Week-12

The IUP Journal of Supply Chain Management, Vol. XVI, No. 2, 201968

Selecting a Logistics Service Provider for a Manufacturing Firm: Issues and Suggestions

Srishti Gupta* and Nasina Jigeesh**

© 2019 IUP. All Rights Reserved.

Logistics is an important activity for all manufacturing firms to distribute their products to the customers on time. The delays and any mishandling of the products may affect customer satisfaction and hamper the business of the firms. Adoption of good logistics by a firm can also contribute to maintaining competitive advantage. This paper attempts to understand the logistics of one big manufacturing firm in India engaged in fertilizers. It proposes the services of one service provider by taking into view several important issues like availability of trucks, distance and turnaround time and others, particularly from the perspective of the manufacturer. It also surveys three different multinational companies to understand the logistics solution adopted by them and their understanding of the issues related to the proposed service provider. In addition, the study also surveys three competent logistics service providers to understand their logistics model and their views on the service provider. Finally, the study attempts to come out with a logistics model to select a service provider.

* BBA Batch of 2019, The ICFAI Foundation for Higher Education (IFHE) (a Deemed to be University u/s 3 of UGC Act, 1956), Dontanapally, Shankarapalli, Hyderabad 501203, Telangana, India; and is the corresponding author. E-mail: [email protected]

* * Professor, Department of Operations and Information Technology, Faculty of Management, IBS Hyderabad (under IFHE – a Deemed to be University u/s 3 of the UGC Act, 1956), Hyderabad, Telangana, India. E-mail: [email protected]

Introduction In a supply chain, movement of material and goods plays a very important role in meeting the requirement or demand. The risk and complexity involved in internal movement is almost negligible when compared with the external movement, wherein raw material and other requirements for manufacturing should come from selected sources related to vendors and finished goods should be delivered to the destinations related to customers. While doing so, there should not be any compromise on time, effort and quality; otherwise, loss of business will be the ultimate result. In order to address such important issue, logistics evolved as a special branch of business and its management became a continuous challenge for the business parties involved. Depending on the capabilities of the manufacturing firm, logistics is being handled either independently by creating and using in-house facilities or by outsourcing it to external agents or third party providers. Because of continuous focus and efforts required to attend the vital manufacturing processes and related issues, several big manufacturing companies are looking at outsourcing logistics activities to third party providers.

69Selecting a Logistics Service Provider for a Manufacturing Firm: Issues and Suggestions

Many service providers are evolving globally and a lot of competition is prevailing among them. In addition, the companies that want to outsource their logistics activities are struggling to find a reliable and economic service provider. In India also, most of the big manufacturing firms are outsourcing their logistics activities to well-established service providers. Many service providers like Aegis Logistics Ltd., Transport Corporation of India (TCI) Ltd., VRL Logistics Ltd., and Allcargo Logistics Ltd. are well-established logistics firms in India and many other startups like Blackbuck and PRDR are establishing their image with new technologies.

This study intends to understand the logistics requirements of a big manufacturing company which is willing to outsource its transportation activities to a firm, the capabilities of the logistics firm and its compatibility with the manufacturing company.

Literature Review Logistics is the central part of the supply chain that impacts the efficiency and cost of the entire supply chain (Li et al., 2012). It plans, implements and controls the efficient flow and storage of goods, services and related information from the origin to the consumption point in order to meet the requirements of customer (Lambert and Cooper, 2000). Management of logistics is an integrative process by optimizing the flows of materials and supplies through the firm and the operations performed for the customer (Christopher, 2017), and therefore, it is becoming a challenge to the firms in making the right decision in selecting and managing the logistics service provider for a smooth run of logistics activities. According to Jharkharia and Shankar (2007), outsourcing of logistics may limit to a single logistic function like transportation or warehousing and it is becoming a common practice for the companies to assign that function to a third party. According to Lieb (1992) and Candler (1994), taking the services of third party logistics suppliers is more economic than doing the same functions in-house for any user organization. Such suppliers can lower costs and be more efficient than the manufacturing firm (Lieb, 1992; and Bradley, 1994) and the overall coordination costs can also come down (Richardson, 1990).

