The best third-party logistics (3PL) provider/client relationships used to be the ones that lasted longest. But things have changed. Today it’s not just the length of these relationships that matters, it’s who else the 3PL can bring to them.
First of all, with mergers and acquisitions on the rise in both the 3PL and client worlds, personal relationships are getting rarer. You might have had a good mutual understanding with your 3PL contact for several years—i.e., he kept you out of trouble and you saw he was paid on time. Today that person may only stay at that 3PL for a couple years.
“In the old days we had a lot more relationships where a traffic manager stayed put until he retired,” says Dick Armstrong, founder and chairman of Armstrong Associates , a consulting firm specializing in logistics outsourcing. “Today relationships are built more around purchasing standards, and the people involved are much more professional in how the process is handled. As a result, even if you have a nice personal relationship with your 3PL contact, that relationship is more likely to be governed by external pressures.”
People on both sides of the business transaction are under more pressure to produce results. That often results in “scope creep,” where a client will try to get the 3PL to do things that are not covered contractually. That’s why today’s contracts have gotten more onerous, according to Armstrong.
“There are so many situations now where the 3PL can’t say a certain company is his customer,” he notes. “The process has become fraught with a lot of lawyerly interference. And while 85% to 90% of contracts are renewed, that’s not as automatic a process as it used to be. There are more situations where the buyer tells the 3PL that he has to go through a process to satisfy the people he reports to.”
As a result, 3PLs are facing more pricing pressure from buyers who more often than not have an MBA degree. That means the relationship is more purchasing focused and less logistician-to-logistician, and therefore less trust-based.
As a result, many of today’s contracts have three-year terms with a 30-day-out provision. That’s why 3PLs are hiring sales people who are more knowledgeable about their clients’ businesses and are therefore more capable of taking care of those clients for the long term.
“We see industry leaders who have re-made their sales forces to reflect that,” Armstrong says. “They’re paying more commissions and it’s less likely the guys who really produce accounts will get bonuses. The commissions will be significantly larger with the result that the company and the sales rep in particular are doing a lot more management of the account.”
With consolidation and company size on the rise among 3PL clients, 3PLs are expanding capabilities and deliverables. That has increased 3PL revenues. The overall increase in 3PL gross revenue in 2010 over the previous year was 19.4%, totaling $127.3 billion. Net revenues were up 13.2%. 2011 net revenue will be up almost 11% above 2010 numbers, according to Armstrong.
A big part of the value proposition a 3PL brings to the table is a network of connections. While the individuals involved in the 3PL/client relationship may change over the course of a contract, whoever the salesperson is on the 3PL side is incented to combine his industry knowledge with his network of supply chain contacts to keep that business from going away.
What follows are two examples of how 3PLs have leveraged their industry contacts to make significant contributions to their clients’ bottom lines. One involves savings achieved outside the four walls of their building and the other involves the building itself.
Cutting transport costs
For companies seeking relief from high shipping costs and market volatility, a 3PL provider may be able to shave extra savings off of already heavily discounted less-than-truckload (LTL) freight costs, according to Larry May, owner of Freight Management Systems, a full service 3PL located in Knoxville, TN. Those savings are achievable if the 3PL’s client makes multiple shipments to multiple locations and if the 3PL works with numerous freight carriers.
According to May, for every $100,000 in freight costs, the savings can range from $18,000 to $25,000. How can a 3PL lower freight costs beyond a company’s existing discounts? By negotiating additional discounts based on volume and the 3PL’s relationship with those carriers.
“A 3PL can analyze current rates and freight requirements, and then bid out the work to qualified freight companies hungry for the work,” May says. “An established 3PL, brokering a large volume of business with major carriers, can negotiate much better discounts than its client.”
Some 3PLs can have ongoing relationships with as many as 25 of the leading U.S. LTL carriers. Add to that relationships with load matchers like Transcorp and Internet Truckstop, and efficiencies can improve.
“The 3PL can then consolidate a client’s freight with its own volume discount, put out a ‘mini-bid’ to a few chosen carriers known to be a good fit, or put out a full bid for which up to 20 select carriers compete,” May adds.
