Like any outsourced partnership to a service and technology provider, such as in a 3PL relationship, it is vital that all sides are on the same page and speaking the same language in the way of goals, desired outcomes, strategy, and execution for whatever the customer and the outsourced provider are trying to achieve. This model, I like to call an “embedded 3PL relationship.”
The definition of “embedded” by itself is as follows, according to Dictionary.com:
So, then, what is an Embedded 3PL Relationship?
In an embedded 3PL relationship, the 3PL representative truly makes itself as a partner with the shipper/customer or a company representative. This is the true idea of an embedded 3PL relationship. The 3PL gets to know the shippers’/customers’ engineers, manufacturing or supply chain experts in the supplin order to eliminate points of failure down the road. Embedded relationships are marked by significant investments in facilities and technology by 3PLs, and companies, i more collaboration, transparency, trust and sharing of information, and by mutual commitments to each partner’s success (sometimes this may involve gain-sharing such as in small package auditing). Collaborating and sharing information that they have not shared in the past and engaging in vested arrangements. In time, they create a relationship where the two companies work together in the spirit of cooperation and trust, as a single unit, with each being invested in the other’s success.
Embedded 3PL Relationship Example
Outsourcing Logistics, and embedding a 3PL into a shipper/customer who give a dedicated representative who handles all of the details for the shipper. Sometimes, this is either having a satelite office near the shipper, a dedicated phone number and communication portal (such as Slack, a new project management/collaboration tool). This can also be done by customers who work closely with their suppliers, like Pratt and Whitney.
This is a big change from the normal relationship of today. The embedded representative helps solidify the 3PL relationship with the shipper/customer, or even futher, in the case of inbound shipping practices, the embedded company representative at the Supplier.
This paradigm shift to an embedded 3PL relationship or supplier model requires significant changes in thinking, behavior, culture, and compensation. The current Logistics Manager or Purchasing Manager at the company may be resentful: “Do I really need a 3PL or company representative to help do my job, and, frequently the point of contact for relations with carriers? Who pays for all this? It’s my job, I can do it without this embedding of the 3PL/Company representative?”
So, company leadership has to decide if enough benefits and efficiencies are derived from this change in doing business. It must be very beneficial and a “win-win” relationship. The current Logistics or Purchasing Manager wants an answer as to “WIIFM?” (What’s In It For Me?). The company/shipper/customer have to be ready to accept this change. Change can be very difficult.
Perhaps a pilot program is needed, to actually see how it will work.
Contract terms need to change since the 3PL is committing uncompensated resources to managing the relationship and investing in innovation. Gain-sharing agreements may need to become more the rule than the exception.
Contract lengths may warrant evaluation in an embedded 3PL model. Tthe 3PL needs time to understand the opportunities, generate ideas, implement the ideas, and measure savings over time in order to realize a return on any investment they decide to make. This can be difficult in the context of a three-year logistics outsourcing contract, so term lengths may influence a 3PL’s decision to invest.
Another needed change is that manufacturers must begin to openly share proactive information about their business and supply chain strategies. They will need to trust their 3PL partners (culture, behavior change) with proprietary information, and this can be a difficult shift in thinking. That is why it is vital to ask for references and see the mission and values of the outsourcing entity before engaging in the 3PL relationship.
3PLs need to change, Too, in this Embedded 3PL Relationship Model
The embedded model is a major shift for 3PLs, and Suppliers as well. To make the embedded model work, 3PLs/Suppliers need to be ready to take on the role of supply chain innovator within a customer’s organization. While traditional outsourced logistics relationships involve the 3PL looking across its own operations and asking “How can I improve?” the embedded 3PL/Company Representative looks across the customer’s entire business and asks “How do I drive overall supply chain efficiency?” Like we like to say, if all parties don’t win, why is their a relationship? Value shared is value gained. Or, another saying, “Rising Tides lift ALL Boats!”
It is believed that a new model for many outsourced relationships is needed that involves a more strategic approach if shippers want to drive out more logistics costs.
What is the Real Issue Holding Back an Embedded 3PL Relationship?
The basic problem is that shippers or suppliers do not believe 3PLs/Companies are being innovative enough. This is something that many 3PLs and their customers hav been building for a while, but with some continuing economic pressures it has really come to a head.
One key factor is that shippers too often tend to keep the 3PL relationship at ‘arm’s length”, and there is not enough collaboration, transparency and trust. Limiting the 3PLs access to information that might enable it to find opportunities for other areas of improvement.
What Else is Needed in this New Arrangement?
There is other upstream information, strategic information, about where the shipper is going, that the 3PL/company are missing. That information would allow the 3PL relationship to be more innovative for the shipper/supplier.
This embedded model would support a higher level of visibility and a more collaborative relationship. The embedded 3PL relationship, in which a senior manager for the 3PL works within the shipper logistics or supply chain organization to act as part of the team. The same occurs when you embed company representatives into a supplier. It would mean joint problem solving/joint idea sessions/brainstorming continuous improvement and co-creation. The 3PL/Customer are engaging with the shipper/customer and supplier in completely different ways.
This change means they are part of strategic conversations and the day to day activity of the shipper/supplier, so they become part of the staff as a partner, much like a hired employee, rather than just having data creating a reactionary 3PL or company.
It is important to note this concept involves a true senior 3PL/Customer operations professional, not a strategic account manager or other more sales related individual that has in the past sometimes served in a somewhat related role at a client.
In the writer’s opinion, there still should be a “win-win”, collaborative Service Level Agreement (SLA) with Key Performance Indicators (KPIs) to ensure continuous improvement takes place between the 3PL/shipper and company/supplier models. If you don’t measure this partnership, you will never know how both parties are doing as to meeting the agreed upon metrics, including cost reduction efforts and continuous improvement. This living document should be reviewed monthly, at first, then perhaps quarterly.
What are your thoughts? Can you see this type of 3PL relationship work for you? What are your pros and cons about this new arrangement?? What benefits do you see? What roadblocks may occur?