Third Party Logistics – Development of a selection model to enhance supply chain visibility

Diploma Thesis 2008 114 Pages

Engineering - Industrial Engineering and Management





Confidentiality Agreement

List of Figures

List of Tables

List of Abbreviations

1. Introduction
1.1. Objectives and Problem Definition
1.2. Structure of the Thesis
1.3. Scope and Delimitations of the Thesis

2. Literature Review
2.1. Introduction to Supply Chain Management
2.1.1. The Supply Chain as a Competitive Advantage
2.1.2. Supply Chain Challenges
2.1.3. Major Supply Chain Drivers Production Inventory Location Transportation Information
2.2. Supply Chain Visibility
2.2.1. Benefits of Supply Chain Visibility Bullwhip-Effect Demand Uncertainty Safety Stock
2.2.2. Obstacles in Achieving Supply Chain Visibility
2.2.3. Technology Landscape
2.3. Key Performance Indicators (KPIs)
2.3.1. The Fundamentals of KPIs
2.3.2. KPIs for Supply Chains
2.4. Introduction to Outsourcing
2.4.1. Outsourcing Benefits and Risks
2.4.2. Outsourcing in the Logistics/Supply Chain Industry
2.4.3. Third Party Logistics (3PL)
2.4.4. A Framework for Make/Buy Decisions
2.5. Customer Segmentation

3. Company Overview
3.1. Company Profile
3.2. Visibility System of COMPANY

4. AS-IS Analysis
4.1. Methodology
4.1.1. Research Methods
4.1.2. Strategy and Data Analysis
4.1.3. Assessment of Method Alternatives
4.1.4. Wrap-up of the Methods
4.2. Elicitation and Analysis
4.2.1. Demand Aggregation and Analysis Stock Turnover Stock Availability Forecast Accuracy Inventory Obsolescence Finished Goods Inventory Stock Outs Ratio: Safety Stock/Demand Safety Stock/Inventory
4.2.2. Inventory Costs Analysis Best Case/Worst Case Scenario Safety Stock Cost Calculation Opportunity Costs
4.2.3. IT Resources Decision Matrix Core Competence Questionnaire Capacity/Knowledge Matrix Make/Buy Decision
4.2.4. Customer Segmentation New Customer Short-Term Service Permanent Service Entire SCM
4.2.5. Vulnerability Analysis

5. TO-BE Concept
5.1. Selection Model Concept
5.1.1. General Information
5.1.2. Reduction of Complexity
5.1.3. Structure and Development of the Selection Model
5.1.4. Sample Case: Metal Stamp Manufacturer
5.2. Pre-requisites for the Selection Model
5.3. Selection Model Sub-Modules
5.3.1. Identifying the Supply Chain Visibility Gap
5.3.2. Inventory Costs
5.3.3. Opportunity Costs Calculator
5.3.4. Make/Buy Decision for the Visibility System
5.3.5. Value-based Customer Segmentation
5.4. Sensitivity Analysis of the Customer Segmentation
5.5. Summary of the Sample Case Company
5.6. General Application of the Selection Model
5.7. Recommendation for Implementation

6. Conclusion and Future Aspects


Appendix A – Top 10 Visibility Technologies

Appendix B – Company Profile User Interface

Appendix C – Demand and Inventory Data & KPI Benchmarks

Appendix D – IT Resource Questionnaire

Appendix E – Customer Segmentation Interface


The diploma is an academic degree conferred by universities and universities of applied sciences. To graduate the degree requires the submission of a thesis to complete the final requirement for the degree of an Industrial Engineer.

The thesis reflects my study’s with majoring in production and logistics and is composed in cooperation and with support of COMPANY in Brisbane, Australia. My study abroad at Queensland University of Technology revived my interest in SCM, especially during the subject “Export Management”. Further readings and particularly the book from Michael HUGOS “Essentials of Supply Chain Management” pointed my interest on supply chain visibility, which is the fundament of the thesis.

For the great support and suggestion during my thesis I want to thank all employees at COMPANY in Brisbane who helped me with problems and who gave me directions and new ideas.

NOTE: To protect the company’s identity, the company’s name has been replaced by the word ‘COMPANY’. Furthermore has the name of the visibility system offered by the company, replaced by ‘Visibility System of COMPANY’.

Brisbane, 25 August 2008

Confidentiality Agreement

To protect COMPANY’ client and any confidential information about its business, COMPANY does not allow publishing or forwarding any business information from this thesis. Condition of COMPANY’ cooperation with the thesis is that the identity of the client company as well as the raw data can not be published. Hence, the sample company’s name is changed to metal stamp manufacturer and only aggregated data is used in the thesis.

