Free Research Paper About Why Are Companies Using 3PL Instead Of Using In-House Resource?
Impact on Supply Chain by Third Party Logistics
In the contemporary business world, business are operating in different locations and hence increase demand for the efficient logistical infrastructure. As such, business have researched in a logistical infrastructure that ensures different locations and facilities are in access of the products they need at the convenient time. While various companies are utilized their own logistical frameworks, others have outsourced logistic tasks to the third party logistic (3PL) firms. A 3PL firm is an entity that offers third party or outsourced logistics services to other firms for some proportion of the overall supply chain management function. According to Green et al. (2011), 3PL “specializes in integrated warehousing and transportation services that can be scaled and customized to customer needs” concerning demand and market condition. Some of the currently offered services by 3PL firms include inventory management, shipment tracking and tracing, and logistics management and consulting. Other basic functions include freight audit and consulting, reverse logistics and value added services, and offering dedicated transportation procurement and contract transportation. Therefore, 3PL is paramount logistic strategy that integrates significant impact on the supply chain in the contemporary business environment.
Today, firms are utilizing the 3PL instead of using the in-house resources because 3PL is more advantageous than the in-house logistics. One of the main advantage of the 3PL over the utilization of the in-house resource is the cost saving. The 3PL firms create economies of scale through specialization and enhanced logistical infrastructures, and use the technology to maximize efficiency. These economies of scale encourage the firms to use the 3PL in order to increase the value of their products through reduced cost (Tezuka, 2011). Therefore, contracting the 3PL firms would help the firm to incur less cost than it would have incurred to develop or operate its logistical infrastructure.
3PL services enable the firm to increase flexibility and services, as well as improving efficiency. According to Tezuka (2011, p.25), “competent 3PL providers are skilled at Coordination, enabling them to search out reliable partners or subcontractors and efficiently manage the inter-firm flow of goods.” For this reason, firms utilizing the 3PL services can have efficiency and capability advantage over the firms using their own logistic structures. For instance, firms in Japan such as ASEAN are utilizing the 3PL providers due to lack of know-how and experience in the new markets. The 3PL providers have know-how experience in diverse markets and hence providing solution for effective logistic services to foster supply chain management. Therefore, while 3PL providers can effectively assist the firms to explore tin the new market effectively, the use of own resource may fail due to uncovered challenges.
Another example of the 3PL over company’s own logistic infrastructure is enabling sharing of risks. When investing in the logistic infrastructures, firms use logistic assets such as information and physical distribution networks, which requires a huge amount of capital. Therefore, in the times of logistical downtime, the firm using their own resources may lose a large amount of revenue and productivity. Consequently, the firm seeks the logistic services from 3PL firms to create dependency, and hence able to mitigate risks and uncertainty involved in the logistics. 3PL also spread their risks by outsourcing logistic service to subcontractors. Therefore, when a firm outsources its logistic services it gains confidence and comfort in the market and hence concentrate on other activities that can maximize productivity and revenue.
Companies also use 3PL because it enables them to access the useful resources that are not directly available to them. 3PL providers are associated with specialized equipment and knowledge that help them to acquire information and searching advantage over other firms. The competent 3PL providers are highly efficient at coordinating with other subcontractors enabling them to search reliable market information to manage the logistics. For instance, a company might coordinate with the domestic 3PL provider in the foreign market in order to acquire informational resources about the foreign market (Green et al 2011). In this way, the client companies achieve sustainable profits and cost-effective outcomes. This informational advantage is hard to acquire when using the owned logistic resources. In addition, the firm acquires more logistic capabilities when outsources logistics than using in-house logistic infrastructures.
The difference between companies that outsource a major part of the logistics than companies who manage their logistics?
As discussed previously in the paper, the companies that outsource a major part of the logistic are different from the companies that manage their logistics. The companies that are outsourcing the logistic services can handle the supply chain management. Due to evolving of technology, globalization, and diverse markets, there is increased demand for outsourcing supply chain. Therefore, the logistic outsourcing has helped the companies to relief pressure on the supply chain and be able to manage the supply chain effectively. As a result, the companies benefits from increased revenue, improved capabilities, reduced costs, and access resources that could be achieved through their own logistics.
Outsourcing logistic is not only important but also necessary in some cases. For instance, the computer industry have relied on the 3PL services that facilitate the “build to order” manufacturing systems which would be otherwise infeasible. In addition, the automobile industry heavily relies on the third party logistics to enhance performance related to just in time operations (Toshinori & Tezuka, 2002). Since the market is rapidly changing, the companies using the 3PL can withstand challenges associated with such changes. In addition, such companies can effectively meet the increasing demand for resources, new information systems, and real-time visibility of production.
