There is sometimes a temptation to think of logistics outsourcing suppliers as black boxes – just entities to which cartons, goods, pallets and containers can be handed off for delivery at the other end of the logistics chain. If this stage of the supply chain is executed within the necessary bounds of quality and cost, some client enterprises consider this to be enough. Yet there may be good reasons for them to take a closer interest in the internal workings of their logistics supplier. If logistics are to procure strategic advantage for them, for instance, the opportunities and limitations can be contributed by their 3PL will determine how much. This is not to contradict the outsourcing goal of transforming a burdensome non core activity to a third party: indeed, knowledge of who the supplier sees the outsourcing market should instead complement and enhance this objective.
Balancing customer satisfaction and making money
Customer satisfaction is mandatory, but…
A logistics outsourcing supplier knows that happy customers make good references for getting more business, and that unhappy ones can be bad news, both for revenue and profitability. However, how customer (dis)satisfaction is handled may differ from one 3PL to another.
A 3PL focusing on cost reductions may simply start looking for a way out of the agreement, following the old sales adage that ‘it’s easier to change customers, than to change a customer’. Another logistics supplier aiming to develop a relationship that transcends box-moving and becomes a strategic partnership may see customer dissatisfaction as a challenge or even an opportunity to provide a solution that then strengthens the bond.
A logistics quality balancing act
Underpinning customer satisfaction is the quality of the supplier’s operations. Higher quality may mean higher prices; in other cases, it may help lower the supplier’s own costs through decreases in wastage, fewer goods damaged in transit, and lower fuel consumption. Knowledge of its own facilities, operations and technology helps 3PL to offer improved quality to customers, to absorb price pressure, or to increase its own bottom line (or a combination of the above). UPS, for example, stresses its strengths in correctly handling reverse logistics as a way for its customers to recover lost profits.
Patience in order to make a profit
While customer satisfaction and logistics quality are both key goals in order to stay in business, a logistics outsourcer also needs to be profitable. One of the characteristics of outsourcing contracts is that they often require time (a full year is common) before starting to generate profit for the supplier. The initial period means net costs for the supplier because of the development and adaptation of skills and the transition of operations from the customer’s premises to the outsourcer’s.
An eye on lifetime value
Because of the lead time before profit, the lifetime value of a contract becomes correspondingly more important. It is also possible for a customer, who considers their services to be commodities, to ‘swap them out’ in favour of another 3PL. Software giant Microsoft did this recently in Europe by moving its logistics outsourcing from Germany to Holland. In the first instance, it makes sense for a supplier to be able to adapt to a customer’s requirements by being flexible enough to expand or contract services as needs change, and keep some of the business, if not all of it. Non-asset based 3PL (4PL) have the extra option of swapping out a subcontractor or two to try to avoid being swapped out themselves.
Extending the service footprint
Similarly, it makes sense for a 3PL to offer further value-added services to a customer. The more the 3PL contributes to the smooth running and profitability of its client, the less likely the client is to think about replacing them. Meshing with supply chain postponement strategies is an example of this. Labelling, packaging, component assembly and even manufacturing are all activities undertaken by certain 3PLs to reinforce their relationship.
Correctly positioned, postponement services like these are perceived by the customer not only as the possible outsourcing of non-core activities, but also as a solution for dealing with its own challenges in forecasting demand or in providing goods to a market that requires customised products. BriteVision Media in California offers its market ‘coffee sleeves’, which are insulated cardboard cup holders with advertising messages. Its 3PL was able to supply the company with a wide range of logistics services to let BriteVision, a company with 20 or so employees, focus on its strategic business instead of worrying about its nationwide shipping and distribution architecture.
During the course of an outsourcing agreement, a supplier may also find opportunities to advantageously change its operations and interfaces. Within an overall move from an emphasis on costs to focus on value, there may be specific actions possible in streamlining processes, and increasing agility and responsiveness within the supplier’s organisation; and improving the efficiency of linkages and optimising the segmentation of its offering to better fit the profile of its customer.
Technology and Logistics Automation
Heads in the cloud
Recent advances in technology have made it possible for 3PL to change how they improve outsourced logistics services. Cloud computing and the online software applications for logistics are a particularly striking example. For capital-conscious 3PL, the ability to connect with partners over the internet and terminate the connection once services have been rendered, coupled with a pay-as-you go billing model, seems almost ideal. In addition, the access possible for different mobile computing devices, including smartphones, fits well with the itinerancy that is inherent to logistics services, whether in terms of the 3PL with the direct customer relationship, its partners, or both. Cloud services also facilitate outsourcing for the outsourcers themselves. Ceva Logistics, the company formed from the merger of TNT Logistics and EGL, effectively moved five of its seven Netherlands-based data centres to India to take advantage of lower costs.
Wait and see
Other technologies may have to wait a while before logistics outsourcers embrace them. Unless a customer mandates intensive use of RFID technology, for example, pragmatic outsourcing providers are unlikely to go overboard in collecting RFID data to track the smallest movement of goods in the distribution chain.
Experiments with big data or predictive analytics that a customer considers to be of strategic interest, may well leave its 3PL unimpressed, unless there is a significant and tangible business advantage that becomes immediately available.
Green logistics, anyone?
Some logistics outsourcing providers are equally hard-nosed about greening their distribution activities. If an eco-friendly approach allows costs to be cut or meets a customer requirement, then it has a chance of being adopted. Candidates from an asset-based outsourcing supplier’s point of view might be energy-efficient warehouse designs and increased order accuracy, to avoid less-than-truckload shipments. But otherwise, suppliers have a number of pressing priorities if they want to remain commercially viable. Saving the planet may have to take its place in the queue.
Human resources – the continual conundrum
Transferring a problem rather than solving it?
Although technology now plays a significant role in logistics efficiency, the critical importance of quality staff for the supplier should not be underestimated. From customer-facing sales, support and contract management staff to employees in depots, transport fleets, administration and planning, a supplier needs a range of competences that machines cannot supply. Many customers already know about the difficulties of hiring and retaining good logisticians. They even outsource their logistics operations for that reason. But the same problem also affects outsourcing logistics suppliers, even if they are in a position to ‘share out’ human resources to satisfy several logistics needs at once.
The structural difficulty in employing logistics workers
Compared to many other sectors, the average age of employees in the logistics sector is higher. Statistics show more workers will move to retirement sooner and fewer new employees entering the industry to take their place. As a percentage, logistics workforces are also weighted considerably towards men rather than women. 3PL must contend with a waning pool of talent and labour shortages, while labour costs continue to rise. As a result, career and succession planning also present challenges.
Moves to change the workforce profile
For the situation that has developed over time, it would be optimistic to expect an instant solution. By extending recruitment to include younger people and more women, and by building logistics and leadership skills through training of new hires, logistics providers will be able to reduce the size of the problem over the next few years. On the other hand, it may take significant innovation in operations and work practices to completely eliminate the scarcity.
Logistics outsourcers are often stretched between their own business needs, customer requirements and the constraints of their employment market. Whether they are manoeuvring with client organisations for tactical decisions or in full strategic partnerships with them, the difficulties of hiring enough of the right people are constantly present. Technology provides some assistance, although it cannot be substituted for a good quality workforce. Motivation to find the right solution is growing with the realisation of the range of services that 3PL can offer to customers and the opportunity to add value and increase profits.