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

THIRD-PARTY LOGISTICS PROVIDERS/ LOGISTICS SERVICE PROVIDERS- A BRIGHT FUTURE

World Wide Shipping December/January 2001
By THOMAS CRAIG
President LTD Management
www.ltdmgmt.com

There is a bright future for third-party logistics providers (3PL) and Logistics Service Providers (LSP), for international and/or domestic logistics opportunities. The continuing growth of supply chain management, outsourcing and globalization plus the dynamic effect of e-commerce are driving and will drive growth.

We distinguish 3PL from LSP. A 3PL is a division of a company, often asset-based, that provides transport, warehousing, forwarding, information technology or other logistics or supply chain management related services. 3PL is seen by the parent organization as a way to develop more business for the parent focus. The 3PL also provides higher revenue and higher profit opportunities than the traditional business of the corporation, which is in a commodity-service arena where price is often the key differentiator versus competitors. 3PLs generally are developed to develop profitable business while using the services of the parent company. That can challenge their ability to develop logistics solutions for all possible customers. Not all customers need logistics programs that include the services of the parent company for all or a significant part of the activity.

An LSP is a stand-alone endeavor. With no parent company that provides a transport or other service, the LSP is free to develop and manage tailored supply chain programs for its customers without having to use the parent company as part of its service package. It can position itself to clients as their defacto in-house logistics department.

Growth for 3PLs and LSPs will come more in consumer related industries that practice supply chain management (SCM). Slower to develop will be industries that use more traditional traffic and other approaches to logistics. Non-consumer goods industries will still be outsourcing opportunities. Their needs and requirements will differ though.

Consumer goods businesses are also more likely to be involved in international with either sourcing and/or sales. The Asia-U.S. trade lane, the largest in the world, is a key outsourcing opportunity. Even more, the dual sword of SCM and globalization creates outsourcing opportunities for companies who do not view logistics as a core competency.

Supply chain management is driving customer practices, both directly and indirectly. Asia-US cargoes are very much consumer-goods-type products. And consumer goods companies are key players of SCM. The purpose of supply chain management is to drive inefficiencies out of the system. That means consumers have the products they want and when they want them. Inventories, as a buffer for uncertainties, should be reduced. Logistics cycle times would be reduced.

To drive out inefficiencies and reduce cycle times, an effective supply chain is built from the customer's door back through his suppliers. This is what SCM is about, and suppliers of companies that practice supply chain management know this. They have to find ways to be both cost and service responsive. Yet sourcing from Asia, with its ocean transport, is a problem link in the supply chain and creates its own issues. How can you be service responsive with a service that could take two weeks or a month or longer in transit? Shippers will continue to demand faster transits. 3PLs/LSPs may create the package to put together service and cost alternatives to meet a shipper's specific needs.

SCM presents a way for 3PLs, who may have an ocean carrier or forwarder as their parent, to break out of their commodity service provider market approach. LSPs can blossom to with being able to meld different carriers and different forwarders, with different services and prices into a flexible program that is responsive to a customer's needs. Being a supply chain partner to shippers will provide a way for 3PLs/LSPs to differentiate them in the marketplace.

In international, forwarders and carriers struggle with the concept of supply chain management, with building customer-specific, tailored logistics programs and with moving away as a traditional, commodity freight service provider. Plus, there are many forwarders chasing cargo. How do they distinguish themselves from competitors? They are too many forwarders in a very highly fractured industry. Consolidation is inevitable. With such market turmoil, 3PLs/LSPs can seize opportunities. LSPs/3PLs will become the customers for the steamship lines. This is creates a dynamic for everyone. And this same dynamic is and will continue to happen in domestic transportation and warehousing.

3PLs and LSPs will continue to grow and thrive. After all, it could be a multibillion-dollar global market opportunity. Corporations will look at outsourcing of their logistics as a way to gain competitive advantage, realize it is not a core competency, reduce costs or whatever drives their decision. A third-party will be the customer.

Carriers must look at the 3PL/LSP market and decide whether they can compete in it. It has many of the same requirements as the supply chain management market. If carriers choose to compete, how will they? Will they develop their own 3PL division with the ability to market it over the core shipping business? Will they view the 3PL as an extension of their business or a competitor? Will they be able to work with 3PL's to develop cooperatively the programs needed by the 3PL or 4PL? This does not mean quoting rates and negotiating volume contracts. It is a very focused business endeavor, but the size of it is huge and profitable.

Success means having a viable 3PL/LSP strategy as to market(s) and how to penetrate it. Inherently that means having the capability to look at each shipper and his individual requirements and developing a unique solution logistics program for that particular customer. If the program is not tailored to each customer, then the 3PL/LSP is not being a true 3PL/LSP. He is providing a generic commodity service.

3PLs and LSPs must define their strengths and weaknesses, from their internal view, customers and market view and competitors view. Perception can be stronger than reality. This is fundamental to knowing what they can and cannot do presently and what is demanded to change.

They must assess their reason for being or wanting to be a 3PL or LSP. If they want to move into other arenas, international or domestic, or other industries, they must understand what practices exist and why. This is important for assessing and defining market opportunities, from having a wish list and turning into business.

There are fundamentals to being a third-party. Whether a 3PL or LSP is established and growing or just beginning, they must understand how supply chain management and logistics differ from their traditional transportation, warehousing or forwarding. 3PLs must understand how they can and cannot drive business to their parent without compromising the customer's specific requirements; how they can tailor to meet a customer's needs and support their parent and how they cannot do this. They must understand a customer's real issues and behind-the-scenes issues. Effective 3PLs and LSPs need and have a shipper's perspective. Their staff can and does provide the shipper view.

We would be remiss if we did not mention E-commerce. E-commerce is THE "in" word in business. It's growth rate and future development is unfathomable. E-commerce is here for both B2B (business to business) and B2C (business to consumer). It redefines the traditional business model. 3PLs and LSPs must decide on how they will participate in the E-commerce. They have no option. They must have dynamic web sites, for booking, tracking, tracing, rates and much, much more. That is the minimum they must do. E-commerce logistics will be a driver in outsourcing because effectiveness lies outside the core competency of shippers. 3PLS/LSPs must also be able to integrate into their customer's system with management information, not with dumping data files into a customer's computer. Customers must have integrated information to manage their business effectively.

The Internet also opens up a new way to quickly handling information and managing business. Where EDI (electronic data interchange) never fulfilled its promise, the Internet will and has. XML and other tools are being developed for this. The web may be the tool and vehicle to really develop logistics effectiveness as it is meant to be. Any company who ignores the Internet should be in a unique business or be prepared for possible extinction.

In conclusion, the growth of 3PLs and LSPs will be significant. The market will evolve as competitors come and go. It will evolve as shippers define and redefine their needs. But they will grow.