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

3PL - How to Do It Successfully or What Investors May Consider

World Wide Shipping
September 2002
President LTD Management

Instead of looking at 3PLs in terms of what customers should consider in selecting a 3PL, let's look at what makes a successful 3PL. What would investors look at in judging a 3PL?

A 3PL is a company that provides more than one logistics service, such as transportation or forwarding and warehousing. Initial 3PL companies were companies who may have provided trucking and moved into providing additional services to maintain their existing customers.

The 3PL logistics services sector is attractive for logistics service providers who want to expand into it the market. That attraction is driven by the opportunities created by companies, potential customers, and how they do business.

Drivers for 3PL market growth. The size of the 3PL market is hard to definitively gauge. It varies depending on the source--$400 million dollars, $700 million dollars or more. Outsourcing to some degree has existed for years. Using for-hire trucking instead of private fleets, freight payment plans, freight forwarders and public warehouses are just four examples. The inclusion of non-U.S. based 3PLs makes this difficult. Four key opportunities drive the potential size of the 3PL market; and these are key drivers in most business. They are:

*Global sourcing and selling. Traditional sourcing with U.S. based suppliers has given way to sourcing based on best price to meet the product specifications. That opened up purchasing to international suppliers. This change, in turn, added complexity to the supply chain in dealing with suppliers who are thousands of miles away, not just a phone call away, and where delivery times for ocean freight can take weeks. Companies must deal with the impact of a global supply chain. 3PLs can be seen as ways to manage that international logistics need, especially for companies that are more comfortable with domestic than with international.

*Supply chain management. SCM has emphasis on speed to improve inventory velocity, turns and cycle time reductions. Firms can be reluctant to add staff, add overhead. Yet the logistics function must be executed and executed well for corporate success. 3PLs can provide the logistics resources and skills needed without adding salary, benefits and other costs associated with hiring direct employees. An external 3PL may overcome internal organizational inertia that impedes a company making its own logistics process improvements. An external firm may be better able to keep up with the speed of business changes or handle needed integration requirements.

*Bottom line pressure. Supply chain success--meeting increasing customer order and delivery requirements, increasing inventory turns, managing a complex international and domestic supply chain, and balancing the conflicting challenge of cost and service-are not options, especially if you compete in certain industries. They are required for profitability and survival. A 3PL can be viewed as the vehicle to bring down logistics costs, provide needed logistics information technology without requiring company systems investment and improve the logistics process more quickly than can be done internally.

*Outsourcing as part of the business model. Outsourcing is an acceptable way for a company to implement, develop and manage its business model and business practice. That makes company executives receptive to doing it as they search for ways to be competitive and profitable. And, as many companies realize, supply chain management success is very important to corporate success.

Drivers for being a 3PL. Why does a firm that has traditionally been an ocean carrier, NVO, freight forwarder, trucking company, warehouse or other logistics service want to become a 3PL?

Basically, the reasons often come down to mitigating parent company business issues. Providers of transportation and other logistics services are basically in a commodity service business. Price is the key way to gain and keep business. Difficulties raising prices puts pressure on the bottom line and on cost containment. Contracts with customers may be of short duration, say one year, or may basically be a contract in name only. That impacts the ability to forecast, if not guarantee, revenue streams for investment needs.

For those segments of the logistics services market that are capital intensive, large, ongoing investments are required. Capital-intensive firms can face the continuing cycle of having to offer low prices to gain the additional business needed to support the investment. This cycle, in turn can move the break-even point for profitability further out.

Some providers have limited potential for economies of scale to improve costs. Increases in volume do not have significant impact on costs. Or there are steps where additional investments are needed to affect expansions and growth. Or similarly, there may be limited scalability to their service. Other issues such as union pressures, maturity of the service sector and the industry(ies) they compete in, consolidation opportunities or lack of causes firms to look to alternative approaches to compete.

A key reason for being a 3PL is profits. Depending on the service sector and industry, the 3PL can generate 3 times, 5 times, or more the profits than does the core, parent service. Implementing a 3PL can open new revenue and profit vistas. The 3PL can be a double source of revenues, as a 3PL and by bringing business to the parent company.
Services are bundled; value-added does not mean giving away ancillary services for free. The 3PL service may not be as asset intensive. There may be scalability opportunities. Expanding the parent company services as a 3PL can also develop new customers by being able to offer more capabilities, since many customers want to deal with fewer suppliers.

The 3PL also likely utilizes contracts for perhaps five years duration or more. It opens up the potential to build customer relationships without the intrusion of annual RFPs. Investors like the longer-term contracts. If the 3PL performs well, then so is the likelihood of contract renewals. The relationship transcends the annual bid process. A good 3PL can become an integral part of his customers' operations and needs. Customers are less likely to remove the 3PL, for nominal price differences.

