While there is an ever-broadening menu of outsourced logistics solutions, pinpointing a primary reason behind the growth is a formidable challenge. Still, two things are clear: 3PL service providers now shoulder increasingly greater responsibilities in financing, and in inventory, technology and data management, and the strategic role played by leading 3PLs at major corporations continues to grow as well.
Inventory ownership and carrying costs are increasingly on offer.
"Outsourcing is here to stay as a very large part of supply-chain capability going forward, though some of the drivers in the future are going to a bit different than they have in the past," says Roger Dik, a partner with Accenture. In the past, outsourcing decisions of manufacturers, retailers and distributors often centered on core vs. non-core functions, "a kind of buy-down, commoditization, hand-it-over-to-somebody-else sort of argument," he explains. "But if you look at some of the larger scale network reconfigurations taking place today - asset shifts, major organizational changes, new technology, the creation of significantly more robust business processes around inventory visibility and reporting - outsourcing gives companies the ability to very immediately transform major segments of supply-chain processes."
Another driver behind outsourcing will be the need of chief executives with shorter tenures to show immediate results. "In most corporations, there's a considerable potential to show efficiency gains amid the complexities in the supply-chain process," he says. "And with the capabilities of logistics outsourcing today, companies have the ability to get immediate impact with predictable results in supply-chain efficiency gains."
The intensely earnings-sensitive nature of the stock market over the past five years has exerted the same force, Dik acknowledges. "But like all cycles of innovation, those cycles are getting shorter and shorter, the planning horizon continues to grow tighter, and folks are thinking in terms of quarters, not years," he says. "When you look at the last wave of major change that has taken place in many industries, people generally have seen those changes in terms of 5- to 10-year transformations. That horizon is shortening considerably now."
The current market where mergers and acquisitions continue to proliferate also fuels the outsourcing flames, says Bruce Edwards, chief executive of consumer, retail and healthcare in the Americas for Exel of Columbus, Ohio. He says the 3PL industry experienced explosive growth in the early and mid-90s and has been gearing up for another wave of significant growth, a primary driver here centering on consolidations among the client base.
"At one time last year we were going through 12 major mergers within our customer base, and those companies increasingly look to 3PL providers to facilitate that integration process," says Edwards. "Supply-chain efficiencies are an increasing part of the justification for the mergers, particularly in the consumer products zone, and those companies are turning to their logistics people to make these efficiencies happen."
All this M&A activity can create some pretty difficult environments on the human resource side of the equation, he says, and a neutral third-party can help in that regard. Considering the limited resources and the rapid timetable senior management often prescribes for these changes, the outsourcing option makes great sense with its potential to provide fairly immediate and reliably predictable results, Dik points out.
Having passed through a period where supply-chain managers emphasized the quantity of available data, that focus quickly is shifting to functionality of data. "The biggest factor that is going to make a difference in supply-chain management, outsourced or not, is data management," says Dick Metzler, president of APL Logistics. It's one of those elements that people often view as perfunctory in terms of interfacing with their trading partners, but it's a tough challenge to maintain and scrub the data into a universally workable format, he says. "Once you have that, almost any reasonably good supply-chain technology will work," he adds. "And almost all supply-chain technologies will not work without it.
"Some of our retail customers source in some of the most god-awful places on the planet, but such operations can be very important to one of our major U.S. retailers that is trying to get product differentiation at low cost in apparel. And the same situation is true for consumer electronics, chemicals, automotive and other industry verticals all across the spectrum."
Although the fundamental issue is hooking up the lines of communication, maintaining them and scrubbing the data, behind that task is the need to provide proactive exception management. "Most of our clients - even if we give them all the data in the world and they have reasonable technology to manage it - very rarely have the bandwidth to do something about it from a continuous improvement, exception management and a re-engineering point of view. And that's where we're finding ourselves more frequently."
In many cases the 3PL is the physical part as well as the enabler, be it warehousing or freight management, "but that's just a tactical support of the basic supply-chain continuous improvement process," he adds. "The idea of supporting your customer in terms of getting returns out of their supply-chain investment dollars starts and ends with data management. If you don't have data management, nothing else matters."
Technology is only one of the primary cost burdens being shifted to the shoulders of 3PL service providers. Inventory ownership and carrying costs as well as other financial elements of supply-chain management now constitute a growing segment of the menu of capabilities offered by, or required of, third-party service providers.
For example, Crowley Logistics of Jacksonville, Fla., works with a Tier I auto parts supplier where inventory ownership plays a critical role in the service program, according to John Hourihan, Sr., Crowley vice president and general manager. The supplier has production facilities in the U.S., Venezuela and Colombia.
"This company has had issues over the years in terms of coordinating the supplies from the U.S. to their offshore production facilities in Venezuela and Colombia, explains Hourihan. Through discussions with company managers, followed by a thorough analysis and identification of what their needs would be, Crowley set up a program for managing the company's supply chain from point-of-origin suppliers in the U.S. to final delivery to their offshore production facilities. "In addition to managing that supply chain, we also, in order to assist them with inventory and tax issues, actually purchase and take ownership of the parts and then sell them back to the customer when the parts are delivered to the production lines at the offshore facilities."
Here's how it works. The company sources from 16 suppliers in the U.S. Crowley manages the milk runs, picks up the parts and hauls them to a point of consolidation in the U.S. The 3PL arranges for the transportation either by air or sea to Venezuela or Colombia and handles all the documentation of the forwarding out and the clearance into those respective countries.
"We then take the inbound parts and components to our distribution facilities, unload the ocean and air containers, and then repackage those parts and components into kanbans, which are then sent out and fed to the factories on a just-in-time basis. Afterwards, we also are responsible for arranging delivery of their aftermarket sales to their distribution networks throughout Venezuela using small delivery trucks. And we're complementing those more traditional supply-chain management pieces with taking ownership of the parts as well," he says.
