3PLs Up The Ante
A good third-party logistics provider can be your ace in the hole to keep supply chain operations running straight and your bottom line flush.
Thirty years ago, the value-add many third party logistics (3PLs) providers offered included simple warehousing and freight transportation services. “The services were rudimentary at best,” says Judy McNeil, supply chain manager, customer operations and planning with Lang Pharma Nutrition, a manufacturer of nutraceutical food and beverages based in Newport, R.I.
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Not any more. Today, many 3PLs essentially act as the supply chain arms of their clients. “Over the past five to 10 years, leading 3PLs have matured from providers of discrete services to highly integrated solution providers,” says Frank Monte, principal, strategy and operations with Capgemini Consulting. Many shippers rely on their 3PLs for visibility, operational control, fulfillment support, supply chain data, and end-of-life product management, among other services.
When McNeil and her colleagues began talking with International Packaging and Distribution (IPD), a 3PL based in Fort Mill, S.C., they learned of the many services that could help manage Lang’s complex supply chain, which includes both import and export, and multiple facets of vendor relationships.
The most valuable aspect has been IPD’s “ability to seamlessly integrate with our systems and processes,” McNeil says. Among other functions, IPD receives finished goods and warehouses intermediate products, and helps Lang consolidate shipments and gain freight efficiencies. It assembles finished products into kits, which allows Lang to support its customers’ promotional initiatives.
Moreover, the partnership “allows my team to focus on what we’re good at—sourcing and developing customer relationships,” McNeil says.
Even from as recently as the 1990s, most shippers expected 3PLs to move their goods from Point A to Point B. Their main concerns were competitive prices, available capacity, and good service. The process wasn’t integrated to any system. “Logistics was an afterthought,” says Brian Winshall, executive vice president of business development with AFN, a logistics firm based in Niles, Ill.
From Back Room to Boardroom
Many 3PLs now offer complex solutions that help shippers achieve strategic goals. “Over the past 20 years, logistics and supply chain has gone from the back room to the boardroom,” Winshall says.
3PL services can be classified into three categories: innovative, value-add, and commodity, says C. John Langley, Ph.D., professor of supply chain management at Penn State University. New services are, at first, innovative. Deliveries via drone, despite the many issues they raise, currently fall into that category. As services become accepted and stand the test of time, they become “value-add.” Finally, customers expect certain services, and they become commodities.
Demand planning and forecasting, for instance, had been considered value-add. “What was considered value-add before is now standard practice because of the way companies are handing off the logistics and fulfillment aspects of their businesses,” says Greg White, CEO with Blue Ridge Solutions, an Atlanta-based provider of supplychain planning technology.
To provide the services their clients are requesting, many 3PLs have had to up the ante, especially in technology. Many now offer solutions that enable supply chain visibility or warehouse management.
This can be essential when 3PLs engage in kitting projects, as they’re taking finished goods—say, a bottle of shampoo and a bottle of conditioner—and moving them back into work-in-process as they’re assembled into kits. Then, they return to finished goods as a new item—all being served from one inventory. “You have to conceptualize the process, then manage it through your warehouse management system,” says Duane Sizemore, senior vice president, marketing and business development with Saddle Creek Logistics Services, Lakeland, Fla. “Use technology to drive efficiency and visibility.”
Shippers have taken note. Three-quarters of those responding to Capgemini Consulting, Penn State University, and Penske Logistics’ 2017 Global State of Outsourcing study say their use of 3PL services contributes to overall logistics cost reductions.
Moreover, while the most frequently outsourced activities continue to be transactional, operational, and repetitive, a growing number of shippers are turning to 3PLs for strategic, IT-intensive, or customer-facing functions, the study finds. For instance, 17 percent of respondents use IT services from their 3PLs, versus 11 percent in the previous year’s study.
“Shippers are turning to 3PLs for value-added services in technology, global shipping, warehousing, and global fulfillment,” Monte says. “They look at 3PLs as extensions of themselves.”
Changing Business Models
One driver behind heightened 3PL expectations is a changing business environment. More companies that use 3PLs essentially are brands, storefronts, and merchandisers. They’re focused on acquiring customers, and thus turn to 3PLs to take on greater roles in purchasing, demand planning and forecasting, and other functions. “They’re handing off more backroom functions,” White adds.
Having a 3PL handle some functions can rein in costs. Rather than ship products to a contract packager to build a display, a 3PL can handle the job at the warehouse where the products already are located “saving on transportation, and reducing product handling, which helps avoid errors and damage,” says Sizemore.
As physical products become more commoditized, the companies that provide them have to differentiate themselves. Service becomes that point of distinction. A case in point: Pegasus helps deliver ATMs to bank lobbies. Rolling them in on traditional dollies could ruin marble bank floors. Instead, they use “safe jacks,” and put a protective covering on the floor.
