Flexibility Measurement within the Service industry

Diplomarbeit von Tobias Kunze

Introduction:

The following thesis was conducted within the confines of Berco Express and seeks to develop a flexibility measurement methodology. Spearheading the introduction of Berco Express, a Logistics Service Provider (LSP), operating in the South African Transportation industry.

Company Profile: Berco Express (BE) is part of Berco Logistics Services (BLS), a wholly owned subsidiary of the Berco Group, a privately owned company established in 1992. The vision and passion of all the people of this company is to make BLS the customer’s logistics service provider of choice. BE started its courier operation in 1992 and has since grown into a medium sized organisation with 16 branches nationally in South Africa (SA), employing close to 1000 people and over 250 vehicles. Additionally under the BLS umbrella included are the two complimentary divisions Active Warehousing and Clearing & Forwarding. BE standard Courier Services embracing dedicated distribution, domestic and international consignments. In conjunction with the Global Distribution Alliance Network (GDA) all major cities worldwide as well as thousands of towns in more than 220 countries are served.

Active Warehousing a newer division is offering in 4 warehouse facilities (Cape town, Durban, Johannesburg and Pretoria) the services below: Receiving, Inventory Management, Order Processing, High Value Store, Value added Services; Services primarily emphasize product flow rather than storage. Revenue contribution from the clearing and forwarding division is based on Business operations in the field of Airfreight, Ocean Freight, Multi-modal solutions, Import & Export and Customs Clearance. The intellectual capital of the BLS group comprises specialists in courier, warehousing, distribution, clearing & forwarding, management information systems, project management and account/contract management.

With a contribution of R 210,000,000 to the Total Berco Group Revenue for 2005 and an annual average growth rate of 35% over the previous five years BE has been established a sustainable position within both the Berco Group and the industry. Continuous improvement esteemed as the platform for Excellence has been implemented to guarantee BE’s drive towards Service Excellence.

SA’s transport industry recorded in 2006 a total income of approximately R 160 000 million. This presents an increase of 7.1% p.a. over the income reported to the corresponding survey of 2002. The transport industry contribution to the increase in economic activity for the third quarter of 2007 amounted 0.4 %. SA’s major problems are high logistics costs, skills shortage within the transport industry and it’s inefficient transport infrastructure.

Problem Definition - objectives: Economy today is characteristic for globalization, consolidation and an ongoing technology to support business processes. All the time Enterprises have to manage these changes in the environment. To be competitive in the future these organizations require an agile and flexible structure. Independent market places will come together to one global market place assuming the requirements for coordination and optimization of business processes are rising rapidly. The competitive challenge generates pressure to optimize processes and to continuously improve services. The need for faster, more visible and more flexible supply chains influences the architecture and structure of enterprises that belong to a specific supply chain. The features agility, flexibility and adaptability are additional to speed and efficiency the key factors of competitive strength. Companies start focusing on their core competencies. As a direct result companies have started outsourcing their transportation requirements to LSP’s.

Today’s transportation industry is faster, more global and more competitive than ever before. Customers prefer LSP’s that can do more than deliver efficient service at a competitive cost. Nowadays customers require more responsive, more visible and more intelligent supply chains. Therefore to compete in this environment the LSP is challenged by forging itself to be flexible, agile, transparent and adaptable.

Regards the topic of the thesis the concentration is directed towards Flexibility Measurement applied in the South African Transportation Industry with a specific focus on BE Express. Main objectives of the report are firstly to define the meaning of flexibility, to measure BE’s flexibility and after all to draw conclusions in form of business strategy objectives as well as requirements and challenges for BE, that exist within the company and which will help to maintain and increase the level of flexibility as well as secure a competitive advantage for BE within its market sector.

Additionally with the ongoing Transformation of BE from a „pure” Courier Company to a „Supply chain solutions” Company the determination of BE’s recognition and perception in the market - derived from results of the Flexibility Measurement - represents an important factor, to consider in terms of strategic planning.

Problem solving - Applied Methodology: The purpose of this chapter is to describe the methodology undertaken in this research. The chapter declares the method of data collection, chosen instruments and explains the reasons for the applied research design. In order to be able to solve the raised topic problematic the work was structured in a pre-study, followed by a main study. The two studies have been performed separately, following different purposes and are of different design.