List of Figures

Figure 1: Operational Goals of COMPANY

Figure 2: Structure of the Thesis

Figure 3: Delimitation Scheme of the Thesis

Figure 4: Extensive Selection Model

Figure 5: Integrated Business Processes across the Supply Chain

Figure 6: Core Competence Matrix

Figure 7: Top Concerns in SCM

Figure 8: The Major Supply Chain Drivers

Figure 9: The Concept of Supply Chain Visibility

Figure 10: Increasing Variability in Orders up the Supply Chain

Figure 11: Supply Chain KPIs

Figure 12: Continuum of Logistics Outsourcing

Figure 13: SCM Functions Outsourced

Figure 14: Capacity and Knowledge Matrix

Figure 15: Elicitation and Analysis Scheme

Figure 16: First Sub-Module – Data Aggregation and Analysis

Figure 17: Customer Demand for the 120 mm Metal Stamp Connector (2002 – 2006)

Figure 18: Second Sub-Module – Inventory Costs Analysis

Figure 19: Composition of Total Inventory Costs

Figure 20: Third Sub-Module – IT Resource Decision Matrix

Figure 21: Forth Sub-Module – Customer Segmentation

Figure 22: Picture of Metal Stamp Connector (120mm)

Figure 23: Visibility Gap Analysis

Figure 24: Safety Stock Reduction

Figure 25: Opportunity Costs

Figure 26: Make/Buy Decision – Recommendation for the Sample Company

Figure 27: Customer Segmentation – Metal Stamp Manufacturer

List of Tables

Table 1: Advantages and Disadvantages of Maintaining Inventory

Table 2: Advantages and Disadvantages of Information Sharing

Table 3: Benefits and Risks of Outsourcing

Table 4: Ratio SSI

Table 5: Demand & Inventory Data Analysis Spreadsheet

Table 6: Inventory Costs Calculator Spreadsheet

Table 7: Opportunity Costs Calculator.

List of Abbreviations

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1. Introduction

“Demand information sharing and supply visibility are two essential elements that build trust between supply partners and form the foundation of supplier integration.”

Edward FRAZELLE (2002, 161)

1.1. Objectives and Problem Definition

Visibility systems become incrementally important for medium sized companies. COMPANY as a Third Party Logistics Provider (3PLs) acknowledged the trend and has developed a web-based visibility system for all sizes of companies. Visibility systems facilitate companies in optimising their links with external supply chain partners in order to gain distinctive visibility into information and product flow. In other words, visibility systems facilitate information sharing between supply chain partners in order to enhance supply chain visibility (SCV) and thus improving supply chain performance.

As a provider of supply chain management (SCM) service, COMPANY’ strategic target is establishing and maintaining long-term relationships with its clients. To achieve this goal, COMPANY offers its Visibility System to enhance the collaboration with its clients. Many small and medium sized companies still hesitate to adopt a visibility system due to the coherence with major investment in both money and time says the manager (National Customer Operations Manager) at COMPANY in Brisbane in a personal interview on 30 April 2008.

In cooperation with COMPANY a selection model is designed and developed to identify and segment client and non-client companies with the need for better SCV (Figure 1). The foregoing identification is necessary to filter companies with insufficient SCV. The affiliating segmentation allows categorising the clients for additional service offered by COMPANY to enhance the SCV.

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Figure 1: Operational Goals of COMPANY

The selection model analyses and benchmarks the demand variation and its effect on safety stock in order to identify a SCV gap. Increasing safety stock levels through higher variability in demand are caused by insufficient information sharing between supply chain members or through the inability to analyse the available information in a value-adding manner (Brainstorming April).

The selection model is an attempt of COMPANY to pro-actively approach its clients and non-clients by analysing and benchmarking their demand and inventory data to evaluate their SCV performance. Hence, the overall operational goal of COMPANY (Figure 1) is providing the companies with additional short-term or one-time service, permanent service, taking over the entire SCM, or acquisition of new customers in order to enhance the company’s supply chain performance. The companies are analysed in order to gain insides into their SCV performance.

The selection model is a prototype in this first instance. In this context the objective is finding a solution to indicate insufficient SCV based on demand variability and its impact on safety stock. That stage of the selection model represents one big module of the entire model. Future development of the selection model includes the extension to additional modules, covering lead time, delivery performance, forecast accuracy, throughput and so forth. The result is a complete analysing and segmentation model, including all aspects of SCV.

