In today’s dynamic business environment, Third-Party Logistics (3PL) providers have become essential partners for companies seeking to optimize their supply chains. 3PLs offer a range of services that extend beyond basic transportation and warehousing, adding significant value to shippers’ operations. However, not all 3PL providers operate in the same way. They employ different strategies and models to create value, and understanding these differences is crucial for shippers looking to select the right logistics partner. This post will explore the various value creation models used by 3PL providers, providing a framework for shippers to make informed decisions.
The Essence of 3PL Value Creation: More Than Just Logistics Execution
3PL providers are not merely executors of logistics tasks; they are strategic partners that can help shippers achieve a variety of objectives. 3PLs strive to offer more value than a shipper could attain on their own. This added value can be seen in several areas, including:
- Cost Efficiency: Providing services at the lowest possible cost while managing the complexities of the logistics industry.
- Specialized Capabilities: Developing expertise in operations that add higher value and offer customized solutions tailored to specific shipper needs.
- Strategic Optimization: Improving a shipper’s overall supply chain through network redesign and innovative solutions.
The business model of a 3PL provider encompasses both its value proposition (the competitive advantages it offers) and its value creation architecture (the resources and mechanisms it uses to deliver the value proposition).
The Building Blocks of 3PL Value Creation
Several key factors contribute to a 3PL’s ability to create value for shippers. These factors include:
- Economies of Scale and Scope: Achieving cost advantages by handling large volumes of goods and offering diverse services.
- Learning Economies: Improving efficiency through experience and replicating successful processes for multiple clients.
- Innovation Capabilities: Developing and implementing new methods and technologies to enhance service delivery and efficiency.
- Flow Management Capabilities: Optimizing the movement of goods through the supply chain to ensure timely and cost-effective delivery.
3PL providers combine these factors in different ways to create their unique approaches to value creation.
Three Distinct Value Creation Models in the 3PL Industry
Research indicates that 3PL providers can be categorized into three primary models, each with its own focus and operational strategies.
- Volume-Oriented 3PL Providers: These providers place a high emphasis on both economies of scale and flow management capabilities. They aim to achieve operational efficiency by managing high volumes of goods.
- Distinctive Strategies:
- Operational planning abilities and the use of forecasting tools.
- Multi-producer warehousing, where goods from various suppliers are stored in the same facility.
- Market segment specialization by industry, sales channel or type of shipper.
- Value Proposition: These 3PLs provide cost-effective solutions by maximizing capacity utilization and consolidating loads, which leads to a cost structure that is difficult for individual shippers to achieve.
- Example: A 3PL that focuses on serving the grocery industry, managing warehousing and distribution for retailers using its own fleet, and employing backhauling agreements with food producers.
- Distinctive Strategies:
- Process-Oriented 3PL Providers: These providers focus on process improvement, using methods such as continuous performance monitoring, benchmarking, and creating supply chain synergies.
- Distinctive Strategies:
- Horizontal integration through alliances with other 3PLs.
- Standardization of processes to create repeatable efficiencies.
- Employee engagement initiatives to encourage proactive process improvements.
- Supply chain synergies, which involves managing shippers within the same supply chain to optimize routes and maximize load handling.
- Value Proposition: These 3PLs aim to optimize their clients’ processes by integrating with other providers and standardizing operations, which leads to greater efficiency.
- Example: A 3PL that uses a performance assessment system for warehousing operations involving both its own staff and those of subcontractors, holding regular meetings to identify and solve problems. They also solicit improvement proposals from all members of the company.
- Distinctive Strategies:
- Innovation-Oriented 3PL Providers: These providers emphasize learning economies and the ability to introduce innovation. They aim to continuously improve their services and create new solutions for their clients by using process re-engineering and best practice transfers.
- Distinctive Strategies:
- Process re-engineering teams focused on both continuous improvement and new customer onboarding.
- Shared IT systems with multiple clients to manage transportation and optimize warehouse performance.
- Partnerships with shippers and technology providers to develop new and innovative solutions.
- Value Proposition: These 3PLs focus on leveraging their expertise, technology, and partnerships to develop cutting-edge solutions that improve supply chain visibility and efficiency for shippers.
- Example: A 3PL that partners with technology providers to introduce automated picking lines and mobile apps that offer real-time proof of delivery, increasing the shipper’s visibility throughout the supply chain.
- Distinctive Strategies:
Operational Strategies: How 3PLs Deliver Value
These value creation models are realized through various operational strategies, including:
- Spatial Integration: Consolidating loads from multiple suppliers or distribution centers located near one another.
- Dynamic Routing: Allocating multiple routes to different loads dynamically to optimize network usage.
- Partnerships: Collaborating with technology providers, research institutes, or consultancy companies to foster innovation.
- Process Re-engineering: Using specialized teams to analyze and re-engineer new customers’ processes.
- Staff Training: Providing continuous training at all levels to develop skills and expertise.
- Exploitation of Supply Chain Synergies: Managing the flow of goods from different shippers within the same supply chain to create efficiencies.
Selecting the Right 3PL Partner
When selecting a 3PL provider, shippers must align their specific needs and objectives with the appropriate value creation model.
- Choose a volume-oriented 3PL provider if you are primarily focused on cost reduction through high-volume operations and economies of scale.
- Opt for a process-oriented 3PL provider if you are looking to improve existing processes and achieve supply chain synergies through a systematic approach.
- Select an innovation-oriented 3PL provider if you are seeking customized and innovative solutions, emphasizing continuous improvement and technology-driven enhancements.
Conclusion
The 3PL industry is not a one-size-fits-all marketplace. By understanding the various value creation models employed by 3PL providers, shippers can select the most suitable partner for their needs and optimize their supply chains. This approach ensures that shippers leverage the expertise and resources of 3PL providers effectively, achieving their desired outcomes.
References
Value creation models in the 3PL industry: what 3PL providers do to cope with shipper requirements. (2017). Full+Paper_Value+Creation++Models_Reviewed+APRL+2017_FINAL.pdf.