etc.
3/23/2005 confidential 18
 Expectations and Challenges

Expectations Logistics Challenges

• Uniform processes across country • Initiating change management and

implementation of new process across the
• Visibility of inventory through the entire
organization
supply chain
• Vendor re-evaluation on proper SLAs and
• Shorter order to delivery TAT
cost optimization - 4PL
• Reduction in inventory holding
• Integrating systems, standardizing process
• Facilitating right stock at right place based
& MIS across multiple locations
on pull system
• Framing stringent KPIs/ SLAs and
• Reduction in working capital through
implementing the same as part of the
increased inventory turns
operations
• Optimization of warehousing space across
• Flexibility in offering dynamic services
the country
required due to seasonality of demand
• Shift from Static to Dynamic model
• Facilitating movement based on pull as
• Over all reduction in logistics cost against push system
• Manage smooth transition • Reduction in total logistics cost to turnover
3/23/2005 confidential 19
 Recommended - SCM Model

Imports
FTL Regional State/ Satellite Dealer/
IBST LST Billing
Warehouse Flow-through Distributor/
IBST 1 EXPRESS Warehouses EXPRESS Customers
FTL

Imports
FTL Regional State/ Satellite Dealer/
Import IBST LST Billing
Warehouse Flow-through Distributor/
Locations EXPRESS EXPRESS
IBST 2 Warehouses Customers
FTL

Imports
FTL Regional State/ Satellite Dealer/
Factory/ IBST LST Billing
Plant Warehouse Flow-through Distributor/
IBST 3 EXPRESS Warehouses EXPRESS Customers
FTL
IBST
FTL

Regional IBST State/ Satellite LST Billing Dealer/

IBST Warehouse Flow-through Distributor/
FTL EXPRESS EXPRESS
4 Warehouses Customers
CST Billing
EXPRESS Imports Domestic
SINGLE 3PL TRANSACTION TRANSACTION
VENDOR DISTRIBUTION MODE DISTRIBUTION MODE

3/23/2005 confidential 20
 Highlights of the
Implemented SCM Model

• Integrated operation and standardized logistics policies across the country facilitating better MIS
and inventory visibility through the supply chain

• Two step distribution model - RWH for stocking and state warehouse for LST billing with state
warehouses essentially holding low inventory only of fast moving SKUs

• Movement from factory to RWH to be on FTL mode, onward movements on express mode
facilitating economies of scale

• Slow moving manufactured items to be stocked primarily at RWH

• Non-saleable/ damaged stock cleansing on regular intervals

• Single point accountability across services across country

• Considerable reduction in lead time envisaged in servicing orders of finished goods across India

• Movements based on pull as against push will result in lower inventory at regional/ state
warehouse, thus reducing inventory holding cost

3/23/2005 confidential 21
 Content

• Understanding the Outsourcing Landscape

• Establishing the Outsourcing Strategy

• Case Study 1 - Consumer Durable

• Case Study 2 - Hi-tech

• Challenges

3/23/2005 confidential 22
 Scope

• Warehousing - 4 mother warehouses, 17 state-warehouses, 24 tertiary

warehouses

– Finished Goods

– Infrastructure Material - open space

– Defective Returns Management

• Intra-country distribution

• Rapid Fulfillment

3/23/2005 confidential 23
 Existing - SCM Model

Drivers
Few Geographical Markets
• Strategy of expanding PAN India on
short notices, with focus on B Class
Port of Imports cities apart from metros
Entry FTL
• Rapid Fulfillment - last mile deliveries
LST billing Dealer/
Warehouses Distributor/ • Increase in volume of transactions
1 EXPRESS Customers
• Barcode integration to capture serial nos.
Factory/ IBST of goods
Plant FTL
• Shorter product life cycle and increased
CST Billing
importance of logistics during new
EXPRESS
product/ service launches

• Postponement logistics - product

Imports Domestic activation at warehouses
MULTIPLE TRANSACTION TRANSACTION • Cost optimization through refurbishing
C&F VENDOR DISTRIBUTION MODE DISTRIBUTION MODE
and reuse of returned material

3/23/2005 confidential 24

Expectations
• Large mother/ regional warehouses and
small satellite warehouses across India
• Process standardization at national level
• Integration of systems like Oracle, SAP,
etc.
• Logistics support during new product/
service launches
• Equipment Serial Nos. capture for
integrated billing and AMC
• Rapid fulfillment
• Value added services
• Reverse Logistics
• Dynamic Cost model (pay-by-use)
3/23/2005
Expectations and Challenges
Logistics Challenges
• Managing transition, systems integration &
process standardization across three
entities within client organization
• Implement SCM across 45 locations in
India including roll-out of closed and open
warehouses
• Formulating and implementing investment
plan to scale up
• Managing logistics during new product/
service launches
• Ability to provide value added services like
product activation, kitting, etc.
• Reverse Logistics Management including
refurbishing activities
• Managing rapid fulfillment and tatkaal
deliveries
confidential 25
 Recommended - SCM Model

