The F Word That’s Becoming Important in the 3PL Selection Process

A few weeks ago on Talking Logistics, I discussed the keys to developing a successful 3pl-customer relationship with Sean Coakley, Senior Vice President at Kenco Logistics. At the beginning of the conversation, I asked Sean if cost savings and service improvements are still the main reasons why companies outsource their logistics operations to third party logistics providers (3PLs), and here’s a snippet of what he said:

It’s a more complicated answer these days. Certainly cost savings and looking for service improvements continue to be key benefits, but flexibility has become incredibly important in the selection process.

Flexibility can mean a lot of things for companies. You have some large companies, for example, that have traditional warehouse footprints in locations near their manufacturing plants that now recognize they need to be closer to their customer bases instead of closer to their manufacturing locations. So those companies are looking for flexibility in the market to get closer to their customers.

Flexibility can also mean companies want the ability to swap in and swap out providers, whether it’s transportation or warehousing, on a more frequent basis based upon available technologies, changes in their customer base, and so on.

So I would say flexibility has been added as a major decision factor, along with cost and service, within the last four years.

I provided another example of flexibility: Many companies are being pressured by their own customers to become more flexible and responsive, especially in supporting new processes or fulfillment models (e.g. omni-channel and e-commerce). But when they look at how much time, cost, and effort it will take them to put in place the necessary processes, technologies, assets and other resources in-house to meet those requirements, they often opt to work with a logistics service provider who may already have the capabilities in place and/or could ramp up faster and less expensively than they can. Sean sees this trend too, but added:

Sometimes that cloak of flexibility could really be hiding a strategy of risk transference, whether it’s transferring the risk of gaining access to the latest and greatest technologies and wanting to swap that out over time, or it’s transferring the risk of labor or assets that are on their books today and they now want to put it on the service provider’s books. So like I said, flexibility can mean a lot of different things, but it is the watchword in the industry today.

Speaking of risk, Sean and I also discussed the red flags that would prompt a service provider to walk away from an opportunity with a prospective client. One example is “an agreement that says you have to take on all liability risk for a particular operation and when you do the math [the risk is unreasonably high].” He added:

Here at Kenco our average customer relationship is over 17 years, so when we bid on a piece of business we look for a long-term investment and long-term relationship, but if one little hiccup in the operation could cause 20 years of profits to go out the window, then passing on that opportunity is an easy decision.

(For related commentary, see The 3PL Industry is Suffering from Gresham’s Law)

I also asked Sean about my prediction for this year, namely that the 3PL value proposition gets flipped — i.e., that instead of logistics services enabled by technology, it’s becoming outsourced IT and business intelligence powered by logistics. “In the long run I agree with that assessment,” Sean said, “but we still have a ways to go. The industry is certainly evolving into a technology-centered solution.” 

I encourage you to watch the rest of my conversation with Sean for additional insights and advice on this topic, then post a question or comment and share your perspective!