The New 3PL Partnership: More Bang for Your Buck
Sure, third-party logistics providers will tune your transportation transactions. But their real value lies in strategic relationships that optimize your entire enterprise.
Manufacturers and retailers used to value third-party logistics (3PL) providers for their physical assets. The very idea of outsourcing transportation and logistics functions evolved as a procured means to a fundamental fix. Pricing was king. Contracts were short. Performance was measured in three-year bids.
That has all changed. Today, companies appreciate 3PLs as much for their cerebral approach to the mundane as their ability to perform the exceptional.
Transactional relationships have given way to strategic partnerships. Trust trumps cost—at least in the short term. And long-term gainsharing has become the hook shippers and their third-party logistics providers hang their hats on.
The idea of a 3PL as some overarching seer is by no means new. Consultants have long touted their neutrality, as well as human and IT intelligence capabilities, thus paving the way for non-asset intermediaries beholden to no one but the customer.
Given the manner in which economic uncertainties have pressed companies to analyze all business functions more frequently, 3PLs provide the variable-cost flexibility to actually act on these urges. Moreover, growing recognition that outsourcing is seldom a one-stop solution provides shippers with even more incentive to consider multiple options for different situations. This forces service providers that want long-term partnerships to check their self-interest at the door, and embrace a more altruistic approach.
At the same time, it also provides 3PLs with new opportunities to assume a more consultative role with customers, stretching beyond simply execution to more strategic designs.
"If 3PLs only focus within a transaction tactical activity, they will always only be transactional tactical providers," says Sean Coakley, senior vice president at Kenco Group, a 3PL based in Chattanooga, Tenn. "The question is, how do 3PLs focus on a bigger picture value for their customers?"
It’s About Time
Kenco measures success in years—which provides a good indication of how the 3PL has gradually grown its business from one 100,000-square-foot warehouse in 1950 to more than 100facilities and 30 million square feet across 25 states and Canada.
Kenco’s client roster includes Whirlpool, Cummins, DuPont, Kohler, Green Mountain Coffee Roasters, and GlaxoSmithKline. The average customer relationship spans 17 years, a remarkable achievement any way you look at it.
But that number is even more telling when you consider the three-year itch many purchasing organizations get when they have to re-bid business. Demonstrating consistent value, year in and year out, lays the foundation for long-term success.
"The 3PL’s responsibility is to look outside the four walls, and find creative ways to drive unique value," Coakley explains. He believes the difference between transactional relationships and strategic partnerships is trust. Ultimately that only comes with time.
For example, for 30 years, Kenco has been managing a variety of transportation and warehousing functions for one customer. Recently the 3PL’s materials handling organization got involved with the client’s manufacturing and warehousing operations.
In so doing, Kenco wound up creating a national project to manage the company’s materials handling fleet across much of its network, providing guaranteed rates for service, service parts, and maintenance. The company previously partnered with small mom-and-pop shops across the country to source those needs.
"Now the company uses one service provider, saving more than $10 million over the life of the initial contract," says Coakley. "That’s one value it never considered part of a 3PL relationship."
The impetus for such change is often 3PL-driven. That’s the value-added sell. Still, shippers have to be receptive to such entreaties. In a true partnership, they know the 3PL is looking out for their best interests. Building this level of trust often takes time. But even shorter-term engagements offer ways to grow collaboration to a point where it becomes almost symbiotic.
All 4 One
Partnerships in today’s environment are growing more transformative, especially within the realm of fourth-party logistics (4PL), according to Paul Mooney, senior director of operations for San Mateo, Calif.-based Menlo Worldwide. The 4PL model offers a platform to get companies thinking about long-term strategy; developing an idea of what they want their future supply chain state to look like; and creating incremental projects that work toward what Mooney calls a "true north vision."
"We try to work from the inside out, and hang wins on the board," he explains. "Once we start showing customers this methodology works—and that we can deliver—we are able to get into radically bigger projects."
The process might begin with an effort to fix truckload rate anomalies, for example, and progress toward a larger project, such as network rationalization. "The strategy or transformation will never sustain itself, nor will it be implemented, if the 3PL can’t deliver quick wins and demonstrate that its methodology actually works," Mooney says.
Over time, the customer usually becomes empowered to take control over some original projects, and the service provider moves on to bigger things.
As a transformative force, the 4PL model actually drives 3PL outsourcing. The difference between the two activities ultimately comes down to scope. In a traditional transactional role, the 3PL will hold on to scope—managing a warehouse, for example. With a 4PL model, the scope ebbs and flows. The service provider scales resources depending on different skill set requirements that materialize.
