As global trade has become increasingly complex and competitive, a tectonic shift has occurred in the relationship between third-party logistics providers and the companies they serve.

Prior to the global economic meltdown, the typical conversation that took place between a 3PL and its client companies revolved around supply chain visibility, on-time and just-in-time delivery, and compliance with a raft of new regulations implemented following the Sept. 11 terrorist attacks on New York and Washington.

But as quickly became clear during a series of interviews with industry insiders, the anxiety that went along with conforming supply chains to the goal of making it a safer world was nothing compared to the heartburn experienced after Lehman Brothers imploded in 2008 and a host of other financial firms appeared close to following suit.

“The meltdown highlighted the weaknesses in a system everyone relies on,” said John Parillo, vice president of sales for Penske Logistics.

Suddenly, logistics managers had to worry about the financial stability of their suppliers, and whether their transportation companies would be viable in the long run, he said.

“The other jolt was the credit collapse and related concerns about cash flow,” Parillo continued. “That drove a lot of rethinking about pending investments and redoubled concerns about which of your supply chain partners would continue to be a presence in the parts of the world you worked in.”

“Add to that energy volatility, the green revolution and even non-economic factors like swine flu, and it hasn’t been an easy time for anyone,” he said.

“Truly unprecedented,” is how Carl Fowler, senior director of operations at Menlo Worldwide Logistics, summed up the situation.

“And it’s ushering in the biggest changes in supply chain management since 3PLs came into their own as a value-added proposition in the early 1990s,” he said.

Against that backdrop, 3PLs are evolving into something akin to strategic partners for the enterprises they serve, as much conduits for actionable intelligence as managers of the various supply chain elements.

When a client asks, 'What should I do?'

“There’s no question the questions are becoming far more complex,” Fowler said. “In the past, a customer would call and say, ‘I need a distribution center in Memphis, with this many people to perform these specific tasks,’ and you would put it together for them in the most efficient way possible. That was easy for a 3PL to do.

“Now the phone rings and the client on the other end of the line will say something like, ‘My order to cash cycle time is terrible, and my supply chain costs as a percentage of goods sold are the worst in my industry. What should I do?’

“For the most part, 3PLs were never designed to provide that kind of strategic assistance, but as companies have trimmed their operations to the bone, they’re turning to us to fill the void left beyond by departed workers,” he said.

In a practical sense, that means 3PLs are increasingly in the position of having to become steeped in the inner workings and corporate strategies of their clients. Before they roll up their sleeves and get down to managing the movement of goods and materials, logistics providers have to understand their client’s upstream and downstream business processes, and then harmonize the supply chain accordingly.

“We’re still in the business of moving shipments from right to left, but now, as supply chain management has become the forum in which business competition is occurring, a lot more factors are coming into play,” Fowler said.

Going deeper

Steve W. Martin, vice president of supply chain excellence at Ryder System Inc., and a 21-year veteran of the industry said he’s not sure he’d describe the new reality for the 3PL industry as a departure from the past so much as a case of clients “going deeper” than they have in the past looking for answers to their supply chain challenges.

“Companies are looking at nontraditional areas,” he explained. “When profits were larger, supply chain issues weren’t as much of a concern. Now, however, they’re really starting to peel back the different layers, looking at the different silos of their businesses for additional savings.”

“What that means for us is that we are spending more time on value-stream mapping, helping them visualize where opportunities for improvement lie and what parts of the supply chain we need to address first,” he added.

Martin said both new and existing clients are re-evaluating their supply chains. Some are taking a second look at core questions, such as where they should source materials from, whether it makes more sense to make components in-house than buying them from a supplier, and whether in the current climate central distribution makes more sense than engaging with multiple facilities.

“Our role in that process is to help clients zero in on whether inventory is effectively flowing through or sitting at a particular point in the supply chain, and to help them understand the supply chain implications that stem from product-specific characteristics,” Martin said.

“For example, if you make school supplies or produce back-to-school clothing, items for which the typical family has a predictable buying schedule, you can source from Asia and, despite the relative length of the supply chain, still be incredibly efficient.”

“On the other hand, when it comes to a product that might be a more discretionary purchase or one that’s inspired by the fashion of the moment, you’re going to want a much shorter supply chain,” he said.

“Now, that’s pretty straightforward,” Martin conceded, “but the variables that are now being factored into that decision are considerable. When fuel prices were high, everyone wanted to talk about near-sourcing. Now companies want to have a deeper discussion, looking at their supply chains and trying to plan them based more from a forecasting process.

