Outsourcing of supply chain management tasks has been functioning at a similar approach level for years.
3PLs, whether they are international or domestic, whether their corporate roots are forwarding, ocean transport, warehousing, trucking, customs brokerage or other, including shippers associations and logistics centers, struggle with common marketing and competitive issues.
They compete in a proliferated market with little brand identification. Firms bid for business, making price the prime delineator, for providing a service. Competitive advantage and competitive excellence are then defined by the lowest bid. Often they are kept in a price squeeze by customers or are asked to expand their portfolio of capabilities into services beyond the original bid. These outsourced logistics service providers may feel that it they have to do this to keep business and to grow. This is a stagnating trap. 3PLS must break out of the competitive gridlock, differentiate themselves and take it to the next level. It is not easy, but here is what leading 3PLs are doing:
For years, retailers, wholesalers, and manufacturers have tired to define their core competencies. Core competencies were held to be central to the company strategy. In some cases, supply chain management (SCM) was not held to be a core competency. Such companies often viewed themselves as marketing or sales or operations firms, not supply chain management firms. They failed to realize that SCM is a process that crosses their entire organization and expands into their customers and into their suppliers. Since supply chain management was not held as essential to business success, they looked at outsourcing as a way to reduce costs, not improve their company with supply chain management. This outsourcing approach took on a life of its own as the approach to outsourcing and became the foundation of the present way 3PLs approach customers and their own business.
Against this background, 3PLs need to see the short-sightedness of their business model and how it is forces them to become commodity-service providers, which is what their parent company is. Remembering that the parent company began the 3PL to move away from their price-driven, profit-squeezed commodity service, the need to take it to the next level is even more important.
The 3PL competitive landscape is vaguely differentiated. Many firms are seemingly to do the same thing. Such a congealed market further erodes profits and drives firms toward being a commodity service. In addition, 3PLs contribute to this market situation with their emphasis on growth, with volume as the business driver. Growth for the sake of growth–getting more containers or having more pallets–is the driver for many outsourced logistics service providers.
Given such economic reality, 3PLs, to be successful, must separate from the 3PL pack, define their business model and create brand identity. Firms that stand pat and do not make the change face slow growth with reduced profits.
Key steps to achieving the new model include:
KNOW THE CUSTOMER AND THE MARKET. Beyond what is in RFPs and the price issue, firms need to know what customers really want and value. This is important to determining who the 3PL should be and laying the foundation of their business. “It” defines and encompasses who you are and how you are to deal with. This is the complete package.
Determining what customers want is not easy. Supply chain management and its segments have varying importance to different industries and to firms. Understanding this is essential to where the 3PL is to go and how it is to get there. It sets the framework to knowing customers and their supply chain value propositions.
Look at successful businesses outside of logistics. What airline or computer manufacturer or grocery chain or internet search engine is successful-and why? The reason may vary within the respective industries, but there is something that makes a firm distinctive and which brands and positions it in the marketplace.
Customers are looking to outsource for a reason. They know there are risks with outsourcing with the change itself and with possible failure. And essential to that outsourcing is the value they are seeking. Value goes beyond a single capability, such as low container rates or web tracking of containers.
A 3PL’s value and value proposition, given the market it competes for, may be the ease with which customers can do business with you. This can be the complete package from introduction, through bid response, implementation, customer responsiveness, information technology, getting containers and chassis, getting on ships, moving containers through ports, delivery appointments, alerting customers of potential problems with suppliers or with other logistics service providers, problem resolution, billing, refunds, claims resolution, advising them of potential operations improvements in their company and more. Or it can focus on the select multiple, key processes and integrating them into a transparent, integrated operation.
Or the value proposition may be the 3PL’s knowledge and understanding of supply chain management, not just shipping or warehousing. It becomes a part of the customer with real world expertise. This is especially relevant to a customer who has supply chain management as both a strategic requirement and core competency. The 3PL takes a different tack on collaboration by being an extended supply chain management resource. For example, it may develop carrier routings based on required inventory velocity or cycle times using faster sailing schedule options where required and lesser where that works. This routing practice is dynamic and is based on seasonal or other criteria with regards key supply chain metrics of which the transit time is one component of the bigger supply chain picture.
Or the value proposition may be low cost freight selling into a commodity industry. This is a special niche. It requires knowing the commodity market being sold in to whether it is a type of grain, steel or other item. The hidden denominator may be timely delivering shipments to meet the sales order and letter of credit. Low cost and on-time deliveries are a unique value.
The key point is to give customers what they want in their particular industries, be unique. This seems like standard advice, but it is not always practiced in the pursuit of growth. A common approach across industries does not develop the mature relationships and mutual synergies that distinguish one 3PL from another. Mature is not the same as how many years the 3PL and his customer co-exist; it reflects the depth it extends into both organizations. One size does not fit all. Something distinct is needed.
DELIVER THE VALUE. Knowing the customer is the first step. Developing the value proposition and delivering the value is the second. The company must:
- Determine the integrated processes required. Each value approach has different key processes which must be integrated. Otherwise each process functions as stand-alone tasks. At the minimum there must be a 3PL version of Sales and Operations Planning (S&OP) that manufacturers and other firms use. Identifying and linking the strategic and tactical processes is not a once-and-done effort. It must be ongoing and must change and improve going forward. Standing still is not an option with a value model based 3PL.
- Determine the organization required. This has a two-fold meaning as to organization design and staffing of the organization. The traditional pyramid organization stifles integrated processes. Success may require that the 3PL design its organization to complement its value model instead of trying to force the value model onto the standard organization chart. An organization focused on its process may be flat relatively speaking reflecting that processes cross functions. Also, each organization segment may be defined by its process role as compare to the functional, traditional “sales”, “operations”, “finance”, etc. Such an organization design, in turn, may revise the skills required of the people in the organization with being broad across the company so that they can work well with strategic customers and potential customers.
- Determine the technology required. This applies to the external and internal usage. Customers have different needs as to information and how that information is presented, manipulated and used. Different groups within the customers’ organizations also have different needs which should be recognized and met. Groups within the 3PL, especially for the process-focused, have their own information needs, some of which should mirror what the customers’ do and some of which is required for integrated uses within the 3PL.
Delivering the new value model is a culture change that extends beyond normal change management issues. This topic cannot be overlooked for successful application of the determined business approach. Training must be extensive and reinforced.
CONCLUSION. Successful 3PLs must develop a value based model. They need to know their customer and market and deliver a new value to customers. This is needed to create competitive advantage and excellence and brand identity. It is a way to separate themselves from the mass of other competitors who seem destined to create a commodity service to an industry that was meant not to be a commodity service. There will be significant growth and profitability for those firms that do it. This has happened in other industries and helped firms set themselves apart in the minds of customers and in the market. 3PLs need to do the same.
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LTD provides logistics consulting for strategic and tactical needs. The scope of capabilities is broad–supply chain management, outsourcing, transportation, warehousing, inventory management, and more for both domestic and international needs. Clients include retailers, wholesalers/distributors, manufacturers, logistics service providers and 3PLs.
