January 2007 | Commentary | 3PL Line

Shortcuts Sound Appealing, But at What Cost?

Tags: 3PL

I recently facilitated a panel discussion at an industry conference that many of you probably attended. The topic was: How 3PLs and their customers can develop and maintain the right relationship.

I asked three Total Logistic Control (TLC) customers—all household-name companies—to answer a series of questions about how they worked with their 3PLs, and how they saw the industry changing.

Their answers were not surprising; they reflected what TLC has experienced in its own 3PL business.From my perspective, however, these industry changes are not positive for 3PLs, or for users of their services. Let me explain.

Short-Term Results, Long-Term Costs

In the 3PL business, as in life, there are no shortcuts; few result in a happy ending. Most logistics professionals working in large companies know that while they are driving short-term results, they end up spending more money in the long run. Sadly, they are forced to do so because that is the directive coming from above.

I certainly cannot change that. But I can continue working with and educating shippers to discover that subtle balance between short- and long-term thinking.

As the 3PL industry evolves, the biggest driver for these changes is shareholder value. And while shareholder value is an important objective, in many cases companies look only for short-term share prices. This short-sighted thinking is disastrous for the end game.

As I listened to these companies discuss how they made decisions on selecting 3PLs, I heard responses such as, "based on a company's track record," or "based on a company's culture," or "based on the way the company operates a facility."

All these are the right answers. This managerial mindset will typically get 3PL customers the results they want.

Today, unfortunately, many 3PL selection decisions are driven by responses to RFPs and sterile discussions with purchasing people. Purchasing people may be told to find the best 3PL to perform a particular service, but they are clearly being judged on finding the lowest price to deliver that service.

I verified this with one senior purchasing manager from a household-name company. After our panel discussion, he told me that he feels conflicted in many ways. Senior management tells him to find the best 3PL to work with, but he is evaluated on securing the lowest cost.

Talk is Cheap

The other problem with this approach is that it limits the opportunity to build a relationship between the 3PL and the people who manage it. The 3PL does not get the chance to demonstrate how it differs from its competitors, other than in an RFP response or a presentation. Almost all these presentations look alike, and it's difficult to find any real point of difference. Talk is cheap.

In my many years in this industry, I have been on both sides of this fence. TLC has won projects or taken them away from competitors who were probably doing a good job by giving a customer an economic value that pushed the project our way. We've also had projects taken from us, even though we were doing a good job, because a competitor came in with a cheaper price. Not necessarily a better value, but a cheaper price.

I'm certainly not opposed to getting the best price to do a job. If 3PLs cannot find a way to operate efficiently, or to price our services at market, then we do not deserve to have that business.

What often happens is that 3PLs that don't understand a particular piece of business will win it anyway by bidding very aggressively. After the fact, they end up either losing the business because they couldn't perform at the promised rate, or they raise the customer's prices back to where they were when the previous 3PL operated the business.

Another comment that came from the panel is that shippers would like their 3PLs to partner with them in innovating cost efficiencies and business improvements. They also want their 3PLs to be strategically involved in their business.

I agree with both those comments. 3PLs should be responsible for coming up with new ideas to take waste out of the supply chain; they should do a good job of interfacing with their major customers' strategies.

Too often, when long-term strategy meetings are set to discuss what we could do together in the future, the list of participants is too large. The promise of a great, productive meeting dwindles to a small group, or the meeting is canceled because no one has time in their busy schedule to think about the big-picture future.

So while some customers say they want better ideas and more strategic thinking, many others say, "let's find ways to cheapen the deal today."

Rather than complain about these trends, do I have a solution? Well, as always, I have an opinion; I'm not sure it is a solution. In my opinion, 3PLs need to strike more of a balance as we think about how we deliver value and how we interact with customers. I believe this because, in some situations, TLC has developed just that kind of relationship with customers.

Yes, we have to go through the dreaded RFP response in many cases. And yes, in many cases we have to deal with purchasing or someone different than the ultimate customer. Because of what we have done for that customer in other areas, they realize the added value we offer.

Sometimes we do have strategy discussions, and we do set aside time to meet. We talk about ways to improve productivity and take waste out, and we look at opportunities for both companies.

This kind of relationship may not provide the lowest management fee in the industry, nor does it give a particular customer the cheapest deal, but I firmly believe that this balance gives 3PL customers the best overall value.

Poor customer service, poor quality, poor communication, poor response, and many other results that come with a cheap solution cost far more than any additional management fee a good 3PL will charge.

Programs Deliver Results

Quality programs, training programs, safety programs, and productivity improvement programs do not happen by accident. These initiatives take time and money to implement, but they all should deliver results far in excess of any additional costs.

In short-term thinking, some would say 3PLs can't afford to offer those programs. My belief is we need to provide them; in fact, we can't afford not to.

The cost of those programs does not look too appealing as a line item in an RFP, especially for start-ups. Many times customers say, "You shouldn't charge us for that service, your competitors don't."

My response? Our competitors may not charge, but that doesn't mean you won't be better off down the road for spending that money. In many cases, these one-time expenses will deliver value and reduce costs per case for months and years to come.

Yes, without those added programs, the RFP response may look more agreeable, and the purchasing manager might be able to boast about getting the cheaper deal. But should they take the shortcut? My lifetime of experience in the 3PL world says no.