Embracing complexity

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October 2005 saw the launch of the 10th Annual Third Party Logistics (3PL) Study, an independent report by Capgemini, The Georgia Institute of Technology, SAP and DHL. This year’s findings should serve as a wake up call to 3PL providers the world over, as it shows that only just over a third (38 per cent) of 3PL customers are satisfied with their providers’ IT capabilities, representing a halving of customer satisfaction in just two years. For the first time, customers are asking not just for value-added services, but for cost-effective ones. It is clear that service providers need to move up the value chain to provide strategic expertise in the area of supply chain management beyond the traditionally tactical asset-focused capabilities. As will be shown, this can be achieved by more intelligent use of the technology available to them. Such enhancements will position 3PLs more effectively as lead logistics providers that help customers to reduce supply chain complexity.

From the 3PL provider perspective, investing in IT is limited to customer demand since the providers operate in an ultra-low margin business. Architecting on common platform functionality is achievable desirable and likely to be undertaken in incremental steps. In the meantime, perhaps, 3PL providers would do well to work towards a more flexible IT infrastructure. Introducing the technologies that will form the basis of a future Service-Oriented Architecture (SOA) will increase the longevity of existing systems in the course of migrating to a common platform. Additionally, SOA will provide the much-needed flexibility to the IT systems of 3PL providers, enabling them to juggle the different IT requirements of many different contracts simultaneously.

Many firms have made significant investments in deploying tools, such as demand to assist in the management of the supply network. Typically, these solutions have been designed with an enterprise focus, and therefore have limited ability to offer insights to external trading partners. However, it is not uncommon for a single supply chain to extend across hundreds of trading partners, leveraging global suppliers and outsourcing end-to-end processes such as order fulfilment. This means that 3PLs that usually have multiple contracts to deal with simultaneously are now faced with the daunting task of using current IT investments in a brand new business model. There are high hopes that SOA frameworks will meet this challenge by offering agility and flexibility at unprecedented levels.

An open service
Theoretically, SOA allows companies to extract insights from existing solutions and offer them as an open service to trading partners. SOA’s significance is amplified in the logistics arena because of the inherent role of a logistics provider as a manager of extended supply networks. Additionally, a logistics provider’s IT network is highly fragmented, based on years of acquisitions and customised solutions. This means that logistics providers must gather insights from disparate sources across their own and their clients’ networks.

For example, a logistics provider like DHL would have to assess the risks associated with suppliers failing to meet their commitments, the availability of transportation capacity, and an updated forecast of demand. It would therefore have to extract pertinent information from disparate legacy systems and apply business logic to present its risk assessment as a business service to its clients.

The promise of SOA is that it can deliver a feasible way to offer this network visibility while using existing technology solutions. This promise will become a significant driver in the adoption of the SOA framework in the logistics industry. And global logistics providers like DHL and UPS are bucking the usual ‘wait and see’ trend to become strong advocates and early adopters of the SOA framework. However, fully-deployed SOA is again taken in iterative steps but early gains through the extension of current systems would be welcome. Architecting towards SOA, in parallel to embracing common platform functionality, looks set to be the way forward.

An additional angle on operational effectiveness would be to embrace Mobile Asset Management (MAM), which provides the opportunity not only to reduce costs but also to improve customer service, with goods receipting and despatch, and enable greater track and trace capabilities. One thing is clear, though, with over 70 per cent of survey respondents claiming their services were merely tactical in nature, 3PL providers need to start thinking on a more strategic level to differentiate themselves and squeeze those tight margins further.

What’s achievable?
Let’s take a look at a real-life example of what is achievable with the technology and

infrastructure available today. The oft-vaunted RFID was listed by just under 50 per cent of this year’s survey respondents as their top IT priority going forward. RFID has suffered somewhat in reputation over the last few years, as is only to be expected from the typical ‘hype cycle’ that accompanies new technologies as they enter the market, with some genuinely hair-raising stories of money wasted on ‘unsuccessful’ installations in its early years. What is important, however, is that RFID is now at a point where it can provide a tangible strategic advantage to those organisations that embrace it.

