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Focus: Distribution/Materials Handling

Feature Article from Our Distribution and Materials Handling Subject Area - See All

From SCDigest's On-Target E-Magazine

- June 25, 2013 -

What are the Ramifications of Shippers Asking 3PLs to Take on More Supply Chain Risk?

New Set of Skills Required by 3PLs to Assess and Manage New Risk Elements; Shippers Need to Share Detailed Information Early On


 SCDigest Editorial Staff

Evidence is mounting that shippers are asking their 3PLs to take on more supply chain risks contractually, a potentially major inflection point in logistics outsourcing.

Risk management of course is a sort of "megatrend" in supply chain management right now, with seemingly every company looking to reduce its risk exposure. Risk management takes up an increasingly significant amount of most supply chain executives' time versus even just five years ago.

SCDigest Says:

This trend means 3PLs really need to step up their games, likely adding staff or training existing managers about incorporating elements of risk into a contract.
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From risks associated with inventory management to potential vendor chargebacks from retailers, shippers are asking and/or requiring 3PLs to assume increasingly high levels of performance risk - and both sides need to well manage this changing dynamic.

"Yes, there have been some big changes with regard to risk," says Gary Griffith, senior VP of business development and marketing for leading third-party logistics provider Kane is Able. "As shippers doubled down their focus on logistics cost reduction after the recession, risk was an inevitable target."

Griffith added that "When you look at cost, you are going to look at risk."

This trend is a major change. In the past, 3PLs in general only incurred what might be called business risk. If they performed poorly, their contract would not be renewed upon expiration, or even prematurely cancelled if performance exceeded certain negative thresholds. Now, 3PLs are being asked to take on more immediate financial risk, in some cases for events outside their complete control.

"Today, what I think we are seeing is that there is a change in thought process among our customers, in that shippers are trying to figure out 'How do I manage my supply chain risk, how do I take some of that risk and make it part of the 3PL's role?,'" Griffith said.

Gene Tyndall, an executive vice president at Tompkins International and former head of 3PL Ryder's supply chain service, agrees this is an important trend.

"3PLs are indeed being asked to take on more risks, whether for inventory management, supply chain disruptions, or revenue variation," Tyndall told SCDigest.

But in the end , taking on more risk, in whatever form, means 3PLs will also take on more cost. Griffith said in the end this arrangement may make a lot of sense, especially if the 3PL really has more control of the risk elements than the shipper - but assuming those risks must be built into the contractual price.

And this is where things get dicey. First, few 3PLs today really have skills and resources for assessing supply chain risk, and how to factor that risk assumption into pricing and contracts.

Second, shippers sometimes either lac k the knowledge themselves about how to provide the right risk information to their 3PLs so it can be appropriately quantified - or think they can get some advantage from hiding risk-related information from 3PL candidates during the selection and contracting steps, hoping to shift risk responsibility at a low-ball price.

This is a mistake, says SCDigest Editor Dan Gilmore.

(Distribution/Materials Handling Story Continues Below )


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"If shippers think they can "pull one over" on a naive 3PL in terms of risk exposure, first it's just a sort of sleazy way to do business, but beyond that it will likely come back to bite them as the 3PL can't handle the risk, and operational problems and 3PL turnover will result," Gilmore said.

This trend means 3PLs really need to step up their games, likely adding staff or training existing managers about incorporating elements of risk into a contract.

"This trend requires 3PLs to be smarter, more operationally excellent, with more business and financial knowledge, evolving well beyond just moving and storing boxes," Tyndall said. "3PLs, for example, will also need more scenario and contingency planning capabilities from a shipper's perspective that most lack today."

"The best way to deal with risk is to get the information out right up front," Griffith says. "A lot of shippers wait until the very end, and say "If you want this business, you're going to have to live with this particular risk." But if you get that information on the table up front, a 3PL can assess that risk and measure that risk."

Gilmore notes that transparency is in the end really in the shipper's best interest as well as the 3PL's.

"If you have a lot of unknowns when it comes to risk exposure, that has to be reflected in the price," Gilmore says.

"Hear no evil, see no evil doesn't really work very well," when it comes to logistics outsourcing and risk, Griffith said, adding when that true information sharing happens, the risk arrangement can truly be a win-win.

You can view the excellent video discussion between Gilmore and Griffith relative to 3PLs taking on more risk below (video excerpt from longer interview).

Thought Leaders Discussion: 3PLs Being Asked to Take on More Risk



In the end, shippers asking 3PLs to take on more risk is a form of insurance - fixing a given supply chain cost by putting more exposure on the 3PL, but necessarily therefore at a higher price for the 3PL to take on that risk. The industry is still early in this game - on both sides - but it seems like this is a trend that is likely to endure, with significant ramifications for shippers and 3PLs.

Are you seeing shippers asking/requiring 3PLs to take on more risk? Is this good or not? What are the keys to making it work? Let us know your thoughts at the Feedback button (email) or section (web form) below.

Recent Feedback

Great article - it would be good to have a greater level of granularity in terms of what the key risk areas are and potential solutions and associated benefits for reducing the risk.

Shaun Carson
International Logistics Development
Mondelez Internation
Jun, 27 2013

Indeed the 3PLs are stockholders of Business and they play a vital role for on time delivery in full be it for raw materials or finished goods.

The adoption of a best practice system and process is voluntary which is what the shipper expects from the 3PLs.
3PLs are expected to take care of all risks involved in the movement like Govt. Policy, Permission, Safety and Road Survey, Safety lifting material , Educated Driver, GPS, Quick and Transparent information, Commitment, and Good Vehicles.

Accountability and ownership on inventory by the 3PLs are the most important factors for consideration.

Self Employed
Jun, 28 2013