Pre-study: In the beginning a Pre-study was conducted to help to enhance the familiarity of the researcher with the given problem, whereby more ideas and insight could be attained. A Pre-study can also clarify the concept and make it easier to break down a broad problem definition into smaller or more particular problems. Another benefit is to assist in defining further research priorities.

In the context of this paper the pre-study helped to define the meaning of flexibility for BE and it’s measurement better. Comprehensive Research of the Logistics environment in SA provided more precise knowledge about the transport industry, Supply chain Development / Maturity and several other issues. Through these information’s the problem definition was developed to a proper state equalling with the achievement of a more purposeful starting point. Additional the cognitions could be used to design the main-study in a more accurate way as well. The Pre-study consisted of a literature review as well as one-on-one interviews with senior staff within BE.

The literature review focused on literature pertaining flexibility and flexibility measurement within the manufacturing and service industry, the SA transportation Industry as well as Supply Chain Development. The Internal Interviews looked to ascertain the state of the Logistics environment within SA. Significant for the interviews was the open discussions atmosphere as no questionnaire was followed. Instead, the area of interest was stated and general questions asked. Therewith this part of the pre-study was designed to be flexible to ensure that no relevant information was missed.

Main-study: The main-study had the structure of a descriptive and analyzing research. With the results of the pre-study it was clearer to determine what to research and what is of interest at this stage. In comparison the main-study was more focused and structured. From the information that was gathered through the pre-study a suitable BE flexibility model could be developed.

The proposed model, as outlined in chapter 2.4, relies on external and internal areas of flexibility measurement within BE. Firstly, the external part was related to BE’s customers. The thesis has therefore included a practical field study, which was undertaken by means of a questionnaire survey (see chapter 2.4 and 4.2.1). Information obtained in this way served as a source of valuable information in terms of the determination of the state of flexibility at BE. Observations were generated systematically and in a structured way, in the form of a customer questionnaire with fixed questions / statements and answers. Comparison and generalisation aspects ranking amongst the main reason for the prioritised standardisation.

It was important to reflect a representative sample of customers. Thus the sample of strategically customers that were chosen to be interviewed was based upon certain criteria, which is outlined in detail in chapter 4.2.1. Due to the standardizing form of the questionnaire the external measurement is equivalent to a quantitative study.

The next section is providing more detail on the internal measurement. To perform this part, interviews were conducted with BE employees, who were in different management positions. The number of interviews was kept relatively low (8 interviews). This is generally recommended when performing a qualitative research. Qualitative studies should be carried out as the name suggest, through a few well-performed interviews rather than through many poorly performed interviews. Of importance is the quality, not the quantity. The internal questionnaire contained of three parts, which getting expanded further in chapter 4.2.2. During the interviews the structure of the internal questionnaire was followed but sometimes supplementary questions were also asked to gather valuable ideas and information’s.

Outline of the thesis: Chapter 1 discussed the problem definition as well as the objectives based upon BE’s company profile, whilst the applied methodology section referred to the approach that was adopted to solve the problem.

Chapter 2 contains the broader structuring of the problem Flexibility and Measurement. After this it follows a comprehensive analysis plus evaluation of relevant concepts and theories that relate to manufacturing and service flexibility as well as their measurement. Once these theories are clearly understood and evaluated regarding their adaptation to BE, the BE flexibility model as well as the developed measurement tools get to some extent explained.

The purpose of chapter 3 is to analyze the South African Logistics environment. Superficially the Development of the 3PL industry is going to be emphasized. Additionally this chapter explores the maturity and competitiveness of South African supply chains. Of prime importance is the derivation of requirements for 3PL’s in SA and for their flexibility level based on the trends / challenges of the industry and the existing supply chain maturity in SA.

