Service on a global scale

As the third-party logistics provider (3PL) industry continues to grow and expand, there is a natural evolution toward globalization, according to Gary Allen, North American distribution leader with consulting firm Capgemini Ernst & Young.

"Yet no one company is truly global in execution," Allen points out. "While freight forwarding and transportation are commonly outsourced worldwide, truly integrated logistics business distribution and value-added services are still segmented by regions of the world."

Even where manufacturers claim to operate globally, Reinhard Rank, general manager with global 3PL DHL Solutions, often finds decisions are still made locally. "Service providers have to adjust to the structure of the customer. If they make decisions locally, we deal with them locally," Rank explains.

Even if there were a 3PL with truly global strength, shippers are reluctant to outsource to just one company, claims Allen. However, he notes a shift in that trend. "In the last two years, shippers increasingly want to minimize the number of 3PLs used. There is a mismatch between this desire and the ability of 3PLs to execute."

Shippers are not outsourcing the full functionality of the supply chain because they don't have the necessary comfort level and they fear the lack of organizational control, according to Allen.

"Some 3PLs are more global than others," observes David Closs, professor of business with Michigan State University's department of marketing and supply chain management. " Increasingly, 3PLs are trying to fill holes where they don't have service or improve where service is shaky," he adds.

Yet there remain major regions of the world without strong 3PL capability. "China, Africa and Latin America are still weak," observes Closs. Specifically, he sees a lack of 3PL expertise in much of China.

"Once you get out of the major cities, China's infrastructure is limited. There's not a lot of expertise in working with the government or political system, nor in integrating myriad little pieces," states Closs. "In China, you must have a relationship with someone who has the needed skills — someone who knows how to work in that environment."

Africa and Latin America have similar problems, according to Closs. 3PLs are not moving into Africa as fast as other areas. In Latin America, 3PLs are trying to build infrastructure in spite of outofcontrol interest rates and difficulty in interfacing with governments to secure licenses and approvals. There is also a problem with corruption, Closs adds.

Whether a shipper operates in a thirdworld country or the major markets of Europe, 3PLs are challenged to ensure consistency and standardization around the globe. 3PLs tend to be segmented by region and deliver unique client solutions. They can benefit considerably if they standardize technology and processes, Allen notes.

DHL achieves a degree of standardization by organizing around vertical industries. "We develop solutions for industry groups," explains Rank. "Customer solution designs are specific but based on our portfolio of standard products or basic services. Each solution is unique even though it is made up of standard modules.

"If we set up an operation in China, the basis is standard operating procedures, the same as in Europe or North America," continues Rank. "How it is put in place and the level of automation may differ by region. For example, we use more automation in Europe because of the higher labor costs," he elaborates.

3PLs are adopting such strategies to ease the burden of developing unique technology solutions per customer. For several years, Robert Lieb, professor of supply chain management, College of Business Administration, at Northeastern University, has advised 3PLs to sell their services up and down the supply chain. Now he's seeing an increase in 3PLs specializing in a limited number of industries.

"Many don't even respond to requests for quotes from outside those vertical markets." explains Lieb. If 3PLs build increased business along a client's supply chain, it's more likely they can produce common platforms and integrate information systems.

In fact, some 3PLs are becoming increasingly customer selective. "The most important characteristic of the desired customer is a profile of high quality and willingness to work in a collaborative relationship with the 3PL," Lieb says.

3PLs are focusing more attention on the quality of existing accounts, using key performance indicators and doing a more thorough financial analysis of prospective customers. In fact, they're developing products they want to sell and seeking customers looking for those solutions.

"The challenge for providers is to continue to improve their capabilities on a global scale while remaining profitable. They need to make healthy margins as they expand globally," says Allen.

While shippers may be looking to outsource a truly global supply chain, the reality is a market segmented by regions and pockets of service. "You need to outsource to local providers with local expertise," says Allen.

He sees the use of a fourth-party logistics provider (4PL) or lead logistics provider (LLP) as an increasingly popular solution. The expectation is that a 4PL or LLP will have the technology and processes to operate globally and integrate partners on a global scale.

In its role as LLP, DHL Solutions offers day-to-day management of the supply chain and support in strategic decision making. "We are involved in design changes on a consulting basis. Strategic decision making, execution and selection of players in the supply chain remain with the customer," says Rank.

From Lieb's perspective, companies in 4PL relationships give mixed messages about its effectiveness. "Using a 4PL or LLP adds a level of management and puts clients one more step away from their customers," he adds.

Perhaps the need for a fourth party will decrease over time. "In the 3PL market, we'll see increasing competition and fewer, bigger players," observes Closs. "We'll see increased consolidation with a few niche players and fewer than ten major players. To be in that league, 3PLs will have to operate essentially globally."

3PLs will continue to grow through acquisition and to fill holes in their capabilities globally, agrees Allen. "We see the future as positive from an industry perspective. The desire to use service providers is there. The challenge for shippers is how to structure and advance the outsourcing relationships."

resources

Capgemini Ernst & Young www.cgey.com

DHL Solutions www.dhl.com

Michigan State University www.msu.edu

Northeastern University www.neu.edu