"In all its 4PL arrangements, Menlo always migrates to execute; we just don’t execute everything," says Mooney.
He cites one example where Menlo acts as a 4PL to manage a customer’s global freight. It also serves as a 3PL for one warehouse in the network. Different service providers—all of whom interface with Menlo—manage the seven other DCs. When the customer decided to outsource warehousing, it did so competitively. Menlo didn’t win all the bids—either because of geographic considerations or because it wasn’t the best solution for that need.
"It becomes more of a strategic partnership," says Mooney. "The 3PL is less concerned with committed revenue and more concerned about providing value to the customer. If the 3PL offers value and an opportunity for savings, the partnership just grows.
"It’s liberating, because rather than worrying about how to sweat a 100,000-square-foot warehouse, we help customers deliver to the bottom line, and we get compensated for that," he adds. "Our engagement organically grows based on fulfilling that value."
Coakley perceives a similar progression. "Companies perform based on how they are measured," he says. "If you measure 3PL partners by getting into the ‘how,’ there will be minimal strategic conversation. Everyone will be focused on tactical activities.
"If shippers can get their team to stop focusing on the ‘how’ and instead concentrate on the ‘what’, they can move into a governance role," he continues. "Essentially, the shippers assume the 4PL role, as they should."
While transformative change can catalyze these types of collaborative 3PL partnerships, it often develops as an organic response to pain points.
G&T Industries, a Byron Center, Mich.-based manufacturer and distributor of foam, hardware, upholstery, and wall coverings, has a long relationship with Ryder’s Fleet Management Solutions (FMS) division. G&T leased tractors from the Jacksonville, Fla.-based 3PL and used its own drivers to transport product.
In Dedicated We Trust
In 2010, G&T consolidated three Pennsylvania warehouses into one facility in Reading. At the time, the manufacturer and Ryder held discussions about growing the lease agreement into a dedicated operation, but plans fell through. In 2013, G&T decided to make the move.
"G&T was trying to establish a stronger foothold with its customer base in Pennsylvania and the eastern United States," explains Gregory Olshefski, logistics manager for Ryder Dedicated. "It wanted to get out of the transportation business because it recognized that managing drivers and DOT compliance wasn’t its strong suit. That’s not the business it’s in."
With new Hours-of-Service rules and CSA requirements, and countless challenges and costs associated with recruiting and retaining qualified drivers, G&T no longer wanted to deal with labor issues. It wanted to concentrate on servicing customers. So the company decided to lift the labor burden and go with a dedicated operation. After an RFP bid, Ryder won the business.
The transition was seamless. "G&T is leasing the same type of equipment, but now Ryder provides drivers, management, and DOT compliance," explains Olshefski. "We’re also working closely with G&T to develop metrics and key performance indicators to analyze potential areas for service and cost improvements."
G&T had always lacked the flexibility to react to emerging customer requirements.By leveraging Ryder’s assets to meet its needs, the manufacturer has been able to free up resources and concentrate on serving its own customers better—which offsets the added cost of outsourcing a dedicated operation.
"The biggest benefit G&T gains by moving to dedicated is that we don’t pass on any liability," Olshefski notes. "As an FMS customer, if G&T had an accident, it was on the hook."
With the dedicated operation up and running, G&T is looking to grow with Ryder. The company maintains a considerable presence in Michigan, where it manufactures product, and Olshefski believes Ryder will find opportunities to expand.
"Ryder’s goal is to prove to G&T that we can keep the promises we made, and continue to grow with its business," he adds.
A Changing Paradigm
Shippers today look at 3PL partners differently than they have in the past. Coakley believes the economic downturn played a big part in this change of perception.
"During the recession, companies suddenly began laying off large groups of people within their supply chain organizations," he says. "They also took a hard look at assets—buildings, equipment, and IT systems. The recession forced companies to start searching outside typical boundaries, to find more fluid and more flexible processes."
In effect, industry has come to recognize the value of trading fixed investments in infrastructure and resources for long-term 3PL partnerships that provide latitude to grow or contract as demand dictates. When uncertainties abound, outsourcing is a sure thing.
3PLs have a vested interest in long-term agreements. They want customers to steer away from the procurement mentality, where transportation and logistics is bought, sold, and negotiated like any commodity. During the recession, as trade volume and capacity softened, many shippers saw this as an opportunity to cost-compare transportation options. That usually comes at a price—namely service.
The manner in which 3PLs such as Kenco, Menlo, and Ryder are working collaboratively with customers speaks volumes about how outsourcing is evolving. As service providers take on a more consultative role, the idea of partnership will only grow. 3PLs are also more willing to be part of a solution—not the entire solution.
