27 August 2014

Viewpoint : Distribution 

Time for a new approach

01 December 2008
Article Type:
Charles Davis
The third party logistics industry is in a difficult place. Despite efforts to differentiate themselves with customers, they are still seen as commodity suppliers by many customers and margins are thin, typically around one per cent for a haulier. While there is a lot of talk about 3PLs being supply chain partners, the reality is often very different. They share minimal risks with their customers and simply provide services, in the worst cases, on a cost plus basis with no incentive to reduce costs. A new model that genuinely ties in with their customers and shares some of the risk is needed if they are to become partners.

When one looks at the services of 3PLs, the main areas are transport, warehousing and supply chain management. Transport and warehousing are increasingly commodities that are procured and managed through a leverage sourcing strategy. Supply chain management offers the potential to differentiate as it has a significant impact if done well and is much harder to specify and procure on price. The issue, however, is that while 3PLs will offer to do the planning, they will rarely offer to take on the risk, which begs the question as to why a company should give them a contract that locks them in. If 3PLs were willing to share risk, particularly around the inventory ownership, then it would be a powerful proposition that would transform them into partners. Even before the credit crunch, there was a lot of discussion but few were willing to do this.

There are, however, companies that increasingly look like, and compete, with 3PLs but are willing to take on the inventory - contract manufacturers. For example, if one looks at the high-tech industry the Electronic Manufacturing Suppliers, such as Flextronics, take the inventory ownership and increasingly offer logistics services. As these companies extend their services along the supply chain, they have the potential to become the logistics partners of the future with their different model. While there are many risks in this strategy, the potential rewards from success will be high.

For 3PLs to move away from being commodity suppliers and become true partners they will need a model that enables them to take the risk, and ideally, ownership of the inventory. This will have a number of challenges, particularly in the current environment:

- Access to funds - while some banks have been looking at this in recent years, in today's environment a new and innovative inventory ownership model will be more difficult.

- Inventory as collateral - while some inventory has a market value, some that is highly branded or specialist has limited value in a "fire" sale. Thus, using the inventory as collateral will be difficult.

- Risk sharing - there are many drivers of inventory and excellent supply chain processes are only part of the solution. Neither party can therefore accept all the risk.

In practice, offering new value added solutions such as inventory ownership needs to be accompanied by a redefinition of the relationship away from "them and us". Rather, a partnership mindset will be needed to drive towards these more advanced models where parties align on shared key performance indicators. These relationships are difficult to form due to the lack of trust and the desire by each party to ensure certainty. While most agreements recognise the need for both parties to meet their objectives, too often they overlook two fundamental alignment areas:

- Supply chain: the relationship should seek to improve the underlying performance of the supply chain so that there are benefits to share between the parties. Unfortunately, in too many circumstances, the desire to measure the performance of the other party leads to sub-optimised supply chains.

- Individual: the relationship should aim to meet the personal objectives of the individuals. Agreements should factor in sufficient revenue for all involved from the dedicated operations manager to the supplier so that the relationship is optimised.

It is true that there are solutions being developed in inventory financing and ownership but these are still very much in their infancy. In many situations it would be inappropriate for a 3PL to take on inventory as they do not control the main drivers, but without a change of focus 3PLs will find it difficult to change and reap the rewards of becoming real partners.

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