Logistics Service Providers can improve their business

Roger OakdenGlobal Logistics, Procurement

Trucks at a distribution centre

What do shippers require of their 3PL suppliers?

A third party logistics (3PL) service provider is unlikely to be equally good at every part of their service offering. So what aspects of the service should 3PL businesses and their shipper clients aim for?

The events firm Eye for Transport has recently asked shippers and retailers in North America to rank five requirements they expect of their 3PLs. In order of preference, over 200 respondents identified:

  1. Speed and response to customer (the shipper) queries
  2. Reliability of the service provided
  3. Develop the business relationship and better understand the shipper’s business
  4. Value for money with the service level expected
  5. New ideas and solutions to address challenges the shipper is experiencing

In other regions and countries of the world the responses to this list may be different. But, it indicates that in North America (and possibly other developed countries), the main requirement of a 3PL is to ‘just do the required tasks’. If so, how should 3PLs structure their business?

Preferences 1 and 2 show that shippers acknowledge their 3PLs are an extension of the business. The visibility of a 3PL’s capabilities means that it can affect the satisfaction level of the shipper’s customers. The main requirement of the contract is therefore for 3PLs to be responsive and reliable – no surprises for the shipper!

Structure your 3PL business for success

To be responsive requires that a 3PL is accessible and helpful. This requires the business to address client requests at the operating level without having to ‘ask management’. Staff must have sufficient training to be effective in solving problems and overcoming emergencies.

Being reliable is concerned with the probability of achieving a perfect order. The measure is DIFOTA – delivery in full, on time, with accuracy of documentation. For many shippers, there is the added requirement of their 3PLs to provide sufficient security for inventory and shipments.

The metrics to measure DIFOTA must be established at both the shipper and 3PL. The metrics required to measure whether the business is responsive and reliable are not those of labour cost, but are focussed on delivery. Break down each element of DIFOTA: delivery in full; delivery on time; delivery with accuracy and identify the individual measures that identify compliance with the objective. These will be measures of planning effectiveness rather than optimal labour efficiency.

Of course, working to the performance measures of effectiveness required by clients does not mean that internal measures of efficiency should be ignored. Reducing costs through eliminating waste is required. For example, inventory control has activities of slow and obsolete (SLOB) stock, stock shortages, excess checking, defects and re-packing to be improved. But implementing Lean or other improvement techniques is an internal program, of minimal interest for clients.

The value of complying with the terms of the contract was illustrated to me when I provided consulting services for a business supplying to supermarket chains. The client reviewed their business and implemented an innovative inventory management process. Although a much improved service could have been provided to customers, my client continued to meet the clauses of the supply contracts. Why? because if they had informed the customers, price reductions would be demanded. Instead, my client retained the improved profit, which allowed them to grow the business using internal funds.

To be consistently responsive and reliable requires a 3PL to employ people who see themselves as a part of the long term success of the business. This is unlikely to be achieved by employing casual and short term contract staff. The reason put forward for such employment practices is flexibility to staff the business according to demand. However, a business cannot build a team of talented people through employing casual staff.

An approach that provides flexibility and attracts talented people is to employ staff on a full time annual hours agreement. This states that staff will work at least the annual hours (likely to be in excess of 1800 hours plus annual leave), but that hours worked may fluctuate within each week to meet demand. This can mean a person working 15 hours in one week and 60 hours the next, but receives the same salary each week. Overtime rates are paid only when the annual hours are exceeded.

With permanent and committed staff, investment in training can be made to ensure the 3PL business is responsive and reliable.  One 3PL that I am aware of takes the training to a level that provides staff members with a recognised national vocational qualification.

This investment provides the base building block to show clients that their 3PL cares. From this can develop a deeper business relationship (preference 3), which allows the 3PL to gain a better understanding of their client’s business; an example is being invited to client’s S&OP meetings.

It is good to read that value for money is number four on the shippers list. Value for money for any product or service is based on a person’s perception; but, if a 3PL shows they provide value through being responsive and reliable, then the fee charged becomes less critical in the eyes of the shipper.

Last on the list is providing new ideas and solutions to challenges. It is last for a good reason – 3PLs are contracted to provide a specified service for shippers. In the shipper’s view, achieving the required service levels is what the contract is about. The role of new ideas and solutions lies with the shipper’s professional logistics staff. Tasks they should be expected to perform are:

  • development of the supply chain and logistics strategy
  • improving the supply network, including modelling, simulation and optimisation studies
  • negotiating and contracting supply chain relationships

The challenge for a 3PL business

For the long term success of a 3PL business, getting price down the list of shipper priorities is critical. As the responses to the list of performance factors shows, providing a responsive and reliable service that can be flexible to client’s  variables in demand and supply will achieve the outcome. The perception of the shipper will be made more positive by the capability of a 3PL supplier in responding to major unknowns – mostly natural disasters.

The challenge for you, as either a 3PL or a shipper, is to identify the objectives of a provider supplying distribution services. The more difficult step is to then structure your 3PL business or shipper contract terms to reflect the objectives. And finally have metrics that reflect the objectives.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...