Last year wasn’t great for third-party logistics (3PL) providers. In lock step with the global economic nose dive, gross revenues for the overall U.S. 3PL market shrank by 16% in 2009 according to industry analysts, while the Value Added Warehousing and Distribution (VAWD) segment suffered single digit reductions. The good news is that first half 2010 results indicate double digit improvements as the economy slowly recovers.

Another positive growth indicator – according to recent research compiled by business information provider Analytiqa (http://www.analytiqa-interactive.com/index.aspx) – spending on logistics outsourcing across Argentina, Brazil, Canada, Mexico and the United States will increase by 32% through the 2010-2012 period.

Analytiqa’s research indicates that a key driver of 3PL adoption is the ever increasing level of sophistication of logistics services. Demands for greater visibility of products, reverse logistics solutions and/or value-added services, which more often than not originate from retailers or manufactures, are forcing logistics service providers (especially SMBs) to looking to 3PLs to provide talent and Material Handling Automation (MHA) resources that don’t exist internally.

Flexibility and Speed are Key Factors

As supply chains become leaner and inventories continue to decline, outsourcing becomes an increasingly attractive proposition, especially for small to medium distributors/shippers – but, the pressure on 3PLs to deliver increases. For 3PLs looking to win this emerging business, flexibility is a ‘must-have’. 3PLs need to improve their responses to changes in volumes, customer order profiles and shorter deadlines. However, with this flexibility also comes increasing demands for greater speed of response.

This is where the adoption of MHA technology will be important. To enable growth objectives to be achieved, investment by 3PLs in MHA will take on an ever important role and well thought-out choices will have to be made about when and how to invest.

However, the challenges faced by 3PLs in North America are more than just technical. Among those analyzed by Analytiqa, there are fears that at a basic level, the logistics sector will experience a severe skills storage as the industry struggles to attract the level and quantity of talent to meet its growth objectives. For a more in-depth look at this issue see – “How will the Changing Workforce Affect Distribution Operations?”

By combining the elements of experienced people, process efficiency, and technology, 3PLs help shippers brew a potent potion of improvements including reduced costs, faster speed to market, improved customer service, increased global capabilities, competitive advantages, increased inventory turns, and the ability to adapt quickly to market changes.

What Shippers Need to Know About 3PLs

The future of 3PLs rests with the shippers. They however, will need to understand their own operations and reasons for outsourcing. This will better enable them to evaluate what the third-parties are telling them. In that regard, the following bullet points were developed by LTD Management www.ltdmgmt.com an independent Supply Chain Logistics consulting firm.

There are many reasons for going to a third-party:

• to acquire an expertise, talent and resources that don't exist internally
• to let the company focus on its core competency which it has determined is not logistics
• to develop value-added capabilities to better service its customers
• to improve operations or customer service
• or simply to improve its processes

All these are good and positive reasons. However, according to LTD Management there are other less positive but still valid reasons:

• to cut costs
• to avoid capital expenditures
• to avoid labor problems
• to avoid costs of regulations

Given the differences in logistics service providers and the differences in why shippers outsource, LTD suggests that the shipper look hard at both the provider alternatives and its reasons for outsourcing. It must ask some difficult questions:

• What am I looking to outsource - all of my logistics operation or just a portion of it?
• Why am I looking to outsource?
• How do I describe my logistics and company operation?
• What are the costs of the operation to be outsourced? Fixed costs? Variable costs?
• What are its capabilities? What are its strengths, limitations?
• What do my customers require of each of their own supply chain specifications?
• How well do I service my customers?
• If there are service problems, what are they and what causes them?
• What do we expect from the third party? How will we know if it is meeting our expectations?
• What about the management responsibility of the third party? How will it be done and by whom?
• How do I effectively transition from my own operations to an outsourced one? How long will it take to transition? Are there problems during transition? If so, what are they and why?
• What if it doesn't work? What are the down sides to this? How serious are they to my business and my customers?

Against this self assessment, LTD says that the shipper can then begin to look for a 3PL provider that has the specific capabilities and services it needs. These questions will help shippers evaluate potential service providers:

• What do you bring to the table? What are your experiences with my industry, with my customers?
• What problems have you encountered with setting up third-party operations and why?
• What will it cost?
• How will it operate?
• How long will it take to set up and have running properly?
• How will we interface?
• What do you require of my business? Is this requirement for start-up or is it ongoing?
• Why do you want my business?
• Why should I select you?

A company looking to outsource its logistics operations, or a portion thereof, must thoroughly understand what they are doing and what they want to accomplish. There are no shortcuts to doing it right, but there are real problems in doing it wrong.

The Vested Outsourcing Contract

Vested Outsourcing is a new methodology that allows companies to work more effectively with their outsource service providers. Under this approach, they develop service agreements that are based on outcomes, not processes, with added incentives to improve results across a broad spectrum of business metrics. Because the two parties typically share both risks and rewards, they each have a stake in finding opportunities for improvement. Or to put it another way, they become vested in one another's success.

One of the difficulties in choosing the right pricing model for a Vested Outsourcing agreement - one that provides incentives for the best cost and service trade-offs - is that there is often confusion about the different models used to construct the agreement. This confusion is due to the lack of consistency in how terms are applied to specific contract elements.

In their book – “Vested Outsourcing: Five Rules That Will Transform Outsourcing”, authors Kate Vitasek, Mike Ledyard, and Karl Manrodt look at the two most common pricing models and explain how to decide which is best for you.

Final Thoughts

The future of outsourcing is significant. It’s important to understand that we are in the early stages of a new automated logistics paradigm. How it all comes together with supply chain management and with 3PLs is still being shaped. There will be some segmentation and consolidation in the market as providers better define who they are and what they can do. It only makes sense that Shippers, who are considering outsourcing, understand the differences in 3PLs so they select the one that best meets their current and future requirements.

Agree or disagree with Holste's perspective? What would you add? Let us know your thoughts for publication in the SCDigest newsletter Feedback section, and on the website. Upon request, comments will be posted with the respondent's name or company withheld.

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