Years ago, a sales outfit for a group of public warehouses developed the following motto: "These firms do more than ship and store." That "more" is what logistics service providers call "valueadded services," the "extras" they offer their customers beyond the basic functions of storage, inventory control, and, perhaps, order fulfillment.
The concept of value-added services originally arose out of service providers' fear that buyers would see their core services as commodity purchases, and that fear is justified. Just as most consumers buy gasoline, milk, or paper based on price rather than brand name or quality features, some buyers of logistics services feel that price is more important than any other factor in provider selection and retention.
But when it comes to value-added services, how much is marketing and how much is truly the service provider's "secret sauce"? And how much is destined to become just another commoditized offering with a short-horizon competitive edge? Is this just a clever way for service providers to enhance revenue? Or is something more fundamental going on in supply chain design and execution? Let's take a dispassionate approach and try to understand just what the idea of value-added services really means.
What are they?
Fundamentally, value-added services are all about problem resolution. The provider gains an edge by developing a service that solves a problem for the customer. It's worth noting that the best of these services are not easily copied or transferred to another source.
For the buyer, a value-added service might be anything that improves productivity and therefore increases sales and profit. A service that attracts more customers adds value. A service that reduces errors and other hassles certainly adds value. Anything that improves morale within any link in the supply chain will add value for the customer.
Two important characteristics of higher-level valueadded services are that they are scarce, and they are complex. Precisely because of scarcity and complexity, they are not easily duplicated by competitors.
When a service is not scarce and not complex, the buyer no longer perceives it as something that adds value. With the passage of time, some special services that were once considered exotic have become widely available and lost their cachet. There was a time when warehouse companies advertised fireproof storage, and later, the progressive ones offered computerized inventory reporting. Promoting either of these as value-added services would be laughable today.
Examples of value-added services
Let's look at some of the services that providers promote as value added.
One of the most frequently discussed is packaging. Relatively few transportation and warehousing providers are also able to offer packaging services. But for the shipper, there can be a significant advantage in shipping product in bulk form and having the final package filled at a distribution center that's located close to the marketplace. Sometimes, the packaging service is simply labeling or branding, converting a can or bottle from "plain vanilla" to a private-label product. In other cases, packaging is simply the assembly and shrink wrapping of multiple consumer packages to provide a "club pack" for the discount retailer.
Another value-added service is marking or recording. A chain retailer may have the retail prices for each item applied at the distribution center rather than at the point of manufacture. When serial number control is important, recording of serial numbers may be performed by the service provider. Similarly, weights—particularly catch weights on variable weight products such as hams—may be recorded as the product is shipped.
In some cases, the value-added service includes light manufacturing, testing, assembly, or kitting. A few also involve sequencing, in which products or components are arranged in the expected order of their use. Still others might entail arranging products and packaging for store-ready display.
A furniture manufacturer might distribute tables or beds in a knocked-down form with final assembly performed just before the product is delivered. A maker of computers may have final assembly or testing performed in a warehouse just before the product is shipped. In some cases, the manufacturing service may convert an item from one SKU to a different one. In other cases, the service provider offers home delivery, field installation, or removal.
When the service provider offers customer fulfillment, a variety of value-added services are performed. The distribution center may operate a call center or receive electronically transmitted orders directly from customers, and the center may be asked to provide information directly to those customers. The distribution center may provide a pick-and-pack service that converts bulk merchandise into a consumer shipping carton. Or the fulfillment operator may process credit card transactions.
For operations whose primary service is warehousing, transportation management is considered a value-added service. For example, the service provider may be asked to select the carriers and to monitor carrier performance. Frequently, they are asked to audit and/or pay freight bills. Some warehouse companies offer freight consolidation and deconsolidation services designed to save transportation dollars for their customers. Others use transportation capabilities to offer JIT (just-in-time) delivery. Merging in transit is another value add, as are pool distribution and cross docking.
Special storage features are always a value-added service, and these include temperature-controlled storage, security vaults, customs bonded storage areas, and hazardous material control. Many providers offer information systems that provide reports on productivity and quality. Information services might include Internet supply chain visibility or handling of EDI (electronic data interchange) transactions. Some providers offer consulting, including transportation network optimization, along with process re-engineering.
A few service providers offer inventory management as well as inventory control. In managing inventory, they will identify slow-moving items and suggest liquidation and simplification of the inventory, in addition to executing replenishment and cycle counting functions.
The ultimate value-added service is for a logistics service provider to become the lead provider, hiring and overseeing subcontractors that offer additional services. Such services might include customs brokerage, duty drawback, and cargo insurance—or even the basics of transportation and/or DC operations in geographies in which the lead provider does not have a presence.
Taking the long view
Actually, we might take the position that there's nothing particularly special about value-added services. Functionally, there's nothing new here. Packaging has always been done somewhere by someone, for example. Price marking has always been done, maybe at the store, maybe at the DC, and now by a third party. What we're seeing now is part of the continuing evolution of supply chain structures for all the usual reasons: cost, speed, quality, flexibility—many of the essential attributes of supply chain performance that are always in continuous improvement mode.
Although in the longer term, these valueadding steps are simply repositioning where in the supply chain certain tasks are accomplished, in the short term, they are different and can be competitive differentiators. And those entities that are flexible and innovative enough to get out in front of this particular parade will be leaders in fact, as well as in perception.
But make no mistake, today's breakthrough is tomorrow's commonplace. The leaders will be looking ahead to tomorrow's breakthrough—the next functional repositioning within the greater supply chain.