Another shift is the greater demands many retailers impose on their suppliers. Merchants that used to create point-of-sale displays often now expect their suppliers to do so, says Miquel Ruiloba, vice president of sales and marketing with XB Logistics, Encino, Calif. In turn, some suppliers ask their 3PLs to handle these requests.
A decade ago, about 10 percent of IPD’s clients requested assistance in complying with specific labeling requirements imposed by their customers, many of them retailers, says Tom Emery, chief financial officer with IPD. Today, about 90 percent do. Similarly, requests for custom and secondary packaging, such as kitting and pallet builds, also have increased, he adds.
The explosion of e-commerce also is changing the role of 3PLs. XB works with a business that typically shipped pallets of its kitchen utensils to big box retailers. It now has to drop-ship individual products as they’re sold through those retailers’ websites—an operation that quickly can grow complex. XB now handles this function.
Tactical to Strategic
As the relationships between many shippers and 3PLs continue to move from tactical and transactional to strategic and value-add, the effective integration of people, processes, and technology between the two firms also becomes more critical.
The technology integration between Lang Pharma Nutrition and IPD took about six to eight weeks to complete. IPD’s IT department was onsite and worked with Lang’s IT department to map how inventory information, among other things, would flow between the two companies. IPD also works with Lang’s customers to request appropriate routing information and to consolidate deliveries where needed.
Some 3PLs are boosting their involvement earlier, by engineering and designing the products and packages their clients ship, says Leslie Ajlouny, vice president of business development with Evans Distribution, a logistics provider based in Melvindale, Mich. For instance, they’ll ask Evans what sort of packaging can both meet their requirements and ship economically. “We become a solutions development team,” she says.
Moreover, the solutions 3PLs provide to help companies meet strategic goals, such as transportation management systems (TMS), now are available to mid-market clients, Winshall says. Indeed, they’re often critical in helping these companies compete in today’s tight market, he adds.
Packaging and Kitting
While 3PLs have long provided packaging and kitting services, they continue to raise the bar. “The marketing people think of wonderful ways to make products pretty. I work with them to make products affordable,” says Keith McGinnas, distribution center manager with IPD.
That might mean making sure clients know that many major carriers charge based on dimensional weight, so they need to consider both the size and weight of the packages they’re moving. “We make sure they’re not overpacking, so they get the biggest bang for their buck,” he says.
“We’ve become a tertiary packaging arm for our customers,” Emery says. IPD works with customers to ensure the products they ship meet each retailer’s specific requirements. It also can ensure that products convey “cachet and pizzazz,” he says. That might mean wrapping products in tissue paper and a sturdy cardboard box, rather than bubble wrap.
Shippers increasingly expect 3PLs to help them meet the promises of exceptional service they’ve made to their customers. One computer maker promises customers it will fix and return malfunctioning devices overnight. To make that happen, customers box up their computers and drop them off with a parcel carrier. The computers are flown to an operations hub, where technicians unbox and work on them during the four-hour window before the planes make their return flights. “The service comes at a cost, but for the people who need it, it’s invaluable,” Monte says.
Such above-and-beyond service can occur with business customers, as well as consumers.
Pegagus works with a company making deliveries to a drugstore chain. Because the stores don’t have docks, the deliveries typically required two people and special equipment. Pegasus found dollies that allowed one person to make deliveries. That saved the client about $500,000, and allowed them to keep the business, says Mike Mangini, vice president, East Region, with Pegasus.
Analytics and Transactions
A significant development in the value-added services 3PLs provide is the growing demand for reporting and analytics. “The use of analytics is at an innovative stage,” Langley says, with everyone striving to better manage data.
Every shipment provides a rich source of data on transportation, warehousing, inventory, and customer demand, among other information, Langley says. Analyzing these details might reveal, for instance, that a customer placing a large number of small shipments could reduce costs by consolidating.
Of course, shippers need to be able to easily make sense of the data. “There’s a heightened general expectation to have great dashboards,” says Sean Mueller, director of customer solutions with Evans Distribution. For instance, shippers want to know that of the 100,000 pieces sorted in the past 24 hours, 1,000 had quality issues stemming from three specific reasons. Moreover, they want this information pushed to them via email or a web portal, rather than having to look it up.
“The reporting demands are more focused on the windshield than the rear-view mirror,” says Dan Ryan, vice president of surface transportation with C.H. Robinson Worldwide, Inc., a 3PL based in Eden Prairie, Minn. That is, shippers want information they can use to prevent problems or streamline operations.
For instance, some shippers ask their 3PLs to analyze the origins and destinations of inbound goods, and the costs to ship them, among other data, Winshall says. Armed with this information, they can better identify the most effective locations for plants and distribution centers, based on costs, markets, and transportation options.
At least a few shippers ask 3PLs to handle transactions, as well as the movement of goods. Evans Distribution, for instance, works with a client for which it receives payments from the client’s e-commerce transactions, (the payments go into a separate bank account), pays vendors, and generates invoice and payment reports. “We manage goods through the supply chain,” Aljouny says, “and now we’re managing the funds also.” For the client, this minimizes the task of reconciling the physical distribution of goods to its financial reports.