For its part, California Innovations, the leading manufacturer of collapsible coolers, tapped Weber Distribution, a leading 3PL and supply chain management provider, to help improve its operations, improve delivery times, and save money on transportation and storage costs.

“Weber took over assembly of California Innovation’s collapsible cooler bags to reduce transportation costs, maximize storage, cut lead time for raw materials, and deliver quick turnaround of product-to-market through just-in-time assembly. We also reduced fixed labor for production and held all finished goods and raw materials in the same building and system. If the product was needed, we would use the kitting module in our WMS and deplete just enough inventory required for assembly of the product to satisfy their customer requirements for product and timing of receipt,” explained Carl Neverman, Weber Distribution’s vice president, client solutions.

More centralized control

Another byproduct of the recession is that supply chains are now receiving executive level attention—a development which Parillo said is “kind of new, and definitely having an effect.”

“In the past, diversified industrials typically had separate supply chain executives overseeing their respective units,” he said. “Today, in many cases, these responsibilities have been centralized.”

In short, CFOs who rarely thought about supply chain issues are becoming the prime movers of change, with one result being a growing interest in the integration of the supply chains of once very distinct business units.

In addition, Parillo believes the increased centralization of the decision making process has made a marked difference in the pace of change.

“When one person is calling the shots, particularly in a large and complex organization, the ability to drive change becomes easier, and certain long-standing barriers to change begin to melt away,” he said.

“In one case, and I won’t identify the company beyond saying it’s a major industrial that’s grown through acquisitions, the plan it ultimately implemented might actually result in a single plant paying higher supply chain costs than it has in the past.

“But what’s important for the company, and the goal of its integrated supply chain, is the overall savings the new system provides,” Parillo said.

In a sense, companies that are turning to 3PLs for assistance are looking at supply chains as a driver of costs they never looked at before, and what they’re saying, according to Parillo and others, is they can’t afford to have that much capital tied up in the system.

“When you design a supply chain you have to look at the value of the material in transit, the cost of transit, customs and other fees, and then you have to consider the cost of energy,” Parillo said. “What these executives want is to be able to rapidly respond to what they see as the increasingly volatile nature of each of these factors.

“What we are being asked is to provide solutions to this volatility,” he said.

Martin too is seeing executives who have never before played active role in the supply chain process. “We’re not just talking to the supply chain officer who only focuses on transportation, warehousing and inventory. The conversations are occurring higher up the organizational chart,” he explained.

“That’s giving us an opportunity to really talk about planning across the entire supply chain,” Martin continued. “Another dynamic we’re seeing grow out of this is that the person we’re working with also has ownership of the company’s inventory function or has a direct influence on inventory decisions.

“That’s helped make the planning process more robust than it has been in the past,” he said.

The rise of an 'engineering' class

It’s also led to a demand for a particular type of expertise to be brought to bear in the supply chain planning process: individuals steeped in information gathering, analytics, and engineering.

“I think one aspect of the response to the economic crisis is that people actually did take the time to step back and catch their breaths,” Martin said. “The reflection grew into a desire to build new strategies and produce new plans.

“The challenge going forward is that supply chains are going to become even more dynamic,” he said. “And our client companies are now recognizing the need to have flexibility in the talent pool and the intellectual resources to make changes faster.”

One result is that where Ryder System used to do network optimizations for clients every three to five years, now the 3PL is typically asked to do them quarterly.

“Companies are constantly looking for ways to position themselves in response to changes in their market,” Martin said. “And as technologies have improved and customers have grown more sophisticated about things like buying and demand data, companies are looking to respond to it more quickly.”

“In short, the supply chain has become the real differentiator,” Martin said. “Companies, of course, will always compete against companies, but it’s the supply chain that enables them to have different price points and the right product on the shelves at the right time.”

To satisfy those desires, 3PLs themselves are constantly on the lookout for new analytical methods and techniques, these include tools for asset optimization and labor planning, as well as those for calculating total landed costs.

While the consideration of total landed costs is nothing new, companies, with the help of their 3PLs are using the data somewhat differently than in days past.

“One thing that’s changed is that we’re now making routing decisions based on landed costs, rather than just transportation decisions,” Martin said. “Again, that’s part of the new dynamism of the supply chain. We’re looking at needs and forecasts and total landed costs and considering them from the perspective—and advantages—of shipment movement.”

Jim Butts, a senior vice president at C.H. Robinson, said thanks to the new dynamism in the planning process, supply chains are now attracting the attention of the “best minds in the business.”

