Increased globalization has led to the increased importance of Supply Chain Management for most businesses involved both domestically and internationally. Globalization has led to record levels of competition from competitors both domestically and internationally. The underlying factors involved in competitive pressure due to globalization are not only the trends of reducing the costs of procurement and decreasing the risks related to purchasing activities, but also the need to develop competitive edge through core competencies which allow businesses to differentiate themselves from competitors and stand out in the market by offering not only a productivity advantage, leading to lower prices, but also a value advantage which differentiates its products from its competitors’ products (Sovereign, 2008). Within a domestic market, productivity advantage has been a linchpin of a company’s overall competitive advantage, enabling them to offer lower prices on the end product. However, the global market is more complex—often requiring a significant level of cultural intelligence and a vast knowledge of varying regulations and social issues prevalent within a company’s target market. Companies often find that the level of attention, expertise and resources required for developing the relationships required to effectively manage logistical complexities involved in a multi-national supply chain to be prohibitive to the development of the very same core competencies required to maintain their productive advantages, and experience significant difficulty balancing the two aspects of international logistics management within their supply chains. Many have found the balancing act easier to accomplish through the outsourcing of logistical functions to third-party logistics providers (3PLs).
David and Stewart (2010) defined logistics as “[T]hat part of the supply chain process that plans, implements, and controls the efficient, effective forward and reverse flow and storage of goods, services, and related information between the point of origin and the point of consumption in order to meet customers’ requirements” and international logistics as “the process of planning, implementing, and controlling the flow and storage of goods, services, and related information from a point of origin to a point of consumption located in a different country” (pp. 28-30). Businesses that are freed from the complexities of the international logistics process are able to utilize their resources to build on the perceived core competencies which are the drivers of their products’ success in international markets while the 3PL develops the necessary relationships in each market that the business targets.
The True Value of 3PLs.
Some question the value of outsourcing logistics services to a 3PL. This question is justified if a business’s only intention is to outsource typical logistical functions. There would be better value for a company with such an intention to enlist the services of a freight forwarder. A freight forwarder will have extensive expertise in handling international freight and it will typically know “what alternative routes are available, it knows how to determine the cost of shipping goods between two points, and it can arrange all of the paperwork necessary to ship the goods, from the exporting country’s requirements to the importing country’s Customs clearance” (David & Stewart, 2010, p. 329). The services provided by a freight forwarder is more than adequate for the typical exporter having a small volume of international business; but for those multinational companies with global supply chains with manufacturing as well as supplier networks in foreign countries, a 3PL will be more suitable.
Although the services provided by a 3PL and a freight forwarder may seem very similar, there are some very important distinctions where the management of a global supply chain is concerned. Likely the most important concerns the nature of the logistics relationship between the typical exporter and freight forwarders and 3PLs. The nature of a relationship between an exporter and a freight forwarder is transactional. Coyle, Langley, Gibson, Novack and Bardi (2008) described transactional logistics relationships as “at arm’s length” and suggesting “a relatively low or nonexistent level of involvement between the parties” (p. 110). Such is the typical relationship between freight forwarders and the typical exporting client. Coyle et al. (2008) suggested that this type of relationship is best suited to “One-time or even multiple purchases of standard products and/or services” (p. 110). This type of relationship is less than appropriate for a business managing a global supply chain.
In contrast, the relationship with a 3PL can usually be termed a strategic alliance, and is more collaborative in nature. According to Coyle et al. (2008), “the relationship suggested by a strategic alliance is one in which two or more business organizations cooperate and willingly modify their business objectives and practices to help achieve long-term goals and objectives” (p. 111). Global 3PLs have worked diligently to transform the relationships they maintain with their clients from that of a transactional nature to one more resembling a strategic alliance. These 3PLs recognize that global supply chains have different needs than do domestic supply chains—they have specialized needs depending upon the industry and the structure of their global supply chains. David Beatson (2004) points out that “by addressing and meeting the specialized needs of specific industries, the better 3PLs are able to differentiate services, add value to clients, develop a high level of expertise in an industry, and profitably grow business” (Beatson, 2004, Adding Value, Differentiating Services section).
The differentiation of services by 3PLs in international logistics services has been the catalyst to reverse the perception of many global supply chains that formerly grouped them in the same category with common freight forwarders as commodities. Ranjan and Tonui (2004) found that the 3PLs transformation from commoditization to strategic partnerships has required the development of industry specific capabilities: “value-added services, expertise in specific areas of operation, and the necessary alliances to provide a broad and deep set of services” (p. 5).
Facilitation of Strategic Relationships through Enhanced Capabilities.
Unlike traditional freight forwarders, the value-added services of 3PLs exceed basic services such as “transportation, warehousing and freight forwarding”. In addition to these basic services, 3PLs provide “packaging/de-packaging, repair work, customer services management and data analysis for reverse logistics” (Ranjan & Tonui, 2004, p. 53). The offering of such services not only fosters the development of long-term relationships, it serves as a barrier to competitors because the 3PLs provide a customized package to their customers designed specifically to the structure of their supply chain.
The development of expertise in their customers’ industries is also a very important factor of differentiation that customers of 3PLs perceive as adding value to their supply chain management operations. During his interview with Ranjan & Tonui (2004), Brian Ashinger, GM of inbound logistics 3PL Transfreight reveals a basic requirement of a 3PL with an international supply chain: “We sit with our customers to plan and suggest improvement in the systems. The knowledge base and expertise in the area of operation is what differentiates us from our competitors”. Ranjan & Tonui confirm that logistics outsourcers look to 3PLs as “consultants in the supply chain with knowledge of best practices” (Ranjan & Tonui, 2004, p. 54).
One area where 3PLs particularly excel, the development of alliances with other service providers is substantiated by the requirements of logistics outsourcers operating complex global supply chains who necessarily require expertise beyond the capabilities of any single service provider (Ranjan & Tonui, 2004, p. 55). In a 2004 article, Foster and Armstrong submit that “Retailers need flexible links to suppliers with low-cost production…and rapid delivery channels for an ever-expanding distribution network of consumers” and “often in remote regions”. They also point to the fact that “Global corporations increasingly want single points of contact for their outsourced logistics….but the actual logistics operations have been subcontracted to other 3PLs” (Foster & Armstrong, 2004, Bigger is Better section, para. 1).