The increasingly complicated electronics and high-tech supply chain has made outsourcing noncore competencies a more cost-effective option for high-tech OEMs and contract manufacturers. As a result, third-party logistics providers (3PLs) are being asked to perform more advanced technical services for their electronics and high-tech customers while contract manufacturers are increasing their logistics services, further blurring the line between these two types of service providers.

Most prominent among the more advanced services being offered by 3PLs are contract manufacturing services and services that come as a result of the increased use of outsourcing among OEMs. Mike Hickey, a 3PL consultant at New York-based Accenture, says some 3PLs have offered contract manufacturing for nearly a decade, but the level of those services and the number of 3PLs providing them has increased recently. And many OEMs still may not realize their 3PL providers can handle contract manufacturing.

"The high-tech industry came to the 3PLs and asked them to start providing these services, offering to increase their business levels with the 3PLs," Hickey says. "And the 3PL industry came back with a resounding 'yes.'"

Evan Armstrong, vice president of logistics consulting firm Armstrong & Associates in Stoughton, Wis., says in addition to 3PLs expanding their contract manufacturing services, there are contract manufacturers moving into the logistics space. "For example, there are companies that perform disk work and burn CDs with software and distribute them. Those types of distributors are looking seriously at the 3PL market. Armstrong expects more 3PLs to be taking on more packaging, programming and subassembly work.

Hickey also sees some traditional contract manufacturers beefing up their logistics and supply chain management capabilities. The result will be participants in both the 3PL and contract manufacturing industries meeting in the middle and creating a new breed of company offering a blend of contract manufacturing and supply chain management services.

"We are seeing contract manufacturers turning into full-service or quasi-3PLs," Hickey says. "They are trying to hold their competitive positions by adding more traditional supply-chain services to their menus of service offerings, which is exactly what the 3PLs did with contract manufacturing."

Some 3PLs say the emergence of contract manufacturers has brought a new customer base to logistics providers. Mike Walsh is director of global strategic developments at Exel, a U.K.-based 3PL. Walsh says Exel has seen an increase in business from the high-tech industry in the past 18-24 months, fueled greatly by the increased demands for aftermarket services on the traditional contract manufacturers by OEMs. "There is increased demand for warehousing, reverse logistics, and returns management services. That has produced a downhill effect with the contract manufacturers requesting some of those things from us, the 3PLs."

The use of contract manufacturers affects the suppliers and their logistics providers, as well. National Semiconductor in Sunnyvale, Calif., outsourced its logistics functions back in 1992 and has been using UPS Logistics for its outbound distribution for the past two years. National has seen a growing trend where they get orders from the OEM and are asked to ship product directly to the contract manufacturer, which is often overseas. Larry Stroud, manager of worldwide logistics at National Semiconductor, says the contract manufacturer often has more stringent requirements for delivery than the OEMs because contract manufacturers don't want to hold unnecessary inventory for the OEMs. Those types of inventory management demands on a supplier like National make it very difficult to manage the logistics in-house.

"We need to continuously improve cycle times," Stroud says. "Inventory aging can be very expensive in our business. If the 3PL can help us reduce cycle time, that helps us manage the inventory risk and the overall cost of doing business. By using the 3PL we are able to make our costs more variable and better match them to the business levels we experience." National has also worked with UPS to upgrade its major distribution center in Singapore and develop some rapid response centers in various strategic locations.

The new services being requested of 3PLs go beyond contract manufacturing. Reverse logistics services are increasing in demand from 3PL users. The increased use of overseas manufacturing by OEMs has made the process of shipping a product back to the manufacturer much more expensive. More OEMs are looking to logistics providers to handle some repair or reprogramming.

Len Batcha, president of TechTrans, a 3PL in Southlake, Texas, says his firm has seen an increase in the amount of reverse logistics it is asked to perform, especially in its outbound medical equipment business. No longer does TechTrans simply deliver a piece of medical equipment from point A to point B. Today, TechTrans will package the product with the ordered accessories in its warehouse, deliver it to the customer, test the new equipment on delivery, decontaminate and remove the old equipment. In its printer and copier business, TechTrans even has a network of diagnostic technicians to identify and troubleshoot service issues.

Richard Clark is the director of materials of Efficient Networks, a Dallas-based Siemens subsidiary. Clark says his company has expanded the services it is requesting from Exel. In the past, Efficient used Exel mostly for freight forwarding and warehousing services for overflow material, Clark says. But this year, things changed.

"In the past three months, we've made a dramatic change in how much we've outsourced to Exel, including all of our returns and inventory management."

Efficient also worked with Exel to redesign its distribution and warehousing network to put more of its inventory in warehouses closer to its customers, which lets the company react more quickly to rush requests for replacement parts. The new warehousing model is expected to help reduce inventory both in transit and in warehouse by at least 25%. And the financial savings are the icing on the cake. Clark says Efficient expects to save in the neighborhood of $500,000 with the new warehousing model.

Globalization is another driver pushing high-tech shippers toward an outsourced logistics model. And in response to that, logistics providers are expanding their global scope. "With more product being manufactured overseas, companies have had to deal with multiple 3PLs to manage their global supply chains," says Brett Harper, vice president of global services engineering at Oakland, Calif.-based APL Logistics. "Now, 3PLs are expanding their breadth so they can pick up a product in Asia, consolidate it, move it to the U.S., deconsolidate it, and move it into a standard distribution network."

Hickey also sees a trend toward globalization, with 3PLs being asked to provide worldwide inventory visibility 24/7. And just below that globalization trend, Hickey sees a major emphasis on security in the wake of Sept. 11. "Third-party logistics providers have to answer some tough questions now," Hickey says. "What happens if there is a sudden closing of the transportation system as there was with Sept. 11 and our air system is grounded for 72 hours? How do you handle that? What is your disaster recovery plan?" Overall, Hickey says 3PLs have responded well to the call for advanced security, but some low-end 3PLs have not been able to keep up with the pace setters in the market.

The future will likely see even more advanced services coming from 3PLs, based on customer demands. "There are services we may not be offering right now that we will a year from now, based on what our customers need," Harper says.

Hickey says customers selecting advanced services from 3PLs or contract manufacturers need to perform a thorough evaluation of the provider's capabilities in these areas. While many 3PL and contract manufacturing providers are making the transition to these services smoothly with big investments, there are those that may bite off more than they can chew and have trouble saying no to customers requesting new services and offering more business.

"There are some situations where neither party has done their due diligence," says Hickey. "The 3PL has not really understood what services a client is requesting and the 3PL may not be very honest with themselves. But generally speaking the 3PLs know what they are doing and the ones asking for services know what that 3PL can provide."