Strategically Integrating Third-Party Logistics into Your Operations
Shippers and third-party logistics (3PL) have been collaborating due to mutual profit motives. While this is economically effective, there’s a better way that offers a more seamless, connected, and integrated model, enhancing value for both parties while maintaining a customer-centric focus.
Authors: Bob Pitts and Mike Reiss, Managing Directors at Ernst & Young LLP Consulting
October 1, 2024
Lisa Caldwell, a former leader of EY’s Americas Advisory practice, mentioned in a recent article on the EY website titled “What Strategic Operations Mean to Businesses,” that supply chains should be “the hub driving integrated decision-making across business functions (from sales and marketing to product development, finance, procurement, and manufacturing).”
Essentially, Caldwell’s view is that supply chains are the binding force within a company; therefore, companies need to better establish these internal connections.
This aligns with reality where shippers must do more with limited resources, provide unique capabilities in an accelerated timeframe, while navigating the evolving global value chain. This necessitates rethinking current working methods, whether for internal teams or external partners.
Done well, it can combine all necessary logistics elements to create a new recipe for success centered on leveraging the true power of the shipper’s supply chain.
Though easier said than done, this “rethink” is crucial for meeting customers’ evolving needs with certainty, agility, and confidence while balancing cost growth equations to create value for both profit and revenue increases, always prioritizing speed.
Todays shippers need to reconsider and redesign their core logistics operating models to include the talent and capabilities that third-party logistics can bring. A recent report by the Supply Chain Management Association on the top ten supply chain trends highlighted a trend towards investing in systems and talent — reflecting that supply chain leaders are already considering this critical topic.
In the April 2024 issue of Logistics Management, an article titled “Digging Deeper into Third-Party Logistics” shared that shippers need to collaborate more deeply with third-party logistics by transforming transactional relationships into strategic partnerships focused on value, governance, performance, visibility, and co-innovation.
Furthermore, a blog post from Penske Transportation Solutions reflected the shift towards a more strategic shipper/third-party logistics relationship, noting that “shippers (62%) and third-party logistics providers (87%) both report shippers are increasing their use of outsourced logistics services, up from 54% and 81%, respectively, last year.”
However, the number of shippers reporting a reduction or consolidation in third-party logistics has increased from 71% to 78%. Among third-party logistics providers, 84% agree that shippers are reducing or consolidating third-party logistics, down 9% from last year.
Considering this shift towards integration — while still focusing on the key areas mentioned above — creates opportunities for building a more strategic framework where these critical areas can be combined to achieve collective value through coordinated application of all efforts.
Shippers and third-party logistics have been collaborating due to mutual profit motives: shippers need to get products to markets with demand, while third-party logistics provides expert intermediary services for this at a fee.
While this seems effective and drives the logistics economy for both shippers and their third-party logistics providers, there’s a better way that offers a more seamless, connected, and integrated model, enhancing value for both parties while maintaining a customer-centric focus.
A New Logistics Operating Model
This better approach is a redesigned logistics operating model (LOM) centered on the shipper/third-party logistics partnership, focusing on core business tasks to determine third-party logistics’ supportive role in logistics strategy and execution.
LOM serves as a market strategy framework for executing logistics functions that inherit and connect with overall business strategies. It ensures equal consideration of shared value propositions and customer commitments when making decisions about processes, transactions, and talent.
Areas Where 3PLs Are Commonly Used Across Transport Categories
The chart highlights scenarios where third-party logistics can be considered to achieve these capability needs.
All LOMs should pivot around the digital “one.” A common framework supporting customer commitments. A single source of information providing optimal service choices for all partners and participants in the ecosystem. A team comprising internal and external resources. An interconnected platform covering multiple technologies needed to drive logistics levels. Guiding principles that continuously adjust to meet customer needs.
Achieving this unity requires shippers to understand all capabilities required to build a top-tier logistics function and their maturity within business requirements — while being mindful of operational costs and the value of some speed.
The latter necessitates an honest assessment of current capability execution compared to industry best practices, to best understand the effort needed to move them to the right position on the maturity spectrum (not all capabilities need to be leading) to bridge gaps required for future state goals and outcomes.
A common example we encounter across various industry clients is when shippers refresh their LOMs by assessing their transportation capabilities and, based on maturity assessments, identify a need to improve overall procurement capabilities.
The initial capability design will focus on the various considerations needed to improve this area, such as: should talent be developed internally or partnered with third-party logistics? What technology is required, provided by internal IT or part of third-party logistics services? Where will actual work take place? Is it part of a broader center of excellence? And so forth.
This is somewhat like “choose your own adventure,” where each decision point opens new ones to fine-tune capability needs. While the above example may not seem too difficult, it requires very detailed and precise decisions to determine all the “right” answers for shippers to achieve planned results.
The aforementioned example highlights the depth and breadth of decisions required for just one capability within a complete LOM. It also reflects the subtleties in considering third-party logistics with a “one team” mindset, which is key to correct implementation.
This intertwined network of third-party logistics-shipper capabilities will produce a hybrid model combining internal and external resources, working together to create a unique shipper ecosystem that flexibly meets customer needs — at the “right” cost and required service levels.
From Design to Delivery
The LOM is essentially a strategic framework or matrix connecting all people, processes, and technologies with appropriate governance and policies supported by key analytics to provide the right data at the right time for executing business strategy.
As illustrated in the previous example, redesigning operating models involves addressing many issues — some of which are critical questions that every logistics organization must answer to understand how best to leverage third-party logistics, considering value speed, cost optimization, and strategic growth drivers. The following graphic lists some core questions.
It should be clear that there is no one-size-fits-all model; balancing centralization, regionalization, and localization is necessary to meet the entire demand spectrum.
Based on the examples above, we have seen maritime and air freight management services transition from business unit/dispersed activities to centralized and global leadership functions, while over-the-road (OTR) models remain anchored in regional or even sub-regional (national-level) models, particularly in EMEA and APAC regions. Similar considerations are needed when refreshing all capabilities of the LOM.
Operational Model Elements
Source: EY
Getting Started
Despite the complexity of redesigning an entire LOM in collaboration with partners, it should be approached from a value-first perspective, prioritizing areas that can most quickly impact the value proposition — whether for revenue growth or cost optimization — to potentially help fund the construction of the remaining parts of the LOM.
EY recently helped two clients unlock over $300 million in capital, which is being reinvested into shippers’ value chains to build future capabilities needed to maintain and grow their market share.
This happens quite frequently in logistics operations where “low-hanging fruit” can quickly reduce overall costs, releasing capital back into the business for strategic growth investments.
Actually, following this path when designing a new LOM is a leading practice to achieve cost optimization and strategic growth goals — introducing a new force of change called “transportation transformation,” which is needed to succeed in today’s market.
Source Website: Logistics Management