A lot of research was done to identify suitable criteria to select the right third party logistics provider. One of the most important criteria is the ability of the service provider to provide their clients with expertise and experience (Dillon, 1989; Sheehan, 1989; Trunick, 1989; Goldberg, 1990; Richardson, 1990, 1992; and Byrne, 1993), and a selection criterion is required to select the right service provider (Maltz, 1992; Menon et al., 1998; Jharkharia and Shankar, 2007; and Alkhatib et al., 2015) and long-term relationship also acts as an important criterion in the selection process (Gürcan et al., 2016). Stank et al. (2001) perceived world-class logistics expanding outside the organizational boundaries in order to address the integration between customer and supplier and reported that top firms are keen to develop extremely close relationships with the selected client firms by significantly improving working arrangements with the supplier firms. Gürcan et al. (2016)

The IUP Journal of Supply Chain Management, Vol. XVI, No. 2, 201970

reported that the company requirements decide the selection criteria and its importance and it is different from one company to another. Gunasekaran (1999) and Narasimhan et al. (2004) stressed the significance of information technology along with outsourcing trends in creating greater synergy across the supply chain. From a detailed literature review, Gürcan et al. (2016) reports that compatibility, long-term relationship, financial performance and reputation act as very important criteria in logistics outsourcing to select a right service provider.

Objective This study focuses on the logistics service requirements of a manufacturing firm (to maintain confidentiality, hereafter referred to as MANF), the capabilities of a third party logistics provider (to maintain confidentiality, hereafter referred to as PRDR), and the compatibility of the service provider with the manufacturing firm. It aims to understand (i) why some big firms do not prefer or do not have interest in the services of PRDR; (ii) the comparison of service model of other competing service providers with that of PRDR; and (iii) why the manufacturing firm is showing interest to take the services of PRDR.

Methodology To achieve the above three objectives, the study did field visits and surveys by interacting with the companies directly. In addition, the study planned to understand the PRDR’s service model by interacting with PRDR itself. Finally, the study is intended to come out with a detailed service model of a logistics service provider.

To understand the views of the other manufacturing firms about PRDR, the study selected three large manufacturing firms in India. The questionnaire consists of questions to know the products they deal with and their seasonality and demanding zones, major routes of transportation, third party logistics providers giving services, major logistics issues being faced, and finally their views on PRDR.

To know the views of other logistics providers who are competing with PRDR, the intended questionnaire questions about their scope of services, routes, goods, and their views on PRDR. They are asked to explain the challenges they face and the technology that would benefit them to improve their performance. In addition, each provider was asked about their readiness to serve MANF. Three service providers were selected and information was gathered from the directors and managers.

The logistics head and the SCM head of the manufacturing firm, MANF, were interviewed in detail to know the current logistics service providers, the issues with them, and their views on PRDR and finally their interest to take the services of PRDR. First of all, it is intended to understand the business model and features of service of PRDR.

For interactions with different companies, separate suitable questionnaires (see Appendix) were developed in order to extract useful and valid information.

71Selecting a Logistics Service Provider for a Manufacturing Firm: Issues and Suggestions

About Manufacturing Firm, MANF Established in the early 1960s, MANF deals with manufacturing and marketing of fertilizers and pesticides and specialty nutrients for agriculture. It carries out retail business by marketing fertilizers of various grades in rural areas of India by setting up 800 outlets in the states of Andhra Pradesh, Karnataka and Telangana. It is India’s second largest phosphatic fertilizer player with three manufacturing plants in South India. For protection of crops, MANF produces pesticides which include insecticides, fungicides and herbicides and sells in both Indian and international markets. To meet the needs of particular crops at different stages of their growth, MANF produces specialty nutrients which include Sulphur pastelles, water soluble fertilizers, micronutrients and also organic fertilizers.

For marketing within India, the fertilizers are packed in 50 kg bags and distributed to several states including Andhra Pradesh, Telangana, Odisha, Tamil Nadu, West Bengal, Maharashtra, Karnataka, Madhya Pradesh and Chhattisgarh. Goods are moved by rail and road, with more focus to increase transportation by road. The peak seasons are during beginning of Kharif (July to October) and Rabi (October to March) when demand is high for fertilizers requiring more number of trucks and with low Turnaround Time (TAT). Current logistics provider of one plant is unable to fulfill the demand and hence MANF is looking for a right logistics service provider.