The 3PL space will continue to be collaborative and competitive. Opportunities will grow for transformative 4PL-type partnerships—or, in some cases, outsourcers assuming that mantle.
Logistics providers will look to grow their value proposition by cross-selling services and capabilities across functions, as well as through the value chain. And shippers will seek partners that can take tactical problems and lead them toward strategic fixes.
Transportation and logistics outsourcing has become a model for doing business—not just another way to move business. And 3PLs will continue to take shippers in new strategic directions.
"The path toward true north is never a straight line," says Mooney. "It always changes, because business changes."
The Consultative Sell: Hitting the Target
Finding shelf space at a big-box chain is competitive business. Most vendors are just hoping to get within range of a retailer such as Target, where product quality and integrity are at a premium. Dr. Raymond Laboratories (DRL) needed a bullseye.
In 2010, the subsidiary of South Korea-based NeoPharm looked to enter the U.S. retail space with its brand of Atopalm skincare products. To help facilitate the transition, DRL partnered with Port Jersey Logistics, a Monroe, N.J., third-party logistics provider. Together they were challenged with growing Atopalm’s market presence through a phased approach.
With Port Jersey’s assistance, the company orchestrated a strategy that started small, then eventually broadened to a larger customer base.
“Our strategy was first to sell exclusively via online retailers and our own website,” says Jim Plaza, president of Plaza Consulting Group, which represents Dr. Raymond Laboratories. “Once the brand gained a foothold, we engaged a team of independent sales representatives to call on small brick-and-mortar stores.”
As DRL’s presence in the United States gained traction, Port Jersey Logistics was there to help meet new requirements.
“The relationship evolved from small orders to doctors’ offices to the current state of mega-store orders and e-commerce fulfillment,” explains Jim Lowman, general manager for Port Jersey Logistics & Tyler Distribution Centers.
In 2011, the line was picked up by several more online retailers, and the launch of a brand-specific website further expanded DRL’s U.S. footprint. Port Jersey Logistics was primarily tasked with pick-and-pack fulfillment to meet these e-commerce demands.
One year later, ULTA Beauty, a chain of cosmetic and personal care boutiques with 550 locations across 45 states, started selling Atopalm. This exposure provided leverage to start looking at a bigger target.
The move from selling exclusively online to brick-and-mortar retailers presented some different challenges for DRL.
“When we sell to online retailers, the process and paperwork are uniform; the process becomes a simplified routine,” says Plaza. “But distributing to large nationwide chains, such as Target and ULTA, means dealing with many individual orders shipping to respective distribution centers around the country, many of which have differing norms.
“Also, meeting on-time ship dates becomes even more important to avoid incurring economic penalties,” he adds.
As DRL’s brand expanded both online and in stores, Port Jersey Logistics provided latitude in terms of service capabilities and industry experience. Eventually, Target started selling Atopalm on its website in 2012. After the initial e-commerce debut, a store test followed—with the promise of a nationwide roll out if everything went well.
To ensure the pilot was successful, DRL opted to sacrifice profit margin for product exposure by offering shoppers “Buy One, Get One Free” dual pack discounts.
This presented a considerable logistics problem. Atopalm is manufactured and packaged in South Korea. There wasn’t enough time to secure a newly packaged, large-order shipment from Asia and meet Target’s deadline. So Port Jersey Logistics was called upon to find a solution.
Because of the recent increase in shipments, and expansion of services, the 3PL had sufficient inventory to meet the big box retailer’s needs. Port Jersey Logistics removed existing packaging, re-wrapped the product into two-packs, and placed promotional stickers on them. Each two-pack was banded with two others of its kind, creating six-packs as mandated by Target for easier handling.
The pilot was successful, and Target began rolling out Atopalm in select nationwide stores starting in 2013.
Working with Target has required a number of changes in how DRL specs inventory for retail use. For example, each store’s packaging and labeling requirements are different—not only for individual items, but for boxes as well.Port Jersey Logistics must apply bar codes to cases, and place both the Target number (which the retailer provides) and the DRL item number on the case labels prior to shipping.
Filling the Bill
Target also demands that its suppliers have Electronic Data Interchange (EDI) capabilities. Port Jersey Logistics incorporated this requirement into its suite of services on DRL’s behalf as well.
“I think the biggest issue—and one that we have, thus far, navigated successfully—is that we have a 100-percent on-time delivery rate with Target. This is critical,” says Plaza.
On the transportation side, DRL has taken advantage of Port Jersey Logistics’ volume pricing with UPS to further reduce costs. “It has been beneficial to deal with one group when bringing in shipments from port and/or shipping overseas—both of which are required from time to time,” adds Plaza.