A successful 3PL understands the outsource relationship, becoming a partner with and an extension of the customer. This is fundamental to long-term relationship and success. Such a 3PL is not providing an isolated service but is truly a part of each customer. He has clearly defined and agreed with his customers as to the expectations each has. The 3PL becomes integrated into his customer so that separation becomes an expensive and painful prospect to the customer.

Market Opportunity Analysis. The Market Opportunity Analysis identifies and quantifies the 3PL opportunities. Some 3PLs stumble because of the initial study they did--the Market Opportunity Analysis they did, or perhaps did not do. The broad 3PL / outsourcing market should be segmented into the type of 3PL services, and where possible, into the industries to be targeted for customers. The MOA-

*Looks to the external or macro-environment that can impact the opportunity. For example, a firm that is going to provide an international 3PL service would look at business trends for the industry to be served, information technology needs, outsourcing, international sourcing, political stability of key countries, and other factors that can affect the growth of the 3PL market.

*Identifies the service-market structure. The structure enables the potential 3PL to understand the market and define the service segments against which the firm will compete. A prospective 3PL needs to also break down the market as to industries in which that he intends to compete.

*Evaluates the market opportunities. Profiles of customers and competitors within the market segments should be developed that recognize and quantify the size, market share, cost and product data, short-range changes in the market and long-range trends and expectations. Survey the competitive landscape and what competitors offer establishes the minimum base of service offerings. Competition should include both direct competitors and substitute or alternative service options that are presently or potentially available. This, coupled with a real understanding what customers want as compared to what competitors provide, sets the potential 3PLs competitive positioning.

Evaluation includes identifying ways to satisfy and exceed customer requirements and compare present core competencies and organization capabilities. The potential 3PL estimates the demand and price/value of the proposed service to customers. The vital task is evaluating the differential advantage versus competitors, including the ease that the proposed service can be adapted by competition. The firm can determine the financial and minimum requirements necessary to enter the market.

Next three steps. One, the company will consider how it should implement the 3PL. What is the best entry? Should it grow with present customers or should it seek alliances with other service providers to develop a combined 3PL service that integrates each other's respective capabilities or acquire a company to give it a foothold? Each option has advantages, disadvantages, branding, costs and capital investment.

Two, the parent company must fully commit to the 3PL business it is creating. This is an area where many 3PLs have difficulty. They get nominal promotion and support. The parent company management often is made of people who have spent years in the commodity service sector and may not fully understand the business. They can view the 3PL as a de facto commodity business, which is exactly the opposite of what a 3PL should be. They may look at the 3PL primarily as a way to generate business for the parent company, and not as a new, profitable business company. That approach force fits the 3PL to be something it is not designed to be.

For example, the parent has sales people call on accounts who may be potential clients. The sales people need to understand what the 3PL does, how the 3PL interacts with and helps them with customers and what questions they need to ask to identify potential 3PL opportunities. When this happens, the totally company gains business and insights into customers and their true requirements.

Three, the 3PL needs good management, with a vision of "where we are going and how do we get there". 3PL success means tailoring a unique logistics program to each customer. This is a significantly different approach that what that of the commodity service provider. This is where the Market Opportunity Analysis is turned into business success-or not. Management cannot replicate some or all of the parent company's commodity service capabilities as a 3PL.

The real test. What do investors think of it? This view of the 3PL business plan, and how well it is executed, is an easy litmus. A logistics service provider, especially a 3PL, is a different type of investment. The investment firm or bank will do a thorough financial evaluation. However the 3PL is not a traditional company as a manufacturer or wholesaler where there are buildings, equipment and inventory assets to value.

Investors have risk aversion. They want to know that there will be a return on their money. This can be difficult for them if they do not understand logistics services. And this can be especially troublesome for a 3PL that has interests in international logistics, or may even be an international company. The 3PL need to be able to clearly and simply explain their business, how it operates, grows, generates profits, and its growth potential.

The investor will look at the 3PL market opportunities. What is the maturity of the 3PL market? What types of industries are being serviced? He will review competition, both available and potential; how fractured the market is and potential market consolidation opportunities.

With all that, they will look very hard at Management. Do they see the skills, capabilities and team in place to do what the 3PL says it will do? Management is the present and the future of the business and of the investor's surety and with certainty getting the financial return they seek.

Conclusion. There is a strong future for 3PLs. To succeed, companies need to understand what is required, both as to customers, competition and management. There is more than adding "Logistics" to the company name.