Sunday, April 30, 2017

If You Expect Your 3PL to Invest, You Have to Commit

I have been doing a lot of thinking lately on the state of the 3PL industry.  I have not worked in the industry for a number of years but I have been a consumer of it and I have stayed very close to those in the industry.  What always amazes me is the turnover in 3PLs.  They are used, bid out, then discarded at a moment's notice.  I also hear over and over again from customers of 3PLs that the 3PLs they use do not invest in technology and people as much as they should. This caused me to ask why?

This feedback has been around for ages on 3PLs and I always wondered why it has not been addressed.  In fact, I would say the industry has really run away from what was true 3PL work and the brokerage industry has co-opted the term 3PL for itself.  3PLs today are mostly just brokerage houses.

So, why all this talk of "partnerships" yet bidding still happens at a torrid pace to reduce costs. A consumer of 3PL services should ask themselves the following questions when looking for cost reduction:

  1. How will value truly be created?  Remember, taking money out of one pocket and putting it in another does not add value to the extended supply chain.  This activity will just merely reallocate the value which is already there.
  2. Is the value truly sustainable?  For example, building cost reduction from paying below market wages is simply not sustainable.  Something will give.  Yet, I hear consumers of services say things such as " I don't care how they do it, just do it".
  3. Are the governance structures supporting the relationship aligned with the overall goals of the program?  Too many times I hear the terms "partnership" and "vested relationships" yet when you look deeply at the contracts and the governance structure, it becomes clear the relationship does not support overall value creation.  
I am sure most reading this will say "not me..." but reality is that this covers 99% of the relationships which exist out in the industry.  How do we know?  Just look at portfolio turnover of the 3PL and look at duration of contracts.  Both suggest that what I am stating above is true.  

So, what can a consumer of 3PL services (warehousing, transportation brokerage etc.) do to ensure the 3PL you are working with is going to be a true value added partner?  Here are a few ideas:
  1. Make contracts long enough for the 3PL to recover investments.  We ask the 3PL to invest in huge amounts of capital (technology, buildings, automation) yet we write the contract for 3 years. Imagine how expensive this is if the 3PL has to recover this investment in 3 years!
  2. Build a payment structure that allows the 3PL to gain from applying innovation.  If the payments are fixed, why would the 3PL invest in innovation?  They need to benefit from this and there are payment structures which allow that to happen.
  3. Build a management governance structure which ensures the 3PL can survive.  For example, in fast growing wage environments, do you really want the 3PL to keep wages low and thus attract the not so best employees?  That is what they will be forced to do if you do not have a structure which allows for real business decisions such as raising wages and everyone sharing in that cost.  
The bottom line is apply all the same values and principles you have in running your company to the 3PL.  I think you will find the 3PL will invest, will apply innovation and will, in the long run, add huge value.  If you bid every few years you are not partnering and not adding value, you are just shifting money from pocket to pocket.