Executive Briefings

Third-Party Logistics and the Demand-Driven Value Network

Across industries, companies are transforming their supply chains into value networks. AMR Research's team of industry value chain analysts is continuously advising companies from all different sectors on how to manage this transformation (see "How Do I Drive Value Through a Value Network?" to understand how much value-driven networks change how companies operate).

Companies will need to dramatically change their cultures to take full advantage of the new evolution of supply chain management (SCM). These new demand-driven value networks aren't just about internal culture change, either. As the name implies, it's about the entire network of players, with customers and suppliers acting together for agile execution in effectively and profitably responding to demand. Central to this effort will be the third-party logistics providers (3PLs).

Do you know how these changes will affect the way your customers will want to use your logistics services or when they'll be asking you to become more involved in their transformations?

However, these cultural and operational changes are not happening overnight, with the customer's transformation maturity proving slow to develop. This means 3PLs can expect customer requests for strategic and integrated involvement to be delayed for the time being.

Proven capability and competency, coupled with trust and transparency, will eventually prevail. The service provider will then be asked to provide more processes that involve assessing, replanning, and adjusting the network flows. In our research of more than 25 service provider engagements, less than a handful are using providers to make value chain decisions.

Today the 3PL is primarily involved in execution-oriented tasks: basic and extended services in transportation, distribution, and fulfillment processes. This is not at all intended to diminish the importance of these functions, since efficient and timely execution is vital to business performance.

Demand-driven networks require more dynamic execution of these same tasks. 3PL providers are increasingly being asked by their customers to participate in evaluating the efficiency of the overall logistics network, especially as the use of lower cost global manufacturing and sourcing has accelerated. The evolution of service provider involvement should continue to grow to a more strategic and involved role, including sensing the network and making decisions about how to create value.

Demand-driven value networks stress relationship performance: Effective demand-driven value networks are reliant on relationships because the network operates as a whole, meaning that eventually the logistics provider should be thought of and treated as a partner like a material or component supplier. The 3PL will be trusted to provide crucial inventory and conveyance services for on-time demand fulfillment. The sensing of demand fluctuations and devising the proper supply network response will eventually move to the service provider as well. Today, this function resides outside 3PL responsibility.

Here are some demand-driven value network considerations for 3PLs:

Customers will not save their way to value--Reducing costs without aligning to a business growth strategy does not create any additional value. Since cost savings is typically the primary business premise of the logistics service provider, you'll need to cast your service in the context of the added value you can bring as well.

Organizational alignment must be cross-functional and span the network--Customers might believe they can focus the back-office functions on cost savings while the front office deals with product launches and customer service, but this reasoning is flawed and eventually will change. Without cross-functional alignment, companies won't achieve a balanced set of objectives, and successful cross-functional alignment must include 3PLs. Understand how your company can play a bigger role in helping companies achieve these balanced objectives.

Understand outside-in orientation for better positioning--Successful companies align their operational strategies with a network designed to create value. This network design is done within the context of outside-in orientation, which essentially means companies look first at the customer or demand and then design a supply network that will create value in matching it. Obviously, the 3PL is a fundamental cog in the machine. Understand outside-in orientation to better position yourself as a valued partner.

Identify what processes are inherited and phase out the ones that don't add value--Inherited supply chain practices are ineffective compared to an optimally designed demand-driven value network. 3PLs can use their competency, expertise, and the right technology tools to help companies design their value networks, creating a supply chain that balances cost with flexibility in responding to demand.

Look for an upcoming AMR Research Report that assesses the maturity levels of the leading 3PLs in enabling demand-driven value networks for their customers.

To provide you with more insight, AMR Research is hosting the 2008 Value Chain and Logistics Exchange: Making Your Logistics Provider Part of Your Value Network, on May 28, 2008, in Scottsdale, Arizona. It will bring together buyers and providers of outsourcing services to discuss, debate, and share leading practices. The half-day exchange pairs supply chain executives with the heads of leading 3PLs so they can identify the barriers to more effective relationships, find ways to succeed together, and uncover opportunities to create joint value in the supply chain of tomorrow.