About Logistics Service Provider, PRDR PRDR is a technology-enabled logistics startup founded in 2014. The company has come up with a new and different approach to logistics. Traditionally, a single driver travels with the truck for entire distance, making halts on the way for rest. While traveling for 500- 1,500 km, the service requires daily stops to give rest for drivers and refueling trucks and drivers wait for a return haul. It also causes problems like weariness in drivers, late deliveries, etc. PRDR has introduced a relay trucking model in India, that is, the truck does not stop but the drivers keep changing at pit stops, thus reducing delivery times by 50%. The distance between each pit stop is 300 km and the driver travels with truck only for a distance of 600 km (two ways). They own a fleet of around 3000+ trucks which they also provide to other logistic companies as a side business. While they use their own trucks for transportation, they do hire trucks from outside (in case they are out of vehicles) and complete their service on time. The vehicles out on the roads for transportation can be tracked with the help of their indigenous app.

PRDR has become a recognized name in the logistics market. The company’s revenues have increased to 402 cr during FY17 from 149 cr in FY16 and its fleet size doubled. It is one of the largest Indian logistics service providers in terms of fleet owned. From a basic survey of some logistics service providers, it was observed that a majority of logistic companies do not own large fleet and hire their vehicles through brokers. PRDR is not only different by its operating model, but also in fleet ownership and investment. While many companies find it difficult to get the required investment, PRDR has received huge

The IUP Journal of Supply Chain Management, Vol. XVI, No. 2, 201972

investment help from private equity firms. It also invests more on drivers and their fleet than other service providers to avoid shortage of truck drivers, which is the problem being faced by many other service providers that were surveyed in a general way. Table 1 provides information related to PRDR in detail.

Views on PRDR from the Perspective of Manufacturing Firms Three manufacturing firms, namely, PGI, ITCB and CCI (real names not disclosed to maintain confidentiality), involved in manufacturing products other than fertilizers, were interviewed to understand their views about and experience with PRDR and impact on their business.

CCI manufactures cold beverages and places them in large crates for transportation depending upon the capacity of truck they are getting transported in. It expects a reasonable rate and 100% compliance with the logistics services taken by it. PRDR, which provides logistics services to CCI, transports these beverages in closed trucks within less time compared to other service providers. According to CCI, closed trucks are not required for the transportation of their products and they prefer to get these moved in open trucks which also saves cost as open trucks are cheaper than closed trucks. Though it appreciates the new approach (of relay-trucking) brought in by PRDR, it finds PRDR to be less compatible with its expectations and would prefer them only in cases of emergency especially during summers as they provide readily available vehicles and a good transit time. Table 2 gives the consolidated information gathered from the three companies.

Features of PRDR

Less TAT

Transparency and Tracking of Goods

Motivation for drivers by showing concern and investing more on them.

Availability of Trucks and Drivers

Detention Charges are Applicable

Limited Routes

Description

From the data collected through general survey of competitors to PRDR, it was found that PRDR takes less time to deliver the assigned goods through the assigned routes.

PRDR has its indigenous app supported by GPS, which helps the clients to track their consignment.

PRDR gives break time for the drivers at each pit-stop, after traveling for 300 km. Drivers are treated as pilots and paid more when compared with other competing firms.

PRDR has a fleet of 3,000 trucks and a large pool of drivers and hence their availability is more.

Specific time is given for loading and unloading of goods, and beyond that time limit, PRDR charges extra from the client.

PRDR operates services in the routes having distance of more than 500 km.

Table 1: Features of PRDR

73Selecting a Logistics Service Provider for a Manufacturing Firm: Issues and Suggestions

PGI is an FMCG manufacturing firm that demands intact delivery of goods, that is, the product should be delivered safely without any wear and tear. As these goods are time critical, it regularly manages its inventory safely stocked in the warehouses. It takes logistics services from many service providers, out of which one is PRDR. When asked about its satisfaction level with PRDR, it was satisfied with their service but had major issue of high detention charge; that is, while loading/unloading of goods, if there was any delay, PRDR charged 30-40% extra. Also, transit time is not a major requirement as the products are safely stocked in warehouses.

