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In last issue’s Technology Toolbox, we discussed the opportunity for 3PLs to capitalize on increasing their value-add to customers via technology. Specifically, we covered how 3PLs can use technology to improve internal operations and planning but, perhaps more importantly, also to improve relationships with clients via better integration of business functions.

We finished by suggesting that 3PLs have to take the initiative in building these solutions and get over the “chicken and egg” concept of developing a solution in advance of customer need. This article takes the next step and shows the potential technology solutions that could truly provide new value-add 3PLs and their customers have been seeking. Lack of Visibility into Customer Plans Causes Inefficiency In many traditional 3PL–customer operations, the 3PL responds when the customer notifies them of an action to take, which is often an order to fill out of a distribution center. Then, the 3PL completes the order out of the current inventory that is available.

This reactive nature of the traditional relationships doesn’t give 3PLs enough advance warning to plan their operations more efficiently. As a result, 3PLs have to carry additional inventory and have enough capacity to handle last minute orders.

Illustrative Retail Example

Consider a situation where a 3PL is handling delivery of product for a manufacturer to its retail customer. Frequently, the retail customer places a product on special and doubles the amount of product requested by the manufacturer within a one week delivery window.

In this case, the 3PL has to scramble to get enough of the product delivered. A solution would be to get visibility into the retailer’s media plan for product that is being promoted in an advertisement in advance. Obviously, confidentiality would be honored so that the retailer’s competitors don’t easily match the advertised product’s price.

Solution

To the extent that 3PLs can gain more visibility into the business operations of their customers, they can better plan their operations and thus better serve their customers. This should allow the 3PL to lower costs — a savings that could then be passed on to their customers. The technology solution to this problem will require combining several traditional supply chain software functionalities. Based on the available research, there are significant opportunities for 3PLs to develop IT-based services that will be viewed by customers as strategic, integrative, and solution-based. To effectively create a solution that will address the visibility issues mentioned, the following elements of supply chain functionality will have to be integrated seamlessly by the 3PL:

• Supply Chain Visibility and Event Management – 3PLs will not only need to have IT-connectivity with their customers but will need to have visibility into the customers’ relationships with their customers. This increases the likelihood that the 3PL will be aware of needs of its customers as early as possible and increases the ability of the 3PL to respond to problems before they occur. – Supply chain visibility is valuable not for its own sake but as a means for 3PLs to better identify and understand customers’ needs and requirements and to enhance the levels of service provided to their customers.

• Transportation Management – 3PLs need to link TMS capabilities directly with the transport providers that have been selected. This helps to select the most appropriate carriers for individual shipments and to make sure the timing and availability of services will best meet the needs of individual customers. – Advance knowledge of the potential shipment will also help the carrier to be more efficient in utilizing their equipment, which should result in lower rates for the 3PL over time.

• Warehouse Management – With advance knowledge of potential orders, inventory availability and location can be arranged so that sufficient quantities of product are at the appropriate facilities to meet customer demand. – WMS solutions should be able to respond to current and forecasted levels of demand (including both scalability and functionality).

• Order Management – The order initiates actual shipment to customer after the order is placed. – 3PLs are able to participate meaningfully in the overall order management process.

• Demand Planning – Potential customer needs should be communicated to the 3PL to allow alignment of product with geographies in need.

– In addition to projected shipment volume information to be shared on a daily basis in the 3PL–shipper relationship, 3PL visibility into customer demand management systems will provide added benefit to the ability of the 3PL to anticipate demand and better serve the customer. This goes a step beyond the volume projections agreed to in the 3PL– customer initial negotiation at the start of the relationship.

• Collaboration – Forecasts can be shared and agreed to in advance and any variations may be communicated among the partners as soon as they are detected.

– To achieve maximum benefit from collaboration, 3PL information technologies should be integrated with business processes and information systems at customer organizations. Therefore, IT infrastructure and integration compatibility can be as important as functionality.

Rod Strata, Industry Principal, SAP Americas, elaborates on these points, in noting:

 “Growth and margins pressures remain prevalent in the global transportation markets. Providing a true business process and technology platform that will enable LSPs to further have upstream visibility into demand of their shippers and consignees is extremely valuable. Reliability and capacity planning are equally important, hence the ability for the LSP to serve up capacity and equipment transparency to their end customers is critical to providing value as well.

Intense competition without differentiation drives margins downward while moving many LSPs into commodity-based relationships. In today’s environment, LSPs receive one-to-two days notice on demand that causes a reactive mode in many cases, which in turn causes uncertainty along with inefficiencies for planning their networks and capacity plans.

From the shipper’s perspective, this also creates risk on executing against the commitments within their supply chains and customer satisfaction. Providing “Demand Visibility Capability” (The ability to have an aggregated, “time-bucketed” view into future requirements [days, weeks, months] and demand streams) will enable the LSPs to plan their networks and capacity accordingly, while giving them visibility to offer additional value added services.”

Benefits

There is significant value in 3PLs having greater visibility into their customers’ order management/supply chain planning activity to provide longer lead time windows with which to plan for logistics activities. In many instances, 3PLs are notified with little time to plan for efficiencies and contingencies forcing a reactive fulfillment operation.