Detailed Demonstration is given in chapter 4 elaborating the main point of flexibility measurement. The first section is mapping out the processes and core competencies of BE. Central point of the second section is to describe the application of the developed tools for internal and external measurement of Flexibility at BE. Moreover after the presentation of the results from the measurement, the evaluation of whose takes place. In this context BE’s flexibility level is determined by the relative position on the BE flexibility matrix. After that the research is focused on the derivation of requirements and challenges for BE, that exist to increase and maintain the current flexibility level. The Closing point presents the suggestion of business strategy objectives based on BE’s strengths and weaknesses.

Chapter 5 concerns the final summary and outlook. A comparison of assigned objectives and achieved objectives determines if the research has been successful or not. The problematic concerning definition and measurement of flexibility gets further discussed. Finally a conclusion regarding the importance of BE’s flexibility level within the SA transport industry is reached.

Table of Contents:

I.	TABLE OF CONTENTS	II
II.	TABLE OF FIGURES	IV
III.	LIST OF ABBREVIATIONS	V
1.	INTRODUCTION	1
1.1	COMPANY PROFILE	1
1.2	PROBLEM DEFINITION - OBJECTIVES	2
1.3	PROBLEM SOLVING - APPLIED METHODOLOGY	4
1.3.1	PRE-STUDY	4
1.3.2	MAIN-STUDY	5
1.4	OUTLINE OF THE THESIS	6
2.	THEORETICAL DECLARATION OF FLEXIBILITY AND FLEXIBILITY MEASUREMENT	8
2.1	STRUCTURING OF THE PROBLEM	9
2.2	ANALYSIS OF ESSENTIAL CONCEPTS AND THEORIES	11
2.2.1	MANUFACTURING FLEXIBILITY	12
2.2.2	MEASUREMENT OF MANUFACTURING FLEXIBILITY	17
2.2.3	SERVICE FLEXIBILITY	20
2.2.4	MEASUREMENT OF SERVICE FLEXIBILITY	24
2.3	EVALUATION OF THE CONCEPTS	25
2.4	DEVELOPMENT - BERCO FLEXIBILITY MODEL	30
3.	SITUATION ANALYSIS OF THE LOGISTICS ENVIRONMENT IN SA	36
3.1	STATEMENT OF THE SA TRANSPORT INDUSTRY	37
3.1.1	DEVELOPMENT AND GROWTH OF THE 3PL INDUSTRY AMONG KEY MARKETS - CONCLUSIONS FOR THE SA 3PL INDUSTRY	43
3.1.2	SOUTH AFRICA'S LOGISTICS AND TRANSPORT INFRASTRUCTURE	53
3.2	SUPPLY CHAIN MATURITY	54
3.3	DERIVATION OF REQUIREMENTS FOR THE 3PL	59
4.	FLEXIBILITY MEASUREMENT AT BERCO - EXPRESS	62
4.1	CORE COMPETENCIES AND PROCESSES OF BERCO-EXPRESS	63
4.2	FLEXIBILITY ANALYSIS	68
4.2.1	PROCEDURE OF EXTERNAL FLEXIBILITY MEASUREMENT	68
4.2.2	PROCEDURE OF INTERNAL FLEXIBILITY MEASUREMENT:	72
4.3	CURRENT STATE OF BERCO'S FLEXIBILITY LEVEL	73
4.3.1	EVALUATION OF RESULTS FROM EXTERNAL FLEXIBILITY MEASUREMENT	73
4.3.2	EVALUATION OF RESULTS FROM INTERNAL FLEXIBILITY MEASUREMENT	82
5.	SUMMARY AND OUTLOOK	87
6.	LIST OF REFERENCES	91
7.	ANNEXURE	97

Text Sample:

Chapter 3, Situation analysis of the Logistics environment in SA: Two components, the SA transport industry and the South African Supply Chain maturity, designate the subject logistics environment in the context of this paper. For the prospect of a comprehensive understanding of both components various forms of literature, research, and surveys from endorsing bodies were reviewed. The study focused on a small selection of material with valuable and suitable contents. Research and surveys concerning the transport industry and the state of supply chains in SA have only been indicated recently.

