Partnering with a third-party logistics provider (3PL) was a sound business decision for many shippers even before the COVID crisis. Still, the pandemic has made a case for a logistics partnership even stronger. COVID-19 has disrupted the supply chain, globally and locally, in ways that would have been unimaginable just a year ago. Partnering with a strong 3PL provider can help your company transcend the turbulence of the current operating environment and preserve — or improve! — your competitive position.
Investing in Infrastructure
The improvements 3PLs bring to the supply chain during COVID are primarily driven by one fundamental factor: their investments in physical and digital infrastructure. Shipping and logistics are capital-intensive by nature, and even in ordinary times, operating a state-of-the-art distribution network is something only the largest companies can do well.
How large? It’s instructive to look at a list of the top private distribution fleets in the country, like the one published in Transport Topics in August 2020. Coca-Cola, with its massive distribution network, is only large enough for 19th on the list. Nestle USA takes the middle spot at #50, and Dunkin’ Brands — operators of the sprawling Dunkin’ Donuts and Baskin-Robbins chains — holds down the 100th and final spot on the list.
The reality is that most companies run best when they focus on their core competencies and don’t have to allocate significant quantities of capital to operating a distribution network as well. The COVID crisis shone a stark light on that simple truth as companies struggled to cut costs if their business suffered or scale up if they were thriving.
The situation is different for third-party logistics providers because distribution is their core competency. Their business model demands a significant investment in warehousing and transport capacity, staffing, and everything required to provide timely fulfillment to their clients. The best go beyond those basic needs, making deep investments in technology — from software to robotics to AI and machine learning — to provide levels of efficiency and transparency that would have been unthinkable just a few years ago.
Bringing Transparency to Their Portion of the Supply Chain
For many in the business world, COVID’s impact on the global supply chain was an early sign of just how problematic the virus would become. The supply chain had become something of a “black box,” which simply worked — until it didn’t — and even the best-run companies had little clarity about how it all came together.
COVID quickly showed how many links the chain contained and how many of them were vulnerable to this kind of disruption. Major consulting firms like PwC have stepped up to offer their services in managing these supply chain issues, but a starting point is often just finding a suitable 3PL to partner with.
“Supply chain visibility is the foundation stone for nearly every other supply chain capability,” according to Professor Michael Gravier, who teaches supply chain management at Bryant University. Gravier holds a Ph.D. in supply chain management from the University of North Texas but has first-hand expertise in the field as an Air Force logistics officer.
“Having a 3PL’s experience to guide what to track and when can enable improved customer service outcomes and increased supply chain efficiencies,” he says. “It also provides flexibility in the face of a disruption, whether from COVID, weather, product recalls, or some other cause.”
It’s not just that a 3PL has the technology to bring transparency to its portion of the supply chain, Gravier says — although that’s important — but that it also has the expertise to know what information as to be shared and how it can best be shared, with stakeholders up and down the supply chain.
Bringing Scalability to Fulfillment and Distribution
Many shippers have struggled with shipping logistics and problems of scale during the crisis, with some cutting back sharply on their operations and others working to keep up with orders. This is precisely where a 3PL can be invaluable.
“Scalability is one of the most important capabilities that 3PLs bring to the table,” Gravier says. “In a nutshell, 3PLs offer flexibility in both capabilities and capacity. Even big corporations that own their fleets rely on 3PLs: the fleet provides core capability, while the 3PL provides above-the-cap capacity.” For smaller companies, a 3PL partnership is even more crucial. “3PLs provide them with both scalability and far better logistics capabilities than they could ever hope to achieve on their own. That goes directly to customer service, which means a competitive advantage.”
Here again, it’s the 3PL companies’ investment in infrastructure that makes the difference. “Transportation and related services are sensitive to economies of scale,” Gravier says. “Buying technology at scale is expensive; it takes a specialist to invest in the required capital and infrastructure. COVID drives home the fact that companies need to be ready at a moment’s notice to shift marketing channels, re-scale capabilities, integrate with new suppliers and customers, and pivot nearly every supply chain and logistics function. The trend toward more reliance on 3PLs, by companies of all sizes, seems likely to continue. Supply chain management is becoming too specialized for generalists to continue to excel in it.”
