Outsourced Logistics: Why 3PLs need to be embedded in your business

Current models for managing outsourced logistics relationships could limit the ability of third-party logistics (3PL) providers to drive the innovation that their customers crave. 

Changes are needed that allow 3PLs to become strategically embedded in their customers’ organizations, with full access to long-range business and supply chain plans. We discussed this in our Viewpoint paper "Managing Logistics Outsourcing Relationships."

New relationship management model for outsourced logistics

For large strategic accounts, 3PLs may have dedicated “strategic account managers,” or SAMs, who manage the relationship and typically report up through the 3PL’s sales organization. They are not located on site at the customer's operation.

The broad goal of SAM programs is closeness to the customer – a good thing. But close is still too far.  The goal of the 3PL should be to work hand-in-hand with the customer to develop the strategy, not just to get close enough to hear about it.  

The solution: get inside

What’s urgently needed is a deeper partnership that allows the 3PL to participate in supply chain management at a more detailed level, and earlier in decision-making processes. The manufacturer needs to invite its outsourced logistics partner to become embedded as a collaborative team member, not just a resource brought in to solve day-to-day problems. That means locating at the customer’s offices and working as a seamless extension of that customer’s supply chain organization.  

What changes does an embedded 3PL model require? 

A shift to an embedded 3PL model requires significant shifts in both thinking and compensation.  

Contract terms need to change since the 3PL is committing uncompensated resources to managing the relationship and investing in innovation.  Gain-sharing agreements need to become more the rule than the exception.   

Contract lengths may also warrant evaluation in an embedded 3PL model.  With gain-sharing, the 3PL needs time to understand the opportunities, generate ideas, implement the ideas, and measure savings over time in order to realize a return on any investment they decide to make.  This can be difficult in the context of a three-year logistics outsourcing contract, so term lengths may influence a 3PL’s decision to invest. 

Another needed change is that manufacturers must begin to openly share forward-looking information about their business and supply chain strategies.  They will need to trust their 3PL partners with proprietary information, and this can be a difficult shift. 

3PLs need to change, too

The embedded model is a major shift for 3PLs, as well. To make the embedded model work, 3PLs need to be ready to take on the role of supply chain innovator within a customer’s organization. While traditional outsourced logistics relationships involve the 3PL looking across its own operations and asking “How can I improve?” the embedded 3PL looks across the customer’s entire business and asks “How do I drive overall supply chain efficiency?”

Download the full article below.