It used to be that a business’s return on investment (ROI) could be taken at something like face value.

You planned a cargo move, the allocation of transportation assets, or a distribution center strategy, and you worked out what you expected to get in return for what you spent in terms of actual dollars, time, personnel, and other resources.

But in today’s constrained budgetary environment—a milieu routinely buffeted by repeated macroeconomic shocks and other surprises—actual ROI can be much harder to quantify, and therefore assigning priorities that much more difficult to do.

As a result, shippers and others who rely on the 3PL community are seeking a new level of partnership from their service providers and asking them to get the most out of a wide range of initiatives in a period marked by transformational shifts—to achieve, meaningful, long-term ROI instead of the time-honored, but short-term, “victory” of a simple transportation spend.

“The old value proposition for shippers turning to a 3PL was that they’d be able to shed assets or people, outsource the work, and free up cash flow that way,” says Ken Heller, SVP for supply chain excellence at DSC Logistics, a Des Plaines, Illinois-based firm active in the consumer products sector.

“Five or six years ago, customers would talk to us about finding ways to save two or three percent in logistics costs,” he continues. “Now, they come to us and say, ‘We need to pull two to three million dollars out of numerous areas.’

“Now, these areas may include logistics costs, but increasingly they also include inventory carrying costs, order to cash performance—a broad band of areas, and that’s true even in sectors that have held their own in recent years, like food, paper, tobacco and so on,” he says.

The move toward partnering

According to Douglas Waggoner, CEO of Echo Global Logistics, a transportation management provider headquartered in Chicago, Illinois, prospective clients rarely articulate their ROI expectations during the first meeting or initial phone call.

“We tend to deal with mid-market companies, and their objective is pretty simple—they want to save money. And that’s unfortunate, because oftentimes, saving money is much more complicated that just getting a better freight rate,” Waggoner says.

That means that frequently, a 3PL’s first task is to educate the customer and hopefully persuade them to buy into the concept of forging a true partnership on a solution.

“At Echo Global Logistics what we emphasize is that achieving a truly meaningful return on investment is a matter of having a good, integrated solution that uses best-of-class transportation providers, technology, the optimization of the flow of goods, and the reduction of work-process expenses,” Waggoner says.

“If you, as a customer, only think of a 3PL as a broker, the only value you’re going to get is a good price on a back-haul carrier, and that’s only as good as your next load,” he says. “If you want recurring benefits—and these can be on the revenue side, as well as the cost side—things like enhanced customer services and better value for your customer’s customers, then you have to look at things from a much broader perspective.

“In fact, oftentimes we find the best way to save clients money is not by beating up asset-based carriers, but by operating the customer’s transportation function more efficiently and more intelligently than they’ve been doing in the past,” he says.

And that tends to turn conversations in an interesting direction.

“Return on investment assumes that you make an investment, but what we find is that a lot of shippers don’t want to make an investment, or at least, haven’t considered what kinds of investments they’d be willing to make to achieve their goals,” Waggoner says.

“That investment might be money, but more often than not, it’s allocation of resources, in terms of people, in terms of capacity, being willing to change processes, being willing to change their organizational structure, being willing, generally, to endure the pain of doing changes,” he explains.

“Sometimes, you can provide a client with a quick fix—depending on how well they’ve done things in the past—but the better alternative or solution is to partner with a 3PL that takes a more holistic view of what they are doing and finding better ways to do it.

“Fortunately, people are becoming much more receptive to that kind of approach,” Waggoner says. “There have been enough examples—Walmart and Dell Computers being two of many—that demonstrate what can be achieved through better management of transportation and supply chain processes.”

The challenge is that improving supply chain or logistics ROI is often only one of several priorities a client is juggling at any one time.

“I think that’s one of the profound consequences of this recession: people are working very hard, with a lot of plates in the air, and yet they can’t get logistics or supply chain ROI prioritized among all the other things they are working on in their business,” Waggoner says.

“It’s an interesting dilemma,” he concedes. “I think if people thought a bit more about supply chain and 3PL activities as an ROI opportunity, even more companies would jump on the bandwagon.”

An integral shift in 3PLs

But as the bandwagon gets more crowded, it’s also fundamentally changing the 3PLs themselves.

Heller says that as a result, DSC Logistics has evolved from being a company that did a lot of what might be called the physical work—securing containers, lining up trucks, and so on—to one that now also does a significant amount of systems work—data mining and providing knowledge-based resources to help clients solve more complex problems.

“In other words, we’ve gone from a situation in which we might be looking at how to make a forklift operation more efficient to helping clients find ways to pull 15 percent of their inventory our of the supply chain,” Heller says.

“As a result, we’re not hiring forklift operators; we’re hiring college graduates who have studied supply chain issues. That’s where the real shift has been in the last few years: we’re bringing far more knowledge-based resources into the pursuit of greater ROI, and we’re dealing with more sophisticated systems to get there,” he says.

Steve Jobs famously beckoned the world to “think different.” Heller says the demands of the marketplace and the clients’ desire to achieve meaningful long-term ROI is forcing 3PLs to look for a new kind of supply chain strategist.

“The reality is today’s challenges require a broader range of thinking,” he explains. “I mean, you can’t turn to someone who had been working solely in warehouse operations for 20 years and ask him to solve the kinds of challenges we’re now confronting.

“So what you see more and more of today is companies like ours hiring engineering majors who get the business end of it, supply chain people who have had a wide range of work experience and get the whole flow of the logistics process, or transportation people  who see supply chain management as more of an engineered solution.

“Again, what you want to be able to offer people in search of greater ROI is a holistic problem-solving approach,” he says.

Toward that end, DSC Logistics has been building its customer care group and eschews marketing a trademark service, per se, for offering clients a very strategic partnership process.

