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  First Thoughts

    Dan Gilmore


    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




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