Transcending Geographic Limitations
One unanticipated effect of the COVID crisis has been the sudden importance of geography. If you operate your own logistics network in-house, but your hub was in a state that shut down because of COVID, suddenly your fulfillment system was broken. At the other end of the spectrum, companies that benefited and saw increased sales during the lockdown often struggled to meet demand outside their common geographic delivery areas.
A 3PL partnership is very much the way forward for companies facing either of those scenarios. For the shipper expanding rapidly to cope with COVID-driven growth, an experienced and proficient 3PL provides the ability to offer timely delivery — and, just as importantly, easy returns — in new geographic areas. For shippers with existing warehousing in locked-down parts of the country, it’s the broader reach of a 3PL that matters. That’s what academics like Gravier describe as network externalities.
“A single telephone isn’t worth much,” he explains, “but a country full of telephones that are all connected [has] immeasurable value. 3PLs bring the benefits of increased network externalities: integrated communications with customers, suppliers, transportation companies, and anyone else connected to the movement and storage of goods.”
In simpler terms, a 3PL partner has the relationships and capacity to hedge against local disruptions in service throughout the supply chain. Suppose a localized shutdown sidelines one part of their capacity. In that case, they can adapt on the fly thanks to the excess capacity (and the relationships and technology that support it) that’s essential to a specialist 3PL’s business model.
Creating a Safer Working Environment
No discussion of the COVID crisis would be complete without examining employee safety, including employees in warehousing and distribution. Maintaining adequate distancing and planning for adequate sanitation and personal protective equipment in a time of national and international shortages is no small challenge for in-house operations. Even Amazon, with its massive budget and state-of-the-art facilities, has struggled with it.
There are two arguments to be made for outsourcing to a 3PL, one immediately personal and the other more calculating. At the simplest and most-human level, it’s hard for any employer to ignore a direct risk to the life and health of their employees. From a more pragmatic (or perhaps cynical) perspective, it makes sense to offload the risk and potential liability to an outside operator. That was true before COVID, and it’s more so now.
“Safety and labor relations are huge issues in logistics because much of the work is dangerous or prone to repetitive movement injury,” says Gravier. “A specialist 3PL brings the best in health and occupational safety to the workers. It also means bringing to bear the best in technology to complement logistics workers, from ‘cobots’ working side-by-side with workers to the use of drones for inventory audits and automated ground vehicles (AGVs) for moving heavy pallets.”
Gravier adds that “companies that divest logistics functions can focus more on the safety of workers in their in-house specialties, such as manufacturing and assembly.”
A 3PL Partnership Can Be Your “Superpower”
As the COVID-19 pandemic drags on, enhancing logistics through a 3PL continues to be important. “Most companies don’t realize how important logistics is as a strategic weapon,” Gravier says. “For example, a truck owned by a 3PL that has a breakdown or other emergency is likely to get help quickly because that’s part of what a 3PL does. It’s more likely to have excess capacity to respond to the unexpected, and these sorts of issues are largely invisible to customers. Even where company goods get damaged, the 3PL makes good on that.”
In addition, “a company trying to truck or warehouse its goods gets caught in a double whammy if something goes wrong,” he says. “First, they have to divert what’s likely a scarce resource. Even if they’re insured, if they’re found at fault, they’ll likely still be partly responsible for costs, and then there’s the added financial impact of lost customer orders.”
In these challenging times, smaller businesses will benefit the most from partnering with 3PLs, Gravier says. “Really large companies can afford to do their 3PL work, but most others would benefit by letting a specialist take over. It depends on each company, but the leading 3PLs provide inventory accuracy, supply chain transparency, reliable customer service, and experienced guidance that most smaller companies — and even relatively few large companies — could never achieve on their own.”
If you’re interested in finding out just how much your own company’s supply chain can be improved by working with a 3PL partner, contact us today for a consultation on your warehousing, distribution, and value-added service needs.
References
https://www.ttnews.com/top100/private/2020
https://www.pwc.com/jg/en/issues/covid-19/pwc-supply-chain-resilience.pdf
