When dealing with the nuances of complex transportation networks, an organization often relies upon multiple transportation-focused 3PL providers, ultimately resulting in a fragmented network that lacks visibility and effective communication. Often this isn’t by design, but organically manifests itself due to different parts of the business being run by different groups. Furthermore, it can be seen frequently in companies that have grown through acquisition or consolidation. In these instances, one business unit used 3PL A and another used 3PL B. Operational status quo continued, and the company never got around to rationalizing its network.
On the other hand, sometimes a company wants to keep a few 3PLs engaged as leverage. That way they can constantly threaten 3PL A with taking away their business and giving it to 3PL B. This can be effective in keeping 3PL’s rates competitive with the market, but this is never considered a best practice or an ideal way to manage a 3PL network, and should ultimately be avoided. All 3PLs are going to the market to secure rates, unless a given 3PL provides direct capacity in the form of trucking assets. Instead of pitting 3PLs against one another to establish rates, a company is better served by evaluating things like procurement practices, carrier management and amount of spend under management at the 3PL level. Many times the difference in rates between 3PLs is really all about the margin anyway. If there is distrust with a 3PL, then companies shouldn’t be doing business with it to begin with.
To gain a better measure of rates, a company should regularly benchmark the rates it is receiving from the 3PL. If it is still unsure about the 3PL’s rates, the company can structure a cost-plus program with its 3PL to see what the 3PL is paying.
Operational Problems That Can Occur With Fragmentation
From an operational standpoint, a lack of visibility across the different networks and different systems can be problematic. Without that visibility, potential opportunities get overlooked, particularly in terms of matching inbound freight with outbound freight. Trucks could be going right by one another on the road that could have been utilized for backhauls within one’s own network.
While this practice is fairly complex, it becomes increasingly difficult when the lanes and data are locked up in different systems, leaving the shipper without access or opportunity to benefit all parties involved. Coordination is tougher as well. Getting multiple 3PLs to work together for the greater good is never easy. Co-opetition is a fun buzzword, but a very difficult strategy to convince partners to adopt and implement.
Options to Consider
When attempting to gain visibility of a fragmented network, consolidation of 3PLs can serve as a potential solution. Recently, our firm partnered with a company for a project that would help it consolidate its network. Ultimately, the company sought a reduction from three major 3PLs to a single 3PL. Even though there were some services that were better from certain 3PLs, there was also some redundant overhead by having three 3PLs working in the network. Many organizations have to evaluate the delicate balance between costs and service levels to determine where the best opportunities lie.
For organizations that want to maintain a balance of 3PLs, there are also some systems that can be implemented that lay across multiple 3PLs to give a shipper visibility across its entire network. These systems obviously take some time, talent, and treasure to implement. However, they are a way to keep numerous 3PLs engaged while giving the shipper the ability to see across the individual businesses that the 3PLs are managing. Shippers truly drive action when they commit resources and time to making use of that platform and engaging with the 3PLs.
Evaluate All Components and Parties Involved
A crucial step to creating greater visibility begins with identifying the organization’s criteria for determining whether consolidation versus overlay proves the best option. This starts with the evaluation of each 3PL to see if multiple 3PLs provide unique services or fit into multiple areas of the business that force the use of more than one 3PL. Furthermore, companies must determine the value they receive from each 3PL by defining the services provided and identifying which services are not easily transferable to another 3PL (i.e., dedicated, cross-docking, load planning, account management, etc.).
Another thing companies should consider is whether the 3PL has additional services not currently being used that align with future company goals. If so, how can the company utilize those services to achieve the desired solution? Furthermore, companies should identify if its business or any segment of its business is highly specialized and limits the number of 3PLs that could service the organization.
Finally, companies should evaluate the people, process and technology provided by each 3PL and how that aligns with its overall business both currently and in the future. Determine which 3PL’s culture best aligns with the company’s corporate culture. This will allow the possibility for a sustained partnership, and at the very least, efficient communication.
The benefits associated with consolidation could potentially result in lower costs, but organizations will definitely achieve higher transparency and better communication, which paves the way to better solutions as well. So, just getting visibility to what is happening will not magically allow a shipper company to unlock a ton of value, but it can help create a more efficient supply chain. One of the big benefits of using a single 3PL can be about rate savings, but the overall focus should be more about cost savings as related to efficiency. It can also be a catalyst that enables centralization of the transportation function.
There is no one solution that works for everyone. In some cases, consolidation of 3PL providers may prove the best strategy. In others, it may be an interconnected network of 3PLs. Relying upon an experienced team of professionals to evaluate an organization’s existing network is the first step. From there, they can help figure out what model works best, and if needed, which technology platform best supports the desired model. This remains a key component to implementing the visibility and communication a successful network needs to move towards optimization.
Rob Achtzehn is a Senior Manager in the Transportation Practice at Chainalytics. He has more than 20 years of experience across all areas of transportation and logistics, including sourcing, private fleets, TMS, warehousing operations, and business intelligence.