Parcel Shipping & Distribution sat down with Brett Harper, vice president of Contract Business Development for APL Logistics, to learn more about third-party logistics and what they have to offer companies who are looking to outsource. Here�s what he had to say:
PSD: I hear that the use of third-party logistics providers (3PL) is on the rise. Can you provide some specifics?
Harper: Dick Armstrong of Armstrong & Associates estimates that 88% of Fortune 100 firms currently use 3PLs. And according to a 2002 study conducted by Georgia Tech and Cap Gemini Ernst & Young, nearly two-thirds of all logistics expenditures in North America will be allocated to outsourcing by 2007 � a huge jump from the 43% reported in 2002. The percentages are even bigger in Europe.
PSD: Do these statistics apply to outsourced warehousing, transportation or both?
Harper: Armstrong estimates that just 550 million to 600 million square feet of warehousing space in the United States � about 10% of the total capacity � is contract or public warehousing space. As a result, you can reasonably conclude that while US companies do indeed outsource warehousing functions, they predominantly rely on 3PLs to provide a large number of other supply chain management and transportation-related services.
PSD: Why do companies typically use 3PLs? And why has the use of logistics outsourcing increased so much?
Harper: There are many reasons that companies choose to outsource logistics, including better economies of scale, improved flexibility, easy access to quality infrastructure, enhanced capabilities and increased expertise based on 3PLs� experience serving other clients.
However, there is no doubt that economic pressures placed on companies in the late �90s and early �00s have been among the biggest contributors to the recent growth of outsourced logistics.
As companies have been compelled to streamline operations and focus more on their core competencies � and to be more conservative about adding capital-intensive logistics operations � 3PLs have been the beneficiaries of more business.
As companies have sought lower-cost manufacturing alternatives in countries like China, it has made the prospect of working with 3PLs with presence in these places � and with experience in getting goods manufactured there to end users across the world � increasingly attractive.
PSD: What are some of the most popular 3PL services?
Harper: According to studies by Northeastern University and Accenture, freight payment and shipment consolidation are considered the most popular 3PL services. Other frequently used 3PL services include customs brokerage, warehouse management and transportation/distribution.
PSD: If our company chooses to outsource logistics, do we have to outsource all of it?
Harper: No. Some companies use 3PLs to provide a single service in one market, while their in-house operations supply the rest. Others rely on 3PLs to provide the bulk of their supply chain services. It really comes down to what�s best for your company.
That said, the more services and strategies your company uses a 3PL for, the more likely it is to benefit from the relationship, because that�s when it will yield the most value.
PSD: Does our company have to work with a single 3PL?
Harper: Of course not. Some companies find it helpful to have a 3PL that serves as an integrator (also known as a fourth-party logistics provider). And some rely heavily on a handful of 3PLs. However, other companies prefer to use numerous 3PLs to perform a wide variety of services.
PSD: Are there any advantages to working with a small number of 3PLs versus working with multiple 3PLs?
Harper: As a rule, you�ll get more out of a 3PL relationship if you approach it as a partnership rather than a vendor-client arrangement. And a partnership is generally easier to attain if you�re not working with a huge number of 3PLs. Additionally, in today�s security-conscious world, it�s generally easier to maintain inventory integrity the fewer times products change hands, a practice that points toward limiting the number of 3PLs you use.
PSD: Talk to me about 3PL contracts. What kinds are there, and which one is best for my company?
Harper: 3PL contracts are typically structured in one of four ways.
� The first pricing structure is traditional unit pricing, which is also known as transactional pricing. Clients agree to pay 3PLs a flat fee per unit of work, whether that unit is defined as a mile-driven, pallet loaded or package delivered.
� The second pricing structure is activity-based costing. Clients agree to pay 3PLs a flat fee to cover the fixed costs related to the handling of their accounts, which might include things such as leases, equipment and management. They also agree to pay a second fee that covers the variable costs associated with handling their accounts, which might include labor, fuel and equipment maintenance.
� Contract scenario number three � cost plus pricing � consists of a fee for cost of services plus a mutually agreed upon mark-up.
� The final form of 3PL contract is one that can actually be combined with the other three. Known as gainsharing, it provides 3PLs with increased compensation for services if they can make significant improvements in the key areas clients choose. (These areas can include everything from prompt delivery to improved customer satisfaction).
Only your company can discern which of the models is the most appropriate.
PSD: What is the typical length of a 3PL contract?
Harper: According to a study conducted by the Association for Logistics Outsourcing, typical contract lengths last from three to five years. However there are some 3PL contracts as short as � 30 days. In fact, one of APL Logistics� longest-standing clients spent years working with the company on 30-day contracts.
If your outsourced logistics needs include a build-to-suit or customized facility, you can reasonably conclude the term of your 3PL contract will probably be longer.
PSD: What are most companies choosing 3PLs based upon?
Harper: In 2003, 3PL customers rated price as in the number one selection factor, according to The Association for Logistics Outsourcing. Reliability, service quality and on-time performance also ranked high.
PSD: One of the reasons many companies hesitate trying outsourcing is concern over lack of control.
Harper: The facts speak for themselves on this issue. Between inventory visibility systems, e-mail, voice mail and more, it�s highly possible to have a sense of exactly where your outsourced logistics inventory is 24/7. Plus, most 3PLs are more than willing to communicate with you as often as you like. And should you desire even more control than this, consider hiring a 3PL close to your own operations. Or have one of your employees work at your 3PL�s facility. Such arrangements are quite common.
Rest assured that we always understand who the boss is � you � and we would never do anything to jeopardize that relationship by keeping you in the dark. If anything, we�re probably even more determined than your own facilities to keep you in the loop.
PSD: Any other words of wisdom to impart?
Harper: Most companies are wise enough to invest considerable time and money in finding and negotiating with the right 3PL provider. However, too often the buck stops there, with very little emphasis on doing what it takes to forge a healthy, productive and long-term relationship with that provider.
Never forget that a successful 3PL relationship isn�t just about the 3PL. It�s also about your company and how it engages with the 3PL.
Be forthcoming with your 3PL about the realities of your logistics. Don�t hesitate to expand the knowledge and talents of your 3PL personnel by exposing them to the same training and conferences you use for your in-house personnel. Make sure you always clearly and accurately represent the expectations you have for that 3PL. And above all, don�t abuse your authority. The result isn�t just a stronger relationship, it�s a stronger supply chain.
Brett Harper is vice president of Contract Business Development for APL Logistics a leading provider of third-party logistics services. For more information on 3PLs, Brett can be reached by email at Brett_harper@apllogistics.com.
