Why one should use third-party logistics

Edited by the Manufacturingtalk editorial team Apr 21, 2008

One of the fastest growing trends is the outsourcing of logistics or third-party logistics, writes Gary Whittle, who says that third-party logistics is in the midst of a rapid and global expansion.

One of the fastest growing trends is the outsourcing of logistics or third-party logistics (3PL).

Without doubt, 3PL is in the midst of a rapid and global expansion.

A significant reason for such growth is that companies are moving from transaction strategies to relationship based alliances such as partnerships.

All types and sizes of companies from small firms to multi-nationals are becoming increasingly aware that they can gain a competitive and economic advantage by outsourcing their supply chain and logistics requirements to specialist companies that offer the resources and expertise to provide a faster, more efficient and cost effective service.

* 3PL frees up resources - companies now understand that they are not in the business of managing supply chains but in marketing and selling their products.

Using a 3PL to manage complex distribution requirements frees up resources to focus on core competencies rather than being tied down with day-to-day operational uncertainty.

In addition to saving time, a well run 3PL partnership reduces expensive distribution processes and the need for costly buffer inventories.

Despite the growing trend towards outsourcing, some companies still baulk at the prospect of contracting out such a critical aspect of their business, believing that relinquishing control to a logistics provider will result in complex arrangements with inadequate service levels and higher costs.

However, those companies now benefiting from using a reputable 3PL provider have stated that they can attribute their increased contribution directly to a solid logistics network.

The trend towards adopting a 3PL is even greater during periods of economic downturn as companies turn to it as a way of reducing their logistics costs.

* passing on costs savings - the notion that all 3PL organisations have complicated management structures and impersonal call centres has also been attributed as a reason why companies have sometimes been reluctant to contract out their logistics requirements.

Some organisations however, such as LinQ Alliance, operate a local management team and are able to pass on cost savings from reduced administration overheads as well as providing efficient decision making in an appropriate reaction time.

This approach also allows for synergies between multiple fleets and services to be identified, offering a single, integrated solution.

In the last ten years, the logistics industry has undergone a great many changes.

These have been especially significant in such areas as company size and makeup, services offered, geographical reach, and IT support.

3PL services have broadened dramatically in response to the users' desire for one-stop shopping.

Now a 3PL can provide a variety of distribution and logistics services including freight forwarding, home delivery and pallet distribution as well as providing a wide range of warehouse and value added services.

Service expansion has been accomplished in several ways.

A 3PL may initiate new services or develop operating alliances with other companies to enable it to provide customers with greater geographical cover, specialist warehousing or additional value added services.

By integrating competencies successfully, 3PL companies are producing a unique and holistic approach to supply chain management that provides their customers with many key benefits.

* Overseas markets - more and more organisations worldwide want to develop products for global markets.

At the same time they need to source material globally to be competitive.

Therefore, it is not surprising that one of the top challenges facing companies is how to handle a progressively more complex global supply chain.

As companies look to source and sell in new markets, their supply chains are extending overseas, most commonly China, but also into India and Eastern Europe.

In China alone the potential market for such services is 'mind-boggling' with reported increases estimated at 25%.

Looking to capture a slice of this market for UK importers and Chinese exporters, many 3PL companies have begun to increase the scope of their services to include IT applications (for ex freight billing), transportation planning and optimisation applications.

Companies that can provide a diverse range of services to include export shipping, documentation requirements, packaging and labelling considerations, warehousing and inland transit options, legal and governmental restrictions and compliance management, are now sought after for these specialist trade routes.

LinQ Alliance is one such Company.

* Using 3PL knowledge - some companies come to a 3PL provider with their geographic needs and service requirements pre-determined.

For instance, take the example of a company, which is thinking about opening a new facility in Manchester, UK.

Certainly the company will be able to find a 3PL who can provide the required services exactly as requested.

But, is it as good as it can be? As an alternative, what if the company approached a 3PL provider with a set of needs, opportunities, and business rules and let the 3PL come back with some alternative solutions? Perhaps there's an even better location or combination of locations that could work.

In addition a 3PL provider may suggest a different mix of activities to lay out within those locations, an alternative way to manage inventory levels and ownership, a different mix of carriers and modes and so on that would eventually yield a more flexible, responsive and efficient supply chain.

* Successful 3PL partnership - a successful partnership with a 3PL provider requires a combination of trust and collaboration.

Trust determines the level of flexibility you will allow the 3PL in running the operation to the best of their capability.

To achieve predetermined performance and cost goals, it is necessary to have a partner that can deliver best-in-class processes and solutions.

Therefore, acknowledge their abilities, agree on a mutually beneficial business arrangement, and trust that they will do what is in your best interest.

Any business that refuses to consider outsourcing is at risk of losing its' competitive advantage or the opportunity to create a new competitive differential.

However, before entering into a relationship with a 3PL provider, companies must map out what they are trying to accomplish and what is expected from a 3PL.

Some of these criteria include customer service, technology, inventory management practices, facility and staff size and what synergies exist with the provider's other clients.

Using this information will aid companies in finding a better match, enable the successful outsourcing of logistics and deliver the benefits which each outsourcer seeks.

* About the author - Gary Whittle is commercial manager with LinQ Alliance.