3PLs: The Next BIG IDEA, March 2005

March 1, 2005
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Trite perhaps, but nonetheless true-the pace of change in the global marketplace has never been more rapid than today. New trade patterns are developing daily, and the parameters of doing business are shifting constantly. Any manufacturing or retail company operating today had better be thinking globally, or it will not survive. Innovation in managing not only the production of goods, but in managing the entire supply chain has become a critical element in success.

But where are the sources of logistics innovation?

A complaint heard in industry sessions is that companies are looking for more ideas and fresh solutions from their logistics providers than they are getting. Indeed, a supply officer for a global consumer products company lamented that he no had nearly given up expecting 'outside the box' suggestions from 3PLs.

At World Trade, we don't subscribe to such a harsh view, but we were sufficiently challenged to inquire about the elements of 3PL innovation. What areas are third-party logistics providers focusing on to bring competitive advantages to their customers? How is the supply chain helping businesses in the never-ending quest for lower costs and higher margins? We asked a broad sampling of the country's largest and most respected 3PLs those questions. We wanted to know how the leading logistics providers were preparing for the future and facilitating the next generation of advances in the supply chain.

Our questions focused on four spaces that are critical to the new logistics: technology, supply chain risk mitigation, metrics, and customer relationships.

I. Technology

Almost all 3PLs are becoming involved with RFID at some level, but to be truthful, the 'testing of the water' remains pretty tentative right now. While there seems to be universal agreement that the technology is inevitable, there is some debate over which industries will see a return on investment in RFID and to what extent. Some logistics companies, such as C.H. Robinson, which plans to implement RFID throughout their own supply chain, have moved aggressively into the RFID arena and believe that it will have huge benefits for the supply chain. More cautious types fear that issues, such as cost and standardization, will delay implementation and that the benefits are still years away.

II. Supply Chain Risk Mitigation

Security concerns continue to dog the 3PL industry at a time when customers are demanding the smooth, reliable flow of goods. "With increased security, the issues are increased costs and potential delays. This lengthens the time of goods in the supply chain, which is contrary to what companies need," comments Chuck Lounsbury, Senior Vice President, Sales and Marketing, Ryder Supply Chain Solutions Division. It's not surprising that all the companies with whom we spoke take very seriously their role in ensuring the safe flow of goods. They have become knowledgeable of all U.S. government requirements and regulations and are working to ensure that their customers are informed. But, security is a global issue and as other nations ramp up their security initiatives, staying on top of the changes becomes an on-going challenge.

Security regulations are not the only potential hold-ups. Issues throughout the extended supply chain, such as delays at the ports or inventory shortages, can also cause hiccoughs. Logistics providers agree that information and increased visibility are the keys to mitigating risk. The ability to predict delays, or to identify problems prior to their occurrence is a service customers are demanding which 3PLs are doing their best to provide.

III. Metrics

While the virtues of measurement have long been appreciated, the use of metrics is changing. Companies are recognizing the strategic importance of the supply chain, and as a result, it has become a high-level issue. "This has been one of the most fundamental areas of change in the transportation and logistics industry," says Tom Perdue, COO, NYK Logistics. Supply chain metrics are now being tied to financial metrics and being used in budgeting and projections. Third-party logistics providers are finding that their customers are asking them to provide more granularity and real-time access, enabling them to make fast, well-informed business decisions. Open access to the right information has never been more important-nor more challenging to provide.

IV. Customer Relationships

Today's logistics customers are extremely sophisticated, and are demanding a higher level of customized performance from their service providers. As the supply chain has increased in complexity, there has been a corresponding expectation of additional 3PL expertise. Many customers now want their 3PLs to become strategic partners, involving them in the logistics decision-making process, involving them deeper into their own operations and expecting a broader range of capabilities. "Customers are pulling us in earlier on in strategic decisions," says Shawn Boyd, Senior Vice President, Global Customer Solutions, DHL. "They are focusing on their core business and asking us to step in and do our business."

In addition to the customer side, we also asked the logistics companies what they see as the most pressing challenges they, and their customers, would be facing in the near future. It's no surprise to anyone the China tops the list, followed closely by the capacity crunch in North America and the increasing demand for a single service provider.

The overpowering presence of China continues to have tremendous repercussions in the North American market. China has become such an important player, with so many products being sourced and manufactured there, that companies doing business with China are looking for a logistics partner with experience and operations in the country. This is forcing many 3PLs to begin establishing a presence in China either through acquisitions, start-ups or joint ventures.

Back home, the sheer volume of goods coming into the U.S. from Asia has led to an unprecedented capacity crunch. Ports on the West Coast are congested, and routes out of the ports are insufficient. Overall, the infrastructure is being stretched to the limit (some suggest even beyond the limit) to handle volume. "It is one of the biggest impediments to global trade happening here in the U.S.," says Tom Escott, President, Schneider Logistics. Escott believes that it is imperative for shippers and carriers to work together to address the infrastructure issue given the increasing severity of the constraints and the continuing growth of trade with Asia.

In the short term, according to Valerie Bonebrake, Executive Vice President and COO, Transportation Solutions, Meridian IQ, the key lies in order management and planning systems to provide alternative shipping strategies. "The more planning time we have, the more alternatives we can find."

With competitive pressures coming from every angle, companies will continue to look for broader service offerings from their logistic providers. They want partners who can not only provide a full range of logistics services, but who can analyze and identify areas for process improvements. As a result, the 3PL landscape is changing. The industry has seen many consolidations over the past few years, and this is expected to continue as logistics providers focus on expanding their supply chain capabilities. For customers, this means access to a 'one-stop shop.' For logistics companies, it means that the small- to mid-sized providers will struggle to fully service their customers and compete with the larger conglomerates. At the same time, it also does leave some room for specialty niche players to serve specific market functions.

The one unifying thread throughout all the issues is that of people. At a time when change is the only constant, you are only as good as your people. The complexity of the supply chain demands high level expertise and solid relationships, which reside in the human resource part of the equation. Global trade is essentially a people business, according to NYK's Perdue. "If you give me average technology but great people, I will win in the street."

Overall, the 3PL companies are optimistic and excited by the challenge of helping their customers succeed in the world trade arena. They believe that creative and innovative partnerships, the strategic use of technology and collaborative supply chain planning will create value for their customers and provide them with the competitive advantages they need to achieve success.

Sidebar: Eagle Global Logistics Raises the Standard of Training to Better Serve Customers

Recognizing that 3PLs must raise the standards of services in the future, Eagle Global Logistics (EGL) has decided to ensure that it is attracting and retaining the best and the brightest. To do this, the company created one of the industry's first training programs aimed at developing the next generation of logistics leaders.

EGL started out as a North American company with a North American focus. As the organization grew and evolved through acquisitions, "we realized there was a component of the company that was missing," says Nelson Bettencourt, senior vice president, Leadership Development. The answer was to develop a training program that reflected the company's global culture of the company, and provided opportunities for employees to advance through the company.

The program focuses not only on product awareness and field training, but also on the development of soft skills, such as leadership or interview skills. "Development is critical in an industry such as ours where there is not always a clear career path." Employees are given a solid awareness of all the different functions in the organization and the skills to adapt what they have learned.

Candidates undergo behavioral assessments as well to determine which aspect of the business would most suit their personality. It's this part that Bettencourt finds exciting, "You can see as they go through the program-they find their strength; they find their passion."

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