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What’s a 3PL? How Does my Firm Decide if we Need One?

Most logistics and supply chain management students have had only a few hours of class sessions about the rationale, benefits and risks for outsourcing a company’s logistics and supply chain activities to a 3PL or logistics integrator. While the call for these skills continues to grow, there is a dearth of case studies and experiential learning in this area. How can industry and our institutions of higher learning mitigate this challenge?

By David J. Closs Ph.D.

As an educator with more than 25 years of teaching and research experience, an ongoing challenge is the education of both undergraduate and graduate students regarding the benefits and pitfalls of Third Party Logistics (3PL) providers or Logistics Integrators (4PL). There are numerous authors and analysts that investigate, evaluate and predict the trends in the logistics services industry (some of the best insight is provided by Benjamin Gordon and Richard Armstrong who have both provided a contribution to LQ in this issue). Thanks to authors like Mr. Gordon and Mr. Armstrong, there is usually timely insight regarding who the 3PL/4PL players are, what services they are offering, who they are offering them to, and how the industry is consolidating. These are all important issues, particularly for executives and managers that use or may want to consider using a logistics service provider or integrator.

This requirement for insight and expertise emphasizes the need for students and managers to have experience in evaluating outsourcing decisions. However, this need is not being met. At the time of their graduation, most logistics and supply chain management students have had anywhere from two to four hours of class sessions discussing the rationale, benefits, and risks for outsourcing the firm’s logistics and supply chain activities to a 3PL or logistics integrator. When the outsourced activities primarily involved transportation and warehousing, the rationale and discussion was quite straightforward. However, with the increased outsourcing of activities such as procurement, manufacturing, inventory management, and customer service, the rationale and justification are more complex. The risks are also more substantial.

The educational challenge is not describing and characterizing what a 3PL/Logistics Integrator is or does. The challenge is to provide students with experiences in requirements definition, evaluation, contracting and monitoring of a logistics service provider. The problem is very evident in class discussions when the use of a 3PL or logistics integrator is considered. Students rapidly jump at the recommendation that a 3PL or logistics integrator should be used because it removes substantial responsibility from the manufacturer or distributor. They also often automatically conclude that a 3PL or logistics integrator could accomplish the defined activities both more efficiently and effectively. While the students are typically aware of the economic considerations, there is not much consideration of the organizational, relationship, or competitive implications. The problem is not that this type of material cannot be taught. An experiential element needs to be built into the classroom to illustrate the complexity and subtleties of service provider integration.

Historically, experiential learning has been achieved through comprehensive case studies such as those provided by Harvard, Stanford, or Western Ontario’s Ivey School. These cases provide a comprehensive view of the firm’s situation, environment, organization, and economics that allow written analyses and class discussion regarding the economic and competitive implications of likely alternatives. Most faculty also require students to make a specific recommendation regarding the next step for the firm. These case situations are developed by faculty and graduate students with input and approval from the firms involved. Even though many supply chain focused cases have been developed over time, there is always demand for new cases to present students with timely, challenging, and new situations.

Historically, companies have willingly participated in case development for a number of reasons. Two of the more significant are desire to increase a firm’s awareness and standing with business professionals and desire to enhance the training of potential employees and managers. Through reviews of presentations and interactions with faculty and students, these firms may also develop additional insight from the discussions and “answers” developed from such case studies. These reasons justify the contribution of the firm’s time, effort, and reduced confidentiality to support case development.

There are numerous logistics and supply chain cases available addressing a variety of business decisions. However, there has been a limited number that focus on the outsourcing decision. When seeking material regarding 3PL and logistics integrator applications, faculty try to develop material based on practitioner publications (such as LQ) or conference presentations (such as CLM). It is true that the CLM case study collection contains a few cases where 3PLs are considered. However, the cases are a little dated (all with publication dates prior to 2001), which results in a relatively narrow consideration of 3PL services. Specifically, the primary focus is on outsourcing transportation and warehousing services rather than broader product fulfillment and logistics integration.

Material provided by the 3PLs and logistics integrators is another source of examples. While this material is useful, it is hardly at the same level of detail as that required for a thorough case analysis. While such sources are often designed to be educational, there is a strong selling orientation as well. The material provides a limited amount of background regarding both the firm and service provider. It discusses why a service provider is the right solution, provides limited insight into the relative economics, offers limited insight into the organizational issues, and doesn’t really consider the option that the 3PL or logistics integrator may not be the best solution. For obvious reasons, these articles also don’t give much insight into relationship or operational failures between firms and their service providers either.

The lack of 3PL-related cases can be attributed to several causes. First, the manufacturer or distributor is less motivated to support the endeavor when the issue concerns outsourcing to a service provider. Specifically, traditional case studies focus on an individual firm. However in the 3PL case, a substantial amount of focus will be placed on the 3PL. This reduces the visibility of a firm and may even reduce the tendency of a firm to enhance their positive image.

Second, developing a case would reduce a firm’s confidentiality regarding its outsourcing process, provide confidential information to potential service providers, and perhaps most significant, make it awkward if this firm decided to change service providers. For example, if a firm decides to change a service provider after its original decision has been written up as a case, the firm would probably want to minimize the visibility of its first selection process and ultimate choice to change.

Third, the firm might view the effort towards case development as a diversion and simply promoting the service provider. As a result, there is a dearth of cases which can challenge students and managers regarding the outsourcing process and decision making. While the service providers themselves would like to promote their successes, they are generally not in the best position to provide the background for the case development and the insight into the decision making process.

Even though this lack of case material directly impacts educators, it should be a concern to industry as well because necessary outsourcing skills are not being developed. The continued growth in service provider offerings and the number of firms that are outsourcing various supply chain activities will increase the need for graduates and managers with these types of skills. While neither the firm nor the service provider is in the best position to instigate or promote case development, it is in the interest of both that such an initiative take place. The question is who should take responsibility and how to motivate it. While there are logistics faculty willing to develop such cases, they need to have access to companies and the potential service providers. In addition to the “winning” service provider, there may also have to be some insight from the unsuccessful bidders as well. This makes it even more of a challenge.

While there is increasing need, there are limited examples of cases involving a broad supply chain outsourcing decision such as contract manufacturing, order fulfillment, or logistics integration. There are a number of ways that such case studies could be developed (such as a focus by the Council of Logistics Management or by 3PL operators), but the ultimate source of information must be the firm itself. Since the situation and alternatives must come from a company, this is a request for companies to support such case development in terms of management time and access to information. This would also include some access to service providers. It is in the interest of manufacturers and distributors to have access to graduates that have some experience in defining, operating, and monitoring a service provider relationship. So, if your firm has some experience relating to supply chain service providers, you may want to consider collaborating with an academic to develop a case experience. If you have such a 3PL experience that could offer a unique learning situation, you may want to approach an academic that you or your firm has a relationship with. The faculty member along with graduate students would need to interview some of the decision makers and service providers to determine the situation and the characteristics of major alternatives. The situation, alternatives, and data would then be written, reviewed for factual consistency by the firm, and then tested and refined using multiple groups of students. Your efforts may be rewarded with better managers of supply chain outsourcing relationships as well as an overall improvement in industry skills. For the academics, your efforts will allow us to communicate much more effectively regarding the benefits, risks, and challenges of supply chain outsourcing.

The author would like to acknowledge the contributions of my Michigan State University faculty colleagues Professors M. Bixby Cooper and Diane A. Mollenkopf.