Case in point: Capgemini has been working with the Finland Post Corporation to apply RFID technology to its transport processes in order to track and manage reuseable assets better, more specifically its roll cages. This new, automated RFID system enables real-time asset monitoring to provide enhanced supply chain visibility, and thus customer service, by increasing asset availability and utilisation. With the asset cost of  ‘lost’ or damaged roll cages in excess of e1m each year– in addition to potentially significant consequential costs – this is a critical business issue. However, an innovative integration of RFID and MAM technologies has allowed the Finland Post Corporation to track and trace the cages with a 100 per cent readability rate.

The importance of asset management, both static and mobile, cannot be underestimated in the supply chain business, and the kind of success achieved with the Finland Post Corporation is achievable anywhere:

Static assets provide a significant challenge for management having to wrestle with an understanding of their physical location, condition and integrity. A significant proportion of FTSE500 companies’ asset registers are inaccurate and therefore incapable of providing the information required by the business.

Mobile assets, of course, present an added level of complexity by virtue of their mobility.

Most major companies – whether primarily involved with the supply chain industry or not – make use of mobile assets to move their raw materials, work-in-progress and finished goods through the supply chain. Such assets are core to operations and can heavily impact overall performance, yet they frequently end up in the wrong place, have an insufficient quantity for delivery or disappear at an alarming rate.

Experience shows that success in a MAM deployment is best achieved through a tried and tested approach-a route map to unlock value. The goal is a solution that resolves real business issues and generates clear ROI. This acknowledges that to deliver workable RFID-enabled solutions, there are some essential steps to develop and test a pragmatic solution based on good RFID engineering and a clear understanding of how it can be deployed in the actual working environment.

There is good and immediate ROI to be had here – not only in savings in terms of pure hard loss (which can equate to millions of euros per year per company) but in the knock-on impact of increased operational activity if managed properly – the ‘opportunity cost.’ Better control of assets can lead to significant benefits in its own right through better utilisation and management. Once these assets are under control, one can look to extend the benefits from the investment, including better management of the consignments these assets contain, improved process operational efficiency and improved overall fulfilment through better end-to-end visibility. Personal experience shows that ongoing annual shrinkage of lost assets in the order 10 – 20 per cent is common; and 40 per cent can be seen in extreme cases.

Mobile Asset Management is also a good place to trial RFID – many companies will need to understand the impact and the opportunities that RFID presents. An asset tracking solution not only supports a robust business case for a real business issue but is in itself a good place to initiate RFID work.

For 3PL providers, the present, with respect to how they are viewed by their customers, leaves a lot to be desired. While overall satisfaction levels are high (88 per cent considered their relationship with their 3PL provider as ‘successful’), there is clear demand for 3PL providers to use technology to offer a more strategic service. There is a danger that unless they respect this demand they will begin to be viewed as the unproductive middle man as advances in technology make direct communication and collaboration between manufacturer and retailer easier. The future may be bright, with SOA promising a utopian state for all involved, but it will be some time before this is realistically achievable. In the meantime, however, 3PL providers would do well to look to technologies such as MAM and RFID to move themselves up the value chain. Such technologies are currently available and in the right hands will not only improve their standing with customers prospective and current, but will help them to squeeze those tight profit margins further and gear themselves up for the future.

