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  First Thoughts

    Dan Gilmore

    Editor

    Supply Chain Digest



 

 
March 9, 2017

Thoughts on Supply Chain Innovation in Shipper-3PL Relationships

New SCDigest Benchmark Study Sheds Light on Increasingly Important Topic

We are at the intersection of two very powerful trends.

First, companies are clearly placing a primacy on innovation. Survey after survey shows becoming more innovative is at or near the very top of the CEO priority list. This year's annual CEO study by PwC, for example, found innovation as the top area CEOs want to strengthen in order to capitalize on new opportunities.

Naturally, if innovation is a priority for the CEO, it de facto becomes a priority for the supply chain, but there are some wrinkles to that, as I will explain shortly.

Gilmore Says....

I was surprised how little shippers and 3PLs say so-called gainsharing contracts were being used, under which both the 3PL and shippers benefit from innovations that reduce costs.

What do you say?

Click here to send us your comments
 

The second major trend is the continued growth in logistics outsourcing. The annual 3PL study from Dr. John Langley released last fall found that 58% of shippers indicate they are increasing their use of outsourced logistics services in 2017, versus just 26% of shippers indicate that they are returning to insourcing of logistics activities.

Meanwhile, data from Armstrong & Associates finds that over the last 10 years, spending on 3PLs on average has risen about 4% annually in North America, and 4.8% on a global basis, solidly above GDP growth.

So, a reasonable conclusion from those two trend lines is that some significant part of a company's supply chain innovation must come in some way from working with 3PLs on new processes and technologies.

Per the point above, when thinking about supply chain innovation, there is both innovation in the supply chain itself, and innovation in supply chain needed to support product/service innovation.

In that context, late last year SCDigest, in partnership with JDA Software, launched a research study on the state of innovation in shipper/3PL relationships. We about received about 200 responses, almost equally split among shippers and 3PLs, which by design allowed us to compare the views and shippers and 3PLs on a number of topics.

We've done many surveys here at SCDigest, but I must say this is some of the best data from a survey I have seen, in terms of what we asked and how interesting the results are. That includes some very insightful comments offered by both shippers and 3PLs for many of the topics.

You can access this in two ways. A pdf copy of the formatted report, with data and commentary, is here. We did not have room in the report for all the data collected, but we didn't want to lose that, so just the data (with comments) for all the questions is here. I recommend downloading both.

First, not surprisingly, the vast majority of shippers place a high priority on innovation by 3PLs. As shown below, about 69% of shippers sees innovation by 3PLs as very important, while literally none said it was not important.


 


Some of the comments were very interesting.

"Looking for 3PLs to be the experts, know all the latest trends and be looking to what is coming in the future and how it will improve logistics," for example, said one respondent.

But shipper views of 3PL innovation capabilities are not high. I don't have room for the pie charts, but just 2% of shippers believe 3PLs have high process innovation capabilities, and 7% high technology innovation. 48% said 3PL innovation in both areas was just "modest."


One respondent commented that "Although we're 14 months into our relationship, I find that, many times, I have to lead the 3PL horse to water - AND make him drink." Ouch!

What are the barriers to more innovation between shippers and 3PLs? The top barrier cited by shippers was "relationships are not strategic," followed (interestingly) by lack of 3PL technology capabilities.

For 3PLs, the top barrier was "nature of the contracts," followed by relationships not strategic.

So the nature of the relationship – strategic or tactical/transactional – is a key issue, and both sides want to evolve to more strategic relationships, as the annual 3PL study has often shown. Yet, few relationships reach that status. And in a bit of "chicken or egg" situation elsewhere in the data, shippers indicated they would likely be more strategic with 3PL that showed high innovation capabilities.


The nature of contracts is of course a key issue, as we have known for many years. Given that, I was surprised how little shippers and 3PLs say so-called gainsharing contracts were being used, under which both the 3PL and shippers benefit from innovations that reduce costs.

As shown in the graphic below, just 8% of shippers say they make extensive use of gainsharing, versus 72% which say they don't use gainsharing at all or have very limited use.

