By Brooks Bentz and Bill Kammerer | Supply Chain management review
The continued evolution of “digital supply networks” depends on just how well shippers and their third-party logistics provider partners can work together to take costs out of the system while making improvements in flexibility and speed. Our consulting team offers a high-level blueprint for making it happen.
Once, in what seems to be a very long time ago, companies took responsibility for their own logistics, from inbound freight to outbound finished product. The concept of an integrated supply chain did not yet exist.
The move to an integrated supply chain and, later, to the formation of partnerships with third-party logistics (3PL) providers, was a gradual one, spearheaded by the rise of airfreight companies such as FedEx and UPS. Over time, companies began to see the importance of getting logistics right, especially as changes in manufacturing processes stressed “just-in-time” delivery and other techniques for freeing up working capital.
While this was happening, new theories of management stressed the concept of core competencies and focusing on the activities that were central to the company’s success. In most cases, those activities did not include logistics. So, the reasoning went, companies should let outside suppliers solve their logistics concerns and concentrate on important things, like manufacturing and customer service.
That concept isn’t working nearly so well anymore. Companies have delegated a vast and ever-growing range of responsibilities to 3PL providers, but in doing so they have lost a degree of control over what has become one of the most important capabilities in the digital age—the ability to get an item from one place to another in a way that meets customer expectations.
The “meets customer expectations” part is critical. In the far distant past, customers really didn’t have expectations about logistics. If the product arrived on schedule and wasn’t damaged in the process that was satisfactory.
Technology changed all that. With the rise of organizations such as Amazon.com, logistics became not just a core competency, but the core competency for many organizations. Expectations—for both retail and commercial customers—changed, as well. “Next week” became “tomorrow,” and customers soon came to expect the ability to track the whereabouts of shipments—not just online, but through mobile applications. If the 3PL was unable to deliver on these expectations, customer satisfaction suffered.
Of course, there are other forces at work in addition too. Companies have become accustomed to operating in an environment marked by volatility and uncertainty. Global supply chains increasingly depend on transportation and logistics in order to be effective, so the impact of disruptive events is greater than ever. The end result, though, is the same: Logistics are more important than ever—far too important for a 3PL provider to handle without careful strategic and tactical direction from the company.
With the rapid adaptation of digital technologies, logistics is no longer a discrete element in a supply chain made up of clearly defined links. Rather, we see and are helping companies realize the evolution of what we call the “digital supply network,” where talent, mobility, social media, analytics and Big Data, cloud computing, and physical locations converge to create digital supply networks that offer four distinct advantages:
Speed. Companies benefit from enhanced responsiveness and proactive prevention; they can spot irregularities and address them long before they become full-blown problems. Resources are managed on an automated basis, leaving skilled personnel available to deal with non-routine, “exception” situations.
Scalable. In a digital supply network, integration of various elements of the supply chain creates organizational flexibility and provides the basis for a personalized customer experience.
Intelligent. Analytics based on high-quality data provide actionable insights and a strong foundation for innovation. Execution is automated, with uniformly high standards.
Connected. Organizations have real-time visibility into every stage of the supply process, from inward shipments to customer deliveries. Collaboration with other parts of the organization as well as with key outside suppliers is seamless.
In the digital supply network, 3PL providers are not going away. If anything, their role becomes even more vital, as companies seek to take advantage of their unique assets, such as far-flung DCs and state of the art materials handling systems, using them as a shared resource without investing their own capital. The key question is how to make the 3PL relationship work best for the organization, taking costs out of the system, while making improvements in flexibility and speed.
Building the dream house
In our view, the big problem in the relationship between companies and their 3PL providers is conceptual, not operational.
Too many companies say, in effect, we have a problem; here is some money; make the problem go away. It’s a bit like handing a large check to a contractor and saying, I need a house; here is some money; let me know when the house is finished. Odds are that the homeowner will not be happy with the final results and neither will the company that behaves similarly when they contract with a 3PL provider.
Several forces are converging to highlight the importance of the relationship between companies and 3PL providers.
First, as noted, the buying public wants and expects high performance. Second, there is ongoing pressure on costs. Shareholders and management look for downward, rather than upward, cost trends. Third, the demarcation line between physical and digital assets is blurring. With machines and physical objects communicating with each other, organizations can act more quickly and more intelligently. Those that fail to adapt will lose competitive ground.
Some companies have moved from a 3PL to a so-called 4PL solution, which means managing a suite of 3PL service providers. In a 4PL environment, an outside provider takes end-to-end responsibility, not just for traditional logistics functions such as pick, pack, and dispatch and freight billing, but also for non-traditional activities such as online ordering—often through a proprietary website. They may even market the company’s products.
While the 4PL concept might make sense in some circumstances, finding a truly “agnostic” 4PL provider—one with no attachments to, or ownership of, transportation or other fixed assets—is difficult, and determining where the company’s responsibilities end and the 4PL provider’s begin is not always easy.
One of the best approaches: Examine the existing supply chain to identify areas of underperformance as well as areas with high potential for improvement. With priorities identified, the next step is to make sure that lines of responsibility are in place to make the right decisions and act on them quickly.
In many cases, companies can gain the benefits associated with 3PL or even 4PL providers while establishing stronger control over every aspect of the supply network. One way to do this is by moving to a “control tower” model, bringing together the capabilities required to manage complex, end-to-end supply chain processes.
At their most basic level, control towers are integrated transactional systems, delivering real-time visibility as to what materials are where in relation to established schedules. Dashboards monitor progress and monitoring systems generate alarms to trigger rapid action when problems arise.
At the next level, control towers incorporate advanced analytics to determine the root cause of supply chain issues. They run simulations and “what if” scenarios to gauge the impact of potential disruptions as well as the feasibility of different approaches—they also analyze risks and the effectiveness of various responses to such risks.
At the highest level, the control tower delivers insights to improve decision-making and makes strategy easier to execute. This means more than having the company do a better job in meeting key performance indicators; it means KPIs are redefined to reflect new capabilities and greater growth potential.
Control towers may require capital expenditures, but the true charm of the model is its flexibility: From an in-sourced, conventional execution model to an out-sourced, cloud-based, variable cost model, the options are innumerable to get to the right solution.
The transformation from a traditional supply chain to a digital supply network—one that incorporates trusted 3PL and 4PL providers as part of a seamless, collaborative enterprise—is not a simple undertaking.
Companies need a high-level roadmap to get from their current state to a highly functional digital supply network. There can be little doubt, however, that supply chain and logistics will become ever more central to corporate strategies, so now is the time to plan—and to act—on building that dream house.