Keys to Success
Shippers looking to their 3PLs to provide value-added services will want to check several attributes. One is “an incredible amount of tech-savvy,” White says. After all, the 3PL often will act as a supply chain, logistics, and technology arm of their own companies.
For a 3PL to become an effective extension of a company, it needs to “get” the company and its objectives, White says. If a company wants handwritten notes to accompany customers’ purchases, the firm should have employees with neat handwriting. This may require training sessions between the companies, or even sharing employees. “It takes intimate working relationships to facilitate this customization,” he says.
Because value-add services don’t happen automatically, 3PLs that promise them should have a “structured process to identify problems faced by their customers and potentially innovative ways to solve them,” Langley says.
To minimize wasted effort and redundant spending, shippers and 3PLs need to align people, processes, and technologies, Langley says. Employees at all levels of both companies should understand and work toward the shipper’s goals. They also need a common understanding of the work to be done and how it will be done.
When it comes to technology, 3PLs have to be able to use various solutions. A 3PL managing a customer’s distribution center should use the same warehouse management system as the shipper. This has become easier as more 3PLs have begun using commercially available software, rather than developing their own.
The initial agreement should define the operations to be performed, key performance indicators, quality checks, and the way in which charges will be applied, Monte says. Some include incentives that enable or even require the 3PL to steadily remove costs and increase service levels.
To be sure, shippers that ask their 3PLs to invest in the technology and processes needed to provide more sophisticated value-added services need to realize that the 3PLs will want some assurance of an ongoing commitment from them. “If we have a business partner with a unique need, we’re willing to make an investment,” Sizemore says. “In exchange, we want an appropriate term to work through the investment.”
Many 3PLs appear to be developing effective solutions to help their customers. According to the 2017 Global State of Logistics study, 73 percent of shippers say their 3PLs offer new and innovative ways to improve logistics effectiveness.
One reason is the technology in which many 3PLs have invested. In addition, more 3PLs are approaching innovation and value-added services as core competencies, rather than add-ons. “It’s a part of every relationship,” Aljouny says. “It’s how we do business.”
Betting on the Right Price
As 3PLs provide more and different value-added services, they’re developing a range of ways to price them. IPD often charges separately, based on the number of employees needed for a project, labor rates, material costs, and a reasonable margin. “Through experience and time, we know what we need to charge,” says Tom Emery, chief financial officer.
Evans Distribution uses a subscription model for one customer for which it regularly provides kitting services, says Sean Mueller director of customer solutions.
Along with reasonable and easy-to-understand pricing, shippers increasingly want metrics, says Leslie Aljouny, vice president of business development for Evans. These summarize both the quantity and quality of the work completed, such as the number of SKUs shipped; the quality inspection pass/fail rate; and order accuracy.
3PLs Rise to the Occasion
Many third-party logistics providers regularly support clients in ways that extend beyond arranging transportation and warehousing services. A few examples:
- A new direction: A manufacturer of GPS navigational equipment asked XB Logistics to update software on 15,000 devices—within 10 days. The work required unpacking each GPS device, erasing the old software and loading the new, testing its quality, and then repackaging and shipping the devices. “We successfully completed the software upgrade and shipped the 15,000 devices on time,” says Miguel Ruiloba, vice president of sales and marketing with XB Logistics.
- Cheers: A producer of premium spirits has relied on Evans Distribution to help it develop, test, and inspect its holiday packages.Along with confirming the packaging’s durability and consistency, Evans also tests co-pack items, such as light-up coasters. Those that fail are repaired, discarded, or returned to the company. This helps maintain the company’s reputation as a purveyor of quality products.
- 24-hour turnaround: A producer of nutritional supplements needed International Packaging and Distribution to create, assemble, and ship a new endcap display within 24 hours, says Keith McGinnas, DC manager. The display was integral to a presentation the client was making to a large wholesale club in hopes of landing it as an account. “We had never made this display before so we had to Frankenstein one together from a couple of others we had made before,” he says. The effort paid off, and helped the company win the account.
- Quick service: A manufacturer of rapid cooking ovens struggled to achieve consistent, accurate deliveries to its customer, a chain of retail food establishments.Pegasus Logistics designed a delivery process that included specific instructions regarding product placement and debris removal, among other functions. The instructions, along with a thorough sign-off document, reduced service calls and boosted end user satisfaction.
- Cutting costs: A producer of wireless transmission systems needed to reduce its overall landed cost while also boosting delivery quality. Reaching these goals was made more difficult by the company’s numerous large projects across the country, most of which required short-term warehouse options.In addition, its supply base was scattered across the country and occasionally would fall behind in production.
Pegasus designed a flex warehouse and merge-in-transit model that reduced the company’s need for on-hand inventory and enabled suppliers from across the country to ship directly to the client’s warehouses.