The headline for our upcoming issue’s cover story, “Evolving the outsourcing relationship”, refers to an important concept supply chain managers and the 3PLs that serve them must come to grips with.
As we mentioned in our report on the 2nd Annual Survey of Canadian Third-Party Logistics, supply chain management is facing unparalleled challenges and 3PLs have a leading role to play in helping contribute to the solutions. But it is important to note that this role, and the relationships that are part of it, are far from set. An important evolution is taking place. We are at a critical point in this process and both 3PL providers and their customers may find that they will have to reinvent themselves before it’s completed, as note the much respected John Langley Jr., professor of supply chain management at Georgia Institute of Technology.I agree with him. (Langley Jr. is also one of the authors of the 9th annual Third-Party Logistics Study, the U.S. based research project which was the main inspiration for our own survey.)
Two important evolutionary trends are already underway. The most obvious is the increased usage of 3PLs (54% of our survey respondents reported outsourcing some or all of their logistics functions) and the desire to move from tactical towards more strategic relationships that have enterprise-wide impact.
The reasons for the growth on both fronts are obvious. Just look at the challenges faced by supply chain managers: executive level focus on improving supply chain management and customer service; a strong need to expand/improve service to new domestic and international markets; an ongoing need to keep up with logistics software technology. And overriding these pressing concerns is the conflicting demand to reduce costs (cited by 80% of our survey respondents.)
But many issues remain to be resolved in the 3PL relationship. Take, for example, the desire of buyers of outsourcing services for a broader service offering from their 3PLs. While the desire is clearly there, consensus on how 3PLs should best deliver broader service offerings is not. Should a 3PL: a) concentrate on becoming expert at a single core service? b) concentrate on providing multiple core services? c) concentrate on becoming expert at a couple of core services but have the capacity to offer additional offerings through subcontracting or buying other providers with that expertise?
This question is forcing 3PLs into difficult strategic moves. If they opt for specialization, and bet on an industry segment or specialty that grows faster than the economy, they come out ahead. But such specialization can also lead to disaster if that particular market segment is hard hit during recessionary times. Concentrating on many markets and services provides greater security from market changes and wider appeal to customers. But it can also lead to over-extension resulting in service failures and unmet customer expectations.
Another issue certain to gain in importance over the coming years is the provision of “value-added” services. The U.S. survey found that buyers of outsourcing services considered “value-added” services as the most important attribute in selecting a 3PL. Yet what exactly should be considered a “value-added” service, as opposed to a “core” service, is a constantly shifting debate. The safest assumption is that whatever may have been perceived as “value-added” five years ago (visibility is a good example) is likely to be considered “core” today. It’s also important to note that only when a “value-added” service creates a measurable benefit can it be considered to actually provide value.
Turning to outsourcing to handle the pressing need to keep up with rapidly changing logistics technology is a natural strategy. 3PLs, by being able to spread their software solutions across many clients, are better able to gain expertise in new technologies and spread out costs. Yet that too poses challenges. The heavy investments 3PLs make in technology produce the best returns when generic solutions can be applied across several companies involved in the same type of business. Yet many customers want their 3PLs to make it easier to tweak the software solution to their individual company needs, a more costly proposition for the 3PL.
3PLs should also expect to feel challenged on another technology front. Many offer their own homegrown solutions. Customers may question why the industry needs so many different TMS solutions, for example. Should the 3PL industry practice what it preaches and outsource its own technology requirements to the larger technology vendors?
Finally, much work needs to be done in better understanding the value outsourcing can bring to supply chain management. For two years in a row now our survey has found a troubling lack of accurate measurement of the 3PL performance. For example, while 37% of our survey respondents reported cost savings of up to 30% by using 3PLs, almost a quarter did not know the exact cost reductions. Also, it’s worth questioning if the kind of enterprise-wide impact expected from deeper relationships with 3PL providers can truly be ascertained during the current average length of contract of three years.
These issues as well as the results from our 2nd Annual Survey of Third-Party Logistics will be discussed in more detail at a special breakfast meeting hosted by SCL and Ryder System Inc. (the survey’s founding sponsor) this November 4th. I hope to see you there.