HOW CAN 3PLS ACHIEVE ECONOMIES OF SCALE?

Over the past few years, the functions of 3PLS ACHIEVE ECONOMIES OF SCALE have changed a lot. In addition to providing warehousing and transportation services, today’s 3PLs are assuming a lot more responsibility in tactical planning and operations to guide the overall supply chain efficiencies. Because of globalization they’re also shaping up quickly their customers’ value chains with services like security consulting and purchase order management. ( April Terreri 2005)

To achieve these premium levels of services they are investing in advanced technologies and methodologies to better understand their customers’ supply chain needs. (Lara L. Sowinski, July 1, 2005)

Ways to achieve Economies of Scales:

Third-party logistics can achieve economies of scale by investing in efficient and integrated supply networks for their clients. As it is one of the biggest challenges being faced by individual customers to manage their complex supply chain networks in emerging markets. The individual customer can’t do it because it saves them almost 15 to 30 percent cost and this outsourcing frees them to focus more intensely on their core business. Moreover, these 3PLs better understand the increasingly complex logistics environment. This is also helpful for companies to expand their global market coverage. For example, it is much harder for the companies distributing their products across Europe to incur the cost, bear delays and risk associated with setting up their systems. (Johan Paul Quinn, July 2006)

The 3pls can also develop horizontal, cross-company supply chains by clustering specific logistics activities and consolidating supply chains. So they can achieve significant economies of scale regarding efficiency (logistics cost), effectiveness (customer service) and environmental sustainability (carbon footprint). (Anonoymous 2009)

Improvement in inventory velocity turns and cycle time reductions are the main emphasis of today’s SCM. However, firms could be unwilling to add staff, add overhead. Yet the logistics function must be executed and executed well for corporate success. 3PLs can provide the logistics resources and skills needed without adding salary, benefits and other costs associated with hiring direct employees.

The next evolution for 3PLs is the involvement in the planning process beyond execution and fulfillment. The industry is continuing to advance in capabilities and service offerings much more upstream in the supply chain. The opportunity will be to integrate all the pieces involved in the supply chain as 3PLs advance their services to provide end-to-end supply chain solutions. (Allen, 2007)

The 3pls can make sufficient investments in advance IT technologies to achieve economies of scale. As shipper respondents are looking to outsource not only logistics activities that are more transactional, operational and recurring but also those that are more strategic, customer-facing and IT-intensive. The economic meltdown is serving as a force for shippers to reconsider the roles that PLs play in helping them make decisions about their supply chain networks.

Integrated software application systems like NextLinx in conjunction with other application have enabled the big 3PLs to integrate their core services with other service providers to offer a fully integrated logistics system to customers. Additional speed has to come from the logistic solutions as trucks and rails and ships cannot be made to travel faster. An automated supply chain system can cut the time needed for deliveries from the Far East to a warehouse in the United Kingdom from months to just 25 days. (Anonymous 2006)

3PLs can save their customer’s risk, costs and time associated with go-live ERP through investing in ERP systems to gain economies of scale. According to the study, the state of logistics outsourcing 2007. 62 percent of companies surveyed in the U.S. felt that 3PLs provide new and innovative methods to improve logistics effectiveness. While reporting an average cost savings of 13 percent after outsourcing. Among the criteria, the respondents felt very important the IT capabilities of 3PLs ranked in top three issues with integration into customer ERP being viewed as” progressive “trait.

RFID (Radio Frequency Identification):

Now, most of the big 3PLs are implementing RFID (to minimize the cost. However, to be truthful this implementation is pretty tentative. Now RFID has become inevitable that is why many companies are going to implement it. More cautious types fear that issues, such as cost, Return on investment and standardization, will delay implementation and that the benefits are still years away.

more articles:

Metrics:

3PLs have to invest in high tech metrics in the supply chain recognizing its strategic importance. They are now being tied with financial metrics and being used in budgeting and projections.

