PARTNERS IN PROFIT

Logistics Asia, 1/3/2008

To ensure continued momentum in the Asia- Pacifi c 3PL market, service providers should look to form strategic relationships with service users.

By PAUL GRAHAM.

For any company seeking to be a truly global competitor, it is imperative that a world-class logistics chain is in place to support a shortening lead time to international markets as well as to satisfy ever-growing consumers’ needs. While some choose to develop in-house logistics competency, others opting for cost efficiency leverage on 3PL (third-party logistics) providers to augment their logistics and supplychain management capacity.

With logistics demands becoming more complex and international, the role of a 3PL is gaining business salience as key logistics players offer a wider range of value-add services, affording clients choice, convenience and hassle-free value propositions.

Overall, the outlook for the global 3PL market remains positive, and the Asia-Pacific segment in particular shows strong growth prospects for logistics outsourcing. However, to ensure sustained economic viability, 3PL service providers will have to strike a strategic collaboration with their service users.

STATE OF ASIA-PAC 3PL
The 3PL market in Asia-Pacific registered continued robust growth in 2007, with a majority of 3PL service users reporting successful outsourcing efforts. According to the 12th Annual Third-Party Logistics Study on the state of logistics outsourcing in 2007, sponsored by DHL and three other organizations, almost seven out of ten Asia-Pacific companies agree that 3PLs provide new and innovative ways to improve logistics effectiveness.

Leveraging on 3PLs’ investment in tracking technology and holistic door-to-door logistics management systems, companies can now offer clients greater responsiveness and an enhanced degree of shipment visibility. More than two-thirds of those surveyed also felt that the use of 3PLs had a positive impact on the service to their customers, and 70 percent agreed that it had improved business process efficiencies.

The top popular services offered by 3PLs in this region last year include domestic and international transportation, warehousing, customs clearance and brokerage, forwarding and shipment consolidation. As in previous years, transportation and warehousing continued to feature strongly for the Asia-Pacific market, as companies sought a bigger piece of the regional trade pie, which is growing from the booms in China and India and deepening economic integration in Asean.

It is also not surprising that Asia- Pacific users tend to outsource forwarding and customs clearance services to facilitate shipment flows across a region that comprises great economic diversity. While regional integration continues apace, a customs union from Tokyo to New Delhi will remain largely an elusive goal for now.

In 2007, Asia-Pacific companies spent an average 62 percent of total logistics expenditure on 3PL services, second only to their European counterparts, which spent 65 percent, and outspending both North and Latin America. Future growth estimates look rosy: the projected 3PL spending share for 2010-2012, according to the survey, could rise to 67 percent. That means 3PL players would be earning two out of every three dollars spent on logistics, enhancing the lucrative appeal ofthe regional 3PL market.

However, this increase is by no means secure without a good rapport between the 3PLs and its users at the operational level, which underpins a successful relationship with their service providers. Other factors include clearly measured improvements in service levels to customers and cost reductions, as well as sound guidance and detailed contract terms allowing performance tracking.

KEY DRIVERS: CHINA & INDIA
Despite a possible US recession looming on the horizon, the sustained economic growth of China and India should continue to provide upward momentum to the regional economy in the short term. Prospects for the two economies are healthy. China – the world’s third largest export economy – is expected to grow by 10 percent in 2008, after registering another year of blistering growth at 11.4 percent in 2007. India also posted very strong growth at 8.7 percent last year, and will grow by as much as 8.3 percent in 2008.

The vast potential of gaining access to the respective billionstrong domestic markets further enhances their economic allure. Not surprisingly, 3PL users continue to eye China and India as the top two markets for regional expansion. About 60 percent and 46 percent of the survey respondents picked the two countries, respectively, way ahead of Russia (30 percent), Brazil (26 percent) and Poland (20 percent).

The 3PL industry within China and India will likely see robust expansion, as more local companies seek logistics expertise to streamline their growing operations. And further opening-up of the Chinese and Indian markets to global retailers will bring new growth opportunities for 3PLs. But thereare challenges to overcome.

