06 SCS:VIEWPOINT DECEMBER 2008 SUPPLY CHAIN STANDARD
www.supplychainstandard.com
THIRD PARTY LOGISTICS
Time for a new
approach
3PLs need to consider
new business models
that enable them to
become true partners
to their customers.
CHARLES DAVIS
The third party logistics industry is in a difficult
place. Despite efforts to differentiate themselves
with customers, they are still seen as commodity
suppliers by many customers and margins are
thin, typically around one per cent for a haulier.
While there is a lot of talk about 3PLs being supply
chain partners, the reality is often very different.
They share minimal risks with their customers and
simply provide services, in the worst cases, on a
cost plus basis with no incentive to reduce costs.
A new model that genuinely ties in with their
customers and shares some of the risk is needed if
they are to become partners.
When one looks at the services of 3PLs, the
main areas are transport, warehousing and supply
chain management. Transport and warehousing
are increasingly commodities that are procured
and managed through a leverage sourcing
strategy. Supply chain management offers the
potential to differentiate as it has a significant
impact if done well and is much harder to specify
and procure on price. The issue, however, is that
while 3PLs will offer to do the planning, they will
rarely offer to take on the risk, which begs the
RESEARCH
What makes a
winning chain?
A new study shows that common
supply chain themes exist among
the top performing companies
regardless of the industry.
BILL BRONSKY
Successful companies have a certain set of
characteristics which are responsible for their winning
supply chains. There is a common pattern among the
top performing companies regardless of the industry
in which they operate their core business. Our belief is
that these world leading supply chain ideas,
techniques and processes can be translated and
incorporated independent of your industry category.
In collaboration with London Business School, OBA
has conducted a six month research programme to
define the characteristics and capabilities of the top
question as to why a company should give them a
contract that locks them in. If 3PLs were willing to
share risk, particularly around the inventory
ownership, then it would be a powerful
proposition that would transform them into
partners. Even before the credit crunch, there was
a lot of discussion but few were willing to do this.
There are, however, companies that increasingly
look like, and compete, with 3PLs but are willing
to take on the inventory – contract manufacturers.
For example, if one looks at the high-tech industry
the Electronic Manufacturing Suppliers, such as
Flextronics, take the inventory ownership and
increasingly offer logistics services. As these
companies extend their services along the supply
chain, they have the potential to become the
logistics partners of the future with their different
model. While there are many risks in this strategy,
the potential rewards from success will be high.
For 3PLs to move away from being commodity
suppliers and become true partners they will
need a model that enables them to take the risk,
and ideally, ownership of the inventory. This will
have a number of challenges, particularly in the
current environment:
● Access to funds – while some banks have been
looking at this in recent years, in today’s
environment a new and innovative inventory
ownership model will be more difficult.
● Inventory as collateral – while some inventory has
a market value, some that is highly branded or
specialist has limited value in a “fire” sale. Thus, using
the inventory as collateral will be difficult.
● Risk sharing – there are many drivers of
inventory and excellent supply chain
processes are only part of the solution.
Neither party can therefore accept all the risk.
In practice, offering new value added
solutions such as inventory ownership needs to
be accompanied by a redefinition of the
relationship away from “them and us”. Rather, a
partnership mindset will be needed to drive
towards these more advanced models
where parties align on shared key
performance indicators. These
relationships are difficult to form due
to the lack of trust and the desire by
each party to ensure certainty. While
most agreements recognise the need
for both parties to meet their
objectives, too often they
overlook two fundamental
alignment areas:
● Supply chain: the
relationship should
seek to improve
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