Navigating the world

British chemist John Walker became an inventor by accident. He was mixing up chemicals for percussion caps – a component of ammunition – when some drops of the mixture accidentally fell onto his workshop floor. Walker’s shoes rubbed on the mixture, and it caught fire. Intrigued, he experimented by treating cardboard sticks with the chemical mixture and rubbing them against a strip of sandpaper. The result was the world’s first friction match. Known at the time as a Lucifer, Walker’s invention demonstrated what could happen when a little friction is applied.
For operators and managers of supply chains, a little friction isn’t a good thing. Modern supply chains depend on the harmonious flow of goods, information and funds. Whatever impedes this flow – factors like port congestion, customs delays, loss of visibility – creates friction. Such friction can lead to higher costs, more inventory, longer lead times and dissatisfied customers.
Global and Just-in-time
Two business mega-trends, globalisation and just-in-time fulfilment, have further complicated the management of free-flowing supply chains. Although some resist it, globalisation is accelerating. Some $8.9 trillion in merchandise was traded around the world in 2004. That’s well over double the $3.5 trillion in merchandise trade in 1990. Today, global trade accounts for approximately one quarter of the US’s gross domestic product (GDP), up from 13 percent in 1970. Supply chains are stretching farther across borders as more companies source and market globally.
Just-in-time (JIT) fulfilment is being adopted with equal fervour. For years, manufacturers found that carrying a large inventory of parts and components was inefficient – and devoured cash, space and resources. In recent years, this lean inventory philosophy has spread from manufacturers at one end of the supply chain to customers like retailers and service companies at the other end. As downstream customers take charge of their supply chains, the need to deliver the right products to the right customers at the right time – just in time – has greatly intensified.
JIT-driven enhancements in supply chain processes have yielded some astonishing business results. For instance, in the ten years between 1992 and 2002, American companies reduced their collective inventories by $4.6 trillion. Order-to-cash cycle times improved by 10 percent.
Globalisation and JIT fulfilment is transforming global logistics. Shipments are getting smaller and more frequent, meaning that delivery services need to be more time-sensitive and time-definite. Shipments are also travelling greater distances and crossing more borders, so planning is more involved, lead times longer and customs compliance more complex. What’s more, there are also more supply-chain parties to manage as well as more handoffs to finesse in international cross-border transactions.
Even transport modal choice is becoming more complex. Shipping decisions are now made on the basis of time and cost rather than on transportation mode. Air, truck, ship or rail: it doesn’t really matter to the customer, as long as shipments get there quickly, affordably and predictably. In fact, a study by the Colography group reveals that 40 percent of US businesses are active shippers in three or more modes of expedited transport. Intermodal logistics adds yet another layer of complexity to an already challenging logistics environment – another layer of friction.
Outsourcing catches fire
Any wonder, then, that all these sources of friction in the supply chain have helped ignite demand for third-party logistics (3PL) outsourcing? Clearly, more and more firms are turning to outside experts to help manage the complexities of their global JIT supply chains. In fact, firms around the world are spending an estimated $270 billion each year on 3PL outsourcing.
And the category is expected to expand by an average of 6.9 percent annually through to 2009. A recent industry survey of 381 American shippers by eyefortransport revealed that 69 percent currently outsource their logistics operations to 3PLs.
Which functions are companies outsourcing, according to the survey? Most popular are the conventional services: 46 percent outsource transportation, and 34 percent warehousing. But companies are also starting to outsource more value-added and customer-facing services like reverse logistics (18 percent), customer support (11 percent) and information systems (10 percent).
In other words, 3PLs can be found from one end of the supply chain to the other, supporting a range of tactical and strategic functions for their clients.
Still, choosing a suitable 3PL partner or group of partners is a mission not to be taken lightly. After all, how well your 3PL partners perform will have a direct impact on your firm’s financial results – not to mention your customers’ level of satisfaction.
The decision also has long-term implications. Once you have chosen your partners and integrated them into your supply chain, it can take months and even years to disentangle if things go awry. Admittedly, the evaluation process isn’t easy – there is a bewildering array of logistics providers to consider. Although the 3PL market has seen considerable consolidation in recent years, the market is still relatively fractured, with a handful of global providers and thousands of "specialised" players.
Even among the largest integrated providers, no single company has a dominant global market share or heavy presence in every part of the world.
