3PL Update: Differentiate or Die

Third-party logistics providers have had a tough ride over the past two years, but 3PLs looking to thrive in the 'New Normal' are bringing new innovations to the market

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By Andrew K. Reese

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Erik Hinson has some words of advice for his fellow executives at third-party logistics providers. "If you compete on price," Hinson says, "you'll die on price."

Hinson is managing director at Logistix Worldwide, a 3PL based in Murfreesboro, Tenn., in Greater Nashville. He acknowledges that the past two years have been "interesting times" for his industry, but he says that the intensified competition brought on by the economic downturn has pushed his company and its peers in the industry to "raise the bar" by innovating to introduce new services that bring additional value for their customers.

"We want to test the envelope," Hinson says. "Because if we're not continuously looking for the next innovation or opportunity, somebody else will, and we don't want to be in a position of having to chase someone down."

Mixed Bag

The economy's slow crawl out of recession and into a period of sluggish growth has brought a mixed bag of news for third-party logistics providers. Armstrong & Associates, the industry research firm, has reported that 3PLs' US revenues fell from $127 billion in 2008 to $107 billion in 2009. But Armstrong & Associates was predicting a rebound to $121 billion for 2010, and the researchers were calling for a measured rebound as the economy settled into the "New Normal."

The economic doldrums clearly have had an impact on rates in the industry over the past 24 months. The 21st "State of Logistics Report," released in June by the Council of Supply Chain Management Professionals (CSCMP) in collaboration with Penske Logistics, documented the impact of the slowdown on the logistics industry. In announcing the release of the report, the CSCMP and Penske noted "due to abundant capacity and decreased freight to move, the industry has experienced significant pressure to reduce costs" throughout 2009. Warehouses emptied of inventory, trucking saw a 9 percent drop in tonnage carried, rail carload traffic was down, and the ocean sector lowered rates to stimulate business. Only air cargo was on stronger footing by the end of the year.

Moreover, "The State of Logistics Outsourcing" report, based on the results of the 15th Annual Third-Party Logistics (3PL) Study conducted by Capgemini Consulting in cooperation with the Georgia Institute of Technology and logistics provider Panalpina, suggested that 3PLs had borne a significant brunt of the impact of the recession on the logistics sector. The results of the study, the authors write, "may mean that on average, shippers were able to scale back their expenditures for 3PL services faster than they were able to scale back their total logistics expenditures."

On the other hand, the shaky recovery from recession could be seen as working in the 3PLs' favor, since shippers concerned about a "double dip" back into recession have been looking to 3PL partners to help increase the agility of their supply chains. For example, "The State of Logistics Outsourcing" report quotes a supply chain executive as affirming that "the ability to be changeable and adaptable is clearly a primary factor for success... The use of 3PL s can be a very useful resource to companies who are striving to keep their supply chains current, flexible and adaptable."

Smarter Services

Lorcan Sheehan, senior vice president of marketing and strategy with Waltham, Mass.-based supply chain service and software provider ModusLink Global Solutions, acknowledges that the recession has hit 3PLs hard. "It's not been an easy 18 months for 3PLs," he says. But Sheehan goes on to say that the turbulent economy also has put increased pressure on logistics services providers to look beyond the fluctuations in rates. "The challenge for the 3PL community is that, if they are to build a sustainable revenue model for the future, it has to be built on being the best-in-class at logistics services at whatever pricing is available, while being able to differentiate through smarter services or solutions to logistics problems," Sheehan says.

The key for 3PLs is to differentiate their services in a way that allows them to avoid falling into the trap of commoditization. The emphasis, Sheehan adds, is on solving customers' new and emerging logistics problems. "The days of just saying 'Here are my rates for a particular service' are gone," he continues. "The 3PLs that are putting their services in the context of the real puzzles that need to be solved are the ones that have the best chance of moving away from that commodity position."