Real-time access to information for making the better decision is one of the pressing requirements and demands by the customer’s Open access to the right information has never been more important-nor more challenging to provide.

Customer relationship management

Today’s logistics customer and demanding customized and sophisticated services from the 3PLs. As the supply chain has become more sophisticated, there has been an increasing expectation of additional 3PL expertise. That is why customer and involving the 3PLs in their strategic and logistics process decision making and expecting a broader range of capabilities. Hence the 3PLs can make investments in CRM technologies to reap the future benefits of a strong long-term relationship with their customers.

Aggregation:

3PLs can minimize they are per unit handling cost by aggregation of the entire task in one department.  This decision presupposes the extensive analysis of important contingency factors, like product line, environmental relations, technology, and organizational size. However, such contingency factors have a limited influence and are modified by the strategy of the organization.

Moreover, shipment aggregation strategy could also be employed by the 3PLs to minimize their operational and overhead cost and reap the benefits of cost-effective LTL(less than truckload shipping) rates. This strategy is creating a single shipment of multiple orders, originating from the same shipper to the same destination on the same day that would have otherwise have been released as separate shipments.

 

Demand Supply Planning:

Demand-supply planning is yet another function that 3PLS are handling for several of its retail clients who had traditionally operated this in-house to optimize their operations and minimize the per unit cost they are helping these clients understand how much inventory they are carrying across their network based on ultimate demand. Then they advise clients on how much inventory they need to carry in particular locations within their network based on point-of-sale consumption, which drives the planning process. This is one of many examples of how the company is advancing upstream in clients’ supply chains to provide higher levels of service and efficiencies. (April Terreri, 2009)

Network Optimization:

To expand the current business and avail the new opportunities, the third party logistics can also move to network optimization for their clients for achieving efficiencies. They can conduct a network-wide analysis on where a client’s DCs and stores are located, and then recommend where they could replace their current DCs with other locations for greater efficiencies. It has been done by an engineering group at APL logistics.

Unprecedented and rapid changes in the prices of oil and other fuels present challenges for the active players in the global supply chain and make it much difficult to reap the benefits of economies of scale and efficiencies.  Moreover, environmental sustainability and energy efficiency present one of the dramatic challenges that will unfold in a variety of complex interactions between various types of global supply chain players that are trying to fulfill emerging realities of consumer sentiment, public policy, and energy supply.

 

Rail service could be an efficient means of transport for 3PLs because of low-cost freight rates and fuel efficiencies. Rail is much cost efficient than truck and air. Now market share is being taken up by efficient and cost-effective modes of transports. However, the current problems being faced are dramatically slower speed of delivery along with more unpredictability in delivery date and capacity that are not meeting their transportation needs. Insufficient capacity and slow delivery problems could be resolved by the public /private partnership.

Large geographical network coverage presents lots of challenges to 3PLs when they are Determining the optimal number of warehouses, the location of each warehouse, the size of each warehouse, allocating space for products in each warehouse, which products need to be transported, and in what quantities, and  the best routes for a vehicle in a transportation network .  However, the 3PLs can remove these challenges such as choosing sites, targeting market segments, planning distribution networks, responding to emergencies are all problems that involve questions of geography, if they use GIS (geographic information systems) applications to cut across industry domains. The use of GIS towards the superior management of business logistics is a relatively new phenomenon but it has become a strategic and operational tool to achieve the efficiencies in logistics management.

3PLs are making efficient use of their labor supply as they are providing staffing services to their customers to achieve the economies of scale. One benefit of this outsourcing model is staffing efficiency.3PLs can offer value added services such as product distribution, customer service, inventory management and order fulfillment at a minimum cost.

In short, the 3PLs have to be more innovative than ever before to be more efficient and effective as a recent report by a research firm shows that 77% of domestic Fortune 500 companies use 3PLs. Moreover, many small companies are also looking to outsource their logistics and non-core operation to them.

You May Also Like

About the Author: Editorial Staff