January 2004 | Commentary | 3PL Line

Becoming Truly Global: 3PLs Face New Challenges

Tags: 3PL

The challenge of heading a global 3PL must be influenced by both an understanding of North American logistics and by a personal desire to help define the role of logistics. The future of freight forwarding depends on the partnerships and collaboration that can only be delivered by third-party logistics providers who have the capability to globally integrate logistics solutions. Most freight forwarders and other transportation service providers just can't deliver a complete solution.

In the long run, only the largest and best-staffed 3PLs will be able to deliver logistics expertise at all points along the supply chain. Partnerships require a level of commitment to assure that value is maximized for all shippers. Only companies with global scope and coverage can control service consistency and quality.

Bigger is Better

Usually, that expertise requires a large staff with offices located strategically around the globe. In this industry, a large staff is a cost issue if there is redundancy or confusion of responsibilities. No company can afford that, and you should not have to pay for redundant services or idle staff. But if a large global staff is well-trained and available to deliver the highest quality logistics solutions at any time and to anywhere in the world, then that staff is adding value to customer service.

There are many ways a truly global 3PL is different from a 3PL that primarily serves only one continent. Of course North America is important, but this is a big world to be truly global. Only about 25 percent of a 3PL's business should come from activities in North America. 3PLs who claim to be global are kidding themselves and their customers if a large percentage of their business comes from North America.

In today's environment, it's pretty simple for a 3PL to set up a "virtual" logistics solution, establishing a global network of independent providers that attempt to present a single face to the customer. But there is no structure to ensure the operation flows smoothly or to tie the information elements together.

Any number of factors can cause disruption in your supply chain: system protocol problems, brokerage issues, local customs, communications breakdowns, or a host of other issues. Only a 3PL that provides a common global system and common approach can identify, resolve, and even prevent these situations. Only a few globally integrated transportation service providers, because of their size and scope, can ensure that a program is properly implemented globally, and that their own people will be working directly with customers in all locations.

The same distinction is true in the air cargo segment of our industry. Without a doubt the demand for premium next-day air freight in North America has declined in the past few years, and that is clearly reflected in the results of the integrators, whether they are in the heavyweight or small package segment. There is a lot of capacity in the market, and that will remain the case for the foreseeable future. I doubt we'll ever see the same high demand we saw in the late 1990s for premium overnight service.

Supply chains have changed, and you are faced with a multitude of options. But domestic air overall, which includes next-day, second-day, and deferred, will remain strong. In fact, those services are an essential part of the distribution process for importexport goods, and a global logistics company must have that capability. Your 3PL needs to provide these services with the flexibility and scalability of a forwarder, however, not with the high-cost, fixed-asset approach of an integrator.

Adding Value, Differentiating Services

The overall objective of every industry change must be to add value to customers. Some specialized airfreight services can do that, and those services will gradually become standard features by the better logistics service companies.

The same is true for specialized ground services, new IT services, security, and collaboration. By addressing and meeting the specialized needs of specific industries, the better 3PLs are able to differentiate services, add value to clients, develop a high level of expertise in an industry, and profitably grow business. This is the process to implement in order to expand into additional markets as well as increase growth in North America.

Since the mid 1990s, outsourcing of equipment, parts, maintenance, and management has greatly increased. Now, on any given day, tens of thousands of parts, replacement parts, and original components move though multiple levels of supply chains in every global region.

The movement of all of these products must be managed to exacting standards in a least-cost environment. Cost pressure is forcing lower-cost manufacturing decisions into remote corners on every continent. And new pressures of security and transportation are challenging the most traditional concepts of how products are delivered.

We can no longer use the same logistics practices that were just fine a decade ago to deliver the level of service required in today's transportation environment. If any piece of the parts process is delayed or breaks down, the entire assembly line could be at risk. There is no room for error, and no room for a logistics operation that cannot make whatever decisions are necessary in real time.

Technology that supports the logistics process also has been changing rapidly. Without the means to control information, transportation service providers will be left on the sidelines because good decisions require good information. Decisions to meet the challenges in today's logistics require access to current and complete information in real time.

Smaller Scalable Solutions Another challenge facing the 3PL industry is the change in size and scope of projects. Customers are less interested in committing to long-term contracts that are based on a high cost IT solution as part of the package. They're looking for smaller, scalable solutions that can successfully integrate and utilize existing systems, perhaps with some minor modifications.

Some of the larger, "pure 3PLs" will have difficulty making that adjustment—their proprietary software is, in effect, a costly asset. Some 3PLs will have a strategic advantage because they will not have to take a "use our software or else" approach with customers. Global shippers can receive a lot more flexibility that way.

Obtaining that flexibility through acquisitions can be a solution, but caution is necessary. Strategic acquisitions that add value to a 3PL make sense, but I have learned through experience that the first priority must always be organic growth—growth from within. By expanding the capability of the internal marketing and sales organization, and expanding relationships with current and prospective new customers, 3PLs can reach the same objectives and concomitantly enrich overall value.

Well-thought-out new business processes and organizational design can enhance operational performance and enable profitable expansion of a 3PL's revenue base. Remember, any 3PL must be a market-driven company if it wants to stay at the top of its ability to serve its constituents.

The Security Umbrella

The list of market forces that are shaping 3PL services globally is long. Security, of course, is at the top of the list. But the issue of security has become almost a cliche because it is an umbrella that covers so many different aspects of supply chain management. Under the umbrella of security are collaboration, visibility, technology, and partnerships built on mutual dependency.

Of course, that is the simple explanation because logistics has gone through a dramatic transformation in the past decade. No longer can a 3PL offer off-the-shelf services where a shipper chooses one of these and two of those. Now every industry group and every customer within an industry group requires a unique combination of logistics services that fit specific requirements.

3PLs have to be flexible, and to be flexible they have to understand not only how to move products from here to there, but also how to interpret and add value to a customer's products.

The manufacture of products is no longer exclusive to a single point of origin. Components for automobiles, household appliances, consumer electronics and almost all other consumer products come from a dozen or more different locations anywhere in the world. They then have to be delivered in an exact sequence to keep an assembly line functioning.

A storm at sea, a highway detour, the impact of SARS, and the West Coast labor problems of a year ago are just a few examples of what can disrupt a supply chain. But you can't make excuses—you must be ready to make whatever decisions are necessary to get a customer's products delivered as promised. Current, accurate information is the key to good decisions.

Establishing a Partnership

Today's logistics challenges require—no actually they demand—that 3PLs work closely with their customers at every point along the transportation conduit. A 3PL can add many bells and whistles to its basket of logistics services, but in the end, customer needs determine if true value is actually being delivered.

With all these demands and pressures, the only way for a transportation service provider to measure success is through the eyes of its customers. To build value, 3PLs must continue to improve the service process at all locations for their customers, and must continue to train and develop staff. The employees of any 3PL are its most valuable asset and those 3PLs must be committed to the development of their workforce. The goal is to provide quality service while providing growth opportunities to the internal team.

I have high expectations that the new business processes and organizational design of the truly global 3PLs will enhance operational performance and enable profitable expansion of North American and global presence.