Once the analysis is completed, the client companies are categorised into one of three customer segments, short-term service, permanent service, entire SCM. Non-clients are categorised as new customers, outlined as the forth customer segment. Approaching the companies with the selection model facilitates COMPANY in offering additional services and benefits the enhancement of the overall supply chain performance. Additional service will be offered in form of key performance indicators (KPIs), benchmarking and the Visibility System of COMPANY.

The selection model is developed for a mid-sized manufacturing company based in Western Australia. The company expressed concerns about insufficient visibility in its supply chain processes towards COMPANY earlier. The concerns are based on growing safety stock levels due to variation in received customer demand in previous years. Analyses of the client company’s customer demand and inventory data provide insides into SCV performance and conclude about the need of a visibility system.

To sum up, the overall objectives of the thesis are:

- Developing a selection model prototype to identify SCV gaps,
- Using demand and inventory data for the analysis,
- IT resource determination of client’s company,
- Including a sub-module for customer segmentation, and
- Application for one specific sample case company.

Companies using Visibility System of COMPANY as their visibility technology are tied closely to COMPANY, resulting in a thoroughly collaboration yielding in enhancement of the overall supply chain performance.

1.2. Structure of the Thesis

The fundament of the thesis is the data elicitation and analysis. The data is gathered with help of COMPANY along with facilitating the design and development of the selection model prototype.

In order to design and develop the selection model prototype, the procedure requires a professional structure. Therefore, the thesis is structured into six chapters as shown in Figure 2.

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Figure 2: Structure of the Thesis

The introduction chapter covers all aspects of the problem definition and objectives, structure and delimitation of the thesis. The literature review outlines the basics of SCM, SCV, outsourcing, KPIs, and customer segmentation. Those are the five fundamentals the thesis is based on in the design and development of the selection model. The third chapter briefly outlines the company COMPANY and its Visibility System of COMPANY. Chapter four exposes all aspects of the research methodology as well as the assessment of alternative methods. The assessment of different methodologies assures that the most suitable is chosen for the thesis. Moreover, the data gathering and analysis process as well as the vulnerability analysis are outlined in the As-Is analysis. The To-Be concept introduces the selection model concept including model delimitations, structure and development as well as the sample company. Results from the As-Is analysis are evaluated and assessed, benchmarked and compiled in sub-modules. Affiliating all sub-modules of the selection model are described. Hence, a quick introduction to each sub-module outlines the specific research methodology. A summary of the sample case company and recommendations for an implementation of the selection model finalises the chapter. The final chapter six summarises all main aspects of the thesis, provides future aspects, and proposes further development of the selection model.

1.3. Scope and Delimitations of the Thesis

The selection model is a prototype developed for purposes at COMPANY based in Brisbane to identify clients with a SCV gap in order to segment those. The model is applied to one of COMPANY’ client companies – a metal stamp manufacturer.

In the literature SCV deals mainly with coherences between information sharing and inventory. Information replaces inventory state FAWCETT et al. (2007).

Hence, inventory/safety stock and information are the major supply chain drivers regarded

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Figure 3: Delimitation Scheme of the Thesis

in the thesis. Figure 3 designates all factors considered in the thesis (bold red font). The literature review outlines the impact information sharing has on inventory and safety stock levels. Restricting the thesis to those two supply chain drivers helps keeping the thesis in scope. However, the priority on information and inventory is determined by COMPANY. The reason is that visibility systems facilitate information sharing in order to reduce inventory/safety stock levels.

However, the thesis does not contain aspects of the development or future implementation of the visibility technology. The identification of the visibility gap is only based on demand and inventory data. Awareness of other factors such as throughput or lead time which need to be considered for a thoroughly and holistic analysis of SCV is existing. Including those factors would extend the scope of the thesis and are matter of future development. Figure 4 shows an extract of the thesis and selection model prototype.

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Figure 4: Extensive Selection Model (Source: adapted from TOMPKINS)

Figure 4 shows the modules considered in the selection model prototype, marked in orange colour. The remaining modules are matter to future development of the selection model in order to completion.

2. Literature Review

The literature review provides the theoretical fundament for the selection model. It defines and outlines all necessities cohering with the thesis and selection model. The literature review is subdivided into five parts, SCM, SCV, KPIs, outsourcing, and customer segmentation.

