Peter Moore, Logistics Management
September 01, 2013
It’s been 15 years since I sold a successful third-party logistics business to a group of investors. And I would like to say that the strategy and market approach of the third-party logistics provider (3PL) industry has changed greatly in those years, but I can’t.
I hear the same three frustrations from industry colleagues who are running 3PLs. First, they say that they’re beat up on margins to the point where there’s little left for innovative investments. Second, they’re pigeonholed into narrow service areas—usually execution focused in spite of having capabilities to help in supply chain and logistics planning and analytical functions. Third, the relationship with a shipper’s staff function such as logistics or distribution inhibits contact with the customer executive team.
Worse yet, they say, is when the purchasing department steps in to block all interaction with key client executives in the name of “arms-length” relationships. Despite the billions spent with 3PLs, most shipper organizations consider logistics non-strategic and relegate it to outsourcing with an expectation that any and all dollars spent as an expense, not an investment.
The above described philosophy of shippers regarding the role of 3PLs leads to unintended consequences. More and more, 3PLs tend to price contracts with an eye toward keeping a “black box” of costs and margin hidden from the shipper customer. This creates mutual suspicion in regard to motives and offers little incentive to go above and beyond the letter of the contract.
Today, shippers need to change their behavior in order to alter the response of their 3PLs. To achieve this, shippers need to better align with their service providers to jointly address the dynamic business challenges of both sides of the contract.
Logistics managers need to first get clear direction from the business executives on the role and cost of logistics over a multi-year period. A recent candid conversation with a business executive lead to the conclusion that, given their market price pressures, they needed to beat inflation and save another 3 percent or more in logistics. Once this was out on the table, the 3PL was able to bring forth a comprehensive logistics strategy involving significant investments by them and new inventory strategies by the shipper to achieve the shipper’s goal. The executive understood that the 3PL needed to make a decent ROI on those investments and that both parties would work collaboratively to “hit the numbers.”
The 3PL got the necessary access to C-level executives and a higher margin. Meanwhile, the logistics manager was invited to more internal executive meetings so she could report and provide input on this new, evolving strategic partnership.
While there are many ways to get to a collaborative agreement, some fundamental principals will apply. First it must be open and transparent. Second, replace across-the-table negotiations (we vs. they) with joint contract language development within stated guardrails of term, minimum margin, and maximum budget (the collective “we”).
Third, be open to changing behaviors of both organizations. It should not just be about the 3PL adapting to poor business practices of their customers. Fourth, commit to ongoing governance driven by data and the free exchange of information on business strategies.
I fully support the old adage “pick your horse and ride it.” By this, I mean if you have a good partner, but a mediocre performing 3PL contract, don’t put it out to bid. Change the contract and strengthen the 3PL relationship so it yields what you need.
We need to change the 3PL game starting with the shipper. The 3PLs I know are all just waiting for a chance to show customers what they can do to reduce costs and improve service while making some money for their investors as well.