The right third-party logistics partner can deliver significant advantages in increased efficiency and improved service.  In order for this to happen, there has to be a match between what the buyer wants and what the 3PL provides.  To make an informed decision, the buyer needs to know the difference between a solutions provider and a service provider - and how each contributes to the buyer's strategy.

The central issue is the type of logistics services necessary to the buyer's business model.  Are dependable delivery and customized solutions vital or will a basic menu suffice?  If the latter, then third-party logistics services should be purchased as a commodity at an appropriate price. On the other hand, buyers who require innovative customized solutions that add value for their customers should select a solutions provider, and be willing to pay a premium.

A dilemma can arise when a buyer expects one type of provider after contracting for the other.  To understand the difference, it is important to distinguish the strategies, structures, people and priorities of service vs. solutions providers.  The two may be in the same industry, yet they are as different as a fast-food restaurant and a five-star steakhouse.

Different Approaches

There is a fundamental difference in the value propositions of the service provider and the solutions provider.  Volume transactions are at the core of the service provider's business model.  To be successful, the service provider must excel at standardization and cost containment, which precludes investment in customization and innovation.

A solutions provider succeeds by providing a high level of responsiveness to each customer's unique, evolving requirements.  To do that, the solutions provider commits resources to the expertise and technology that allow it to adapt to and for its customers.  In short, these two approaches are distinct and incompatible. The buyer can get one or the other, but not both.

Common procurement practices tend to drive buyers toward a service provider who delivers a commodity product, and away from the provider of customized solutions.  Requirements are typically standardized for pricing comparisons, favoring commodity services.  The buyer may assume the capability and willingness of the provider to address unforeseen requirements, but those are not weighted in the evaluation process.
The common practice of bundling also favors the commodity provider.  In bundling, similar services (often across locations or business units) are sold as a group in an effort to increase the overall value of the contract.  However, supposed savings from bundling can be misleading, hiding the prices of some services, and including others that the buyer may not need.

Keeping costs down is important, especially in the current economy and particularly for non-core activities, which is why outsourcing is adopted in the first place.  Still, the savvy buyer should not lose sight of the economic efficacy of value.  There are both strategic and economic advantages in partnering with a provider who continually develops customer-oriented solutions.  Not all companies need this, but for those who do the short-term savings gained by using a service provider are far less than the longer-term gains from customized solutions that allow them to better serve their own customers.

Steps for Success

In pursuit of a business win, there are providers who will promise more than can be delivered. To make matters worse, those claims are typically difficult to evaluate until after the service is acquired.  To help avoid mistakes, here are five questions that should be asked about every potential provider.

1. Can they deliver examples of customized services they have developed?

This should be easy to do (without revealing proprietary information) through case examples that demonstrate the firm's flexibility.  References should be obtained and verified.

2. How are modifications handled?

The provider's first step should be to collaborate with the client to clearly define requirements.  Expectations on both sides should be agreed upon and documented.  As much as possible, the provider should leverage components of existing technology and processes to reduce development expense and length of implementation.

3. How can a practice developed for one client be modified to benefit others without reducing impact and value? 

Leveraging or reconfiguring existing technology and processes should be only part of customization, but it is an essential part of the process.  A provider with a deep stock of "off the shelf" pieces that can be combined and enhanced offers the best of both worlds - customization at a reasonable price.

4. What happens if a request is made that is beyond the scope of expertise?

Honesty and integrity are critical in this instance.  There are several possible courses of action.  First, the provider may suggest alternatives.  If it is not a current service, they could offer to develop the new capability, but this can be costly and time-consuming for both parties.  Alternatively, the provider could partner with another firm with the specific expertise.

Finally, the provider may simply, say the request is beyond their capability and recommend another firm entirely.  The most undesirable outcome is to be told that they can fulfill the request, only to learn that they are actually attempting a new endeavor and won't be able to deliver at the quality, and price, agreed upon.

5. How do you define "success" and what do you do to ensure that it is attained?

There are emotional aspects of success that are important on the surface level, such as the relationship developed over the course of the engagement, and a provider's overall responsiveness.  While important, it is even more significant to have defined measurable objectives that can be graded against.

Only through metrics can success be unambiguously evaluated.  At routine business reviews and other checkpoints, the establishment of priorities, charting of progress, identification of obstacles, and remediation tactics should be part of an ongoing collaboration between a client and provider.

It should be clear by now that engaging a solutions provider requires a trade-off.  The solutions provider is a specialist who typically costs more to engage.  They simply can't perform the work of a generalist at the same price.  However, the benefits are significant.  Cutting edge solutions can deliver a competitive advantage that leads to greater profitability.  Eventually, all service providers will replicate and offer those services.  The question is, can you afford to wait?

Source: Choice Logistics