Are you keeping your 3PL from innovating?

Do you feel your third-party logistics service provider isn't innovative enough? That it's failing to come to you with new—or at least, new to you—ideas for cutting costs or streamlining your operations?

If so, you're not alone. A 2012 survey by the Tompkins Supply Chain Consortium, Outsourced Distribution: Emerging Trends and Performance Satisfaction, found that 37 percent of respondents were dissatisfied or very dissatisfied with their logistics service providers' ability to come up with innovative solutions. A second study, The 2013 Third-Party Logistics Study, conducted by Penn State University, Capgemini Consulting, and others, showed that only 53 percent of shippers believe their third-party logistics service providers (3PLs) are even ready to innovate (meanwhile, 89 percent of 3PLs insist that they are).

What are shippers looking for with regard to innovation? It varies all over the map, says John Langley, a professor at Penn State University and lead author of The 2013 Third-Party Logistics Study. While some are looking for a "disruptive" or game-changing innovation—such as using social media to track order status in real time—most are simply looking for ideas that are "innovative to them," he explains. Examples of "new to them" practices might include using RFID chips to track assets, replacing spreadsheets with a transportation management system, and introducing back hauls.

While it's easy to blame your 3PL for failing to come up with new ideas, it might not be the provider's fault. You might be partly responsible as well. Many times, shippers unintentionally sabotage their 3PL partners' best efforts to innovate and discourage them from proposing new ideas. How do you know if you might be one of those shippers? Here are five questions to ask yourself:

1. Are you constantly bidding and rebidding the business? Some shippers are so intent on reducing rates and finding the lowest-cost provider that they're constantly putting their business out to bid.

"Shippers and 3PLs remain, for the most part, entrenched in the ... low-cost-at-all-times approach to doing business. This is not conducive to innovation," says Kate Vitasek, founder of the consulting company Supply Chain Visions.

Langley agrees, noting that constant rebidding emphasizes short-term performance at the expense of long-term innovation. "A 3PL doesn't have any chance to settle in and provide good service if it's spending all its time trying to regain the business," he explains. In his view, a contract should run three to five years in duration in order to give a provider enough time to study your business, understand it, and come up with some suggestions for improvement.

2. Are you preventing your 3PL from getting the big picture? It's hard for a logistics service provider to come up with innovative ideas when it has a very limited view of your operation—say, if it only deals with a buyer or supplier relationship manager or interacts with just one department. "If we are stuck within the confines of a traditional transportation unit, we are unable to take a holistic approach that ties in purchasing, distribution, and sourcing," says Brian Catron, director of product management for third-party service specialist APL Logistics.

To avoid this, Vitasek urges shippers to bring representatives from all parts of their supply chain—such as purchasing, sourcing, distribution, and manufacturing—into discussions with the third party. "You need to think of it as being like a joint venture," she says. "When you are a joint venture, you have a board of directors guiding the operation instead of a single account manager or supplier relationship person."

3. Do you talk only about daily operations with your 3PL? While lots of shippers are good at communicating with their logistics service provider about day-to-day operational matters, few are eager to share the details of their overall strategy with an outside company, says Tim Pyne, vice president at Tompkins Associates and co-author of the Outsourced Distribution report. But withholding that kind of information can be counterproductive. In order to be innovative, a 3PL must be familiar with your overall strategy, says Langley. He urges shippers to share key elements of their strategic plan with their providers.

These discussions should include where the company is going and what changes it is planning to make, says Pyne. For example, is the company moving into e-commerce? Does it plan to start serving a new market? Has it gained any new customers? Does it intend to open a new distribution center or close an existing one?

4. Are you paying your 3PL for activities instead of outcomes? Often, the biggest obstacle to innovation is the standard pricing model used by most 3PLs and shippers, says Vitasek. That's because under the standard model, 3PLs are compensated for transactions or activities, like number of lines picked or orders shipped, instead for overall desired outcomes—such as a reduction in transportation or inventory costs or an increase in on-time complete orders.

The flaw in the transactional model is that logistics service providers have no incentive to boost overall productivity because that would likely mean reducing the very activities or transactions they are paid for. In these cases, suggesting process improvements would almost certainly cost the provider some business. "There's not going to be any innovation if there's no return on investment," Vitasek says.

As an example, Vitasek recalls asking a 3PL what its inventory turns were for a particular client. According to Vitasek, the general manager responded, "Why do I care? We don't own the inventory. We just store it and ship it. In fact, we like inventory—the more inventory, the more money we make."

Vitasek says that transportation in particular is still "stuck in the Dark Ages," with shippers asking providers to bid on getting products from Point A to Point B. "Instead, they should be asking their logistics service providers how they can reduce their transportation costs by 30 percent," she says.

5. Are you unwilling to pay for innovation? "Innovation is not a costless exercise," says Langley. Whether you're implementing new equipment and technology or redesigning a process, there's going to be some expense involved. "At the end of day, someone has got to pay for it," Langley says. "But relatively few customers want to pay for an extra line item."

Of course, the same holds true of LSPs—few, if any, will want to take on the full cost burden themselves. Which is why a shipper that's reluctant to invest its own capital or resources in any improvements probably won't be seeing many new ideas from its provider. "There's no question about it, it limits our ability to pursue innovation," says Catron of APL Logistics.

WHAT YOUR PROVIDER CAN DO
Of course, the fault does not all lie with the shipper, when it comes to lack of innovation. There are many things that providers can do to ensure they're not missing out on opportunities for improvements.

These can be as simple as training personnel to maintain a "process improvement" mindset or making it clear to all of their site managers that they're expected to be innovative, Pyne says. One way to get managers to focus on continuous improvement is by implementing a Six Sigma or Lean program, he notes. A formal program that pushes managers not to be satisfied with the status quo goes a long way toward encouraging innovation.