Chapter 4 Supply Chain Relationships

Learning Objectives
After reading this chapter, you should be able to do the following:

Understand the types of supply chain relationships and their

importance.

Describe a process model that will facilitate the development and

implementation of successful supply chain relationships.

Recognize the importance of collaborative supply chain

relationships.

Define what is meant by third-party logistics (3PL) and know what

types of firms provide 3PL services.

Learning Objectives
After reading this chapter, you should be able to do the following:

Know what types of 3PL services are used by client/customer

firms and what types of 3PL providers are used.

Discuss the role and relevance of information technology-based

services to 3PLs and their clients/customers.

Know the extent to which customers are satisfied with 3PL

services and identify where improvement may be needed.

Understand some of the likely future directions for outsourced

logistics services.

Logistics Relationships
Types

vertical relationships:

of Relationships

these refer to the traditional linkages between firms in

the supply chain such as retailers, distributors,
manufacturers, and parts and materials suppliers

horizontal relationships:

includes those business agreements between firms that

have parallel or cooperating positions in the logistics
process.

Range of relationship types

Transactional:

Both parties in a vendor relationship are said to be at arms

length

Collaborative:

the relationship suggested by a strategic alliance is one in

which two or more business organizations cooperate and
willingly modify their business objectives and practices to
help achieve long-term goals and objectives

Strategic:

represents an alternative that may imply even greater

involvement than the partnership or strategic alliance.

Figure 4-1 Relationship Perspectives

Relational

Transactional

Vendor

Partner

Strategic Alliance

Levels of Collaborative Intensity

High

Difficulty
(Supply Risk)

Low

Low

High

Strategic Importance (Profit Impact)

Commodity Materials are of low strategic

importance and low supply chain
difficulty- These items are best purchased at
arms length
Bottleneck materials are also of low
strategic importance but are of high
supply chain difficulty- Some level of
ongoing relationship with a particular supplier

Leveragable Materials are of high strategic

importance but low difficulty levelsCollaboration to maximize both cost savings and
reliability through means such a bulk purchasing
by multiple members of the supply chain
Direct/core competency materials are of high
strategic importance and high difficultyRequired strategic partnerships for longer periods
of time to ensure availability and quality

Regardless of form, relationships may differ in numerous

ways. A partial list of these differences follows:

Duration
Obligations
Expectations
Interaction/Communication
Cooperation
Planning
Goals
Performance analysis
Benefits and burdens

Source: Copyright 2001, C. John Langley PhD Used with permission

Figure 4-3
What Does It Take to Have an Area of Core Competency?

Drivers
defined as compelling reasons to partner; all parties
must believe that they will receive significant benefits in
one or more areas and that these benefits would not be
possible without a partnership

Facilitators
are defined as supportive corporate environmental
factors that enhance partnership growth and
development; As such, they are the factors that, if
present, can help to ensure the success of the
relationship

Figure 4-4 Implementation and Continuous Improvement

Ray A. Mundy, C. John Langley Jr., and Brian J. Gibson, Continuous Improvement in Third Party
Logistics, (2001).

Collaboration:
Collaboration

occurs when companies work together

for mutual benefit.

Collaboration

goes well beyond vague expressions of

partnership and aligned interests.

Companies

leverage each other on an operational

basis and creates a synergistic business environment
in which the sum of the parts is greater than the
whole.

Seven Immutable Laws of Collaborative Logistics

Collaborative Logistics Networks Must Support:

Real and recognized benefits to all members

Dynamic creation, measurement, and evolution of collaborative
partnerships
Co-buyer and co-seller relationships
Flexibility and security
Collaboration across all stages of business process integration
Open integration with other services
Collaboration around essential logistics flows

Definition of Third-Party Logistics

Essentially, a third-party-logistics firm may be defined as an

external supplier that performs all or part of a companys
logistics functions.

Among these, multiple logistics activities are included, those that

are included are integrated or managed together, and they provide solutions to logistics/supply chain problems.

Types of 3PL Providers

transportation-based

warehouse/distribution-based

forwarder-based

shipper/management-based

financial-based

information-based firms

Figure 4-6 3PL Logistics Market Turnover Growth (US $Billion)

$100
$80
$60
$40
$20
$0

1996 1997 1998 1999 2001 2002 2003 2004 2005 2000

Source: 2005 Tenth Annual 3PL Study, Georgia Tech and Cap Gemini LLC. Used with permission

Source: 2005 Tenth Annual 3PL Study, Georgia Tech and Cap Gemini LLC. Used with permission

Figure 4-11Fourth-PartyTM TM Logistics*

+ Greater Functional Integration +
Broader Operational Autonomy

Source: Accenture, Inc. Used with permission. *TM Registered trademark of Accenture, Inc.

Figure 4-12 Current vs. Projected Logistics Expenditures Directed to

Outsourcing

Table 4-9 Future 3PL Industry Trends

Continued expansion, acquisition

and consolidation of 3PL industry

Expansion of global markets and

needed services

Growing range of strategic

services offered by 3PLs and
4PLs

Continued broadening of service

offerings across supply chain and
broad-based business process
outsourcing

IT Capabilities to become an
even greater differentiator

Increased efforts to update,

enhance, and improve 3PL
provider-user relationships

Two-tiered relationship models

(strategic and tactical)

Emphasis on relationship
reinvention, mechanisms for
continual improvement, and
solution innovation

Summary

The two most basic types of supply chain relationships are vertical (e.g.,
buyer-seller) and horizontal (e.g., parallel or cooperating).

In terms of intensity of involvement, interfirm relationships may span from

transactional to relational and may take the form of vendor, partner, and
strategic alliances.

There are six steps in the development and implementation of successful

relationships. These six steps are critical to the formation and success of
supply chain relationships.

Collaborative relationships, both vertical and horizontal, have been identified

as highly useful to the achievement of long-term supply chain objectives.
The Seven Immutable Laws of Collaborative Logistics provide a framework
for the development of effective supply chain relationships.

Summary (cont.)

Third-party logistics providers may be thought of as an external supplier

that performs all or part of a companys logistics functions. It is desirable
that these suppliers provide multiple services, and that these services are
integrated in the way they are managed and delivered.

The several types of 3PLs are transportation-based, warehouse/distributionbased, forwarder-based, financial-based, and information-based suppliers.

Based on the results of a comprehensive study of users of 3PL services in

the United States, over 70 percent of the firms studied are, to some extent,
users of 3PL services.

User experience suggests a broad range of 3PL services utilized; the most
prevalent are warehousing, outbound transportation, and freight bill payment
and auditing.

Summary (cont.)

While nonusers of 3PL services have their reasons to justify their

decision, these same reasons are sometimes cited by users as
justification for using a 3PL.

Customers have significant IT-based requirements of their 3PL

providers, and they feel that the 3PLs are attaching a priority to
respond to these requirements.

Approximately two-thirds of the customers suggest 3PL involvement

in their global supply chain activities.

Although most customers indicate satisfaction with existing 3PL

services, there is no shortage of suggestions for improvement.

Summary (cont.)

Customers generally have high aspirations for their strategic use of

3PLs and consider their 3PLs as keys to their supply chain success.

There is a growing need for fourth-party logistics relationships that

provide a wide range of integrative supply chain services.