 

Why is that? I am not sure. My friend the late Ken Miesemer believed deeply in gainsharing while running logistics for Hershey Foods, for example. It seems obvious to me innovation would be limited if the 3PL does not have a way to benefit from process or technology improvement.

Wrapping things up for this column, what should be the role if any of 3PLs in terms of introducing this whole new wave of advanced technologies, such as robots, drones, 3D printing, etc.?

There were decidedly mixed results here. As seen below, 50% of shippers don't expect these advanced technologies from 3PLs, while about one in four want 3PLs to do a lot more in this area. About another 25% say it depends on the 3PL and the situation, which is probably the right answer.

I'll note a few 3PLs, notably DHL, have in fact been very aggressive with some of these new technologies, seemingly to their benefit. For example, DHL seems to actually be the leader across shippers or 3PLs in advancing the use of smart glasses in distribution center applications.

Ok, that all the room I have. I've just scratched the surface of the data here - and not yet offered my own thoughts on the topic, so there will be a part 2. Whether you are a shipper or a 3PL, there is some great data and insight in the formal benchmark report or the full survey response data.

What are your thoughts on innovation between shippers and 3PLs? Are contracts a major issue? Let us know your thoughts at the Feedback button or section below.


Your Comments/Feedback

Jim Barnes

Sr. Managing Partner, enVista
Posted on: Mar, 09 2017

We just spent a half day with a mid-market 3PL (>$500M in annual revenue). You are spot on that 3PLs don’t see themselves as Technology Providers and hence this is an inhibitor to their growth and their ability to add value to a “shipper”

There are reasons for this in my opinion: 1) 3PLs don’t think in terms of technology first. It is an after-thought and not seen as strategic with respect to their value proposition. Or as seen as a necessary evil. This is in part due that most 3PLs don’t have a “build it and hope it come business model” they organically grow due to business pressure to deliver a solution for a shipper. 2). Lack of Strategic Talent and Big Idea Thinkers. Most if not all 3PLs are very tactical in nature. They are run by operators and not strategic thinkers.

Case in point conduct a survey of e-Commerce 3PLs that have a Tier 1 OMS, WMS or TMS with an integration frame work that allows the 3PL to manage the life cycle of the customer regardless of how the customer wants to buy (multiple form factors) and from multiple inventory fulfillment sources. I can only name a handful of 3PLs. Why lack of strategic thinking regarding Unified Commerce and how they (the 3PL) can leverage technology to differentiate and hence in compete in the world of Unified Commerce.

Metaphorically speaking this is like shippers asking the 3PL providers to climb Mount Everest (Compete Amazon). Technology, processes and people have successfully climbed Mount Everest. The challenge is that Most 3PL are still at base camp and don’t know what they don’t know. In order to get 3PLs to change and start thinking strategically, we need to stop selling the solution (what can be) and focus on educating them on the problem. Why? They can relate to the problem, but they cannot relate to the solution.

 The winners in the 3PL Market regardless of size will 1) Solution Sell, by adding consulting services to help the shipper, 2) They will recruit and hire talent that understand Unified Commerce and how to deliver it or deliver components of it,  3) Invest in Unified Commerce technology in order help the shipper manage the life cycle of the customer and orders, 4) Increase their ability to provide data visualization to the shipper by taking the shippers data and turning it into information that can be used to drive decisions, 5) Create win:win contracts, not lose:win or lose:lose.

Move from Level 1 Partnership to Level III that are strategic and built on TRUST. Shippers, cannot think of a 3PL as a commodity and the 3PL cannot give the shipper the reason to think of them as a commodity.

Karl Payne

Worldwide Fulfillment Design & Engineering, Amazon
Posted on: Mar, 09 2017

Great article and PDFs, thanks for sending this.

Renee Krug

CFO, Globaltranz
Posted on: Mar, 12 2017
Great article.   As a mid size 3PL at $700M this year, Globaltranz is focused on innovation.  It has been key to our organic growth.
 
 
 
 

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