However, the companies that are not outsourcing their logistics have advantage over their counterparts. The companies carrying out their logistics acquired management experience and hence ensure the efficiency in management, in the long run. If the company has been experiencing bad management in the past and ought to outsource logistics, there is a possibility that the manager might be unable to manage external management company. In some cases, high trained logistic professional might be hired to manage the outsourced logistics. As a result, such companies increase the cost of production rather than reducing it. In addition, when the outsourced logistic company changes how it offers logistic services or its organizational structure, the firm might be required to establish a new partnership or learn how to operate in the market. Consequently, such firms become unstable in their management roles, and this might affect the profitability of the company.
Companies outsourcing logistics may face information asymmetry while their counterpart might be enjoying full access to the market information. For instance, the contracting company may have limited access to the information regarding the third party company and vice versa. Therefore, this affects the operations of the contracting company. For instance, when the third part has limited information regarding the contracting firm’s cost structure, it may fail to enlace the cost effectiveness of the firm (Toshinori & Tezuka, 2002). On the other hand, the companies that use their own logistics understand well their cost structure, mission, and their objectives and hence develop logistic strategies that match to their cost structure. In addition, the contracting companies’ ability to alter prices are constrained by the pricing models in the agreement. Therefore, while in-house logistics can determine the most efficient and cheaper solution, the companies using the 3PL model are constrained by the price models.
The companies outsourcing logistics may lose control to their logistics while the companies using their own logistic framework have full control of logistics. The contracting companies trust the outsourcing companies with their logistics, hence giving the 3PL firm full control of their products. If the company has contracted with the incompetent 3PL firm, the firm may end up having inefficiency and building up losses. For instance, unethical 3PL may give false claims concerning the handling of freight. Consequently, damage and loss claims might become more expensive than the company handling its own logistics (Toshinori & Tezuka, 2002).
The effects 3PL have on companies like Wal-Mart
However, retailers and manufacturers are utilizing the 3PL service to gain competitive advantage and hence excel in their respective markets. Through the 3PL services, the companies can plan and forecast and hence reducing the volatility in the market. For instance, Wal-Mart was the leading company in the industry to use 3PL services by using the point of sale information to forecast and read trends. As a result, the company has successfully and effectively carried out its logistics in a different region in the world to become one of the competitive companies in the industry. For instance, Wal-Mart continued to produce solid profit growth in 2014. Through the use of 3PL and other strategies, the Wal-Mart acquired 4 percent growth of income due to its increase in net sales to $5 billion. This has been as a result of the cost reduction and leveraged expenses. Consequently, this has enabled the company to remain not only the domestic leader but also the global leader.
The 3PL has provided companies with a global supply chain to make their distribution and transportation effective. For instance, the U.S. –based companies such as Wal-Mart are now able to exploit the global perspective of doing business. For instance, the Wal-Mart company has been able to acquire the global coverage through brand awareness, outsourcing synergy develops, and extended top-line projections. In addition global consuming population is growing fast hence providing sustainable opportunities for retailers and manufacturers to expand their business. Through the 3PL service, the Wal-Mart will acquire the necessary ingredient to expand in the new retail global market.
In conclusion, it is evident that the 3PL services have a huge impact in the contemporary global market. The companies utilizing this services can reduce the cost through increased flexibility efficiency, able to share risks and have access to useful resources that are not directly available to them reduced costs. Companies such as Wal-Mart are utilizing 3PL services by using the point of sale information to forecast and read trends. However, this strategy requires effective management to deliver effective outcomes. For instance, if the company has been experiencing bad management in the past and ought to outsource logistics, there is a possibility that the manager might be unable to manage external management company. In the future, the 3PL is anticipated to incorporate more technological advancement such as the use of mobile application and dedicated and smarter technology such as Transportation Management Systems. In addition, more collaboration is expected to increase between shippers and the 3PL.
Green, F. B., Turner, W., Roberts, S., Nagendra, A., & Wininger, E. (2011). A practitioner’s perspective on the role of a third-party logistics provider. Journal of Business & Economics Research (JBER), 6(6).
Tezuka, K. (2011). Rationale for utilizing 3PL in supply chain management: A shippers' economic perspective. IATSS Research, 35(1), 24-29.
Toshinori, N., & Tezuka, K. (2002). Advantage of Third Party Logistics in Supply Chain Management. Retrieved from Hitotsubashi University Repository website: http://hdl.handle.net/10086/16053
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