Over the last 18 months, more and more clients have been asking us who are the right third-party logistics (3PLs) providers for certain supply chain processes or functions. For the most part, these inquiries are not for traditional transportation and warehousing activities—the services historically provided by 3PLs. Instead, as the supply chain globalizes and as companies increasingly pursue inventory optimization strategies, they are looking to 3PLs to help them meet a multitude of more complex supply chain challenges.

In many cases, the 3PLs are being asked to provide services that extend well beyond their current capabilities. In fact, companies are finding it difficult to find service providers with the required competencies and proven experience to handle more complex global assignments. This situation brings with it challenges and opportunities—both for the 3PLs and the users of their services.

To understand the current landscape, let’s briefly examine what’s been happening in the supply chain space. With almost reckless abandon, companies have rushed to global low-cost labor regions to source and produce their goods. This heightened level of global supply chain activity has certainly provided new business opportunities for the service providers. In fact, AMR Research’s 2005 global trade management study found that more than 90 percent of companies surveyed relied on outsourced providers to execute their global logistics functions. These companies look to their providers for deep supply chain knowledge and for the technologies to manage their more complex logistics activities. (Because companies rely on their outsourcer for technology, in fact, they generally aren’t investing in global trade technology themselves. This is the primary reason the global trade management software market has not prospered in correlation to the actual growth in global trade.)

Although the goal is to reduce costs, logistics management teams report that offshore outsourcing is actually resulting in increased costs—not in line-item costs but in total landed costs. These expenses include the increased costs of transportation and, in some cases, the cost associated with lower product quality. Also substantial are the increased costs of holding buffer stock and the inventory stockpiles that must be built to mitigate the longer lead times as well as the greater variability of the more extensive, more complex international supply chain.

What’s the answer to these problems? Many believe that a hybrid geographic strategy—one that combines “near-shore” and “far-shore” manufacturing or sourcing—would produce better results. However, most logistics managers don’t really know how to develop a supporting business case to top management who are hell-bent on moving everything to far-shore outsourcing. Therein lies an opportunity for the savvy 3PL that can assess the total landed costs of products and geographies. One such company, UPS Professional Services, offers network design, supply chain flow, and inventory optimization services to their clients in the form of a consultative engagement. UPS Professional Services can also go beyond the assessment to the actual execution of the plan—something traditional consulting firms cannot do.

Opportunities and challenges exist with regard to inventory optimization as well. The introduction of advanced supply chain planning techniques about ten years ago ushered in a period of inventory reduction strategies. This trend has evolved to the point at which companies are now seeking to sense and respond to demand much more frequently. They want just the right amount of inventory levels across a multi-tiered supply chain network. Both the lengthened global supply chain and the explosion of customer configuration options in products, however, have wreaked havoc on these inventory right-sizing strategies.

Companies are looking for programs such as foreign-origin consolidation, product postponement and product completion, vendor-managed inventory (VMI), and supplier-managed inventory (SMI) to help them get the right inventory at the right place at the right time. Opportunities are abundant for 3PLs to extend their service offerings to support their customers’ advanced supply chain strategies in these and other areas. For instance, one service provider, Banta Global Turnkey, offers widespread local product completion services to high-tech and telecom companies. Banta specializes in sourcing technology products locally and performing the late-stage configuration necessary on an order-by-order basis.

As 3PLs develop their capabilities and as offshore outsourcing continues to grow, the amount of global logistics under management will dramatically increase. Recognizing this, many of the companies we work with are transforming their corporate logistics departments into global management operations. In the future, they will spend far less time on executing specific logistics tasks and far more time on managing the service-level agreements of their outsourcing relationships. The new department will focus on control through information system visibility and will measure providers via key performance indicators (KPI) using business intelligence and analytics. Companies will rely on increased visibility across the supply chain to manage these outside parties effectively. Such an endeavor will involve technological advances and more seamless integration between companies and their providers.

This will be new territory for many companies. While they have worked to improve the management of the production line through programs like lean and Six Sigma, they have disregarded the logistics processes involved in getting products to their final destination. Responding to this void, a group at Exel Logistics NA offers clients an approach whereby global logistics movements are managed as part of a continuous “production line” process. The approach leverages seamless information integration to client enterprise resource planning (ERP) backbone systems using electronic messaging and Internet portals. In this way, Exel provides full visibility to the global supply chain so that the client can determine holistic landed-costs and profitability.

For whatever services they provide, 3PLs increasingly will be expected to plug into their clients’ information system platforms. This will allow them to offer information in real-time about inventory, orders, shipments, capacity, movements, and exceptions over the Internet. 3PLs will be tasked to develop information system capabilities based on the emerging service-oriented architecture (SOA) model. This systems architecture, with its ultimate flexibility capabilities, will allow providers to have uniform and consistent systems even though they will still provide customized solutions on a client-by-client basis.

Going forward, 3PLs will have an unprecedented opportunity to succeed by positioning themselves as experts in business process outsourcing (BPO) of the supply chain—not just as providers of transportation or warehousing services. By positioning themselves this way, 3PLs should easily penetrate the C-level office (which they’ve rarely had an opportunity to visit in the past). By studying the positioning that other BPO companies use and modifying their pitch accordingly, 3PLs should be able to form stronger, higher-level strategic relationships with their corporate customers.