Let me know if you have any thoughts on how 3PLs can help with the value chain transformation so many companies are currently undergoing--gaimi@amrresearch.com.
http://www.amrresearch.com

Across industries, companies are transforming their supply chains into value networks. AMR Research's team of industry value chain analysts is continuously advising companies from all different sectors on how to manage this transformation (see "How Do I Drive Value Through a Value Network?" to understand how much value-driven networks change how companies operate).

Companies will need to dramatically change their cultures to take full advantage of the new evolution of supply chain management (SCM). These new demand-driven value networks aren't just about internal culture change, either. As the name implies, it's about the entire network of players, with customers and suppliers acting together for agile execution in effectively and profitably responding to demand. Central to this effort will be the third-party logistics providers (3PLs).

Do you know how these changes will affect the way your customers will want to use your logistics services or when they'll be asking you to become more involved in their transformations?

However, these cultural and operational changes are not happening overnight, with the customer's transformation maturity proving slow to develop. This means 3PLs can expect customer requests for strategic and integrated involvement to be delayed for the time being.

Proven capability and competency, coupled with trust and transparency, will eventually prevail. The service provider will then be asked to provide more processes that involve assessing, replanning, and adjusting the network flows. In our research of more than 25 service provider engagements, less than a handful are using providers to make value chain decisions.

Today the 3PL is primarily involved in execution-oriented tasks: basic and extended services in transportation, distribution, and fulfillment processes. This is not at all intended to diminish the importance of these functions, since efficient and timely execution is vital to business performance.

Demand-driven networks require more dynamic execution of these same tasks. 3PL providers are increasingly being asked by their customers to participate in evaluating the efficiency of the overall logistics network, especially as the use of lower cost global manufacturing and sourcing has accelerated. The evolution of service provider involvement should continue to grow to a more strategic and involved role, including sensing the network and making decisions about how to create value.

Demand-driven value networks stress relationship performance: Effective demand-driven value networks are reliant on relationships because the network operates as a whole, meaning that eventually the logistics provider should be thought of and treated as a partner like a material or component supplier. The 3PL will be trusted to provide crucial inventory and conveyance services for on-time demand fulfillment. The sensing of demand fluctuations and devising the proper supply network response will eventually move to the service provider as well. Today, this function resides outside 3PL responsibility.

Here are some demand-driven value network considerations for 3PLs:

Customers will not save their way to value--Reducing costs without aligning to a business growth strategy does not create any additional value. Since cost savings is typically the primary business premise of the logistics service provider, you'll need to cast your service in the context of the added value you can bring as well.

Organizational alignment must be cross-functional and span the network--Customers might believe they can focus the back-office functions on cost savings while the front office deals with product launches and customer service, but this reasoning is flawed and eventually will change. Without cross-functional alignment, companies won't achieve a balanced set of objectives, and successful cross-functional alignment must include 3PLs. Understand how your company can play a bigger role in helping companies achieve these balanced objectives.

Understand outside-in orientation for better positioning--Successful companies align their operational strategies with a network designed to create value. This network design is done within the context of outside-in orientation, which essentially means companies look first at the customer or demand and then design a supply network that will create value in matching it. Obviously, the 3PL is a fundamental cog in the machine. Understand outside-in orientation to better position yourself as a valued partner.

Identify what processes are inherited and phase out the ones that don't add value--Inherited supply chain practices are ineffective compared to an optimally designed demand-driven value network. 3PLs can use their competency, expertise, and the right technology tools to help companies design their value networks, creating a supply chain that balances cost with flexibility in responding to demand.

Look for an upcoming AMR Research Report that assesses the maturity levels of the leading 3PLs in enabling demand-driven value networks for their customers.

To provide you with more insight, AMR Research is hosting the 2008 Value Chain and Logistics Exchange: Making Your Logistics Provider Part of Your Value Network, on May 28, 2008, in Scottsdale, Arizona. It will bring together buyers and providers of outsourcing services to discuss, debate, and share leading practices. The half-day exchange pairs supply chain executives with the heads of leading 3PLs so they can identify the barriers to more effective relationships, find ways to succeed together, and uncover opportunities to create joint value in the supply chain of tomorrow.

Let me know if you have any thoughts on how 3PLs can help with the value chain transformation so many companies are currently undergoing--gaimi@amrresearch.com.
http://www.amrresearch.com