Where logistics is critical to strategy but logistics management competency is low, finding a firm with which to partner may provide significant benefits. A strong partner may provide facilities located in new and existing markets, a transportation capability and administrative expertise not available within the company.
Business firms have been using the services of other companies to support their own logistics activities. Transport companies provide trucking and rail services, public warehouses provide storage services, and specialty firms provide freight bill auditing and accounting services. After 1991, because of the opening up of the Indian economy and deregulation of transportation, many logistics companies that provide a full-service logistics capability have emerged. They can handle the entire logistics operation for a client company for a contract price. They are called third-party logistics providers. Some of the general benefits of outsourcing to 3PLs are:
- Reduced cost and lower capital requirements
- Access to technology and management skills
- Improved customer service
- Competitive advantage such as through increased market penetration
- Increased access to information for planning
- Reduced risk and uncertainty
Of these benefits, a potential reduction in transportation/distribution costs and freed up capital from non-core areas rank at the top, with reduced personnel also being a noted advantage. The primary risk to the firm is the loss of control over critical logistics activities, which may result in the potential advantages (cost effectiveness and efficiency) never being realized.
Logistics companies (3PLs) are selling services rather than forming partnerships that benefit from the synergism between the members of the alliance. However, because there can be information sharing and close working relationships, the relationship between a company and its outside logistics provider is frequently referred to as a partnership. 3PL logistics companies provide high- level solutions to logistics problems and excellent performance in the execution of logistics operations. A primary motivation for a company to outsource some or all of its logistics activities is that the third-party provider is more efficient because logistics is its primary business, while logistics is not the core competency of the buying firm.
Failures in 3PL relationships have sometimes been spectacular. They have resulted in lawsuits because of high expectations of benefits. For the outsourcer to reap benefits from a 3PL partnership, the following suggestions can lead to a company’s successful long-term relationship:
- Find out your baseline performance in logistics and keep it as the base to compare with the 3PL’s performance for evaluation
- Develop proper metrics for performance evaluation (relating to waste reduction and damage control)
- Invest the time to make sure that you and the 3PL are in strategic alignment
- Establish trust by sharing responsibilities by developing a dispute resolution mechanism
- Develop relationship management capabilities
- Measure the performance of the 3PL in terms of costs, but also attempt to measure the 3PL’s contribution to increased sales
- Treat the 3PL as a partner rather than as a vendor
- Ensure open and honest communication
- Share both risk and reward
- Develop a common contact person in both the organizations
- Recognize the 3PL’s team that is working on your behalf
- Work through the difficult situations rather than quickly changing providers
- Explore the frontiers for performance improvement as the relationship matures
A new dimension to organization has emerged with the evolution of IT. It is called a partnership or collaboration. There are firms that are experts in carrying out logistics activities. As the manufacturing firm does not have a core competency in logistics, it makes sense to outsource it to the logistics expert and create a partnership. The partnership achieves the organization’s objectives of lowering the logistics costs, reducing the inventories and improving customer service.
Partnering with members in the supply channel has seen success when retail point-of-sale information was shared with suppliers, who were better able to plan inventory levels at the retail level (vendor-managed inventory control or VMIC); and when requirement plans were shared with suppliers in the just-in-time (JIT) systems. Collaboration among channel members has the potential for improving supply chain performance by reducing the uncertainty associated with demand and lead times. The uncertainty in demand creates bullwhip, when each channel member forecasts demand based on information derived from the order patterns of an immediate downstream member. Sharing information about end customer demand is known to improve forecasting accuracy for all members and minimizes the bullwhip effect.
Although sharing information among partners reduces demand-estimating variability, decisions also need to be made about order quantities, shipment sizes, delivery methods and production or supplier response times. In a partnering environment, information about these issues will be shared and the outcomes negotiated. This needs a different organization design to ensure coordination, joint decision making and responsiveness from both the sides to service the end customer in a better way. The impediment to adoption of partnership is the lack of trust. Companies remain reluctant to share vital data with firms outside their control; and who may have business relationships with competitors. Formal agreements between partners may reduce distrust, but it is likely to remain a hurdle to overcome for some time. Yet, the potential for collaborative partnerships remains high.
Source: Sople V.V (2013), Logistics Management, Pearson Education India; Third edition.