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  First Thoughts

    Dan Gilmore

    Editor

    Supply Chain Digest



 

 
April 27, 2017

Chicken or the Egg with 3PLs and Supply Chain Innovation?

More Great Data from SCDigest Benchmark Study, but Does it All Come Down to Contracts in the End?

For a variety of reasons, I was not able to make this year's JDA Software Focus user conference this week in Las Vegas, the first time I have missed the event I believe since 2003, which well may have been the longest such streak among media/analyst types.

I hope to be able to do a little catch up soon and summarize where JDA is headed under new CEO GIrish Rishi, but as a somewhat poor substitute I am finally getting back around to part 2 of my summary of some recent research SDigest has undertaken on innovation in shipper-3PL relationships, an effort that was supported by JDA.

You can find my first column on this research here: Thoughts on Supply Chain Innovation in Shipper-3PL Relationships

Gilmore Says....

A surprisingly low percentage of shippers and 3PLs are using gainsharing or "vested outsourcing" types of arrangements, without which it makes it tough for the 3PsL to innovate to reduce costs

What do you say?

Click here to send us your comments
 

That first column actually led to some interesting reader feedback that we haven't posted yet, such as an email from Jim Barnes, CEO of consulting and software firm enVista, who wrote in part that "You are spot on that most 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 reasons for this, Barnes said, are: (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 at best it is seen as a necessary evil; and (2) Lack of strategic talent and "big idea" thinkers, since "Most if not all 3PLs are very tactical in nature. They are run by operators and not strategic thinkers," Barnes added.

Agree or disagree?

As I noted in part 1, we've done many surveys here at SCDigest, but 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.

And I think this is a very important topic because we are far from any sort of consensus - let along "best practices" - as to the model for how innovation should play out between shippers and 3PLs, even as more logistics is outsourced and companies are increasingly focused on increasing the level and speed of their innovation.

You can access this excellent data 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.

So let's get into a bit more of the charts.

As evidence of the diversity of thinking on this topic, we asked both shippers and 3PLs as to the basic framework they use and experience, respectively, when it comes to managing innovation.
As seen in the chart below, about one-quarter of shippers and 3PL say thie predominant model is for shippers to set the goals and let 3PLs figure out how to get there.


But then there was some disconnect. 41% of shippers say they are highly prescriptive in their 3PL relationships, while only 14% of 3PLs said most shipper clients are highly prescriptive. I do not how to explain that dichotomy. The right answer should probably be the third choice, a hybrid approach that varies with application and specific 3PL.

Commenting on this topic, one shipper said that "We currently are prescriptive but want to focus only on just the goals. However the 3PL are not showing they are capable of using that best approach."

Meanwhile, one 3PL noted that "Fulfillment and distribution are pretty much prescribed - "Get it out the door accurately and fast." Logistics and transportation management are more open to innovative approaches driven by us." Interesting.

Next, shippers and 3PLs both agree there is a clear trend towards shippers more formally evaluating a logistics services provider's innovation capabilities as part of the selection process.

As seen in the chart below, 65% of shippers say they either always or usually do such a formal evaluation, a trend echoed on the 3PL side. I think there numbers are likely much higher than they would have been a decade ago or maybe even 5 years ago.

 


 

The bigger question, perhaps, is how do you really do that evaluation?

One shipper noted the challenge, saying "We do not yet have a strategy but will develop one as we have some upcoming contracts."

Some shippers said they check innovation with the 3PL references, while others said they ask 3PLs to present innovation case studies as part of the selection process. Another added this thoughtful response: "[We] ask for a demonstration of recent innovation and data to support that it is an actual improvement projected savings.You also need to correct for market forces that may inflate or deflate the claimed savings."

Finally for this week, a long-running issue is that 3PLs are generally reluctant - to put it mildly - to invest in distribution center automation (often a form of innovation) because contact periods are too short to ensure a payback. It is impossible to invest in a system with a 4-5 year payback when the length of the contract with a shipper is two years.

If 3PLs were more willing to make such investments, would shippers be willing to extend contractual periods? (Or should I ask that the other way around?) As seen in the chart below, 31% of shippers said they have and/or would sign longer contracts. 26% say they would not consider such a trade-off, while 41% said they would consider doing so.

 



My guess? 3PLs would say that in their experience the percentage of "have/would" or "might" are exxaggerated from the reality.

So there you have it. I keep coming back to the central point that contractual issues - often a reflection of the type of relationship a company wants to have with a 3PL, are huge barriers to innovation, at many levels. As we noted in part 1 of this series, a surprisingly low percentage of shippers and 3PLs are using gainsharing or "vested outsourcing" types of arrangements, without which it makes it tough for the 3PsL to innovate to reduce costs - and hence often revenue.

I've just scratched the surface of the data here. Whether you are a shipper, 3PL, or other, 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, at multiple levels? Let us know your thoughts at the Feedback button or section below.


Your Comments/Feedback

Srihari

Senior Consultant, Infosys
Posted on: May, 22 2016
Great article. I am a little suprised not to see BNSF in the mix while I understand their financial mode/operation is a little different. 

That would only give a complete perspective with all the players in the pool.

Mike O'Brien

Senior editor, Access Intelligence
Posted on: May, 26 2016
Surprised to see Home Depot fall off the list; thought they were winning with Sync?