“They’re now seen as key to differentiating oneself and holding onto or seizing the competitive advantage,” he said. “They really are the means of survival for many companies.

“What clients are looking for is more supply chain discipline, and a byproduct of that is a real focus on metrics, process, and the flow of continuous information,” Butts said.

As has already been noted, the message 3PLs have been hearing loud and clear from their clients are requests that they be more strategic with them.

“Where in the past 3PLs were generally more service oriented, now clients are coming in and saying, ‘What other resources do you have?’” Butts said.

“You have to remember, as much as globalization has taken hold in the world, a lot of companies either don’t have supply chain expertise in-house, or they’ve let some of it go due to recession inspired downsizing.

“And there’s one more thing driving this search for outside expertise, and any and all possible assistance a 3PL may provide: Once the economy does revive, to whatever extent it actually does, they want to capitalize on it without adding substantially to their costs beforehand.

That’s not all, Butts adds: “They want their supply chain to be scalable, configurable, and nimble enough to respond to market changes as the economy revives,” Butts said.

Tony Zasimovic, vice president of international logistics for APL Logistics, said in light of such a goal, the task of supply chain management has “almost become an attack on inefficiencies.”

Therefore, “The question we always have to ask is, ‘How many buckets will you let us address?’” Zasimovic said. “They have money budgeted for production, money budgeted for warehousing…and these buckets extend ever further along the supply chain. So it really boils down to how many different functions will they allow us to take a look at?”

Butts agreed that tamping down on inefficiencies has become a huge part of the 3PL/client relationship, but he said it can only truly be achieved once the two parties are entirely on the same page.

“One of the most effective ways to be a better partner is this new environment is time spent early on getting to know each other, getting to understand each other’s strengths and weaknesses, getting to understand each other, period,” Butts said.

“You need to arrive at an understanding of things like, ‘What does success mean?’ ‘What are the performance metrics we need to look at in this particular circumstance?’ ‘Who has access to this information?’ ‘Who can be a contributor to it?’ And, ‘How are we going to tailor the continuous improvement process to meet your needs?’ These are things that need to be understood right at the beginning.

“The other thing that’s becoming increasingly important in our conversations is procurement, and how the procurement process aligns with the supply chain, and these processes we’re looking to put in place,” Butts continued. “Our job is to make all this as easy as possible to incorporate.”

Sophisticated intelligence

The other thing client companies want now more than ever is reliable business intelligence—better information that they can access in a more timely fashion.

According to Zasimovic, “Our clients are now asking for sophisticated intelligence, market info, the early identification of trends in the industry that they’ll need to guide their decisions over the next 12, 18 and 24 months.”

In a sense, the search for new paradigms by importing and exporting companies—and the resulting demands this search places on 3PLs—is quite similar to the strategy author David Kilcullen lays out in The Accidental Guerilla, a meditation on mounting a counter insurgency in Afghanistan and Iraq.

Kilcullen, an Austrailian military officer who for several years has been working closely with the U.S. Department of State, and more recently, Gen. David Petraeus, holds that in the 21st Century environment, failing to look beyond traditional intelligence is almost certainly a recipe for disaster.

In his world (that of diplomacy and warfare), the fatal flaw of diplomacy is that it too often focuses almost entirely on the engagement of elites in society, basically missing or ignoring what’s going on at other levels of the country being engaged.

Why, for example, did Western intelligence miss the imminent fall of the Soviet Union in 1992? In part, Kilcullen said, because they were reading the mail of the Soviet leadership, which itself had failed to grasp the depth of the grassroots disillusionment with Communism.

Kilcullen holds that actionable intelligence that would have revealed what was actually happening could easily have been divined from readily accessible “open sources”—unclassified information, newspaper reports, and independent studies, that are turned out on a routine basis, but are rarely effectively seized upon (see sidebar).

Traditional intelligence reveals what a nation’s elite “believes” to be happening, Kilcullen holds; not necessarily what’s occurring on the ground. wt



Contributing writer Dan McCue lives in Charleston, S.C. where he writes on global trade, foreign direct investment, and port-related issues.

Sidebar: A Journalist's Riff on 'Open Source' Information

Mark Dennis, a former journalist who has covered wars and conflict zones around the world, has long been considered a master at mining the value of “open source” information. Since leaving the profession, he’s been chief communications advisor for Terje Roed-Larsen, the Norwegian diplomat who from 1999 through 2004 was United Nations special envoy to the Middle East, and worked for Bell Pottinger, the global consultancy, before setting out on his own as a provider of specialized business intelligence services.