2.1. Introduction to Supply Chain Management

In today’s global markets, supply chain management (SCM) is becoming an eminent issue for many organisations. Globalisation and mature information technology enable all sizes of organisations to operate globally. Some mid-sized companies who have been national operations with lucid supply chains turned into global operating organisations with enormous supply chain networks. Companies with distinctive supply chains provide their products and services to customers faster, cheaper, and better than the competitors. These companies recognised SCM as a core competence strategy (HANDFIELD and NICHOLS 2002, 3). SCM is a cross-functional and inter-organisational process, implying that companies are no longer competing as single entities, but rather within supply chains (LAMBERT 2008, 1). Regarding to AYERS (2006) supply chain management is more than the physical movement of goods; it includes the flow of information, money, and knowledge as well as service.

HANDFIELD and NICHOLS (2002, 8) define SCM as “[…] the integration and management of supply chain organisations and activities through cooperative organisational relationships, effective business processes, and high levels of information sharing to create high-performing value systems that provide member organisations a sustainable competitive advantage.

The definition contains three important aspects about SCM. Firstly, supply chain members need to be integrated through collaboration and organisational relationships. Secondly, the definition emphasises the importance of information sharing to create a high-performing value chain. Moreover, information sharing leads to visibility across supply chains argue BARRATT and OKE (2007) and hence competitive advantage can be achieved for the members.

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Figure 5: Integrated Business Processes across the Supply Chain (Source: LAMBERT 2008, 3)

A typical supply chain consists of initial supplier, supplier, manufacturer, customer and end-customer as depicted in Figure 5. Other important members in an extended supply chain are warehouses, distribution centre (DC), other intermediaries, and service provider such as for logistics, finance, market research, product design, or information technology (IT) states HUGOS (2006, 26). In 2005, Tom Blackstock, Vice President of Supply Chain Operations at Coca- Cola North America (cited in LAMBERT 2008, 3) stated “supply chain management is everybody’s job”. That implies the integration of all supply chain members, processes, and business functions as shown in Figure 5 in order to add value for customers and other stakeholders. Importantly, information flow is superordinated as it is the centrepiece of coordination and decision-making in the supply chain. Information flow enhances supply chains when data such as forecasts, point-of-sale data (POS), production schedules, or inventory levels is shared.

FAWCETT and other (2007, 377) state, sharing information substitutes for inventory and time, reduces company’s costs, improves customer service levels, reduces lead times, improves profitability, increases quality levels, and enables collaboration between supply chain partners. Global operating organisations made by now progress in SCM improvement through information sharing. They enhanced their SCV to achieve competitive advantage. Companies such as Dell Inc. and Wal-Mart have focused on their supply chains in order to improve their business performance and to gain competitive advantage through SCM (HANDFIELD and NICHOLS 2002).

2.1.1. The Supply Chain as a Competitive Advantage

PRAHALAD and HAMEL (1990) firstly introduced the term core competence in their article “The Core Competence of the Corporation” published in the HBR. According to HANDFIELD and NICHOLS (2002, 122) core competencies should fulfil at least three criteria:

- It is valued by the customer,
- It can be applied across multiple business units or products, and
- It is unique and cannot be easily imitated by competitors.

Identifying a company’s core competence is important to decide which product, service, process or technology is under consideration for outsourcing or in- sourcing. The process is known as the Make/Buy decision. PRAHALAD and HAMEL state that core competencies are the source of competitive advantage. Subsequently, if a company accidentally outsource a core competence, it may lose its competitive advantage.

How can the concept of core competence, and thus of competitive advantage be applied to supply chains? 12MANAGE states that “competitiveness derives from an ability to build a core competence, at lower cost and more speedily than competitors”. Additionally, HANDFIELD and NICHOLS (2002) argue that the growing number of successful global operating organisations have forced companies to improve their competitiveness by concentrating on their core competencies. It distinguishes one company from another and can lead to competitive advantage. The company’s ability to “build a dominant set of technologies and/or skills that enable it to adapt to quickly changing marketplace opportunities” (HANDFIELD and NICHOLS 2002, 123) is a core competence and leads to competitive advantage through SCM. Benefits can be achieved in cost, technology, flexibility and so forth. HUGOS (2006, 163) claims that today’s competition has evolved from a company-to-company competition towards a supply-chain-to-supply-chain competition. It means that it is not longer enough for companies to seek only for their own core competence, but to develop the integrated supply chain as a core competence. MENTZER (2007) argues that the most important competitive advantage principle for SCM is to stick to the core competencies and to outsource the non-core competencies including the coordination of these functions to the supply chain partners. Therefore each supply chain member has to identify its own and its supply chain partners core competencies. The outcome is the cognition of what each single supply chain member has to do well to gain competitive advantage for the entire supply chain. To identify the company’s core competencies and core competencies of supply chain partners, MENTZER (2007) recommends creating a simple matrix as shown in Figure 6.

