Trends-November 2008

Outsourcing demands spin third-party logistics providers in countless directions, a reality manifest in the array of value-added services today’s players bring to the market. Look no further than where 3PLs have evolved from—warehousing, transportation, forwarding, freight payment, truck lease, chemical, automotive, electronics—and the level of complexity, breadth of resources, and geographic scope they now wield. Supply chains have become nothing less than many-layered networks of integrated logistics partnerships. Lines have blurred and expectations have evolved.

Strip a 3PL bare, take away all the value, and what are you left with?

“A person who solely receives, holds, or otherwise transports a consumer product in the ordinary course of business but who does not take title to the product,” according to the Consumer Product Safety Improvement Act of 2008 (H.R. 4040), signed into law last August in response to a spate of recent consumer product recalls and quality concerns.

You have to dig deep into H.R. 4040 and maneuver beyond and around 38 references to “third-party testing requirements” and “third-party conformity assessment bodies” before you find government’s definitive assessment of what a “third-party logistics provider” is. That defining a 3PL comes second to detailing the services it can provide is indicative of the difficulty, perhaps simplicity, of actually placing a label on something that is evolving. But it’s necessary.

Service providers largely support Congress’ recognition if for no other reason than it gives them a steadier leg to stand on when confronted with recurring liability issues. The ramifications of 2004’s Schramm v. Foster case still reverberate among 3PLs in the transportation brokerage business.

More broadly, the fear that any negligence among contracted supply chain partners, at any touch point and during any thought process, can be brought to bear in the court of law is very real. So intermediaries can appreciate a legislative imprimatur that limits legal accountability in handling and transporting product.

“From our perspective, this is a significant and timely piece of legislation in its effort to increase consumer safety and provide protections against the importation of potentially harmful products,” observes Jim Butts, senior vice president of C.H. Robinson.

“The actual definition of a 3PL is perhaps secondary,” he adds. “In this context it is appropriate for the purposes of describing the aim and intent of the legislation, which attempts to identify the role and responsibilities of a 3PL in relation to the bill, rather than to establish a lasting legal description.”

“The legislation reinforces that 3PLs often don’t take ownership to product. In this regard, it serves as a credible definition,” agrees John Nofsinger, CEO of the Material Handling Industry of America (MHIA), an international trade association representing the interests of the materials handling and logistics industry.

As an example, Nofsinger shares how the MHIA is working as a facilitator for the American Logistics Aid Network, helping humanitarian agencies such as the Red Cross engage private industry to apply supply chain best practices.

“If an agency ships a product that ultimately hurts someone, are we to be held responsible?” he asks.

In the framework of H.R. 4040, the answer would be no.

Contextual Semantics

But outside this context, Nofsinger wonders how this seemingly “de facto” definition truly reflects a 3PL’s evolving value proposition.

“Some 3PLs offer value-added services, manufacturing value,” he says. “They may not own product, but they add value to that product and they own some piece of that responsibility and liability.”

Indeed, given current price pressures and the visibility 3PLs have into extended supply chain networks, some outsourcing customers are soliciting logistics service providers to operate distribution centers in accordance with vendor-managed inventory requirements. If a third party takes ownership of a product, it is necessarily inclined to reduce inefficiencies and costs while the product remains on its balance sheet. This is the type of value-add that customers demand, and the “sell” 3PLs bring to the table when courting new business and growing existing partnerships.

Others agree that this new contrivance doesn’t adequately spell out a 3PL’s true capability, and to some extent, devalues its role. H.R. 4040’s definition places 3PLs in the same category as carriers and forwarders, points out Clifford Lynch, executive vice president of CTSI, a Memphis-based supply chain management solutions provider.

In fact, one of the legislation’s amendments specifically pairs “third-party logistics providers” with “common carriers, contract carriers, and freight forwarders.” Arguably, all of the above deliver third-party logistics services in one form or another. As integrated as supply chains have become, and given the seamlessness of some outsourcing relationships, one might even consider whether “third-party” is appropriate taxonomy.

Still other third-party logistics companies perceive this new legislation in a different context—as a means of separating themselves from competitors and cementing their own unique niche in the outsourcing fray.

“I agree with Congress’ definition that if you do not take possession of the product you are only a 3PL. If you take possession of the cargo or product, as we do, then you are more than a 3PL,” observes John Knight, vice president of Knight Electronics, a Dallas-based company that provides procurement, design, manufacturing, assembly, and shipping services to OEMs.

“We consider ourselves a 5PL. We define that as completing the supply chain from design and manufacturing through order fulfillment for our customers. We can handle any portion of the supply chain, but bring the most value to those customers who use our full capabilities,” he adds.

In this sense, the onus remains with the customer to define the role its third-party logistics provider assumes. But that role invariably changes as 3PLs help customers respond to shifting outsourcing dynamics, and as 3PLs evolve themselves.

