If you were to review any of the current lists of top 500 growth companies across North America, dollars to donuts you will find at least two third-party logistics companies (3PL). It seems that our desire to build and retain logistics expertise internally is diminishing, and quickly. In 2011 for example, the 3PL sector grew at a rate of five percent and is expected to top six percent in 2012. It’s no wonder we are shying away from managing logistics internally if you consider the growing complexity of global supply chains, but the question we should be considering is whether outsourcing complexity – and the risk and rewards that go along with it – to those who seemingly have expertise in the area is the right thing to do for our organization.
Personally, I don’t think this is the best decision for most organizations.
A study conducted by Cap Gemini recently identified two distinct trends that reflect our changing perceptions relative to outsourcing logistics. First, the study found that there is a declining belief that shipping is a core competency among those companies surveyed; secondly, and more importantly, there is a declining sense that cost reductions will be attained by moving to a 3PL provider. Interestingly, these shifting perspectives were quite significant, dropping by nearly 15 percent during the past five years.
This is both good and bad.
The good news is that there are several 3PL companies that are in fact better equipped than most organizations to manage the complexity of logistics across a global supply chain. No argument there. Unfortunately, however, in handing over the reins many organizations are loosing significant opportunities to create competitive advantage and differentiation; in addition, they are losing awareness and control of the costs associated with managing logistics across their organization. From my experience, the ratio of companies that have successfully transitioned from a 3PL back to managing transportation in-house when they decided the relationship was not for them is, well, low.
Now, I will admit that using a 3PL (or 4PL, 5PL, 6PL or 7PL – yes, there are distinct differences between each of these businesses) makes sense for at least a portion of logistics for many organizations operating globally. But the decision to do so is one that should be made as the result of creating and executing a sound logistics strategy. If you have such a strategy in place, then you can likely stop reading at this point, unless you are looking for validation of your present strategy. However, my experience is that most do not have such a strategy – this is something they leave to the 3PLs to figure out. Therefore, I wanted to share with you the three pillars of an effective logistics strategy.
Before you get started.
Before we look at this in greater depth, it is important to consider the following questions to be sure that you have a sufficient basis for developing a strategy. These questions should be reflected upon considering the entire multitiered supply chain that includes input from both internal and external partners and stakeholders. More specifically, if you answer all five of these questions in less than five minutes, your responses are not robust enough to support the development of an effective strategy – that I can guarantee.
- To what degree does logistics impact your customer, or impact your operations? If you are a distributor, for example, logistics is more critical to your operation than it would be for a manufacturer.
- What is the percentage of spending relative to other similar operating costs? Is logistics a significant expense, or something that is a minor part of the overall total cost of goods?
- How crucial is timely delivery to inbound and outbound deliveries? Are you operating under constrained timelines or does your process, product or customer(s) allow some margin of error.
- Who are the various parties involved in your logistics network, and what are their roles? Do you have an extensive network of internal or external sources and, more importantly, what value do they bring to the table relative to question No. 1 above?
- How extensive is your existing transportation network? What are the various modes and methods used to transport goods and what are the advantages and threats associated with each?
With this information in hand, you are now in the best possible position to develop an effective logistics strategy. Similar to developing an organizational strategy, the process is best done in solitude, away from the hustle and bustle of daily operations. In addition, including input from pertinent internal and external stakeholders will ensure the strategy is robust and includes buy-in from all those to whom it pertains.
Pillar 1: Value is in the eye of the customer.
What purpose does logistics serve relative to achieving and delivering value to customers? Walmart’s recent decision to use its own fleet of trucks to pick up all inbound goods was a strategic decision. The primary reason was not to create better controls around cost, but to increase rigor surrounding timely delivery of inbound goods. No doubt cost is a factor and a beneficial outcome to moving this function in-house, but for Walmart, timely delivery is of primary value to customers, and can mean the difference between gaining and losing market shares.
What is the purpose of logistics in your organization, and what value does logistics deliver to customers? In the distribution business, for example, logistics is often more critical than in manufacturing. Shorter lead-times, limited storage space, high inventory turns and quick delivery all play a significant role in enhancing service quality and differentiating in an often-crowded market place.
Pillar 2: R.O.L.I. (return on logistics investment)
What are the various methods, modes and means that can ensure the defined value is delivered to the customers while maximizing investment? Of the three pillars, this is the one you should spend the greatest amount of time on. At this point, considering how a third party might be integrated becomes relevant, but not without considering all other options. I have a client who runs a very large global distribution business for consumer goods. In considering this pillar we developed a logistics structure that varies by region. In the United States, for example, a third party manages his service, whereas in Canada the role is managed internally.
Through customer segmentation, we determined that customers within each geographic region had different demands and similarly the costs associated with using a third party fluctuated widely by region. The best option then was to develop a hybrid model that included both internal and third-party support globally in order to ensure customer value was maximized and costs were minimized. This is in essence how you can create a return on logistics investment.
Pillar 3: Ongoing improvement
What opportunities exist to continuously reduce cost and create a competitive advantage?
As I mentioned earlier, using a third party should not be a “go to” decision strictly to reduce risk and complexity. There must be clear advantages from a cost and competitive position. More over, handing over the reigns to a third party can also, over time, lead to hidden and often unnecessary cost. I recall several years ago telling someone in shipping that I needed something done immediately. They nearly ripped my head off! I was injecting disruption into their plans, which caused them pain and the company money.
In a 3PL relationship, you are the customer, and the customer is always right. Ask for and you shall receive – both the service and the invoice. I have never witnessed pushback from a 3PL, but you can be sure when the invoice arrives, any additional costs associated with “jumping through the hoops” will be captured. What mechanisms do you have in place today to understand, challenge and reduce cost across your logistics network? How do you collect and track ideas to improve efficiency and reduce costs?
At a multinational client, we introduced a quarterly review panel made up of front-line supervisors and senior-level executives. The meeting focused on reviewing costs for the quarter, discussing new customer routings and quality concerns, and brainstorming ideas on improving efficiency and reducing cost. The best ideas came from the staff at the front lines, while senior-level executives were able to challenge, understand and support improvements to the logistics system.
For most, logistics represents a significant component of delivering value to the customer. Making the decision to hand over the reins to a third party without first considering the three pillars above, should, in my view, be outlawed.
So take some time to consider your business, your customers, and how a logistics strategy might better increase the agility, competitiveness and profitability of your supply chain. After all, that’s the name of the game, isn’t it?