The first Sate of Logistics Survey for SA in 2004 highlighted several issues with respect to logistics research in SA: Lack of continuity in surveys is limiting trend development, Current surveys are too complex, Companies unwilling to contribute information (regarded as threat to their competitiveness), No qualitative benchmarking exists Therefore it is difficult to study the Development of the transport industry and supply chains maturity over a long time period as the continuity of logistics research has only improved subsequent to 2004. The decision to conduct additional internal interviews was based on gathering input data from sources with knowledge and experience within the SA logistics environment. First of all, the next chapter is summarizing the facts about the SA Transport industry.

Chapter 3.1, Statement of the SA Transport Industry: At present and for the foreseeable future the South African economy can be described as healthy with predicted annual growth rates of 6 %. For the SA logistics environment growth simultaneously translates into challenges which are going to be dependent on how well the overall logistics infrastructure of SA can cope with the demands placed on it and how well it will be able to support the envisaged growth.

The following review of the SA transport industry starts from the countries change with the end of apartheid policy in 1994 up to the current situation.

In the 1980’s SA experienced high inflation rates, record unemployment and problems with its balance of payments. This problem continued until the early 90s and was one of the major limitations to economic growth. To overcome the balance of payments problem, international competitiveness had to be the prerequisite for increasing the level of exports.

With the new SA in 1994 (end of Apartheid Policy) economic conditions changed causing a more competitive environment with far greater pressure on management. This required a different management emphasis, focused on managing productivity and cost-effectiveness instead of turnover as a means of staying profitable. Greater attention was given to the main cost drivers within business including logistics. At this point of time logistics in SA was an ongoing emerging discipline and fast growing management field.

Furthermore the deregulation of the South African Transport industry has extended the growth in the share of private transport since 1991. In 1991 almost 60% of the cargo was transported by road, followed by 25% rail and 15% sea. This imbalance between rail and road usage is still an existing problem in SA. As pointed out earlier, logistics was not seen as value adding activity from a business point of view.

The logistics elements such as purchasing, warehousing, inventory and transport were managed according to a functional approach, while the more modern and efficient approach of integrated logistics would avoid a fragmentation of logistics activities.

SA’s status of logistics was determined in 1994 by two academic researchers. The main finding confirmed that SA was still in the early phases of integration of logistics activities, based on the following conclusions: Understanding for logistics has improved but the implementation still lags behind, outsourcing isn’t considered as a real alternative as yet. Logistics is still not seen as a creator of value, importance for competitiveness enhancement not realized. Logistics management is still fragmented, functionally fragmented approach dominant, optimization and advancement not possible.

As consequence the study outlined priorities for future development. Vital challenges such as holistic training to improve application of logistics as well as further improvement on the integration process and customer service needed to be addressed in the future. Logistics was certainly receiving increasing attention but further development of third party logistics was not indicated to be under „important issues”, which symbolized a small willingness to outsource logistics activities. Rather the transport industry changed from a regulated to a deregulated industry, with private companies entering the market to gain benefit (i.e. high market share) from the forecasted growing economic environment. Logistics slowly gained a critical role in enhancing competitiveness, which started to forge the SA Transport industry. Thus, the service offering had more operational character (pure transport services).

The market demand for services was rather simple than complex, which required standardization instead of customization (low vs. high flexibility). Anyway companies were in the position to analyse their logistics activities regarding cost effectiveness, maturity, quality etc. in order to implement appropriate changes / strategies. But first of all logistics wasn’t seen important enough and secondly SA was in the beginning of international trade and domestic economic growth. Companies were increasingly faced with the challenge of developing competitive products. Purchase decisions were mainly based on price and therefore service was not a strategic weapon, whereupon third party logistics service provider (3PL) further development wasn’t prioritised.

