An Explosion of 3PL Services: How Are These Expanding to Meet Customer Needs?
A host of new services are turning 3PLs into company "partners" in the logistics process.
William Atkinson (Logistics Distribution Warehousing 2007)

For years, companies have arranged for warehouses, carriers, logistics service providers, and other "disinterested third parties" to handle services related to the storage and delivery of product to customers. In fact, logistics service providers became known as 3PLs (third-party logistics providers). These days, though, 3PLs are working so closely with their customers in terms of offering value-added services that they almost operate in partnership mode - as "second-party providers."

Gone are the days when companies simply asked their 3PLs to do the "pallet in-pallet out" drill. More and more, companies expect 3PLs to perform a host of sometimes complex, intricate, and even strategic tasks that were once performed by the companies themselves, with never a thought that such activities, being so critical to the company's success, could ever be outsourced. Interestingly, the arrangements are working out so well that not only are companies asking their 3PLs to handle more and more of these value-added tasks, but the 3PLs themselves are coming up with innovative value-added ideas that allow companies (their customers) to focus more on their core competencies.

The increasing popularity in value-added services from 3PLs seems to be growing as a result of synergy between customers and 3PLs. Customers are telling 3PLs that they don't want to handle certain tasks anymore, and the 3PLs are happy to take these responsibilities on because they make money on labor. Then, as they get more involved, they start to see additional opportunities, which, in turn, they suggest to their customers.

Popular Value-Added Services
These days, the core services being offered by 3PLs are a basic requirement, according to Carl Melville, vice president of marketing for Total Logistic Control, Holland, Mich., a 3PL provider. "You have to be able to offer certain basic things just to be considered by a customer," explains Melville. "The core services don't get you the business anymore."

He has found that 3PLs need to be able to offer "outside-the-box" services and expertise. One of these is a solid information technology system that will integrate with the customer's system and provide visibility and control to the customer. "In other words, customers want to know just as much about what is going on as the 3PL does," he explains.

Another area where 3PLs are attempting to differentiate themselves relates to integrated services. "The 3PLs can still offer more individual value-added services but, more importantly, they can integrate several services into a single offering," says Melville. For example, a 3PL may operate a distribution center for a customer in a certain region. In addition, it may also handle the customer's inbound and outbound transportation, handle its EDI (electronic data interchange) transactions, and integrate order flow with its production facility, with all of these services being offered as a total package to the customer.

Postponement is another value-added service that has experienced significant popularity and continues to remain strong. "One of the most useful value-added services is being able to provide postponed configuration or customization of the product near to or at the time of fulfillment," says Doug Christensen, managing director of Chapman Associates, Schaumburg, Ill. This can include packaging, mini-assembly, and testing. Postponement allows companies to lower their inventory levels because they don't have to finalize particular SKUs (stock keeping units).

Customers are also seeking technological innovations from 3PLs, according to Chuck Franzetta, CEO of Franzetta & Associates, Boalsburg, Pa., a supply chain and logistics consulting firm. "In large markets and mid-markets, the trend is toward a focus on more offerings related to technology and technology interface, such as supply-chain technologies that can improve efficiencies for the customer."

Who Initiates?
In some cases, 3PLs come up with new services and then market them to customers. In other cases, customers may approach 3PLs and ask them to begin offering specialized services. How it works depends on the companies involved.

"Large companies tend to work with a number of 3PLs, each of which has a specific type of expertise," says Franzetta. Sometimes 3PLs will promote their service to clients, he adds. For example, they may purchase a new type of technology, and then begin to market it to clients. "Interestingly, though, some 3PLs have technology available that they really aren't offering," he notes. In these cases, the implementation of this technology for clients is the result of client inquiries, asking in general what the 3PL might have available, or asking specifically if they can provide a certain service.

In still other cases, 3PLs attend customer executive meetings, where they sit down with people from operations, finance, sourcing, logistics, marketing, and sales and get involved with strategic planning. During these meetings, according to Franzetta, the customer and the 3PL begin to realize that a certain technology or service that the 3PL offers would be useful. "Some clients are simply looking for cost savings," he says. "Others are looking for ways to improve profitability, which come from cost savings, enhanced customer interface, and so on."

According to Christensen of Chapman Associates, the offering of new services in the past tended to be tactical in nature. "The 3PLs would create services based on hearing about customer needs because they were very customer-focused," he explains. These days, though, he has found, new services tend to be strategic in nature. "A lot of the large 3PLs that have been formed as a result of mergers and acquisitions create and offer services based on what they already know that the marketplace needs," he explains.

The Future Is Green
When asked what new value-added services seem to be gaining the most, virtually everyone responds with "green." Customers want 3PLs to be more focused on environmental issues, and forward-thinking 3PLs are complying, not only because they want to respond to customer demand, but because there are ways to increase the flow of "green" (money) by "going green." Finally, more companies in general are becoming environmentally conscious.

