Improving 3PL management: Parting is such sweet sorrow
Two new research studies reveal that the recession has indeed created a disconnect between shippers and their logistics service providers. How can you close the gap?
By Patrick Burnson, Executive Editor -- Logistics Management, 4/1/2009
Upon first reading Eyefortransport's North American 3PL Market 2009 Report, one gets the distinct feeling that there's a growing disconnect between shippers and their logistics service providers.
The survey, conducted over the first two months of 2009, set out to identify the main challenges for North American 3PLs and 3PL users, pinpoint the best potential opportunities in the different geographical regions and verticals for 3PLs, and measure the impact the global economic downturn has had on the 3PL/shipper relationship. According to Katherine O'Reilly, the report's author, interesting results were obtained when comparing the views of 3PL users with those of 3PLs. "The recession has colored the concerns of all respondents this year," she says.
The 558 individual responses were culled from 3PLs, freight forwarders, carriers, warehouse operators, shippers, consultants, and technology providers. From the outset, researchers thought both 3PL and shippers would clearly agree that "poor service" was the main reason for a relationship to fail. But O'Reilly says she was surprised to find a higher rate of disagreement between the shippers and 3PLs on what actually drives failure.
"Our thinking was that the recession would have brought shippers closer to their logistics service providers as they seek crucial advice and the 3PL reaches out to help and retain their customers," she says. "In fact what we saw was more confusion from the 3PLs over what their customers are really looking for and a lack of confidence on the shipper side in their 3PL's ability to help recession-proof their supply chain."
According to O'Reilly, the message is clear: As we go further into economically unstable times, 3PLs that are closer to their business partners—and realign their priorities accordingly—will have a clear advantage in retaining those accounts.
"Cost-reducing and efficiency-improving projects that may have been secondary to growth initiatives are now front-of-mind concerns for everyone," she adds. While this may seem negative at first glance, the positive element of this observation, says O'Reilly, is that 3PL best practices cannot be ignored. Indeed, there are huge opportunities for shippers to now work with 3PLs to make dramatic improvements, take advantage of the expertise in both organizations, and use economic weakening as a catalyst for innovation.
Major Scale Differentiators
In a separate report recently done by Armstrong & Associates, Inc. called 2009 Trends in 3PL/Customer Relations, the researchers came to many of the same conclusions as Eyefortransport—but with reservations.
"There's no question that shippers are putting cost reduction and improved efficiency front-of-mind," says Evan Armstrong, one of the authors of the report. "But a shift from one 3PL to another now weighs heavily on whether shippers are getting tactical or strategic help from their current provider."
According to Armstrong, a shipper's brand loyalty is only as strong as the commitment made by the 3PL. Indeed, long-term, more strategic contracts of three to five years have a renewal rate of 93 percent, while tactical relationships are more vulnerable than ever. "3PLs who can't deliver more than just basic brokerage or truckload lanes are coming under increased pressure in this down economic cycle," says Armstrong. "And those 3PLs that demonstrate significant process improvement will prevail."
The major scale differentiators between 3PLs revolve around supply chain management systems and logistics engineering expertise, notes Armstrong. Several 3PLs have implemented a fully integrated systems "backbone" to support global transportation and warehouse management operations.
"These systems offer Internet visibility and exception handling capabilities combined with transportation management functionality allowing for the daily optimization of thousands of shipments across large geographical areas," says Armstrong. "The same 3PLs can run value-added warehousing operations, perform supply chain network analysis and design, and manage call center and fulfillment operations."
In fact, several 3PLs have expanded their global scope to provide significant coverage in those countries comprising the majority of the world's gross domestic product. According to Armstrong, major 3PLs will continue to integrate the pieces they now have over the next several years, adding that 10 to 12 will offer single-source global solutions with the scale to handle the supply chain needs of large multinational companies. "These types of global supply chain managers can be expected to become more dominant," says Armstrong.
GE Makes a Move
Is it a strategic or tactical relationship? That is the question. For General Electric's parts distribution manager, Ed Huttenen, it was a little of both.
But Huttenen's recent decision to move from one major 3PL to another was also about regional strengths and speed. Working out of the company's Cranbury, N.J., facility he's charged with keeping GE's parts division nimble and lean. In an interview with LM, the 30-year GE veteran touched upon many of the same findings in the Eyefortransport and Armstrong reports.
"As the location dynamics and needs of our customers change, GE parts has to change with it," he says. "The Northeast is a particularly challenging area to win in. So, in opting for TMSi over a global competitor, GE determined that it must improve in velocity and service to meet our customer's growing expectations."
Huttenen says GE needed to leverage the synergies that it had built in other Northeast centers in order for its DCs to operate at full capacity. Fluid communication—both internally and externally—was a vital component of this process, and Huttenen says that his former 3PL was not doing an adequate job. Productivity was suffering, too.
So, after crunching the numbers, he choose to give the business to 3PL provider TMSi. "TMSi has always been responsive and willing to take on challenges," says Huttenen. But the transition was not without some difficulty, he admits. The accuracy and quality of shared data took a few months to get up to full speed; but once that was solved, GE was getting an unexpected bonus. In fact, Huttenen says that several orders of "magnitude improvement" in parts fulfillment were realized.
"The new 3PL partner gave us a team leader, and he pulled in several facility managers to set up the new DC processes and KPIs as well as connecting the new processes to the rest of the network," he says. "They put together a very defined and well thought out training plan for the new facility and its staff."
TMSi placed a leader in charge of training the warehouse team, while Henry Birnbaum, an industry veteran working for GE, excelled at communicating the company's mission to 3PL workers. This, says Huttenen, generated measurable improvement.
"It just reinforces the fact what when a team fully shares the goals in an open environment and communication is wanted by all, the whole can be far greater than the sum of the parts" says Huttenen.
The benefits, he says, start "from the eyes and actions" of GE's customers. Complaints have decreased tenfold and business has increased 5 percent to date. "And this was achieved in a very tough economy," Hutten adds. "Speed, quality, and accuracy have produced higher turns with less inventory; and now the planning function is able to stock a wider variety of SKUs in the DC and that gives the center a growth plan."
What's the bottom line? All of this contributes positively to how GE is perceived by its customer base. Being regarded as "best in class," says Huttenen, is a position no manufacturer would want to jeopardize.
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