Philip Harker is with the Supply Chain Management practice at consultants, Capgemini

Key trends for the next 10 years

  • Continued expansion, acquisition, and consolidation of the 3PL industry.
  • Improved customer-needs alignment (provide the right solution, be involved in client integration planning,
    and understand the client industry) and solution innovation.
  • Simplified advanced service definitions by adopting a two-tiered relationship model (strategic and tactical).
  • Improved product management, flexibility in service offerings, cost management, ease of integration, and
    process orientation capabilities by 3PL providers’ service- oriented architectures.
  • Continual expansion of service offerings and capabilities across the supply chain and broad-based business
    process outsourcing (back office, finance, call center, and manufacturing).
  • Continued activity in updating, enhancing, and improving/extending the overall 3PL provider-user
    relationship.
  • Expansion of global markets and 3PL providers’ abilities to provide necessary services.
  • Increased adoption of shared service networks and ‘coopetition’ strategies (collaboration of traditional
    competitors).
  • Improved usage of 3PL providers of product portfolio and channel management strategies.

 

Challenges facing the 3pls

While the 3PL industry has seen success and continues to prosper, gaps continue to exist in several areas:

Disappointment with the 3pl provider’s ability to develop advanced services
.Although many 3PL providers satisfy user requirements around basic services, such as transportation or warehousing, ongoing development of capabilities is still a key issue. Users continually state they are initially satisfied with 3PL provider performance, but the providers fail to advance their capabilities around their users’ evolving needs. These user needs include globalization, inventory/asset-based services, contract manufacturing, strategic management/consulting, broad business process outsourcing, technology innovation, and leveraged solutions. A critical success factor in meeting these needs is for 3PL providers to get closer to users, thereby better understanding the users’ industry challenges, and better anticipating the users’ evolving needs and demands. Such an approach requires additional investment and skill-set changes by the 3PL provider, but it yields payback by creating longer-term relationships.

Need for relationship reinvention, mechanisms for continual improvement, and solution innovation.
The continual gap between user expectations and what 3PL providers deliver is a clear signal that 3PL providers and users need to ‘reinvent’themselves to be more capable business partners to one another. The success of future 3PL relationships will depend on the ability of both parties to take their individual and collective capabilities ‘to a new level’; they will have to effectively reinvent themselves to be more responsive to changing logistics and supply chain environments. The industry is experiencing a convergence of service providers as capabilities and services are enhanced. Distributors providing 3PL services, contract manufacturers offering outsourced solutions, and consulting companies selling supply chain solutions are all signs that 3PL providers are encountering new competitors. The pressure for 3PL providers to continually improve operations and develop innovative solutions to new or existing problems is pressuring them to rethink their operating models, skill-set development, and solution development methods.

Increasing importance of repeatable and leveraged solutions 
Users continually expect 3PL providers to leverage their solutions, including the technology behind these solutions, across customers. Providers continue to struggle with standardizing offerings to lower their total cost of ownership, especially for some of the basic services like transportation and warehousing. Although the need for successful functional execution is great, a strategic shift has occurred:The need for capable strategic management services and deep industry knowledge, coupled with the availability of low-cost standard solutions, is now a high priority for both 3PL users and providers.

Emerging role of supply chain integration
The stated need for advanced supply chain services and for organizations that can serve as ‘integrators’has validated the ‘strategic service’model in meeting the needs of-and servicing-3PL users. Specifically, providers that can bring multiple service capabilities relating to the use of logistics information, operational knowledge, user-provider relationships, and supply chain integration are of critical importance. The industry is flooded with various terms and marketing pitches around strategic service models, creating confusion and frustration among users. For example, the terms 4PL, SCM, and LLP can mean the same thing depending on individual definitions. Initially, the use of strategic services has been limited to supply chains that are complex, large, and rapidly changing, as well as limited to user organizations that are themselves large, complex, and global. Recently, we have seen an increased demand in these strategic services from mid- and small-sized companies because they do not have the capacity or capability to adequately manage these activities themselves.

Global evolution of 3PL usage
Principal among the strategic directions for the future is the need for 3PL providers to offer globally capable services; that is, providers that can integrate processes and information across vast regional boundaries. Although many 3PL providers market their ‘global’abilities, 3PL users indicate significant improvement is needed before most of these claims are realistic. Achieving this goal may be more realistic as a result of ‘reinvention’ or ‘acquisition’rather than ‘marginal improvement’.

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