Third-party logistics (3PL) companies play a key role in heightening global supply chain efficiency. Yet many of them tend to provide a narrow range of offerings — generally just transportation and warehousing — which constrains supply chain opportunities and leaves these businesses with pricing as their only competitive weapon. Meanwhile, purchasers at many organizations face tremendous pressure to control costs, most often due to a lack of purchasing power and insufficient volume. These professionals are seeking innovative ways to manage procurement more effectively.
In response, innovative 3PL providers have begun differentiating themselves and creating greater value for their customers through service assortments — in particular, offering outsourced procurement. In these scenarios, the client typically will outsource the purchasing of its noncritical items to a partner company in order to save money and free up time to focus on its own core competencies. By creating such a service package, a 3PL provider transforms itself into a third-party purchase (3PP) provider.
3PP in the real world
“Third-party purchase: An empirical study of third-party logistics providers in China,” published in the International Journal of Production Economics, examined 245 Chinese 3PL providers to better understand how 3PP services are being used and perceived by their customers. The research also explored the general operating dynamics of third-party purchasing.
Study respondents represented 3PP providers that integrate purchasing and logistics platforms; offer purchase order management services for raw materials and finished goods; develop e-commerce capabilities; and provide import and export customs brokerage, freight consolidation and freight forwarding — among other solutions.
Participants reported that their clients choose to extend purchasing functions to their 3PL companies because they believe them to be trustworthy, they have strong reputations and there are significant workforce cost benefits. They also indicated that the greatest benefits of these arrangements include
• lower overall procurement costs
• fewer direct labor, operational and administration expenses as a result of procurement activities
• augmented freight and warehouse capacity
• more efficient customs clearance
• quicker response to market shifts
• enhanced customer service and loyalty
• easier access to new markets
• greater ability for the client to focus on core business processes
• more efficient and environmentally friendly supply chains.
Specifically, the 3PL companies indicated that offering 3PP services helps their clients reduce their purchasing costs by more than 78 percent and improve customer service by 75 percent.
Taking this a step further, many financially strong 3PL providers are offering their clients integrated inventory financing as part of the 3PP service offerings. In this way, both provider and user achieve higher levels of supply chain integration. Conventional logistics-related purchasing activities are facilitated by a specialized procurement service provider, which must engage with a 3PL business in order to handle the buying. But most 3PL companies already are orchestrating their clients’ supply chains, so they are uniquely positioned to be able to streamline and seamlessly integrate any flow of client materials, information and financials that is associated with outsourced procurement.
The ability to successfully extend 3PL services to include a procurement function depends on many factors, including the level of business uncertainty, order frequency and transaction size, as well as the relationship between value to the client and benefit to the provider. Key considerations include the following.
Business uncertainty: There is a significant relationship between uncertainty and 3PP service capabilities. In short, the lower the level of uncertainty, the more likely a 3PL provider is to offer effective 3PP services. The good news is that, according to the study, most 3PL providers believe they can manage demand volatility in the types and volume of products that are outsourced to them. Larger providers are even more confident — although they too are affected by uncertainty, of course.
Order frequency: Most 3PL providers expect weekly orders from their clients. Consolidating similar orders helps reduce the fixed cost per transaction and improve asset efficiency. Respondents also suggest that increasing order frequency enables them to aggregate more orders and have more bargaining power. The benefits multiply when they are able to deal with the same suppliers in current transactions.
Transaction size: Large transaction sizes give 3PP companies more clout in purchase price negotiations and enable them to seek greater benefits for their customers. They also help the providers address unexpected issues more efficiently. This is because using aggregated orders increases the possibility of negotiating better purchase prices, and consolidating small and similar orders increases flexibility in meeting uncertain market demand.
Value to the client and benefit to the provider: Because 3PL providers already offer logistics services to their clients, using the same information-exchange platform for any added 3PP services reduces transaction, negotiation, manpower, decision and other costs. This leads to enhanced customer loyalty, increased market share, and maximized capacity utilization of warehousing and transportation assets.
Currently, the biggest limitation facing a 3PL provider that is hoping to transition to a 3PP provider is a lack of purchasing expertise. This was cited by more than 50 respondents. Another crucial issue is a lack of purchasing technology, reported by more than 40 respondents. Finally, it is challenging to balance logistics and procurement as an integrated service unless clear operating procedures are laid out between the partners.
More to come
In recent years, the 3PL market has become increasingly competitive as leading providers continually develop new, value-added services in order to differentiate themselves. Yet, few have seized the opportunity presented by third-party purchasing — and even those that have are discovering that users are unaware of the service at a level that would enable effective consolidation of purchasing volume and unlock the benefits of the business model. It will take some time for client companies to learn about and embrace 3PP solutions. Indeed, this market has yet to take off, and there are obstacles to overcome.
Still, the outsourcing of purchasing functions has been a growing sector since the early 2000s, and 3PL providers are extremely well-positioned to offer procurement services. There is no doubt that the concept of 3PP services being successfully implemented by logistics providers is an interesting and promising concept. Once enough users choose to outsource purchasing, providers will have the power to offer greater and greater benefits due to the increased leverage. As soon as this tipping point is reached, the 3PP market is ready to take off, and all parties can enjoy meaningful business advantages as a result of achieving a better purchase price and the consolidation of orders from multiple customers.
To avoid the hazard of competing only on price, today’s 3PL providers would be wise to consider the various ways they can augment their offerings through both standardized and customized purchasing services. This may require adding specialists to their purchasing teams — perhaps distinguished purchasing experts from different industries. The first movers are poised to gain a competitive advantage once they secure the right number of users.
Want more? Read a case study of one business' successful foray into 3PP.
Yangyan Shi teaches in the School of Management and Economics at the Beijing Institute of Technology and the Macquarie Graduate School of Management at Macquarie University. He may be contacted at email@example.com.
Clark Luo teaches at the Toiohomai Institute. He may be contacted at firstname.lastname@example.org.
V.G. Venkatesh, CSCP, is a teaching and doctoral fellow at the University of Waikato. He may be contacted at email@example.com.
Our Principles of Distribution and Logistics Seminar teaches the fundamentals to help you run nimble, efficient processes in an era of unprecedented change. Learn more and find a seminar near you.