There are transformational shifts occurring in the retail supply chain that are particularly affecting small to medium-sized suppliers in ways that can threaten their very existence. Consumers' insatiable appetite for quality products, delivered quickly and at a low price, creates a rippling effect throughout the supply chain: It starts with retailers, who are exerting more pressure on small suppliers to adhere to their specifications, such as being able to handle more inventory and the direct-to-consumer "drop ship" model. This pressure is not going to go away anytime soon and is in fact increasing at a steady pace - not just in the United States, but worldwide.

Suppliers who want or need to support this drop-ship model are beginning to examine their own supply chain, looking at where they're sourcing products, how they can source them cheaper and how they can source them better. In the face of intensified competition in the emerging global economy, large and small suppliers alike are progressively turning to outsourcing of their logistics functions. This provides an enormous opportunity for third-party logistics providers (3PLs) that can handle drop-ship order management models and expand quickly to support suppliers' need to carry additional inventory.

There are roughly 16,000 logistics providers in North America alone that provide everything from transportation management and warehousing to shipment consolidation. With so many 3PL companies to choose from, suppliers are looking for logistics partners that can functionally meet their physical supply chain requirements. They must be able to efficiently receive inbound goods and ship goods, accurately represent inventory, be able to scale to support growth, and do it at a competitive cost.

Here's the problem. There's not one 3PL out there who will say they don't offer these fundamental capabilities. As a result, from the supplier's perspective, it looks like a commodity, and 3PL providers face the tremendous challenge of differentiating themselves in the marketplace. Competitive advantage and competitive excellence end up getting defined by the lowest bid.

Cloud computing solutions offer 3PLs a new way to add real capabilities at a low cost of ownership. Raising the bar on services, while controlling costs.

The Challenge to Provide Value-Added Services

3PLS must break out of the competitive gridlock by differentiating themselves and taking it to the next level. 3PLs can differentiate themselves by adding more services, taking on more responsibility, and becoming more operationally efficient to drive costs down. They can add things like direct fulfillment services, where they contract directly with the retailers themselves on behalf of the supplier and handle all their order-management needs.  Moreover, the development and implementation of value-added, technology-based services and solutions is the best way for 3PLs to differentiate themselves from the competition and reduce pressure on profitability. If 3PLs can take on some of the burden that retailers and suppliers frequently struggle with - by supporting their e-commerce initiatives, drop-ship and all other order-management models from both a physical and information supply chain perspective - it will give them an edge.

Some 3PLs have not completely stepped up to the challenge of meeting the needs of its customers. This is due, in part, to the fact that most 3PLs are extremely low-tech. Even large 3PLs that are tech-savvy are living with legacy systems, so just because they have certain functionality doesn't mean they're able to provide advanced supply chain technology.

It is up to 3PLs to create the solutions that their customers want, and if they can't, then have the good sense to partner with a cloud or Software-as-a-Service (SaaS) provider that can. Many 3PLs are discovering that SaaS solutions are available in application areas including ERP, WMS and EDI, which provide proven technologies usually available through predictable monthly subscription fees instead of large upfront costs. This enables 3PLs to increase their overall service offerings for customers.

The cloud-based delivery model allows 3PLs to pay for only the technologies and functions they need, which can dramatically lower their initial investment cost. By reducing their internal IT staffing and infrastructure costs using SaaS solutions, 3PLs can pass along those savings in the form of more competitive rates to customers while improving their services. SaaS also enables 3PLs to be more nimble than they otherwise would be, helping even mid-market 3PLs behave and perform as if they were a large, tier one logistics providers. 3PLs can achieve world-class service levels at total costs that would simply not be possible had they bought and built these solutions themselves.

Conclusion

As companies try to wring more out of their existing operations, they're turning to 3PLs to service markets they can't reach or to tackle their distribution challenges for their most demanding customers. But competition for new business is fierce. 3PLs, whether they are large or small, domestic or international, need to differentiate themselves by adding new services, new capabilities and higher degrees of operational efficiencies. Successful 3PLs should develop a value-based model. It is a way to separate themselves from competitors who seem destined to offer commodity services to the industry. There will be significant growth and profitability for those 3PLs that do it.

Source: SPS Commerce