Home: March 2007 Lead Story › Adapt for survival

Adapt for survival

Adapt for survival

31/03/2007 | Channel: Logistics / Packaging

THE CHALLENGE FOR 3PL PROVIDERS. BY IAN MAUGHAN, A BUSINESS SPECIALIST AT AWARD WINNING WAREHOUSE MANAGEMENT SYSTEM (WMS) VENDOR, AQUITEC

Users are looking for a more strategic approach from their 3PLs, but many are failing to rise to the challenge. Yet 3PLs have a golden opportunity to differentiate their offering in a crowded market by developing their logistics capability beyond the standard distribution offering. Those providers that display a willingness to align themselves with their customers and expand their partnerships into wider areas of the supply chain will gain a clear advantage over their competitors.

“I struggle to even think 3PLs know what the whole supply chain is, often they are distributors only and cannot support the rest of the supply chain.” That's not me talking, that is a high profile customer with serious money to invest in outsourcing logistics, and he is not alone. There is a growing sense of dissatisfaction with the 3PL providers amongst their customers. But let's be positive. The fact is that customer requirements are changing and those 3PLs that are willing to adapt will have a clear advantage over their competitors.

It is no exaggeration to say that the logistics industry is in the midst of a revolution. In the last few years, customers have been under pressure to reduce cost in their supply chains leading to an emphasis on price over value-added services when selecting a 3PL provider. As a result, 3PLs have become very focused on providing a cost-effective warehousing and distribution service, while neglecting some of the valueadded services that require greater investment and a more strategic approach.

Innovation and partnership
The impact of this trend can be seen in the shift away from the traditional three to five year contract to a rolling contract, based on fixed management fees. This arrangement, while reducing risk for both parties, has also reduced innovation and partnership, leading to the very opposite of a win-win situation for customers and 3PL providers alike. The fixed management fee provides no incentive for the 3PL provider to introduce innovations that might reduce costs in the supply chain or provide the customer with a strategic advantage.

Yet, privately many customers are prepared to admit that they would invest more financial equity in their relationship with their 3PL provider if they felt the provider had the skills and experience to manage more of the supply chain function.

There is ample evidence to support this view; a recent survey found that the vast majority of respondents looked to their outsourcing providers to provide access to
resources like world-class services, products, processes and technology, without the need for investment in infrastructure. At the same time, 25 per cent of respondents regarded 'loss of logistics innovative capacity' as one of the factors that could adversely impact their outsourcing strategies.

A recent US study provides further food for thought, pointing out that the majority of customers assume that the cost of logistics services will continue to decrease while the quality and number of services received will continue to increase!

Understanding customer needs
So how can 3PL providers build long-term, profitable, relationships with their customers, while continuing to provide a low-cost, competitive service? There is no doubt this is a tough challenge, but one that every 3PL provider is going to have to face in the next few years. The first step is to get closer to your customers, by demonstrating an understanding of the competitive pressures they face. In today's global economy, new technologies, the accelerating evolution of online commerce and the increasing reality of the real-time enterprise, are all putting managers under pressure to make their supply chains as cost-effective, transparent and responsive as possible.

Show your customer that you want to help them reap the rewards of this massive change; in the form of leaner inventories and lower working capital, higher profits and productivity, better customer service and competitive advantage. Find out how your customer thinks you might be able to help and start to explore how you can deepen your working relationship, while finding ways to manage the risk involved for both parties.

Adding value to logistics capability
Ask your customers how you can help by adding value to the logistics functions you already provide, building on the experience and knowledge you have gained of their business. All too often, 3PLs look at logistics in its narrowest sense, starting at the point where goods enter the distribution centre. Yet there is a whole bunch of logistics to be taken care of, from the processes that influence the decisions to purchase, through the sourcing, manufacture and transportation from the supplier.While retailers tend to want to keep the buying function in-house, 3PLs could add value and help reduce costs by developing expertise in managing supplier and consumer relationships, as well as shipping and duty management for imported goods.

Understanding IT Requirements

It is all too often forgotten, not least by 3PL providers themselves, that some of the most in-depth understanding of supply chain technology resides with the 3PL providers. Why not use this knowledge to help customers get the most from their current IT solutions, or even to help them identify where investment in new applications, such as voice picking, can improve productivity and accuracy? Voice picking, in particular, brings such clear productivity gains that it is rapidly becoming a standard feature of every warehouse. If it is going to be introduced anyway, then the 3PLs should make sure they become valued partners in the process.

Another recent report highlighted the gap between customer needs and 3PL's capacity to deliver. It found that while 90 per cent of respondents agreed that IT capability is a necessary element of overall 3PL provider expertise, only 38 per cent are satisfied with their providers' capabilities. By partnering with the technology vendors, 3PLs can start to bridge this gap, gaining a deeper insight of how innovations in technology can add value to the business processes in the distribution centre. For example, purchasing and forecasting applications can add value to the data that resides in the warehouse and an opportunity for 3PL providers to offer added value services to their customers.

It makes sound financial sense for the 3PL providers to leverage their understanding of the warehouse environment to drive improvements in the functionality offered by
the WMS vendors.Vendors such as AquiTec are starting to adopt a partnership approach to broadening their portfilio, in areas such as voice technology, supplier management and import/duty management.

The 3PLs are ideally placed to take a similar approach and play a more significant
role in the market by adopting the same approaches and pulling themselves from the fixed fee comfort zones. Similarly they could help customers to integrate the WMS applications with ERP systems to increase visibility throughout the supply chain and facilitate real time Business to Business and Business to Consumer relationship capability.

Expanding in-house capabilities
The possibilities are vast, so 3PLs are going to need to make important strategic decisions to focus on the areas that will provide most benefit to customers, now and in the future. It may be necessary to expand the in-house management team to provide the skills customers need, whether that be accountants, strategists, planners or even visionaries. Customers are increasingly demanding that the provider has
management skills, project start-up capabilities and execution abilities that are as good, or better, than the customers themselves. The strength of the management team and operational employees is already becoming the deciding factor in many 3PL contracts, when there is so little to differentiate the providers in terms of service or cost.

3PLs that stand out can offer more then expertise in one area, either through partnerships or owned expertise. They can align themselves to their customer's logistics challenges from end to end as well as understanding about their market place and trading pressures and trends.Many customers want a one-stop provider who can offer the experience and expertise that allows the retailer to concentrate on their core business and minimise the need to employ their own logistics personnel to fill the gaps.

Developing keener vision
The far-sighted 3PLs will already be looking at future trends to identify areas where they can leverage their existing infrastructure to develop new revenue streams. They will be looking at areas where customers can make a financial saving by sharing costs. Shared fleet is one obvious example, where 3PLs can maximise their own assets while offering cost savings to their customers. Few of us will have failed to notice that Corporate Social Responsibility is moving up the corporate agenda, fuelled by EC initiatives such as the recent WEEE legislation which requires retailers and manufacturers to take back old electrical equipment from the customer.

Finally, 3PLs should build on one of their key strengths - customer experience! There is immense value to be gained in bringing your customers together to talk about the challenges they all face and to share expertise and experience. As an industry we face some exciting challenges. Those 3PL providers that recognise these challenges and start now to share some of the responsibility for solving them, are going to be around for much longer than those who bury their head in the sand.