Although its service has been satisfying, it has not been able to expand its business with the two MNCs. Whereas, ITCB currently is not a client of PRDR because it cannot work within a bound time and PRDR works strictly according to time (as their model would not be supported by such changes). Though it is not a client of PRDR, it has been showing keen interest in becoming one. PRDR’s relay model and low transit time has attracted ITCB since the beginning of their setup.

Table 2: Consolidated Information Collected from the Three Manufacturing Companies

Business Sector

Company Size

Seasonality

Logistics Issue

Does it take services of PRDR

View on PRDR

FMCG

Large

Not in particular and the demand is uncertain

Shortage in availability of Vehicles

Yes

Good service, but major detention issue.

Conglomerate

Large

There is no season and the business is continuous

Vehicles are not readily available

No

Good approach, but incompatible.

Non-alcoholic beverages

Large

Summer season has the highest demand

Sometimes trucks are not available

Yes

Unsatisfactory

The three companies are different in manufacturing products.

All three MNCs are top players in their respective industry in India.

The demand for the products is varying highly among the three companies.

All three have a common logistics issue, that is, non- availability of required number of trucks to transport their products.

PRDR gives logistics services to PGI and CCI, but not to ITCB.

Two companies appreciate the service and business model of PRDR, but the third company is not happy with its services.

DescriptionItem/Issue/ View

Manufacturing Companies

PGI ITCB CCI

The IUP Journal of Supply Chain Management, Vol. XVI, No. 2, 201974

Views on PRDR from the Perspective of Its Competitors To understand their view about the PRDR model and its impact on the industry, three different logistics service providers, namely, RCIL, RR and EFCL (real names not disclosed to maintain confidentiality), were interviewed. Table 3 gives the consolidated information collected from the three competitors of PRDR.

Table 3: Consolidated Information Collected from Three Competitor Companies of PRDR

Major Routes

Challenges or Issues Faced

View on PRDR

Improvement in Services

Multiple locations from North to South.

Dropping of freight rates due to competition.

PRDR was viewed as a good startup which disrupted the market with innovative operating model.

By tweaking the operating model a little similar to PRDR’s

West

Prediction of freight rates, increased prices of diesel, availability of drivers.

The business model of PRDR was perceived as a great model and is also socioeconomic.

Have not yet thought of it.

Mumbai to Kolkata and vice versa.

Availability of drivers, margin % being reduced due to competition.

PRDR was viewed as having good service level and seems to invest more on drivers.

By improving efficiency and trying to reduce transit time.

The three companies are operating in different routes.

The two major issues commonly faced are: (i) reduction of rates; and (ii) availability of drivers.

Overall, all the three companies which compete with PRDR praised its business model.

Two companies are keen on improving their service.

DescriptionItem/Issue/ View

Competitor Companies

RCIL RR EFCL

According to these service providers, PRDR has brought in a great approach and has helped the market to reduce their transit time. PRDR is not a threat to them yet, but is a force that is driving them to buckle up. Anyhow, it is too soon to come to a conclusion on how it is doing and what strategy it is using. It has ignited the use of technology by using it in different ways. Its relay model is something that these companies appreciate.

Earlier, service providers would deliver goods in the usual time taken for transportation but now they need to reduce their transit time as load providers compare them with PRDR. RCIL plans to enhance its services by tweaking its model similar to that of PRDR

75Selecting a Logistics Service Provider for a Manufacturing Firm: Issues and Suggestions

to reduce its transit time too. EFCL has no such plan because PRDR does not operate in the routes that EFCL does. According to RR, PRDR’s model looks appealing, but it is not really required for their clients, so they would not change anything about their service for the time being.

Views on PRDR from the Perspective of MANF In MANF, discussions were held with the Heads of Logistics and SCM about the logistics of their goods from one particular plant located in Vizag. There are currently many local transporters providing their services to move the goods from Vizag plant to various states like Telangana, Maharashtra, Odisha, etc. There is a stable movement of goods by fulfilling all the expectations. But sometimes, during seasonality of other goods, there may be shortage of availability of trucks. It is managed somehow and is not a big issue, but to put an end to the issue of low availability, they have spoken to PRDR. Since, major volume is distributed to districts within 500 km, they contacted PRDR for trucks and their discussion is still in progress.

