Companies outsource to shed fixed costs, says Ron Cain, president and CEO of TMSi. Often that equates to physical assets. In a down market with stagnant growth, that decision can translate into consolidating multiple distribution centers into fewer facilities or outsourcing a private fleet operation to a dedicated contract carrier. But it can also mean reducing inventory or moving inventory through the supply chain faster.
Improving efficiency and flow in a global supply chain starts to sound like greater investment in resources, not fewer assets, and here too, outsourcing provides some answers. A third party logistics provider (3PL) can offer greater availability of relevant strategic resources, suggests Jim Butts, a vice president at CH Robinson. He includes network analysis, consulting and supply and demand planning among those resources.
But just as the users of 3PL services are looking for ways to focus on their core business and shed assets and operations that don't contribute to providing customer value, 3PLs themselves have evolved an attitude of focusing on core competency. Start-up Crane Worldwide will begin operating in the freight forwarding segment applying the lessons of a combined 185 years of experience among its executives. The 3PL will practice what it preaches, according to John Magee, CEO, and outsource what is not a core competency and doesn't drive customer value.
Cain at TMSi begins his discussion with a list of reasons why users come to him and other 3PLs in the first place:
Shed fixed costs - often this means shifting control of assets to a 3PL or shedding assets in favor of using the facilities and/or vehicles owned or controlled by the 3PL.
Increased service requirements - driven by the user's customers or market demands and extending to a desire to see continuous improvement in network performance.
Logistics is not a core competency - or a facet of logistics is viewed almost like a “necessary evil” or cost component rather than a strategic asset.
The logistics activity does not add value to product or service to the customer.
Liability issues - an area where many companies want to maintain an arm's length relationship.
Technology issues - including the need to unify on a single platform or lack of resources to implement or upgrade systems.
Efficiency and control - which Cain and other 3PL providers suggest is the core of what 3PLs do. The 3PL is in the business of efficiency improvement and, with the right contract and the right partner, the user's control actually increases, he continues.
3PLs are unabashedly asset light in a market that increasingly values the end result — a culture of execution as CH Robinsons' Butts describes it. And for the 3PL, the transition has taken it from a traditional brokerage to a larger, more comprehensive solution provider. Some users prefer to have a particular color truck bump up against their dock every day, he comments, “but increasingly we're seeing that is not the case.”
Taking a more strategic approach, logistics providers begin with a network analysis based on the demands and expectations of the user and the user's customer, Butts points out. Cain concurs, saying that part of the process for the 3PL is an analysis of where the user's needs are and where facilities should be, based on volume. Solutions should be based on effectiveness and productivity, adds Butts.
Establishing a baseline for the relationship is critical to the success of any outsourcing contract. Users don't always have sufficient or accurate data on their networks, and before setting key performance indicators (KPIs) in those circumstances, Cain says TMSi will often establish the first 90 days of a contract to develop that information so that the parties can come back together and establish realistic goals and expectations along with the performance measures and other critical contract elements. Looking at those needs also points to which resources need to be employed, and this is another key decision point for the 3PL and the user.
Not long ago, everyone wanted to be a one-stop shop, says Cain. The 3PLs wanted to handle everything in-house. They were the expert at everything. But even though logistics service providers still want to be the single face to their customer, there is a pretty widespread recognition that they don't have the volume or expertise to do it all, Cain continues.
This is one of the lessons Crane Worldwide's Magee acknowledges. Customers took them into more and more areas, he says, and in the new company, the focus is on the core competency. When users want you to do more, there is a time to do more and there is a time to say “no,” says Magee. Stick to your focus and what you do best, he cautions.
That said, 3PLs are developing not only traditional 3PL relationships with their users, but also act as lead logistics providers, coordinating and managing relationships with other 3PLs that provide services that are not part of the lead logistics providers' core competency. The 3PL reaches out to what it considers to be the best-in-class providers for those services and sits down with the management teams to establish a reciprocal relationship and set up a contract. That relationship and contract will be governed by the KPIs established between the lead logistics provider and its user customer and, though the sub-contracted components will be managed through the lead logistics provider, it is the lead logistics provider who is ultimately responsible to the user for the performance of the entire supply chain.
It's important for the lead logistics provider to be open with the user about the relationship, says Cain. But the lead logistics provider (LLP) will have the responsibility for the other party's performance and, with a carefully executed contract, the ability to change providers should the user's needs change or if the provider does not meet the performance requirements.
For companies like CH Robinson that often perform carrier management for their customers, the need is similar, but it may manifest differently. For users, the visibility may be the performance measurement systems the 3PL uses to manage carriers more than details about the carriers themselves. How does the 3PL measure and manage carrier performance? How does it identify and address operational problems? How does it vet carriers for financial stability? And what is the 3PL's payment record with carriers?
The relationships a lead logistics provider has with other providers will be nearly as important as those providers' ability to perform. And that leads to another issue for the 3PL, the user's performance. Reducing costs throughout the supply chain often means pinpointing the “bad actors,” says Butts. As a middleman in the logistics process, Butts notes the 3PL serves both the providers (carriers) and the users and must measure performance on both sides. Impediments for a carrier at pick up or delivery locations can be as important to deal with as the internal factors in the user's supply chain. A consignee who takes eight hours to unload a truck or a shipper facility that doesn't keep appointments are as disruptive as a carrier that doesn't perform. And while a shipper (or its logistics service provider) will drop a carrier that doesn't perform, carriers or other service providers will also be reluctant to take assignments that are disruptive to their operations.
Optimizing supply chain performance is a matter of bringing the right resources to bear on a problem, measuring performance, and striving for continuous improvement on all sides. “Any company that has additional costs is going to be at a competitive disadvantage,” points out Butts. Increasingly, those resources are a combination of a 3PLs operational core and its relationships, agrees Cain. Those assets often sit at a desk, not in a parking lot.