Julie Leonard

Marketing Director, Inovity
Posted on: Jun, 27 2016
Using the right tool for the right job has always been a best practice and one of the reasons, we feel, that RFID has never taken off in the DC as exponentially as pundits have been forecasting since 2006. While these results may seem surprising to those solely focused on barcode scanning, the adoption of multi-modal technologies in the DC makes perfect sense for greater worker efficiency and productivity.

Carsten Baumann

Strategic Alliance Manager, Schneider Electric
Posted on: Aug, 19 2016

The IoT Platform in this year's (2016) Hype Cycle is on the ascending side, entering the "Peak of Inflated Expectation" area. How does this compare to the IoT positions of the previous years, which have already peaked in 2015? Isn't this contradicting in itself?

Editor's Note: 

You are right, Internet of Things (IoT) was at the top of the Garter new technology hype curve not long ago. As you noted, however, this time the placement was for “IoT Platforms,” a category of software tools from a good number of vendors to manage connectivity, data communications and more with IoT-enabled devices in the field.

So, this is different fro IoT generally, though a company deploying connected things obviously needs some kind of platform – hoe grown or acquired – to manage those functions.

Why IoT generically is not on the curve this year I wondered myself.

 

 

Jo Ann Tudtud-Navalta

Materials Management Manager, Chong Hua Hospital, Cebu City, Philippines
Posted on: Aug, 21 2016

I agree totally with Mr. Schneider.

I have always lived by "put it in writing" all my work life.  I am a firm believer of the many benefits of putting everything in writing and I try to teach it to as many people as I can.

This "putting in writing" can also be used for almost anything else.  Here are some general benefits (only some) of "putting in writing":

1. Everything is better understood between parties involved.  There are lots of people types who need something visual to improve their understanding.
2. Everyone can read to review and correct anything misunderstood.  This will ensure that all parties concerned confirm the details of the agreements as correct.  This is further enhanced by having all parties involved sign off on a hard copy or confirm via reply email.
3. Everything has a proof.  Not to belittle the element of trust among parties involved, it is always safest to have tangible proof of what was agreed on.
4. There will be a document to refer to at any time by any one who needs clarification.
5. The documentation can be useful historical data for any future endeavor.  It provides inputs for better decisions on related situations in the future.
6. This can also be compiled and used to teach future new team members.  "Learn from the past" it is said.

There are many more benefits.  Mr. Schneider is very correct about his call to "put it in writing".





Sandy Montalbano

Consultant, Reshoring Initiative
Posted on: Aug, 24 2016
U.S. companies are reshoring and foreign companies are investing in U.S. locations to be in close proximity to the U.S. market for customer responsiveness, flexibility, quality control, and for the positive branding of "Made in USA".

Reshoring including FDI balanced offshoring in 2015 as it did in 2014. In comparison, in 2000-2007 the U.S. lost net about 200,000 manufacturing jobs per year to offshoring. That is huge progress to celebrate!

The Reshoring Initiative Can Help. In order to help companies decide objectively to reshore manufacturing back to the U.S. or offshore, the nonprofit Reshoring Initiative's free Total Cost of Ownership Estimator can help corporations calculate the real P&L impact of reshoring or offshoring. http://www.reshorenow.org/TCO_Estimator.cfm

Robert

Transportation Manager, N/A
Posted on: Aug, 30 2016
 Good article!  I am sending this to my colleagues who work with me.  We have to keep this in mind.  Thanks!

Ian Jansen

Mr, NHLS
Posted on: Sep, 14 2016
SCM is all about getting the order delivered to the Customer on date/ time requested because happy Customers = Revenue. Using the right tools to do the right job is important and SCM is heavily dependent on sophisticated ERP systems to get right real data info ASP.

I've worked in a DC with more than 400,000 line items and measured the Productivity of Pickers by how many "picks" per day.

I've learned that one doesn't have to remind Germany about your EDI orders.

Don Benson

Partner, Warehouse Coach
Posted on: Sep, 15 2016
Challenge - to build and sustain effective relationships at the level of the organizations that are responsible for effectively coordinating and colaborating in an otherwise highly competitive environment 

Jade

Admin, Fulfillment Logistics UK Ltd
Posted on: Oct, 02 2016
Of course we all need to up our game. We need to move with the times, and always be one step ahead of what the future will bring.

Mike Dargis

President of asset-based carrier based in the Midwest, Zip Xpress Inc. (at ZipXpress.net)
Posted on: Oct, 03 2016
Thanks for the article, but I know there's a lot more to this issue than just the pay rates. Please check out my blogs on the subject at www.zipxpress.net.

Blaine

Inventory Specialist, Syncron
Posted on: Nov, 16 2016
Lora, great article! I agree that companies choose the 'safe' solution more often than not. My solution is a bolt-on for legacy ERP's and we even face challeneges of customer adoption. Most like to play it safe and choose an ERP upgrade, which is more costly, time consuming, and has lower ROI across the board. Would love to learn more about your company, we are always looking for partnerships.

Blaine
blaine.schultz@syncron.com

Bob McIntyre

National Account Executive, DBK Concepts LLC
Posted on: Nov, 21 2016
This is a game changer in GE's production and prototyping.  It also has huge implications across the GE global supply chain with regard to the management of their support and spare parts network. 
 
 
 
 

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