As the economy recovers, shippers rethink potential advantages of 3PLs
Third-party logistics providers offer flexibility and capacity when it may be hard to come by.
By David Hannon -- Purchasing, 11/19/2009 2:00:00 AM
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One of the major challenges for logistics and supply chain professionals heading out of the recession will be ensuring that their supply chains have the right levels of logistics capacity to meet the needs for their companies' growth both on the inbound and outbound side of the supply chain. And clearly, there's a role for the third-party logistics provider in helping shippers secure freight capacity in the post-recessionary environment to ensure supply chain success.
According to an annual survey of 3PL users conducted by CapGemini and Georgia Tech, nearly 60% of shippers polled say market conditions of 2009 will drive them to rethink their supply chains and their relationships with 3PLs. In the study, Mark Holifield, senior vice president of supply chain at Home Depot, says, "It is very important for us to mitigate or reduce any adverse service level impacts or financial risks that result from the current economic environment. There are selected instances where the use of a 3PL may be a wise business decision."
"By outsourcing to a 3PL, companies can maintain or even improve service levels, often at a reduced cost, given today's competitive environment," says Tony Zasimovich, vice president of international logistics services at APL Logistics in Oakland. "They can also take advantage of subject matter expertise and redirect their own resources to their core business."
Steve Martin, vice president, supply chain excellence for Ryder in Miami, points out that as more freight capacity leaves the marketplace in 2010 due to bankruptcies, shippers will have more difficulty meeting service levels.
"When demand comes back and volumes pick up, shippers managing logistics in-house who have negotiated lower rates with fewer carriers—which isn't a bad thing—may find themselves falling short, paying a premium or and having trouble moving goods on schedule. Carriers will naturally move capacity towards those shippers that pay a higher price point as the economy comes back."
Martin says 3PLs, which have a broader view of transportation across all modes, have a larger carrier base and should be in a better position to source reliable and cost effective transportation.
3PLs, he says, can help ensure a company's service levels remain consistent by determining optimal levels of inventory needed to sustain a defined service level given a supply chain's variability profile to minimize working capital requirements.
"Inventory is a critical metric of supply chain performance that is often overlooked," he says.
Certainly, one of the takeaways from the past 18 months for freight buyers is the value of a very detailed assessment of carrier financial status. And Zasimovich at APL Logistics says that while in-house logistics organizations can bid services, ask for financial information and perform their own research to study the health of a carrier base, "3PLs are experts at analyzing and evaluating the carrier base and contracting with multiple carriers to build a service package."
By way of an example, Ryder's Martin says "if a carrier is significantly under pricing, beyond normal competitive pressures, this could be a sign that the carrier is facing financial difficulties. Not only may 3PLs have closer relationships with carriers and better insight into potential issues within the carrier base, but also, because of the size and scale of major 3PLs, they have more of an ability to adjust and react with a back-up plan should there be a disruption."
Terry Miller, executive vice president of operations at Penske Logistics in Reading, Pa., says 3PLs design solutions "that are capable of flexing up and down with demand...which provides companies with the best competitive advantage possible entering, during and exiting a recessionary period."
Penske uses a process called Continuous Compliance Management to ensure its carrier base not only has financial security, but also the right insurance and risk coverage. "We have a vested interest in working only with economically viable carriers, to protect our customers' and our own interests," Miller says.
But it's more than just help with carrier selection and capacity that freight buyers will need from 3PLs heading out of the downturn. With resources cut to the bone, many shippers may rely on 3PLs for more strategic help. Martin says while forecasting and planning in an uncertain economy are difficult, because 3PLs manage many supply chains across multiple industries, they have a view of emerging trends that enable them to make clearer forecasts than many individual companies.
"3PLs can help companies simulate different scenarios and analyze total landed costs and risk based on changing variables in a supply chain," Martin says. "As a result, 3PLs can formulate alternative network designs should any one factor dramatically change. 3PLs also then have the ability to implement those changes quickly. It's easier to make process changes with an outside provider, especially when you can tap into someone else's existing infrastructure, technology and people. By partnering with a 3PL, a company can improve its ability to quickly adapt to change."
And Miller points out that leveraging a 3PL coming out of a recession can help companies free up some cash flow at a time when it is much-needed. "They don't need to make those investments [to increase freight capacity in their supply chains], because we already have them in place. This gives shippers the increased cash flow to invest in their businesses and to focus on their core competencies."
What shippers want from 3PLs
What shippers want from 3PLs
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Timely KPIs and performance data
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Real-time order and shipment visibility
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Alerts for orders and shipments that deviate from plan
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Accurate bills
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Real-time inventory status
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Electronic integration
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Automated business process management
Source: 14th Annual Third Party Logistics Study
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