“We work with our customers on unlocking the value within their supply chain,” Heller says.

The nuts and bolts of the process includes a structured communications plan through which projects are sanctioned—typically four to six projects a year per client—with monthly, quarterly, or yearly business meetings held to assess project execution and the ROI that’s being achieved.

“Each customer is different, and generally speaking, the more enlightened the customers, the more information and more contact they’re going to provide and they’re going to desire,” Heller says. “They get it that the more people you have looking at your business, the more help you are going to get, and the faster you’re going to arrive at an appropriate solution.”

In the ideal situation, Heller says DSC Logistics’ project team will meet on a monthly basis with the client’s logistics or supply chain group, for “relatively tactical” discussions.

“Quarterly meetings will expand to include ancillary groups within the company, including say, people in manufacturing and sales, and then on a yearly basis, we’ll have what I call ‘top-to-top’ meetings, where all the  key executives will get together to discuss the strategic growth plan for the organization.”

Heller is quick to say that DSC Logistics still has customers who want him to simply move their pallets in and out of their facilities— “And we’re happy to provide that service,” he says—but he feels that those companies risk missing out on bigger ROI opportunities.

“Today, ROI is much more complex, because it is over a much broader scope,” he says. “I mean, even for us. I think we have become much more sophisticated over the last five to seven years in terms of understanding the wider range of factors that have a financial impact on our customers.

“As a result, discussions can revolve around cash flow, tax implications, fuel savings, all manner of things…and at the same time, when you deal with 10 or 15 customers at a time as we do, all in different businesses that are being hit by different regulations, you have to keep up with a wide range of regulatory regimes to make sure the client isn’t incurring unnecessary incremental costs.

“For example, we do all of the logistics work for Star-Kist, and so we have to keep abreast of any and all regulatory issues related to tuna sustainability,” Heller continues.

“But that said, no matter how on top of these things you are, achieving a meaningful ROI is still very challenging,” he says. “I mean, very rarely do we have the ability to go to a customer and say, ‘You’re going to be subject to this new regulation and therefore we will do this, and it will cost you X.’ Oftentimes the client will say, ‘We realize it will cost X, but we can’t do that.’

“So what you do in a case like that is look to make other things better and achieve the ROI you desire in other areas; the ever-evolving regulatory environment has forced us to be as clever as possible,” he says.

Process improvements

Also addressing the subject of creativity, Douglas Waggoner says the process starts the moment a 3PL starts trying to get the potential client to buy in to a supply chain or logistics solution.

“You have to show them what you can do and what you’ve done for other clients, so they can see how the process works and how results can be achieved in sometimes unexpected areas,” Waggoner says. “In other words, you have to give them the ability to kick the tires, see how your operation works, and decide whether or not your culture is compatible with theirs.

“Then when you say, ‘But it’s going to take some work on your part,’ they tend to believe you, and they’re willing to make the investments necessary to meet their ultimate goals,” he says.

As an example, Waggoner points to a client who asked for help reducing their small parcel spend.

“This is a company that had made a number of acquisitions in recent years, and as a result they had disparate computer systems that didn’t talk to each other, and the way they processed their transportation costs was causing such a delay in invoicing that they often took as long as 50 days to invoice a customer,” he says.

“So, we stepped in and negotiated a good price with their small parcel carriers, but the real savings were in improving their processes,” Waggoner continues. “We streamlined the way data came in from their carriers; we audited it, processed their freight markup, and then fed it into their accounting system so they could invoice their customer.

“As a result, we took their invoicing process from 50 days down to a week, and that improved their cash flow,” he says.

“Now, that was far more important than saving them some money on their freight costs, but it wasn’t what they came to us for. To achieve these things, we had to look at their business as a whole and they had to give us access to their IT department, their carriers…in other words, it had to be a true partnership, with investment on both sides.”

Continuous progress

Waggoner calls the kind of partnership that achieves the greatest ROI “a sticky solution,” one in which integration is tantamount and in which it’s not uncommon for the 3PL to turn to the client in mid-contract and say, “We’ve found another way to enhance the returns on your investments.”

“That’s really critical,” Waggoner says. “We’re very fortunate in that we have a 95 percent renewable rate among our clients, but the reason we have that—one of them, anyway—is that we recognize that what clients are most interested in today isn’t that one-time success when it comes to ROI; what they want—and I hear this all the time—is to foster an environment of continuous improvement.”

“That requires that we make ourselves better at what we do and that we find better ways to add value for our customers,” he says.

Speaking in early January, Waggoner says the year ahead will be an interesting one for those striving to boost their ROI, with as much effort placed on avoiding increased costs as in cutting the costs they’ve already been reckoning with.

“Everything is going up,” he says. “Transportation has a lot of inflation in it, there’s fuel inflation, driver shortages, accelerating equipment costs, regulatory pressures and uncertainties…and all of these things tend to cause costs to escalate faster than the consumer price index.

“What I think that means is that those of us engaged in trying to improve our clients’ ROI are going to have to be even more creative than we have in the past,” he says.

“What that will mean depends on the client, of course, but it could mean diversifying their mode selection, maybe converting truckload freight unto intermodal; maybe it’s doing consolidation or deconsolidation. In short, you have always got to be looking for better ways to do things.

“Beyond that, we’ll have to deal with the reality—in fact, it’s something we’ve always been mindful of—that our customers’ businesses do change over time,” he says. “It may be that they come out with a new product, or that they’ve made an acquisition or a divestiture, and it changes what they do. It may be that they open a new distribution center or close one.

“What I’m trying to illustrate is that achieving the maximum ROI is really a continuous, evolving program,” Waggoner says. “It’s almost like a mathematical problem that never ends because every day is a new day and you have to execute every day.” Waggoner says.  wt