Many third-party logistics companies tout themselves as carrier-neutral. They proclaim to their customers that they select carriers based on getting the best service at the lowest cost. But the 3PL industry has evolved significantly since the late 1980s and early 1990s, when a few transportation companies started 3PLs, and carrier neutrality has been swept up in the evolution.
Almost every transportation company now has a 3PL operation. The goal of a transportation company is to move up the supply chain and garner additional revenue and provide bundled services such as transportation, distribution and fulfillment, freight brokerage and intermodal services under the umbrella of logistics services. A secondary consideration is to protect transportation revenue for the other transportation divisions.
In the 1990s, 3PLs prided themselves on being carrier-neutral and providing best-service-least-cost transportation solutions. This was relatively straightforward; carriers were ranked and rated on a balanced scorecard that included on-time delivery, claims ratio and rates. 3PL providers touted their carrier programs and aggressively marketed their carrier-neutral capabilities. The industry was new and there were few players in the industry. Logistics outsourcing was still a new concept. Information technology for logistics was still in its infancy, and carrier network optimization was not as sophisticated as today.
Things started to change in the new millennium as more transportation companies established 3PL operations. Carrier neutrality became a thing of the past. Many transportation companies committed heavily to funding their 3PL operations.
Today, 3PLs owned by a transportation carrier are not carrier-neutral, and for good reasons. When the 3PL managers present to the transportation company’s board, they face questions about how much revenue the 3PL has generated for the parent company’s transportation business. The 3PL exists to put freight in the transportation company’s network. Most 3PLs keep statistics and track the amount of business generated for the transportation company’s various divisions — parcel, less-than-truckload, air and truckload, for example.
Remember, the parent company has invested heavily in the startup of the 3PL through funds and people. Having a 3PL executive presenting to the board or senior management team about carrier neutrality and displaying the amount of business going to a competitor won’t get the 3PL executive a promotion.
Bundled solutions and pricing is another strategy used to protect the transportation company’s book of business and garner additional revenue. Transportation companies over the years have moved into distribution and fulfillment services, return services and brokerage services, creating a one-stop shop for supply chain solutions. Carriers have figured out that by co-locating distribution centers near major freight terminals and end-of-runaway operations, the customer can significantly extend its order cutoff time from 5 p.m. to 10 or 11 p.m. This is a tremendous service benefit to the customer and its customers because it allows orders to be filled and shipped the same day. This is a pretty standard offering in the industry and is in response to customer and consumer demands.
Many customers choose a bundled suite of 3PL service offerings, including transportation, fulfillment and other logistics services. The customer doesn’t have the resources or the expertise in house to dissect the bundled solutions pricing components. The customer is sold the benefits of the bundled solution along with a discount off the standard rates for a volume commitment.
Many transportation companies have a multitude of shipping options, and it’s extremely difficult to do an apples-to-apples comparison on the various transportation modes without a highly trained staff experienced in transportation rate analysis and logistics services. As customers focus on their core business, they rely on a 3PL provider to become their logistics and transportation staff.
3PLs have done an excellent job of integrating with customers in long-term logistics deals. Most deals are three-year contracts with annual one-year renewals. The barriers to changing 3PL providers can be significant and cause disruptions to the customer’s business. 3PLs are adept at building tightly coupled data links from the customer to the 3PL and their sister divisions. Many 3PLs have increased their revenue base through organic growth because well-managed 3PLs are constantly looking for revenue opportunities.
Carrier-neutral 3PLs may be a thing of the past because of the evolution of the transportation and logistics industry. But a 3PL provider that understands your business and can provide bundled solutions with competitive rates can reduce your logistics costs. It’s up to the customer, however, to understand the agreement and perform the proper due diligence before selecting that provider.
James Bisaha is managing partner of Logistics and IT Consulting in Atlanta. Contact him at email@example.com.