Specifically, Crowley buys the parts from the U.S. suppliers, with ownership transferring at the point of pick-up, then sells them back, with ownership transferring when the inbound parts roll through the security gates at the production facilities in Venezuela and Colombia. In addition to the cash-flow advantage of freeing capital resources that otherwise would be tied up in inventory moving through the supply-chain pipeline, Crowley's ownership of the parts reduces their customer's tax and duty exposure.
UPS dedicates an entire branch of its widening operation, UPS Capital Corp., to fulfilling the capital needs of its supply-chain customers and pulls no punches with its operational objectives. "Our strategy is to own the supply-chain finance niche, but we don't just go out and offer financial products to our customers," says Bob Bernabucci, an 18-year UPS veteran who heads the Capital operation.
"Everything we do has to have connectivity either with Fritz, UPS or UPS Logistics. The benefit to the customer is our people can talk a complete solution: not only how to get goods moved from Asia to the U.S., but more importantly how we can provide financing or funding against a letter of credit or fund against the customer's receivables that get generated from the logistics movement."
Typically, it might take the customer 145 days to get paid, says Bernabucci, "so they look to us to speed up that cash flow."
UPS Capital coordinates with the supply-chain solutions group on some sales calls, but Capital's own salespeople can position the solution, as they understand the concept of supply-chain management as well as having the expertise in financing, adds Bernabucci.
Supply-chain managers find that their skill sets now require managing third-parties, or networks of them.
The operation has changed significantly since it entered the market three years ago. Initially, its focus was to concentrate on building partnerships in the financial arena, but the company shifted strategies about 18 months ago and began to build its own capabilities. Now, UPS Capital consists of six distinct businesses that offer to UPS logistics service clients an array of financial services that range from granting working capital against physical inventory or the receivables that get generated from those inventories to providing private label or closed-loop credit cards. To facilitate their operations, the Capital group purchased First International Bank of Hartford, Conn., an institution that specializes in funding assistance to small and medium-sized clients.
Global trade consulting offers another avenue for 3PLs to broaden their service menu and value to the customer base, says Jim Monkmeyer, group director of transportation management for Ryder Corp. of Miami. "We see a lot of customers getting into global trade for the first time, while others that have been in the international business for a long time are realizing that the trade issues are rapidly changing," he says. "The events of 9/11 awakened a lot of people to the fact that things are going to be changing in the area of international trade and that some of the changes are going to be permanent in terms of the way we move product, the legality of trade, and the duties and taxes and costs associated with those international movements."
Ryder has been asked by a number of customers to look into those matters and help them out with global trade planning, which the 3PL now is doing with a combination of in-house talent as well as through alliances with other service providers.
Ryder has decided to table for one year a decision to market its ability to manage customs brokers and optimize the customs brokerage selection process, though Monkmeyer predicts this will be fruitful territory for 3PLs in the near future. "We've seen that most shippers are still holding close to their chests the customs broker decisions as well as the management of those relationships, some of which go back many years," he says. "We see 2003 as the year to really go after the whole customs brokerage side of the business."
Although it's a somewhat more garden-variety trend in logistics outsourcing, shifting the technology investment burden to third-party service providers makes even greater sense in the logistics market going forward, says APL's Metzler. It's a growing trend that works in favor of those 3PLs with deeper pockets and will increasingly become a market differentiator among third-parties, he adds.
"What really now separates the men from the boys, if you will, in outsourced supply-chain management is the ability to invest in technology," says Metzler. "In many cases, we're taking off-the-shelf products, combining them and integrating it against a trading partner's solution, and smaller guys can't do that. So if you're going to be in the game in the long run, this whole ability to do data management and have not only the technology but the talent as well - logistics engineer types who can augment the customers' supply chain staffs - will be critical. Many customers don't have the bandwidth to do this themselves, and they want to buy by the drink or buy by continuous improvement or gain-sharing."
Outsource providers are much better positioned to do this than any one company that can invest in such technology, talent and infrastructure on its own, he adds. "We've all read in the press about the challenges and the write-offs of supply-chain-related software with the Nike's and Kmarts of the world, but that's one of the primary advantages a 3PL can bring to the table. We're longer and deeper in terms of evaluating that level of investment and technology and diversifying our risk than any one given supply-chain manager."
That doesn't necessarily require a tremendous critical mass on the part of the 3PL, says Metzler. "If you stay focused on the fundamentals and an ASP-type of approach that 'variablizes' the customer's cost and at the same time is a good deal for the 3PL, it can be a win-win value proposition. The customer has the ability to either turn up the expertise or flex it down as needed, depending on the demands of the business. Our role then is to have a diverse customer base to smooth out the peaks and valleys in that demand. It's going to be tough to be a medium-sized outsource logistics player as time goes on."
All of this outsourcing activity together adds an interesting twist on the skill sets that manufacturers, retailers and distributors will require of their senior supply-chain management executives, Dik notes. "If you look at what this means for companies today, it says that managing a third-party relationship or network of third-parties needs to become a core competence. You don't see many companies today where individuals claim as part of their role or title a major executive responsibility around managing a network of outsourced parties, but it's increasing in strategic value."
He predicts that things will be very different in just three years. "Then, if you ask senior executives about their supply-chain strategy, you'll hear a lot more about outsourcing and the ability of logistics executives to manage networks of virtual providers across a broader range of supply-chain functions. They will see a great deal of competitive advantage for their company, just in their ability to understand those outsource service markets and the ability to manage them on a dynamic basis."
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