In the following years transport has truly become a basic commodity, with very few barriers to entry and therewith being subjected to substantial pressure. Considering the period 1994 - 2000 / 2001 the trends during these years include: Formation of large transport conglomerates with diversified scope of services. Companies / Customers set huge emphasis on transportation costs with the result that transport rates were constantly under pressure, maintaining profitability was increasingly difficult. Change of customer expectations: Increased demand for value add activities, such as Visibility/Transparency with regards to information, forces to invest in technology, without being compensated proportionally. Invest in security technology and services due to constantly deteriorating security situation, especially for high value commodities. Diversification of transport companies, moving out of the transport market, pursuing „higher value-add business”. Increased effort to sell the concept of Supply Chain outsourcing, thus more reputable 4PL (fourth-party logistics service provider) and 3PL service provider needed to which can be outsourced, increasingly demand for further development of the transport industry. Consolidation of the industry: smaller players finding it increasingly difficult to survive. Restructuring of companies to achieve productivity improvement - i.e. owner driver arrangements, dramatic downsizing. Labour legislation, strains on labour relations, wage increases, etc. Internet: Concept of eCommerce, eFulfilment and eProcurement will bring new opportunities, diversified requirements and increase competition.

The above explained trends and challenges shaping the modern logistics service provider profile. Players in the SA transport industry had to manage new external constraints (opportunities / threats) and customer requirements, which challenged them in terms of further development, technology, service offering, cost efficiency, skills and expertise.

The debate between 3PL and 4PL service provider seems to be a controversial topic and should be clarified first. A 3PL is defined as: an outside party that takes care of company’s distribution. The 4PL profile is extended by creating comprehensive supply chain solutions integrating therefore own resources or that of other organizations (such as 3PLs).

Currently there are no true 4PLs in SA, all current 4PLs have some link to a transporter or respectively 3PL. Theoretically a „pure” 4PL with no asset base can play the supply chain management role, striving towards an optimum solution where the best combination of service providers is used. Should the 4PL be in charge of a large asset base, it’s business is driven by the need to make returns on it’s asset base, which hampers to deliver the optimal solution.

Within the SA transport industry the trend appears to be that the distinction between 3PL and 4PL is becoming increasingly vague. Supply Chains with a higher level of maturity make increased use of 3PL and 4PL services. General 3PL service providers can perform a more strategic partnership role and evolve into a 4PL when achieving a comprehensive array of services in its place. Providing more advanced multiple logistics services emerged as the challenge of the transformation process into a 4PL.

Users of LSP’s believe that 4PL providers can add the greatest value in the following areas: Supply chain integration, Decrease in management time and expenses, Managing activities of multiple 3PL providers; 3PL providers need to develop the capability to deliver value beyond their core service. An ability to understand their customers business, to identify + understand the customers needs and to provide professional supply chain management, will strongly position 3PL providers as 4PL providers. This reflects the described changes of customer expectations in SA towards a demand for value add over the entire supply chain.

Nowadays service offerings should include the ability to offer a one stop solution – logistics activities operated by one provider over the entire supply chain. With the growth in outsourcing in SA the competition between 3PL and 4PL has worsened. 4PLs have forced the 3PLs to reduce pricing and fostered supplier relationships versus that of a partner. They have also requested support from consultants to enlarge their market share.

The lasting price reduction enforced the 3PL to compete with a different type of skill setting against 4PL’s. In the end the 3PL has taken a bigger role now, positioned between consultant and 4PL, which has resulted in the 4PL becoming obsolete within the market. In conclusion there are no true 4PL’s in the SA transport industry as they all have their roots in the traditional transport business. The term „Lead logistics provider”, which is an asset based company offering the intellectual value of a 4PL, might be quite an avenue to explore in this context.

Chapter 3.1.1, Development and Growth of the 3PL industry among key markets - Conclusions for the SA 3PL industry: As part of this chapter an extensive study was undertaken in order to establish general logistics outsourcing practises, 3PL service offerings, Management / relationship issues and finally industry future trends and challenges. The key results identified in the study characterised the 3PL environment in the developed countries (North America, Western Europe and Asia-Pacific) including to some extent in the emerging countries Latin Africa, SA and the Middle East. The findings from the developed countries will be used to ascertain whether the current SA 3PL environment comprises of similar findings.

The first section „Logistics Outsourcing Practises” concerns trends among users and non users. There is a significant use of 3PL providers and services expressed in an overall using rate of about 80% with growing rates in the most regions. SA shows a 3PL usage rate of 74%. Costs (65%-74%) and Service (51% to 64%) are the most prevalent outsourcing criteria’s.

