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As supply chain professionals we are all aware of the huge growth of the 3PL market. But why is third party logistics so important to organizations in today’s competitive markets? When should an organization seek a 3PL alternative and what should the third party provide?
“Outsourcing has become more conspicuous for a couple of reasons,” says Frank J. Casale, founder and CEO of The Outsourcing Institute, a professional association of outsourcers headquartered in Jericho, NY. “Reason one is the continuing pressure on management to make more money by reducing operating costs. Reason two — there are more outsource companies now, and they've become much better at what they do. The companies provide broader service menus and a wider range of pricing and delivery models, and offer more experience under one roof. Thanks to these improvements and the greater need for outsourcing in general, the industry has been growing at a rate of 15%-20% per year.”
There are general reasons across industries to employ a third party. Such examples are niche market products, speed to market need, technology advancements, partnership & collaboration of product groups/types, and of course service.
Niche markets are a good example of the need to outsource to a 3PL. As business models change and alternatives are introduced to the marketplace, the core business infrastructure often does not support new product or changing product introductions. Before an organization spends thousands of dollars in revamping internal operations, a 3PL is the best alternative for market introduction.
In addition, if the product is targeted to a small market segment albeit high dollar value, the likelihood of fulfillment strategies are slim. This becomes another natural for 3PL providers.
The next general reason to go outside an organization's own fulfillment infrastructure is the need for speed to market. Speed usually indicates that the product lifecycle is fairly short, the competition may be highly competitive, such as the cell phone market, or the product is completely astray for the core business.
One good example of alternative SKU fulfillment might be coffee and music. As consumers we most likely drink coffee and listen to music frequently. But do we purchase these products at the same retail outlets? However, if we could purchase music and coffer together, whether at a book store or coffee shop that would be ideal. Hence the need for alternate channels of distribution. It stands to reason that a core business of music is different than coffee requirements when it comes to fulfillment.
Quantifiable Measures of 3PL Success
North America
Logistics cost reduction 7%
Fixed logistics asset reduction 16%
Avg. order cycle length changed 6.5 to 4.3 days
Overall inventories reduced by 9%
Cash-to-cash cycle reduced 20.4 to 16.4 days
Service improvement 63%
Western Europe
Logistics cost reduction 10%
Fixed logistics asset reduction n/a
Avg. order cycle length changed 4.4 to 3.5 days
Overall inventories reduced by 8%
Cash-to-cash cycle reduced 27.3 to 20.0 days
Service improvement 40%
Source: Third-Party Logistics Study 2002, Georgia Tech, Cap Gemini Ernst & Young, Ryder System Inc.
As always technology plays a major role when it comes to partnering with a third party provider. Casale says, “Technology, especially Web-based technology, is helping 3PLs provide increasingly sophisticated and seamless logistics services. “Internet access to a 3PL provider lends reality to virtuality, and in the future it's possible that with an outsourced partner you'll get better and more real-time data than you ever got on your own.”
Internet Messaging and Portals the Preferred Path
* Internet-based Messaging 38%
Phone/fax 12%
E-mail 17%
Supplier Portal 20%
Webforms 4%
Traditional EDI 9%
* EDI over Internet, EDI over FTP, XML over Internet or Web Services
Going forward, portals and Internet-based messaging, including EDI over Internet, EDI over FTP, XML over Internet, or Web services, are the preferred methods to connect new domestic suppliers. [Source: Aberdeen Group].
Portals are both an alternative and a complement to other communications technologies that have long been important in the supply chain, including electronic data interchange (EDI).
Collaboration between the organization and the selected 3PL is now easier thanks in part to the maturing of Web services. Portals are also participating in the trend toward capturing real-time supply chain data from warehouses and factory floors. A prominent example is SAP’s Inventory Collaboration Hub (ICH). The idea is to bring the replenishment cycles into much tighter time frames, down to the level of store shelves using RFID.
It is important that the chosen 3PL understand the vision of the organization. A true partnership involves more than technology collaboration. It includes trust, dedication to the same goals, and accountability to the same metrics as used by the organization and so on. Like all growth industries, 3PL’s will continue to evolve and enhance as they continue to mature.
Source information:
1. Supply & Demand Chain Magazine 2005
2. Inside the Private World of Portals, David Essex, Supply Chain Systems Magazine June 08, 2005
3. The Lady or the TIGER
Jun 1, 2003 12:00 PM , BY D. DOUGLAS GRAHAM Operations & Fulfillment Magazine
4. Third Party Logistics Study 2002, Georgia Tech, Cap Gemini Ernst & Young, Ryder System Inc.-
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Introduction