In addition, one more employee of PRDR was interviewed about the services of PRDR and its interest in providing services to MANF. When asked about transportation of fertilizers from Vizag to other parts of Andhra Pradesh, Telangana and Maharashtra, the proposal of MANF may be considered, as Vizag is an important logistics hub and many trucks travel through these routes. But transportation from Vizag may only be considered if the condition of a minimum distance of 500 km is maintained.

Conclusion In a business deal, compatibility is the main basis for selection. Similarly, when selecting a service provider, not only efficiency of the service matters but whether it is needed or not matters too. Here, the manufacturing firm needs to focus on getting a suitable logistics solution rather than just considering how good the services are. When the major distribution of MANF is in areas within 500 km from the plant, PRDR functions majorly on routes above 500 km. This is a major drawback for both the parties. But as fertilizer has a seasonal demand, their movement needs to be quick throughout the peak season, which PRDR provides compared to other service providers. Hence, for other areas that are at a distance of 500 km and above, MANF can take services from PRDR to operate more efficiently in those areas. From the above research, several facts and views were derived, and by analyzing them, it can be suggested that PRDR cannot be given a large part of business but can have a trial and see if it works out in other routes.

Future research is directed to look at not only one logistics service provider, but also several well-established service providers in India. It is planned to examine various issues and factors that contribute to the selection of a service provider from the perspective of users. Future research will also have sufficient sample size and use suitable analytical techniques like Analytic Hierarchy Process (AHP), fuzzy AHP and any other

The IUP Journal of Supply Chain Management, Vol. XVI, No. 2, 201976

Multi-Criteria Decision Making (MCDM) model to analyze the data and derive valuable insights. Future study also aims to draw a holistic framework to select the right logistics service provider and to act as a roadmap for any organization that is willing to outsource logistics.

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77Selecting a Logistics Service Provider for a Manufacturing Firm: Issues and Suggestions

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The IUP Journal of Supply Chain Management, Vol. XVI, No. 2, 201978

1. Service Provider Interview: Hyderabad Hub Incharge, PRDR.

Q1: What is your USP?

Q2: What kind of goods would you prefer to transport?

Q3: Which routes do you majorly operate on?

Q4: Would you prefer transporting 50 kg bags of fertilizer from Vizag to other parts of Andhra Pradesh, Telangana, Odisha, Maharashtra and Karnataka?

Q5: How many vehicles did you start with and what is the growth?

Q6: What technology do you use?

Q7: Are you planning to increase your services/technology?

Q8: Who are your clients currently?

Q9: What are your expectations from a load provider?

Q10: Do you charge for detention?

2. Manufacturing Firm Interview: Logistics Manager, CCI

Q1: What products have major demand?

Q2: What is the seasonality of your products, if any?

Q3: In which zone is demand comparatively higher?

Q4: What are the major routes?

Q5: What are your expectations from a logistics service provider?

Q6: Which companies mainly provide you logistics service?

Q7: Do you face any issue with your current logistics? If yes, what?

Q8: Approximately how much share of logistics does PRDR handle?

Q9: What opinion do you form of PRDR? Are you satisfied with its performance?

Appendix

79Selecting a Logistics Service Provider for a Manufacturing Firm: Issues and Suggestions

Appendix (Cont.)

3. Competitor Interview: Director, RCIL

Q1: What is your USP?

Q2: What kind of goods would you prefer to transport?

Q3: Which routes do you majorly operate on?

Q4: Would you prefer transporting 50 kg bags of fertilizer from Vizag to other parts of Andhra Pradesh, Telangana, Odisha, Maharashtra and Karnataka?

Q5: Have you heard of PRDR? If yes, what opinion do you form of it?

Q6: Do you see it as a threat?

Q7: How do you plan to enhance your services?

Q8: Do you use technology? If yes, what?

Q9: Do you think technology has helped? Is it important to function efficiently?

Q10: What are the challenges you face?

4. Load Provider Interview: Head-Logistics, MANF

Q1: Who provides you with logistics service at Vizag?

Q2: Is the service satisfactory? Any issues?

Q3: Is there any seasonality of the product? If yes, what?

Q4: What quantity of load do you transport in general?

Q5: From where does the main demand for the product come?

Q6: Have you heard of PRDR?

Q7: What is your opinion of it?

Q8: Would you think of approaching PRDR?

Reference # 34J-2019-06-04-01

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