Outside The Letter Of The Law

A great example of this comes from the freight brokerage industry, where 3PLs today go far beyond what is required in their capacity as brokers, suggests Butts. 3PLs such as C.H. Robinson and others contractually provide specific protections in terms of financial security and performance, to help shippers and carriers manage risk. The fact is, for most outsourcers the role 3PLs play in their supply chain goes far beyond any standard definition.

“Ensuring we have the flexibility to address diverse shipper needs is very important,” reports Butts. “Beyond what is required by law or legal statute, the critical question is what responsible industry members make commercially available to the marketplace. Many 3PLs provide financial stability, risk reduction, and considerable value by going above and beyond ‘what the law requires.'”

Does It Matter?

So does H.R. 4040’s definition really matter? For consumer product companies and intermediaries charged with securing shipments against contamination and theft, yes. In other contexts, no.

More than anything else, by exclusion, H.R. 4040 reinforces the additional value 3PLs bring to their customers beyond nuts and bolts, asset-based services. To this end, government spin has little correlation to how customers define outsourcing parameters.

“We advise shippers not to rely on a provider’s compliance to legislation or a government standard for selecting a 3PL,” says Butts. “Instead, find a financially strong and market-viable 3PL, examine the contractual protections it provides to customers, and verify its track record and ability to deliver on commitments.”

Defining a 3PL, and divining the value it brings to any outsourcing partnership, are about as far removed as a supplier in Shanghai and a Wal-Mart customer. The key, as in all areas of the supply chain, is communication and continuous improvement between supply and demand. That’s where 3PLs define themselves, and outsourcers divine their 3PL’s true value.

Do-It-Yourself Supply Chain Renovation

The Home Depot has made “do-it-yourself” projects a popular fad for enthusiastic consumers. But in light of a deteriorating economy, severe credit crunch, and downturn in new property construction, the world’s largest home improvement retailer has taken a page out of its own book by slashing prices to increase sales.

The Home Depot has made a concerted effort to reduce prices anywhere from five to 50 percent on as many as 1,200 items to encourage spontaneous spending and compete for customers with supply chain savvy players such as Lowe’s Home Improvement and Wal-Mart. The retailer is also rationalizing its product mix, removing under-selling, non-core products, and eliminating multiple SKUs of like products.

The company’s front-facing sales and marketing efforts reflect a major supply chain overhaul as the company looks to better manage transportation and increase inventory turns by reducing direct-to-store shipments and progressing toward a more regional DC-centric distribution model. In the past, stores stocked inventory in lieu of using distribution facilities.

To date, The Home Depot’s strategy is paying off. The chain’s effort shows early signs of success, increasing unit sales and causing customers to leave the store with more products, says Citigroup Analyst Deborah Weinswig in a research note published recently.

“In light of the difficult environment, The Home Depot is focused on delivering a more relevant merchandise assortment to customers and improving service levels in the store to drive sales and gain market share,” she writes, saying the price cut results “exceed expectations.”

Full Disclosure

Some companies pull the green card to indulge consumer whim; others push green innovation to new levels. Hewlett Packard (HP) is among the latter, and the technology manufacturer continues to lead the way in pioneering industry best practices.

In an effort to promote transparency in environmental standards, HP recently announced emissions data for its largest suppliers, representing more than 80 percent of the company’s costs for materials, manufacturing, and assembly in its global product line.

In 2007, the aggregated carbon dioxide equivalent (CO2e) emissions associated with more than 80 percent of HP’s first-tier manufacturing expenditures totaled approximately 3.5 million metric tons. Operating the largest supply chain in the technology industry, HP will use this data to incorporate energy efficiencies into how it manages first-tier suppliers. Additionally, the manufacturer will propagate this information to the rest of its supply chain to determine further emissions reductions as it incorporates similar reporting processes in lower tiers.

HP’s CO2e supply chain emissions reporting represents an initial step in a long-term program. The company is working to establish better standardization of tools and methodologies to facilitate consistent and reliable measurements among suppliers and enable a robust process that it can implement throughout its global supply chain.

What It Means To Be Green.

Hp Has A Legacy of supply chain social and environmental leadership:

• In 2002, HP established a social and environmental responsibility policy for its supply chain and extended the HP Supplier Code of Conduct to include its supply base.
• HP helped lead the development of the industry-wide EICC, which was introduced in 2004.
• HP has conducted more than 500 audits with first—and second-tier suppliers worldwide.
• In April 2008, HP became the first major technology company to publish a list of its largest suppliers, advancing supply chain transparency standards across the industry.
• In August 2008, HP became the first company to qualify for the U.S. Environmental Protection Agency (EPA) SmartWay product packaging logo, certifying that its surface transportation carrier network reduces transportation-related emissions.