Over the past several years, his boutique service has proven particularly adept at handling and staying ahead of the curve in crisis and high-stakes situations. Today, he continues to serve as a trusted consultant for DP World, the large, diversified company owned by Dubai’s royal family. “As a journalist, I recognized that dailies and wire services put pressure on their reporters just to get the story of the day out,” Dennis said. “That led to an editorial system that relied on building stories around official sources, and ultimately led to a consensus of reporting.

“I was writing on a weekly deadline at the time, didn’t have the daily pressure, but what I did have—due to the consensus of reporting—was the feeling that the more I read, the less I understood,” he continued. “What worked for me was gathering empirical information on the ground.”

To illustrate the danger of relying on the conventional wisdom, Dennis went on to recall his experience in Kosovo before the outbreak of the war in 1998. Driving in the countryside, he saw tanks lined up in a defense position and troops digging in. He called his editor, telling him what he had seen and wanted to report, but was rebuffed.

“He said, ‘No, I have a story from our State Department reporter that says it’s all a bluff.’ I thought, ‘Okay, that’s classic journalism, listening to official sources rather than going out and thinking for yourself,” Dennis recalled.

Within days, Kosovo was at war. Soon, Dennis had moved on, and was working in the Middle East Policy Office of the United Nations. The office relied in part on a daily briefing, a translation of what was appearing in the Israeli press that morning.

“I said, ‘How can you possibly trust it? The newspapers are only reporting what they find newsworthy on any given day, and then you’re having it translated by someone who might apply his perceptions and biases to what’s being reported,” Dennis said.

In time, however, Dennis said he realized the daily briefing contained a treasure trove of information, if only one were willing to delve beneath the surface of what was being said.

“If something in the information I was being presented caught my attention, then I’d mine all the way down and try to see how the story unfolded, from source to publishing. And, I would only believe the information in stories that I could determine was provable. A bill passed, fine. A hurricane struck, fine.

“The consequences of what happened and why it happened? That’s opinion and conjecture. It may be provable and it may not be,” Dennis said.

“Today, anything I read in the media I read with the assumption that it’s false—unless I read something that’s provable, something I can accept as fact. Then at that point, I start to question what’s going on,” he said.

Dennis described a big part of his work process as “pattern analysis,” or identifying where patterns develop and where divergence occurs.

During the Dubai ports controversy in 2006—it was Dennis who famously advised CNN to ‘Tell Lou Dobbs to shut up’—the consultant reviewed scores of reports on the controversy and the debate over port security; he said it quickly became very clear how members of Congress stood on the issue.

“In politics you’re dealing with people who all have very limited time and sometimes have some serious biases,” he said. “The more time I spent focusing on the political game, the more I started to see how congressional staffers have created a very simplistic communications style, and briefing their bosses on the top five or ten questions they might be asked.

“Judging from what they were saying to the media, I could tell who was using the same talking points and who wasn’t,” Dennis said. “Taking the analysis a step further, I would then look at the tone of the rhetoric. If someone was using ‘attack-minded phrases,’ I knew they were engaged in battle. If they were saying more ‘policy-wonky’ things, I knew these were the people who were engaged in trying to find a policy solution to the controversy.

“If you break down your analysis that way, you come away with an almost foolproof predictor of what’s going to happen,” he said. “Through this empirical type of reporting and analysis, you can determine who’s belligerent and attack-minded, and whether or not they’re interested in producing a policy or playing policy.”

Another key technique is beginning one’s analysis with a “MacGuffin.” The phrase was popularized by the director and producer Alfred Hitchcock, and not surprisingly, it’s a technique that is often employed in movie thrillers.

Think of the MacGuffin as the central focus in the first act of a film, a focus that declines in importance as the motivations and actions of the characters play out.

“In the movies, a MacGuffin often leads to a surprise—things might not be what they initially seemed—but you need to have a reason to have that journey within the film. It’s the same with information for a client.

“Once you figure out your MacGuffin and start following it, you start to see patterns emerge,” he explained. “And then as each of those patterns emerge, you mine further and further down until you arrive at an actionable assumption. It might not have any relation to where you started, but your MacGuffin got you where you needed to go.

“Having that kind of information was very important to my clients,” Dennis said. “In short, by doing deep analysis, you’re not just giving your clients information, you’re providing them with a decision making apparatus.”