Contract logistics

Contract logistics is not just an extension of traditional logistics services. It frequently replaces them with comprehensive, tailor-made and contractually regulated packages of services.

Individual service packages for special customers

Contract logistics combines many logistics functions into a complex service package that is based on the customer’s individual wishes and needs. Even mobile phones reach store shelves this way. Suppliers of these services are called third-party logistics providers, or 3PL. They handle all of the jobs needed to get the mobile phone onto store shelves. To provide this service, the contract-logistics provider must do a number of key tasks for the mobile-phone company - e.g., manage incoming orders, pack and address mobile phones that have been ordered, create special offers for retailers, regulate returns, payment and customs-related issues, and perform repairs.

Duties and extent of contract logistics

€192,700,000,000 is the total volume of the global market for contract logistics.
134,000 transactions took place in European contract logistics for consumer goods in 2004.
10 percent is the global growth rate of contract logistics.

The business model of contract logistics

Contract logistics providers combine several logistics functions into service packages of increased complexity that are tailored to the needs of the customer or shipper. In this business, the logistics services may extend well beyond transport, storage and order processing.
This work requires contract logistics to make substantial customer-related investments. In the process, these service providers also gain extensive sector-specific know-how. The provided logistics services are governed by a contract between the customer and service provider that runs for at least one year and usually for several years. In this manner, contract logistics is completely different from a transaction-based business relationship that can be discontinued at any time.
The business volume frequently exceeds a large level of minimum revenues - e.g., €500,000 to €1 million a year. An “open-book policy” is usually used in price calculations. This means that the data on which the price is calculated is open to both partners. This reduces the risk to the logistics service provider and the customer, compared to a fixed transaction rate or “closed-book” arrangement.

The terms “contract logistics,” “3PL,” “4PL” and “LLP”

Providers of contract logistics, system services or logistics solutions are frequently called third-party logistics providers (3PL) or full-service provider.
A separate group is called fourth-party logistics providers (4PL). This group concentrates on an administrative area and offers consultation services. Lead logistics providers (LLP) coordinate several individual logistics-service providers and form a uniform interface to the customer. But they may not have their own logistics services, a characteristic that distinguishes them from conventional contract-logistics providers.

Definition of logistics services

The market for contract logistics

The market for contract logistics is extremely fragmented. In 2006, the world’s largest share was maintained at 6.2 percent by DHL Exel Supply Chain. All other major providers had market shares of between 1 percent and 2 percent. The market is so strongly divided because a large amount of sector-specific know-how must be created in order to make a successful offer of contract-logistics services. For this reason, the use of a differentiation or niche strategy appears particularly promising in this market. As a result of reduced market shares, small and mid-sized companies are much more successful in contract logistics than they are in the traditional areas of TTS logistics.

References

DHL Corporate Development | September 2007
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