As manufacturers and retailers continue to focus on controlling costs —while increasing their agility and responsiveness — third-party logistics (3PL) providers have become a critical resource. According to the 2014 18th Annual Third Party Logistics Study published by Dr. John Langley of Penn State and Capgemini1, 72 percent of shippers are planning to increase their use of outsourced logistics services in the future. Those 3PL providers who can best help customers to adapt to volatility and omni-channel market requirements will win the lion’s share of this business.

However, that same study revealed an “IT gap” that vendors must close in order to add greater value for their customers. A full 98 percent of shippers believe that the continued success of their global supply chains depends on managing data, as well as leveraging it to make better decisions. Yet only 55 percent of shippers are satisfied with the information technology services delivered by their 3PL partners. This is very similar to the 2013 edition of this same study2 which likewise found that only 55 percent of shippers were satisfied with their 3PLs’ IT capabilities even though 94 percent said that these capabilities are very important. This suggests that 3PLs are not making significant inroads in meeting customer expectations even though tremendous opportunities exist.

Why aren’t 3PLs investing in information technology to close this IT gap? First, the uncertainty and volatility in customer relationships makes long-term investment in new technology a more risky financial proposition for 3PLs than for other industries. Second, many 3PLs lack the in-house expertise or bandwidth to understand, evaluate and implement the new, advanced systems. Third, some 3PLs have insufficient or outdated technology stacks that are not able to support the advanced systems required. And fourth, most logistics partnerships are focused on short-term, tactical objectives such as cost reduction and improved service levels, not on long-term strategic advantage. Yet, advances in system capabilities, vendor services and cloud platforms can overcome all of these challenges.

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Closing the 3PL Technology Gap: The Single Biggest Challenge for Staying Relevant in Today’s MarketplaceWhile market volatility and the rise of the omni-channel marketplace have created significant challenges for manufacturers and retailers, these trends are also creating huge opportunities for logistics partners who are able to bring the right technology to bear to help solve customers’ most pressing issues.

Going Beyond the Tactical to Provide Real Strategic ValueThe 2014 Langley report revealed that, when it comes to adding value via technology, shippers view their 3PL partners as tactical rather than strategic. For example, 76 percent of respondents said they rely on logistics providers for electronic data interchange (EDI) — but only 42 percent see 3PLs as a true partner in advanced analytics and data mining even though both shippers (97 percent) and 3PLs (93 percent) agree that improved, data-driven decision-making will be essential to the future success of their supply chains.

The fact is, 3PLs represent a veritable warehouse of market information and customer insights for their customers. Logistics providers know who is ordering which products, how demand varies from month to month, how customers like to receive their shipments, and other key business insights. While this data is currently applied at a low, operational level, it can actually add tremendous strategic value as well — and help manufacturers and retailers meet their core challenge of managing volatility.

Imagine if a 3PL partner could suddenly begin providing real-time input to the demand planning and sales forecasting functions. Or if that logistics provider could mine its wealth of data to create new product bundles, value-added services or delivery options based on actual consumer needs.

Or imagine if a 3PL partner could help manufacturers and retailers solve their important challenge of providing a seamless omni-channel customer shopping experience through intelligent, profitable fulfillment of orders across all channels. Suddenly that company would be able to stand out from every other 3PL — and become viewed as a real strategic partner versus as just one of many capable service providers.

The list of ‘what if’ scenarios for 3PLs is virtually limitless, covering areas such as value-added services, postponement strategies, reverse logistics and repair, distributed order management and many other value-creation services that can add strategic value and differentiate a 3PL from its competitors. But to create this strategic value, 3PLs will have to go beyond traditional processes, technologies and services. They also must go beyond traditional customer-provider contractual relationships to true partnerships as Kate Vitasek of the University of Tennessee describes in her groundbreaking book on vested outsourcing: The Vested Way: How a “What’s in it for We” Mindset Revolutionizes Business Relationships.3

From Vision to RealityThis vision may seem futuristic or unrealistic to many 3PLs who are burdened with outdated technologies and cost-focused contractual relationships, but the truth is that leading third party logistics companies are already moving in this direction. They are providing end-to-end supply chain solutions for their customers that incorporate integrated, holistic forecasts, constraint-aware planning, profitable omni-channel fulfillment decisions, optimized shipment planning and execution, and efficient warehouse and labor management solutions. Many are relying on vendor expertise to guide them in how best to incorporate these new functions and on cloud platforms to quickly ramp up with the right solutions and technologies to create strategic partnerships and competitive advantage at lower risk and total cost of ownership.

