So You Want To Be a 3PL?

Users may want to leave the 3PL business to the professionals.

A reader called recently to ask where he might find a customer to fill his warehouse space. Before referring him to advertising sales, I asked a few questions and learned he was a manufacturer with a facility available where he had performed full pick and pack operations and transportation management for his company and now wanted to keep that facility operating by offering that service commercially.

The question this left for me was not where he would find someone to occupy that space but why he would want to become, in effect, a third-party logistics provider (3PL). Even if you are a superb logistics executive, becoming a successful commercial provider of logistics services is not an easy path.

When transportation deregulation granted privately operated motor carrier fleets the ability to provide “compensated inter-corporate hauling,” private fleet operators saw an opportunity to offset the cost of their fleets or even earn some profit for the company. Now they could put their capacity out for bid and fill those empty backhauls. Some fleets even developed logos and printed business cards. Also in the 1980s, the rise of technology was leaving some functional areas behind and various facets of the logistics function found the means to develop homegrown software for inventory control, warehouse management and other functions. Pleased with the results, some companies decided to try their hand at commercializing their software systems to pay back the development costs and possibly create a new profit center.

In each of these cases, there was strong functional capability, but in none was the proposed commercial venture a core competency. That presents some distinct problems as you get deeper into the “business” you just created. One is resources. Will your corporate management back investments in a non-core business unit?

Another issue is the liability you take on when you are handling someone else’s product or data. For instance, if you don’t presently store, handle or transport hazardous materials, what happens if your client’s product fits a Department of Transportation hazard class? Do you have the appropriate safety equipment, insurance, security, staff and training?

The companies that sought to commercialize their proprietary software quickly learned that after-sales support was a major burden—well beyond what was needed for internal upgrades and user support. Similarly, fleet operators had to prospect for loads and handle billing and collecting for shipments as well as claims for loss and damage. And, if your contracted warehouse suffers a power outage or worse catastrophe that interrupts the client’s business or damages the product, what is your level of liability?

Logistics transactions and contract negotiations look a lot different when you’re sitting in the supplier’s chair instead of on the user’s side of the table, and even the most knowledgeable and skilled practitioners can find themselves in an uncomfortable situation when they aren’t backed by an organization whose primary business supports the service they are selling.

In the end, a few of the fleet operators, some of the software developers and perhaps some distribution operations can commercialize, but against a growing market of commercial outsource logistics providers and corporate management that wants to become asset light themselves and outsource non-core functions, the warning of the acrobat about to perform a difficult and dangerous feat comes to mind—Don’t try this at home.

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