The following activities could benefit from advanced operational and strategic information from 3PL customers:

• Forecasting – By receiving customer forecasts in advance, 3PLs can use the forecasts to plan their equipment, labor and facility needs

• This will help lower 3PL costs and perhaps allow a cost reduction to their customers

• Inventory planning and management – Inventory objectives (e.g., turnover) can be enhanced.

• Overstocks and out of stocks can be reduced in totalDC scheduling of labor – By having more advanced knowledge of pending orders, 3PLs can better plan DC labor to ensure enough resources are available without requiring overtime. – Scheduling objectives are best met by coordination between 3PLs and customers.

• Sourcing and procurement – More accurate purchase volumes can be known in advance allowing the right amount of material to be purchased, rather than the need plus a buffer, which is currently required to account for changes that weren’t communicated in advance.

• Mode and carrier selection – Provides enhanced ability to select carriers and equipment types most appropriate for individual shipments. – Facilitates development of meaningful “core carrier” program.

• Transportation route design – Transportation providers to be given more advance notice of individual shipment needs to allow for better and more efficient scheduling.

• Improved ability of 3PL to provide/manage value-added transport services – Contingency planning for merge-in-transit. – Downstream multi-carrier collaboration and coordination for multi-stop movements

• Synchronization across 3PLs and the carriers, coupled with more shared demand/capacity visibility from shippers, creates a great total supply chain opportunity.

Pain Points

With the needs and benefits defined, what might be keeping this 3PL visibility solution from being realized? There are some “pain points” associated with getting systems connectivity established:

• Lead time to integrate – Although the pieces of this solution already exist, some effort will have to be invested to tie them together and make the solution a reality.

• Up-front costs – There will obviously be an investment needed; however, the market desire should justify the investment.

• On-going costs – Good working solutions will require continual updating and integrating.

• Confidentiality – Safeguards will have to be put in place to ensure that data is secure and that parties out of the direct line of the transaction do not have any access or visibility to the data being exchanged.

• Market need of solution – Because the solution is new, the market opportunity is subjective until its value has been shown to prospective customers.

However, these pain points can be lessened or eliminated with the right approach, and the opportunity for the application provider who creates this solution is significant.

Applicability to Transportation Companies

The benefits of visibility are not lost on any type of LSP. The transportation companies, including trucking companies, railroads, ocean carriers and parcel companies, can also greatly benefit from visibility across the supply chain.

With better visibility, all carriers regardless of mode should be able to better plan, optimize, and execute solutions. The goal is to synchronize carrier capacities with shipper needs. In today’s capacity-constrained transportation environment, customers want to know if there will be enough capacity to meet their needs. However, in order for carriers to provide the right amount of capacity at the right time, carriers need adequate forecasts far enough in advance to plan for demand.

It is this sharing of information between shippers and carriers that offers promise. “While railroads are investing significantly in expansion projects, these investments take time to put into place. With improved visibility into our customers’ future demand, we can not only better plan when and where to invest, but also better plan our operations to have crews, equipment, and trains in the right place at the right time. Improved visibility not only benefits the railroads with their capital and operations planning, but also benefits shippers by ensuring their services needs are met,” says Todd A. Olsen, Assistant Vice President, BNSF Railway Company.

It would also be helpful if the industry changed its focus to the end point of the shipment rather than the origin. For instance, what if a customer could give a carrier all Memphis shipments on Monday? Rail runs 24 hours a day, 7 days a week and would run more efficiently if it were possible to fill in gaps of the volumes during a shipping week. Given the nature of railways, the equipment has to be planned in a closed loop. Intermodal does a lot of shipping over the weekend and therefore is always moving as compared to most other modes.

What if capacity on lanes could be known by lane, by day of week, and by time of day?

Most people want pickups and deliveries between 8 a.m. and 5 p.m.; however, a lot of freight moves continuously.

How could moves be made more efficiently not only with advanced information from the customers but by using the information to synchronize across carriers tied into a single move?

Benefits of this information sharing leading to better visibility and synchronization should include increased service for shippers, increased velocity, and possibly decreased transportation costs. In addition, additional capacity might be created by more effectively balancing supply and demand. Increased sharing of information should reduce the cost structure of the customer/shipper as well.

Conclusions

Through this piece, we have articulated the need and, more importantly, the opportunity to develop a software solution targeted at giving 3PLs more value in the outsourcing process. As a result of experience and research, we believe the following to be true:

• There is a need in the 3PL arena for better connectivity and collaboration with customers. In addition, there also is a need to enable better collaboration between supply chain partners.

• There is a need for a systematic and repeatable solution kit and platform for achieving this greater level of connection and visibility.

• The strategic nature of this approach is new and unique as opposed to the more tactical, “one-off” methods employed in most shipper–LSP relationships today.

• The practicality of establishing a repeatable platform for collaboration between shipper and LSP exists and it is up to the software providers to capitalize on it.

• The need for a repeatable solution for LSPs across customers is being demonstrated in the marketplace.

• A business model of how the demand visibility process is achieved has been shown to better explain the concept of 3PL–customer visibility.