"The industry needs to look at the green and sustainability movement from two perspectives," explains Christensen. One is environmental. The other is economic. "There are a large number of companies that are completely missing the economic perspective," he emphasizes. "There is a lot of money to be saved, but they don't yet realize the opportunities." One example: There is a lot of value in being able to tear down and separate returned product components, then reuse or sell them rather than discard them.

Melville of Total Logistic Control strongly agrees: "A lot of customers are beginning to focus heavily on supply-chain sustainability-green initiatives," he points out. "This has been gaining a tremendous amount of momentum in just the last few months, and we expect it to continue."

The company has found that most large customers have sustainability initiatives internally, and they are being funneled to the distribution groups, which are passing them on to the vendors. In addition, according to Melville, many retailers are looking at sustainability. "This, of course, drives manufacturing, which then drives the whole supply chain," he continues. An example of this would be the adoption of slightly different materials or different work practices.

Glenn Mauney, senior vice president of GENCO, Pittsburgh, Pa., a 3PL provider, also sees the trend toward green. The company offers services in three areas: outbound logistics (contract warehousing), basic transportation services, and reverse logistics, which involves the processing of returned goods as well as asset recovery (reselling returned products and recapturing the value). It is in this third area that GENCO is seeing significantly increasing requests from customers and opportunities for growth related to environmental initiatives.

"Reverse logistics involves the recovery and disposition of items coming back through the channel," explains Mauney. One reason for the popularity of the service is that consumers are demanding that companies have solid returns policies in place. Another relates to Sarbanes-Oxley, i.e., there needs to be a focus on accounting for all inventory, including pockets of returned goods sitting idle in a warehouse somewhere. A third reason, though, which GENCO has seen take on more importance in the last year, relates to green initiatives.

One element of green relates to the disposition of products, especially electrical items (electronics and appliances). "While there has been an awareness of and a movement toward this in Europe for quite a while, it is now just gaining traction in the U.S.," says Mauney. "Some large companies such as Wal-Mart are focusing on this." Thus, while green opportunities cover initiatives related to distribution, packaging, and destruction of packaging material, the big growth area, as noted, relates to returned goods.

"In the future, the liquidation and disposition of goods will become more popular," continues Mauney. One option is to destroy product, which is expensive and requires landfill or other forms of destruction, e.g., shredders. A second option is to recover the value by selling a product on the secondary market. A third is to recoup the product, which includes recovery, cleaning it up, repacking, and putting it back into the channel, such as is becoming the case with electronic products and appliances via Internet auctions. More and more companies, according to Mauney, are seriously exploring these profitable alternatives.

Working Together
Of course, unless you find a way to work cooperatively with 3PLs, the number and types of services they offer will be meaningless. The key, according to the experts, is to trust enough to be open and honest.

"Some companies work with a consultant, and then at the last minute drop RFPs in the laps of 20 3PLs," notes Melville of Total Logistic Control. "There is nothing wrong with this, but it does give the customer a very one-sided, reactionary, tactical solution." However, if the customer goes to two or three providers early on and discusses issues, the customer will end up getting much more from the relationship. "We have found through experience that the earlier we can get involved with a prospect, the more value we can bring, and the better solution the customer gets," he explains.

New opportunities also come about as a result of these discussions. "We find that the best new services tend to be situational - unique to a customer's needs," says Melville. That is, customers often come to the company with a problem. Then, collaboratively, both organizations will come up with a solution. "We are aware of technologies, capabilities, and best practices that the customer is not familiar with," he explains. "We combine these with the unique attributes of the customer's network to create new value."

GENCO's Mauney agrees with the importance of close relationships and sharing of information. "Customers know their business processes and their [own] customers better than we do. They also have a vision. However, they should look to us to provide input on best practices and benchmarking," he explains. As such, GENCO likes to get as much information as it can from customers on what they want to accomplish. Then, it can come back with its experience to make best-practice suggestions. "When we combine their objectives with our strategies, we come up with the best solutions," Mauney says.

Franzetta is also a fan of cooperation. "When we have intervened in establishing dialogue between a 3PL and a customer, the results have been outstanding," he says. Unfortunately, though, without this kind of mediation, both sides tend to resist. "The 3PL seems to feel that the meeting will be time-consuming, while the customer tends to fear the invasion of proprietary information," he continues. "Yet, once they actually do get involved with each other, they both tend to expand the interface well beyond either of their initial considerations."

Christensen provides perspective: "The key to success is being candid in your dialogue and exchange of information," he suggests. This, of course, requires building trust. "Ultimately, the goal should be a cost-plus relationship, where you both work together to take cost out of the system," he concludes.

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