Taking Advantage of Expanding 3PL Services, July 2005
Third-party logistics providers are at the top of their game. The demand for their services has never been greater, thanks to ongoing globalization and the need for companies to manage increasingly complex supply chains. The 3PLs have a lot more to offer too and they're moving quickly up their customers' value chains with services like security consulting and purchase order management.
The growth in the 3PL industry mimics that of most industry life cycles, observes Jerry Levy, vice president of marketing for BAX Global. "When the 3PL industry started around 1990, we all went after the low hanging fruit. That is, the obvious non-core activities of warehousing, transportation, basic customs clearance activities, transportation management, and documentation." Today's 3PLs are much more robust and typically play a more significant role than previously, he says. Anymore, the 3PL "really needs to have a cross-functional presence" inside the customer's business. "It used to be their presence was limited to the transportation and logistics department. Now, you're finding 3PLs in purchase order management and supplier management, for example. You need to have a presence in the marketing department, the operations department, and the finance department if you want to move up the value chain. You have to understand your customer's needs and hot buttons, but if you stay just in the transportation and logistics area you're never going to understand those other commercial needs."
Levy also says it's important for 3PLs to have "leading edge systems and Web-based information exchange capabilities." He says that in the late 1990s, companies spent a lot of money on software vendors' ERP systems and transportation modules then expected the 3PL to interface with those systems. However, "Companies spent a lot of money of these systems and they haven't gotten the ROI they anticipated. Now, we're seeing quite a technology off-load from corporations, manufacturers, and retailers. They're saying to the 3PLs, 'Look, you start providing that information to us. I want to be able to access transportation performance, statistics, supplier compliance, and I want you to be able to do that for me, Web-based, so I can just go into your system and pull that information because we're not going to buy software.'"
According to 3PL executives, relationships with customers are getting closer, more intimate, and there's plenty of room for expansion. Levy believes relationships have evolved into "real partnerships, especially when it comes to international supply chain management. We have more business critical information than we've ever had from our customers. Our customers are willing to open their books more than they ever have, and quite frankly we're willing to open our books to those kinds of customers."
Ken Chay, director of marketing strategy for APL Logistics agrees. "Today's 3PL clients are more receptive to working with 3PLs as strategic partners and not just as tactical cogs in the wheel. As any 3PL worth its salt will tell you, the more you allow your 3PL to work with you at a strategic level, the more successful and productive your relationship will likely be." There are also more companies using 3PLs, says Chay. "As recently as ten years ago, do-it-yourself was still the norm. In fact, when Northeastern University conducted one of its first studies on the use of 3PL services in 1991, only 38 percent of respondents indicated they were using 3PLs. By contrast, a joint study conducted by Northeastern University and Accenture in 2004 showed that number has grown to 80 percent."
Chay advises that to get the most out of the relationship, companies should take care not to "underestimate or underutilize their 3PL." He cites the area of logistics network optimization as one example. "Some companies come to a 3PL with their geographic needs and service requirements pre-determined. For instance, let's say a company is thinking about opening a new facility in Chicago. Certainly the company will be able to find a 3PL who can provide the required services exactly as requested. But, is it as good as it can be? As an alternative, what if the company approached a 3PL with a set of needs, opportunities, and business rules and let the 3PL come back with some alternative solutions? Perhaps there's an even better location or combination of locations that could work, not to mention a different mix of activities to lay out within those locations, a different way to manage inventory levels and ownership, a different mix of carriers and modes and so on that would eventually yield a more flexible, responsive and efficient supply chain."
In the meantime, Levy points out a troubling trend, namely contracts that are only one year's duration. "When you sign an agreement with a company to manage their global supply chain you have to make a sizeable investment to bring it up to speed (typically 90 to 120 days). The last think you need is another RFP to come out a few months later." Rather, companies should take the time to really evaluate what 'price' means, he says. "Total supply chain cost takes into account customer satisfaction, agility, and market penetration. You have to decide when evaluation your 3PL what the effect of their offering is on your total supply chain cost versus 'is the transportation I'm getting at the lowest possible price?'"
Furthermore, companies should look at the 3PL's management tenure, says Levy. "You need stability in your 3PL supplier. Not necessarily the CEO, but the mid-level and lower-level managers at the 3PL that all your people around the world are going to have to be working with. For instance, what is the tenure of the 3PL's engineer in Tokyo who is working with your suppliers in putting the operation together? Is this someone who is going to be there for 2 or 3 years, or are they going to be getting a new engineer every 6 months? The people you'll be working with ultimately have to learn your business. Next, what is the 3PL's expertise in your vertical? Are you a pharmaceutical company, yet your 3PL specializes in automotive? Supply chains are different by verticals. Companies also need to think about a 3PL's global coverage. If you're sourcing from a lot of different countries around the world, this is critical. If your 3PL only has agents or 'shake hands' partners, I'd be concerned. Finally, what is the 3PL's growth philosophy? Is the 3PL looking to grow organically or are they a product of a lot of mergers and acquisitions, which means they're probably very inwardly focused and trying to get their systems integrated, and so on. Third-party logistics suppliers whose growth philosophy doesn't involve purchasing their expertise or presence are going to offer you a more stable product."
The biggest challenges facing 3PL customersNot surprisingly, one of the top challenges facing companies is how to handle a progressively more complex global supply chain. "As companies look to source and sell in new markets, their supply chains are extending overseas, most commonly China, but also into India and Eastern Europe. That means a supply chain that is longer, more complex, and potentially more costly," says Chay. "Secondly, as supply chains move beyond U.S. borders into emerging markets, these companies are finding they lack the local expertise in finding and managing vendors, dealing with customs, and with securing reliable transportation partners to get their goods from the factory floor all the way to the retail store."
"Third, the cargo security initiatives implemented post-September 11 have added a layer of compliance, documentation, and cargo verification requirements, making supply chain management more complex," adds Chay.
Levy has experienced similar developments. "One of the biggest questions on customers' minds is, 'How can we be sure we're compliant?'" says Levy, who has seen a growing need for security support or consulting, especially as companies encounter differing rules and regulations overseas. BAX Global is a participant in Customs and Border Patrol's C-TPAT (Customs-Trade Partnership Against Terrorism) program, and may have been one of the first in the 3PL industry to become certified. "We have a lot of high-tech customers turning to us for guidance on C-TPAT," he says, adding that it will likely be just one of a number of programs that companies will eventually be required to participate in.
Another challenge for customers, says Chay, is the export boom from China has led to significant congestion on the global transportation infrastructure, impacting all modes of transport that carry the goods, be it ocean or air, truck or rail, international or domestic. Our customers are asking us to help them design and manage supply chains that are fluid and flexible. That way, they can better respond to transportation bottlenecks and changing market conditions."
As a final word of advice, Chay says, "When approaching the subject of logistics outsourcing, it's easy to fall into the trap of assuming all companies' needs are similar, when in fact the value that a 3PL can bring to the table varies dramatically by industry, global region, product line, and individual company. More importantly, the value a 3PL brings can depend largely on an individual company's approach to outsourcing. The burning question isn't, 'What can your 3PL do for you?' it's 'What are you willing to let your 3PL do for you?' In other words, are you willing to give your 3PL more of a partnership role or do you want it to be just an order-taker? Are you willing to let your 3PL be an innovator in the big picture and day-to-day? Or, have you already decided the innovation is the exclusive province of your internal operations? And, how much of a 3PL's potential plan and advice are you willing to consider? Bear in mind that supply chain management is highly interdependent, where the sum of the parts can be greater than the whole."