If you haven’t noticed by now, I’m a big believer in the power of a network, particularly when it comes to software-as-a-service TMS solutions. The leading telecommunications companies also view their networks as competitive differentiators-e.g., “America’s Largest and Most Reliable Wireless Network” (Verizon Wireless) and “More Bars in More Places” (AT&T).
But in the logistics service provider (3PL) industry, some service providers have been reluctant to position and leverage their asset-based networks as a strength and differentiator. This has been particularly true for 3PLs that have both asset and non-asset-based operations. Many 3PLs put a “Chinese wall” between their asset and non-asset based operations in order to maintain the latter’s neutrality in designing the best solution for a client. While I understand the reasons for avoiding real or perceived conflicts of interest, I also think these firewalls have constrained the ability for 3PLs to innovate and achieve their maximum value potential.
There are exceptions, of course. UPS is arguably the best example of a logistics service provider that is not shy about positioning its assets, including its IT capabilities, as a unique differentiator. “What can Brown do for you?” is a more elegant way of saying “How can we leverage our trucks, planes, UPS stores, sorting facilities, warehouses, and IT infrastructure to bring you value?”
Wall Street generally favors non-asset-based logistics service providers for financial reasons. But in terms of providing unique value to customers, is owning assets and a logistics network a differentiator or a disadvantage for 3PLs? A lot has been said about the latter, especially by non-asset-based 3PLs, so I’m going to argue that assets and a network could serve as a differentiator, particularly when you consider the following two trends: (1) companies are finding that as trade flows shift, their distribution centers are in the wrong locations, and (2) shippers and consignees are seeking ways to lower their total landed costs.
I’ve written several times on how supply chain networks are becoming more fluid and dynamic. For example, back in December, I commented on how many companies are looking to move production and sourcing away from China (due to rising labor costs and supply quality issues) and reestablish operations in Mexico and Central America (see “Does NAFTA Need Fixing?“). Other companies are looking to shift some of their import volume from West coast ports to the East coast or the Gulf of Mexico for cost and lead time reasons. New product introductions and more frequent and targeted promotions are also creating the need for more flexible, scalable, and configurable distribution networks. Therefore, a service provider with a large network of well-positioned facilities and other assets across the country can leverage these assets as a configurable distribution platform for clients.
But wouldn’t non-asset-based 3PLs provide more flexibility because they are not constrained by a fixed network, and so they can assemble a logistics network “on demand” via partners? This is the strongest argument in favor of non-asset-based service providers, and it’s a valid one. But in my opinion, this value proposition is partially negated by the challenges the partnership approach creates in providing clients with end-to-end visibility, and this is where total landed costs come in.
Companies are very interested in understanding and managing their total landed costs, as evidenced by the popularity of our recent posting, “Is It Possible to Accurately Calculate Total Landed Costs?” Like enabling “end-to-end” visibility, tracking and managing total landed costs is arguably easier if the information is coming from a single source and IT platform, as opposed to integrating together a multitude of partners and disparate IT systems (and don’t forget those faxes and phone calls). The more pieces of the “end-to-end” logistics solution that a 3PL owns and manages, the easier their ability to provide customers with timely and accurate visibility to cost and performance metrics.
This assumes, of course, that the 3PL has a common IT platform across the company, or at least a well-integrated one; otherwise, it is in the same boat as non-asset-based providers. Unfortunately, many asset-based 3PLs fall short of this ideal. Simply put, for my argument to hold, asset-based 3PLs must view IT as a strategic weapon and they must invest in creating an integrated technology platform in order to achieve their maximum value potential.
This drive to provide clients with end-to-end solutions and visibility, via a single integrated platform, is already occurring in the logistics software industry (see “The Expanding Footprint of TMS“). What will it take for more logistics service providers to follow suit and embrace their assets and networks? In my opinion, I think performance-based outsourcing is the answer, where customers look to pay for outcomes (e.g., reduced lead times and lead time variability, fewer out-of-stocks, reduced total landed costs, timely and accurate visibility) and don’t really care how those outcomes are achieved, whether the 3PL uses its assets, somebody else’s assets, or a combination of both. However, as I’ve written before, PBO will be a difficult journey for many 3PLs and customers, so I don’t expect these Chinese Walls to come down anytime soon.
What do you think?