A 3PL may also use “best carrier pricing” software, which rates shipments from multiple carriers to determine the best carrier at the best cost. With this software, 3PL customers also have the option of going online to check shipping rates themselves via a protected user name and password.
Usually the 3PL is paid a negotiated percentage of the savings delivered. The savings come from a greater discount on LTL freight, eliminating freight bill errors, and reducing in-house payroll.
“For some companies that have negotiated 77% to 80% freight discounts with carriers on their own, a 3PL may be able to cut more off those costs while taking care of all the paperwork,” May says.
Because mistakes in LTL freight billing are common, especially in product classification, May recommends you make sure your 3PL conducts freight bill audits. For instance, they should audit the National Motor Freight Classification (NMFC) code on the freight’s bill of lading to ensure it hasn’t been mis-classified at a higher rate.
The bottom line is, a 3PL may be able to help clients contain freight’s hidden costs such as chasing down quotes, invoices and documentation. It may also offer inbound and outbound shipment analysis, invoicing and reporting with appropriate backup documentation.
Behind every good 3PL is a landlord
When ADI Logistics was in the market for a new warehouse and headquarters space from which to better serve its clients, this 3PL apparel distributor worked with its landlord, Heller Industrial Parks, a developer of industrial real estate, to find a good fit. These facilities eventually occupied a 160,000-square-foot site in Heller’s Edison Industrial Park home. ADI determined it was ready to vacate the 305,000 square feet of space it was using in two antiquated buildings in Kearny and Belleville, NJ.
ADI Logistics serves hundreds of manufacturers, importers and distributors, shipping to the largest retailers in the country. With strong roots still in the apparel industry, ADI has branched out to serve other markets ranging from office and medical supplies to electronics and sporting goods.
Despite relocating to a building that’s nearly half the size of its previous one, Bill Drummer, ADI’s CEO and co-founder, feels his company is now operating more efficiently in a facility that is better suited for his customer’s requirements.
“The 36-foot clear ceiling heights and the early suppression fast response (ESFR) sprinkler system allow us to store our product in the rack system to 35 feet top-of-product,” says Drummer. “The floors allow us to use even the most sensitive or heavy-duty material handling equipment.”
The new facility also enables ADI to provide more specialized services such as ticketing, pick & pack, replenishments and kitting.
“There is a lot of out-of-date space across the Hudson River,” notes Chet Barton, vice president and property manager for Heller Industrial Parks. “We are seeing a trend with warehouses, especially apparel companies, moving into more modern spaces which can handle their expansions at a much more cost-effective basis than comparable space in the New York/Meadowlands submarket.”
Property owners like Heller are trying to help their 3PL tenants please their customers so they can more effectively tap into the market growth 3PLs are enjoying. For example, Frederick Kurtz, vice president of property management for Heller, met with another 3PL client that occupies one of Heller’s specialized storage facilities. The building is organized into three sections: a hydrogen (H2) storage room, a temperature control section and a general storage section. As part of their contract renewal, the 3PL asked Heller to take on half the financial responsibility for roof leaks. Heller volunteered to take on all of it.
“During the conversation, I asked them if they could be profiting more if they could handle more flammables than the current H2 room allowed,” Kurtz adds. “It turned out that they had been turning down more profitable business due to the space limitations and current clients were complaining about not being able to store more with the 3PL. Now Heller is working on the engineering to begin the process of converting part of the general commodity space to H2 storage. If we wrap the improvements into a longer lease term, I view it as a win for all of us.”
These longer-lease terms also enable building owners to negotiate infrastructure improvements which can be part of an overall commitment to environmental sustainability. This can help 3PLs win over green-minded corporate clients.
For example, Heller Industrial began to take a hard look at photo-voltaic (solar) power systems for its buildings in New Jersey. This was initially pursued to help tenants reduce electrical energy costs. In 2009 it installed over one half mega-watt, in 2010 over one mega-watt and this year it plans to install 5.4 mega-watts. Over the next five years, Heller plans to install over thirty mega-watts in New Jersey. The company sees this as a way for it to meet the requirements of its own green initiatives, as well as those of its tenants.