What should 3PLs do to progress from this vision of strategic partnership to the reality of having the necessary capabilities in place? Here is a basic roadmap that can help transform your business and your relationships with customers.

• First, gain as much information as possible about what systems, technologies and cloud platforms are available in the marketplace. The supply chain technology industry has made great strides in capabilities to address the pressing needs of the rapidly exploding omni-channel marketplace, as well as with cloud platforms that speed deployment at lower costs.

• Second, hold executive level meetings with customers to learn what their strategic objectives are, not just their tactical needs. Look for synergies between their objectives and what you can potentially provide, and sound them out for their willingness to consider outsourced options to support their strategies.

• Third, do an honest assessment of internal capabilities and capacities, and compare this with what is needed to support customers’ strategic objectives. This assessment should include: processes, people, expertise, equipment and technology.

• Fourth, engage outside experts and/or technology vendors to identify options, costs and timeframes for filling the gap between current capabilities and customers’ strategic visions. Include customers in these discussions to ensure proposed solutions will actually fulfill customer expectations.

• Fifth, implement the new solutions as quickly as possible, considering the best financial arrangements and deployment options, such as cloud platforms, that meet both your financial objectives and customers’ strategic needs.

• And finally, repeat these steps on a regular basis, at least once per year, to make sure your capabilities continue to support customers’ strategic objectives. Typically, this process is started with a pilot program for one key customer who is both open to change and stands to realize significant competitive advantage by implementing the new capabilities and services. Then expand the program out to other customers in a well-planned and controlled process.

The New Technology LandscapeInherent in moving to new strategic value for customers is incorporating new technologies that will support the expanded scope of the relationship. Historically, 3PL technology has focused on execution—transportation management, warehouse management and labor management systems. These worked perfectly well in the old “push” version of supply chain and associated tactical outsourcing relationships, and they continue to provide great value today. But the much more complex and real-time requirements of the omni-channel marketplace are forcing manufacturers and retailers to adopt integrated, end-to-end supply chain solutions that closely link demand with replenishment and cross-channel fulfillment.

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POS-based demand sensing and forecasting systems are being integrated with multi-channel replenishment systems to ensure product availability without excess inventory. Distributed order management systems are being closely integrated to constraint-aware omni-channel fulfillment systems to reduce costs and safety stock while improving service levels and supporting customer delivery choices. And these constraint-aware planning systems are being integrated to all execution systems so that the plans created are both possible and profitable to execute.

To play in this new, much more highly integrated and real-time environment, 3PLs will have to step outside of their comfort zone and realize that outsourcing relationships in the future will no longer depend just on efficient execution. They will become strategic partnerships that support the sense and respond paradigm that manufacturers and retailers must master to survive going forward.

The Time is NowIt’s an exciting time for 3PLs, as manufacturers and retailers increase their reliance on outsourced logistics providers to support an ever-wider range of services to help them deal with volatility and the many-faceted challenges of omni-channel fulfillment. The key to lasting success for 3PLs will be to look beyond short-term, tactical logistics services — to become a strategic partner focused on customers’ success. This is the only way 3PLs can stay relevant in today’s fast-changing marketplace. It’s a ‘Reset’ time for 3PLs. Some will adapt and thrive as true strategic partners with their customers. Others will not. The time is now for those decisions to be made. The marketplace won’t wait.

1 C. John Langley, Jr., Penn State University, and Capgemini, “2014 Third-Party Logistics Study: The State of Logistics Outsourcing,”2 C. John Langley, Jr., Penn State University, and Capgemini, “2013 Third-Party Logistics Study: The State of Logistics Outsourcing,”3 Kate Vitasek and Karl Manrodt, “The Vested Way: How a “What’s in it for We” Mindset Revolutionizes Business Relationships,” Palgrave MacMillan, 2012