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Figure 6: Core Competence Matrix (Source: adapted from MENTZER 2007)

The matrix provides two major findings immediately. Firstly, the matrix emphasises functions which are core competence within the own company, but performed poorly by supply chain partners. Secondly, the matrix shows the functions which are performed poorly by the own company, but which are core competencies within supply chain partners. In the first case the own company should take over those functions and tie the supply chain partners closer to the own company. In the second case the supply chain partners should take over all activities in which they perform well. All supply chain members concentrate on their own core competencies in order to achieve competitive advantage for the entire supply chain. When all supply chain members know their core competencies and outsource all non-core competencies to their supply chain partners, competitive advantage can be gained for those supply chains. Competitive supply chains provide their products or services faster to customers, and in a cheaper and better way than their competitors. Referring to HANDFIELD and NICHOLS (2002, 3) managers realised that it is not enough to achieve competitive advantage for their single company; they must work in cooperation with their supply chain members. Effective SCM has helped Wal-Mart becoming the largest and most profitable retailer in the world (HANDFIELD and NICHOLS (2002, 193). However, SCM is not an easy task and coheres with both opportunities and challenges, such as finding the trade-off between efficiency and responsiveness.

2.1.2. Supply Chain Challenges

According to an article in the HBR (1998) Michael DELL early recognised one of the biggest challenges of supply chains. M. DELL argues that the greatest challenge is working with suppliers to get them in synchronisation with the company’s own operations and that the key driver for success is information. Information must be shared with supply chain members to achieve performance enhancement along the supply chain. BARRATT and OKE (2007) conduct in a recent survey that information sharing leads to SCV yielding in supply chain performance improvement. Aberdeen Group (Jun and Nov 06, Sep 07) surveys are conforming to the concerns Michael DELL mentioned almost a decade earlier.

The surveys include more than 200 small to large companies from Asia, EMEA, and North-, South- and Central America, covering key industries such as consumer packaged goods (CPG), automotive, retail/distribution, and industrial equipment manufacturing.

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Figure 7: Top Concerns in SCM (Source: compiled from Aberdeen Group Jun 06, Nov 06, and Sep 07)

More than half of the participants (51%) stated “Lack of critical supply chain process visibility” as a major concern (Figure 7) in the surveys. Additional areas of concern and thus supply chain challenges according to the survey (Aberdeen, Jun 2006) are coordination between supply chain partners (37%), loss of control after outsourcing operations (30%), and effectively managing global operations and distribution networks (29%). Remarkable are the relative low ratings for logistics costs and lead times (incl. variability), both 20%. The bottom half of Figure 7 breaks down the major concern and challenge SCV. The graph is composed of two surveys conducted by Aberdeen Group in November 2006 and September 2007. The survey - results are combined to outline the development and significant differences in supply chain challenges. As the bottom graph in Figure 7 shows, major challenges in year 2007 regarding SCV were improving on-time delivery (72%) and reducing lead time and lead time variability (63%). According to the results, reducing lead time and its variability is not only a SCM challenge, but moreover a specific and major SCV challenge. Noticeable is that the need to improve on-time delivery is the only challenge which became a bigger concern in year 2007, whereas “Proactively alert customers of late shipment” and “Shorter delivery windows caused by JIT and lean programs” show a significant decrease in 2007. The importance of those challenges has reduced in 2007, whilst companies still struggle to improving their on-time delivery performance.

Countering these supply chain challenges coheres with adjusting all supply chain drivers in an organisation. The right trade-off between efficiency and responsiveness of the supply chain driver’s turns challenges into opportunities. Each supply chain performance is determined by the five major drivers named production, inventory, location, transportation, and information.

2.1.3. Major Supply Chain Drivers

Today’s markets require efficient and responsive supply chains. Unfortunately responsiveness contradicts with efficiency. Collectively five major drivers determine the responsiveness and efficiency of entire supply chains (HUGOS 2006, 17). For each single driver the trade-off between efficiency and responsiveness must be made. The drivers are Production, Inventory, Location, Transportation, and Information as shown in Figure 8. Information is the centrepiece of all drivers as it provides the basis for decision-making on all drivers. The drivers are in correlation with each other and in total they determine the performance of the entire supply chain.



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Third Party Logistics Development



Title: Third Party Logistics – Development of a selection model  to enhance supply chain visibility