12 Trends that will shape 3PLs
As third-party logistics providers plan for the future, the sky--or the globe--is the limit. Here are some of the factors that will determine how they fare.
By Jim Thomas -- Logistics Management, 1/1/1998
Like the perennial minor leaguer, the third-party industry has evinced more potential than performance for a long time. Once again, however, the industry appears ready to grow rapidly. Here are the trends to watch as providers move toward that long-promised prosperity.The market will create the one-stop, everything-you-need 3PL through partnerships.
All right, you can't be all things to all people. Global supply chains require such wide-ranging expertise in so many diverse areas, that no one company--not even one run by Bill Gates--could ever provide all the business solutions.
But customers like the idea of using one provider. It means one computer interface, one point of contact, one contract, one bill, etc. So 3PLs will form partnerships with other 3PLs, with technology companies, and with other vendors to serve a customer's entire supply chain. One 3PL, the "master integrator" of the supply chain, will oversee the other vendors and act as the single point of contact, says Jim Fields, vice president of business development for Menlo Logistics.
3PLs will become more profitable.
Third parties have improved their profitability through tighter internal cost controls and better use of technology, says Thomas Escott, president of Caliber Logistics. At the same time, customers are showing a willingness to pay more when 3PLs add more value to their supply-chain operations, adds Edward M. Straw, president of Ryder Integrated Logistics. Third parties will add this value through "sophisticated, integrated supply-chain solutions," he notes.
These big-picture solutions will come from partnerships (as mentioned above) and global opportunities. "More and more domestic manufacturers are moving offshore," says Straw. "If you're going to be a third party, you are going to have to move with them."
Some companies maintain profitability by becoming "more selective in taking on new business," says Fred Kimball, vice president of operations technology for third-party provider USCO. "We make sure the client is not in a total cost-cutting mode and that [it is] serious about outsourcing," he says. "It's ironic that some companies want to see your financials to make sure you're profitable, but then they try to negotiate contracts that aren't profitable."
New customers create larger and more efficient networks for 3PLs.
These include transportation, warehousing, and information networks. For example, most 3PLs can run their load-optimization software with the freight from multiple clients. So the 20,000-pound load from customer A in Cleveland and the 20,000-pound load from customer B in Akron can be consolidated on a single truck and save both companies money. The more customers a 3PL finds with similar geographic needs, the greater the opportunity.
"You're not going to optimize loads with chemicals and foodstuffs, but for commodities that can be mixed, it makes a lot of sense," says James Hertwig, president of Landstar Logistics.
Customers will depend on 3PLs to make sense of technology.
In the realm of information and communications technology, systems can become outdated by the time they are implemented. Instead of continuously investing in in-house IT solutions, many managers will depend on 3PLs to supply a portion--or all--of the logistics system.
Third parties must "maintain the flexibility to provide any number of customized solutions for [their] clients," says Menlo's Fields. He adds that you should judge a 3PL not only by how well it uses its systems, but also by how quickly it can implement a system into a customer's operations.
Customers also will look to 3PLs to evaluate systems. "What good is the latest optimizer if it doesn't help the customer do the job better?" asks Andrew L. Wood, chairman and CEO of Burnham. "Technology should provide better inventory visibility so the job is done better. It should improve cash-to-cash cycles and eradicate obstacles that exist in customers' organizations."
Third parties are looking for a few good men and women.
It's not easy finding people who are able to analyze and then optimize logistics networks and supply chains. Once companies find them, they commit them to projects that last several months. Because 3PLs run more than one project at a time, they require more of these gifted individuals.
There are solutions. Straw of Ryder, who is the former director of the Defense Logistics Agency, reveals his secret--retired military personnel. "These logisticians spend 25 years doing nothing but supply-chain management," says Straw, a vice admiral (retired) in the U.S. Navy. "They also bring related business and technology experience."