Meanwhile the customers of South African companies employing 3PL’s are placing greater emphasis on logistics customer service. In developed countries this trend exists for greater period of time as the use of logistics as strategic competitive advantage for companies was becoming more and more important in an environment where many products are becoming commodities. Despite that SA companies are aware of increasing service demand from their customers, their willingness to pay extra for value added services and high service quality, offered by the 3PL, is quite low. They rather prefer to demand high service quality for the lowest rate.

The significant pressure to reduce costs and the emphasis on improved supply chain management is a phenomenon, which can be observed across all regions. An overview about current / projected total logistics expenditures and expenditures represented by the different logistics activities is shown in figure 3.1.

Most frequently outsourced activities to 3PL’s are those that are more operational in nature like transportation and warehousing operations. The graphs evidence the continued overemphasis of the traditional outsourced portion – transport, where all regions spend the majority of their expenditure. As a result it seems transport is to be considered as the most variable cost. Sources estimate that a huge opportunity for cost savings and competitive advantage in SA sits in warehouses - inventory.

The wider industry is still not grasping this potential advantage in outsourcing. A reason might be difficult constraints for the 3PL industry to successful provide value added services, which request labour intensity and skills. The lack of skills is a common problem across the SA transport industry.

High Inventory Carrying costs in SA are caused due to the need for instance in the manufacturing industry of holding extra stock to buffer scenarios like delayed replenishment stock shipped from Europe, which represents SA geographical disadvantage.

Similar to Western Europe and Asia-Pacific, SA tends to spend greater portions of their logistics budgets on outsourcing than their counterparts in North America and Latin America. A positive sign is the anticipated growth in expenditure directed to outsourcing in SA. However the industry should understand that growth is depending on the condition if the right development priorities for the industry have been configured and if these are going to be implemented consistently.

In the study price was suggested as the key selection criteria under 3PL users. In the developed markets core service offerings, all capabilities are being commoditized and users are exerting pressure on pricing. However, in contrast to SA the overall satisfaction and feeling regarding a 3PL provider is much more sophisticated. Performance and Capability of core/basic service offerings fulfil high performance standards. The SA Transport Industry is still struggling to get the basics right, which underlines that the industry in this region is not as mature. There are only less 3PL’s performing significant above the low industry average.

In the region Asia-Pacific respondents rated that they prefer 3PL’s, that do the core / basic service offerings right instead of dealing with providers, who promise (high Performance in basic and advanced service offering) but are not able to execute. The often critical role of pricing was not confirmed by the respondents, who ranked this selection criterion as less important. These factors above reveal that in the emerging markets (Asia Pacific, Latin America and SA) 3PL’s are still in a building process of core / basic service offerings.

SA Providers with the ability to offer high quality service gain competitive advantage and differentiate themselves further by creating value added capabilities around their basic service offerings, whereupon they become attractive for acquisitions by Global Players, who intend market share. The study emerged various supply chain areas where 3PL’s were able to help their users (see figure 3.2).

Interestingly SA isn’t too far off from developed key markets. The majority of users in all regions felt that 3PL providers were helping facilitate supply chain improvement, providing needed information technologies and providing means for geographical expansion. Fewer respondents in SA agreed with these statements which reproduces SA developing market position. Current information technology costs in SA are high, what is restricting the 3PL to meet the customer’s expectations in this field (see lower % of Accomplishment in figure 3.2). The more so as again the customer’s willingness to pay for that constraint is not satisfying. Three areas for improvement – global supply chain solutions, supply chain integration solutions and advanced supply chain services – should be focused in the near future.

Realistic expectation setting predicts successful relationships between 3PL providers and users (see Figure 3.3.). 3PL providers are being pressured to enhance their relationships – while expanding their service offerings. Continually growing and maintaining profitability adds additional pressure on the 3PL to address this challenge.

The aspects regarding relationship management outlining that both parties must invest in the relationship and work in a collaborative fashion. In other words it needs to be mutually beneficial for providers and customers. It can’t be that way that the 3PL is all things to all people, but is not supposed to receive any reward or benefit.