For China, the biggest issue is the ability to deliver against promises and agreed-upon service levels. Indeed, while 3PLs in China have been able to deliver upon committed service levels consistently, the standards are set to a lower level than in more developed countries. In this respect, there is much scope for service improvement, which represents an opportunity for international 3PL players, such as DHL, to work with global and local customers to raise the bar on service delivery standards.

India’s challenge, on the other hand, resides in its weak transport infrastructure that lags economic development, and complex tax structure that varies from one state to another. The fragmented logistics landscape is a further complication for a 3PL player, which would need to provide a range of service options potentially involving partnerships with local 3PLs to navigate differing conditions and legislation across various Indian states. Consolidation among the local 3PLs through mergers and acquisitions to enhance efficiency would be a key strategy plank to build market presence in India.

TOWARDS TRUE COLLABORATION
Growth markets aside, 3PLs will need to establish strategic relationships with their user clients to secure the business and grow market share in the longer-term. This means moving the partnership beyond a superficial business transaction of value-add services to actual meaningful integration in growth strategy and plans.

Such collaboration will involve a deep level of interaction across three factors – people, process, technology – based on trust and mutual respect for each other’s synergistic contributions to obtain the best possible win-win outcome for all parties. Corporate compatibility in terms of visions, goals and cultures along with regular communication are vital to establish the bedrock of trust that will subsequently allow for shared decision-making and equitable sharing of gains, losses and investments. Naturally, this is a process that will take time.

Successful collaborations characterized by regular closer consultations can bring a host of benefits:

• Seamless, all-round appreciation of the supply chain, offering an upstream view to suppliers and a downstream view to customers

• Users get access to and knowledge of the global marketplace by capitalizing on the 3PLs’ experiences

• 3PL service providers can allow for forecasted increase in capacity during the peak season or promotion period, which translates to higher service levels at lower cost.

• Faster new product introduction and reduced inventory and stockouts due to forecasting activities.

• 3PLs can help users better navigate government regulations in a more holistic and sustained manner based on the intimate understanding of product or service needs

• Gains through improved customer service

• Enhanced business processes

In a leading collaboration model, there should be organizational and strategic alignment from the executive to the operational level, and regular joint review and planning meetings on strategic topics are encouraged. The business contract may be focused on gain-sharing, which would incentivize both sides to bring the best ideas to the table.

The collaborating parties should work closely to optimize extended supply chain processes, and agree on shared key performance indicators (KPIs) and share information freely.

In the best-case scenario, 3PL service providers would be involved, alongside 3PL users, in direct interaction with customers, although such comfort levels may be initially hard to achieve. The same survey of Asia-Pacific 3PL users indicated that perceived benefits were restricted to inventory efficiency issues, and not revenue-generating concerns. A good collaboration would also entail cooperation to jointly develop customer-oriented technology solutions.

THE TECHNOLOGY EDGE
Enhancing logistics service offerings with good technology solutions will offer 3PLs a cuttingedge advantage in winning over more service users. The top items on the wish list, according to the survey, are visibility tools, Web-enabled communication, transportation management systems, and warehouse management systems.

Visibility and Web-enabled tools in particular will provide significant value-add in the current highly competitive environment where clients are demanding fast and easy access to track shipments at any place, any time. Putting in place proper technologies to offer ready information to customer query is fast becoming an industry gold standard. Failing to meet customer expectation in this regard could mean losing business to competitors that could command that extra technological edge.

It is noteworthy that the survey of 3PL users reflected increasing demand for good technology platforms that would put them ahead of competitors. More than 90 percent of the respondents expect to employ visibility tools such as track-and-trace and event management solutions in the future, up from the current 58 percent. Web-enabled communications is equally popular.

3PL customers are also looking at greater plug-and-play integration to reduce implementation time. High technical flexibility and fast turnaround time to business requirements, along with flexible choice of IT solutions are highly valued. Ideally, these customers also hope to see new software releases and upgrades committed in contract and software standardization on a global basis and at competitive costs.

3PLs that are willing to invest in the right solution to meet customers’ needs and industry standards would likely reap significant gains in business sales and productivity, as well as intangible goodwill critical to keeping loyal customers.

Paul Graham

Maturity model for effective 3PL-Customer collaboration