Whether you choose a single integrated 3PL provider to manage your global supply chain or opt to stitch together a number of specialised players, finding the right match for your company and your overall business strategy is probably the most important logistics decision you’ll make. Following is a checklist of factors to consider when you’re choosing your 3PL partners:
3PL checklist
• Scope of strategic services. Supply chains are no longer just tactical considerations to be managed by the shipping department. Supply-chain management is taking ever-increasing high profile in the executive boardroom, as firms begin to use their supply chains not only to cut costs but also to support company strategy.
In fact, smart companies use efficient, synchronized supply chains to minimise costs, enhance cash flow and financial performance, expand into new markets, differentiate their products and improve customer service.
To support these strategic business objectives, your 3PL partner should offer a range of services – or at least partner with other logistics specialists who do. Your provider should be able to move up the value chain from conventional services like transportation and warehousing to sophisticated services like service parts logistics, reverse logistics, IT services, supplier management and supply-chain design. With the ability to address the entire breadth of the supply chain, the 3PL provider can make strategic logistics decisions that won’t benefit one part of the supply chain only to harm another.
• Intermodal flexibility. Increasingly, firms don’t care how their shipments get there – just as long as it is quick, predictable and affordable. What’s more, different product lines within a single company might demand different modes of transport, depending on their weight, value, product type, seasonality or vulnerability to obsolescence. Your 3PL provider should provide access to a range of transportation modes – rail, truck, ship or plane – to offer the optimum balance of speed and cost. This doesn’t mean a single 3PL partner has to operate its own multi-modal transportation networks – just as long as it has solid partnerships with other transportation companies.
• Global assets and reach. In a recent survey of North American 3PL providers, respondents say that increased pressure to internationalise company service offerings is the most important dynamic in the marketplace. Your 3PL partner should own or have access to an extensive global network with a presence in Europe and Asia. Transportation networks, warehouses, customs brokerage, forward stocking locations and information systems for product tracking, inventory management and low-cost routing: these are the kind of assets you need to source and sell globally. Also, check to see if your 3PL has sufficient capital to reinvest in continued growth and to compete in an increasingly competitive global logistics marketplace.
• Vertical expertise. There’s no such thing as a universal supply-chain design. Different industries have different demand patterns, different delivery requirements and time frames and different product types. Your 3PL should demonstrate deeper expertise and knowledge of your particular industry sector – and have capabilities in place to serve these specific needs.
• Supply-chain Visibility. The ability to see where an order is at any given point in the supply chain – where it originated and where it’s heading, down to the product stock-keeping unit (SKU) level – is the key to efficient, effective supply chains. Without end-to-end visibility, there’s no control. As supply chains cross more borders, incorporate more modes of travel and involve more parties, maintaining visibility through all the handoffs is a greater challenge. Compliance with increasingly stringent security measures from customs agencies (customs agents often require transmission of product-level information before the ships reach port or the aeroplanes land) places an even higher premium on 3PLs with advanced visibility tools.
Emerging technologies like RFID promise to improve supply-chain visibility. But for now, make sure your 3PL partners offer visibility platforms today that can span parties and modes of transport. The kind of technology used to deliver visibility isn’t as important as whether the 3PL can deliver the type of information your firm needs. Too much information can be a bad thing if you’re not equipped to capture and manage it. If your firm is a high-volume shipper, look for 3PLs whose information platforms easily integrate with your own automated systems.
• Disruption planning. No matter how carefully you might plan your supply chain and hone your processes, contingencies will arise to disrupt the flow. Chief among these disruptions is the congestion on transportation networks, both in the US and around the world. At the major shipping ports on the east and west Coasts of the US, imports and exports can experience capacity- related delays. Road congestion in the US costs the economy more than $63 billion each year, and truckers carrying the goods will tell you that it’s getting worse. Rail demand is up and capacity is down, creating bottlenecks. The same is true at American airports, where air cargo traffic is increasing by more than five percent every year. Infrastructure congestion isn’t the only problem. There are other disruptions like bad weather, mechanical breakdowns and port strikes – even a shortage of truck drivers.
Make sure your 3PL provider is experienced in disruption planning.
Check to see that it has the advanced in-transit visibility systems – as well as arrangements with multi-modal transportation providers – to accommodate emergency rerouting of shipments. For unusual spikes in demand, your 3PL partner should also have the extra capacity to accommodate fluctuations. Flexibility in a world of supply-chain friction and unexpected disruptions is invaluable.
Friction is good for making fires but bad for making your supply chain flow. Choose a 3PL partner that can help your firm smooth the path for global sourcing and selling.