Mother Circle Cluster

warehouse warehouse warehouse

Local Material Receipt Pick List Generation

Supplier
Quantity Check Material Retrieval

Serial Nos. Capturing Dispatch Agent

Customer
Put Away Generate System Report

System Update Reverse Logistics

Equipment Activation Conduct inspection and segregation

Equipment refurbishing
Systems Updation

Overseas Supplier Receive Order-STN/Invoice System Update

In-Bound Out - Bound

3/23/2005 confidential 26
 Highlights of the
Implemented SCM Model
• Surrogate customer account management (single window - Program Mgmt)

• Standardized logistics policies across the country

• Customized SCM reports for effective inventory management through bar-

coding technology

• Warehouses scaled across 45 locations in India within 6 months

• Rapid fulfillment mechanism from warehouses to meet immediate demands

• Standard Operating Procedure to manage distribution during new service and

product launches

• Value added activities conducted at warehouse

• Reverse logistics management within warehouse

• Implementation/ Roll-out of customer’s ERP within warehouses

3/23/2005 confidential 27
 Content

• Understanding the Outsourcing Landscape

• Establishing the Outsourcing Strategy

• Case Study 1 - Consumer Durable

• Case Study 2 - Hi-tech

• Challenges

3/23/2005 confidential 28
 Outsourcing Challenge -
Internal to the Organization

• Strategic
– Management buy-in
– Cultural fit
– Scope of outsourcing
• Organizational
– Restructuring organization
– Re-deploying existing resources
– Anticipating quantum and timing of change
– Managing change
• Operational
– Reengineering existing processes in view of outsourcing strategy
– Framing KPIs/ SLAs both for internal resources and for external agencies
– Implementing processes across the organization and initiating MIS generation
– Measuring performance and benefits of outsourcing
3/23/2005 confidential 29
 Outsourcing Challenge -
Vendor Selection
• Selection Challenges
– Ability to understand and assess customer’s requirement
– Project management and roll-out capabilities
– Framing appropriate performance measurement system
– Information technology integration and interface
– IT and communication infrastructure upgradation
– Managing relationship with customers/ vendors/ authorities/ employees
– Developing short-term and long-term infrastructure
– Developing strong intra-country dependable distribution service
– Ability to scale-up/ down depending on customer’s requirement
– Developing and enhancing Intellectual Capital
– Continuously enhancing and expanding service offerings
– Developing and implementing industry-specific SCM solutions with tangible
measurable results
3/23/2005 confidential 30
 Outsourcing Challenge -
External Business Environment

• External Challenges
– Optimizing within infrastructure constraints
• Poor road conditions
• Lack of dependable communication infrastructure
• Real estate hurdles
– Managing multiple government authorities
• Sales tax authority
• Octroi Authorities/ Entry Tax Authorities
• Local bodies (Gram Panchayats, etc.)
– Understanding and adopting laws of land
• Sales Tax
• Entry Tax
• Excise Laws
• Octroi rules
• Other documentation like permits, etc.

3/23/2005 confidential 31
 Future Expectations from 3PL

• Forth Party Logistics - managing multiple

3PLs and technology partner

Production Transportation Distribution • Transportation Excellence

Control & Management Management
Production • National Footprint
Management
• Advanced IT Application - WMS,Track and
Trace, RFID, etc.
Customer
Network Logistics Service and • Optimizing Decision Support Tools
Management/ Order
Optimization Management • Transition and relationship management
capabilities

• 24/ 7 Service Capability

Procurement
& Inventory Strategy Information • Managing ‘Mission Critical’ installations
Management & Planning Technology
during high cost machine down time
scenarios

Getting the right combination • Value added services and Postponement

logistics

3/23/2005 confidential 32
 Key Success Factors

• Management Buy-in

• Project Management Capabilities (Service Provider & Customers end)

• Flexibility in scaling and adapting to changes

• Standardized service and processes across the country

• Strict adherence to performance management - KPIs/ SLAs

• Cost reduction and resource optimization initiatives

• IT integration and upgradation capabilities

• Change management capabilities

• Adequate trained and skilled manpower

3/23/2005 confidential 33
 “MANUFACTURING QUALITY IS NO LONGER THE KEY COMPETITIVE
DIFFERENTIATOR, SUCCESS NOW DEPENDS ON THE ABILITY TO MEET
CUSTOMER DEMANDS FOR DELIVERY, QUANTITIES AND OPTIONS AS A
RESULT, COMPANIES ARE SCRAMBLING TO IMPROVE SUPPLY CHAIN
PERFORMANCE SIMPLE TO REMAIN COMPETITIVE.”
- JIM SHEPHERD - V. P. RESEARCH, ADVANCE MANUFACTURING REASEARCH

• When quality is given and customer order fulfillment becomes a key

differentiator between products/ organizations, SCM design and efficient
outsourcing becomes the buzzword.
• 80% of Global Fortune 500 manufacturers use 3PL services as
compared to 55% of Indian manufacturers
• With booming Indian economy where infrastructure and tax reforms are
being implemented, SCM will be the prime focus for organizations

3/23/2005 confidential 34
 Future competitive weapon

Competitive Weapons Competitive Weapons

of the 1990’s of the 2000’s

Costs Speed

Speed
Economy of Scale Economy of Skill

Openness Collaboration Collaboration

Command
(CPFR),
and Control
Communities of
Interest (Service
Time Trust Skills Providers & Industry)

3/23/2005 confidential 35
 Thank you

3/23/2005 confidential 36