Escott of Caliber Logistics notes that older logistics companies can train employees in a variety of disciplines as they progress in the company. "It's a source we didn't have when we were a two-year-old company," he says.
With gain sharing, 3PLs talk the talk. With risk sharing, they walk the walk.
Consider the impact of the supply chain on inventory ownership and working capital and you will understand why sophisticated companies are willing to share gains with their logistics providers. You'll also realize why customers want their vendors to take risks.
"The reality is that when a 3PL takes over a supply chain, it is responsible for its client's sales and business streams," says Mark Skoda, executive vice president of Penske Logistics.
What happens if the third party fails? "If we do not achieve our minimum projected results, we would give up our profitability, not costs, on a given project," says Skoda.
Certain projects work better with a gain- or risk-sharing approach, notes Caliber's Escott. "There almost always will be a gain- or risk-sharing arrangement when we take over an existing logistics network, because our performance will be measured against that of the previous network," he says. "But if a customer creates a new network or business process, then there is no way to think comparatively. Gain sharing requires good comparative benchmarks."
Customer-3PL relationships will last for longer periods of time.
"The longer the relationship, the better a third party can understand and improve a customer's operations," says Peter E. Brennan, vice president and general manager of North American Van Lines Customized Logistics.
A longer relationship will not always yield proportionately lower costs. "If you do an effective job, there will come a time of diminishing returns," says Brennan. "So you have to come up with breakthrough thinking, maybe in service reliability, or maybe somewhere else in the customer's company."
Small contracts frequently lead to larger provider-driven logistics relationships.
Many third-party relationships begin when customers outsource a small piece of the supply chain. But it doesn't end there. "For example, we'll get hired to implement transportation cost controls," Landstar's Hertwig says. "When that's accomplished, it leads to inventory questions: Can we cut inventory costs by shipping directly? What is the cost of air freight vs. inventory-carrying costs? It's our job to uncover these opportunities."
As these opportunities are exploited, the roles switch and "the customer expects the 3PL to bring to the table its vision of logistics excellence," says Escott.
USCO's Kimball calls this "provider-driven logistics," which will lead to new levels of performance and cost control. "Companies that have reduced middle management really don't have the internal resources to take logistics to the next level," he notes.
The year 2000 computer dilemma may be a boon for 3PLs.
In a scenario presented by Burnham's Wood, companies that have not begun solving the year 2000 problem (where computers mistakenly interpret the year 2000 as the year 1900) will scramble for a fix. Manufacturing and finance will get first priority, leaving inadequate resources to solve the problem in logistics computer systems. The result: Companies will outsource their logistics systems to third-party providers that have year 2000-compliant systems.
3PLs will not become consultants (but they may charge service fees).
Before a third party ever wins a contract, it spends months analyzing the prospect's logistics operations. The 3PL will make recommendations and provide detailed reports to the prospect. In short, the 3PL assumes the role of consultant, minus the six-figure fees.
Observers say that as 3PLs look for ways to improve their profitability, the free analysis could end. "We are not a consulting firm, but our knowledge and experience has value, so shouldn't we charge an associated fee?" asks Penske's Skoda.
"Loss of control" is still an issue for companies evaluating the potential use of 3PLs, but not for 3PL customers.
Corporations--and individuals--that have not tried the third-party route often cite fear of losing control over their logistics operations. Yet customers of 3PLs rarely voice this complaint.
"Customers who go through this exercise will tell you that they gain control," says Menlo's Fields. "They have a better handle on their systems and metrics than they had in the past."
Often, companies have metrics that differ from unit to unit or from product line to product line. "Third parties are able to standardize that across the entire supply chain," says Fields. "This enables companies to make better decisions."
Good logistics, whether it comes from 3PLs or in-house staffs, is good business.
"It's to the benefit of the American economy that we all become advocates of supply-chain engineering," says Ryder's Straw. "And it's not just 3PLs, it's an industrywide challenge. Taking cost out of the system improves shareholders' value and it improves the economy."
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