Mike Markham, vice president of sales and marketing with Denver-based Cadre Technologies, a provider of solutions for the fulfillment and distribution industries, agrees that successful 3PLs today are offering new services that create "sticky" customer relationships by embedding themselves more deeply into their customers' processes. In particular, he says that 3PLs are looking to leverage technology that allows them to provide customers with greater visibility into inventory in the supply chain. "It used to be that people would go down the street to a competitor for a dollar less per pallet," he says. "Well, today it's so much more about getting the information that's being provided. Good information has become as important as the product that you're moving."

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Eye on Collaboration

Customers also are looking to their 3PL partners to facilitate opportunities for greater collaboration with peers, says Ben Cubitt, a 20-year veteran of the logistics industry who is senior vice president for consulting and strategic services at Transplace, a Texas-based 3PL. Cubitt suggests that while many companies have become adept at managing their freight and supply chain, they have been stymied at working with peers to effectively collaborate on transportation. The reason, he says, is that companies have historically tried to do collaboration on a lane-by-lane basis. That might work for a couple weeks or a month, but then something changes and the arrangement collapses.

"Now," Cubitt says, "companies are moving from shipment-by-shipment collaboration to really trying to get strategic with a set of partners, and they're looking for the 3PL to be the facilitator of that. They're saying, 'You, Mr. 3PL, have visibility into all our shipments, all our networks, you're agnostic somewhat, so why don't you take the lead and work with our people to implement a solution.'"

In addition, as companies change their business models to adapt to the new economic realities, they are looking to 3PLs who can support the move to new paradigms, suggests Jeff Max, CEO, North America at New York-based Venda, Inc., which provides a software-as-a-service e-commerce platform that allows small, medium and large OEMs to go direct to consumers over the Web. "OEMs have been used to shipping pallets to their distribution channels and partners, and they typically haven't had the infrastructure, systems or relationships necessary to deal with 'eaches,'" Max says. To service these companies, Venda partnered with a 3PL called Quiet Logistics, based in the Boston area. Quiet bills itself as a "fulfillment to consumer" services provider offering an outsourced solution that leverages the material handling robotics of Kiva Systems to handle high levels of transient inventory with very high daily throughput. With a facility just outside the UPS hub in Louisville, Quiet is able to offer next-day fulfillment for many of Venda's clients, a critical service for OEMs going direct to consumer, Max says. "The execution of fulfillment and delivery is the most important thing that these manufacturers will be dealing with."

Visibility as Differentiator

Hinson, at Logistix Worldwide, adds that his company is constantly looking for ways to more deeply ingrain itself in its customers' process. "We're trying to become an extension of our customer and our customer's business, because what we want to do is let our customer focus on that, say, 20 percent of their business that is most important, and let us focus on the distribution chain."

Logistix has worked to differentiate itself from competitors by offering a high level of visibility into goods in its customers' supply chains. Hinson explains that his company has deployed an on-demand warehouse management solution from Manhattan Beach, Calif., solution provider 3PL Central, combined with a Web-based EDI connectivity solution from SPS Commerce. By extending integration all the way back to its customers' suppliers, Logistix provides visibility to inventory not only within its own four walls but across its customers' complete supply chains. That capability gives those customers a higher level of control over goods moving through the supply chain, Hinson says.

For example, a customer could go into the system via a Web portal, pull up a report and see that its supplier has 16,000 units built; knowing that it takes 25,000 units to build a container, and the manufacturer is promising to build so many units over the next two days, the customer gains a better understanding of when the container needs to leave. "That's a strategic advantage for us, both in letting the customers log into the system and get whatever information they need on an on-demand basis, and in minimizing the amount of time that our customer service reps have to spend on tasks that do not require a great deal of expertise," Hinson says.

At the same time, Hinson acknowledges that what is a "cutting-edge" capability today can quickly become part of the base set of services (and customer expectations) for all 3PLs tomorrow. "As we ove forward, some of the services that we have offered as a competitive advantage will become part of our standard offering," he says. "But we have to be consistently looking ahead to what will be the next innovation in our business. There is always strong competition, which I think is a good thing because it raises the bar."