Customer satisfaction strategies differ by industry, client size, and relationship expectation (tactical or strategic). Customers appreciate 3PL’s efforts in terms of collaboration, deeper industry knowledge and proper expectation setting with trust and relationship improvement. The situation in SA is different, the price pressure within the industry leads rather to a supplier than strategic / partner relationship between customer and 3PL. Customer’s expect a low rate per kg in what they understand is potential for cost reduction but don’t see the prospective long term value - add, for instance, by service level improvements. Pushing pricing is no efficient way of collaboration.

The maturity of supply chains in SA is mixed; especially in the case of domestic supply chains, which have a low level of maturity. Real value added service must be seen in a long term perspective, which involves a collaborative relationship based on information sharing. Often companies just push their disability to be innovative to the 3PL; apparently 3PL users have not aligned expectations with the appropriate relationship structure and have a preference to utilize 3PL provider’s tactical capacity. More detail on the problematic supply chain maturity in SA is provided in Chapter 3.2.

As 3PL providers shift toward a strategic role and continue to expand their capabilities users should be prepared to accept premium charges for advanced services. Therefore the relationship model must incorporate risk and reward pricing mechanisms. Relationships in SA are rather unbalanced being more penalty orientated as often the 3PL’s revenue is linked to performance, which is manifested in Service Level Agreements, positioning the 3PL user in a master / servant position with his provider.

The 3PL industry went through an evolutionary change in past years. 3PL providers and their capabilities continue to change as well as customer expectations. In fact the SA transport industry is moving forward, but it is not efficient enough to generate substantial progress towards maturity. Furthermore customers mind sets about service provider relationships needs to shift towards maturity. Hence, 3PL industry challenges for SA exist in several areas:

1. Disappointment with the 3PL provider’s ability to maintain High Performance Standards and to develop advanced services: Meeting user requirements and performance standards around the basic services (transportation or warehousing) plus the ongoing development of capabilities is still a key issue. Users are satisfied initially with the 3PL provider’s performance, main flaw stays that the provider fails to advance its capabilities when the user’s needs evolving. The significant conclusion to emerge from is that the 3PL is still in a process of learning to add value to a customers supply chain. Even if transportation is being commoditized users need to understand the principle of more value for more money.

In the developing 3PL industry environment a provider’s concept based on the combination of low service quality for low rate per kg will fail and lead to consolidation in the market, as soon as the industry standards increase across the board and such providers can’t perform according to the uplifted standards anymore. Critical success factor in meeting increasing customer’s expectations contains of more mutually convergence from both parties (3PL provider and user), comprehensive understanding and anticipating of customer’s needs and also skills-set changes / skills development.

2. Need for relationship reinvention, mechanisms for continual improvement and solution innovation:Supply chain partners need to foster mutually beneficial relations to improve the supply chain. The shift from tactical to strategic thinking should occur in the near future. A better understanding of the challenges within the market, including globalization and the evolving demands of their own supply chain’s, customer’s will recognize the need for improvement in the relationship with 3PL’s and change to collaboration driven environment. In general it is a challenge to implement logistics strategies in a Developing Economy. Intensification of competition could characterise the market, when global 3PL’s commence operations in SA importing logistics / supply chain expertise and experience behind a globally supported 3PL network. The global logistics infrastructure and capabilities of these 3PL’s is another benefit local 3PL’s could profit from. Hence the 3PL is pressured to continually improve operations and to develop innovative solutions to new or existing problems. Ensuring that the offered services are indispensable for the customers and their supply chains would be first prize and moreover increase retention rate of clients.

The implementation of a continuous improvement philosophy forces rethinking of operating models, skill-set development, and solution development methods, which increases further development of the 3PL.

3. Increasing importance of repeatable and leveraged solutions:This challenge focuses on the trade off between standardization and customization. Sophisticated users have a need for strategic management services and deep industry knowledge, coupled with available low-cost standard solutions. Yet, providers struggle with standardizing their offerings to lower their total cost of ownership successfully.

Customized solutions are not always working 100% from the beginning; there may be changes and adaptations required until all runs smoothly. This requires trust and confidence in the capabilities of the 3PL provider. Lessons learned from previous experience with customised solutions should be noted in terms of development of further solutions.