3PLS - AN UNDERLYING ISSUE
Third-party logistics providers, or 3PLs, face a basic question that can be phrased in different ways. Why you? What differentiates you from competition? Is there more than just price? Do you have a value proposition that distinguishes you from other 3PLs and that creates a strong position with customers? This question arises with discussions on growth, profitability, or customer retention. It also occurs when a 3PL considers becoming a 4PL.
3PLs have evolved from the core services of the parent companies who were logistics service companies by providing expanded services to customers. Freight forwarders placed people in customers' offices to handle export bookings. Warehouses provided light manufacturing. This special service capability gained visibility and took on a different life. Those who were doing this were unique and had a value proposition for customers.
The 3PL became a way for commodity service providers to grow sales, increase profit margins and expand market reach. At some point though, the potential was lost or not realized. Either way, the impact was the same. With customer RFPs and other actions, the 3PL became another logistics commodity service provider. The shortcoming with being a commodity service is that price is a key delineator among competitors. Pricing as the central determinate for customers can erode margins going forward with new customers and retaining existing ones. The push by customers for lower prices, whether realistic or not, can increase customer turnover. For 3PLs and their parents who have high fixed costs, the profit squeeze can compound the overall situation and push the break-even point further out. And the cycle continues with prices, margins and break-even.
The challenge for 3PLs is to regain the value proposition issue. Move business from being more than a price topic. Define a service that is customer centric, solves a customer problem, creates customer retention, has high switch pain and cost for customers, and is sustainable.
Logistics service providers are often on the outside of the customer. They have their duties and tasks. But they are reactive to what the customers say. This places them at a disadvantage to customer penetration which, in turn, constrains account longevity and growth.
A value proposition changes the playing field, among competitors and with customers. The value proposition states what you do for customers, your contribution to making them operate better. It is not a tag line or slogan; it does not define the work you do. Instead it is a strong differentiator versus competition. It is a unique service that you do for customers and that has strong worth to customers.
3PLs, whether struggling for market share and growth, higher margins, moving the companies forward or to transition into being a 4PL, need to assess the business-both as to where they are and where they want to be with a value proposition. The analysis should include:
- Long term sustainability for the desired value proposition. Does it create an advantage? Is that advantage sustainable? Is it unique or very specialized?
- Well positioned company. Is the company presently in the right markets? Where is it positioned in those markets? Where it started may not be where it should be now. How does it enter a new market? How does the company position itself where it should be?
- Market size. How large is the market being targeted? Larger markets can offer more opportunity and less risk.
- Multiple markets. Does the value proposition apply to one market or does it work in several markets? That is important.
- Competition. Who is the competition when you offer the value proposition? If there are multiple markets, are there different competitors for each market? Even if none exists at the time of launching it, others will copy and enter to compete. Who will those firms be and how will they compete? What does competition do to your growth plans?
- Defined and positioned value proposition. This is more than a wish list. Is it a proven business model? Does it have more than one part to it? How complete is it? This impacts growth, penetration, retention and potential competition. Note, there often is not one value proposition; customers differ. There are customer adapted variations of the proposition.
- Change in strategic direction. Is it necessary? Do not take it lightly. Buy-in throughout the company is important.
- Sales and marketing strategies? Does the company have them? Are they consistent to where the company where it wants to be? A "go to market" plan is necessary.
- Strategic alliances. Do you need it? Access to markets, channel support, technology and other capabilities can add to the value proposition.
- Funding. Does the development and operation of the value proposition require funding? If so, determine the funding strategy.
- Change management. Will the value proposition require change management in the present operation? If it will, then clearly address this in the planning and implementation.
There are the details that go with this. The value proposition is not about fitting the proposition to the 3PL's business; it is about the 3PL fitting the proposition. Generally, the 3PL should not replow old ground or market. There is the topic of management experience required with the value proposition and new market. Being able to handle not only more leads, but better leads, is a nice problem to deal with. A successful value proposition presents branding opportunities.
It is not that 3PLs do a bad job; but without the customer perspective that value proposition requires, it lacks impact and context that can drive growth and profitability. The value proposition will not apply to much of the 3PL's present entire business, account base and market. It will be used as a venture. The 3PL must be able to deliver on the value proposition.
Those customers who do outsourcing should also consider more than price and look for the value proposition. Turnover of 3PLs by customers reflects on them, not just on the 3PLs.
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