LTD Management
Logistics & Supply Chain Management Consulting Global Solutions That Work

3PL-The Key Issue

Eye For Transport August 2003
By THOMAS CRAIG
President LTD Management
www.ltdmgmt.com

Logistics service providers expand into the 3PL sector for business reasons-to grow revenues and especially to grow profits. Being a logistics service provider, whether a freight forwarder, warehouse, carrier or other type of provider means an ongoing effort to maintain and gain customers in a very competitive environment. These firms understand price pressures; they understand deflation. They are basically providing a commodity service where price is the initial and a key delineator versus the competition. That is a difficult business environment with constant price pressures.

The 3PL arena provides an option to this situation. Good 3PLs may have five times better profit margin with their 3PL business as compared with the core service. Becoming a 3PL and succeeding as a 3PL however involve one key issue-defining your service.

Defining the Service. Sometimes a company is led into beginning a 3PL operation by its customers. They may ask for additional services. So to keep them happy, the firm begins providing these capabilities. And from that, a 3PL provider is begun. For other logistics service providers, starting a 3PL is a management decision. They recognize also that outsourcing, along with supply chain management and globalization, are three dynamic factors for many of businesses, regardless of industry. Against this background, logistics service providers have to define what niche, what service or services, they will provide as a 3PL. The core service of the parent is the starting point. Determining where to go next as a 3PL is the question.

One approach to assessing potential services is to perform a strategic assessment called SWOT (sometimes also referred to as TOWS)-Strengths, Weaknesses, Opportunities and Threats. This analytical approach looks at the company's internal company capabilities and resources, or Strengths and Weaknesses. The methodology also studies external market and competitive situations, or Opportunities and Weaknesses. The purpose is to formulate and select the service that aligns internal capabilities with the external environment. One cautionary note to any methodology or decision is to avoid the "value-added" trap that is part of many commodity services and to avoid that with the 3PL business. "Value-added" is often a phrase for giving away parts of your service to customers for free.

With the Strengths and Weaknesses, consider such points as:
*Management. Good management, with vision, is vital to transitioning from a commodity service to a more tailored 3PL approach. Is it a strongly centralized management? Expanding into other geographic areas may mean decentralization of authority. Identifying management capabilities as a strength or weakness is fundamental.

*People. Good people are needed to operate, market and sell the service. They need to be able to do that while focusing on and not losing sight of each customer's logistics requirements. Understand what capabilities you have and how good they are.

*Technology. Information technology is necessary for an agile, lean operation which is also integrated and streamlined. Recognizing this and keeping abreast of technology is needed.

*Process. Look at your service. Is it process based or transaction driven? A 3PL is often process driven with the strong tie to meeting specific needs of each customer's supply chain. That is different from transaction based services which are more repetitive and standard in nature.

*Market presence. For the logistics service you provide, look at yourself. Ask hard questions. What distinguishes you in the market? Are you a quality service provider? Are you considered leading-edge? Are you customer focused? Are you a low-cost, low-price operation? Know yourself.

Do you have strong market name identification? That can draw prospective customers to you if you have name recognition with your core logistics service business. If not, then you must address it in marketing and sales development. Your market image can be an excellent sales tool. Determine if there are other, serious shortcomings, such as a too bureaucratic, slow-to-respond organizational culture? Then moving into a rapidly changing service niche may be very difficult to attain success.

*Costs. Analyze your cost structure as to assets and overhead. Services that require significant investment need a different customer size and volume focus than those with more variable costs which can be more agile. Similarly look at other key costs. Knowing your costs will help with analyzing start-up costs, investment and ongoing needs.

*Present position in supply chains. Supply chains are usually directed and controlled by the buyer of a product. They set the supply chain program. Sellers must be able to take each customer's supply chain demands and translate and execute them to maintain the customer's business. Position in the supply chain requires different strategies and tactical abilities.

With Opportunities and Threats, assess the landscape for:
*Domestic or international. There can be a significant difference in how and what is required to be a 3PL in domestic versus international logistics with people, technology, communication, speed of responsiveness, supply chain security, service, agility and other key factors. Each has different issues with regards to business concerns such as size of potential market, saturation of service providers and maturity of market.

*Geographic scope. This takes the domestic or international to a different perspective. Are you looking within the U.S., North America, intra-Europe, Asia-U.S.; Asia-Europe, intra-Asia or other trades? Each has a different situation as to existing competition, with the number of, quality of and size of competitors. Each has differing emphasis with cost and service.

*Industry. This is the shotgun or rifle question. Going across multiple industries with supply chain solutions can require different capabilities than targeting and specializing in selected industries, such as pharmaceutical, automotive, chemical or retail. The market size of an industry is important as to the potential number of customers, supply chain complexity and additional concerns, such as regulatory controls, that need to be recognized and delineated.

*Competition. Look at the competition as to how many there and the size required to be a 3PL with office networks and infrastructure investment. Determine the maturity and agility of competitors. Competition can be a barrier to entry or it can be an open invitation with weak competitors who are not really satisfying customers. The analysis of competition can also provide initial indication whether you may have to buy competitors as a means of gaining credible access to that business sector.

*Other. Look at trade issues and barriers. Consider political and economical stability. Look behind the numbers and statistics.

Conclusion. The first and key decision to being a successful 3PL is determining what niche you want to serve. The number of 3PL alternatives is significant. Think of it as a three-dimensional matrix for service, industry and geographic scope. SWOT is a tool to assess your own capabilities and resources and to view where you will position yourself as a 3PL firm.